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, 2004

| |  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 Identification No.)
 incorporation or organization)

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: $8,619,393.

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
16, 2004: $8,957,422.

Number of shares outstanding of the issuer's Common Stock as of September 16,
2004: 10,538,144.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders to be held on November 11, 2004 are incorporated by
reference in Part III hereof.

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


<PAGE>

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

                                                                            Page
                                                                            ----
                                     PART I

Item 1   Description of Business ...........................................  2
Item 2   Description of Property ...........................................  8
Item 3   Legal Proceedings .................................................  9
Item 4   Submission of Matters to a Vote of Security Holders ...............  9

                                     PART II

Item 5   Market for Common Equity and Related Stockholder Matters .......... 10
Item 6   Management's Discussion and Analysis or Plan of Operations ........ 11
Item 7   Financial Statements .............................................. 14
Item 8   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure ............................................. 14
Item 8A  Controls and Procedures ........................................... 14

                                    PART III

Item 9   Directors, Executive Officers, Promoters and Control Persons;
          Compliance with 16(a) of the Exchange Act ........................ 15
Item 10  Executive Compensation ............................................ 15
Item 11  Security Ownership of Certain Beneficial Owners and Management and
          Related Stockholder Matters ...................................... 15
Item 12  Certain Relationships and Related Transactions .................... 15
Item 13  Exhibits and Reports on Form 8-K .................................. 16
Item 14  Principal Accountant Fees and Services ............................ 17

         Signatures ........................................................ 18

____________
*    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 it's 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. These filings
are also available free of charge through the Company's investor relations
department.

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 industry and
consumers. These solutions include Sharps Disposal by Mail System(TM),
Pitch-It(TM) IV Poles, Trip LesSystem(TM), Sharps Pump Return Box, Sharps
Enteral Pump Return Box, Sharps Secure(TM), Sharps SureTemp Tote(TM),
IsoWash(TM) Linen Recovery 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(TM) 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(TM) 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 safely hold up to 150 milliliters of fluids; a red
bag for additional containment and complete documentation and tracking manifest.
Customers who use the Sharps Disposal by Mail System(TM) are responsible for
mailing the system to the Company's disposal facility for incineration (i.e.
Sharps Environmental Services). 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.

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<PAGE>


The Trip LesSystem(TM) 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(TM) has combined two
complete programs for return and disposal. All systems contain the Sharps
Disposal by Mail System(TM) 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(TM) 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(TM) 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(TM) 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(TM) 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(TM), 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(TM) 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 Sharps e-Tools online services include SharpsTracer(TM), AssetTracer(TM) and
ComplianceTrak. 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 manage effectively 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 oversee directly the proper disposal of its Sharps
Disposal by Mail Systems(TM). 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.

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.


                                       3
<PAGE>


MARKETS

Sharps' target markets include the home healthcare industry, assisted living
facilities and dental, veterinarian and physician markets (commercial
healthcare); hospitality and other industrial markets (commercial
non-healthcare); home self-injectors (retail) and other markets where Sharps'
products and services may be bundled or cross-sold to provide solutions to
prospective customers. Sharps is involved in the mission to help separate the
potentially infectious medical waste from the regular waste. The repeat order
nature of our business and an infrastructure, which is nationwide, has helped
drive our growth. Sharps has remained flexible and responsive to its customer
needs in industries that demand effective cost and logistical solutions, quick
response and technological innovation.

Home Healthcare Industry. Healthcare is increasingly provided in the home
setting, requiring healthcare professionals to dispose of contaminated syringes,
surgical supplies and other materials outside of medical facilities. The home
healthcare industry is a primary market for the Trip LesSystem(TM), which
includes the Sharps Disposal by Mail System(TM), Pitch-It(TM) IV Pole and asset
return box. Sharps' products are distributed to the home healthcare industry
through major national homecare equipment and supply distributors. The home
healthcare industry is a somewhat fragmented market; however, management
estimates that approximately 20 corporations dominate the home healthcare market
within the United States and Sharps currently maintains a relationship with a
majority of these corporations.

The Trip LesSystem(TM) is predominate with many of the top home healthcare
corporations under contract and is under serious consideration with several of
the remaining companies. Sharps' current principal customers include many
nationally recognized, leading home healthcare customers. Among the leading
national home healthcare companies, Sharps has become part of the formulary for
dealing with the disposal of the sharps (syringes, needles, lancets, sutures,
catheter needles or any item that can puncture the skin), primarily because of
the Trip LesSystem(TM). The system is cost effective because it reduces the
number of costly trips by the home healthcare providers to patients' homes to
retrieve medical waste or to deliver or retrieve medical equipment.

Sharps sells its products and services to home health companies directly and
through distributors. Sharps' strategy is to obtain agreements with homecare
companies to use Sharps' products and arrange for the homecare company's
distributor of choice to sell and deliver the product and services directly to
the homecare company.

In recent publications, the Department of Transportation ("DOT") clarified the
exemptions to 49CFR Part 173.134(b) of the Hazardous Materials Regulations
("HMR"), thereby requiring home healthcare providers to follow most of the HMR
requirements for regulated medical waste during transport. Healthcare providers
who are transporting regulated medical waste must use DOT approved, tested and
registered containers. The Sharps Disposal by Mail System(TM) meets all HMR
requirements through USPS permitting procedures. Sharps has started a marketing
and educational program informing home healthcare providers of this
clarification and offering the Sharps Disposal by Mail System(TM) for their
transportation needs.

Assisted Living Facilities. Sharps believes that assisted living providers are
an excellent market for the Sharps Disposal by Mail System(TM) because their
residents are more likely than the general populous to self-inject, thereby
generating a stream of medical waste requiring proper disposal. The volume
produced by each facility is particularly suited for disposal in Sharps Disposal
by Mail System(TM).

Home Self-Injectors. A growing market is the home self-injector market.
Approximately three percent of the United States population, or individuals in
one out of every 12 households, use sharps in the treatment of conditions such
as diabetes, multiple sclerosis, infertility, migraines, allergies and
hemophilia, as well as infectious diseases like hepatitis and HIV. While medical
waste disposal in the home is largely unregulated, certain states require used
sharps from home self-injectors to be disposed as medical waste and not as solid
waste.

Sharps is actively marketing to a vast number of insulin dependent diabetics and
this market is expected to grow as testing for the condition increases and
modern dietary habits lead to growing numbers of diabetics. In May of 2002,
Sharps signed a three year, renewable agreement with BD Consumer Health Care, a
division of Becton Dickinson and Company ("BD"), the world's largest syringe
manufacturer. The agreement names Sharps as the exclusive supplier of Sharps
Disposal by Mail System(TM) for retail sale nationally. BD will be marketing the
mail-back disposal system to Sharps' target market of home self-injectors in
BD's syringe boxes, diabetic newsletter and "Getting Started" kits for newly
diagnosed diabetics. Sharps is also marketing to the retail customer through a
joint sales and marketing agreement with Waste Management, Inc., a leading waste
services provider. WM will market Sharps' disposal by mail systems to WM's 25
million residential customers.

                                       4
<PAGE>

Dentists, Veterinarians and Physicians. Sharps has a presence within these
healthcare markets with the Sharps Disposal by Mail System(TM). Sharps' system
is ideal for these small volume waste generators. Sharps has grouped the dental,
physician and veterinarian market together due to their similar model and
duration usage.

Sharps utilizes distributors to reach the dental, veterinarian and physician
marketplace. In all areas, Sharps' products and services are distributed through
major distributors within each of the respective markets.

Agricultural During fiscal year 2004 Sharps began marketing and selling its
products to the agricultural industry. Specifically, Sharps has targeted the
dairy industry and other animal segments for the distribution and sale of its
Sharps Disposal by Mail Systems(TM). Sharps markets to companies involved in the
production and/or distribution of injectables used for various purposes in the
agricultural industry. This industry is estimated to have $9 billion in
agriculture. Customers in the agricultural industry generally require safe and
efficient disposal of sharps. Sharps estimates the agricultural industry could
provide growth to the Sharps Disposal By Mail Systems(TM) products.

Hospitality and Other Industrial Markets. Sharps sells both directly and through
major distributors to the hospitality and other industrial markets, including
hotels, motels, resorts, schools, colleges, stadiums, daycare centers, planes,
trains, cruise ships, casinos, supermarkets, distribution centers, business
offices, restaurants, bars and clubs. The Company also sells directly to the end
customers in the industrial market. Management believes that OSHA enhanced
regulations will increase this important market for Sharps' products and
services. Sharps has developed specialized versions of its Sharps Disposal by
Mail System(TM), which permit an institutional establishment to easily introduce
the product. Sharps developed custom-designed cones, one used to collect
contaminated sharps when discovered and a second used as a temporary receptacle
by transient individuals who need to dispose of syringes.


The large, fragmented medical waste industry has experienced significant growth
since its inception. The regulated medical waste industry arose with the Medical
Waste Tracking Act of 1988, which Congress enacted in response to media
attention after medical waste washed ashore on beaches, particularly in New
Jersey. Since the 1980s, the public and governmental regulators have
increasingly restricted the handling and disposal of medical waste generated by
the healthcare industry. The EPA has recently changed its guidance regarding the
safe disposal of medical sharps in the non-regulated markets. The new guidance
reflects information about alternative disposal methods including mail-back
programs. Additionally, California recently enacted legislation authorizing
state agencies and municipalities to expand the scope of the hazardous waste
plans to provide for the safe disposal of medical sharps.


Today, almost all businesses have some medical waste disposal concerns for
safety and liability reasons. Medical waste such as syringes, razor blades,
bloodborne contaminated items, bio-hazard waste spills and other sharps waste
can occur in several situations. Those situations are as follows: treating cuts,
abrasions and burns; finding needles, syringes or blood-soaked items in the
workplace; laundering blood-soaked linens or finding needles or razor blades in
linens; and cleaning up broken glass with blood or other bio-hazardous waste.


MARKET SIZE

Management believes many businesses that are not outsourcing medical waste
services are unaware of OSHA requirements regarding proper training of employees
that may handle medical waste. These businesses include restaurants, casinos,
hotels and generally all businesses in which employees may come into contact
with bloodborne pathogens. In addition, medical waste generated in the home is
currently unregulated and may become subject to similar bloodborne pathogen
regulations in the future. Use of the Company's products and services are
designed to significantly reduce the liabilities associated with improper
disposal of medical waste.

Home Healthcare Industry

Homecare target markets include Sharps' primary market, home infusion providers,
as well as home nursing agencies. There are approximately 4,500 sites in the
United States that provide home infusion services including local, national and
hospital-based providers generating approximately 4.5 billion dollars in annual
revenue. Twenty large chains and affiliations service a large percentage of the
patients in this market. The Company believes it has about 10% of this market.
Recent statistics on home nursing agencies show approximately 7,000 Medicare
Certified Agencies employing approximately 240,000 clinical full time employees.
The home nursing market, unlike the infusion market, downsized after the
Balanced Budget Amendment of 1997. Sharps' focus in the home nursing market is
secondary to infusion due to the potential business per site, but the Sharps
Disposal by Mail System(TM) could service their total medical waste handling,
disposal and documentation needs. Sharps' sales force focuses on these accounts.

                                       5
<PAGE>

Dentist, Veterinarians and Physicians

Recent figures supplied by the American Dental Association, the American Medical
Association and the American Veterinary Association, indicate that there are
approximately 152,000 dentists, 598,000 physicians and 59,000 veterinarians in
active practice in the United States. Management estimates that a large majority
of these offices would benefit from replacing waste hauling services with the
Sharps Disposal by Mail System(TM).

Hospitality and Other Industrial Markets

The Lodging Industry Profile for 2002, published by Bureau of Labor Statistics,
estimates there are approximately 41,000 properties consisting of 4.2 million
rooms supporting more than 7.8 million jobs. In 29 states, the tourism industry
ranks as the first, second or third largest employer. According to the National
Restaurant Association, the restaurant industry employs approximately 11.7
million people. Management believes that a comprehensive application of OSHA
regulations would require the majority of these employees to be trained in the
proper handling of medical waste encountered in the workplace which would
include proper disposal.

Home Self-Injectors

The American Diabetes Association estimates approximately 17.0 million people in
the United States, or 6.2% of the population, have diabetes. Of diagnosed cases,
the ADA estimates 3.7 million require daily insulin injections.

Management believes that the overall demand for Sharps' solutions will grow,
with such growth being fueled by a number of factors, including the following:

     1.   The healthcare industry is under pressure to reduce costs and improve
          efficiency. Sharps believes that the Company's solutions help
          healthcare providers reduce costs by reducing their medical waste
          tracking, handling and compliance costs and equipment delivery and
          return costs.

     2.   Recent changes in Federal, state and local regulations regarding the
          proper transportion and/or disposal of medical sharps are increasing
          over time.

     3.   OSHA has issued regulations concerning employee exposure to bloodborne
          pathogens and other potentially infectious materials that require
          special procedures for the handling and disposal of medical waste and
          annual training of all personnel who may be exposed to blood and other
          body fluids. Management believes these regulations will expand the
          market for Sharps' products and services.

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(TM) in many different areas, since small quantity medical waste
generators can be found in many industries. 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 was
completed utilizing the services of the prospective manufacturer, which kept
development costs to a minimum. Currently, Sharps does not have any agreements
with prospective manufacturers regarding the development of any products.

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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, which are primarily
distributors. For the year ended June 30, 2004, two customers represented
approximately 49% of revenues. Those same two customers represented
approximately 47% (or $460,000) of the total accounts receivable balance at June
30, 2004. For the year ended June 30, 2003, three customers represented 60% of
revenues. Those same three customers represented approximately 60% (or $445,000)
of the total accounts receivable balance at June 30, 2003. 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.

Sharps continues to sole-source transportation, which consists of delivering the
Sharps Disposal by Mail System(TM) from the end user to the Company's facility.
Transportation is currently sole-sourced to the USPS. Management believes the
risk of dependence is mitigated by the long-standing business relationship.
Although there are no assurances with regard to the continued future business
association, management believes that alternative sources would be available.

INTELLECTUAL PROPERTY

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


RISK FACTORS

Operating History; History of Losses

Although, the Company was profitable in the fourth quarter of Fiscal 2004,
Sharps has incurred cumulative losses from operations since its inception. 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 factoring line of credit, will be sufficient to
fund operations through fiscal year 2005. There can be no assurance that the
Company will be able to obtain financing, if necessary, on acceptable terms to
fund operations beyond that time frame; however, management believes that it
will be successful in raising such financing, if necessary.

Dependence on Certain Management Personnel

Sharps' growth and development to date has been largely dependent on the active
participation and leadership of its Chairman and Chief Executive Officer, Dr.
Burton Kunik, as well as its senior management team. The Company believes that
the business is dependent upon the continued employment of the Chief Executive
Officer as well as the senior management team and has therefore entered into
employment agreements with all the above noted individuals in order to provide
incentive for their continued employment with the Company.

Competition

There are several competitors who offer disposal of medical waste services such
as a division of Stericycle, Inc.; however, no other company focuses primarily
on the disposal of sharps medical waste, nationally, through transport by the
USPS. While Sharps currently does not face any significant competition in the
mail sharps disposal business, the Company must compete with larger and
better-capitalized companies.

                                       7
<PAGE>


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,
canceled 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 uses an incinerator facility for medical waste disposal.
The Company has an agreement for such a facility with the City of Carthage,
Texas, and Panola County to operate the PCRRF through June 30, 2012. 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, 2004
was $11,805. Any disruption in the availability of a disposal facility may have
an adverse impact on the Company. The Company can make no assurances that no
such disruption 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 TNRCC
("Texas Natural Resources Conservation Commission") regulations. The Company
entered into an agreement with a secondary burn facility to provide services in
the event the PCRRF is unavailable.

Governmental Regulation

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.

Postal Work Interruptions

Since Sharps transports its disposal products using the USPS, any interruption
in day-to-day postal 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.

Employees

Sharps employs 30 individuals, of which 28 are full-time employees.


ITEM 2. DESCRIPTION OF PROPERTY

Sharps currently leases 10,634 square feet of rentable (office and warehouse)
space in Houston, Texas. The lease period commenced October 1, 2002, and
terminates January 31, 2008.

                                       8
<PAGE>


The Company leases an incinerator facility located in Carthage, Texas for
medical waste disposal. The amended lease 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 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. For
accounting purposes and 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

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 a
$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. The Company believes it has meritorious defenses against Mr. Pierce's
claims and has not recorded a liability related to this matter.

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

During the three months ended June 30, 2004, no matter was submitted by the
Company to a vote of its stockholders through the solicitation of proxies or
otherwise.

                                       9
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information: During the two years ended June 30, 2004, 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 38,000 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 Ended June 30, 2003
    -------------------------------
    First Quarter                                 $ 1.80           $ 1.05
    Second Quarter                                $ 1.70           $ 1.10
    Third Quarter                                 $ 1.50           $ 1.10
    Fourth Quarter                                $ 1.25           $ 0.72

    Fiscal Year Ending June 30, 2004
    --------------------------------
    First Quarter                                 $ 1.15           $ 0.82
    Second Quarter                                $ 1.15           $ 0.51
    Third Quarter                                 $ 1.01           $ 0.60
    Fourth Quarter                                $ 1.05           $ 0.58

    Fiscal Year Ending June 30, 2005
    --------------------------------
    First Quarter (through September 16, 2004)    $ 0.96           $ 0.57

Stockholders: At September 16, 2004, there were 10,538,144 shares of common
stock held by 210 holders of record. The last reported sale of the common stock
on September 16, 2004, 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>
<S>                               <C>                             <C>                     <C>
                                                 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
Equity compensation plans
 approved by security holders               2,883,890                     0.98                    116,110
Equity compensation plans not
 approved by security holders                 637,500                     0.76                         NA
                                            ---------                     ----                    -------

Total                                       3,521,390                     0.96                    116,110
                                            =========                     ====                    =======
</TABLE>

Recent Sales of Unregistered Securities: Any sales of unregistered securities
have been included in previously filed form 10-QSB.

                                       10
<PAGE>


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

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 Condensed Consolidated Financial Statements of Operations,
expressed as a percentage of revenue:

                                                         Year Ended June 30,
                                                     ---------------------------
                                                       2004                2003
                                                     -------             -------

    Total revenues                                      100%               100%
    Costs and expenses:
         Cost of revenues                              (59%)               (69%)
         Selling, general and administrative           (40%)               (44%)
         Depreciation and amortization                  (2%)                (2%)
                                                     -------             -------

    Total operating expenses                          (101%)              (115%)
                                                     -------             -------
    Operating loss                                      (1%)               (15%)
    Interest income (expense), net                       0%                  0%
                                                     -------             -------
    Net loss                                            (1%)               (15%)
                                                     =======             =======

YEAR ENDED JUNE 30, 2004 COMPARED TO YEAR ENDED JUNE 30, 2003

Total revenues for the year ended June 30, 2004 of $8,619,393 increased by
$200,054, or 2%, over the total revenues for the year ended June 30, 2003 of
$8,419,339. The increase in revenues is attributable to an increase in sales (i)
of Pitch-It(TM) IV Poles of $232,000, (ii) Pump Return Box products of $102,000,
(iii) manufacturing revenues related to the Pro-Tec product line of $102,000,
(iv) Sharps Disposal by Mail System products of $85,000 and (v) the new Sharps
Secure product of $31,000. These increases were partially offset by, (i) the
absence in the current year of an accounting estimate related to the revenue
deferral on Pump Return Boxes which was recorded in the prior year of $183,000,
(ii) a reduction in sales of Sharps SureTemp Tote(TM) of $76,000 and (iii) a
reduction in Environmental Revenues of $72,000. The underlying reason for the
increases in revenues for these product lines is an overall demand in the home
healthcare market for the Company's products as well as new sales in the
agricultural market.

Cost of revenues for the year ended June 30, 2004 of $5,108,635 was 59% of
revenues. Cost of revenues for the year ended June 30, 2003 of $5,798,150 was
69% of revenues for the corresponding period and included the following special
items, (i) an inventory write-down of $87,000 and (ii) bad debt write-off of
$205,000. When excluding the two special items noted above, the cost of revenues
was $5,506,000 or 65% of revenues. Operational efficiencies implemented
beginning in April 2003 also contributed to the reduction in the cost of
revenues for the year ended June 30, 2004.

SG&A expenses for the year ended June 30, 2004 of $3,419,251 decreased by
$334,763, or 9%, over the SG&A expenses for the year ended June 30, 2003. The
decrease in the SG&A expenses is primarily a result of reductions in the
following expenses, (i) professional fees of $221,000, (ii) group benefits of
$73,000, (iii) commissions of $63,000, and (iv) advertising and public relations
consulting of $41,000. The underlying reasons for the decrease in the above
noted expenses are, (i) the absence in the year ended June 30, 2004 of SEC
review related and S-3 preparation costs which were incurred in the year ended
June 30, 2003, (ii) the change in benefits plan providers from ADP and
Administaff to independently procured programs (in-house), (iii) the reduction
in commissioned salespersons and a reduction in commissionable products and (iv)
a reduction on public relations consulting.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $106,919 to $242,803 at June 30, 2004
from $135,884 at June 30, 2003. Conversely, restricted cash decreased by
$138,173 to $14,678 at June 30, 2004 from $152,851 at June 30, 2003. The overall
net decrease in cash and cash equivalents plus restricted cash of $31,254 is
primarily a result of (i) payments on notes payable and capital lease
obligations of $282,788, (ii) the operating net loss of $117,879 and (iii)
purchases of property, plant, and equipment and patents of $103,608. These
decreases were partially offset by the proceeds from the private placement of
common stock of $500,000.

                                       11
<PAGE>

Property and equipment decreased by $57,891 to $539,800 at June 30, 2004 from
$597,691 at June 30, 2003. This decrease is attributable to depreciation for
2004 of $160,287 that was partially offset by the purchase of, (i) operational
tools and dies $48,562, (ii) upgrades to the incineration facility of $31,638,
(iii) computer equipment of $16,521 and (iv) office equipment of $6,230.

The Company's various debt and capital leases (including current portion)
decreased by $273,035 as of June 30, 2004 as compared to the June 30, 2003
balances. This decrease is attributable to, (i) payments on the remaining
obligation incurred in conjunction with the ProTec acquisition of $152,778, (ii)
the net reduction on $96,960 on the working capital line of credit debt and
(iii) payments on capital lease obligations of $26,608.

The decrease in the Company's net loss of $1,159,648 for the year ending June
30, 2004 compared the year ending June 30, 2003 is primarily a result of the
$889,569 increase in Gross Profit as well as a reduction in SG&A expenses of
$334,763.

Management believes that the Company's current cash resources along with its
asset-based factoring line of credit will be sufficient to fund operations for
the twelve months ended June 30, 2005.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following tables set forth selected quarterly information for 2004 and 2003.
We believe that all necessary adjustments have been included in the amounts
below to present fairly the results of such periods.
<TABLE>
<CAPTION>
<S>                            <C>                   <C>                  <C>               <C>
                                                                  Quarter Ended
                               ----------------------------------------------------------------------------
                                September 30, 2003    December 31, 2003    March 31, 2004    June 30, 2004
                               ----------------------------------------------------------------------------
Total revenues                  $        1,997,212    $       2,074,220    $    2,079,946    $   2,468,015
Cost of revenues                $        1,217,710    $       1,251,600    $    1,234,515    $   1,404,810
Operating income (loss)         $          (95,542)   $         (15,549)   $      (59,185)   $     101,139
Net income(loss)                $         (116,577)   $         (22,361)   $      (69,165)   $      90,224
Net income(loss) per share      $            (0.01)   $            0.00    $        (0.01)   $        0.01
Weighted average shares -
 basic and diluted                       9,960,811           10,538,114        10,538,114       10,538,114


                                                                  Quarter Ended
                               ----------------------------------------------------------------------------
                                September 30, 2002    December 31, 2002    March 31, 2003    June 30, 2003
                               ----------------------------------------------------------------------------
Total revenues                  $        2,048,868    $       2,339,809    $    1,837,796    $   2,192,866
Cost of revenues                $        1,381,390    $       1,598,551    $    1,438,175    $   1,380,034
Operating loss                  $         (195,484)   $        (263,583)   $     (705,809)   $    (118,243)
Net loss                        $         (188,202)   $        (257,020)   $     (706,386)   $    (125,919)
Net loss per share              $            (0.02)   $           (0.03)   $        (0.07)   $       (0.01)
Weighted average shares -
 basic and diluted                       9,822,023            9,862,784         9,874,060        9,897,134
</TABLE>

                                       12
<PAGE>


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
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 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 January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities", and subsequently revised the
interpretation in December 2003 ("FIN 46R") which requires that companies that
control another entity through interests other than voting rights should
consolidate the controlled entity. As revised, FIN 46R is generally effective
for financial statements for interim or annual periods ending on or after March
15, 2004. The related disclosure requirements are effective immediately.
Management does not believe the adoption of FIN 46R will have any impact on the
Company's financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends SFAS No. 133 to
provide clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires that contracts with similar
characteristics to be accounted for on a comparable basis. The provisions of
SFAS No. 149 are effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The adoption
of SFAS No. 149 will not have a material impact on the Company's results of
operations or financial position.

                                       13
<PAGE>


In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", which
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS No. 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS No. 150 did not have a material impact on the Company's
results of operations or financial position.

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-19.

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

The information required by this item is not applicable.

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 13a-14. 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.


                                       14
<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 11, 2004.

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, 2004, 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), Cooke, 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 is filed as an exhibit to this
Annual Report on Form 10-K. Individuals may also request a free copy of the
Company's Code of Ethics from the Company's investor relations department.
Additionally, the Company posts 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 five 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 11, 2004.

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 11, 2004.

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 11, 2004.

                                       15
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) 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 Form10-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).
 14.1     Sharps Compliance Corp. Code of Ethics (filed herewith).
 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 Financial Officer in accordance with Section
          906 of the Sarbanes-Oxley Act (filed herewith).

(b) Reports on Form 8-K

     Form 8-K, dated and filed August 3, 2004, disclosing a claim by the
     Company's former Chief Operating Officer, Mr. Ron Pierce.

     Form 8-K, dated and filed August 9, 2004, announcing the Company's results
     of operations for the year ended June 30, 2004.


                                       16
<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 11, 2004.

                                       17
<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 20, 2004                          By: /s/ BURTON J. KUNIK
                                                       -------------------------
                                                       Dr. Burton J. Kunik
                                                       Chairman of the Board and
                                                       Chief Executive Officer

                                                   By: /s/ DAVID P. TUSA
                                                       -------------------------
                                                       David P. Tusa
                                                       Senior Vice President &
                                                       Chief Financial Officer

                                                   By: /s/ C. LEE COOKE, JR.
                                                       -------------------------
                                                       C. Lee Cooke, Jr.
                                                       Director

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



                                       18
<PAGE>


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED FINANCIAL STATEMENTS                                           PAGE
                                                                            ----

 Report of Management and Internal Controls................................. F-2

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

 Consolidated Balance Sheets as of June 30, 2004 and 2003 .................. F-4

 Consolidated Statements of Operations for the Years Ended June 30, 2004
  and 2003 ................................................................. F-5

 Consolidated Statements of Stockholders' Equity (Deficit) for the Years
  Ended June 30, 2004 and 2003 ............................................. F-6

 Consolidated Statements of Cash Flows for the Years Ended June 30, 2004
  and 2003 ................................................................. F-7

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


                                      F-1
<PAGE>



                   REPORT OF MANAGEMENT AND INTERNAL CONTROLS

     The consolidated financial statements included herein have been prepared in
conformity with accounting principles generally accepted in the United States of
America. Management is responsible for preparing the consolidated financial
statements and maintaining and monitoring the Company's system of internal
accounting controls. The Company believes that the existing system of internal
controls provides reasonable assurance that errors or irregularities that could
be material to the consolidated financial statements are prevented or would be
detected in a timely manner. Key elements of the Company's system of internal
controls include careful selection of management personnel, appropriate
segregation of conflicting responsibilities, periodic evaluations of Company
financial and business practices, communication practices that provide assurance
that policies and managerial authorities are understood throughout the Company,
and periodic meetings between the Company's audit committee, senior financial
management personnel and independent public accountants.

     The consolidated financial statements were audited by UHY Mann Frankfort
Stein & Lipp CPAs, LLP, independent public accountants, who have also issued a
report on the consolidated financial statements.

/s/ BURTON J. KUNIK
-------------------
Dr. Burton J. Kunik
Chairman of the Board, Chief Executive Officer
and President

/s/ DAVID P. TUSA
-----------------
David P. Tusa
Senior Vice President, Chief Financial Officer
 and Corporate Secretary

                                      F-2
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

We have audited the accompanying consolidated balance sheets of Sharps
Compliance Corp. (a Delaware corporation) and subsidiaries (the "Company") as of
June 30, 2004 and 2003, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years 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 audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (of the 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
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 audits provide 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, 2004 and 2003, and the results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States.


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

Houston, Texas
July 30, 2004

                                      F-3
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                           <C>              <C>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                                                                          June 30,
                                                                                               -----------------------------
                                                                                                    2004            2003
                                                                                               -------------   -------------
                                            ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                                                     $   242,803     $   135,884
  Restricted cash                                                                                    14,678         152,851
  Accounts receivable, net of allowance for doubtful accounts of $12,986 and $35,141,
   respectively                                                                                     981,408         740,760
  Inventory                                                                                         393,238         299,136
  Prepaid and other assets                                                                          138,798         125,808
                                                                                               -------------   -------------
     TOTAL CURRENT ASSETS                                                                         1,770,925       1,454,439

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $507,945 and $429,502, respectively      539,800         597,691

INTANGIBLE ASSETS, net of accumulated amortization of $101,582 and $101,225, respectively            10,051               -

OTHER ASSETS                                                                                              -          11,695
                                                                                               -------------   -------------

TOTAL ASSETS                                                                                    $ 2,320,776     $ 2,063,825
                                                                                               =============   =============

                        LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
  Accounts payable                                                                              $   592,943     $   567,918
  Accrued liabilities                                                                               338,153         226,427
  Deferred revenue - pump return                                                                    110,702         205,125
  Current portion of deferred revenue - incineration                                                108,299         108,547
  Current portion of deferred revenue - transportation                                              553,938         476,630
  Notes payable and current portion of long-term debt                                               185,932         407,374
  Current maturities of capital lease obligations                                                    37,513          36,501
                                                                                               -------------   -------------
     TOTAL CURRENT LIABILITIES                                                                    1,927,480       2,028,522

LONG-TERM DEFERRED REVENUE - INCINERATION, net of current portion                                    30,408          35,794

LONG-TERM DEFERRED REVENUE - TRANSPORTATION, net of current portion                                 179,506         164,142

LONG-TERM DEBT, net of current portion                                                               10,826         45,563

OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities                                          84,446        102,314

OTHER LIABILITIES                                                                                    45,500         27,000
                                                                                               -------------   -------------

     TOTAL LIABILITIES                                                                            2,278,166       2,403,335

COMMITMENTS AND CONTINGENCIES                                                                             -               -

STOCKHOLDERS' EQUITY (DEFICIT)
  Common stock, $0.01 par value per share; 20,000,000 shares authorized; 10,538,144 and
   9,910,356 shares issued and outstanding, respectively                                            105,381          99,103
  Additional paid-in capital                                                                      7,457,639       6,963,918
  Accumulated deficit                                                                            (7,520,410)     (7,402,531)
                                                                                               -------------   -------------
     TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                                                            42,610        (339,510)
                                                                                               -------------   -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                            $ 2,320,776     $ 2,063,825
                                                                                               =============   =============

           See accompanying notes to consolidated financial statements
</TABLE>

                                      F-4
<PAGE>


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                  Year Ended June 30,
                                         ---------------------------------------
                                               2004                   2003
                                         ----------------       ----------------
REVENUES
  Distribution, net                      $     7,754,441        $     7,632,998
  Consulting and environmental services          395,162                415,815
  Manufacturing                                  469,790                370,526
                                         ----------------       ----------------
     TOTAL REVENUES                            8,619,393              8,419,339

COSTS AND EXPENSES
  Cost of revenues                             5,108,635              5,798,150
  Selling, general and administrative          3,419,251              3,754,014
  Depreciation and amortization                  160,644                150,294
                                         ----------------       ----------------
     TOTAL COSTS AND EXPENSES                  8,688,530              9,702,458
                                         ----------------       ----------------

OPERATING LOSS                                   (69,137)            (1,283,119)

OTHER INCOME (EXPENSE)
  Interest income                                     48                 16,562
  Interest expense                               (48,790)               (10,970)
                                         ----------------       ----------------
     TOTAL OTHER INCOME (EXPENSE)                (48,742)                 5,592
                                         ----------------       ----------------

NET LOSS                                 $      (117,879)       $    (1,277,527)
                                         ================       ================


BASIC AND DILUTED NET LOSS PER COMMON
 SHARE                                   $          (.01)       $          (.13)
                                         ================       ================


WEIGHTED AVERAGE SHARES USED IN COMPUTING
 BASIC AND DILUTED NET LOSS PER COMMON
 SHARE                                        10,392,994              9,863,123
                                         ================       ================


           See accompanying notes to consolidated financial statements

                                      F-5
<PAGE>

<TABLE>
<CAPTION>
<S>                                       <C>          <C>        <C>         <C>            <C>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                                                                                                 Total
                                               Common Stock        Additional                Stockholders'
                                          -----------------------   Paid-in     Accumulated    (Deficit)
                                             Shares      Amount     Capital       Deficit       Equity
                                          ------------ ---------- ------------ ------------- -------------

Balances, July 1, 2002                      9,822,023  $  98,220  $ 6,846,313  $ (6,125,004) $   819,529

Issuance of common stock for cash              88,333        883       56,368             -       57,251

Issuance of options for services provided           -          -       61,237             -       61,237

Net loss                                            -          -            -    (1,277,527)  (1,277,527)
                                          ------------ ---------- ------------ ------------- -------------

Balances, June 30, 2003                     9,910,356     99,103    6,963,918    (7,402,531)    (339,510)

Issuance of common stock for cash             625,000      6,250      493,750             -      500,000

Other                                           2,788         28          (29)            -           (1)

Net loss                                            -          -            -      (117,879)    (117,879)
                                          ------------ ---------- ------------ ------------- -------------

Balances, June 30, 2004                    10,538,144  $ 105,381  $ 7,457,639  $ (7,520,410) $    42,610
                                          ============ ========== ============ ============= =============
</TABLE>
           See accompanying notes to consolidated financial statements

                                      F-6
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                <C>            <C>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                         Year Ended June 30,
                                                                    ---------------------------
                                                                       2004           2003
                                                                    -----------   -------------
CASH FLOWS FROM OPERATING ACTIVITIES
 Net loss                                                           $ (117,879)   $ (1,277,527)
 Adjustments to reconcile net loss to net cash used in operating
  activities:
  Depreciation and amortization                                        160,644         150,294
  Stock based consulting expense                                             -          61,237
  Bad debt expense                                                           -         179,955
  Inventory write-down                                                       -          86,918
  Loss on disposal of equipment                                            556               -
 Changes in operating assets and liabilities:
  (Increase) decrease in restricted cash                               138,173        (142,841)
  Increase in accounts receivable                                     (240,648)       (136,249)
  Increase in inventory                                                (94,102)        (54,591)
  Decrease (increase) in prepaid and other assets                       (1,295)        119,197
  Increase (decrease) in accounts payable and accrued liabilities      155,251        (105,219)
  Decrease (increase) in deferred revenue                               (7,385)       (117,528)
                                                                    -----------   -------------
    NET CASH USED IN OPERATING ACTIVITIES                               (6,685)     (1,236,354)

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property and equipment                                  (93,200)        (83,685)
  Payment on note receivable                                                 -         320,000
  Proceeds from sales of short-term investments                              -         502,287
  Patent                                                               (10,408)              -
                                                                    -----------   -------------
    NET CASH PROVIDED BY (USED IN) INVESTING
     ACTIVITIES                                                       (103,608)        738,602

CASH FLOWS FROM  FINANCING ACTIVITIES
  Payments on long-term debt                                          (159,220)       (197,762)
  Borrowings on long-term debt                                               -          28,364
  Net proceeds from (payments on) factoring agreement                  (96,960)        262,043
  Payments on capital lease obligations                                (26,608)        (13,613)
  Issuance of common stock                                             500,000          57,251
                                                                    -----------   -------------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                          217,212         136,283
                                                                    -----------   -------------

NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                                           106,919        (361,469)

CASH AND CASH EQUIVALENTS, beginning of year                           135,884         497,353
                                                                    -----------   -------------

CASH AND CASH EQUIVALENTS, end of year                              $  242,803    $    135,884
                                                                    ===========   =============


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 Cash paid for interest                                             $   50,389    $     10,970
                                                                    ===========   =============
NONCASH INVESTING AND FINANCING ACTIVITIES:
 Property and equipment additions financed
  through issuance of debt                                          $        -    $    221,636
                                                                    ===========   =============

 Property and equipment additions acquired under
  capital lease obligations                                         $    9,752    $    152,428
                                                                    ===========   =============

</TABLE>
           See accompanying notes to consolidated financial statements

                                      F-7
<PAGE>


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003

NOTE 1 - ORGANIZATION AND BACKGROUND

Organization: The accompanying consolidated financial statements include the
financial transactions and accounts of Sharps Compliance Corp. and it's 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(TM),
Pitch-It(TM) IV Poles, Sharps Secure(TM), Sharps SureTemp Tote(TM), IsoWash(TM)
Linen Recovery System, Trip LesSystem(TM), 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(TM) 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(TM) 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(TM) 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(TM) 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(TM) 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(TM) 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(TM) 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(TM), 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(TM) 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 Trip LesSystem(TM) 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(TM) has combined two
complete programs for return and disposal. All systems contain the Sharps
Disposal by Mail System(TM) along with

                                      F-8
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003

NOTE 1 - ORGANIZATION AND BACKGROUND (continued)

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 Sharps e-Tools online services include SharpsTracer(TM), AssetTracer(TM) and
ComplianceTrak. 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 Programs 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(TM) 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.

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, 2004,
two customers represented approximately 49% of revenues. Those same two
customers represented approximately 47% (or $460,000) of the total accounts
receivable balance at June 30, 2004. For the year ended June 30, 2003, three
customers represented 60% of revenues. Those same three customers represented
approximately 60% (or $445,000) of the total accounts receivable balance at June
30, 2003. 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 the
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.

Sharps continues to sole-source transportation, which consists of delivering the
Sharps Disposal by Mail System(TM) from the end user to the Company's facility.
Transportation is currently sole-sourced to the USPS. Management believes the
risk of dependence is mitigated by the long-standing business relationship.
Although there are no assurances with regard to the continued future business
association, management believes that alternative sources would be available.

Liquidity: The Company has incurred cumulative losses since its inception. The
future success of Sharps is dependent upon many factors, including environmental
regulation, continuity of its distributorship agreements,

                                      F-9
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003


NOTE 1 - ORGANIZATION AND BACKGROUND (continued)

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 financial resources will be
sufficient to fund operations through fiscal year 2005. There can be no
assurance that the Company will be able to obtain financing on acceptable terms
to fund operations beyond that time frame; however, management believes that it
will be successful in raising such financing, if necessary. Additionally, the
Company maintains an agreement with a financial institution for a $1.25 million
asset-based line of credit (see Note 5).


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 and are
classified at amortized cost.

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.

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. During the years ended June 30, 2004 and 2003,
the Company recorded depreciation expense of $160,287 and $130,048,
respectively.

Intangible Assets: Intangible assets consist of costs related to three patents,
two acquired in June 1998 and one in November 2003. 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, 2004 and 2003, the Company
recorded amortization expense of $357 and $20,246, respectively. Accumulated
amortization at June 30, 2004 and 2003 was $101,582 and $101,225, 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.

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, pro
forma information regarding net income (loss) and earnings per share is required
under SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of SFAS Statement No. 123", 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. 123.

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,
2004 and 2003, as follows: risk-free interest rates of 3.74% and 3.38%,
respectively; expected annual dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of approximately 52.76% and
61.81%, respectively; and a weighted-average

                                      F-10
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

expected life of the options of 7 years.

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 loss would have been increased, as follows:

                                                         Year Ended June 30,
                                                    ----------------------------
                                                       2004             2003
                                                    -----------    -------------
Net loss, as reported                               $ (117,879)    $ (1,277,527)
Less: Total stock-based employee compensation
 expense determined under fair value based
 method for all awards, net of related tax effects  $ (325,764)        (255,091)
                                                    ===========    =============

Net loss, pro forma                                 $ (443,643)    $ (1,532,618)
                                                    ===========    =============

Basic and diluted net loss per share, as reported   $    (0.01)    $      (0.13)
                                                    ===========    =============

Basic and diluted net loss per share, pro forma     $    (0.04)    $      (0.16)
                                                    ===========    =============

The Company records the fair value of options issued to non-employee consultants
at the fair value of the options issued. Any expense is recognized over the
service period or at the date of issuance if the options are fully vested and no
further performance obligation exists. During the years ended June 30, 2004 and
2003, expense of $0 and $61,237 was recorded for option grants to non-employees
that were fully vested at the date of the grant and for which no further
performance obligation exists. The expense was recorded in selling, general and
administrative expenses in the accompanying consolidated financial statements.

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 offer 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 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 is
recognized at the point of sale.

During the fourth quarter of fiscal year 2003, the Company recognized increased
revenues of approximately $279,000 in conjunction with a change in accounting
estimate related to pump return products. Prior to the change in estimate, the
Company deferred 100% of all pump return sales. Through historical trend
analysis that was not available in the past, the Company has subsequently
determined that a certain percentage of all containers sold are

                                      F-11
<PAGE>


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

not returned. Accordingly, the Company has recognized, during the fourth quarter
of 2003, a portion of the deferred revenue that was previously deferred.

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 $61,731 and $70,744 for the years ended June 30, 2004 and 2003,
respectively.

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 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. There are no differences in basic EPS and diluted EPS for either
year presented.

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.

Recent Accounting Pronouncements: In January 2003, the FASB issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities",
and subsequently revised the interpretation in December 2003 (FIN 46R) which
requires that companies that control another entity through interests other than
voting rights should consolidate the controlled entity. As revised, FIN 46R is
generally effective for financial statements for interim or annual periods
ending on or after March 15, 2004. The related disclosure requirements are
effective immediately. Management does not believe the adoption of FIN 46R will
have any impact on the Company's financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends SFAS No. 133 to
provide clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires that contracts with similar
characteristics to be

                                      F-12
<PAGE>


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

accounted for on a comparable basis. The provisions of SFAS No. 149 are
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The adoption of SFAS No.
149 will not have a material impact on the Company's results of operations or
financial position.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", which
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS No. 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS No. 150 did not have a material impact on the Company's
results of operations or financial position.


NOTE 3 - ACCOUNT RECEIVABLE AND INVENTORY WRITE-DOWN

In 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. The assets of
Ameritech representing collateral for the judgments were sold by Ameritech to
MedSolutions, Inc. ("MedSolutions") in November 2003. In January 2004, the
Company secured a garnishment order against MedSolutons whereby MedSolutions was
ordered to pay to the Company $170,765, plus interest at 5%. Payments under the
garnishment order are scheduled to be made monthly in the amount of $4,375
(inclusive of interest) with a balloon payment of $137,721 due November 7, 2004.
The Company has received two payments totaling $8,750 (principal and interest),
of which $2,917 was paid to an outside attorney for collection services. In the
quarters ending March 31, 2003 and June 30, 2003, the Company wrote-off all
outstanding amounts, $75,996 and $106,397 respectively, due from Ameritech.
Therefore, all future recoveries of receivables will be recorded as a credit to
the allowance for bad debts. Although the Company will continue to aggressively
pursue collection of the outstanding amounts under the garnishment order, no
assurances regarding collection can be made.

During fiscal year 2003 and as a result of a physical inventory performed, the
Company recorded an inventory write-down adjustment totaling $86,918 (included
in cost of revenues). The write-down consisted of obsolete inventory of $22,649
and shrinkage of $64,269.


NOTE 4 - PROPERTY AND EQUIPMENT

At June 30, 2004 and 2003, property and equipment consisted of the following:

                                                              June 30,
                                                     --------------------------
                                     Useful Life        2004            2003
                                   --------------    -----------    -----------
Furniture and fixtures              3 to 5 years     $   23,903     $   34,538
 Equipment                               5 years        208,125        171,718
 Manufacturing                          15 years        221,636        225,782
 Computers and software             3 to 5 years        398,942        431,654
 Leasehold improvements                  3 years        162,728        131,090
 Automobiles                             5 years         32,411         32,411
                                                     -----------    -----------
                                                      1,047,745      1,027,193
 Less: accumulated depreciation                         507,945        429,502
                                                     -----------    -----------

 Net property and equipment                          $  539,800     $  597,691
                                                    ============    ===========

                                      F-13
<PAGE>


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003


NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt consisted of the following:
<TABLE>
<CAPTION>
<S>                                                                      <C>            <C>
                                                                                   June 30,
                                                                         --------------------------
                                                                            2004            2003
                                                                         -----------     ----------
Factoring agreement with financial institution, bearing interest at a
 rate of prime (4% as of June 30, 2004) plus 2%, plus an
 administrative fee of 0.25% of gross receivable financed                $  165,083      $ 262,043

Note payable to Futura in monthly installments of $13,889, final
 payment due August 31, 2004                                                 13,889        166,667

Promissory note to a finance company for the purchase of an
 automobile, due in monthly installments of principal and interest
 of $674, bearing interest at 7.75% through November 2006, and
 is secured by the automobile                                                17,786         24,227

                                                                         -----------     ----------
                                                                            196,758        452,937
Less: notes payable and current portion of long-term debt                   185,932        407,374
                                                                         -----------     ----------

Total notes payable and long-term debt                                   $   10,826      $  45,563
                                                                         ===========     ==========
</TABLE>

On October 1, 2002, Sharps completed a purchase of the Pro-Tec product line
assets from Futura Medical Corporation ("Futura") for $300,000. As consideration
for the asset purchase, the Company made payments of $50,000 at closing, $83,333
on March 1, 2003 and monthly payments of $13,889 from September 2003 through
July 2004. The Company remitted the final payment to Futura on August 1, 2004 of
$13,889, thereby reducing the balance to zero. This asset purchase consists of
all inventories, molds, fixtures, supplies, customer list and other fixed assets
used in the manufacturing of the Pro-Tec product line. The asset purchase
increased inventory by $78,364 and property and equipment by $221,636. The
Company did not assume any operations, other liabilities or employees as a part
of this asset purchase. Revenues generated from this product line are $469,790
in the year ended June 30, 2004 and are classified in the Company's Statement of
Operations as "Manufacturing".

The Company maintains an arrangement with a financial institution for a $1.25
million asset-based line of credit. The agreement allows the Company to factor
customer receivables generated out of its ordinary course of business. The
maximum amount available under the line of credit is $1.0 million (or $1.25
million of its gross receivable balance). The agreement is automatically renews
on an annual basis (August 30 of each year) unless terminated by either party.
The Company may borrow up to 80% of the eligible receivables presented and will
incur interest on borrowings at a prime rate of interest (4% as of June 30,
2004) plus 2%, plus administrative fees of .25% on gross receivables financed

The following are future maturities on notes payable and long-term debt as of
June 30, 2004:

         Year Ending June 30,
         --------------------
                  2005 .....................................     185,932
                  2006 .....................................       7,518
                  2007 .....................................       3,308
                  2008 .....................................           -
                                                               ----------
                                                               $ 196,758
                                                               ==========
                                      F-14
<PAGE>


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003


NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES

Capital lease obligations consist of the following:
<TABLE>
<CAPTION>
<S>                                                                      <C>            <C>
                                                                                   June 30,
                                                                         --------------------------
                                                                            2004            2003
                                                                         -----------     ----------
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                           $   99,315      $ 121,000

Capital lease for purchase of phone system due in monthly
 installments of $455, interest imputed at 12% through August
 2007                                                                        14,315         17,815

Capital lease for purchase of copier/printer due in monthly
 installments of $157, interest imputed at 21% through August
 2006                                                                         3,252              -

Capital lease for purchase of phone system upgrades due in monthly
 installments of $157, interest imputed at 16% through December
 2007                                                                         5,077              -
                                                                         -----------     ----------
                                                                            121,959        138,815
Less: current portion                                                        37,513         36,501
                                                                         -----------     ----------

                                                                         $   84,446      $ 102,314
                                                                         ===========     ==========
</TABLE>

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

         Year Ending June 30,
         --------------------
                  2005 .....................................      57,964
                  2006 .....................................      57,964
                  2007 .....................................      40,150
                  2008 .....................................       1,854
                                                               ----------

           Total future minimum lease payments .............     157,932
           Less: amount representing interest ..............      35,973
                                                               ----------

           Present value of future minimum lease payments...     121,959
           Less: current maturities ........................      37,513
                                                               ----------

           Long-term portion of capital lease obligations...   $  84,446
                                                               ==========

The following describes leased equipment held under capital leases:

                                                                 June 30,
                                                          ----------------------
                                                             2004        2003
                                                          ----------  ----------
Equipment ............................................... $  26,023   $  20,428
Computers and accounting software .......................   138,450     132,000
                                                          ----------  ----------

                                                            164,473     152,428
Less:  accumulated amortization .........................    41,913       8,516
                                                          ----------  ----------

                                                          $ 122,560   $ 143,912
                                                          ==========  ==========

                                      F-15
<PAGE>


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003


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, 2004 and 2003 are as follows:

                                                          Year Ended June 30,
                                                       -------------------------
                                                           2004          2003
                                                       ------------  -----------

 Statutory rate .......................................      (34.0)%     (34.0)%
 State income taxes, net ..............................       (3.0)       (3.0)
 Meals and entertainment ..............................       17.2         1.6
 Change in valuation allowance ........................       19.8        35.4
 Other ................................................          -           -
                                                       ------------  -----------
                                                                 -%          -%
                                                       ============  ===========

At June 30, 2004 and 2003, significant components of net deferred tax assets are
approximated as follows:

                                                                June 30,
                                                       -------------------------
                                                          2004          2003
                                                       ------------ ------------
Deferred tax assets relating to:
 Accounts receivable reserve ......................... $     5,000  $    13,000
 Deferred revenue ....................................     364,000      366,000
 Deferred compensation ...............................           -      102,000
 Net operating loss carryforwards and other credits...   4,163,000    4,147,000
                                                       ------------ ------------
  Total deferred tax assets ..........................   4,532,000    4,628,000

Deferred tax liabilities related to:
 Depreciation differences ............................     (73,000)     (62,000)
                                                       ------------ ------------

                                                         4,459,000    4,566,000
Valuation allowance ..................................  (4,459,000)  (4,566,000)
                                                       ------------ ------------

Net deferred tax assets .............................. $         -  $         -
                                                       ============ ============

At June 30, 2004, the Company had net operating loss carryforwards for income
tax purposes of approximately $11.2 million, of which approximately $5.6 million
was acquired in an acquisition in February 1998. The Company's ability to
utilize these net operating losses to reduce future taxable income may be
limited upon a change of ownership and amounts of separate Company taxable
income, as defined by the Internal Revenue Code. The carryforwards will begin to
expire in 2010 if not otherwise used. 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. The valuation allowance relates primarily to the
Company's net losses. The Company has not made any income tax payments since
inception.


NOTE 8 - STOCK TRANSACTIONS

The following represents the significant stock transactions for the years ending
June 30, 2004 and June 30, 2003, respectively.

On September 24, 2003, the Company completed a private placement of 625,000
unregistered shares of its common stock for net proceeds of $500,000.

During fiscal year 2003, the Company issued 88,333 shares of common stock in
conjunction with the exercise of stock options. Cash proceeds to the Company
totaled $57,251.

                                      F-16
<PAGE>


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003


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, either incentive or non-statutory, to purchase up to 3,000,000 shares
of the Company's common stock. The Company also has issued 637,500 options to
advisors and consultants of the Plan. Options granted generally vest over a
period of three years. Options expire five to seven years after the date of
grant.

The following summary of activity for all stock options during the years ended
June 30, 2004 and 2003 is presented in the table below:

                                                                      Weighted
                                                                       Average
                                                    Options           Exercise
                                                  Outstanding           Price
                                                  -----------         ---------

Balance, June 30, 2002 ....................        1,720,140          $   1.09
    Granted ...............................        1,123,390          $   1.10
    Exercised .............................          (88,333)         $   0.65
    Forfeited or Canceled .................         (346,807)         $   1.44
                                                  -----------         ---------

Balance, June 30, 2003 ....................        2,408,390          $   1.06
    Granted ...............................        1,168,000          $   0.78
    Exercised .............................                -          $      -
    Forfeited or Canceled .................          (55,000)         $   1.74
                                                  -----------         ---------

Balance, June 30, 2004 ....................        3,521,390          $   0.94
                                                  ===========

Exercisable at June 30, 2004 ..............        1,795,958          $   0.97
                                                  ===========

The weighted average fair values of options granted during the years ended June
30, 2004 and 2003 were $0.44 and $0.76, respectively. As of June 30, 2004 and
2003, there were 116,110 and 1,104,110 options, respectively, available for
grant under the Plan.

The following table summarizes information about stock options outstanding as of
June 30, 2004:
                            Options Outstanding            Options Exercisable
                --------------------------------------  ------------------------
                                 Weighted
                                  Average
                                 Remaining   Weighted                   Weighted
   Range of       Outstanding   Contractual   Average     Exercisable    Average
   Exercise          as of         Life      Exercise        as of      Exercise
    Price        June 30, 2004  (in Years)     Price     June 30, 2004    Price
--------------   -------------  -----------  --------    -------------  --------

 $0.50 - $1.00     2,103,890       5.59      $   0.73       901,795     $  0.67
 $1.01 - $1.50     1,142,500       4.79          1.25       710,833        1.22
 $1.51 - $2.00       275,000       4.82          1.53       183,330        1.53

                 -------------               --------    -------------  --------
                   3,521,390                 $   0.94     1,795,958     $  0.97
                 =============               ========    =============  ========

                                      F-17
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003


NOTE 10 - COMMITMENTS AND CONTINGENCIES

Litigation: The Company operates in a regulated industry and is subject to
routine and/or unannounced regulatory inspections. The Company has received
notification from the City of Carthage for various notices of violations which
it has received from the Texas Natural Resource Conservation Commission
("TNRCC"). Management believes that the ultimate resolution of these matters
will not have any material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.

Operating Leases: The Company leases office space and various types of equipment
under certain operating lease agreements that expire at various dates through
January 2008. The Company also leases an incinerator facility located in
Carthage, Texas for medical waste disposal. The amended lease requires rental
payments of $2,000 per month for the first year (year ended June 30, 2003)
escalating by $500 per month each year thereafter until 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, 2004 and 2003 was $184,853 and $196,713, respectively. Future minimum lease
payments under non-cancelable operating leases as of June 30, 2004 are as
follows:

         Year Ending June 30,
         --------------------
                  2005 .....................................     $  174,267
                  2006 .....................................        186,228
                  2007 .....................................        193,331
                  2008 .....................................        139,614
                  2009 .....................................         60,000
                  Thereafter ...............................        216,000
                                                                 -----------

                                                                 $  969,440
                                                                 ===========

For accounting purposes, and 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 that computes to $4,250 per month, or $51,000 per year. As
a result, a deferred portion is recorded, which, at June 30, 2004 was $45,500.

Former Employee Matter: 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 a
$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. The Company believes it has meritorious defenses against Mr. Pierce's
claims and has not recorded a liability related to this matter.

                                      F-18
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2004 AND 2003

NOTE 11 - RELATED PARTY TRANSACTIONS

On January 2, 2003, the Chief Executive Officer of the Company sold 356,000
shares of common stock in Sharps Compliance Corp. through a private sale.
Purchasers of these shares included, among others, New Century Equity Holdings
Corp. ("New Century") (200,000 shares), a 3% shareholder in the Company, John
Dalton (50,000 shares), a 10.1% holder in the Company, and Philip Zerrillo
(10,000 shares), a member of the Company's Board of Directors.

                                      F-19