**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington, D.C.
      20549**




**Form 10-K**




ý
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934**




**For
      the fiscal year ended June 30, 2008**




o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934**




**COMMISSION
      FILE NUMBER 0-22390**


**SHARPS
      COMPLIANCE CORP.**


*(Exact
      name of registrant as specified in its charter)*




**Delaware**
            
            **74-2657168***(State
                or other jurisdiction of*
              *incorporation
                or organization)*
            
            *(I.R.S.
                Employer*
              *Identification
                No.)***9220
                Kirby Drive, Suite 500, Houston, Texas**
              *(Address
                of principal executive offices)*
            
            **77054**
              *(Zip
                Code)*




**Registrant’s
      telephone number, including area code (713) 432-0300**


**Securities
      registered pursuant to Section 12(b) of the Act:**




**Title
                of Each Class**
            
            **Name
                of Each Exchange on Which Registered**Common
                Shares, $1.00 Par Value
            
            OTCBB




**Securities
      registered pursuant to Section 12(g) of the Act:**


**None**




Indicate
      by check mark if the Registrant is a well-known seasoned issuer, as defined
      in
      rule 405 of the Securities Act.  Yes o No þ




Indicate
      by check mark if the Registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the Exchange Act.  Yes o No þ




Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months, and (2) has been subject to such
      filing requirements for the past 90 days.  Yes þ No o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of the Registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-K or
      any amendment to this Form 10-K. o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
                accelerated filero
            Accelerated
                filero
            Non-accelerated
                filero
            Smaller
                reporting companyþ




Indicate
      by check mark whether the Registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).  Yes o No þ




Based
      on
      the closing price on the OTCBB on September 19, 2008, the aggregate market
      value of Registrant’s common shares held by non-affiliates of the Registrant on
      that date was $14,337,527.




The
      number of common shares outstanding of the Registrant was 12,702,114 as of
      September 18, 2008.




**DOCUMENTS
      INCORPORATED BY REFERENCE:**




(1)
            
            Portions
                of the Registrant’s Proxy Statement to be filed with the Securities and
                Exchange Commission pursuant to Regulation 14A for the Annual Meeting
                of Shareholders to be held on November 21, 2008 are incorporated
                by
                reference into Part III.









SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES


TABLE
      OF
      CONTENTS *


ANNUAL
      REPORT ON FORM 10-K





PagePART
                IItem
                1
            Description
                of Business
            2Item
                1A
            Risk
                Factors
            5Item
                1B
            Unresolved
                Staff Comments
            8Item
                2
            Description
                of Property
            8Item
                3
            Legal
                Proceedings
            8Item
                4
            Submission
                of Matters to a Vote of Security Holders
            9PART
                IIItem
                5
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            10Item
                6
            Selected
                Financial Data
            11Item
                7
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
            11Item
                7A
            Quantitative
                and Qualitative Disclosures About Market Risk
            17Item
                8
            Financial
                Statements
            17Item
                9
            Changes
                In and Disagreements with Accountants on Accounting and Financial
                Disclosure
            17Item
                9A
            Controls
                and Procedures
            18Item
                9B
            Other
                Information
            19PART
                IIIItem
                10
            Directors,
                Executive Officers and Corporate Governance
            19Item
                11
            Executive
                Compensation
            20Item
                12
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            20Item
                13
            Certain
                Relationships and Related Transactions and Director Independence
            20Item
                14
            Principal
                Accountant Fees and Services
            20PART
                IVItem
                15
            Exhibits
                and Financial Statement Schedules
            20Signatures
            22





____________


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




1


**INFORMATION
      REGARDING FORWARD-LOOKING STATEMENTS**





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





**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS**





Sharps
      Compliance Corp. was formed in November 1992 as a Delaware Corporation. The
      information presented herein is for Sharps Compliance Corp. and its wholly
      owned
      subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance, Inc.),
      Sharps e-Tools.com, Inc. (“Sharps e-Tools”), Sharps Manufacturing, Inc., Sharps
      Environmental Services, Inc. (dba Sharps Environmental Services of Texas, Inc.)
      and Sharps Safety, Inc. (collectively, “Sharps” or the “Company”). Sharps’
principal office is located at 9220 Kirby Drive, Suite 500, Houston, Texas
      77054. Sharps’ treatment facility is located at 1544 NE Loop Carthage, Texas
      75633.





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





**PRODUCTS
      AND SERVICES**





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





The
      Sharps Disposal by Mail System® 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® contains a securely sealed, leak and puncture resistant sharps
      container in several sizes ranging from one quart to eighteen gallon; United
      States Postal Service (“USPS”) approved shipping carton with priority mail
      (pre-paid) postage; absorbent material inside the container that can safely
      hold
      up to 150 milliliters of fluids; a red bag for additional containment and
      complete documentation and tracking manifest. The Sharps Disposal by Mail
      System® is transported to the Company’s disposal facility for incineration (i.e.
      Sharps Environmental Services) in a pre-paid USPS approved shipping carton.
      Upon
      destruction, Sharps supplies verification of destruction to the
      customer.





The
      Pitch-ItTM 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-ItTM poles are available
      in three models: (i) tabletop, (ii) floor and (iii) full-size with
      wheels.




2


The
      Trip
      LesSystem® 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® has combined three complete
      programs for return and/or disposal. All systems contain the Sharps Disposal
      by
      Mail System® along with either (i) a prepaid pump return box or (ii) a Pitch-ItTM
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, such as infusion and enteral pumps, phototherapy and TENS
      units, between the healthcare provider and the patient.





The
      Sharps Secure® 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® needle collection container, housed in the newly
      designed (patent pending) Sharps Secure® 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® 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® 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®, 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® water-soluble bag, which is clear to reveal the bag’s contents and is
      marked with a biohazard warning. The isolated linens are placed in industrial
      laundry equipment for recovery. Once the wash cycle begins, the bag dissolves
      within two minutes allowing chemicals in the wash to safely clean the
      contaminated laundry with minimal handling. Sharps is the exclusive distributor
      for the patented product.





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





The
      Sharps e-Tools online services include SharpsTracerTM and AssetTracerTM.
      SharpsTracerTM 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. SharpsTracerTM 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. AssetTracerTM allows its
      registered subscribers to effectively manage all types of capital assets through
      a single, organized database. The program can be used in conjunction with other
      Company products or independently and includes management reporting for
      regulatory compliance, preventative maintenance and asset status and/or
      location.





Sharps
      Environmental Services provide environmental solutions for customers with a
      wide
      variety of waste disposal needs. Primary services include the destruction and
      disposal of (i) medical sharps waste, (ii) legal/confidential documents, (iii)
      pharmaceutical products and (iv) non-hazardous industrial waste. This service
      allows the Company to directly oversee the proper disposal of its Sharps
      Disposal by Mail Systems®. On January 23, 2008, the Company purchased its
      formerly leased disposal facility in Carthage, Texas.





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





**MARKETS**





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





-
            Healthcare


-
            Retail


-
            Hospitality


-
            Professional


-
            Pharmaceutical
                Manufacturer


-
            Commercial
                / Industrial


-
            Agriculture





Healthcare :
      The
      Company markets its Sharps Disposal by Mail System®, Pitch-ItTM IV Poles, Trip
      LesSystem®, Sharps Pump Return Box, Sharps Enteral Pump Return Box and Sharps
      SureTemp Tote® products to the Healthcare segment. This market consists
      primarily of home healthcare companies and generated 55% of the Company’s
      billings for the year ended June 30, 2008.





Retail :
      The
      Company markets its Sharps Disposal by Mail System® products to the Retail
      segment. This market consists of, (i) companies that purchase the products
      to
      properly dispose of syringes utilized to administer flu shots, and (ii)
      non-emergency clinics located in the retail setting. The Retail market generated
      8.5% of the Company’s billings for the year ended June 30, 2008.





Hospitality : **** The
      Company markets its Sharps Disposal by Mail System®, IsoWash® Linen Recovery
      System, Biohazard Spill Clean-Up Kit and Disposal System products to the
      Hospitality segment. This market includes hotel, retirement and assisted living
      and contract food service provider companies. The Hospitality segment generated
      9% of the Company’s billings for the year ended June 30, 2008.





Professional :
      The
      Company markets its Sharps Disposal by Mail System® products to the Professional
      segment. This market includes physician, dental, veterinarian and other
      service-related firms. The Professional segment generated 6% of the Company’s
      billings for the year ended June 30, 2008.





Pharmaceutical
      Manufacturer :
      The
      Company markets its Sharps Disposal by Mail System® products to pharmaceutical
      manufacturers and clinical drug trial companies. Although the Pharmaceutical
      segment generated only 7% of the Company’s billings for the year ended June 30,
      2008, it is believed to be a segment with significant growth
      potential.





Commercial
      / Industrial : **** The
      Company markets its Sharps Disposal by Mail System®, Sharps Secure®,and
      Biohazard Spill Clean-Up Kit products to the Commercial / Industrial market.
      This market includes a wide variety of customers including those with safety,
      industrial, retail and other facilities. The Commercial / Industrial segment
      generated 5% of the Company’s billings for the year ended June 30,
      2008.





Agriculture :
      The
      Company markets its Sharps Disposal by Mail System® products to the Agriculture
      segment. This market consists of companies that purchase the products to
      properly dispose of syringes used to inject farm animals (ex., dairy cattle)
      and
      generated 4% of the Company’s billings for the year ended June 30,
      2008.





**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® in many different industries and markets, since small quantity
      medical waste generators can be found throughout the country. Sharps is also
      developing new products to that address the proper and cost-effective disposal
      of unused medications.




4





**MARKET
      RISKS**





Although
      Sharps has experienced growth in revenues over the past few years, there is
      an
      inherent concentration of credit risk associated with accounts receivable
      arising from sales to its major customers .
      For the year ended June 30, 2008, four customers represented approximately
      38%
      of revenues. Those same four customers represented approximately 34%, or
      $402,723 of the total accounts receivable balance at June 30, 2008. For the
      year
      ended June 30, 2007, four customers represented approximately 40% of revenues.
      Those same four customers represented approximately 46%, or $614,120 of the
      total accounts receivable balance at June 30, 2007. The Company may be adversely
      affected by its dependence on a
      limited number of high volume customers. Management believes that the risks
      are
      mitigated by, (i) the contractual relationships with key customers, (ii) the
      high quality and reputation of the Company and its products and (iii) the
      continued diversification of the Company’s products and services into additional
      markets outside of its traditional Healthcare customer base.





Currently,
      the majority of Sharps transportation is sourced with the United States Post
      Office (“USPS”), which consists of delivering the Sharps Disposal by Mail
      System ® from the
      end user to the Company’s incineration facility. The Company also has an
      arrangement with United Parcel Service Inc. (“UPS”) whereby UPS transports the
      Company’s Sharps Disposal by Mail System® products from the non-healthcare
      facility end user to the Company’s owned incineration facility. The Company
      began selling a UPS product to select customers in fiscal year 2007. Management
      believes the risk of dependence on the USPS is mitigated by (i) the arrangement
      with UPS and (ii) the long-standing business relationship with and successful
      performance by USPS.





**INTELLECTUAL
      PROPERTY**





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





**COMPETITION**





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





**EMPLOYEES**





Sharps
      employees 33 individuals, of which 31 are full-time employees.





**ITEM
      1A. RISK FACTORS**





***Operating
      History***





Sharps
      has been profitable in fiscal years 2006 through 2008. Prior to fiscal year
      2006, the Company had a history of operating losses. The future success of
      Sharps is dependent upon many factors, including environmental regulation,
      continued acceptability of its products and services, continuity of its customer
      agreements, successful completion of its product development activities and
      the
      identification and penetration of additional markets for its products and
      services. Management believes that the Company’s current financial resources,
      including cash on hand and its line of credit with JPMorgan Chase Bank, N.A.,
      will be sufficient to fund operations through June 30, 2009.




5





***Dependence
      on Key Management Personnel***





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





***Customer
      Relationships***





Sharps
      believes it’s relationships with its customers is very good as a result of its
      long standing reputation and successful performance in the delivery of
      value-added products. Sharps generally has no firm long-term volume commitments
      from its customers but does have contractual relationships with the majority
      of
      its customers. Sharps has experienced fluctuations in order levels in many
      of
      its markets which may continue until the Company obtains critical mass and
      as
      the awareness of the proper disposal of medical sharps continues to increase.
      In
      general, customer purchase orders may be canceled and order volume levels can
      be
      changed or delayed with limited or no penalties. Sharps cannot assure the
      replacement of canceled, delayed or reduced purchase orders with new business.
      Moreover, Sharps’ financial condition and results of operations will depend in
      significant part upon the Company’s ability to obtain orders from new customers,
      the increased recognition by its prospective customers of the proper disposal
      of
      sharps and continued legislation mandating the proper disposal of sharps.





***Disposal
      Facility***





The
      Company’s business utilizes an incinerator facility for the proper disposal of
      sharps waste. The Company’s owned treatment facility is located in Carthage,
      Texas (Panola County). Prior to the purchase of the facility in January 2008,
      the Company operated the treatment facility since 1999. The Company believes
      it
      operates and maintains 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 year ended June 30, 2008 was $9,225.
      Although the Company entered into an agreement with a secondary burn facility
      to
      provide services in the event the incinerator is unavailable, any disruption
      in
      the availability of a disposal facility or increased governmental regulation
      may
      have an adverse impact on the Company. The Company can make no assurances that
      no such disruption or burdensome regulation will occur in the
      future.





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





During
      fiscal 2008, the Company began the
      process of adding alternative autoclave technology for medical waste disposal
      with plans to be fully operational by December 31, 2008 depending upon the
      timing of the completion of required state permitting. Autoclaving is a process
      that treats regulated waste with steam at high temperature and pressure to
      kill
      pathogens. Combining the autoclaving with a shredding or grinder process allows
      the waste to be disposed in a landfill operation. The Company believes
      autoclaving is environmentally cleaner and a less costly method of treating
      medical waste than incineration. The autoclaving technology is planned to be
      used in addition to incineration and is estimated to cost approximately
      $400,000.





***Governmental
      Regulation***





*Operations
      and Incinerator*





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




6





In
      November 2005, the EPA amended the Clean Air Act which will affect the
      operations of the leased incineration facility located in Carthage, Texas.
      The
      regulation modifies the emission limits and monitoring procedures required
      to
      operate an incineration facility. The new rules will necessitate changes to
      the
      Company’s owned incinerator and pollution control equipment at the facility or
      require installation of an alternative treatment method to ensure compliance.
      Such change would require the Company to incur significant capital expenditures
      in order to meet the requirements of the regulations. The regulation allows
      a
      minimum period of three years and a maximum of five years to comply after the
      date the final rule was published. The Company has studied the amended EPA
      Clean
      Air Act and its options, and has decided in the interim to move forward with
      the
      process of adding alternative technology, autoclaving, for medical waste
      disposal with plans to be fully operational by December 31, 2008 at its current
      facility in Carthage, Texas. Autoclaving is a process that treats regulated
      waste with steam at high temperature and pressure to kill pathogens. Combining
      the autoclaving with a shredding or grinder process allows the waste to be
      disposed in a landfill operation. The Company believes autoclaving is
      environmentally cleaner and a less costly method of treating medical waste
      than
      incineration. The Company has not yet decided if and when it will incur the
      additional capital expenditures needed in order to meet the new regulations.
      The
      additional capital expenditures are estimated at approximately $1.4 million
      and
      would increase its permitted incineration capacity from eleven (11) tons per
      day
      to thirty (30) tons per day. Should the Company incur such additional capital
      expenditures, it would do so subsequent to the development and launching of
      a
      business plan designed to generate significant incremental and new revenue
      stream from third party medical waste services. See Disposal Facility section
      above for further information regarding the purchase of the Carthage, Texas
      facility and addition of autoclave technology.





*Proper
      Disposal of Medical Sharps*





The
      first
      significant regulatory development occurred in December 2004 with the improved
      guidance issued by the Environmental Protection Agency (“EPA”) regarding the
      safe disposal of medical sharps (needles, syringes and lancets). This new
      guidance is a result of disposal problems created by the estimated 2 billion
      syringes discarded annually by legal self-injectors of medicines in homes and
      non-healthcare commercial facilities. Until December 2004, the EPA guidance
      has
      instructed consumers to place used sharps in a household container and to place
      the container in the household garbage. New guidance posted on the EPA website
      reflects information about alternative disposal methods including mail-back
      programs. The improved guidance issued by the EPA is a significant step toward
      the removal of needles, syringes and other sharps from the solid waste stream,
      consistent with the current practice in healthcare facilities. The Company’s
      products and services, which are included in the EPA list of recommended
      solutions, are designed to improve safety, efficiency and patient concerns
      related to the proper disposal of medical sharps.





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





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





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





In
      addition to California and Massachusetts, many other states are considering
      similar legislation.




7





In
      August
      2007, the U.S. House of Representatives and U.S. Senate introduced bills 3251
      and 1909, respectively, which would provide for Medicare reimbursement, under
      part D, for the safe and effective disposal of used needles and syringes through
      a sharps-by-mail or similar program. This legislation proposes Medicare coverage
      for the safe needle disposal for approximately 1.3 million insulin-dependent
      diabetic beneficiaries and is intended to reduce the number of accidental
      injuries, infections and subsequent costs associated with the improper disposal
      of approximately 4 million needles generated daily by Medicare covered
      diabetics. The Company’s Sharps Disposal By Mail Systems® is an example of the
      cost-effective and easy-to-use solution recommended in the
      legislation.





***Postal
      Work Interruptions***





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





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





As
      of the
      date of this report, the Company did not have any unresolved staff
      comments.





**ITEM
      2. DESCRIPTION OF PROPERTY**





Sharps
      currently leases 23,760 square feet of rentable (office and warehouse) space
      in
      Houston, Texas. The lease period commenced on March 1, 2007 and will expire
      on
      February 28, 2012. The lease was amended as of December 12, 2007 to expand
      the
      rentable square feet from 18,231 to 23,760 effective January 1, 2008. The
      Company also sub-leases approximately 5,000 square feet of warehouse space
      on a
      month-to month basis. Such space is considered over flow space used for assembly
      and storage.





On
      January 23, 2008, the Company purchased its formerly leased disposal facility
      in
      Carthage, Texas for medical waste disposal. The purchase includes an incinerator
      with a maximum capacity of thirty (30) tons per day, a 12,000 square foot
      building and 4.5 acres of land. The facility is currently permitted to treat
      eleven (11) tons per day of waste.





**ITEM
      3. LEGAL PROCEEDINGS**





***Ronald
      E. Pierce Matter***





On
      July
      15, 2008, the Company received a demand for arbitration from Ronald E. Pierce
      related to a June 2004 issue summarized below:





On
      June
      14, 2004, the Company provided Mr. Ronald E. Pierce, its then 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. 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.





The
      claim
      amount under the July 15, 2008 demand for arbitration is $300,001.




8





On
      July
      18, 2008, the Company responded to the July 15, 2008 request for Arbitration
      from Mr. Pierce. In its response, the Company advised that the request for
      arbitration was filed more than four (4) years from the date upon which Pierce
      knew, or should have known, of any alleged breach of contract. Accordingly,
      the
      Company will not agree to arbitrate a time barred claim.





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





***Patent
      Infringement Litigation***





In
      May
      2007, the Company filed patent infringement lawsuits in the United States
      District Court for the Southern District of Texas in Houston against MediSupply,
      Inc. (a/k/a or f/k/a Medi-Supply Alliance, LLC and Medi-Supply, Inc.
“MediSupply”) and Drive Medical Design & Manufacturing (“Drive Medical”) for
      infringement of three U.S. patents. The complaints allege that MediSupply and
      Drive Medical infringe the patents by making, selling, and offering for sale
      disposable IV poles which are identical to the Company’s Pitch-It TM IV Pole.





On
      January 2, 2008, the Company announced the settlement of the patent dispute
      with
      MediSupply and Drive Medical. In conjunction with the settlement, Drive Medical
      is now the exclusive manufacturer and Sharps is the exclusive seller of the
      Sharps Pitch-ItTM IV Poles. Additionally, Drive Medical and MediSupply will no
      longer sell IV Pole products that infringe upon Sharps’ patents. The settlement
      resolved all issues between the parties related to the patent litigation. As
      part of the exclusivity agreement, Sharps agreed to a minimum annual purchase
      commitment of $600,000 in IV Pole product a year. The Company believes it will
      purchase more than $600,000 in IV Pole products from Drive Medical on an annual
      basis.





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





During
      the three months ended June 30, 2008, no matter was submitted by the Company
      to
      a vote of its stockholders through the solicitation of proxies or
      otherwise.




9


**PART
      II**





**ITEM
      5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
      ISSUER PURCHASES OF EQUITY SECURITIES**





**Market
      Information** :
      During
      the two years ended June 30, 2008, 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 trading volume, averaging approximately
      258,000 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, 2007**First
                Quarter
            
            $
            0.98
            
            $
            0.85Second
                Quarter
            
            $
            2.45
            
            $
            0.80Third
                Quarter
            
            $
            3.83
            
            $
            2.30Fourth
                Quarter
            
            $
            3.40
            
            $
            2.95**Fiscal
                Year Ended June 30, 2008**First
                Quarter
            
            $
            3.65
            
            $
            2.50Second
                Quarter
            
            $
            3.10
            
            $
            2.30Third
                Quarter
            
            $
            2.85
            
            $
            2.20Fourth
                Quarter
            
            $
            2.80
            
            $
            2.30**Fiscal
                Year Ending June 30, 2009**First
                Quarter (September 18, 2008)
            
            $
            3.07
            
            $
            2.35





**Stockholders** :
      At
      September 18, 2008 there were 12,702,114 shares of common stock held by
      approximately 200 holders of record with approximately 500 held in street name.
      The last reported sale of the common stock on September 18, 2008, was $3.03
      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.





**Issuer
      Purchases of Equity Securities:** The
      Company has no reportable purchases of equity securities.




10





**Securities
      Authorized for Issuance under Equity Compensation Plans:**





**Equity
      Compensation Plan Information**





Plan
                category
            
            Number of securities to
              be issued upon exercise
              of outstanding options,
              warrants and rights
              (a)
            
            Weighted average
              exercise price of
              outstanding options,
              warrants and rights(4)
              (b)
            
            Number of securities
              remaining available
              for future issuance
              under equity
              compensation plans
              (excluding securities
              reflected in
                column
              (a))
              (c)Equity
                compensation plans approved by security holder(1)(3)
            
            
            1,482,600
            
            $
            1.13
            
            
            224,444Equity
                compensation plans not approved by security holders(2)
            
            
            275,000
            
            
            0.95
            
            
            N/ATotal
            
            
            1,757,600
            
            $
            1.10
            
            
            224,444





Notes:


(1)
            Represents
                stock options issued under the 1993 Sharps Compliance Corp. Stock
                Plan.


(2)
            Represents
                options to purchase unregistered common stock of the
                Company.


(3)
            Includes
                the effect of 101,000 shares of Restricted Stock issued to
                Directors.


(4)
            Weighted
                Average exercise price excludes the effect of 101,000 shares of Restricted
                Stock issued to Directors.





**Recent
      Sales of Unregistered Securities:** None





**ITEM
      6. SELECTED FINANCIAL DATA**





As
      a
      smaller reporting company, as defined in Rule 12b-2 of the securities Exchange
      Act of 1934, the Company is not required to provide the information required
      by
      this item.





**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 10-K. See “Information Regarding Forward Looking Statements.”




11





**RESULTS
      OF OPERATIONS**





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





**Year
                  Ended June 30,****2008**
              
              **2007**Total
                  revenues
              
              
              100
              %
              
              100
              %Costs
                  and expenses:Cost
                  of revenues
              
              
              (60
              )%
              
              (58
              )%Selling,
                  general and administrative
              
              
              (37
              )%
              
              (34
              )%Depreciation
                  and amortization
              
              
              (3
              )%
              
              (2
              )%Total
                  operating expenses
              
              
              (100
              )%
              
              (94
              )%Operating
                  profit
              
              
              0
              %
              
              6
              %Other
                  income (expense), net
              
              
              1
              %
              
              1
              %Net
                  income
              
              
              1
              %
              
              7
              %





**YEAR
      ENDED JUNE 30, 2008 COMPARED TO YEAR ENDED JUNE 30, 2007**





Total
      revenues for the year ended June 30, 2008 of $12,840,911 increased by $884,895,
      or 7.4%, over the total revenues for the year ended June 30, 2007, of
      $11,956,016. Billings by market are as follows:





**Twelve
                Months Ended June 30,****2008**
            
            **2007**
            
            **Variance**Billings
                by Market:Health
                Care
            
            $
            7,293,267
            
            $
            7,327,530
            
            $
            (
                34,263
            )Hospitality
            
            
            1,202,330
            
            
            878,100
            
            
            324,230Retail
            
            
            1,124,040
            
            
            1,107,442
            
            
            16,598Pharmaceutical
            
            
            889,766
            
            
            553,885
            
            
            335,881Professional
            
            
            748,919
            
            
            615,014
            
            
            133,905Commercial/Industrial
            
            
            617,390
            
            
            528,915
            
            
            88,475Agriculture
            
            
            502,878
            
            
            515,281
            
            
            (12,403
            )Protec
            
            
            457,788
            
            
            416,307
            
            
            41,481Government
            
            
            204,403
            
            
            177,790
            
            
            26,613Other
            
            
            144,120
            
            
            128,810
            
            
            15,310Subtotal
            
            
            13,184,901
            
            
            12,249,074
            
            
            935,827GAAP
                Adjustment*
            
            
            (343,990
            )
            
            (293,058
            )
            
            (50,932
            )Revenue
                Reported
            
            $
            12,840,911
            
            $
            11,956,016
            
            $
            884,895





*Represents
      the net impact of the revenue recognition adjustment required to arrive at
      reported GAAP revenue. Customer billings includes all invoiced amounts
      associated with products shipped during the period reported. GAAP revenue
      includes customer billings as well as numerous adjustments necessary to reflect,
      (i) the deferral of a portion of current period sales and (ii) recognition
      of
      certain revenue associated with product returned for treatment and destruction.
      The difference between customer billings and GAAP revenue is reflected in the
      Company’s balance sheet as deferred revenue. See Note 3 “Revenue Recognition” in
      Part I, “Notes to Consolidated Financial Statements”.




12





The
      increase in revenues is primarily attributable to increased billings in the
      Pharmaceutical ($335,881), Hospitality ($324,230), Professional ($133,905),
      Commercial/Industrial ($88,475), ProTec ($41,481), Government ($26,613), Retail
      ($16,598), and Other ($15,310) markets. These increases were partially offset
      by
      decreased billings in the Health Care ($34,263) and Agriculture ($12,403)
      markets. The increase in the billings in the Pharmaceutical market is
      attributable to increased billings to a top ten pharmaceutical manufacturing
      customer under the previously announced $1.4 million purchase order. The
      increase in the Hospitality market reflects increased demand of the Sharps
      Disposal by Mail System® and Biohazard Spill Clean-Up Kit products by hotels,
      restaurants and assisted living facilities. The increase in the Professional,
      Commercial/Industrial, and Protec markets is being driven by higher demand
      for
      the Company’s products as industry and consumers become more aware of the proper
      disposal of medical sharps (syringes, lancets, etc.). The increase in the
      billings in the Retail market is a result of the increased use of our products
      in grocery stores and pharmacies to properly dispose of syringes utilized to
      administer flu and other inoculations. The decrease in the Health Care market
      is
      due primarily to a temporary backorder situation at June 30, 2008 with respect
      to the Company’s Pitch-ItTM IV Poles that shifted approximately $150,000 of
      billings from the fourth quarter of FY 2008 to the first quarter of FY 2009.
      The
      decrease in the Agriculture market is primarily attributable to decreased demand
      of the Sharps Disposal by Mail System by a customer who provides the product
      to
      facilitate the injection of dairy cattle due to growing public concern over
      the
      use of hormones.





Cost
      of
      revenues for the year ended June 30, 2008 of $7,725,921 was 60% of revenues.
      Cost of revenues for the year ended June 30, 2007 of $6,942,567 was 58% of
      revenues for the corresponding period. The decrease in gross margin is a result
      of increased costs, customers and product mix. Additionally, the Company
      incurred unexpected air freight costs of approximately $75,000 in the fourth
      quarter of fiscal year 2008 related to the shipment of Pitch-ItTM IV Poles. This
      expense was necessary to minimize the backorder situation resulting from
      overseas production issues which were resolved beginning in July
      2008.




Selling,
      general and administrative (“S, G & A”) expenses for the twelve months ended
      June 30, 2008 of $4,782,532, increased by $836,890, or 21%, over the S, G &
A expenses for the twelve months ended June 30, 2007. The increase in S, G
&
A expense is primarily due to higher, (i) compensation expense and associated
      benefits ($271,473) (ii) office lease and related expenses ($136,515), (iii)
      sales-related professional fees ($91,086), (iv) investor relations expenses
      ($85,166), (v) the cash portion of Board of Director compensation expense
      ($80,000), (vi) non-cash stock-based compensation expense ($65,730) and (vii)
      sales and marketing related travel expenses ($55,614). The increase in
      compensation expense was due primarily to increased sales and sales support
      personnel. The professional fees increase is primarily for consulting work
      related to major sales initiatives. The increase in investor relations expense
      is due to the Company’s increased investor relations activity (conferences,
      presentations, etc). The increase in travel is directly related to the Company’s
      increased sales and marketing efforts.




During
      the fourth quarter of fiscal year 2008, the Company recorded a special charge
      of
      $67,541, or $0.00 per diluted share, which represents severance related costs
      incurred in conjunction with the termination of a sales person (former Sr.
      Vice
      President of Sales and Marketing). During the prior year ended June 30, 2007,
      the Company recorded a special charge of $138,000, $0.01 per diluted share,
      related to the re-alignment of the leadership in the Company’s sales and
      marketing department. The charge included a severance accrual of $102,000 and
      an
      executive recruiter fee of $36,000.





The
      Company generated an operating loss of $696 for the year ended June 30, 2008
      compared to operating income of $727,305 for the year ended June 30, 2007.
      The
      decrease in operating income is a result of the increase in S, G & A and as
      noted above.





The
      Company generated income before tax of $85,019 for the year ended June 30,
      2008
      versus a pre-tax income of $805,880 for the year ended June 30, 2007. The
      decrease of the income before tax is a result of the lower operating income
      (discussed above) offset with the higher interest income (result of higher
      cash
      balances throughout the year).





The
      Company reported diluted earnings per share of $0.01 for the year ended June
      30,
      2008 versus diluted earnings per share of $0.06 for the year ended June 30,
      2007. The decrease of the earnings per share is a result of the lower net income
      (discussed above).





**PROSPECTS
      FOR THE FUTURE**





The
      Company continues to take advantage of the many opportunities in the markets
      served as communities, consumers and industries become
      more aware of the proper disposal of medical sharps (syringes, lancets, etc.).
      This education process was enhanced in March 2004 when the U. S. Environmental
      Protection Agency (“EPA”) issued its new guidelines for the proper disposal of
      medical sharps (see www.epa.gov/epaoswer/other/medical/sharps.htm ).
      Additionally, in July 2006 both the states of California and Massachusetts
      passed legislation designed to mandate appropriate disposal of sharps waste
      necessary to protect the general public and workers from potential exposure
      to
      contagious diseases and health and safety risks. In August 2008, the U.S. House
      of Representative and U.S. Senate introduced bills 3251 and 1909, respectively,
      which would provide for Medicare reimbursement, under part D, for the safe
      and
      effective disposal of used needles and syringes. Among the methods of disposal
      recommended as part of the above noted regulatory actions are mail-back programs
      such as those marketed by the Company. The Company estimates that there are
      an
      estimated 2 billion used syringes disposed of in the United States outside
      of
      the hospital setting. Additionally, the Company estimates that it would require
      30 – 40 million Sharps Disposal by Mail System® products to properly
      disposal of all such disposed syringes, which would equate to a $1 billion
      small
      quantity generator market opportunity. Based upon the current level of sales,
      the Company estimates that this $1 billion market has only been penetrated
      by
      approximately 1% or less.




13





The
      Company continues to develop new products for its Sharps Disposal by Mail
      System® and Sharps SureTemp Tote® product lines. The Company is also developing
      products designed to facilitate the proper and cost effective disposal of unused
      medications. The Company believes its future growth will be driven by, among
      other items, (i) the positive impact and awareness created by the above noted
      regulatory actions as well as additional potential future legislation, (ii)
      the
      effects of the Company’s extensive direct marketing efforts and (iii) the
      Company’s leadership position in the development and sale of products designed
      to properly and cost effectively disposal of small quantities of medical
      waste.




Demand
      for the Company’s primary product, the Sharps Disposal by Mail System®, which
      facilitates the proper and cost-effective disposal of medical waste including
      hypodermic needles, lancets and other devices or objects used to puncture or
      lacerate the skin (referred to as “sharps”), has been growing rapidly in the
      small quantity generator sector because of its mail-back convenience and unique
      data tracking feature. In addition, targeted opportunities continue to expand
      as
      a result of , (i) legislation mandating the proper disposal of sharps, (ii)
      the
      growing awareness of the need to properly handle sharps medical waste for safety
      and environmental concerns, (iii) the significant increase in self-injectable
      medications and (iv) the changing paradigm in the healthcare
      industry.





**LIQUIDITY
      AND CAPITAL RESOURCES**





Cash
      and
      cash equivalents decreased by $98,933 to $2,035,219 at June 30, 2008 from
      $2,134,152 at June 30, 2007. **** The
      decrease in cash and cash equivalents is primarily a result of additions to
      property and equipment of $610,467, purchase of and improvements to treatment
      facility of $491,900, additions to intangible assets of $76,174 and payment
      on
      capital lease obligations of $1,809. The decrease was partially offset by cash
      generated from operations of $517,401, plus proceeds from the exercise of stock
      options of $554,389.




Accounts
      receivable decreased by $146,756 to $1,183,975 at June 30, 2008 from $1,330,731
      at June 30, 2007. The decrease is a direct result of the decrease in billings
      generated by the Company for the quarter ended June 30, 2008 versus the quarter
      ended June 30, 2007 of $935,827.





Inventory
      increased by $216,856 to $580,861 at June 30, 2008 from $364,005 at June 30,
      2007. The increase in inventory is attributable to purchases necessary to
      facilitate an upcoming pharmaceutical manufacturing market order, a recent
      bulk
      purchase of Sharps Secure® products manufactured overseas and additional stock
      needed for the 2008 flu shot season.





Property
      and equipment increased by $785,090 to $1,375,657 at June 30, 2008 from $590,567
      at June 30, 2007. This increase is attributable to capital expenditures of
      $1,102,366, partially offset by depreciation expense of $245,139 and rent
      abatement of $72,137 (reduction in property and equipment recorded in
      conjunction with the purchase of the previously leased treatment facility in
      Carthage, Texas). The capital expenditures are attributable to the purchase
      of,
      (i) treatment facility and land of $350,000 (ii) custom software programming
      of
      $106,999 (iii) new system software and implementation of $263,073, (iv)
      treatment facility improvements of $141,900, (v) warehouse/operations-related
      equipment $124,371, (vi) molds, dies and printing plates for production of
      $73,422, (vii) computer equipment of $37,855 and (viii) office furniture and
      equipment of $4,747. The custom software program was related to enhancements
      to
      the Company’s proprietary Sharps Tracer TM system and to the Company’s website.
      The new system and implementation was incurred to upgrade the Company’s
      financial and operations system. The warehouse/operations-related equipment
      was
      related to equipment necessary to accommodate the in-house assembly of the
      Company’s products, automation and racking for additional warehouse space. The
      treatment facility improvements are related to pre-installation capital
      expenditures related to the autoclave technology and general facility
      improvements. The molds and printing plates were procured for development of
      new
      product and additional production capacity. The computer equipment was purchased
      to facilitate the upgrade of outdated equipment and growth needs.




14





Accrued
      liabilities decreased by $180,880 to $432,971 at June 30, 2008 from $613,851
      at
      June 30, 2007. The decrease is a result of timing in the receipt of invoices
      for
      product received.





Stockholder’s
      equity increased by $716,411 from $2,169,125 to $2,885,536. This increase is
      attributable to (i) net income for the twelve months ended June 30, 2008 of
      $81,573 and (ii) the effect of stock options to purchase 581,730 common stock
      exercised with proceeds of $554,389 (average exercise price of $0.95), (iii)
      the
      effect on equity (credit) of SFAS 123R expense of $70,823 and (iv) the excess
      tax benefits from stock-based award activity of $9,626.





**Disposal
      Facility**





In
      January 2008, Company purchased its previously leased disposal facility in
      Carthage, Texas. The purchase included an incinerator with a maximum capacity
      of
      thirty (30) tons per day, a 12,000 square foot building and 4.5 acres of land.
      The Company incinerator is currently permitted at a capacity of eleven (11)
      tons
      per day.





Additionally,
      the Company has executed a purchase order for a state-of-the-art autoclave
      system and technology capable of treating up to seven (7) tons per day of
      medical waste at the same facility. Autoclaving is a process that treats medical
      waste with steam at high temperature and pressure to kill pathogens. An
      autoclave is environmentally cleaner and is a less costly method of treating
      most medical waste versus traditional incineration. The autoclave is expected
      to
      be placed in service by December 31, 2008.





With
      the
      addition of the autoclave, the Company believes it will own one of only
      approximately ten (10) permitted commercial disposal facilities in the country
      capable of treating all types of medical waste.





The
      total
      cost of the treatment facility purchase, addition of the autoclave technology
      and other planned improvements at the Carthage, Texas facility is estimated
      to
      be approximately $900,000 with $458,818 incurred to date. The remainder (which
      consists primarily of the autoclave equipment) is expected to be incurred by
      December 31, 2008 consistent with the date the autoclave will be permitted
      and
      placed in service.





In
      November 2005, the EPA amended the Clean Air Act which will affect the
      operations of the incineration facility located in Carthage, Texas. The
      regulation modifies the emission limits and monitoring procedures required
      to
      operate an incineration facility. The new rules will necessitate changes to
      the
      Company’s owned incinerator and pollution control equipment at the facility or
      require installation of an alternative treatment method to ensure compliance.
      Such change would require the Company to incur significant capital expenditures
      in order to meet the requirements of the regulations. The regulation allows
      a
      minimum period of three years and a maximum of five years to comply after the
      date the final rule was published. The Company has studied the amended EPA
      Clean
      Air Act and its options, and has decided in the interim to move forward with
      the
      process of adding alternative technology, autoclaving, for medical waste
      disposal with plans to be fully operational by December 31, 2008 at its current
      facility in Carthage, Texas. Autoclaving is a process that treats regulated
      waste with steam at high temperature and pressure to kill pathogens. Combining
      the autoclaving with a shredding or grinder process allows the waste to be
      disposed in a landfill operation. The Company believes autoclaving is
      environmentally cleaner and a less costly method of treating medical waste
      than
      incineration. The Company has not yet decided if and when it will incur the
      additional capital expenditures needed in order to meet the new regulations.
      The
      additional capital expenditures are estimated at approximately $1.4 million
      and
      would increase its permitted incineration capacity from eleven (11) tons per
      day
      to thirty (30) tons per day. Should the Company incur such additional capital
      expenditures, it would do so subsequent to the development and launching of
      a
      business plan designed to generate significant incremental and new revenue
      stream from third party medical waste services.





**New
      Operating and Accounting System**





The
      Company has recently implemented a project to replace and upgrade its integrated
      operations and accounting system. The Company’s existing system is approximately
      five (5) years old. The total cost of the project (including software, hardware,
      enhancements, and customization and implementation fees) is estimated at
      $300,000 with $247,309 paid through June 30, 2008. The remainder is expected
      to
      be incurred during the first half of fiscal year 2009. The new system is
      expected to be placed in service by December 31, 2008.





Management
      believes that the Company’s current cash resources (cash on hand and cash
      generated from operations) along with its $2.5 million line of credit will
      be
      sufficient to fund operations and capital expenditures for the twelve months
      ending June 30, 2009.




15





**INFLATION**





The
      Company does not believe that inflation has had a material effect on the results
      of operations during the past three years. However, there can be no assurance
      that the Company’s business will not be affected by inflation in fiscal 2009 and
      beyond.





**QUARTERLY
      RESULTS OF OPERATIONS (UNAUDITED)**





The
      following tables set forth selected quarterly information for 2008 and 2007.
      We
      believe that all necessary adjustments have been included in the amounts below
      to present fairly the results of such periods.





**Quarter
                Ended****September 30,**
              **2006**
            
            **December 31, 2006**
            
            **March 31, 2007**
            
            **June 30, 2007**Total
                revenues
            
            $
            2,990,884
            
            $
            3,181,777
            
            $
            2,896,651
            
            $
            2,899,704Cost
                of revenues
            
            $
            1,693,588
            
            $
            1,819,800
            
            $
            1,681,437
            
            $
            1,747,742Operating
                income (loss)
            
            $
            298,662
            
            $
            392,378
            
            $
            69,293
            
            $
            (33,027
            )Net
                income (loss)
            
            $
            291,588
            
            $
            421,196
            
            $
            81,970
            
            $
            (10,054
            )Net
                income (loss) per share
            
            $
            0.03
            
            $
            0.04
            
            $
            0.01
            
            $
            0.00Weighted
                average shares - diluted
            
            
            10,991,339
            
            
            11,576,162
            
            
            13,395,644
            
            
            11,894,855





**Quarter
                Ended****September 30,**
              **2007**
            
            **December 31, 2007**
            
            **March 31, 2008**
            
            **June 30, 2008**Total
                revenues
            
            $
            3,391,112
            
            $
            3,750,802
            
            $
            2,927,700
            
            $
            2,771,297Cost
                of revenues
            
            $
            1,957,735
            
            $
            2,145,468
            
            $
            1,786,892
            
            $
            1,835,826Operating
                income (loss)
            
            $
            220,299
            
            $
            354,368
            
            $
            (103,325
            )
            $
            (472,038
            )Net
                income (loss)
            
            $
            241,604
            
            $
            379,904
            
            $
            (83,589
            )
            $
            (456,346
            )Net
                income (loss) per share
            
            $
            0.02
            
            $
            0.03
            
            $
            (
                0.01
            )
            $
            (0.04
            )Weighted
                average shares - diluted
            
            
            13,535,520
            
            
            13,494,251
            
            
            12,478,315
            
            
            12,561,337




**CRITICAL
      ACCOUNTING POLICIES**





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




16





Uncertain
      Tax Positions:  The
      Company adopted the provisions of FASB issued Interpretation No. 48 ("FIN 48"),
      Accounting for Uncertainty in Income Taxes, - an interpretation of FASB
      Statement No. 109, effective July 1, 2007. The adoption of FIN 48 did not have
      a
      material effect on the Company’s consolidated financial statements. The Company
      classifies interest and penalties associated with the payment of income taxes
      in
      the Other Income (Expense) section of its consolidated statement of income
      (loss). Tax return filings which are subject to review by local tax authorities
      by major jurisdiction are as follows:





·
            United
                States – fiscal years ended June 2004, 2005, 2006 and
                2007


·
            State
                of Texas – fiscal years ended June 2004, 2005, 2006 and
                2007




Stock-Based
      Compensation :
      T he
      Company accounts for share-based compensation under the provisions of Statement
      of Financial Accounting Standards No. 123R, (“SFAS 123R”) *Share-Based
      Payment* ,
      which
      establishes accounting for equity instruments exchanged for employee services.
      Under the provisions of SFAS No. 123R, share-based compensation cost is measured
      at the grant date, based on the calculated fair value of the award, and is
      recognized as an expense over the employee’s requisite service period (generally
      the vesting period of the equity grant). Share-based compensation expense,
      included in general and administrative expenses in the Company’s consolidated
      statement of operations for the years ended June 30, 2008 and June 30, 2007,
      was
      $70,823 and $5,162 respectively. SFAS No. 123R requires any reduction in taxes
      payable resulting from tax deductions that exceed the recognized tax benefit
      associated with compensation expense (excess tax benefits) to be classified
      as
      financing as financing cash flows. The Company included $9,626 and $0 excess
      tax
      benefits in our cash flows from financing activities for the years ended June
      30, 2008 and June 30, 2007, respectively.





**RECENTLY
      ISSUED ACCOUNTING STANDARDS**




In
      September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework and gives guidance
      regarding the methods used for measuring fair value, and expands disclosures
      about fair value measurements. SFAS 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. The Company adopted SFAS 157 effective July 1, 2008
      and the adoption of the standard did not have a material impact on its financial
      position and results of operations.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities — Including an Amendment of FASB
      Statement No. 115.” This statement permits entities to choose to measure
      many financial instruments and certain other items at fair value that are not
      currently required to be measured at fair value and establishes presentation
      and
      disclosure requirements designed to facilitate comparisons between entities
      that
      choose different measurement attributes for similar types of assets and
      liabilities. SFAS 159 is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. Early adoption is
      permitted as of the beginning of a fiscal year that begins on or before
      November 15, 2007, provided the entity also elects to apply the provisions
      of SFAS No. 157. The
      Company adopted SFAS 159 effective July 1, 2008 and the adoption of the
      standard did not have a material impact on its financial position and results
      of
      operations.





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





Not
      required as the Company is a small business issuer, in accordance with Section
      12(b)-2 of the Act.





**ITEM
      8. 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-16.





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





None.




17





**ITEM
      9A. CONTROLS AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





The
      Company maintains "disclosure controls and procedures," as such term is defined
      in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange
      Act"), that are designed to ensure that information required to be disclosed
      in
      our Exchange Act reports is recorded, processed, summarized and reported within
      the time periods specified in the Securities and Exchange Commission rules
      and
      forms, and that such information is accumulated and communicated to management,
      including the Chief Executive Officer and Chief Financial Officer, as
      appropriate, to allow timely decisions regarding required disclosure. The
      Company conducted an evaluation (the "Evaluation"), under the supervision and
      with the participation of the Chief Executive Officer ("CEO") and Chief
      Financial Officer ("CFO"), of the effectiveness of the design and operation
      of
      our disclosure controls and procedures ("Disclosure Controls") as of the end
      of
      the period covered by this report pursuant to Rules 13a-15(e) and 15d-15(e)
      of
      the Exchange Act. Based on this Evaluation, the CEO and CFO concluded that
      our
      Disclosure Controls were effective as of the end of the period covered by this
      report.





**Changes
      in Internal Controls**





During
      the quarter ended June 30, 2008, there were no changes in the Company’s internal
      controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
      of the Exchange Act) that occurred during the quarter ended June 30, 2008,
      that
      have materially affected or are reasonably likely to materially affect the
      Company’s internal control over financial reporting.





**Limitations
      on the Effectiveness of Controls**





The
      Company’s management, including the CEO and CFO, does not expect that the
      Disclosure Controls and internal controls will prevent all errors and all fraud.
      A control system, no matter how well conceived and operated, can provide only
      reasonable, not absolute, assurance that the objectives of the control system
      are met. Further, the design of a control system must reflect the fact that
      there are resource constraints, and the benefits of controls must be considered
      relative to their costs. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, within the Company have been
      detected. These inherent limitations include the realities that judgments in
      decision-making can be faulty, and that breakdowns can occur because of a simple
      error or mistake. Additionally, controls can be circumvented by the individual
      acts of some persons, by collusion of two or more people, or by management
      or
      board override of the control.





The
      design of any system of controls also is based in part upon certain assumptions
      about the likelihood of future events, and there can be no assurance that any
      design will succeed in achieving its stated goals under all potential future
      conditions; over time, controls may become inadequate because of changes in
      conditions, or the degree of compliance with the policies or procedures may
      deteriorate. Because of the inherent limitations in a cost-effective control
      system, misstatements due to error or fraud may occur and not be
      detected.





**CEO
      and CFO Certifications**





Appearing
      immediately following the Signatures section of this report there are
      Certifications of the CEO and the CFO. The Certifications are required in
      accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section
      302
      Certifications). This Item of this report, which you are currently reading
      is
      the information concerning the Evaluation referred to in the Section 302
      Certifications and this information should be read in conjunction with the
      Section 302 Certifications for a more complete understanding of the topics
      presented.





**Management's
      Report on Internal Control over Financial Reporting**





The
      Company’s management is responsible for establishing and maintaining adequate
      internal control over financial reporting, as such term is defined in Exchange
      Act Rules 13a-15(f) and 15d-15(f). The Company's internal control over financial
      reporting is a process designed to provide reasonable assurance to our
      management and board of directors regarding the reliability of financial
      reporting and the preparation of the financial statements for external purposes
      in accordance with accounting principles generally accepted in the United States
      of America.




18





The
      internal control over financial reporting includes those policies and procedures
      that (i) pertain to the maintenance of records that, in reasonable detail,
      accurately and fairly reflect the transactions and dispositions of the assets
      of
      the Company; (ii) provide reasonable assurance that transactions are recorded
      as
      necessary to permit preparation of financial statements in accordance with
      accounting principles generally accepted in the United States of America, and
      that receipts and expenditures of the Company are being made only in accordance
      with authorizations of management and directors of the Company; and (iii)
      provide reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the Company's assets that
      could
      have a material effect on the financial statements.





Because
      of its inherent limitations, internal controls over financial reporting may
      not
      prevent or detect misstatements. All internal control systems, no matter how
      well designed, have inherent limitations, including the possibility of human
      error and the circumvention of overriding controls. Accordingly, even effective
      internal control over financial reporting can provide only reasonable assurance
      with respect to financial statement preparation. Also, projections of any
      evaluation of effectiveness to future periods are subject to the risk that
      controls may become inadequate because of changes in conditions, or that the
      degree of compliance with the policies or procedures may
      deteriorate.





The
      Company’s management assessed the effectiveness of the internal control over
      financial reporting as of June 30, 2008. In making this assessment, it used
      the
      criteria set forth by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO) in *Internal Control-Integrated Framework* .
      Based
      on the assessment, the Company’s management believes that, as of June 30, 2008,
      the Company's internal control over financial reporting was effective based
      on
      those criteria.





This
      annual report does not include an attestation report of our independent
      registered public accounting firm regarding internal control over financial
      reporting. Management's report was not subject to attestation by our independent
      registered public accounting firm pursuant to temporary rules of the Securities
      and Exchange Commission that permit us to provide only management's report
      in
      this annual report.





**ITEM
      9B. OTHER INFORMATION**





The
      information required by this item is not applicable.





**PART
      III**





**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
      GOVERNANCE**





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 21, 2008.





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, 2008, 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), Parker and Grow
      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.




19




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 under the Securities Act of 1933, as
      amended.  The Company’s Code of Ethics was previously an exhibit to the
      Annual Report on Form 10-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 posted its Code of Ethics on its
      website ( www.sharpsinc.com ).
      The
      Company intends to disclose any amendments to, or waivers from, the provisions
      of its Code of Ethics within four business days of the amendment or waiver
      within Form 8-K.





**ITEM
      11. 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, within 120 days, relating to its Annual Meeting of Stockholders
      to
      be held on November 21, 2008.




**ITEM
      12. 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, within 120 days, relating to its Annual
      Meeting of Stockholders to be held on November 21, 2008.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE**





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, within 120 days, relating to its Annual Meeting
      of
      Stockholders to be held on November 21, 2008.





**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, within 120 days, relating to its Annual Meeting of Stockholders
      to
      be held on November 21, 2008.





**PART
      IV**





**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**





ExhibitNumber
            
            Description
                of Exhibit2.1
            
            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).




20




10.2
            
            Employment
                Agreement by and between Sharps Compliance Corp. and Ronald E. Pierce
                dated July 14, 2003 (filed herewith).10.3
            
            Employment
                Agreement by and between Sharps Compliance Corp. and David P. Tusa
                dated
                July 14, 2003 (filed herewith).10.4
            
            Employment
                Agreement by and between Sharps Compliance Corp. and Michael D. Archer
                dated July 14, 2003 (filed herewith).10.5
            
            Exclusive
                Distributorship Agreement between Pro-Tec Containers, Inc. and Sharps
                Compliance, Inc., dated April 1, 1998 (incorporated by reference
                from
                Exhibit 10.31 to Form 10-KSB, dated June 30, 1998).10.6
            
            Purchase
                Agreement between Ivy Green Corporation and Sharps Compliance, Inc.,
                dated
                June 19, 1998 (incorporated by reference from Exhibit 10.32 to Form
                10-KSB, dated June 30, 1998).10.7
            
            Lease
                Agreement between Lakes Technology Center, Ltd. and Sharps Compliance,
                Inc., dated August 1, 1998 (incorporated by reference from Exhibit
                10.33
                to Form 10-KSB, dated June 30, 1998).10.8
            
            Severance
                Agreement between C. Lee Cooke, Jr. and Sharps Compliance Corp. (formerly
                known as - U.S. Medical Systems, Inc.), dated September 2, 1998
                (incorporated by reference from Exhibit 10.34 to Form 10-KSB, dated
                June
                30, 1998).10.9
            
            Employment
                Agreement Amendment by and between Sharps Compliance Corp. and David
                P.
                Tusa dated June 21, 2004.10.10
            
            Employment
                Agreement Amendment by and between Sharps Compliance Corp. and David
                P.
                Tusa dated August 19,2005.10.11
            
            Credit
                Agreement dated March 27,2006, by and between Sharps compliance Corp.
                and
                JPMorgan Chase Bank, N.A.10.12
            
            Line
                of Credit Note dated March 27, 2006, by and between Sharps Compliance
                Corp. and JPMorgan Chase Bank, N.A.10.13
            
            Security
                Agreement dated March 27, 2006, by and between Sharps Compliance
                Corp. and
                JPMorgan Chase Bank, N.A.10.14
            
            Lease
                Agreement dated as of July 13, 2006, between Sharps Compliance, Inc.
                and
                Warehouse Associates Corporate Centre Kirby II, Ltd.10.15
            
            Lease
                Termination Agreement dated as of July 13, 2006, between Sharps
                Compliance, Inc. and Warehouse Associates Corporate Centre Kirby
                I &
                II, Ltd.10.16
            
            Amendment
                to Credit Agreement dated February 5, 2007, by and between Sharps
                compliance Corp. and, JPMorgan Chase Bank , N.A.10.17
            
            Line
                of Credit Note dated February 5, 2007, by and between Sharps Compliance
                Corp. and JPMorgan Chase Bank, N.A.10.18
            
            Offer
                Letter between Sharps Compliance Corp., and David C. Mayfield dated
                March
                15, 2007.10.19
            
            Form
                of restricted stock award agreement dated July 2, 2007.10.20
            
            Letter
                Agreement by and between Sharps Compliance Corp. and David C. Mayfield
                dated April 10, 2007 (filed herewith).10.21
            
            Letter
                Agreement by and between Sharps Compliance Corp. and Claude A. Dance
                dated
                December 26, 2007.10.22
            
            Letter
                Agreement by and between Sharps Compliance Corp. and Al Aladwani
                dated
                April 24, 2008.10.23
            
            Form
                of restricted stock award agreement dated June 9, 2008.14.1
            
            Sharps
                Compliance Corp. Code of Ethics.16.1
            
            Letter
                regarding changes in Certifying Accountant to Arthur Andersen LLP,
                dated
                April 22, 1998 (incorporated by reference from Exhibit 16.1 to Form
                8-K,
                dated April 22, 1998).16.2
            
            Letter
                regarding changes in Certifying Accountant to Mann Frankfort Stein
&
                Lipp CPAs L.L.P. (incorporated by reference from Exhibit 16.1 to
                Form 8-K,
                dated January 11, 2002).31.1
            
            Certification
                of Chief Executive Officer in accordance with Section 302 of the
                Sarbanes-Oxley Act (filed herewith).31.2
            
            Certification
                of Chief Financial Officer in accordance with Section 302 of the
                Sarbanes-Oxley Act (filed herewith).32.1
            
            Certification
                of Chief Executive Officer in accordance with Section 906 of the
                Sarbanes-Oxley Act (filed herewith).32.2
            
            Certification
                of Chief Financial Officer in accordance with Section 906 of the
                Sarbanes-Oxley Act (filed
                herewith).





21





**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 29, 2008
            By:
            /s/
                BURTON J. KUNIKDr.
                Burton J. KunikChairman
                of the Board,Chief
                Executive Officer and PresidentBy:
            /s/
                DAVID P. TUSADavid
                P. TusaExecutive
                Vice PresidentChief
                Financial Officer, BusinessDevelopment
                and Corporate SecretaryBy:
            /s/
                RAMSAY GILLMANRamsay
                GillmanDirectorBy:
            /s/
                JOHN R. GROWJohn
                R. GrowDirectorBy:
            /s/
                PARRIS H. HOLMES, JR.Parris
                H. Holmes, Jr.DirectorBy:
            /s/
                F. GARDNER PARKERF.
                Gardner ParkerDirectorBy:
            /s/
                PHILIP C. ZERRILLOPhilip
                C. ZerrilloDirector




22





**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**PAGE****CONSOLIDATED
                    FINANCIAL STATEMENTS**Report
                of Independent Registered
                Public Accounting Firm
            F-2Consolidated
                Balance Sheets as of
                June 30, 2008 and 2007
            F-3Consolidated
                Statements of Income
                for the Years Ended June 30, 2008 and 2007
            F-4Consolidated
                Statements of
                Stockholders’ Equity for the Years Ended June 30, 2008 and 2007
            F-5Consolidated
                Statements of Cash
                Flows for the Years Ended June 30, 2008 and 2007
            F-6Notes
                to Consolidated Financial
                Statements
            F-7




F-1




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
      the
      Board of Directors and Stockholders of


Sharps
      Compliance Corp. and Subsidiaries


Houston,
      Texas





We
      have
      audited the accompanying consolidated balance sheets of Sharps Compliance Corp.
      (a Delaware corporation) and subsidiaries (collectively the “Company”) as of
      June 30, 2008 and 2007, and the related consolidated statements of income,
      stockholders’ equity 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 (United States). Those standards require that we
      plan
      and perform the audits 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.




We
      were
      not engaged to examine management’s assertion about the effectiveness of the
      Company’s internal control over financial reporting as of June 30, 2008 included
      in the accompanying annual report on Form 10-K and, accordingly we do not
      express an opinion thereon.




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, 2008 and 2007, and the
      consolidated results of their operations and their cash flows for the years
      then
      ended, in conformity with accounting principles generally accepted in the United
      States of America.




As
      discussed in Note 2 to the consolidated financial statements, the Company
      changed its method of accounting for uncertain tax positions effective July
      1,
      2007.






/s/
                UHY LLPHouston,
                Texas
              September
                26, 2008





F-2




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**June
                30,****2008**
            
            **2007**ASSETSCURRENT
                ASSETSCash
                and cash equivalents
            
            $
            2,035,219
            
            $
            2,134,152Restricted
                cash
            
            
            10,010
            
            
            10,010Accounts
                receivable, net of
                allowance for doubtful accounts of $15,301 and 15,793, respectively
            
            
            1,183,975
            
            
            1,330,731Inventory
            
            
            580,861
            
            
            364,005Prepaid
                and other current assets
            
            
            359,894
            
            
            186,101TOTAL
                CURRENT ASSETS
            
            
            4,169,959
            
            
            4,024,999PROPERTY
                AND EQUIPMENT
            
            
            1,375,657
            
            
            590,567INTANGIBLE
                ASSETS, net of accumulated amortization of $140,801 and $120,327,
                respectively
            
            
            130,702
            
            
            75,002TOTAL
                ASSETS
            
            $
            5,676,318
            
            $
            4,690,568LIABILITIES
                AND STOCKHOLDERS’ EQUITYCURRENT
                LIABILITIESAccounts
                payable
            
            $
            778,423
            
            $
            557,302Accrued
                liabilities
            
            
            432,971
            
            
            613,851Deferred
                revenue
            
            
            1,063,016
            
            
            883,678Current
                maturities of capital lease obligations
            
            
            -
            
            
            1,809TOTAL
                CURRENT LIABILITIES
            
            
            2,274,410
            
            
            2,056,640LONG-TERM
                DEFERRED REVENUE
            
            
            516,372
            
            
            392,803RENT
                ABATEMENT
            
            
            -
            
            
            72,000TOTAL
                LIABILITIES
            
            
            2,790,782
            
            
            2,521,443COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS’
                EQUITYCommon
                stock, $0.01 par value per share; 20,000,000 shares authorized; 12,580,183
                and 11,998,453 shares issued and outstanding, respectively
            
            
            125,802
            
            
            119,985Additional
                paid-in capital
            
            
            9,225,342
            
            
            8,596,321Accumulated
                deficit
            
            
            (6,465,608
            )
            
            (6,547,181
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            2,885,536
            
            
            2,169,125TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            5,676,318
            
            $
            4,690,568





See
      accompanying notes to consolidated financial statements


F-3


**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**





**Year Ended June 30,****2008**
            
            **2007**REVENUESProduct
            
            $
            12,441,075
            
            $
            11,603,434Environmental
                and other services
            
            
            399,836
            
            
            352,582TOTAL
                REVENUES
            
            
            12,840,911
            
            
            11,956,016COSTS
                AND EXPENSESCost
                of revenues
            
            
            7,725,921
            
            
            6,942,567Selling,
                general and
                administrative
            
            
            4,782,532
            
            
            3,945,642Special
                charge
            
            
            67,541
            
            
            138,000Depreciation
                and amortization
            
            
            265,613
            
            
            202,502TOTAL
                COSTS AND EXPENSES
            
            
            12,841,607
            
            
            11,228,711OPERATING
                INCOME (LOSS)
            
            
            (696
            )
            
            727,305OTHER
                INCOME (EXPENSE)Interest
                income
            
            
            85,259
            
            
            50,680Interest
                expense
            
            
            (44
            )
            
            (4,605
            )Other
                income
            
            
            500
            
            
            32,500TOTAL
                OTHER INCOME (EXPENSE)
            
            
            85,715
            
            
            78,575INCOME
                BEFORE INCOME TAXES  NET INCOME)
            
            
            85,019
            
            
            805,880INCOME
                TAXES
            
            
            (3,446
            )
            
            (21,180
            )NET
                INCOME
            
            $
            81,573
            
            $
            784,700NET
                INCOME PER COMMON SHAREBasic
            
            $
            0.01
            
            $
            0
                .07Diluted
            
            $
            0.01
            
            $
            0.06WEIGHTED
                AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHAREBasic
            
            
            12,313,160
            
            
            11,161,367Diluted
            
            
            13,540,381
            
            
            12,338,047





See
      accompanying notes to consolidated financial statements


F-4


**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**Additional**
              
              
              
              **Total****Common Stock**
              
              **Paid-in**
              
              **Accumulated**
              
              **Stockholders’****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **Equity**Balances,
                  July 1, 2006
              
              
              10,551,310
              
              
              105,513
              
              
              7,478,268
              
              
              (7,331,881
              )
              
              251,900Exercise
                  of stock options
              
              
              1,443,060
              
              
              14,431
              
              
              1,100,601
              
              
              -
              
              
              1,115,032Stock-based
                  compensation and other
              
              
              4,083
              
              
              41
              
              
              17,452
              
              
              -
              
              
              17,493Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              784,700
              
              
              784,700Balances,
                  June 30, 2007
              
              
              11,998,453
              
              $
              119,985
              
              $
              8,596,321
              
              $
              (6,547,181
              )
              $
              2,169,125Exercise
                  of stock options
              
              
              581,730
              
              
              5,817
              
              
              548,572
              
              
              -
              
              
              554,389Stock-based
                  compensation
              
              
              -
              
              
              -
              
              
              70,823
              
              
              -
              
              
              70,823Excess
                  tax benefits from stock-based award activity
              
              
              -
              
              
              -
              
              
              9,626
              
              
              -
              
              
              9,626Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              81,573
              
              
              81,573Balances,
                  June 30, 2008
              
              
              12,580,183
              
              $
              125,802
              
              $
              9,225,342
              
              $
              (6,465,608
              )
              $
              2,885,536





See
      accompanying notes to consolidated financial statements


F-5


**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year Ended June 30,****2008**
            
            **2007**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income
            
            $
            81,573
            
            $
            784,700Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            265,613
            
            
            202,502Stock
                based compensation expense
            
            
            70,823
            
            
            17,493Excess
                tax benefits from stock-based award activity
            
            
            (9,626
            )
            
            -Changes
                in operating assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            116,941
            
            
            (395,448
            )Increase
                in inventory
            
            
            (216,856
            )
            
            (38,317
            )Increase
                in prepaid and other assets
            
            
            (143,978
            )
            
            (97,753
            )Increase
                (decrease) in accounts payable and accrued liabilities
            
            
            50,004
            
            
            385,352Increase
                in deferred revenue
            
            
            302,907
            
            
            238,149NET
                CASH PROVIDED BY OPERATING
                ACTIVITIES
            
            
            517,401
            
            
            1,096,678CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of property and equipment
            
            
            (610,466
            )
            
            (316,160
            )Purchase
                of treatment facility
            
            
            (350,000
            )
            
            -Improvements
                to treatment facility
            
            
            (141,900
            )
            
            -Intangible
                Assets
            
            
            (76,174
            )
            
            (18,097
            )NET
                CASH USED IN INVESTING
                ACTIVITIES
            
            
            (1,178,540
            )
            
            (334,257
            )CASH
                FLOWS FROM FINANCING ACTIVITIESPayments
                on capital lease obligations
            
            
            (1,809
            )
            
            (40,260
            )Excess
                tax benefits from stock-based award activity
            
            
            9,626
            
            
            -Proceeds
                from exercise of stock options
            
            
            554,389
            
            
            1,115,032NET
                CASH PROVIDED BY IN FINANCING ACTIVITIES
            
            
            562,206
            
            
            1,074,772NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            (98,933
            )
            
            1,837,193CASH
                AND CASH EQUIVALENTS, beginning of year
            
            
            2,134,152
            
            
            296,959CASH
                AND CASH EQUIVALENTS, end of year
            
            $
            2,035,219
            
            $
            2,134,152SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATIONCash
                paid for interest
            
            $
            44
            
            $
            4,602





See
      accompanying notes to consolidated financial statements


F-6


**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**





**NOTE
      1 - ORGANIZATION AND BACKGROUND**





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





Business :
      Sharps
      is a leading developer of cost effective solutions for improving safety and
      efficiency related to the proper disposal of medical waste by healthcare
      (outside of hospital), industry and consumers. These solutions include Sharps
      Disposal by Mail System® Pitch-ItTM IV Poles, Trip LesSystem®, Sharps Pump Return
      Box, Sharps Enteral Pump Return Box, Sharps Secure®, Sharps SureTemp Tote®,
      IsoWash® Linen Recovery System, Biohazard Spill Clean-Up Kit and Disposal
      System, Sharps e-Tools, Sharps Environmental Services and Sharps
      Consulting.





Concentration
      of Customers :
      Although Sharps has experienced growth in revenues over the past few years,
      there is an inherent concentration of credit risk associated with accounts
      receivable arising from sales to its major customers .
      For the year ended June 30, 2008, four customers represented approximately
      38%
      of revenues. Those same four customers represented approximately 34%, or
      $402,723 of the total accounts receivable balance at June 30, 2008. For the
      year
      ended June 30, 2007, four customers represented approximately 40% of revenues.
      Those same four customers represented approximately 46%, or $614,120 of the
      total accounts receivable balance at June 30, 2007. The Company may be adversely
      affected by its dependence on a
      limited number of high volume customers. Management believes that the risks
      are
      mitigated by, (i) the contractual relationships with key customers, (ii) the
      high quality and reputation of the Company and its products and (iii) the
      continued diversification of the Company’s products and services into additional
      markets outside of its traditional Healthcare customer base.





Currently,
      the majority of Sharps transportation is sourced with the United States Post
      Office (“USPS”), which consists of delivering the Sharps Disposal by Mail
      System ® from the
      end user to the Company’s leased incineration facility. The Company also has an
      arrangement with United Parcel Service Inc. (“UPS”) whereby UPS transports the
      Company’s Sharps Disposal by Mail System® products from the end user
      (non-healthcare facility) to the Company’s leased incineration facility. The
      Company began selling a UPS product to select customers in fiscal year 2007.
      Management believes the risk of dependence on the USPS is mitigated by (i)
      the
      new arrangement with UPS and (ii) the long-standing business relationship with
      the USPS.





Liquidity :
      Sharps
      has been profitable for three years. Prior to fiscal year 2006, the Company
      had
      a history of operating losses. The future success of Sharps is dependent upon
      many factors, including continued legislation, acceptability of Sharps’ products
      as value-added and cost effective, environmental regulation, continuity and
      growth of its customer base, successful completion of its product development
      activities and the identification and penetration of additional markets for
      its
      products and services. Management believes that the Company’s current financial
      resources, including cash on hand and its line of credit with JPMorgan Chase
      Bank, N.A., along with cash flow from operations, will be sufficient to fund
      operations through fiscal year 2009.





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





Cash
      Equivalents :
      The
      Company considers all highly liquid investments with a maturity of three months
      or less at the time of purchase to be cash equivalents.





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





F-7





**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**





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





Inventory :
      Inventory consists primarily of finished goods and supplies held for sale and
      are stated at the lower of cost or market using the average cost method. At
      June
      30, 2008 total inventory was $580,861 of which $393,648 was finished goods
      and
      $187,213 was raw materials. At June 30, 2007 total inventory was $364,005 of
      which $179,193 was finished goods and $184,812 was raw materials.





Property
      and Equipment :
      Property and equipment is stated at cost less accumulated depreciation.
      Depreciation is computed using the straight-line method based on the estimated
      useful lives of the assets. Additions, improvements and renewals significantly
      adding to the asset value or extending the life of the asset are capitalized.
      Ordinary maintenance and repairs, which do not extend the physical or economic
      life of the property or equipment, are charged to expense as incurred. When
      assets are retired or otherwise disposed of, the cost and related accumulated
      depreciation are removed from the accounts, and any resulting gain or loss
      is
      reflected in the results of operations for the period. During the years ended
      June 30, 2008 and 2007, the Company recorded depreciation expense of $245,139
      and $198,980, respectively.





Intangible
      Assets :
      Intangible assets consist of, (i) permit costs related to the Company’s leased
      incineration facility in Carthage, Texas, (ii) three patents, two acquired
      in
      June 1998 and one in November 2003 and (iii) defense costs related to certain
      existing patents. The permit costs are being amortized over the remaining
      initial term of the corresponding incinerator lease. The one patent acquired
      in
      November 2003 is being amortized over its estimated useful life of seventeen
      years. During the years ended June 30, 2008 and 2007, the Company recorded
      amortization expense of $20,474 and $3,522, respectively. Accumulated
      amortization at June 30, 2008 and 2007 was $140,801 and $120,327, respectively.
      Future amortization for intangible assets is as follows: $24,949, $24,949,
      $24,949, $24,949, $10,556 and $20,350 for the years ending June 30, 2009, 2010,
      2011, 2012, 2013 and thereafter, respectively, for a total amortization of
      $130,702.




Stock-Based
      Compensation: T he
      Company accounts for share-based compensation under the provisions of Statement
      of Financial Accounting Standards No. 123R, (“SFAS 123R”) *Share-Based
      Payment* ,
      which
      establishes accounting for equity instruments exchanged for employee services.
      Under the provisions of SFAS 123R, share-based compensation cost is measured
      at
      the grant date, based on the calculated fair value of the award, and is
      recognized as an expense over the employee’s requisite service period (generally
      the vesting period of the equity grant). Share-based compensation expense,
      included in general and administrative expenses in the Company’s consolidated
      statement of operations for the years ended June 30, 2008 and June 30, 2007,
      was
      $70,823 and $5,162 respectively. SFAS No. 123R requires any reduction in taxes
      payable resulting from tax deductions that exceed the recognized tax benefit
      associated with compensation expense (excess tax benefits) to be classified
      as
      financing as financing cash flows. The Company included $9,626 and $0 excess
      tax
      benefits in our cash flows from financing activities for the years ended June
      30, 2008 and June 30, 2007, respectively.




F-8





**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**




The
      Company estimates the fair value of stock options using the Black-Scholes
      valuation model. Key input assumptions used to estimate the fair value of stock
      options include the exercise price of the award, the expected option term,
      the
      expected volatility of the Company’s stock over the option’s expected term, the
      risk free interest rate over the option’s expected term, and the Company’s
      expected annual dividend yield. The Company believes that the valuation
      technique and the approach utilized to develop the underlying assumptions are
      appropriate in calculating the fair values of the Company’s stock options
      granted during the year ended June 30, 2008. Estimates of fair value are not
      intended to predict actual future events or the value ultimately realized by
      persons who receive equity awards.




The
      fair
      value of the Company’s stock options was estimated on the grant date using the
      Black-Scholes option-pricing model with the following assumptions:




**Year Ended June 30,****2008**
            
            **2007**Risk-free
                interest rate
            
            
            3.3
            %
            
            4.9
            %Expected
                volatility
            
            
            88
            %
            
            100
            %Expected
                life (in years)
            
            
            5.2
            
            
            3.3Dividend
                yield
            
            
            -
            
            
            -




For
      stock-based awards granted on or after July 1, 2006, the Company considers
      an
      estimated forfeiture rate for stock option and RSUs based on historical
      experience and the anticipated forfeiture rates during the future contract
      life.





Revenue
      Recognition :
      The
      Company complies with the Securities and Exchange Commission’s (“SEC”) Staff
      Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, which provides
      guidance related to revenue recognition based on interpretations and practices
      followed by the SEC. Under SAB No. 104, certain products offered by the Company
      have revenue producing components that are recognized over multiple delivery
      points (Sharps Disposal by Mail Systems, referred to as “Mailbacks” and Sharps
      Return Boxes, referred to as “Pump Returns”) and can consist of up to three
      separate elements as follows: (1) the sale of the container system, (2) the
      transportation of the container system and (3) the treatment and disposal
      (incineration) of the container system. The individual fair value of the
      transportation and incineration services are determined by the sales price
      of
      the service offered by third parties, with the fair value of the container
      being
      the residual value. Revenue for the sale of the container
      is recognized upon delivery to the customer, at which time the customer takes
      title and assumes risk of ownership. Transportation revenue on Mailbacks is
      recognized when the customer returns the mailback container system and the
      container has been received at the Company’s treatment facility. The Mailback
      container system is mailed to the incineration facility using the USPS.
      Incineration revenue is recognized upon the destruction and certification of
      destruction having been prepared on the container. Since the transportation
      element and the incineration elements are undelivered services at the point
      of
      initial sale of the container, the Mailback and Incinerator revenue is deferred
      until the services are performed. The current and long-term portions of deferred
      revenues are determined through regression analysis and historical trends.
      Furthermore, through regression analysis of historical data, the Company has
      determined that a certain percentage of all container systems sold may not
      be
      returned. Accordingly, a portion of the transportation and incineration elements
      are recognized at the point of sale.





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 $20,292
      and
      $16,572 for the years ended June 30, 2008 and 2007, respectively.





F-9




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**





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





Employee
      Benefit Plans :
      In
      addition to group health related benefits, the Company maintains a 401(k)
      employee savings plan available to all full-time employees. The Company matches
      a portion of employee contributions with cash (25% of employee contribution
      up
      to 6%). Company contributions to the 401(k) plan were $20,700 and $21,575 for
      the years ended June 30, 2008 and 2007, respectively, and are included in
      selling and administrative expenses. For purposes of the group health benefit
      plan, the Company self-insures an amount equal to the excess of the employees’
deductible ($1,000 for individual and $2,000 for family coverage) up to the
      amount by which the third party insurance coverage begins ($5,000 for individual
      and $10,000 for family). The amount of liability at June 30, 2008 and 2007
      was
      $3,267 and $3,603, and is included in “Accrued Liabilities”.





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





Net
      Income 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.





Financial
      Instruments :
      The
      Company considers the fair value of all financial instruments, including cash
      and cash equivalents, accounts receivable, accounts payable and accrued
      liabilities, not to be materially different from their


carrying
      values at year-end due to their short-term nature.





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





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





F-10




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**





Uncertain
      Tax Positions:  The
      Company adopted the provisions of FASB issued Interpretation No. 48 ("FIN 48"),
      Accounting for Uncertainty in Income Taxes, - an interpretation of FASB
      Statement No. 109, effective July 1, 2007. The adoption of FIN 48 did not have
      a
      material effect on the Company’s consolidated financial statements. The Company
      classifies interest and penalties associated with the payment of income taxes
      in
      the Other Income (Expense) section of its consolidated statement of income
      (loss). Tax return filings which are subject to review by local tax authorities
      by major jurisdiction are as follows:





·
            United
                States – fiscal years ended June 2004, 2005, 2006 and
                2007


·
            State
                of Texas–
                fiscal years ended June 2004, 2005, 2006 and
                2007





Recent
      Accounting Pronouncements :
      In
      September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework and gives guidance
      regarding the methods used for measuring fair value, and expands disclosures
      about fair value measurements. SFAS 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. The Company adopted SFAS 157 effective July 1, 2008
      and the adoption of the standard did not have a material impact on its financial
      position and results of operations.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities — Including an Amendment of FASB
      Statement No. 115.” This statement permits entities to choose to measure
      many financial instruments and certain other items at fair value that are not
      currently required to be measured at fair value and establishes presentation
      and
      disclosure requirements designed to facilitate comparisons between entities
      that
      choose different measurement attributes for similar types of assets and
      liabilities. SFAS 159 is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. Early adoption is
      permitted as of the beginning of a fiscal year that begins on or before
      November 15, 2007, provided the entity also elects to apply the provisions
      of SFAS No. 157. The Company adopted SFAS 159 effective July 1, 2008
      and the adoption of the
      standard did not have a material impact on its financial position and results
      of
      operations.





**NOTE
      3 - PROPERTY AND EQUIPMENT**





At
      June
      30, 2008 and 2007, property and equipment consisted of the
      following:





**June 30,****Useful Life**
            
            **2008**
            
            **2007**Furniture
                and fixtures
            
            
            3
                to 5 years
            
            $
            62,232
            
            $
            57,485Equipment
            
            
            5
                years
            
            
            515,499
            
            
            317,706Manufacturing
            
            
            15
                years
            
            
            221,636
            
            
            221,636Computers
                and software
            
            
            3
                to 5 years
            
            
            831,934
            
            
            614,267Plant
                and Equipment
            
            
            3
                to 5 years
            
            
            667,484
            
            
            257,721Land
            
            
            
            
            
            10,000
            
            
            -2,308,785
            
            
            1,468,815Less:
                accumulated depreciation
            
            
            
            
            
            933,129
            
            
            878,248Net
                property and equipment
            
            
            
            
            $
            1,375,657
            
            $
            590,567





F-11




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**





**NOTE
      4 - NOTES PAYABLE AND LONG-TERM DEBT**





Effective
      February 5, 2007, the Company entered into an Amended Credit Agreement with
      JPMorgan Chase Bank, N.A. (“Credit Agreement”) which provides for a $2.5
      million Line of Credit Facility the proceeds of which may be utilized for,
      (i) working capital, (ii) letters of credit (up to $200,000), (iii)
      acquisitions (up to $500,000) and (iv) general corporate purposes. Indebtedness
      under the Credit Agreement is secured by substantially all of the Company’s
      assets. Borrowings bear interest at a fluctuating rate per annum equal to
      either, (i) prime rate or (ii) LIBOR plus a margin of 2.75%. Any outstanding
      revolving loans, and accrued and unpaid interest, will be due and payable on
      March 27, 2009, the maturity date of the facility. The aggregate principal
      amount of advances outstanding at any time under the Facility shall not exceed
      the Borrowing Base which is equal to, (i) 80% of Eligible Accounts Receivable
      (as defined) plus (ii) 50% of Eligible Inventory (as defined). The Credit
      Agreement contains affirmative and negative covenants that, among other items,
      require the Company to maintain a specified tangible net worth and fixed charge
      coverage ratio. The Credit Agreement also contains customary events of default.
      Upon the occurrence of an event of default that remains uncured after any
      applicable cure period, the lenders’ commitment to make
      further loans may terminate and the Borrower may be required to make immediate
      repayment of all indebtedness to the lenders. The lender would also be entitled
      to pursue other remedies against the Company and the collateral. As of June
      30,
      2008, the borrowing base has been reduced by $13,000 in letters of credit
      outstanding drawn against the line of credit. As of June 30, 2008 and 2007
      respectively, no amounts related to the Credit Agreement were outstanding.
      Under
      the Credit Agreement, and based upon the Company’s June 30, 2008 level of
      accounts receivable and inventory, the amount available to borrow at year end
      was $1.3 million.





**NOTE
      5 - INCOME TAXES**





The
      reconciliation of the statutory income tax rate to the Company’s effective
      income tax rate for the years ended June 30, 2008 and 2007 are as
      follows:





**Year Ended June 30,****2008**
            
            **2007**Statutory
                rate
            
            
            34.0
            %
            
            34.0
            %State
                income taxes, net
            
            
            14.1
            
            
            0.0Meals
                and entertainment
            
            
            25.7
            
            
            2.8Change
                in valuation allowance
            
            
            (48.5
            )
            
            (34.6
            )Other
            
            
            (21.2
            )
            
            .44.1
            %
            
            2.6
            %





For
      the
      year ended June 30, 2008 state income taxes relate to the Texas Margin Tax.
      The
      net operating loss carryforwards and other deferred tax assets are fully
      reserved in the valuation allowance.





F-12




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**





At
      June
      30, 2008 and 2007, significant components of deferred tax assets and liabilities
      are approximated as follows:





**June
                30,****2008**
            
            **2007**Deferred
                tax assets relating to:Accounts
                receivable allowance
            
            $
            5,202
            
            $
            5,369Deferred
                revenue
            
            
            536,992
            
            
            434,004Stock
                Compensation
            
            
            25,859
            
            
            -Net
                operating loss carryforwards and other credits
            
            
            2,408,947
            
            
            2,240,228Total
                deferred tax assets
            
            
            2,679,601
            
            
            2,679,601Deferred
                tax liabilities related to:Depreciation
                differences
            
            
            (31,636
            )
            
            (21,685
            )Stock
                Compensation
            
            
            -
            
            
            (1,755
            )2,945,364
            
            
            2,656,161Valuation
                allowance
            
            
            (2,945,364
            )
            
            (2,656,161
            )Net
                deferred tax asset (liabilities)
            
            $
            -
            
            $
            -





At
      June
      30, 2008, the Company had net operating loss carryforwards for income tax
      purposes of approximately $9.4 million. The carryforwards will begin to expire
      in 2009 if not otherwise used. There is a limitation under the Internal Revenue
      Code Section 382 on the Company’s net operating losses generated prior to 1998.
      This limitation will cause $2.8 million of losses to expire unused. Therefore,
      only $6.6 million of the Company’s net operating loss carryforwards are
      available for use in future years.





It
      should
      be noted that $1.0 million of the deferred tax asset (and valuation allowance)
      related to net operating losses is a result of the exercise of non-qualified
      stock options. If and when these net operating losses are utilized the benefit
      will be recorded to additional paid in capital.





With
      the
      exception of the last three years, the Company had a history of losses and
      therefore a valuation allowance has been established to fully offset the
      Company’s deferred tax assets.





**NOTE
      6 - STOCK TRANSACTIONS**





During
      the year ended June 30, 2008, stock options to purchase 581,730 of common shares
      were exercised. Total proceeds to the Company were $554,389 (average price
      of
      $0.95 per share). During the year ended June 30, 2007, stock options to purchase
      1,443,060 of common shares were exercised. Total proceeds to the Company were
      $1,115,032 (average price of $0.77 per share).





**NOTE
      7 - STOCK OPTIONS**





The
      Company sponsors a Stock Plan (the “Plan”) covering employees, consultants and
      non-employee directors. The Plan, as amended, provides for the granting of
      options to purchase up to 3,500,000 shares of the Company’s common stock of
      which 1,482,600 are outstanding as of June 30, 2008. The Company also has issued
      637,500 non-Plan options to purchase common stock of which 275,000 are
      outstanding as of June 30, 2008. Options granted generally vest over a period
      of
      three years and expire seven years after the date of grant.





F-13




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**





The
      following summary of activity for all stock options during the years ended
      June
      30, 2008 and 2007 is presented in the table below:


**Weighted****Average****Options**
              
              **Exercise****Outstanding**
              
              **Price**Balance,
                  July 1, 2006
              
              
              3,703,890
              
              $
              0.88Granted
              
              
              125,000
              
              $
              3.21Exercised
              
              
              (1,443,060
              )
              $
              0.77Forfeited
                  or Canceled
              
              
              (177,500
              )
              $
              1.24Balance,
                  June 30, 2007
              
              
              2,208,330
              
              $
              1.06Granted
              
              
              140,000
              
              $
              2.65Exercised
              
              
              (581,730
              )
              $
              0.95Forfeited
                  or Canceled
              
              
              (110,000
              )
              $
              3.02Balance,
                  June 30, 2008
              
              
              1,656,600
              
              $
              1.10
              (1)Exercisable
                  at June 30, 2008
              
              
              1,508,266
              
              $
              0.94
              (1)




(1)
            Excludes
                101,000 shares of Restricted Stock.





As
      of
      June 30, 2008 and 2007, there were 224,444 and 360,444 options, respectively,
      available for grant under the Plan.





The
      following table summarizes information about stock options outstanding as of
      June 30, 2008:


**Options Outstanding****Weighted****Average**
              
              **Weighted****Range of**
              
              **Outstanding**
              
              **Remaining**
              
              **Average****Exercise**
              
              **as of**
              
              **Life**
              
              **Exercise****Price**
              
              **June 30, 2008**
              
              **(in Years)**
              
              **Price**$0.50
                  - $1.00
              
              
              1,106,600
              
              
              3.10
              
              
              0.82$1.01
                  - $1.50
              
              
              280,000
              
              
              1.24
              
              
              1.09$1.51
                  - $2.00
              
              
              110,000
              
              
              0.82
              
              
              1.53$2.01
                  - $3.50
              
              
              160,000
              
              
              6.52
              
              
              2.761,656,600
              
              
              3.34
              
              $
              1.10
  F-14





**S** **HARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**





The
      following table summarizes information about stock options outstanding and
      exercisable as of June 30, 2008:


**Options Outstanding And Exercisable****Weighted****Average**
              
              **Weighted****Range of**
              
              **Outstanding**
              
              **Remaining**
              
              **Average****Exercise**
              
              **as of**
              
              **Life**
              
              **Exercise****Price**
              
              **June 30, 2007**
              
              **(in Years)**
              
              **Price**$0.50
                  - $1.00
              
              
              1,106,600
              
              
              3.10
              
              $
              0.82$1.01
                  - $1.50
              
              
              280,000
              
              
              1.24
              
              
              1.09$1.51
                  - $2.00
              
              
              110,000
              
              
              0.82
              
              
              1.53$2.01
                  - $3.50
              
              
              11,666
              
              
              5.75
              
              
              3.331,508,266
              
              
              2.61
              
              $
              0.94




**NOTE
      8 - COMMITMENTS AND CONTINGENCIES**





Operating
      Leases: Sharps
      currently leases 23,760 square feet of rentable (office and warehouse) space
      in
      Houston, Texas. The lease period commenced on March 1, 2007 and will expire
      on
      February 28, 2012. The lease was amended as of December 12, 2007 to expand
      the
      rentable square feet from 18,231 to 23,760 effective January 1, 2008. Rent
      expense for the years ended June 30, 2008 and 2007 was $316,787 and $229,293,
      respectively. Future minimum lease payments under non-cancelable operating
      leases as of June 30, 2008 are as follows:








Year
                Ending June 30,2009
            
            $
            294,7962010
            
            
            294,7962011
            
            
            285,7722012
            
            
            71,443$
            946,807





Former
      Employee Matters :





***Ronald
      E. Pierce Matter***


On
      July
      15, 2008, the Company received a demand for arbitration from Ronald E. Pierce
      related to a June 2004 issue summarized below:





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. 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.





F-15




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007**





**NOTE
      8 - COMMITMENTS AND CONTINGENCIES (continued)**





The
      claim
      amount under the July 15, 2008 demand for arbitration is $300,001.





On
      July
      18, 2008, the Company responded to the July 15, 2008 request for Arbitration
      from Mr. Pierce. In its response, the Company advised that the request for
      arbitration was filed more than four (4) years from the date upon which Pierce
      knew, or should have known, of any alleged breach of contract. Accordingly,
      the
      Company will not agree to arbitrate a time barred claim.





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





Other :





In
      May
      2007, the Company filed patent infringement lawsuits in the United States
      District Court for the Southern District of Texas in Houston against MediSupply,
      Inc. (a/k/a or f/k/a Medi-Supply Alliance, LLC and Medi-Supply, Inc.
“MediSupply”) and Drive Medical Design & Manufacturing (“Drive Medical”) for
      infringement of three U.S. patents. The complaints allege that MediSupply and
      Drive Medical infringe the patents by making, selling, and offering for sale
      disposable IV poles which are identical to the Company’s Pitch-It TM IV Pole.





On
      January 2, 2008, the Company announced the settlement of the patent dispute
      with
      MediSupply and Drive Medical. In conjunction with the settlement, Drive Medical
      will be the exclusive manufacturer and Sharps will be the exclusive seller
      of
      the Sharps Pitch-ItTM IV Poles. Additionally, Drive Medical and MediSupply will
      no longer sell IV Pole products that infringe upon Sharps’ patents. The
      settlement resolved all issues between the parties related to the patent
      litigation. As part of the exclusivity agreement, Sharps agreed to a minimum
      annual purchase commitment of $600,000 in IV Pole product a year. The Company
      believes it will purchase more than $600,000 in IV Pole products from Drive
      Medical on an annual basis.





The
      Company is also involved in legal proceedings and litigation in the ordinary
      course of business. In the opinion of Management, the outcome of such matters
      will not have a material adverse effect on the Company’s financial position or
      results of operations.


F-16