UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                               -------------------

                                   FORM 10-KSB

|x|  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934 For the fiscal year ended June 30, 2006

|_|  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934
     For the transition period from             to            .
                                    -----------    -----------

                         Commission File Number: 0-22390

                               -------------------

                             SHARPS COMPLIANCE CORP.
                 (Name of small business issuer in its charter)

           Delaware                                               74-2657168
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

     9350 Kirby Drive, Suite 300, Houston, Texas                     77054
      (Address of principal executive offices)                    (Zip Code)

                    Issuer's telephone number (713) 432-0300


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes |x| No |_|

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |x|

Issuer's revenues for most recent fiscal year: $10,562,720.

Aggregate  market  value of the  voting and  non-voting  common  equity  held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity,  as of September
7, 2006: $4,355,284.

Number of shares  outstanding  of the  issuer's  Common Stock as of September 7,
2006: 10,551,310.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the  Registrant's  definitive  Proxy  Statement  for the 2006 Annual
Meeting of  Stockholders  to be held on  November  9, 2006 are  incorporated  by
reference in Part III hereof.

Transitional Small Business Disclosure Format (check one): Yes |_| No |x|


<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                               TABLE OF CONTENTS *
                          ANNUAL REPORT ON FORM 10-KSB
--------------------------------------------------------------------------------

                                                                            Page
                                                                            ----
                                     PART I

Item 1   Description of Business ..............................................2
Item 2   Description of Property ..............................................9
Item 3   Legal Proceedings ....................................................9
Item 4   Submission of Matters to a Vote of Security Holders .................10

                                     PART II

Item 5   Market for Common Equity and Related Stockholder Matters ............11
Item 6   Management's Discussion and Analysis or Plan of Operation ...........12
Item 7   Financial Statements ................................................15
Item 8   Changes In and Disagreements with Accountants on Accounting and
          Financial Disclosure ...............................................15
Item 8A  Controls and Procedures .............................................15
Item 8B  Other Information ...................................................15

                                    PART III

Item 9   Directors, Executive Officers, Promoters and Control Persons;
          Compliance with 16(a) of the Exchange Act ..........................16
Item 10  Executive Compensation ..............................................16
Item 11  Security Ownership of Certain Beneficial Owners and Management and
          Related Stockholder Matters ........................................16
Item 12  Certain Relationships and Related Transactions ......................16
Item 13  Exhibits ............................................................17
Item 14  Principal Accountant Fees and Services ..............................18

         Signatures ..........................................................19

------------
*    This Table of Contents is inserted for convenience of reference only and is
     not a part of this Report as filed.


                                       1
<PAGE>

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-KSB contains  certain  forward-looking  statements
and information  relating to the Company and its subsidiaries  that are based on
the  beliefs of the  Company's  management  as well as  assumptions  made by and
information currently available to the Company's  management.  When used in this
report, the words "anticipate",  "believe", "expect", "estimate",  "project" and
"intend" and words or phrases of similar  import,  as they relate to the Company
or  its   subsidiaries   or  Company   management,   are  intended  to  identify
forward-looking   statements.   Such  statements   reflect  the  current  risks,
uncertainties  and assumptions  related to certain  factors,  including  without
limitations,   competitive  factors,   general  economic  conditions,   customer
relations,  relationships with vendors, governmental regulation and supervision,
seasonality,   distribution  networks,  product  introductions  and  acceptance,
technological  change,  changes in industry practices,  onetime events and other
factors described herein. Based upon changing conditions, should any one or more
of  these  risks  or  uncertainties   materialize,   or  should  any  underlying
assumptions  prove  incorrect,  actual  results may vary  materially  from those
described herein as anticipated,  believed, estimated, expected or intended. The
Company does not intend to update these forward-looking statements.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

Sharps  Compliance Corp. was formed in November 1992 as a Delaware  Corporation.
The information  presented herein is for Sharps  Compliance Corp. and its wholly
owned  subsidiaries,  Sharps  Compliance,  Inc. of Texas (dba Sharps Compliance,
Inc.), Sharps e-Tools.com, Inc. ("Sharps e-Tools"), Sharps Manufacturing,  Inc.,
Sharps Environmental Services, Inc. (dba Sharps Environmental Services of Texas,
Inc.) and Sharps Safety, Inc. (collectively, "Sharps" or the "Company"). Sharps'
principal  office is located  at 9350 Kirby  Drive,  Suite 300,  Houston,  Texas
77054.

The  Company  provides  access to all of its  filings  with the  Securities  and
Exchange  Commission ("SEC") through its website  www.sharpsinc.com,  as soon as
reasonably practicable after the reports are filed with the SEC. The filings are
also  available  via   the   SEC's   website  at  www.sec.gov/edgar/searchedgar/
companysearch.html.

PRODUCTS AND SERVICES

Sharps is a leading  developer of cost effective  solutions for improving safety
and  efficiency  related to the proper  disposal of medical  waste by healthcare
(outside of hospital),  industry and consumers.  These solutions  include Sharps
Disposal by Mail System(R) Pitch-It(TM) IV Poles, Trip LesSystem(R), Sharps Pump
Return Box,  Sharps Enteral Pump Return Box, Sharps  Secure(R),  Sharps SureTemp
Tote(R),  IsoWash(R)  Linen Recovery  System,  Biohazard  Spill Clean-Up Kit and
Disposal  System,  Sharps  e-Tools,  Sharps  Environmental  Services  and Sharps
Consulting.  Some  products and services  facilitate  compliance  with state and
federal  regulations by tracking,  incinerating  and documenting the disposal of
medical waste.  Additionally,  some products and services facilitate  compliance
with educational and training requirements required by federal, state, and local
regulatory agencies.

The Sharps  Disposal  by Mail  System(R)  is a  comprehensive  solution  for the
containment,  transportation,  destruction  and  tracking  of medical  waste for
commercial  (healthcare and  non-healthcare)  and retail industries.  The Sharps
Disposal  by Mail  System(R)  contains  a  securely  sealed,  leak and  puncture
resistant  sharps  container in several  sizes;  United  States  Postal  Service
("USPS")  approved  shipping  carton  with  priority  mail  (pre-paid)  postage;
absorbent  material  inside  the  container  that  can  safely  hold  up to  150
milliliters  of  fluids;  a red  bag for  additional  containment  and  complete
documentation  and tracking  manifest.  The Sharps Disposal by Mail System(R) is
transported to the Company's  disposal  facility for incineration  (i.e.  Sharps
Environmental  Services)  in a pre-paid  USPS  approved  shipping  carton.  Upon
destruction, Sharps supplies verification of destruction to the customer.

The  Pitch-It(TM)  IV  Poles  are  designed  as  a  cost  effective,   portable,
lightweight  and  disposable  alternative  to  traditional  IV  poles  used  for
gravity-fed or pump-administered  infusions. The innovative pole design provides
opportunities   for  the  home   healthcare   industry  to  improve   logistical
efficiencies by eliminating the costs and inconvenience of retrieving, cleaning,
bagging, tagging and storing of traditional IV poles. The Pitch-It(TM) poles are
available in three models:  (i) tabletop,  (ii) floor and (iii)  full-size  with
wheels.


                                       2
<PAGE>

The  Trip  LesSystem(R)  is a  solution  for the  home  healthcare  (commercial)
industry that eliminates  costly trips by healthcare  providers to the patient's
home after therapy has been completed.  The Trip LesSystem(R) has combined three
complete  programs for return and/or  disposal.  All systems  contain the Sharps
Disposal by Mail  System(R)  along with either (i) a prepaid  pump return box or
(ii) a Pitch-It(TM) IV Pole, depending on the patient's therapy.

Sharps' asset return boxes (i.e.,  the Sharps Pump Return Box and Sharps Enteral
Pump Return Box) are marketed to home  healthcare  providers,  primarily for use
with home infusion  patients.  These products  provide delivery and retrieval of
expensive  equipment,  like infusion and enteral  pumps,  phototherapy  and TENS
units, between the healthcare provider and the patient.

The Sharps Secure(R) Needle Disposal System is the first commercially  available
wall mounted needle collection and disposal by mail system specifically designed
for the retail and industrial markets.  The system is mounted on the wall inside
of public restrooms to provide a visible  collection point for self-injectors to
safely and privately  dispose of used needles,  which are often discarded in the
public waste at commercial and office buildings. The system consists of a Sharps
Disposal by Mail  System(R)  needle  collection  container,  housed in the newly
designed  (patent  pending)  Sharps  Secure(R)  metal  collection  cabinet.  The
wall-mounted  cabinet,  which is manufactured  from heavy gauge metal,  has been
designed with numerous safety features to ensure that needles properly  disposed
of will not present a hazard.

The Sharps SureTemp  Tote(R) is a disposable  cooler that maintains a safe range
for  temperature-sensitive  materials.  Sharps primarily  markets the product to
home healthcare  providers to protect IV medications used in home infusion.  Its
disposable  nature relieves the home healthcare  provider of tracking,  cleaning
and maintaining reusable coolers.

The IsoWash(R) Linen Recovery System is designed to address the safe handling of
linens  contaminated  with  blood,  bodily  fluids and other  biohazards  in the
hospitality  market.  Historically,  contaminated  linens are  discarded at most
domestic  hotels.  IsoWash(R),  however,  provides  an  alternative  for  safely
handling  and   de-contaminating   at  a  significant   cost  savings  to  linen
replacement. Contaminated linens are isolated from human contact by being placed
into the  IsoWash(R)  water-soluble  bag,  which is clear to  reveal  the  bag's
contents and is marked with a biohazard warning.  The isolated linens are placed
in industrial  laundry equipment for recovery.  Once the wash cycle begins,  the
bag dissolves within two minutes allowing  chemicals in the wash to safely clean
the  contaminated  laundry  with  minimal  handling.  Sharps  is  the  exclusive
distributor for the patented product.

The Biohazard Spill Clean-Up Kit and Disposal System is a complete  solution for
both cleanup and disposal by mail of  bio-hazardous  spill waste and  materials.
This convenient system comes complete with everything  necessary for clean up of
potentially  bio-hazardous materials such as blood and bodily fluids. The Sharps
system  provides a means to safely,  easily and legally  remove these  materials
from your  location and transport  them to a  destruction  facility via the U.S.
Postal  Service.  Sharps  Bio-Hazard  Clean-Up  Kit has the  capacity to contain
spills of up to 1 liter of contaminant. Spill clean-up equipment, transportation
and proper disposal are all included in the price of the system.

The Sharps e-Tools online services  include  SharpsTracer(TM),  AssetTracer(TM).
SharpsTracer(TM)  is a manifest  imaging and  tracking  program  for  registered
customers  for the purpose of tracking and  certifying  the  transportation  and
disposal of regulated  medical waste.  SharpsTracer(TM)  eliminates  traditional
paper-based  methods of manifest  tracking  and is designed to enhance  customer
efficiencies  with an automatic  Proof of  Destruction,  Market Data  Collection
abilities and Return to Store Programs capabilities.  AssetTracer(TM) allows its
registered subscribers to effectively manage all types of capital assets through
a single,  organized database. The program can be used in conjunction with other
Company  products  or  independently  and  includes  management   reporting  for
regulatory  compliance,   preventative   maintenance  and  asset  status  and/or
location.  ComplianceTrak  offers a broad range of employee centered  compliance
and education programs. The programs range from policy and procedure development
to specialized  training and  certification  for all employees  required to meet
certain Occupational Safety and Health Administration ("OSHA") standards.

Sharps Environmental Services provide environmental solutions for customers with
a wide variety of waste disposal needs. Primary services include the destruction
and disposal of (i) medical  sharps waste,  (ii)  legal/confidential  documents,
(iii)  pharmaceutical  products and (iv)  non-hazardous  industrial  waste. This
service allows the Company to directly oversee the proper disposal of its Sharps
Disposal  by Mail  Systems(R).  The Company  has an  agreement  with the City of
Carthage,  Texas,  and Panola  County to manage and  operate  the Panola  County
Resources  Recovery Facility  ("PCRRF"),  a municipally owned  incinerator.  The
agreement  extends  through June 30, 2012 with optional  renewal periods through
June 2022.


                                       3
<PAGE>

Sharps Consulting  provides a broad range of services  including (i) analysis of
legal and  regulatory  implications  of present waste handling  practices,  (ii)
communicating  new legislation and industry best practices  minimizing  employee
exposure and liability,  (iii) serving as intermediary with regulatory  agencies
and (iv) educating  employees on infection  control practices and the dangers of
improperly handled medical waste.

MARKETS

The Company's key markets for its products and services are as follows:

     -    Healthcare
     -    Agriculture
     -    Retail
     -    Hospitality
     -    Professional
     -    Commercial / Industrial
     -    Pharmaceutical

Healthcare:   The  Company  markets  its  Sharps  Disposal  by  Mail  System(R),
Pitch-It(TM) IV Poles, Trip LesSystem(R), Sharps Pump Return Box, Sharps Enteral
Pump Return Box and Sharps SureTemp Tote(R) products to the Healthcare  segment.
This market consists primarily of home healthcare companies and generated 67% of
the Company's billings for the year ended June 30, 2006.

Agriculture:  The Company markets its Sharps Disposal by Mail System(R) products
to the Agriculture segment.  This market consists of companies that purchase the
products to properly dispose of syringes used to inject farm animals (ex., dairy
cattle) and generated 7% of the  Companies  billings for the year ended June 30,
2006.

Retail:  The Company markets its Sharps  Disposal by Mail System(R)  products to
the Retail segment. This market consists of companies that purchase the products
to properly  dispose of  syringes  utilized  to  administer  flu shots and other
inoculations in the retail setting (grocery and drug stores).  The Retail market
generated 5% of the Companies billings for the year ended June 30, 2006.

Hospitality:  The  Company  markets  its  Sharps  Disposal  by  Mail  System(R),
IsoWash(R)  Linen  Recovery  System,  Biohazard  Spill Clean-Up Kit and Disposal
System  products  to  the  Hospitality  segment.  This  market  includes  hotel,
retirement and assisted living and contract food service provider companies. The
Hospitality  segment  generated 5% of the Company's  billings for the year ended
June 30, 2006.

Professional: The Company markets its Sharps Disposal by Mail System(R) products
to  the  Professional   segment.   This  market  includes   physician,   dental,
veterinarian and other service-related firms. The Professional segment generated
4.5% of the Company's billings for the year ended June 30, 2006.

Commercial / Industrial:  The  Company  markets  its  Sharps  Disposal  by  Mail
System(R),  Sharps  Secure(R),and  Biohazard  Spill Clean-Up Kit products to the
Commercial / Industrial market. This market includes a wide variety of customers
including  those  with  safety,  industrial,  retail and other  facilities.  The
Commercial / Industrial  segment generated 2% of the Company's  billings for the
year ended June 30, 2006.

Pharmaceutical:  The  Company  markets  its Sharps  Disposal  by Mail  System(R)
products to the  Pharmaceutical  segment.  This market  includes  pharmaceutical
manufacturer and clinical drug trial  companies.  Although,  the  Pharmaceutical
segment generated only 1% of the Company's  billings for the year ended June 30,
2006, it is believed to be a segment with significant growth potential.


                                       4
<PAGE>

RESEARCH AND DEVELOPMENT

Sharps'  research and  development  costs for the last two fiscal years have not
been material.  The Company is seeking new  applications for the Sharps Disposal
by Mail System(R) in many different industries and markets, since small quantity
medical waste  generators can be found  throughout  the country.  Sharps is also
considering  the  development  of new products to assist  companies in complying
with OSHA  regulations  regarding  medical waste  handling.  Development  of new
products  is  completed   when   utilizing  the  services  of  the   prospective
manufacturer, which kept development costs to a minimum. Currently, Sharps works
with several manufacturers regarding the development of any products.

MARKET RISKS

Although,  Sharps has  experienced  growth in revenues  over the past few years,
there is an inherent  concentration  of credit  risk  associated  with  accounts
receivable  arising from sales to its major  customers.  For the year ended June
30, 2006, three customers represented  approximately 48% of revenues. Those same
three customers represented approximately 38%, or $378,939 of the total accounts
receivable  balance at June 30,  2006.  For the year ended  June 30,  2005,  two
customers  represented  approximately 47% of revenues.  Those same two customers
represented  approximately  42%, or $409,000  of the total  accounts  receivable
balance  at  June  30,  2005.  The  Company  may be  adversely  affected  by its
dependence on a limited  number of high volume  customers.  Management  believes
that the risks are  mitigated  by, (i) the  contractual  relationships  with key
customers,  (ii) the high quality and reputation of the Company and its products
and (iii) the continued  diversification  of the Company's products and services
into additional markets outside of its traditional Healthcare customer base.

Currently, Sharps sole-sources transportation with the United States Post Office
("USPS"),  which  consists of delivering  the Sharps  Disposal by Mail System(R)
from the end user to the Company's  leased  incineration  facility.  The Company
recently  entered into an arrangement  with United Parcel  Service Inc.  ("UPS")
whereby  UPS has agreed to  transport  the  Company's  Sharps  Disposal  by Mail
System(R)  products  from  the end  user to the  Company's  leased  incineration
facility.  The Company  expects to offer a UPS product to its current and future
customers in fiscal year 2007. Management believes the risk of dependence on the
USPS is mitigated by (i) the new arrangement with UPS and (ii) the long-standing
business relationship with the USPS.

INTELLECTUAL PROPERTY

Although,  Sharps has applied in the United States for  registration of a number
of trademarks and patents,  many of which have been  registered and granted,  it
can give no assurance  that the Company  will obtain and maintain  registrations
for existing and the other trademarks and patents for which it has applied.

RISK FACTORS

Operating History; History of Losses

Until fiscal year 2006, Sharps has incurred annual operating losses.  The future
success  of  Sharps is  dependent  upon many  factors,  including  environmental
regulation,   continuity  of  its  distributorship   and  customer   agreements,
successful   completion   of  its  product   development   activities   and  the
identification  and  penetration  of  additional  markets for its  products  and
services.  Management  believes that the Company's current financial  resources,
including  cash on hand and its line of credit with JPMorgan  Chase Bank,  N.A.,
will be sufficient to fund operations  through fiscal year 2007. There can be no
assurance  that the  Company  will be able to obtain  additional  financing,  if
necessary,  on  acceptable  terms to fund  operations  beyond  that time  frame;
however,  management  believes  that it  would be  successful  in  raising  such
financing, if necessary.

Dependence on Key Management Personnel

Sharps' growth and development to date has been largely  dependent on the active
participation and leadership of its senior management team. The Company believes
that the  continued  success of the  business is  dependent  upon the  continued
employment  of the  senior  management  team  and  has  therefore  entered  into
individual  employment  agreements  with the senior  management team in order to
provide incentive for their continued employment with the Company.


                                       5
<PAGE>

Competition

There are  several  competitors  who offer  similar or  identical  products  and
services that facilitate the disposal of medical waste.  There are also a number
of companies that focus  specifically  on the marketing of products and services
which  facilitate  disposal  through  transport  by  the  USPS  (similar  to the
Company's  products).  These companies are typically  smaller  organizations  or
divisions of larger companies.  While Sharps does not believe it currently faces
significant  competition in the sharps  disposal by mail business,  it is likely
that this could  change as the  Company  continues  its  success and the country
becomes more aware of the need for the proper disposal of medical sharps.  It is
possible that future  competition  may also come from  companies that are larger
and better capitalized than the Company.

Customer Relationships

Sharps generally has no firm long-term volume commitments from its customers and
enters  into  individual  purchase  orders or  contracts.  Although,  Sharps has
contractual  relationships  with  the  majority  of its  customers,  Sharps  has
experienced  fluctuations  in order  levels from period to period and expects to
continue  experiencing  such  fluctuations  in the  near  future.  In  addition,
customer purchase orders may be canceled and order volume levels can be changed,
or delayed with limited or no penalties. Sharps cannot assure the replacement of
canceled, delayed or reduced purchase orders with new business. Moreover, Sharps
financial  condition and results of operations  will depend in significant  part
upon the Company's  ability to obtain orders from new customers,  as well as the
financial  condition and success of its customers,  its customers'  products and
services  and the  general  economy.  The  factors  affecting  any of the  major
customers of Sharps, or their customers, could have a material adverse effect on
the businesses, financial condition and results of operations of Sharps.

Incinerator Facilities

The  Company's  business  utilizes an  incinerator  facility  for medical  waste
disposal.  The Company has a lease  agreement  for the facility with the City of
Carthage, Texas (Panola County) to operate the PCRRF through June 30, 2012 (with
options to extend the lease through June 30, 2022).  The Company is  responsible
for operating and maintaining the facility in compliance with all federal, state
and local  laws  and/or  any  other  regulatory  agency  involving  solid  waste
disposal.  The cost of such  compliance  for the period ending June 30, 2006 was
$13,791.  The Company is also  responsible  for all  operating and capital costs
associated with day-to-day operations of the incinerator facility.  Although the
Company  entered into an  agreement  with a secondary  burn  facility to provide
services  in  the  event  the  PCRRF  is  unavailable,  any  disruption  in  the
availability  of a disposal  facility or increased  governmental  regulation may
have an adverse impact on the Company.  The Company can make no assurances  that
no such disruption or burdensome regulation will occur in the future.

The Company believes the facility is in compliance with all applicable  federal,
state,  local and/or  regulatory  agency  requirements,  air  pollution and TCEQ
("Texas  Commission  on  Environmental  Quality")  regulations.  See  change  in
Government Regulation below.

Governmental Regulation

Operations and Incinerator

Sharps is required to operate within guidelines  established by federal,  state,
and/or local  regulatory  agencies.  Such  guidelines  have been  established to
promote occupational safety and health standards and certain standards have been
established  in  connection  with the handling,  transportation  and disposal of
certain  types of medical and solid  wastes,  including  mailed  sharps.  Sharps
believes that it is currently in  compliance  in all material  respects with all
applicable laws and regulations  governing its business.  However,  in the event
additional  guidelines are established to more specifically control the business
of  Sharps,   including  the  environmental   services  subsidiary,   additional
expenditures  may be required in order for Sharps to be in compliance  with such
changing  regulations.  Furthermore,  any  material  relaxation  of any existing
regulatory  requirements  governing the  transportation  and disposal of medical
sharps  products  could  result in a reduced  demand for  Sharps'  products  and
services  and could  have a material  adverse  effect on  Sharps'  revenues  and
financial  condition.  The scope and duration of existing and future regulations
affecting the medical and solid waste  disposal  industry  cannot be anticipated
and are subject to change due to political and economic pressures.

In  November  2005,  the EPA  amended  the Clean Air Act which  will  affect the
operations of the leased incineration  facility located in Carthage,  Texas. The


                                       6
<PAGE>

regulation  modifies the emission limits and monitoring  procedures  required to
operate an incineration  facility. The new rules will necessitate changes to the
Company's leased  incinerator and pollution control equipment at the facility or
require  installation of an alternative  treatment method to ensure  compliance.
Such change would require the Company to incur significant capital  expenditures
in order to meet the  requirements of the regulations.  The regulation  allows a
minimum  period of three  years and a maximum of five years to comply  after the
date the final rule was published. The Company has studied the amended EPA Clean
Air Act and its options,  but has not yet made a decision  regarding how it will
comply with the new rules. Should the Company decide to upgrade its incineration
facility to comply with the new regulations or install  alternative  technology,
it  would  do so not  only to  comply  with  the  new  regulations  but  also to
potentially generate additional revenue sources including medical waste disposal
(in additional to the incineration of sharps, syringes, lancets, etc.).

Proper Disposal of Medical Sharps

The first significant  regulatory development occurred in December 2004 with the
improved  guidance  issued  by  the  Environmental   Protection  Agency  ("EPA")
regarding the safe disposal of medical sharps  (needles,  syringes and lancets).
This new guidance is a result of disposal problems created by 3 billion syringes
discarded  annually by self-injectors  of medicines in homes and  non-healthcare
commercial  facilities.  Until  December  2004,  the EPA guidance has instructed
consumers  to place  used  sharps  in a  household  container  and to place  the
container  in the  household  garbage.  New  guidance  posted on the EPA website
reflects  information  about alternative  disposal methods  including  mail-back
programs.  The improved  guidance issued by the EPA is a significant step toward
the removal of needles,  syringes and other sharps from the solid waste  stream,
consistent  with the current  practice in healthcare  facilities.  The Company's
products  and  services,  which  are  included  in the EPA  list of  recommended
solutions,  are  designed to improve  safety,  efficiency  and patient  concerns
related to the proper disposal of medical sharps.

The next  regulatory  development  was the enactment of  California  Senate Bill
1362,  "The Safe  Needle  Disposal  Act of 2004."  This  legislation  authorizes
California  agencies to expand the scope of their existing  household  hazardous
waste  plans to  provide  for the safe  disposal  of  medical  sharps  including
hypodermic  needles  and  syringes.  Authorized  disposal  programs  include the
mail-back programs currently marketed by the Company.

In July 2006,  the State of California  passed Senate Bill 1305 ("SB 1305"),  an
amendment to The Medical Waste  Management  Act. The new law requires the proper
disposal of home-generated sharps waste (syringes,  needles,  lancets, etc.) and
acknowledges  mail-back programs as one of the most convenient  alternatives for
the collection and destruction of  home-generated  sharps  Effective  January 1,
2007 (with enforcement  beginning September 1, 2008), SB 1305 addresses the need
to meet the changing  demands of  healthcare  provided in alternate  sights that
currently  allows  hundreds  of millions of  home-generated  sharps  waste to be
disposed in solid  waste and  recycling  containers.  The new law is designed to
ensure  appropriate  disposal of sharps  waste  necessary to protect the general
public and workers from potential exposure to contagious diseases and health and
safety risks.

Also in July 2006, The Massachusetts  Legislature enacted Senate Bill 2569 which
requires the  Massachusetts  department of public health,  in  conjunction  with
other relevant state and local agencies and government  departments,  to design,
establish  and  implement  a  program  for  the   collection   and  disposal  of
non-commercially  generated,  spent hypodermic needles and lancets.  Recommended
disposal methods include mail-back  products approved by the U.S. Postal Service
such as the Sharps Disposal By Mail Systems(R).  The  Massachusetts  legislation
addresses  the need for proper  disposal of used  syringes,  needles and lancets
outside of the traditional healthcare setting.

Postal Work Interruptions

Sharps currently transports its disposal products using the USPS, therefore, any
interruption in day-to-day USPS delivery  services could have a material adverse
effect  on  Sharps'   revenues  and   financial   condition.   Postal   delivery
interruptions  are rare and  unpredictable.  However,  since USPS  employees are
federal  employees,  such  employees  may  be  prohibited  from  engaging  in or
continuing a postal work stoppage,  although there can be no assurance that such
work stoppage can be avoided.  As noted above, the Company recently entered into
an arrangement with UPS whereby UPS has agreed to transport the Company's Sharps
Disposal by Mail  System(R)  products from the end user to the Company's  leased
incineration facility. The Company expects to offer a UPS product to its current
and future  customers  in fiscal  year  2007.  Management  believes  the risk of
dependence on the USPS is mitigated by the new arrangement with UPS and its long
standing relationship with the USPS.


                                       7
<PAGE>

Employees

Sharps employees 28 individuals, of which 26 are full-time employees.



















                                       8
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

Sharps  currently  leases 10,634 square feet of rentable  (office and warehouse)
space in Houston,  Texas. On July 13, 2006 Sharps executed a new lease agreement
for 18,231 square feet of rentable  (office and  warehouse)  space ("New Lease")
near the existing leased facility in Houston,  Texas ("New  Premises").  The new
lease period will commence upon the  completion of the  construction  of the New
Premises,  which the Company  anticipates  to be in October or November of 2006.
The New  Lease  will  expire on the five (5) year  anniversary  of the New Lease
commencement  date. The existing lease will be terminated upon acceptance of the
New Premises by the Company in accordance with the terms of the New Lease.

The  Company  leases an  incinerator  facility  located in  Carthage,  Texas for
medical waste disposal.  The lease agreement  requires rental payments of $2,000
per month for the first year (year ended June 30, 2003) escalating by $6,000 per
year (or $500 per month) each year thereafter  until initial  termination of the
lease on June 30, 2012. The Company is required to pay additional  rent equal to
$0.02 per pound for all materials  burned,  treated,  received or transferred at
the  incinerator  facility  exceeding  100,000 pounds per month.  The Company is
responsible for the cost of operating and  maintaining  the facility,  including
compliance with state and federal  regulations.  For accounting  purposes,  as a
result of the lease  escalation  clause,  the Company  records lease expense for
this  facility  on a  straight-line  basis  over  the life of the  lease,  which
computes to $4,250 per month, or $51,000 per year.

ITEM 3. LEGAL PROCEEDINGS

During  September  and October  2003,  the  Company  secured  judgments  against
Ameritech  Environmental,  Inc.  ("Ameritech")  totaling $176,958 related to the
non-payment by Ameritech for services provided by the Company in 2002. Ameritech
sold the  assets of  Ameritech  representing  collateral  for the  judgments  to
MedSolutions,  Inc. of Dallas,  Texas  ("MedSolutions") in November 2003. During
January  2004,  the Company  secured a Garnishment  Order  against  MedSolutions
whereby  MedSolutions was ordered to pay to the Company $170,765,  plus interest
at 5%, subject to the terms of the agreement by which MedSolutions purchased the
Ameritech  assets. A balloon payment of $137,721 due November 7, 2004, under the
Garnishment  Order,  was not  made by  MedSolutions  to the  Company.  It is the
position  of the  Company  that  MedSolutions  is  currently  in  breach  of the
Garnishment  Order.  Additionally,  the Company filed an amended suit, in August
2006, against Ameritech,  its officers and directors (Jasper S. Howard, Alton H.
Howard  and  Jonathon  S.  Howard)  alleging  fraudulent  conveyance,  fraud  on
creditors, civil conspiracy, breach of court order and conversion.  Although the
Company will  continue to  aggressively  pursue  collection  of the  outstanding
amounts, no assurances can be made regarding ultimate collection.

On June 14, 2004,  the Company  provided Mr. Ronald E. Pierce,  its then current
Chief  Operating  Officer  ("Mr.  Pierce"),  with notice of  non-renewal  of his
employment  agreement.  As such,  July 14,  2004  was Mr.  Pierce's  last day of
employment.  The  Company  has  advised  Mr.  Pierce that under the terms of the
employment contract no further  compensation  (including  services) was due. The
Company then received various letters from Mr. Pierce's  attorney  advising that
Mr.  Pierce  is taking  the  position  that the  non-renewal  of the  employment
agreement  was not timely and,  therefore,  Mr.  Pierce was  terminated  without
cause.  Additionally,  Mr.  Pierce  claims  that  the  Company  had no  right to
terminate him on the anniversary date of his Agreement without the obligation of
paying  Mr.  Pierce as if he were  terminated  without  cause.  Mr.  Pierce  has
demanded severance related payments totaling  approximately  $280,000 (including
an $80,000  bonus)  along  with the full  accelerated  vesting of 500,000  stock
options  previously  awarded to Mr. Pierce.  The Company believes that notice of
such non-renewal was timely, and that in accordance with Mr. Pierce's employment
agreement,  the Company was entitled to provide notice thirty (30) days prior to
the anniversary of its intent to terminate the agreement, and no severance would
therefore be due to Mr. Pierce.  On July 30, 2004, the Company  received  notice
from Mr. Pierce's attorney requesting commencement of arbitration to resolve the
claim. No further  communications  have been received from Mr. Pierce's attorney
since July 30, 2004. The Company  believes it has meritorious  defenses  against
Mr. Pierce's claims and has not recorded a liability related to this matter.

In March 2005, the Company's  wholly-own  subsidiary  Sharps  Compliance,  Inc.,
filed a lawsuit in Harris  County  District  Court,  Texas against Mr. Jodway (a
former  employee) and Attentus  Medical Sales,  Inc.  ("Attentus").  The lawsuit
claimed,  (i) breach of a confidentiality  agreement,  (ii)  misappropriation of
trade secrets and (iii) tortuous  interference  with the Company's  existing and
prospective  contracts  and  business  relationships.  On  April  7,  2005,  the
defendant  filed its answer and counter claims against Sharps  Compliance,  Inc.
asserting  breach of contract,  quantum  merit and violation of the Texas Payday
Act. On September 19, 2005,  the Company  amended its pleadings and added claims
asserting  conversion,  unjust  enrichment,  unfair  competition  and  trademark
infringement  in violation of the Lanham Act, false  advertising in violation of
the Lanham Act,  trademark  dilution under the Texas Business and Commerce Code,
and tortuous interference with existing and/or prospective customers. On July 6,


                                       9
<PAGE>

2006,  the Company,  Attentus and Mr. Jodway  reached  settlement on all matters
related to this  litigation  and  dismissed  all claims  against each other.  In
conjunction  with the  resolution  of the  matter,  the Company  entered  into a
business  relationship  whereby  Attentus  now markets  and sells the  Company's
Sharps Disposal By Mail Systems(R) to its current and future customers.

In July 2006, the Company received a Notice of Charge of Discrimination from the
U.S.  Equal  Employment  Opportunity  Commission  ("EEOC")  filed  by  a  former
employee,  Sylvia Haist. The charge alleges sex  discrimination and retaliation.
Sylvia Haist was an employee of the Company from July 1998 until her termination
in January 2006.  The Company  believes the charges to be totally  without merit
and  frivolous.  The Company has filed a response with the EEOC in the form of a
position statement and believes the EEOC will rule in favor of the Company.  The
Company intends to vigorously defend itself against the erroneous allegations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the three  months  ended June 30,  2006,  no matter was  submitted by the
Company to a vote of its  stockholders  through the  solicitation  of proxies or
otherwise.











                                       10
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market  Information:  During the two years ended June 30, 2006, the common stock
of the Company has been quoted on the  over-the-counter  ("OTC")  Bulletin Board
under the symbol  "SCOM".  The  Company's  common stock has had limited  trading
volume,  averaging  approximately  78,000  shares  traded  per  month on the OTC
Bulletin  Board.  The table below sets forth the high and low closing  prices on
the OTC Bulletin Board for each quarter within the last two fiscal years.

                                                              Common Stock
                                                        -----------------------
                                                         High             Low
                                                        -------         -------
          Fiscal Year Ending June 30, 2005
          --------------------------------
          First Quarter                                 $ 0.95           $ 0.57
          Second Quarter                                $ 1.20           $ 0.70
          Third Quarter                                 $ 1.15           $ 0.60
          Fourth Quarter                                $ 1.15           $ 0.75

          Fiscal Year Ending June 30, 2006
          --------------------------------
          First Quarter                                 $ 0.94           $ 0.60
          Second Quarter                                $ 0.85           $ 0.61
          Third Quarter                                 $ 1.05           $ 0.62
          Fourth Quarter                                $ 0.99           $ 0.85

          Fiscal Year Ending June 30, 2007
          --------------------------------
          First Quarter (September 7, 2006)             $ 0.98           $ 0.85


Stockholders:  At September 7, 2006 there were 10,551,310 shares of common stock
held by 191 holders of record with  approximately  500 held in street name.  The
last  reported  sale of the common stock on  September  7, 2006,  was $ 0.85 per
share.

Dividend  Policy:  The Company has never declared nor paid any cash dividends on
its common stock.  The Company  currently  intends to retain all of its earnings
for the operation and expansion of its business and does not  anticipate  paying
any dividends in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans:
<TABLE>
<CAPTION>
                      Equity Compensation Plan Information

                                      Number of securities to be       Weighted average       Number of securities
                                        issued upon exercise of       exercise price of        remaining available
        Plan category                  outstanding options,          outstanding options,      for future issuance
                                         warrants and rights         warrants and rights
<S>                                             <C>                             <C>                     <C>
Equity compensation plans
  approved by security holders                 3,066,390                   $   0.91                    315,444
Equity compensation plans not
  approved by security holders                   637,500                       0.76                        N/A
                                               ---------                   --------                    -------
Total                                          3,703,890                   $   0.89                    315,444
                                               =========                   ========                    =======
</TABLE>

Recent Sales of Unregistered  Securities:  There have been sales of unregistered
securities in the last three years.


                                       11
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The discussion and analysis  presented below should be read in conjunction  with
the consolidated  financial  statements and related notes appearing elsewhere in
this Form-10KSB. See "Information Regarding Forward Looking Statements."

RESULTS OF OPERATIONS

The following table sets forth,  for the periods  indicated,  certain items from
the Company's  Consolidated  Financial Statements of Operations,  expressed as a
percentage of revenue:

                                                       Year Ended June 30,
                                             -----------------------------------
                                                  2006                  2005
                                             -------------         -------------
Total revenues                                     100%                  100%
Costs and expenses:
     Cost of revenues                              (57%)                 (61%)
     Selling, general and administrative           (37%)                 (39%)
     Depreciation and amortization                  (1%)                  (2%)
                                             -------------         -------------
Total operating expenses                           (96%)                (102%)
                                             -------------         -------------
Operating  profit (loss)                             4%                   (2%)
Interest income (expense), net                       0%                    0%
                                             -------------         -------------
Net income (loss)                                    4%                   (2%)
                                             =============         =============

YEAR ENDED JUNE 30, 2006 COMPARED TO YEAR ENDED JUNE 30, 2005

Total  revenues  for the year ended June 30, 2006 of  $10,562,720  increased  by
$1,561,543,  or 17%, over the total revenues for the year ended June 30, 2005 of
$9,001,177. The increase in revenues is primarily attributable to an increase in
billings  in  the  Retail  ($336,098),   Hospitality  ($220,112),   Professional
($150,540),  Agriculture ($136,971) and Pharmaceutical ($101,158) markets. These
increases were partially  offset by decreased  billings in Health Care market of
$83,639.  The increase in the  billings in the Retail  market is a result of the
increased  use of our  products  in grocery  stores and  pharmacies  to properly
dispose of  syringes  utilized to  administer  flu and other  inoculations.  The
increase  billings in the Hospitality and  Professional  markets is being driven
higher by demand for the  Company's  products as industry and  consumers  become
more aware of the proper disposal of medical sharps (syringes,  lancets,  etc.).
The  increased  billings  in the  Agriculture  market are a result of  increased
demand of the Sharps  Disposal by Mail System by a customer who uses the product
to facilitate  the  injection of dairy  cattle.  The increase in billings in the
Pharmaceutical  market is a result of the demand for the Sharps Disposal By mail
System products in the clinical drug trial setting.

Cost of  revenues  for the year ended  June 30,  2006 of  $6,068,399  was 57% of
revenues.  Cost of revenues for the year ended June 30, 2005 of  $5,499,355  was
61% of revenues  for the  corresponding  period.  The  improvement  in the gross
margin (reduced cost of revenue) is a result of increased revenue and the mix of
products sold.

Selling,  general and  administrative  ("SG&A") expenses for the year ended June
30, 2006 of $3,957,652 increased by $437,607, or 12%, over the SG&A expenses for
the year ended June 30, 2005.  The increase in the SG&A  expenses is primarily a
result of increases in the following  expenses,  (i)  compensation  of $163,000,
(ii)  professional fees of $179,000 and (iii) recruiting fees and other totaling
$68,400 . The increase in compensation is a result of the increase in the number
of the Company's  sales persons hired to facilitate the Company's  growth plans.
The increase in professional fees is related to Company  litigation and advisory
fees.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $38,532 to $296,959 at June 30, 2006 from
$258,427  at June  30,  2005.  The  increase  in cash and  cash  equivalents  is
primarily a result of cash  generated  from  operations  of $322,687,  partially
offset by, (i) additions to property and equipment of $175,188,  (ii)  additions
to intangible  assets of $63,258 and (iii) payments on capital lease obligations
of $48,601.


                                       12
<PAGE>

Property and equipment,  net,  increased by $35,323 to $473,387 at June 30, 2006
from $438,064 at June 30, 2005.  This increase is  attributable  to the purchase
of, (i) software  purchases and upgrades  $77,241,  (ii)  incineration  facility
equipment  installed  of  $56,375,   (iii)  computer  equipment  $22,572,   (iv)
operational  tools and dies of $16,808 and (v) other of $2,192.  These additions
were partially offset by depreciation expense for 2006 of $139,865. The software
purchases and upgrades and the computer  equipment were purchased to accommodate
new employees and the growing  customer/revenue  base. The incineration facility
equipment  additions were incurred to keep the facility  operating  efficiently.
The  costs  incurred  for  operational  tools  and dies are for new and  updated
product designs.

The Company's  obligations  under capital  leases  (including  current  portion)
decreased  by  $48,601  as of June 30,  2006 as  compared  to the June 30,  2005
balances.  This decrease is attributable to the  corresponding  payments on such
capital lease obligations.

Stockholder's  equity increased by $395,556 from a deficit of $143,656 to equity
of $251,900.  This increase is attributable  to, (i) fiscal year 2006 net income
of $381,629,  (ii) the effect of stock options exercised and (iii) the effect to
equity of the acceleration of stock option vesting.

Management  believes that the Company's  current cash  resources  along with its
$1.5 million line of credit will be sufficient to fund operations for the twelve
months ended June 30, 2007.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following tables set forth selected quarterly information for 2006 and 2005.
We believe  that all  necessary  adjustments  have been  included in the amounts
below to present fairly the results of such periods.
<TABLE>
<CAPTION>
                                                                  Quarter Ended
                               ------------------------------------------------------------------------------------
                                September 30, 2004      December 31, 2004      March 31, 2005      June 30, 2005
                               ---------------------- ---------------------- ------------------- ------------------
<S>                                     <C>                     <C>                     <C>             <C>
Total revenues                   $      2,419,386         $   2,229,045        $   2,232,644       $   2,120,102
Cost of revenues                 $      1,387,544         $   1,330,947        $   1,398,141       $   1,382,723
Operating income (loss)          $        120,469         $      (4,356)       $     (97,500)      $    (194,296)
Net income (loss)                $        108,912         $      (9,135)       $     (96,219)      $    (196,658)
Net income (loss) per share      $           0.01         $       0.00         $       (0.01)      $       (0.02)
Weighted average shares -
 diluted                               10,887,750            10,538,144           10,538,144          10,543,794
</TABLE>

<TABLE>
<CAPTION>
                                                                  Quarter Ended
                               ------------------------------------------------------------------------------------
                                September 30, 2005      December 31, 2005      March 31, 2006      June 30, 2006
                               ---------------------- ---------------------- ------------------- ------------------
<S>                                     <C>                     <C>                     <C>             <C>
Total revenues                   $      2,660,112         $   2,663,376        $   2,531,210       $   2,708,022
Cost of revenues                 $      1,560,919         $   1,496,692        $   1,466,906       $   1,543,882
Operating income (loss)          $        171,806         $     171,119        $      (2,830)      $      37,110
Net income (loss)                $        164,532         $     166,972        $      (2,513)      $      52,638
Net income (loss) per share      $           0.02         $        0.02        $        0.00       $        0.00
Weighted average shares -
 diluted                               10,732,740            10,720,512           10,547,328          10,950,196
</TABLE>

CRITICAL ACCOUNTING POLICIES

Inventory:  Inventory consists primarily of finished goods and supplies held for
sale and are  stated  at the  lower of cost  using the  average  cost  method or
market.

Realization of Long-lived  Assets:  The Company evaluates the  recoverability of
property and equipment and intangible or other assets if facts and circumstances
indicate  that any of  those  assets  might be  impaired.  If an  evaluation  is


                                       13
<PAGE>

required, the estimated future undiscounted cash flows associated with the asset
are compared to the asset's  carrying  amount to  determine  if a write-down  to
market value or discounted cash flow value is necessary.

Revenue   Recognition:   The  Company   adopted  the   Securities  and  Exchange
Commission's  ("SEC")  Staff  Accounting  Bulletin  ("SAB")  No.  101,  "Revenue
Recognition",  which provides  guidance related to revenue  recognition based on
interpretations  and practices  followed by the SEC. Under SAB No. 101,  certain
products  offered by the Company  have  revenue  producing  components  that are
recognized  over  multiple  delivery  points  (Sharps  Disposal by Mail Systems,
referred  to as  "Mailback"  and  Sharps  Return  Boxes,  referred  to as  "Pump
Returns") and can consist of up to three separate  elements as follows:  (1) the
sale of the container system, (2) the transportation of the container system and
(3) the  treatment and disposal  (incineration)  of the  container  system.  The
individual  fair  value of the  transportation  and  incineration  services  are
determined by the sales price of the service offered by third parties,  with the
fair value of the container  being the residual  value.  Revenue for the sale of
the  container is recognized  upon  delivery to the customer,  at which time the
customer  takes title and assumes risk of ownership.  Transportation  revenue on
Mailbacks is recognized when the customer returns the mailback  container system
and the container has been received at the  Company's  treatment  facility.  The
Mailback container system is mailed to the incineration facility using the USPS.
Incineration  revenue is recognized upon the destruction  and  certification  of
destruction  having been  prepared on the  container.  Since the  transportation
element and the incineration  elements are undelivered  services at the point of
initial sale of the container,  the Mailback and Incinerator revenue is deferred
until the services are performed. The current and long-term portions of deferred
revenues are  determined  through  regression  analysis and  historical  trends.
Furthermore,  through  regression  analysis of historical  data, the Company has
determined  that a certain  percentage of all container  systems sold may not be
returned. Accordingly, a portion of the transportation and incineration elements
are recognized at the point of sale.

Shipping and Handling  Fees and Costs:  The Company  records  amounts  billed to
customers  for shipping and handling as revenue.  Costs  incurred by the Company
for shipping and handling have been classified as cost of revenue.

Income Taxes:  The liability  method is used in accounting  for deferred  income
taxes.  Under this method,  deferred tax assets and  liabilities  are determined
based on  differences  between  financial  reporting and tax bases of assets and
liabilities  and are measured  using the enacted tax rates and laws that will be
in effect when the differences  are expected to reverse.  The  realizability  of
deferred tax assets is evaluated annually and a valuation  allowance is provided
if the deferred tax assets,  more likely than not,  will not give rise to future
benefits in the Company's tax returns.

Segment  Reporting:  SFAS No. 131,  "Disclosures about Segments of an Enterprise
and Related  Information,"  requires that a public  business  enterprise  report
financial and descriptive  information about its operating segments.  Generally,
financial  information  is required to be reported on the basis used  internally
for evaluating segment performance and resource allocation. The Company operates
in a single  segment,  focusing on developing  cost  effective,  logistical  and
educational solutions for healthcare and non-healthcare institutional markets.

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the FASB issued Statement No. 123 (revised 2004) ("FAS 123R"),
Share-Based Payments.  FAS 123R requires all entities to recognize  compensation
expense in an amount equal to the fair value of  share-based  payments,  such as
stock options granted to employees. The Company has elected to apply FAS 123R on
a modified  prospective  method.  Under this method,  the Company is required to
record  compensation  expense  (as  previous  awards  continue  to vest) for the
unvested  portion of previously  granted  awards that remain  outstanding at the
date of adoption.  For public entities that file as small business issuers,  FAS
123R is effective as of the beginning of the first  interim or annual  reporting
period of the first fiscal year beginning on or after December 15, 2005 (quarter
ended September 30, 2006). Although,  management has completed its evaluation of
the  effect  that FAS 123R,  the  effect of the new  standard  to the  Company's
statement of operations  beginning  with the quarter  ended  September 30, 2006,
will be  significantly  lower  than that  disclosed  in its  previous  pro forma
footnote disclosures as a result of the June 30, 2006 acceleration of vesting of
unvested stock options previously awarded to employees,  officers, and directors
(See Notes 2 and 9 of the Notes to the Consolidated Financial Statements).

In February 2006, the FASB issued SFAS No. 155,  "Accounting  for Certain Hybrid
Financial Instruments." which amends SFAS No. 133 and SFAS No. 140. SFAS No. 155
permits hybrid financial  instruments  that contain an embedded  derivative that
would  otherwise  require  bifurcation  to  irrevocably be accounted for at fair
value,  with changes in fair value  recognized in the  statement of income.  The
fair value election may be applied on an  instrument-by-instrument  basis.  SFAS


                                       14
<PAGE>

No. 155 also eliminates a restriction on the passive derivative instruments that
a qualifying  special  purpose  entity may hold.  SFAS No. 155 is effective  for
those  financial  instruments  acquired or issued  after  December  1, 2006.  At
adoption,  any difference  between the total  carrying  amount of the individual
components of the existing  bifurcated hybrid financial  instrument and the fair
value of the  combined  hybrid  financial  instrument  will be  recognized  as a
cumulative-effect  adjustment to beginning retained  earnings.  The Company does
not  expect  the new  standard  to have any  material  impact  on its  financial
position and results of operations.

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial Assets, an amendment of FASB Statement No. 140." SFAS No. 156 requires
all  separately  recognized  servicing  assets and servicing  liabilities  to be
initially measured at fair value, if practicable. The standard permits an entity
to subsequently measure each class of servicing assets or servicing  liabilities
at fair value and report changes in fair value in the statement of income in the
period in which the changes occur.  SFAS No. 156 is effective for the Company as
of December 1, 2006.  The Company  does not expect the new  standard to have any
material impact on its financial position and results of operations.

In July 2006, the FASB issued FIN No. 48,  "Accounting for Uncertainty in Income
Taxes - an  interpretation  of  FASB  Statement  No.  109.  This  interpretation
clarifies  the  accounting  for  uncertainty  in income taxes  recognized  in an
entity's financial  statements in accordance with SFAS No. 109,  "Accounting for
Income Taxes." It prescribes a recognition  threshold and measurement  attribute
for financial  statement  disclosure  of tax  positions  taken or expected to be
taken on a tax  return.  This  interpretation  is  effective  for  fiscal  years
beginning  after  December 15, 2006.  The Company will be required to adopt this
interpretation in the first quarter of fiscal year 2008. Management is currently
evaluating the  requirements of FIN No. 48 but does not believe the new standard
will have a material impact on its consolidated financial statements.

ITEM 7. FINANCIAL STATEMENTS

The financial  statements of the Company and the related report of the Company's
independent  registered  public  accounting  firm  thereon are  included in this
report and are referenced as pages F-1 to F-20.

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

In order to effect a name change of UHY Mann  Frankfort  Stein & Lipp CPAs,  LLP
("UHY-MFSL"),  the  partners  of  UHY-MFSL  announced  that they were  joining a
currently  affiliated firm, UHY LLP (a New York limited liability  partnership).
Accordingly,  UHY-MFSL  notified the Company that it will provide audit services
to the Company under the affiliated entity UHY LLP.

ITEM 8A. CONTROLS AND PROCEDURES

Within the ninety days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management,  including the Company's Chief Executive Officer and Chief Financial
Officer,  of the  effectiveness  of the design and  operation  of the  Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13(a)-15(e) and
15(d) - 15(e). Based upon that evaluation, the Chief Executive Officer and Chief
Financial  Officer  concluded  that  the  Company's   disclosure   controls  and
procedures  are  effective  in  timely  alerting  them to  material  information
relating to the Company (including its consolidated subsidiaries) required to be
included  in the  Company's  periodic  SEC  filings.  There were no  significant
changes  in the  Company's  internal  controls  or in other  factors  that could
significantly  affect these  controls  subsequent  to the date of the  Company's
evaluation.

ITEM 8B. OTHER INFORMATION

The information required by this item is not applicable.


                                       15
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

The information required by this item is incorporated herein by reference to the
information under the caption "Management" of the Registrant's  definitive Proxy
Statement  to be filed  pursuant  to  Regulation  14A with  the  Securities  and
Exchange Commission ("SEC") relating to its Annual Meeting of Stockholders to be
held on November 9, 2006.

Paragraph 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's  executive  officers and directors,  and persons who  beneficially own
more than 10% of the Company's  equity  securities,  to file reports of security
ownership and changes in such  ownership with the SEC.  Officers,  directors and
greater  than 10%  beneficial  owners also are  required by SEC  regulations  to
furnish the Company with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely on review of the copies of such reports
furnished  to the  Company,  during the fiscal  year  ended June 30,  2006,  all
Section 16(a) filing  requirements  applicable  to its  officers,  directors and
greater than 10% beneficial owners were complied with.

The Audit  Committee is comprised of certain  Directors who are not employees of
the Company or any of its subsidiaries.  Messrs.  Zerrillo (Chairman) and Parker
and are the current  members of the Audit  Committee.  The Audit Committee meets
with the independent auditors and management representatives,  recommends to the
Board of Directors  appointment of independent  auditors,  approves the scope of
audits,  interim  reviews and other services to be performed by the  independent
auditors,  approves in advance all  permissible  non-audit  services,  considers
whether the performance of any professional  services by the auditors other than
services  provided  in  connection  with the audit  function  could  impair  the
independence  of the  auditors  and  reviews  the  results of audits and interim
reviews  and the  accounting  principles  applied  in  financial  reporting  and
financial and operational  controls.  The independent auditors have unrestricted
access to the Audit Committee and vice versa.

The Company's  Board has determined  that Mr. Parker is an independent  director
who qualifies as an audit committee  accounting  expert, as that term is defined
in Item 401(h) of Regulation  S-K under the  Securities Act of 1933, as amended.

The Company's Board adopted a Code of Ethics for all of our directors,  officers
and employees, as defined in Item 406 of Regulation S-K under the Securities Act
of 1933, as amended.  The Company's  Code of Ethics was previously an exhibit to
the Annual  Report on Form 10-KSB.  Individuals  may also request a free copy of
the Company's Code of Ethics from the Company's investor  relations  department.
Additionally,   the   Company   posted  its  Code  of  Ethics  on  its   website
(www.sharpsinc.com).  The Company  intends to  disclose  any  amendments  to, or
waivers from,  the provisions of its Code of Ethics within four business days of
the amendment or waiver under of Form 8-K.

ITEM 10. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the
information under the captions "Management" and "Executive  Compensation" of the
Registrant's  definitive  Proxy Statement to be filed pursuant to Regulation 14A
with the SEC  relating  to its  Annual  Meeting  of  Stockholders  to be held on
November 9, 2006.

ITEM 11.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference to the
information under the captions  "Security  Ownership of Management" and "Certain
Beneficial  Owners" of the  Registrant's  definitive Proxy Statement to be filed
pursuant  to  Regulation  14A with the SEC  relating  to its  Annual  Meeting of
Stockholders to be held on November 9, 2006.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to the
information under the caption "Certain  Relationships and Related  Transactions"
of  the  Registrant's  definitive  Proxy  Statement  to  be  filed  pursuant  to
Regulation 14A with the SEC relating to its Annual Meeting of Stockholders to be
held on November 9, 2006.


                                       16
<PAGE>

ITEM 13. EXHIBITS

Exhibit
Number                          Description of Exhibit
------- ------------------------------------------------------------------------

2.1     Agreement and Plan of Reorganization between U.S. Medical Systems, Inc.,
        Sharps  Compliance,  Inc. and  its Stockholders, dated February 27, 1998
        (incorporated  by reference from Exhibit 2.1 to Form 8-K, dated February
        27, 1998).
3.1     Bylaws of Company (incorporated by reference  from  Exhibit  3.4 to Form
        10-KSB, dated June 30, 1994).
3.2     Certificate  of  Elimination of  the  Series  A  10%  Voting Convertible
        Preferred  Stock  of  Sharps Compliance Corp. (incorporated by reference
        from Exhibit 3.6 to Form 10-KSB, dated June 30, 1998).
4.1     Specimen Stock  Certificate (incorporated  by reference from Exhibit 4.4
        to Form-10KSB, dated June 30, 1998).
10.1    Employment Agreement by and between Sharps Compliance Corp. and Dr. Burt
        Kunik  effective January 1, 2003 (incorporated by reference from Exhibit
        10.35 to Form 10-QSB dated December 30, 2002).
10.2    Employment  Agreement by and between Sharps Compliance Corp. and  Ronald
        E. Pierce dated July 14, 2003 (filed herewith).
10.3    Employment Agreement by and between Sharps Compliance Corp. and David P.
        Tusa dated July 14, 2003 (filed herewith).
10.4    Employment Agreement by  and between Sharps Compliance Corp. and Michael
        D. Archer dated July 14, 2003 (filed herewith).
10.5    Exclusive Distributorship Agreement between Pro-Tec Containers, Inc. and
        Sharps Compliance, Inc., dated April 1, 1998  (incorporated by reference
        from Exhibit 10.31 to Form 10-KSB, dated June 30, 1998).
10.6    Purchase Agreement between Ivy Green Corporation and Sharps  Compliance,
        Inc., dated June 19, 1998  (incorporated by reference from Exhibit 10.32
        to Form 10-KSB, dated June 30, 1998).
10.7    Lease Agreement  between  Lakes  Technology  Center,   Ltd.  and  Sharps
        Compliance,  Inc., dated August 1, 1998  (incorporated by reference from
        Exhibit 10.33 to Form 10-KSB, dated June 30, 1998).
10.8    Severance  Agreement  between  C.  Lee  Cooke, Jr. and Sharps Compliance
        Corp. (formerly known as - U.S. Medical  Systems, Inc.), dated September
        2, 1998 (incorporated  by reference  from Exhibit  10.34 to Form 10-KSB,
        dated June 30, 1998).
10.9    Employment  Agreement  Amendment  by and between Sharps Compliance Corp.
        and David P. Tusa dated June 21, 2004.
10.10   Employment  Agreement  Amendment  by and between Sharps Compliance Corp.
        and David P. Tusa dated August 19,2005.
10.11   Credit Agreement dated March 27,2006,  by and between Sharps  compliance
        Corp. and JPMorgan Chase Bank, N.A.
10.12   Line  of  Credit  Note  dated  March  27,  2006,  by  and between Sharps
        Compliance Corp. and JPMorgan Chase Bank, N.A.
10.13   Security  Agreement  dated  March  27,  2006,  by  and   between  Sharps
        Compliance Corp. and JPMorgan Chase Bank, N.A.
10.14   Lease  Agreement  dated  as of July 13, 2006, between Sharps Compliance,
        Inc. and Warehouse Associates Corporate Centre Kirby II, Ltd.
10.15   Lease Termination Agreement  dated as of July 13, 2006,  between  Sharps
        Compliance, Inc. and Warehouse Associates Corporate Centre Kirby I & II,
        Ltd.
14.1    Sharps Compliance Corp. Code of Ethics.
16.1    Letter  regarding  changes  in Certifying  Accountant to Arthur Andersen
        LLP, dated April 22, 1998  (incorporated  by reference from Exhibit 16.1
        to Form 8-K, dated April 22, 1998).
16.2    Letter  regarding  changes  in  Certifying  Accountant to Mann Frankfort
        Stein & Lipp CPAs L.L.P. (incorporated by reference from Exhibit 16.1 to
        Form 8-K, dated January 11, 2002).
31.1    Certification  of Chief Executive Officer in accordance with Section 302
        of the Sarbanes-Oxley Act (filed herewith).
31.2    Certification  of Chief Financial Officer in accordance with Section 302
        of the Sarbanes-Oxley Act (filed herewith).
32.1    Certification  of Chief Executive Officer in accordance with Section 906
        of the Sarbanes-Oxley Act (filed herewith).
32.2    Certification  of Chief Fnancial Officer in accordance  with Section 906
        of the Sarbanes-Oxley Act (filed herewith).


                                       17
<PAGE>



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the
Registrant's  definitive  Proxy Statement to be filed pursuant to Regulation 14A
with the SEC  relating  to its  Annual  Meeting  of  Stockholders  to be held on
November 9, 2006.














                                       18
<PAGE>

                                   SIGNATURES

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                      REGISTRANT:
                                      SHARPS COMPLIANCE CORP.

Dated: September 13, 2006             By: /s/ BURTON J. KUNIK
                                          --------------------------------------
                                          Dr. Burton J. Kunik
                                          Chairman of the Board,
                                          Chief Executive Officer and President

                                      By: /s/ DAVID P. TUSA
                                          --------------------------------------
                                          David P. Tusa
                                          Executive Vice President
                                          Chief Financial Officer, Business
                                          Development and Corporate Secretary

                                      By: /s/ RAMSAY GILLMAN
                                          --------------------------------------
                                          Ramsay Gillman
                                          Director

                                      By: /s/ JOHN R. GROW
                                          --------------------------------------
                                          John R. Grow
                                          Director

                                      By: /s/ PARRIS H. HOLMES, JR.
                                          --------------------------------------
                                          Parris H. Holmes, Jr.
                                          Director

                                      By: /s/ F.  GARDNER PARKER
                                          --------------------------------------
                                          F. Gardner Parker
                                          Director

                                      By: /s/ PHILIP C. ZERRILLO
                                          --------------------------------------
                                          Philip C. Zerrillo
                                          Director


                                       19
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED FINANCIAL STATEMENTS                                           PAGE
                                                                            ----
  Report of Independent Registered Public Accounting Firm .................. F-2

  Report of Independent Registered Public Accounting Firm .................. F-3

  Consolidated Balance Sheets as of June 30, 2006 and 2005 ................. F-4

  Consolidated Statements of Operations for the Years Ended
   June 30, 2006 and 2005 .................................................. F-5

  Consolidated Statements of Stockholders' Equity (Deficit) for the Years
   Ended June 30, 2006 and 2005 ............................................ F-6

  Consolidated Statements of Cash Flows for the Years Ended
   June 30, 2006 and 2005 .................................................. F-7

  Notes to Consolidated Financial Statements ............................... F-8







                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of
Sharps Compliance Corp. and Subsidiaries
Houston, Texas

We have audited the  accompanying  balance sheet of Sharps  Compliance  Corp. (a
Delaware  corporation) and subsidiaries  (the "Company") as of June 30, 2006 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated  financial  statements are the
responsibility of the company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
also includes  examining,  on a test basis,  evidence supporting the amounts and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  financial statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Sharps
Compliance  Corp. and subsidiaries as of June 30, 2006, and the results of their
operations  and their cash flows for the year then  ended,  in  conformity  with
accounting principles generally accepted in the United States of America.


/s/ UHY LLP

Houston, Texas
September 13, 2006




                                      F-2
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of
Sharps Compliance Corp. and Subsidiaries
Houston, Texas

We have audited the  accompanying  balance sheet of Sharps  Compliance  Corp. (a
Delaware  corporation) and subsidiaries  (the "Company") as of June 30, 2005 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated  financial  statements are the
responsibility of the company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
also includes  examining,  on a test basis,  evidence supporting the amounts and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  financial statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Sharps
Compliance  Corp. and subsidiaries as of June 30, 2005, and the results of their
operations  and their cash flows for the year then  ended,  in  conformity  with
accounting principles generally accepted in the United States of America.


/s/ UHY MANN FRANKFORT STEIN & LIPP CPAs, LLP

Houston, Texas
August 5, 2005






                                      F-3

<PAGE>
<TABLE>
<CAPTION>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                                                                         June 30,
                                                                             --------------------------------
                                                                                   2006            2005
                                                                             ---------------  ---------------
<S>                                                                                 <C>             <C>
                                     ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                                  $     296,959    $     258,427
  Restricted cash                                                                   10,010           10,010
  Accounts receivable, net of allowance for doubtful accounts of
   $20,024 and 21,757, respectively                                                935,283          964,148
  Inventory                                                                        325,688          368,495
  Prepaid and other assets                                                          88,348           79,320
                                                                             ---------------  ---------------
    TOTAL CURRENT ASSETS                                                         1,656,288        1,680,400

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $790,397
 and $650,532, respectively                                                        473,387          438,064

INTANGIBLE ASSETS, net of accumulated amortization of  $116,805 and
 $102,195, respectively                                                             60,427           11,779
                                                                             ---------------  ---------------
TOTAL ASSETS                                                                 $   2,190,102    $   2,130,243
                                                                             ===============  ===============

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
  Accounts payable                                                           $     526,582    $     567,398
  Accrued liabilities                                                              262,219          283,953
  Deferred revenue                                                                 826,764          996,597
  Current maturities of capital lease obligations                                   40,260           48,558
                                                                             ---------------  ---------------
    TOTAL CURRENT LIABILITIES                                                    1,655,825        1,896,506

LONG-TERM DEFERRED REVENUE                                                         211,568          272,781

OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities                          1,809           42,112

RENT ABATEMENT                                                                      69,000           62,500
                                                                             ---------------  ---------------
    TOTAL LIABILITIES                                                            1,938,202        2,273,899

COMMITMENTS                                                                              -                -

STOCKHOLDERS' EQUITY (DEFICIT)
  Common stock, $0.01 par value per share; 20,000,000 shares authorized;
   10,551,310 and 10,547,311 shares issued and outstanding, respectively           105,513          105,473
  Additional paid-in capital                                                     7,478,268        7,464,381
  Accumulated deficit                                                           (7,331,881)      (7,713,510)
                                                                             ---------------  ---------------
    TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                                           251,900         (143,656)
                                                                             ---------------  ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                         $   2,190,102    $   2,130,243
                                                                             ===============  ===============
</TABLE>



           See accompanying notes to consolidated financial statements


                                      F-4
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                      Year Ended June 30,
                                                   -------------------------
                                                        2006         2005
                                                   ------------ ------------
REVENUES
 Product                                           $10,143,651  $ 8,637,397
 Environmental services                                394,318      331,103
 Consulting services                                    24,751       32,677
                                                    -----------  -----------
   TOTAL REVENUES                                   10,562,720    9,001,177

COSTS AND EXPENSES
 Cost of revenues                                    6,068,399    5,499,355
 Selling, general and administrative                 3,957,653    3,520,045
 Depreciation and amortization                         154,475      157,460
                                                    -----------  -----------
   TOTAL COSTS AND EXPENSES                         10,180,527    9,176,860
                                                    -----------  -----------

OPERATING INCOME (LOSS)                                382,193     (175,683)

OTHER INCOME (EXPENSE)
 Interest income                                        12,314        5,450
 Interest expense                                      (12,878)     (22,867)
                                                    -----------  -----------
NET INCOME (LOSS)                                  $   381,629  $  (193,100)
                                                    ===========  ===========
NET INCOME (LOSS) PER COMMON SHARE
 Basic                                             $       .04  $      (.02)
                                                    ===========  ===========
 Diluted                                           $       .03  $      (.02)
                                                    ===========  ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
 INCOME (LOSS) PER COMMON SHARE
 Basic                                              10,547,846   10,539,215
 Diluted                                            10,953,831   10,539,215



           See accompanying notes to consolidated financial statements


                                      F-5
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
                                                                                                    Total
                                             Common Stock         Additional                     Stockholders'
                                         ---------------------     Paid-in        Accumulated      Equity
                                           Shares     Amount       Capital          Deficit       (Deficit)
                                         ----------- ---------    -----------     ------------   ------------
<S>                                         <C>        <C>          <C>                <C>          <C>
Balances, July 1, 2004                   10,538,144   $105,381    $ 7,457,639     $(7,520,410)   $   42,610

Exercise of stock options                     9,167         92          6,742               -         6,834


Net loss                                          -          -              -        (193,100)     (193,100)
                                         ----------- ---------    -----------     ------------   ------------
Balances, June 30, 2005                  10,547,311    105,473      7,464,381      (7,713,510)     (143,656)

Exercise of stock options                     3,999         40          2,852              -          2,892

Accelerated vesting of stock options                                   11,035                        11,035

Net income                                        -          -              -         381,629       381,629
                                         ----------- ---------    -----------     ------------   ------------
Balances, June 30, 2006                  10,551,310   $105,513    $ 7,478,268     $(7,331,881)   $  251,900
                                         =========== =========    ===========     ============   ============
</TABLE>



           See accompanying notes to consolidated financial statements


                                      F-6
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                                                     ---------------------
                                                                        2006       2005
                                                                     ---------- ----------
<S>                                                                     <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income (loss)                                                   $  381,629 $ (193,100)
 Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
   Depreciation and amortization                                        154,475    157,460
   Stock option acceleration expense                                     11,035          -
   Bad debt expense                                                           -      8,771
   Loss on disposal of equipment                                              -        126
 Changes in operating assets and liabilities:
   Decrease in restricted cash                                                -      4,668
   Decrease in accounts receivable                                       28,865      8,489
   Decrease in inventory                                                 42,807     24,743
   (Increase) decrease in prepaid and other assets                       (9,028)    59,478
   Decrease in accounts payable and accrued liabilities                 (56,050)   (62,745)
   Increase (decrease) in deferred revenue                             (231,046)   286,525
                                                                     ---------- ----------
     NET CASH PROVIDED BY OPERATING ACTIVITIES                          322,687    294,415

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of property and equipment                                 (175,188)   (64,333)
   Proceeds from the disposal of property and equipment                       -     18,026
   Intangible Assets                                                    (63,258)    (2,341)
                                                                     ---------- ----------
     NET CASH USED IN INVESTING ACTIVITIES                             (238,446)   (48,648)

CASH FLOWS FROM FINANCING ACTIVITIES
   Payments on long-term debt                                                 -    (31,675)
   Net payments on working capital bank debt                                  -   (165,083)
   Payments on capital lease obligations                                (48,601)   (40,219)
   Proceeds from exercising of stock options                              2,892      6,834
                                                                     ---------- ----------
     NET CASH USED IN FINANCING ACTIVITIES                              (45,709)  (230,143)
                                                                     ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                38,532     15,624

CASH AND CASH EQUIVALENTS, beginning of year                            258,427    242,803
                                                                     ---------- ----------
CASH AND CASH EQUIVALENTS, end of year                               $  296,959 $  258,427
                                                                     ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 Cash paid for interest                                              $   12,879 $   22,867
                                                                     ========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:

 Property and equipment additions acquired under
  capital lease obligations                                          $        - $    8,930
                                                                     ========== ==========
</TABLE>




           See accompanying notes to consolidated financial statements


                                      F-7
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005


NOTE 1 - ORGANIZATION AND BACKGROUND

Organization:  The accompanying  consolidated  financial  statements include the
financial  transactions  and accounts of Sharps  Compliance Corp. and its wholly
owned  subsidiaries,  Sharps  Compliance,  Inc. of Texas (dba Sharps Compliance,
Inc.), Sharps e-Tools.com, Inc. ("Sharps e-Tools"), Sharps Manufacturing,  Inc.,
Sharps Environmental Services, Inc. (dba Sharps Environmental Services of Texas,
Inc.) and Sharps Safety,  Inc.  (collectively,  "Sharps" or the "Company").  All
significant  intercompany  accounts and  transactions  have been eliminated upon
consolidation.

Business Products: The Company focuses on developing cost effective,  logistical
and  educational  solutions  for  healthcare  and  non-healthcare  institutional
markets. These solutions include Sharps Disposal by Mail System(R), Pitch-It(TM)
IV Poles, Sharps Secure(R),  Sharps SureTemp Tote(R),  IsoWash(R) Linen Recovery
System,  Trip LesSystem(R),  Sharps asset return boxes,  Sharps e-Tools,  Sharps
Environmental  Services,  and Sharps  Consulting.  The  Company's  products  and
services are  provided  primarily  to create cost and  logistical  efficiencies.
These products and services facilitate compliance with certain state and federal
regulations,  as well as compliance with  educational and training  requirements
required by federal, state, local and regulatory agencies.

The Sharps  Disposal  by Mail  System(R)  is a  comprehensive  solution  for the
containment,  transportation,  destruction and tracking of medical waste for the
commercial,  industrial and home healthcare  industries.  The Sharps Disposal by
Mail System(R)  contains a securely sealed,  leak and puncture  resistant sharps
container in several  sizes;  United States  Postal  Service  ("USPS")  approved
shipping  carton with  priority  mail  postage;  absorbent  material  inside the
container that can hold up to 150 milliliters of waste; a red bag for additional
containment; and complete documentation and tracking manifest. Customers who use
the Sharps Disposal by Mail System(R) are responsible for mailing the systems to
the Company's  disposal  facility for incineration  (i.e.  Sharps  Environmental
Services).

The  Pitch-It(TM)  IV Pole systems are designed as a cost  effective,  portable,
lightweight  and  disposable  alternative  to  traditional  IV  poles  used  for
gravity-fed or pump-administered  infusions. The innovative pole design provides
opportunities   for  the  home   healthcare   industry  to  improve   logistical
efficiencies through elimination of traditional delivery and pickup of IV poles.
The Pitch-It(TM) poles are available in three models:  (i) tabletop,  (ii) floor
and (iii) full-size with wheels.

The Sharps  Secure(R)Needle  Disposal System is the first commercially available
wall mounted needle collection and disposal by mail system specifically designed
for the retail and industrial markets.  The system is mounted on the wall inside
of public restrooms to provide a visible  collection point for self-injectors to
safely and privately  dispose of used needles,  which are often discarded in the
public waste at commercial and office buildings. The system consists of a Sharps
Disposal by Mail  System(R)  needle  collection  container,  housed in the newly
designed  (patent  pending) Sharps  Secure(TM)  metal  collection  cabinet.  The
wall-mounted  cabinet,  which is manufactured  from heavy gauge metal,  has been
designed with numerous safety features to ensure that needles properly  disposed
of will not present a hazard.

The Sharps SureTemp  Tote(R) is a disposable  cooler that maintains a safe range
for  temperature-sensitive  materials.  Sharps primarily  markets the product to
home healthcare providers to protect IV medications used in home infusion.

The IsoWash(R) Linen Recovery System is designed to address the safe handling of
linens  contaminated  with  blood,  bodily  fluids and other  biohazards  in the
hospitality  market.  Historically,  contaminated  linens are  discarded at most
domestic  hotels.  IsoWash(R),  however,  provides  an  alternative  for  safely
handling  and   de-contaminating   at  a  significant   cost  savings  to  linen
replacement. Contaminated linens are isolated from human contact by being placed
into the  IsoWash(R)  water-soluble  bag,  which is clear to  reveal  the  bag's
contents and is marked with a biohazard warning.  The isolated linens are placed
in industrial  laundry equipment for recovery.  Once the wash cycle begins,  the
bag dissolves within two minutes allowing  chemicals in the wash to safely clean
the  contaminated  laundry  with  minimal  handling.  Sharps  is  the  exclusive
distributor for the patented product.




                                      F-8
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005

NOTE 1 - ORGANIZATION AND BACKGROUND (continued)

The Trip LesSystem(R)is a solution for the home healthcare (commercial) industry
that will  eliminate  multiple  trips to the patient's  home by providers  after
treatment has been completed.  The Trip  LesSystem(R)  has combined two complete
programs for return and  disposal.  All systems  contain the Sharps  Disposal by
Mail  System(R)  along  with  either  (i) a prepaid  pump  return  box or (ii) a
Pitch-It(TM) IV Pole system, depending on the patient's therapy.

Sharps' asset return boxes (i.e., Sharps Pump Return Box and Sharps Enteral Pump
Return Box) are marketed to home  healthcare  providers,  primarily for use with
home  infusion  patients.  These  products  provide  delivery  and  retrieval of
expensive equipment, like infusion and Enteral pumps.

The Biohazard Spill Clean Up Kit and Disposal System is a complete  solution for
both cleanup and disposal by mail of  bio-hazardous  spill waste and  materials.
This convenient system comes complete with everything  necessary for clean up of
potentially  bio-hazardous materials such as blood and bodily fluids. The Sharps
system  provides a means to safely,  easily and legally  remove these  materials
from your  location and transport  them to a  destruction  facility via the U.S.
Postal  Service.  Sharps  Bio-Hazard  Clean-Up  Kit has the  capacity to contain
spills of up to 1 liter of contaminant. Spill clean-up equipment, transportation
and proper disposal are all included in the price of the system.

The Sharps e-Tools online services include SharpsTracer(TM). SharpsTracer(TM) is
a manifest  imaging and  tracking  program  for  registered  customers  with the
purpose of tracking and certifying the  transportation and disposal of regulated
medical waste.  SharpsTracer(TM)  eliminates traditional  paper-based methods of
manifest  tracking  and is designed  to enhance  customer  efficiencies  with an
automatic Proof of Destruction,  Market Data Collection  abilities and Return to
Store Program capabilities. AssetTracer(TM) allows its registered subscribers to
manage all types of capital assets  through a single,  organized  database.  The
program can be used in conjunction  with other Company products or independently
and  includes  management  reporting  for  regulatory  compliance,  preventative
maintenance,  and asset status and/or  location.  ComplianceTrak  offers a broad
range of employee centered compliance and education programs. The programs range
from policy and procedure  development to specialized training and certification
for all  employees  required  to meet  certain  Occupational  Safety  and Health
Administration ("OSHA") standards.

Sharps  Environmental  Services provides  environmental  solutions for customers
with a wide variety of waste disposal  needs.  Destruction and disposals are the
primary services which are available to the Company's affiliates,  as well as to
its and other  customers and includes  destruction  and disposal of, among other
things,  (i)  medical  waste,  (ii)  legal  and  confidential  documents,  (iii)
pharmaceutical  products and (iv)  non-hazardous  industrial waste. This service
also allows the Company to  directly  oversee the proper  disposal of its Sharps
Disposal by Mail  Systems(R)  and allows the Company to provide its  proprietary
SharpsTracer(TM).  The Company has an  agreement  with the City of Carthage  and
Panola County,  Texas to manage and operate the Panola County Resources Recovery
Facility, a municipally owned incinerator.  The agreement expires June 30, 2012.
The Company has the option of extending the lease through July 30, 2022.

Sharps Consulting provides a broad range of services including,  (i) analysis of
legal and  regulatory  implications  of present waste handling  practices,  (ii)
communicating  new  legislation  and  industry  best  practices  for  minimizing
employee  exposure and liability,  (iii) serving as intermediary with regulatory
agencies and (iv) educating staff on the dangers of improper  medical wastes and
infection control practices.

Concentration  of Customers  and  Suppliers:  Although,  Sharps has  experienced
growth in revenues over the past few years,  there is an inherent  concentration
of credit risk  associated  with accounts  receivable  arising from sales to its
major customers,  which are primarily distributors.  For the year ended June 30,
2006,  three customers  represented  approximately  48% of revenues.  Those same
three customers represented approximately 38%, or $378,939 of the total accounts
receivable  balance at June 30,  2006.  For the year ended  June 30,  2005,  two
customers  represented  approximately 47% of revenues.  Those same two customers



                                      F-9
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005

NOTE 1 - ORGANIZATION AND BACKGROUND (continued)

represented  approximately  42%, or $409,000  of the total  accounts  receivable
balance at June 30,  2005.  The Company may be affected by its  dependence  on a
limited number of high volume  customers.  Management  believes that the risk is
mitigated  by,  (i) the  contractual  relationships  with  the  end  user of the
products  and  reputation  of  Sharps'  major  customers,  (ii)  a  loss  of any
distributor does not necessarily  mean the loss of the underlying  customer base
of  that  distributor  for  the  Company's  products  and  (iii)  the  continued
diversification of the Company's products and services.

Currently,  Sharps sole-sources  transportation with the USPS, which consists of
delivering  the  Sharps  Disposal  by Mail  System(R)  from  the end user to the
Company's  leased  incineration  facility.  The Company recently entered into an
arrangement  with United Parcel Service Inc.  ("UPS")  whereby UPS has agreed to
transport the Company's Sharps Disposal by Mail System(R)  products from the end
user to the Company's leased  incineration  facility.  The Company expects to be
offering a UPS product to its current and future  customers in fiscal year 2007.
Management  believes the risk of  dependence on the USPS is mitigated by the new
arrangement with UPS and its long-standing business relationship with the USPS.

Liquidity:  Until fiscal year 2006, Sharps has incurred annual operating losses.
The  future  success  of  Sharps  is  dependent  upon  many  factors,  including
environmental  regulation,   continuity  of  its  distributorship  and  customer
agreements,  successful completion of its product development activities and the
identification  and  penetration  of  additional  markets for its  products  and
services.  Management  believes that the Company's current financial  resources,
including  cash on hand and its line of credit with JPMorgan  Chase Bank,  N.A.,
will be sufficient to fund operations  through fiscal year 2007. There can be no
assurance  that the  Company  will be able to obtain  additional  financing,  if
necessary,  on  acceptable  terms to fund  operations  beyond  that time  frame;
however,  management  believes  that it  would be  successful  in  raising  such
financing, if necessary.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents and Short-term  Investments:  The Company  considers all highly
liquid  investments  with a  maturity  of  three  months  or less at the time of
purchase to be cash equivalents.  Short-term investments consist of certificates
of deposit with original  maturities greater than three months but less than one
year. Short-term investments are classified as held-to-maturity.

The Company  maintains  funds in bank accounts  that,  at times,  may exceed the
limit insured by the Federal Deposit Insurance Corporation,  or "FDIC". Accounts
are  guaranteed  by the FDIC up to $100,000.  The risk of loss  attributable  to
these  uninsured  balances is mitigated by depositing  funds only in high credit
quality  financial  institutions.  The Company has not experienced any losses in
such accounts.

Accounts Receivable:  Accounts receivable consist primarily of amounts due to us
from our normal business activities. Accounts receivable balances are determined
to be delinquent when the amount is past due based on the contractual terms with
the  customer.  We maintain an allowance  for  doubtful  accounts to reflect the
expected  uncollectibility  of  accounts  receivable  based  on past  collection
history and specific  risks  identified  among  uncollected  accounts.  Accounts
receivable  are charged to the  allowance  for  doubtful  accounts  when we have
determined that the receivable will not be collected and/or when the account has
been referred to a third party collection agency.

Inventory:  Inventory consists primarily of finished goods and supplies held for
sale and are  stated  at the  lower of cost  using the  average  cost  method or
market.  At June 30, 2006 total  inventory  was  $325,688 of which  $162,634 was
finished goods and $163,054 was raw materials.  At June 30, 2005 total inventory
was  $368,495  of  which  $206,830  was  finished  goods  and  $161,665  was raw
materials.

Property  and  Equipment:   Property  and  equipment  is  stated  at  cost  less
accumulated  depreciation.  Depreciation  is  computed  using the  straight-line
method  based  on  the  estimated   useful  lives  of  the  assets.   Additions,
improvements and renewals  significantly  adding to the asset value or extending
the life of the asset are capitalized.  Ordinary maintenance and repairs,  which
do not extend the physical or economic  life of the property or  equipment,  are
charged to expense as incurred.  When assets are retired or  otherwise  disposed



                                      F-10
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

of, the cost and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is reflected in the results of operations for the
period.  During the years  ended June 30, 2006 and 2005,  the  Company  recorded
depreciation expense of $139,865 and $156,847, respectively.

Intangible Assets:  Intangible assets consist of (i) permit costs related to the
Company's  leased  incineration  facility  in  Carthage,  Texas  and (ii)  three
patents,  two acquired in June 1998 and one in November  2003.  The permit costs
are  being  amortized  over  the  remaining  initial  term of the  corresponding
incinerator  lease.  The two patents  acquired in June 1998 have been  amortized
over their estimated  useful lives of five years and were fully amortized during
the year ended June 30, 2003. The one patent  acquired in November 2003 is being
amortized over its estimated  useful life of seventeen  years.  During the years
ended June 30,  2006 and 2005,  the  Company  recorded  amortization  expense of
$14,610 and $613,  respectively.  Accumulated  amortization at June 30, 2006 and
2005 was $116,805 and $102,195, respectively. Future amortization for intangible
assets is as follows: $14,610, $14,610, $14,610, $6,663, $819 and $9,115 for the
years  ending  June  30,  2007,   2008,   2009,   2010,  2011,  and  thereafter,
respectively, for a total amortization of $60,427.

Stock-Based Compensation:  The Company adopted Statement of Financial Accounting
Standards  ("SFAS") No. 123,  "Accounting  for  Stock-Based  Compensation",  but
elected to continue to account for its employee  stock-based  compensation  plan
under Accounting  Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" and its related interpretations in accounting for its stock
option plan (see Note 9). While the Company continues to use APB No. 25 (through
the quarter ended June 30,  2006),  pro forma  information  regarding net income
(loss) and earnings per share is required under SFAS No. 123R,  "Accounting  for
Share-Based-Payment Arrangements",  including that the information be determined
as if the  Company  had  accounted  for its stock  options  under the fair value
method prescribed by SFAS No. 123R.

The Company  uses the  Black-Scholes  option  valuation  model to value  options
granted.  Because changes in input  assumptions  can materially  affect the fair
value estimate,  the existing model may not necessarily provide the only measure
of fair value for the employee  stock  options.  The Company used the  following
weighted-average assumptions for options granted during the years ended June 30,
2006  and  2005,  as  follows:  risk-free  interest  rates  of 4.7%  and  3.74%,
respectively,  expected annual dividend yield of 0%;  volatility  factors of the
expected market price of the Company's  common stock of  approximately  114% and
75.1%, respectively;  and a weighted-average expected life of the options of 3.4
and 3.9 years, respectively.

Had compensation expense for stock based compensation been determined consistent
with the  provisions  of SFAS No.  123 (and as  amended  by SFAS No.  148),  the
Company's net income (loss) would have been as follows:

                                                             Year Ended June 30,
                                                           ---------------------
                                                               2006       2005
                                                           ---------- ----------
Net income (loss), as reported                             $ 381,629  $(193,100)
Less: Total stock-based employee compensation
  expense determined under fair value based
  method for all awards, net of related tax effects        $(724,361) $(298,075)
                                                           ========== ==========
Net loss, pro forma                                        $(342,732) $(491,175)
                                                           ========== ==========
Diluted net income (loss) per share, as reported           $   0 .03  $   (0.02)
                                                           ========== ==========
Diluted net loss per share, pro forma                      $   (0.03) $   (0.05)
                                                           ========== ==========

Stock options issued to consultants or advisors in exchange for services  (other
than those related to an equity offering) are valued utilizing the Black-Scholes
option valuation model and expensed over the corresponding service period.


                                      F-11
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

On June 20, 2006,  the  Company's  Board of Directors  approved the  accelerated
vesting of unvested stock options previously awarded to employees, officers, and
directors as of June 30, 2006 in light of new accounting  regulations  that will
take effect on July 1, 2006 (see third paragraph below).

As a result of the vesting  acceleration,  options to purchase 757,696 shares of
Company  common stock,  which would  otherwise  have vested over the next one to
three years, became exercisable  effective June 30, 2006. Based upon the closing
stock price of the  Company's  common stock on June 30, 2006 of $0.85 per share,
fifty-two  percent  (52%),  or 391,028,  of the total  accelerated  common stock
options are  "in-the-money" and have exercise prices ranging from $0.52 to $0.84
per share.  Thirty percent (30%),  or 226,666,  of the total  accelerated  stock
options have an exercise price of $0.85 per share.  Eighteen  percent (18%),  or
140,001,   of  the  total   accelerated  stock  options  are  "under  water"  or
"out-of-the-money"  and have  exercise  prices  ranging  from $0.86 to $1.15 per
share.  Of the  accelerated  options,  328,408  options  are  held by  executive
officers  (of which  161,741 are  "in-the-money"),  246,774  options are held by
non-employee  directors  (of which  133,441  are  "in-the-money"),  and  182,514
options are held by other  employees (of which 95,846 are "in-the-  money").  In
addition to the above,  the vesting of annual grants to  non-employee  directors
totaling 260,000 stock options, granted on June 28, 2006, was also accelerated.

Under the recently issued Statement of Financial  Accounting Standards No. 123R,
"Share-Based  Payment" ("SFAS 123R"), the Company would be required to apply the
expense  recognition  provisions  beginning  July 1,  2006.  As a result  of the
acceleration,   the  Company   eliminated   future  stock   option   expense  of
approximately  $232,000 in fiscal 2007,  $132,000 in fiscal 2008, and $55,000 in
fiscal 2009 on a pre-tax  basis,  based upon the  Company's  value  calculations
using the Black-Scholes methodology.  The acceleration resulted in the recording
of non-cash compensation expense of $11,035 in the quarter ending June 30, 2006.

SFAS 123R requires all entities to recognize  compensation  expense in an amount
equal to the fair value of share-based  payments,  such as stock options granted
to  employees.  The  Company  has  elected  to  apply  SFAS  123R on a  modified
prospective  method.  Under  this  method,  the  Company is  required  to record
compensation  expense for the unvested portion of previously granted awards that
remain  outstanding  at the date of adoption.  For public  entities that file as
small business  issuers (such as the Company),  SFAS 123R is effective as of the
beginning of the first  interim or annual  reporting  period of the first fiscal
year beginning on or after December 15, 2005 (quarter ended September 30, 2006).
The Company will recognize  compensation  expense under SFAS 123R beginning with
the quarter ended September 30, 2006.

Revenue   Recognition:   The  Company   adopted  the   Securities  and  Exchange
Commission's  ("SEC")  Staff  Accounting  Bulletin  ("SAB")  No.  101,  "Revenue
Recognition",  which provides  guidance related to revenue  recognition based on
interpretations  and practices  followed by the SEC. Under SAB No. 101,  certain
products  offered by the Company  have  revenue  producing  components  that are
recognized  over  multiple  delivery  points  (Sharps  Disposal by Mail Systems,
referred  to as  "Mailbacks"  and  Sharps  Return  Boxes,  referred  to as "Pump
Returns") and can consist of up to three separate  elements as follows:  (1) the
sale of the container system, (2) the transportation of the container system and
(3) the  treatment and disposal  (incineration)  of the  container  system.  The
individual  fair  value of the  transportation  and  incineration  services  are
determined by the sales price of the service offered by third parties,  with the
fair value of the container  being the residual  value.  Revenue for the sale of
the  container is recognized  upon  delivery to the customer,  at which time the
customer  takes title and assumes risk of ownership.  Transportation  revenue on
Mailbacks is recognized when the customer returns the mailback  container system
and the container has been received at the  Company's  treatment  facility.  The
Mailback container system is mailed to the incineration facility using the USPS.
Incineration  revenue is recognized upon the destruction  and  certification  of
destruction  having been  prepared on the  container.  Since the  transportation
element and the incineration  elements are undelivered  services at the point of
initial sale of the container,  the Mailback and Incinerator revenue is deferred
until the services are performed. The current and long-term portions of deferred
revenues are  determined  through  regression  analysis and  historical  trends.
Furthermore,  through  regression  analysis of historical  data, the Company has
determined  that a certain  percentage of all container  systems sold may not be
returned. Accordingly, a portion of the transportation and incineration elements
are recognized at the point of sale.


                                      F-12
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Shipping and Handling  Fees and Costs:  The Company  records  amounts  billed to
customers  for shipping and handling as revenue.  Costs  incurred by the Company
for shipping and handling have been classified as cost of revenues.

Advertising  Costs:  Advertising costs are charged to expenses when incurred and
totaled  $22,187  and  $33,880  for the  years  ended  June 30,  2006 and  2005,
respectively.

Realization of Long-lived  Assets:  The Company evaluates the  recoverability of
property and equipment and intangible or other assets if facts and circumstances
indicate  that any of  those  assets  might be  impaired.  If an  evaluation  is
required, the estimated future undiscounted cash flows associated with the asset
are compared to the asset's  carrying  amount to  determine  if a write-down  to
market value or discounted cash flow value is necessary.

Employee  Benefit  Plans:  In addition to group  health  related  benefits,  The
Company  maintains a 401(k)  employee  savings plan  available to all  full-time
employees.  The Company  matches a portion of employee  contributions  with cash
(25% of employee  contribution up to 6%).  Company  contributions  to the 401(k)
plan were  $20,954  and  $3,571  for the  years  ended  June 30,  2006 and 2005,
respectively,  and are  included in selling  and  administrative  expenses.  For
purposes of the group health  benefit plan, the Company  self-insures  an amount
equal to the excess of the  employees'  deductible  ($1,000 for  individual  and
$4,000 for family  coverage) up to the amount by which the third party insurance
begins coverage ($4,000 for individual and $8,000 for family coverage).

Income Taxes:  The liability  method is used in accounting  for deferred  income
taxes.  Under this method,  deferred tax assets and  liabilities  are determined
based on  differences  between  financial  reporting and tax bases of assets and
liabilities  and are measured  using the enacted tax rates and laws that will be
in effect when the differences  are expected to reverse.  The  realizability  of
deferred tax assets is evaluated annually and a valuation  allowance is provided
if the deferred tax assets,  more likely than not,  will not give rise to future
benefits in the Company's tax returns.

Net Income  (Loss)  Per Share:  Earnings  per share  ("EPS")  data for all years
presented  has been  computed  pursuant to  Statement  of  Financial  Accounting
Standards ("SFAS") No. 128,  "Earnings Per Share",  that requires a presentation
of basic and diluted  earnings  per share.  Basic EPS  excludes  dilution and is
determined by dividing  income or loss available to common  stockholders  by the
weighted average number of common shares  outstanding during the period adjusted
for  preferred  stock  dividends,  if any.  Diluted EPS reflects  the  potential
dilution  that could occur if  securities  and other  contracts  to issue common
stock were exercised or converted into common stock.  Options outstanding during
each year have not been  included  in the  calculation  of diluted  EPS, as they
would have an anti-dilutive effect on EPS.

Financial  Instruments:  The Company  considers  the fair value of all financial
instruments  not to be  materially  different  from  their  carrying  values  at
year-end based on management's estimate of the Company's ability to borrow funds
under terms and conditions similar to those of the Company's existing debt.

Segment  Reporting:  SFAS No. 131,  "Disclosures about Segments of an Enterprise
and Related  Information,"  requires that a public  business  enterprise  report
financial and descriptive  information about its operating segments.  Generally,
financial  information  is required to be reported on the basis used  internally
for evaluating segment performance and resource allocation. The Company operates
in a single  segment,  focusing on developing  cost  effective,  logistical  and
educational solutions for healthcare and non-healthcare institutional markets.

Use of  Estimates:  The  preparation  of  consolidated  financial  statements in
conformity with accounting  principles  generally  accepted in the United States
requires  management to make estimates and assumptions  that affect the reported
amounts of assets,  liabilities and disclosure of contingent  liabilities at the
date of the  consolidated  financial  statements  and the  reported  amounts  of
revenue and expense  during the reporting  period.  Actual  results could differ
from these estimates.


                                      F-13
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Reclassifications:  Certain items in the 2005 Consolidated  Financial Statements
have been reclassified to conform with the 2006 presentation.

Recent  Accounting  Pronouncements:  In December 2004, the FASB issued Statement
No. 123 (revised 2004) ("FAS 123R"), Share-Based Payments. FAS 123R requires all
entities to recognize  compensation expense in an amount equal to the fair value
of share-based payments, such as stock options granted to employees. The Company
has  elected  to apply FAS 123R on a  modified  prospective  method.  Under this
method,  the  Company is required to record  compensation  expense (as  previous
awards continue to vest) for the unvested  portion of previously  granted awards
that remain  outstanding at the date of adoption.  For public entities that file
as small  business  issuers,  FAS 123R is effective  as of the  beginning of the
first interim or annual  reporting  period of the first fiscal year beginning on
or after  December  15,  2005  (quarter  ended  September  30,  2006).  Although
management  has completed its evaluation of the effect that FAS 123R, the effect
of the new standard to the Company's statement of operations  beginning with the
quarter  ended  September  30,  2006,  will be  significantly  lower  than  that
disclosed in its previous pro forma footnote disclosures as a result of the June
30, 2006 acceleration of vesting of unvested stock options previously awarded to
employees,  officers,  and  directors  (See  Notes 2 and 9 of the  Notes  to the
Consolidated Financial Statements).

In February 2006, the FASB issued SFAS No. 155,  "Accounting  for Certain Hybrid
Financial Instruments." which amends SFAS No. 133 and SFAS No. 140. SFAS No. 155
permits hybrid financial  instruments  that contain an embedded  derivative that
would  otherwise  require  bifurcation  to  irrevocably be accounted for at fair
value,  with changes in fair value  recognized in the  statement of income.  The
fair value election may be applied on an  instrument-by-instrument  basis.  SFAS
No. 155 also eliminates a restriction on the passive derivative instruments that
a qualifying  special  purpose  entity may hold.  SFAS No. 155 is effective  for
those  financial  instruments  acquired or issued  after  December  1, 2006.  At
adoption,  any difference  between the total  carrying  amount of the individual
components of the existing  bifurcated hybrid financial  instrument and the fair
value of the  combined  hybrid  financial  instrument  will be  recognized  as a
cumulative-effect  adjustment to beginning retained  earnings.  The Company does
not  expect  the new  standard  to have any  material  impact  on our  financial
position and results of operations.

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial Assets, an amendment of FASB Statement No. 140." SFAS No. 156 requires
all  separately  recognized  servicing  assets and servicing  liabilities  to be
initially measured at fair value, if practicable. The standard permits an entity
to subsequently measure each class of servicing assets or servicing  liabilities
at fair value and report changes in fair value in the statement of income in the
period in which the changes occur.  SFAS No. 156 is effective for the Company as
of December 1, 2006.  The Company  does not expect the new  standard to have any
material impact on our financial position and results of operations.

In July 2006, the FASB issued FIN No. 48,  "Accounting for Uncertainty in Income
Taxes - an  interpretation  of  FASB  Statement  No.  109.  This  interpretation
clarifies  the  accounting  for  uncertainty  in income taxes  recognized  in an
entity's financial  statements in accordance with SFAS No. 109,  "Accounting for
Income Taxes." It prescribes a recognition  threshold and measurement  attribute
for financial  statement  disclosure  of tax  positions  taken or expected to be
taken on a tax  return.  This  interpretation  is  effective  for  fiscal  years
beginning  after  December 15, 2006.  The Company will be required to adopt this
interpretation in the first quarter of 2008.  Management is currently evaluating
the requirements of FIN No. 48 but does not believe the new standard will have a
impact on the consolidated financial statements.

NOTE 3 - ACCOUNT RECEIVABLE AND INVENTORY WRITE-DOWN

During  September  and October  2003,  the  Company  secured  judgments  against
Ameritech  Environmental,  Inc.  ("Ameritech")  totaling $176,958 related to the
non-payment by Ameritech for services provided by the Company in 2002. Ameritech
sold the  assets of  Ameritech  representing  collateral  for the  judgments  to
MedSolutions,  Inc. of Dallas,  Texas  ("MedSolutions") in November 2003. During
January  2004,  the Company  secured a Garnishment  Order  against  MedSolutions
whereby  MedSolutions was ordered to pay to the Company $170,765,  plus interest
at 5%, subject to the terms of the agreement by which MedSolutions purchased the


                                      F-14
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005

NOTE 3 - ACCOUNT RECEIVABLE AND INVENTORY WRITE-DOWN (continued)

Ameritech  assets. A balloon payment of $137,721 due November 7, 2004, under the
Garnishment  Order,  was not  made by  MedSolutions  to the  Company.  It is the
position  of the  Company  that  MedSolutions  is  currently  in  breach  of the
Garnishment  Order.  Additionally,  the Company filed an amended suit, in August
2006, against Ameritech,  its officers and directors (Jasper S. Howard, Alton H.
Howard  and  Jonathon  S.  Howard)  alleging  fraudulent  conveyance,  fraud  on
creditors, civil conspiracy, breach of court order and conversion. Prior to year
ending June 30, 2003,  the Company  wrote-off all  outstanding  amounts due from
Ameritech.  Any recovery  that may be received by the Company will be reduced by
collection-related  legal fees estimated at  thirty-five  percent of any amounts
collected  plus  expenses.  Although the Company will  continue to  aggressively
pursue  collection  of the  outstanding  amounts,  no  assurances  can  be  made
regarding ultimate collection.

NOTE 4 - PROPERTY AND EQUIPMENT

At June 30, 2006 and 2005, property and equipment consisted of the following:
<TABLE>
<CAPTION>
                                                                      June 30,
                                                       ------------------------------------
                                   Useful Life              2006                2005
                                  ----------------     ----------------    ----------------
<S>                                     <C>                  <C>                <C>
Furniture and fixtures             3 to 5 years        $        25,026     $        23,903
Equipment                               5 years                250,058             226,629
Manufacturing                          15 years                221,636             221,636
Computers and software             3 to 5 years                543,963             444,150
Leasehold improvements                  3 years                223,101             172,278
                                                       ----------------    ----------------
                                                             1,263,784           1,088,596
Less:  accumulated depreciation                                790,397             650,532
                                                       ----------------    ----------------
Net property and equipment                             $       473,387     $       438,064
                                                       ================    ================
</TABLE>

NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT

On March 27, 2006,  the Company  entered into a Credit  Agreement  with JPMorgan
Chase Bank,  N.A. which provides for a $1.5 million Line of Credit  Facility the
proceeds of which may be utilized for, (i) for working capital,  (ii) letters of
credit (up to $200,000),  (iii)  acquisitions  (up to $500,000) and (iv) general
corporate  purposes.  Indebtedness  under the  Credit  Agreement  is  secured by
substantially  all  of the  Company's  assets.  Borrowings  bear  interest  at a
fluctuating rate per annum equal to either,  (i) prime rate or (ii) LIBOR plus a
margin of 2.75 %. Any  outstanding  revolving  loans,  and  accrued  and  unpaid
interest,  will be due and payable on March 27, 2008,  the maturity  date of the
facility.  The aggregate  principal  amount of advances  outstanding at any time
under the Facility  shall not exceed the  Borrowing  Base which is equal to, (i)
80% of  Eligible  Accounts  Receivable  (as  defined)  plus (ii) 50% of Eligible
Inventory (as defined).  The Credit Agreement contains  affirmative and negative
covenants that,  among other items,  require the Company to maintain a specified
tangible net worth and fixed charge  coverage ratio.  The Credit  Agreement also
contains customary events of default. Upon the occurrence of an event of default
that remains uncured after any applicable cure period,  the lenders'  commitment
to make  further  loans may  terminate  and the Borrower may be required to make
immediate repayment of all indebtedness to the lenders. The lender would also be
entitled to pursue other remedies against the Company and the collateral.  As of
June 30, 2006,  there were no borrowings  under this Line Of Credit Facility and
the Company was in compliance with all loan covenants.

The  above  noted  Line of  Credit  Facility  replaces  the  Company's  previous
arrangement  with  a  financial  institution  for a  $1.25  million  asset-based
(accounts receivable factoring) line of credit.


                                      F-15
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005

NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES

Capital lease obligations consist of the following:

                                                                  June 30,
                                                              -----------------
                                                                 2006     2005
                                                              -------- --------
Capital lease for the purchase of accounting and
 operating system software and hardware, due in
 monthly installments of $4,061, interest imputed
 at 21% through February 2007                                 $30,160  $68,313

Capital lease for purchase of phone system due in
 monthly installments of $455, interest imputed at
 12% through August 2007                                        5,916   10,368

Capital lease for purchase of copier/printer due
 in monthly installments of $157, interest imputed
 at 21% through August 2006                                       155    1,811

Capital lease for purchase of phone system
 upgrades due in monthly installments of $157,
 interest imputed at 16% through December 2007                  2,530    3,905

Capital lease for purchase of forklift due in
 monthly installments of $290, interest imputed at
 11% through June 2007                                          3,308    6,273
                                                              -------- --------
                                                               42,069   90,670
Less: current portion                                          40,260   48,558
                                                              -------- --------
                                                              $ 1,809  $42,112
                                                              ======== ========

Minimum  future  lease  payments  for each of the  next  five  years  and in the
aggregate are as follows:

         Year Ending June 30,
         --------------------
                 2007                                         $43,469
                 2008                                           1,853
                                                              --------
         Total future minimum lease payments                   45,322
         Less: amount representing interest                     3,253
                                                              --------
         Present value of future minimum lease payments        42,069
         Less: current maturities                              40,260
                                                              --------
         Long-term portion of capital lease obligations       $ 1,809
                                                              ========

The following describes leased equipment held under capital leases:

                                                                   June 30,
                                                              -----------------
                                                                2006      2005
                                                              -------- --------
Equipment                                                     $ 34,954 $ 34,954
Computers and accounting software                              138,450  138,450
                                                              -------- --------
                                                               173,404  173,404
Less:  accumulated amortization                                111,492   76,443
                                                              -------- --------
Net equipment under capital lease                             $ 61,912 $ 96,961
                                                              ======== ========



                                      F-16
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005


NOTE 7 - INCOME TAXES

The reconciliation of the statutory income tax rate to the Company's effective
income tax rate for the years ended June 30, 2006 and 2005 are as follows:

                                                         Year Ended June 30,
                                                         -------------------
                                                            2006      2005
                                                         --------   --------
Statutory rate                                              34.0%    (34.0)%
State income taxes, net                                     99.3      (3.0)
Meals and entertainment                                      5.1      11.7
Expiration of net operating losses                          60.3       0.0
Adjustment of net operating losses due to Internal
  Revenue Code ss.382 Limitation                           415.4       0.0
Change in valuation allowance                             (618.8)     24.8
Other                                                        4.7       0.5
                                                         --------   --------
                                                               -%         -%
                                                         ========   ========

State income taxes were  adjusted  based on a review of available  net operating
loss  carryforwards  and the recent  changes made to the state tax law in Texas.
The net  operating  loss  carryforwards  were fully  reserved  in the  valuation
allowance.  Therefore,  the  expiration  of net  operating  losses  is offset by
changes in the valuation allowance.

At June 30, 2006 and 2005,  significant  components  of deferred  tax assets and
liabilities are approximated as follows:

                                                                June 30,
                                                       ---------------------
                                                           2006       2005
                                                       ----------  ---------
Deferred tax assets relating to:
 Accounts receivable allowance                         $    6,808  $   8,050
 Deferred revenue                                         353,033    469,669
 Contribution Carryover                                         -      1,036
 Net operating loss carryforwards and
  other credits                                         1,921,863  4,114,250
                                                       ----------  ---------
   Total deferred tax assets                            2,281,704  4,593,005

Deferred tax liabilities related to:
 Depreciation differences                                 (23,378)   (27,802)
                                                       ----------  ---------
                                                        2,258,326  4,565,203
Valuation allowance                                    (2,258,326)(4,565,203)
                                                       ----------  ---------
Net deferred tax                                       $        -  $       -
                                                       ==========  =========


At June 30, 2006,  the Company had total net operating  loss  carryforwards  for
income tax purposes of approximately $10.2 million. The carryforwards will begin
to expire in 2010 if not otherwise  used.  There is a limitation  under Internal
Revenue Code ss.382 on the Company's net  operating  losses prior to 1998.  This
limitation  will result in $4.6 million of losses  expiring  unused.  Therefore,
only  $5.6  million  of the  Company's  net  operating  loss  carryforwards  are
available for use in future years. A valuation allowance has been established to
fully offset the Company's  deferred tax assets due to the Company's  history of
losses since inception.

In May 2006, the state of Texas enacted a new law that substantially changes its
tax system. The law replaces the  taxable-capital  and earned surplus components
of the  current  franchise  tax with a new tax that is based on  modified  gross
revenue.  This new tax is  referred  to as the  "Margin  Tax"  and is  effective
January 1, 2007.  The Company has  assessed  the impact of the change in tax law
and does not believe it will have a material  effect on the Company's  financial
statements.


                                      F-17
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005

NOTE 8 - STOCK TRANSACTIONS

The following represents the significant stock transactions for the years ending
June 30, 2006 and 2005.  In May 2005 stock  options to purchase  9,167 of common
shares were exercised.  Total proceeds to the Company were $6,834.  In March and
June 2006 stock  options to purchase  1,499 and 2,500,  respectively,  of common
shares were exercised.  Total proceeds to the Company were $2,852. In June 2006,
the  Company   accelerated  vesting  of  unvested  stock  options  resulting  in
compensation expense of $11,035. (See Note 2 - Stock-Based Compensation).

NOTE 9 - STOCK OPTIONS

The Company sponsors a Stock Plan (the "Plan") covering  employees,  consultants
and non-employee directors.  The Plan, as amended,  provides for the granting of
options to purchase up to  3,500,000  shares of the  Company's  common  stock of
which 3,066,390 are outstanding as of June 30, 2006. The Company also has issued
637,500  non-Plan  options to purchase common stock.  Options granted  generally
vest  over a period of three  years and  expire  seven  years  after the date of
grant.

The following  summary of activity for all stock options  during the years ended
June 30, 2006 and 2005 is presented in the table below:
                                                                Weighted
                                                                Average
                                               Options          Exercise
                                             Outstanding         Price
                                            -------------     ----------
Balance, July 1, 2004                          3,521,390       $  0.94
  Granted                                        541,000       $  0.85
  Exercised                                       (9,167)      $  0.75
  Forfeited or Canceled                         (645,833)      $  1.25
                                            -------------

Balance, June 30, 2005                         3,407,390       $  0.94
  Granted                                        393,500       $  0.79
  Exercised                                       (3,999)      $  0.72
  Forfeited or Canceled                          (93,001)      $  1.27
                                            -------------

Balance, June 30, 2006                         3,703,890       $  0.88
                                            =============
Exercisable at June 30, 2006                   3,703,890       $  0.88


As of  June  30,  2006  and  2005,  there  were  315,444  and  230,110  options,
respectively, available for grant under the Plan.




                                      F-18
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005

The following table summarizes information about stock options outstanding as of
June 30, 2006:

                            Options Outstanding And Exercisable
                     ----------------------------------------------
                                         Weighted
                                         Average        Weighted
    Range of          Outstanding      Remaining         Average
    Exercise             as of             Life         Exercise
     Price           June 30, 2006      (in Years)        Price
-----------------    ---------------   -------------   ------------
 $0.50 - $1.00            2,726,390        4.47        $      0.75
 $1.01 - $1.50              762,500        2.64               1.17
 $1.51 - $2.00              215,000        2.82               1.53
                     ---------------                   ------------
                          3,703,890        4.00        $      0.88
                     ===============                   ============


NOTE 10 - COMMITMENTS AND CONTINGENCIES

Operating  Leases:  The Company  currently leases 10,634 square feet of rentable
(office and warehouse) space in Houston, Texas. On July 13, 2006 Sharps executed
a new lease agreement for 18,231 square feet of rentable  (office and warehouse)
space ("New Lease") near the existing  leased  facility in Houston,  Texas ("New
Premises").  The new lease  period  will  commence  upon the  completion  of the
construction  of the New  Premises,  which is  anticipated  to be in  October or
November of 2006. The New Lease will expire on the five (5) year  anniversary of
the New Lease  commencement  date.  The existing  lease will be terminated  upon
acceptance  of the New Premises by the Company in  accordance  with the terms of
the New Lease.  The  Company  also  leases an  incinerator  facility  located in
Carthage,  Texas for medical waste disposal. The lease agreement requires rental
payments  of $2,000  per month for the first year  (year  ended  June 30,  2003)
escalating  by $6,000 per year (or $500 per month)  each year  thereafter  until
initial  termination  of the lease on June 30, 2012.  The Company is required to
pay additional rent equal to $0.02 per pound for all materials burned,  treated,
received or transferred at the incinerator facility exceeding 100,000 pounds per
month.  The  incineration  fee has not been  included in the table  below.  Rent
expense for the years ended June 30, 2006 and 2005 was  $184,313  and  $189,806,
respectively.  Future  minimum lease  payments  under  non-cancelable  operating
leases as of June 30, 2006,  including the lease commitment related to the lease
executed on July 13, 2006, are as follows:

        Year Ending June 30,
        --------------------
                2007                   $  269,249
                2008                      303,417
                2009                      301,867
                2010                      306,660
                2011                      312,660
                Thereafter                138,165
                                       -----------
                                       $1,632,018
                                       ===========

For accounting  purposes,  the Company records lease expense for the incinerator
facility on a  straight-line  basis over the life of the lease that  computes to
$4,250 per month,  or $51,000 per year.  As a result,  a deferred  portion (rent
abatement) is recorded,  which, at June 30, 2006 was $69,000 and is reflected in
the Company's Consolidated Balance Sheet.


                                      F-19
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2006 AND 2005

NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)

Former Employee Matters:

On June 14, 2004,  the Company  provided Mr. Ronald E. Pierce,  its then current
Chief  Operating  Officer  ("Mr.  Pierce"),  with notice of  non-renewal  of his
employment  agreement.  As such,  July 14,  2004  was Mr.  Pierce's  last day of
employment.  The  Company  has  advised  Mr.  Pierce that under the terms of the
employment contract no further  compensation  (including  services) was due. The
Company then received various letters from Mr. Pierce's  attorney  advising that
Mr.  Pierce  is taking  the  position  that the  non-renewal  of the  employment
agreement  was not timely and,  therefore,  Mr.  Pierce was  terminated  without
cause.  Additionally,  Mr.  Pierce  claims  that  the  Company  had no  right to
terminate him on the anniversary date of his Agreement without the obligation of
paying  Mr.  Pierce as if he were  terminated  without  cause.  Mr.  Pierce  has
demanded severance related payments totaling  approximately  $280,000 (including
an $80,000  bonus)  along  with the full  accelerated  vesting of 500,000  stock
options  previously  awarded to Mr. Pierce.  The Company believes that notice of
such non-renewal was timely, and that in accordance with Mr. Pierce's employment
agreement,  the Company was entitled to provide notice thirty (30) days prior to
the anniversary of its intent to terminate the agreement, and no severance would
therefore be due to Mr. Pierce.  On July 30, 2004, the Company  received  notice
from Mr. Pierce's attorney requesting commencement of arbitration to resolve the
claim. No further  communications  have been received from Mr. Pierce's attorney
since July 30, 2004. The Company  believes it has meritorious  defenses  against
Mr. Pierce's claims and has not recorded a liability related to this matter.

In July 2006, the Company received a Notice of Charge of Discrimination from the
U.S.  Equal  Employment  Opportunity  Commission  ("EEOC")  filed  by  a  former
employee,  Sylvia Haist. The charge alleges sex  discrimination and retaliation.
Sylvia Haist was an employee of the Company from July 1998 until her termination
in January 2006.

The Company believes the charges to be totally without merit and frivolous.  The
Company has filed a response  with the EEOC in the form of a position  statement
and believes the EEOC will rule in favor of the Company.  The Company intends to
vigorously defend itself against the erroneous allegations.

Attentus  Medical Sales,  Inc. Matter:  In March 2005, the Company's  wholly-own
subsidiary  Sharps  Compliance,  Inc., filed a lawsuit in Harris County District
Court,  Texas against Mr. Jodway (a former employee) and Attentus Medical Sales,
Inc.  ("Attentus").  The  lawsuit  claimed,  (i)  breach  of  a  confidentiality
agreement,   (ii)   misappropriation   of  trade  secrets  and  (iii)   tortuous
interference with the Company's existing and prospective  contracts and business
relationships.  On April 7, 2005,  the  defendant  filed its answer and  counter
claims against Sharps  Compliance,  Inc.  asserting breach of contract,  quantum
merit and violation of the Texas Payday Act. On September 19, 2005,  the Company
amended its pleadings and added claims asserting conversion,  unjust enrichment,
unfair  competition  and trademark  infringement in violation of the Lanham Act,
false advertising in violation of the Lanham Act,  trademark  dilution under the
Texas Business and Commerce Code, and tortuous interference with existing and/or
prospective  customers.  On July 6, 2006,  the Company,  Attentus and Mr. Jodway
reached  settlement on all matters  related to this litigation and dismissed all
claims against each other. In conjunction with the resolution of the matter, the
Company entered into a business  relationship  whereby  Attentus now markets and
sells the Company's Sharps Disposal By Mail Systems(R) to its current and future
customers.


                                      F-20