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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB

 [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934 For the fiscal year ended June 30, 2000

 [ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934 for the transition period from           to          .
                                                  ----------   ---------

                         Commission File Number: 0-22390

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

                             SHARPS COMPLIANCE CORP.
                 (Name of Small Business Issuer in its Charter)

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

  9050 KIRBY DRIVE, HOUSTON, TEXAS                       77054
(Address of principal executive offices)               (Zip Code)

                                 (713) 432-0300
                          Registrant's telephone number

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

Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [x]

Issuer's revenues for most recent fiscal year: $4,202,000

Aggregate market value of the voting stock held by non-affiliates computed by
the closing stock price on September 19, 2000: $12,422,079

Number of shares outstanding of the issuer's Capital Stock as of September 19,
2000: 8,626,444

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders to be held on November 14, 2000 are incorporated by
reference in Part III hereof.

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


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                             SHARPS COMPLIANCE CORP.

                               TABLE OF CONTENTS*
                          ANNUAL REPORT ON FORM 10-KSB
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           Page
                                        PART I
<S>                                                                        <C>
Item 1   Description of Business..............................................3
Item 2   Description of Property..............................................9
Item 3   Legal Proceedings....................................................9

                                        PART II

Item 4   Market for Common Equity and Related Stockholder Matters............10

Item 5   Management's Discussion and Analysis of Financial Condition and
         Results of Operations...............................................10
Item 6   Financial Statements................................................11
Item 7   Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure............................................11

                                       PART III

Item 8   Directors, Executive Officers, Promoters and Control Persons of the
         Registrant; Compliance with Section 16(a) of the Exchange Act.......12
Item 9   Executive Compensation..............................................12
Item 10  Security Ownership of Certain Beneficial Owners
         and Management......................................................12
Item 11  Certain Relationships and Related Transactions......................12
Item 12  Exhibits and Reports on Form 8-K....................................13

         Signatures..........................................................13
</TABLE>

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


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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

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

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

Sharps Compliance, Inc. ("Sharps") was formed in May of 1994 by Dr. Burt Kunik.
Sharps, a Texas corporation, has its principal office located at 9050 Kirby
Drive, Houston, Texas 77054. Sharps focuses on developing cost effective,
logistical and educational solutions for healthcare and non-healthcare
institutional markets. These solutions include Sharps Disposal by Mail(TM)
System, Trip LesSystem(TM), Pitch It(TM) IV Poles, Sharps e-Tools and Sharps
Environmental Services. Its products and services are provided primarily to
markets to facilitate cost and logistical efficiencies, compliance with state
and federal regulations by tracking, incinerating and documenting the disposed
medical waste, and compliance with training and education required by federal,
state, local and regulatory agencies.

Until February 27, 1998, Sharps Compliance Corp., formerly known as U.S. Medical
Systems, Inc. ("the Company"), through its wholly owned subsidiary, U.S.
Medical, Inc., developed, produced and marketed products directed to the
over-the-counter consumer market and the professional dental healthcare
industry. As of September 2, 1998, and as further discussed below, the Company
divested all of the U.S. Medical product lines to devote all of its resources to
developing logistical systems that center around the Sharps Disposal by
Mail(TM)System described above.

The Company, Sharps and all of the stockholders of Sharps entered into an
Agreement and Plan of Reorganization (the "Agreement") as of February 27, 1998.
The Agreement closed on February 27, 1998. The Company did not have sufficient
authorized but unissued shares of Common Stock to issue to the former
stockholders of Sharps to complete the transaction. Therefore, under the terms
of the Agreement, the Company acquired all of the issued and outstanding common
stock of Sharps in consideration for the issuance of 1,000,000 shares of
Preferred Stock such that each share of common stock of Sharps, par value $.01
per share, outstanding on the closing date was exchanged for 0.142858 shares of
Preferred Stock. The Company filed its Certificate of Designation, Powers,
Preferences and Rights of the Series of the Preferred Stock with the Secretary
of State of the State of Delaware on February 23, 1998, setting forth the terms
and conditions of the Preferred Stock upon its issuance. Among other provisions
of the Certificate of Designation, each share of Preferred Stock was entitled to
35.190319 votes.

Subsequent to February 27, 1998, Sharps has operated as a wholly owned
subsidiary of the Company. The Agreement is treated as a reverse acquisition for
accounting and financial reporting purposes. As such, Sharps is considered the
acquiror for accounting and financial reporting purposes and the net assets of
the Company were combined with those of Sharps at their historical cost basis,
which approximated their fair market value on the effective date of the
Agreement. Sharps has reflected the ongoing results of operations of the Company
in its financial statements from the effective date of the Agreement. The
combined entity carried forward the Company's fiscal year end of June 30.

On July 23, 1998, the stockholders voted to (i) elect three directors, (ii)
approve a one-for-5.032715 reverse stock split, (iii) change the name of the
Company to Sharps Compliance Corp., (iv) delete Article 10 of the Company's
Certificate of Incorporation relating to specific stockholders' rights, (v)
increase the number of shares subject to issuance under the Company's 1993 Stock
Plan, (vi) ratify the selection of Arthur Andersen LLP as the Company's
independent auditors for the fiscal year June 30, 1998 and (vii) adopt the
Company's Amended and Restated Certificate of Incorporation. Each share of
Preferred Stock received by the former stockholders of


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Sharps was converted into seven (7) shares of Common Stock of the Company, at
which time the former stockholders of Sharps owned approximately 91% of the
issued and outstanding Common Stock of the Company on a fully diluted basis.
Upon completion of the conversion, the Company had 7,583,944 shares of Common
Stock outstanding, of which the existing stockholders of the Company held
583,944 shares and the former stockholders of Sharps held 7,000,000 shares.

On March 14, 2000, Sharps e-Tools.com, Inc., ("Sharps e-Tools"), a Delaware
corporation, was formed as a wholly owned subsidiary of Sharps Compliance Corp.
Sharps e-Tools will provide a range of electronic solutions to improve
profitability for the healthcare and hospitality industries, including employee
centered training and education programs designed to facilitate compliance with
federal, state and local regulations.

On April 18, 2000, Sharps Environmental Services, Inc., ("Sharps Environmental
Services"), a Delaware corporation, was formed as a wholly owned subsidiary of
Sharps Compliance Corp. Sharps Environmental Services designs programs providing
assurance that waste materials are properly handled through the disposal
process.

PRODUCTS AND SERVICES

The Sharps Disposal by Mail(TM) System is a comprehensive solution for the
containment, transportation, destruction and tracking of medical waste for the
commercial, industrial and home healthcare industries. The Sharps Disposal by
Mail(TM) System contains a securely sealed, leak and puncture resistant sharps
container in several sizes; U.S. Postal Service approved shipping carton with
priority mail postage; absorbent material inside the container that can hold up
to 150 milliliters; a red bag for additional containment; and complete
documentation and tracking manifest. When the container is full, the customer
closes the sharps container, places it in the red bag, places it back inside the
approved prepaid shipping carton and deposits the container with the mail
carrier who sends the authorized shipping carton through the U.S. Postal Service
routing to a municipally owned incinerator for destruction. Effective July 1,
2000, management and operation of the incinerator was assumed by Sharps
Environmental Services. After destruction of the Sharps Disposal by Mail(TM)
System, the Company sends verification of such destruction to the customer.

The Trip LesSystem(TM) is a solution for the home healthcare industry that will
free them from making unnecessary and more costly trips to the patient's home
after treatment has been completed. The Trip LesSystem (TM) has combined three
complete programs for return and disposal. All systems contain the Sharps
Disposal by Mail(TM) System along with either (i) a prepaid pump return box
using Federal Express, (ii) a Pitch It(TM) IV Pole system which Sharps
manufactures or (iii) a reusable case for the collapsible IV pole and pole
mounted IV pump, depending on the patient's therapy.

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

The Sharps e-Tools online services include SharpsTracer(TM), AssetTracer(TM) and
ComplianceTrak. SharpsTracer(TM) is a manifest imaging and tracking program for
registered customers with the purpose of tracking and certifying the
transportation and disposal of regulated medical waste. SharpsTracer(TM)
eliminates traditional paper-based methods of manifest tracking and is designed
to enhance customer efficiencies. AssetTracer(TM) allows its registered
subscribers to effectively manage all types of capital assets through a single,
organized database. The program can be used in conjunction with other Sharps
products or independently and includes management reporting for regulatory
compliance, preventative maintenance, and asset status and/or location.
ComplianceTrak offers a broad range of employee centered compliance and
education programs. The programs range from policy and procedure development to
specialized training and certification for all employees required to meet
certain Occupational Safety and Health Administration ("OSHA") standards. The
Company believes the remaining portions of the e-Tools product line will be
operational by December 31, 2000 under an agreement entered into in July 2000.

Effective July 1, 2000, the Company entered into an agreement with the City of
Carthage, Texas and Panola County to manage and operate the Panola County
Resources Recovery Facility, the municipally owned incinerator to which the
Sharps Disposal by Mail(TM) System is mailed for destruction. The length of the
agreement is three years, and Sharps is responsible for maintaining the facility
as required by federal, state, local and/or regulatory agencies. Sharps
Environmental Services will provide environmental solutions for customers with a
wide variety of waste disposal needs. Primary services will be 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


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Company to directly oversee the proper disposal of its Sharps Disposal by
Mail(TM) Systems and allows the Company to provide its proprietary
SharpsTracer(TM) discussed above.

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 staff on the dangers of improper medical wastes and infection
control practices.

MARKETS

Sharps' target market segments include the home healthcare industry;
non-healthcare institutional users; the diabetic community that requires insulin
injection; dental, veterinarian and physician markets; and other markets where
the products and services may be bundled or cross sold to provide solutions to
prospective customers. While maintaining a low overhead structure, highly
automated tracking, accounting and operational systems, cross-trained employees
and a quality staff, Sharps has remained flexible and responsive to its customer
needs in industries that demand effective cost and logistical solutions, quick
response and technological innovation.

HOME HEALTHCARE INDUSTRY. The home healthcare industry is a primary market for
the Sharps Trip LesSystem(TM) that centers on the Sharps Disposal by Mail(TM)
System, Pitch It(TM) IV Poles and Asset Return boxes. Sharps products are
distributed to the home healthcare industry through major national homecare
equipment and supply distributors, including Medline, Medical Specialties, Medic
ACS and Redline. The home healthcare industry is a somewhat fragmented market;
however, management of Sharps estimates that there are approximately 20
corporations that dominate the home healthcare market within the United States.
Sharps currently has a presence with the majority of those corporations. The
Trip LesSystem(TM) is predominate with many of the top home healthcare
corporations under contract and is under serious consideration with several of
the remaining companies. Sharps' current principal customers include nationally
recognized homecare customers such as Apria Healthcare Inc., Coram Healthcare
Inc. and Gentiva Health Services Inc.

Homecare has intensified its focus on self-injection, resulting in a significant
increase in used syringes outside of medical care facilities. Sharps has created
a system for the home healthcare industry that will free them from making
unnecessary and more costly trips to the patient's home. In the home healthcare
industry, Sharps has become part of the formulary for dealing with the disposal
of the sharps encountered by the leading national homecare companies primarily
because of the Trip LesSystem(TM), which makes the system cost effective.

NON-HEALTHCARE INSTITUTIONAL. The second market of Sharps is the non-healthcare
institutional market. Because of OSHA enhanced regulations, management believes
that this market could be one of the fastest growing segments for the company's
products and services and will include hotels, restaurants and manufacturing
sites. Sharps has contracted with Ecolab, Inc. as its exclusive distributor to
the industrial market. Ecolab has an extensive marketing program that includes
7,000 sales people. Ecolab markets to potential users of the Sharps Disposal by
Mail(TM) System such as hotels, motels, resorts, schools, colleges, stadiums,
daycare centers, planes, trains, cruise ships, casinos, supermarkets,
distribution centers, business offices, restaurants, bars and clubs. Ecolab has
a substantial impact in this market. Sharps has developed specialized versions
of its Sharps Disposal by Mail(TM), which permit an institutional establishment
to easily introduce the product. Sharps developed custom-designed cones, one
used to collect contaminated sharps when discovered and a second used as a
temporary receptacle by transient individuals who need to dispose of syringes.
Sharps and Ecolab have granted each other mutual exclusivity for the
distribution of the Sharps Disposal by Mail(TM) System, custom designed cones
and wall mount brackets along with Sharps' customized automatic reorder service
available for all Ecolab customers within this marketplace.

Sharps believes that certain segments of the non-healthcare institutional market
provide additional opportunities for "bundling" and/or cross selling its e-Tools
products along with the Sharps Disposal by Mail(TM) System. The Company believes
that the segments within this market that experience high employee turnover and
require initial and annual OSHA training would benefit from convenient, cost
effective methods of education and training and tracking of employee training.

DIABETIC COMMUNITY. A third area of focus is the diabetic who often requires
numerous insulin injections. Sharps intends to actively market to the vast
number of insulin injected diabetics, and this market is expected to grow over
the next three to five years because modern dietary habits are leading to an
increased number of diabetics and more people are being tested for the
condition.


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DENTISTS, VETERINARIANS AND PHYSICIANS. Sharps has made a presence within the
medical market that has identified the usefulness of the Sharps Disposal by
Mail(TM) System. Sharps' product has been demonstrated to be a perfect fit for
these small volume waste generators. Sharps has grouped the dental, physician
and veterinarian market together due to their similar model and duration usage.

Sharps has strategically placed four sales people around the U.S. to sell to the
homecare market. Sharps sells its products and services to home health companies
and their distributors. Sharps' goal is to obtain agreements with homecare
companies to use its products and arrange for the distributor of choice of that
homecare company to sell and deliver the product and services directly to the
end user. Sharps also has three sales people to sell to the non-healthcare
institutional market. Sharps' goal is to obtain agreements with large
hospitality companies to use its products and services and arrange for its
distributor to sell and deliver the products and services to the end user. In
some instances, products and services may be directly sold to customers where
exclusive agreements have not been entered into with strategic partners.

Sharps utilizes distributors to reach the dental, veterinarian and physician
marketplace. In all areas, Sharps' products and services are distributed through
major distributors within each of the respective markets. Henry Schein and
Patterson Dental distribute to dental customers. In the veterinary market, the
main distributors utilized are The Butler Company and MWI Veterinary Supply. In
the physician market, a variety of methods are used to reach the needs of all
physicians, including sales through Group Purchasing Organizations ("GPO").

INDUSTRY ANALYSIS

The large, fragmented medical waste industry has experienced significant growth
since its inception. The regulated medical waste industry arose with the Medical
Waste Tracking Act of 1988 ("MWTA"), which Congress enacted in response to media
attention after medical waste washed ashore on beaches, particularly in New York
and New Jersey. Since the 1980s, the public and government regulators have
increasingly demanded the proper handling and disposal of medical waste
generated by the healthcare industry. Regulated medical waste is generally
described as any medical waste that can cause an infectious disease, including
single-use disposable items, such as needles, syringes, gloves and other medical
supplies, cultures and stocks of infectious agents and blood and blood products.
Today, almost all businesses have waste disposal concerns for safety and
liability reasons. Regulated waste such as syringes, razor blades, bloodborne
items, bio-hazard waste spills and other sharp waste can occur in the following
situations: treating cuts, abrasions and burns; cleaning rooms and finding
needles, syringes or blood-soaked items; laundering linens and finding needles
or razor blades in towels; maintenance people finding syringes, needles and
broken glass with blood stains; and bio-hazard clean-up.

MARKET SIZE

Management of the Company believes that many businesses that are not currently
using outsourced medical waste services are unaware of the need for proper
training of employees and OSHA requirements regarding the handling of medical
waste. These businesses include restaurants, casinos, hotels and generally all
businesses where employees may come into contact with bloodborne pathogens. In
addition, home healthcare generated medical waste in the home is currently
unregulated and may become subject to similar bloodborne pathogen regulations in
the future.

NON-HEALTHCARE INSTITUTIONAL

The Lodging Industry Profile ("LIP") for the year 1998 estimates there are
approximately 51,000 properties consisting of 3.9 million rooms supporting more
than 7 million jobs. In 32 states, the tourism industry also ranks as the first,
second or third largest employer. According to the National Restaurant
Association, the restaurant industry employs approximately 11 million people,
with 7 out of 10 eating-and-drinking establishments having fewer than 20
employees in 1997.

DIABETIC COMMUNITY

The American Diabetes Association ("ADA") estimates there are approximately 15.7
million people or 5.9% of the population in the United States who have diabetes.
Of the diagnosed cases, the ADA estimates 5-10% need daily insulin injections to
stay alive.


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DENTIST, VETERINARIANS AND PHYSICIANS

1997 census figures supplied by the American Dental Association, the American
Medical Association and the American Veterinary Association indicate that there
are approximately 115,000 dentists, 600,000 physicians and 60,000 veterinarians
in active practice in the U.S.

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

     1.   The healthcare industry is under pressure to reduce costs and improve
          efficiency. To accomplish this reduction, it is continually searching
          for solutions that provide cost effective and logistical efficiencies.
          Sharps believes that its solutions help healthcare providers reduce
          costs by reducing their medical waste tracking, handling and
          compliance costs and providing online education and training to help
          reduce their potential liability related to employee exposure to
          bloodborne pathogens and other infectious material.

     2.   The continued move toward stronger federal, state and local
          regulations for transporting and/or disposing of medical waste.

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

     4.   The continued growth in the non-healthcare related industries such as
          hospitality. This industry has needs for a low cost, effective method
          of training employees to satisfy the requirements discussed above, in
          addition to many other safety programs to reduce potential liabilities
          in the workplace.

RESEARCH & DEVELOPMENT

The Company is seeking new applications for the Sharps Disposal by Mail(TM)
System in many different areas since small quantity medical waste generators can
be found in many industries. The Company is constantly looking into the
development of new products to assist companies in complying with OSHA
regulations for disposal of potentially infectious waste and attempting to
reduce potential liability. The Company has dedicated a minimum amount of time
and money toward research and development of alternative disposal and healthcare
treatments, focusing on the acquisition of compatible product lines such as the
"Pitch It" and "Pitch It Jr." disposable IV poles. The "Pitch It Sr." disposable
IV pole, which is capable of holding a pump, was introduced in June 1999.
Development of this new product was completed utilizing the services of the
prospective manufacturer, which kept development costs to a minimum. The
Company's research and development costs have not been material.

MARKET RISKS

Although Sharps has experienced growth in revenues over the past few years,
there is an inherent concentration of credit risk associated with accounts
receivable arising from sales to its major customers, which are primarily
distributors. For the years ended June 30, 2000 and 1999, four customers
represented approximately 68% and 76% of revenues respectively. Four customers
comprised approximately 72% (or $568,220) of the total accounts receivable
balance at June 30, 2000 and 79% (or $373,236) at June 30, 1999. Sharps may be
affected by its dependence on a limited number of high volume customers.
Management believes that the risk is mitigated by (i) the contractual
relationships with and reputation of Sharps' major customers, (ii) that a loss
of any distributor does not necessarily mean the loss of the underlying customer
base of that distributor for the Company's products and (iii) the continued
diversification of the Company's products and services.

Sharps continues to sole-source each of its manufacturing, assembly,
transportation, disposal and software development functions. Sharps may be
affected by its dependence on the suppliers of these functions. The risk is
mitigated by the long-standing business relationships with and reputation of
Sharps' suppliers. The Company entered into an agreement with a strategic
partner to provide online education programs related to the Company's e-Tools
service line. Although there are no assurances with regard to the


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continued future business associations, after expirations of certain agreements
between Sharps and its suppliers, management believes that alternative sources
would be available at similar costs due to the generic nature of products and
services offered.

MANUFACTURING

Manufacturing capabilities are key in the total solution offered by Sharps.
Sharps can control quality, remain flexible and be responsive to its customer
requirements. The technology required to participate in the various markets is
key to being on the forefront of project design. Sharps manufactures certain
products in Houston, Texas and can currently produce approximately 1,000 systems
per day, per shift. The manufacturing facility has the ability to increase its
capacity to produce in excess of 3,000 systems per day, per shift. Sharps
currently operates one shift, and its manufacturing facility is approximately
15,000 square feet. The Company entered into a contract with Futura Medical
Corporation for the manufacture of certain one, two and three-gallon containers
for sale to the Company's industrial and healthcare facilities, and diabetic
patients.

INTELLECTUAL PROPERTY

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

RISK FACTORS

DEPENDENCE ON CERTAIN MANAGEMENT PERSONNEL

Sharps' growth and development to date has been largely dependent upon active
participation of its current chief executive officer, Dr. Burt Kunik. Although
Sharps expects to hire and retain other qualified and experienced management
personnel from time to time, the loss of services of any of its current
executives, especially Dr. Kunik, could have a material adverse affect on the
development of the Company's business. Sharps has key man life insurance on Dr.
Kunik and not on any other officer, director or employee of the Company, but may
elect to do so in the future.

COMPETITION

There are several competitors who offer disposal of medical waste services such
as Stericycle, Inc.; however, no other company focuses primarily on the disposal
of sharps medical waste through transport by the U.S. Postal Service. While
Sharps currently does not face any significant competition in the mail sharps
business, Sharps must compete with other larger and better financed and
capitalized companies. Portions of Sharps e-Tools product lines compete with
online education providers, regional and national training programs, providers
of video programs and various trade association training programs. While the
online training industry is very competitive with numerous companies offering
similar products, the Company has existing customer relationships that provide
opportunities to introduce its online services.

CUSTOMER RELATIONSHIPS

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


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BURN FACILITIES

Effective July 1, 2000, the Company entered into a multi-year agreement with the
City of Carthage, Texas and Panola County to operate the Panola County Resource
Recovery Facility ("PCRRF"). The Company is responsible for operating and
maintaining the facility under compliance of all federal, state and local laws
and/or any other regulatory agency involving solid waste disposal. The Company
believes the operation of the facility is in compliance of all applicable
federal, state, local and/or regulatory agency requirements as of September 19,
2000. The Company entered into an agreement with a secondary burn facility to
provide services in the event the PCRRF is unavailable. The price negotiated
with the secondary burn facility in some instances may be higher than primary
pricing.

OPERATING HISTORY; HISTORY OF LOSSES

Sharps has incurred significant losses from operations since its inception and
has had working capital deficits in the past. There can be no assurance that
Sharps will ever attain profitable operations or will be able to generate future
revenue levels to support operations. The future success of Sharps is dependent
upon many factors, including environmental regulation, continuity of its
distributorship agreements, successful completion of its product development
activities and the identification and penetration of additional markets for its
products and services. There can be no assurance that future additional capital,
if necessary, will be available to Sharps from any other sources, or that if
available, it will be on terms acceptable to Sharps; however, management
believes that it will be successful in raising such financing, if necessary.

GOVERNMENTAL REGULATION

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

POSTAL WORK INTERRUPTIONS

Since the basis by which Sharps transports its medical sharps products is by use
of the U.S. Postal Service, any interruption in the day-to-day postal services
would have a material adverse effect on Sharps' revenues and financial
condition. Postal delivery interruptions are rare and cannot be predicted with
any certainty. However, since U.S. Postal 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.

ITEM 2. DESCRIPTION OF PROPERTY

Sharps currently leases 7,274 square feet of commercial office space in Houston,
Texas. The lease period commenced August 1, 1998 and runs through July 31, 2002
at an annual rental rate of $8.59 per square foot. The lease agreement provides
for annual escalations based on increases in common area maintenance, property
taxes, insurance costs and management. Sharps believes that the facility is
adequate and anticipates remaining in the facility for the period of the lease.

ITEM 3. LEGAL PROCEEDINGS

Sharps is involved in certain legal actions and claims arising in the normal
course of business. While the outcome of these matters cannot be predicted with
certainty, management believes these matters will not have a material adverse
effect on Sharps' consolidated financial position, results of operations or
liquidity.

                                       9
<PAGE>   10


                                     PART II

ITEM 4. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION. During the two (2) years ended June 30, 2000, the Common
Stock of the Company has been quoted on the NASD OTC Bulletin Board under the
symbol "SCOM" (beginning July 23, 1998) and "USME" (from December 19, 1996 to
July 22, 1998). The Company's Common Stock has had limited trading volume,
averaging approximately 25,400 shares traded per month (giving effect to the
one-for-5.032715 reverse stock split effective July 23, 1998) 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.

<TABLE>
<CAPTION>
                                                                 COMMON STOCK(1)
         Fiscal Year Ended June 30, 1999                        High           Low
<S>                                                           <C>            <C>
         First Quarter                                        $  7.50        $ 2.50
         Second Quarter                                       $  3.13        $ 1.13
         Third Quarter                                        $  1.81        $ 1.06
         Fourth Quarter                                       $  1.37        $ 1.06

         Fiscal year Ended June 30, 2000
         First Quarter                                        $  3.00        $ .875
         Second Quarter                                       $  2.00        $ 1.03
         Third Quarter                                        $  2.88        $ 1.06
         Fourth Quarter                                       $  2.12        $  .75

         Fiscal Year Ending June 30, 2001
         First Quarter (through September 19, 2000)           $  1.88        $  .88
</TABLE>

     (1) Prices have been adjusted to reflect the one-for-5.032715 reverse split
effective July 23, 1998.

STOCKHOLDERS: At September 19, 2000, there were 8,626,444 shares of Common Stock
held by 253 holders of record. The last reported sale of the Common Stock on
September 19, 2000, was $1.44 per share.

DIVIDEND POLICY: The Company has never declared or 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.

ITEM 5. 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-10KSB. See "Information Regarding Forward Looking Statements."

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                           YEARS ENDED JUNE 30,
                                                           --------------------
                                                           2000            1999
                                                           ----            ----
<S>                                                        <C>             <C>
Total revenues                                              100%            100%
Costs and expenses:
     Cost of revenues                                       (54)%           (61)%
     Selling, general and administrative                    (75)%          (125)%
     Depreciation and amortization                           (3)%            (3)%
                                                           ----            ----

Total operating expenses                                   (132)%          (189)%
                                                           ----            ----
Operating loss                                              (32)%           (89)%
Interest income, net                                          1%              6%
                                                           ----            ----
Net loss                                                    (31)%           (83)%
                                                           ====            ====
</TABLE>


                                       10
<PAGE>   11


YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999

Revenues for fiscal 2000 increased 80% as compared to the prior year due to
continued penetration of target markets and strong revenue growth in Sharps
Disposal by Mail(TM), Pitch It(TM) IV Pole systems, and Sharps Consulting
services. Year over year revenues increased by approximately $1,867,000 while
cost of revenues narrowed to 54% in fiscal year 2000 compared to 61% in 1999.

Gross margin increased as a percentage of revenue for fiscal 2000 to 46% from
39% in fiscal 1999. The increase of approximately $1,034,000 was due primarily
to increased sales, recognition of a lower return rate for the Sharps Disposal
by Mail(TM) System, and an expanded product mix, including the growth of Pitch
It(TM) IV Pole systems.

Selling, general and administrative expenses declined as a percent of revenue to
75% in 2000 from 125% in 1999. The decline is due to increased sales and the
Company's ability to leverage the existing cost structure supporting the new
growth. Expenses grew by approximately 9%, or approximately $250,000, year over
year primarily due to the launch of a new Company branding campaign designed to
deliver a more focused Company image on a national scale, an initiative to
enhance investor community awareness of the Company's products and performance,
and an increase in commissions due to sales growth.

The Company narrowed the net loss from operations from 1999 to 2000 by
approximately 34%, or approximately $657,000. This improvement is a result of
leveraging the existing cost infrastructure and expanded product and service
lines with higher margins.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2000, the Company had approximately $194,000 in cash and
short-term investments. Current assets were exceeded by current liabilities by
approximately $629,000 at June 30, 2000, primarily due to the Company's disposal
liability which is classified as a current liability. Management cannot
accurately predict when Sharps will be required to fund disposal costs, but
management believes it will not have to pay all of the accrued disposal costs
within one year of June 30, 2000; however, the Company does not have sufficient
information to classify any amounts as long-term. On August 31, 2000, the
Company completed a private placement of 1,000,000 shares of its common stock
for gross proceeds of $1,000,000 that improved the Company's working capital
position. As of September 19, 2000, the Company had approximately $1,018,000 in
cash and short-term investments.

Capital expenditures during the year ended June 30, 2000 were approximately
$63,000 and consisted of computers, computer software development, computer
networking related equipment and tooling for manufactured products.

At June 30, 2000, total long-term debt outstanding was approximately $9,000 for
the combined Company.

The Company expects to continue to incur substantial costs related to sales,
marketing and administrative activities. The amount and timing of anticipated
expenditures will depend upon numerous factors both within and outside the
Company's control, including the nature and timing of marketing and sale
activities. Moreover, the Company's ability to generate income from operations
will be dependent upon, among other things, sufficient penetration of the target
and other markets and the ability to launch new products and/or services into
these markets. Management believes that the Company's current resources will be
sufficient to fund operations for the next 18 months. There can be no assurance
that the Company will be able to obtain financing on acceptable terms to fund
operations beyond that time frame; however, management believes that it will be
successful in raising such financing, if necessary.

ITEM 6.  FINANCIAL STATEMENTS

The financial statements of the Company and the related report of the Company's
independent accountants thereon are included in this report and are referenced
as pages F-1 to F-14.

ITEM 7.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

The information required by this item is incorporated herein by reference to the
information under the caption "Changes in Registrant's Certifying Accountant" on
page 13 of the Transitional Report on Form 10-QSB for the transition period
January 1, 1998.


                                       11
<PAGE>   12


                                    PART III

ITEM 8.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
           REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The information required by this item is incorporated herein by reference to the
information under the caption "Management," of the Registrant's definitive Proxy
Statement to be filed pursuant to Regulation 14A with the Securities and
Exchange Commission ("SEC") relating to its Annual Meeting of Stockholders to be
held on November 14, 2000.

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, 2000, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.

ITEM 9.    EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the
information under the captions "Management" and "Executive Compensation" of the
Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A
with the SEC relating to its Annual Meeting of Stockholders to be held on
November 14, 2000.

ITEM 10.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated herein by reference to the
information under the captions "Security Ownership of Management" and "Certain
Beneficial Owners," of the Registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A with the SEC relating to its Annual Meeting of
Stockholders to be held on November 14, 2000.

ITEM 11.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to the
information under the caption "Certain Relationships and Related Transactions,"
of the Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A with the SEC relating to its Annual Meeting of Stockholders to be
held on November 14, 2000.


                                       12
<PAGE>   13


ITEM 12.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit Number      Description of Exhibit

     2.2     Agreement and Plan of Reorganization dated as of February 27, 1998,
             between and among U.S. Medical Systems, Inc., Sharps Compliance,
             Inc. and its Stockholders (incorporated by reference from Exhibit
             2.2 to 2/27/98 Form 8-K)

     3.4     Bylaws of Company (incorporated by reference from Exhibit 3.4 to
             6/30/94 Form 10-KSB)

     3.6     Certificate of Elimination of the Series "A" Voting Convertible
             Preferred Stock (incorporated by reference from Exhibit 3.6 to
             6/30/98 Form 10-KSB)

     4.4     Specimen Stock Certificate (incorporated by reference from Exhibit
             4.4 to 6/30/98 Form 10-KSB)

     10.29   Employment Agreement effective January 1, 1998 by and between
             Sharps Compliance, Inc. and Dr. Burt Kunik, and First Amendment to
             Employment Agreement (incorporated by reference from Exhibit 10.29
             to 6/30/98 Form 10-KSB)

     10.30   Second Amendment to Employment Agreement dated May 15, 1998
             (incorporated by reference from Exhibit 10.30 to 6/30/98 Form
             10-KSB)

     10.31   Exclusive Distributorship Agreement dated April 1, 1998 between
             Pro-Tec Containers, Inc. and Sharps Compliance, Inc. (incorporated
             by reference from Exhibit 10.31 to 6/30/98 Form 10-KSB)

     10.32   Purchase Agreement between IVY Green Corporation and Sharps
             Compliance, Inc., dated June 19, 1998 (incorporated by reference
             from Exhibit 10.32 to 6/30/98 Form 10-KSB)

     10.33   Lease Agreement between Lakes Technology Center, Ltd. and Sharps
             Compliance, Inc. dated August 1, 1998 (incorporated by reference
             from Exhibit 10.33 to 6/30/98 Form 10-KSB)

     10.34   Severance Agreement dated September 2, 1998, between C. Lee Cooke,
             Jr. and Sharps Compliance Corp. (formerly known as - U.S. Medical
             Systems, Inc.) (incorporated by reference from Exhibit 10.34 to
             6/30/98 Form 10-KSB)

     16.4    Letter regarding changes in Certifying Accountant to Arthur
             Andersen LLP (incorporated by reference from Exhibit 16.4 to
             6/30/98 Form 10-KSB)

     21.1    Subsidiaries (filed herewith)

     27.1    Financial Data Schedule (filed herewith)

(b) Reports on Form 8-K

None
                                   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 28, 2000        By: /s/ Burton J. Kunik
                                     -------------------------------------------
                                     Dr. Burton J. Kunik, Chairman of the Board,
                                     President and Chief Executive Officer

                                 By: /s/ Kevin L. Spears
                                     -------------------------------------------
                                     Kevin L. Spears, Vice President and
                                     Chief Financial Officer


                                       13
<PAGE>   14


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                              PAGE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<S>                                                           <C>
   Report of Independent Public Accountants ................   F-2
   Consolidated Balance Sheets as of June 30, 2000
      and 1999 .............................................   F-3
   Consolidated Statements of Operations for the Years Ended
       June 30, 2000 and 1999 ..............................   F-4
   Consolidated Statements of Stockholders' Equity (Deficit)
      for the Years Ended June 30, 2000 and 1999 ...........   F-5
   Consolidated Statements of Cash Flows for the Years Ended
      June 30, 2000 and 1999 ...............................   F-6
   Notes to Consolidated Financial Statements ..............   F-7
</TABLE>


                                      F-1
<PAGE>   15


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Sharps Compliance Corp.:

We have audited the accompanying consolidated balance sheets of Sharps
Compliance Corp. (a Delaware corporation) and subsidiaries as of June 30, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended June 30, 2000 and 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sharps Compliance
Corp. and subsidiaries as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for the years ended June 30, 2000 and 1999, in
conformity with accounting principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Houston, Texas
August 22, 2000


                                      F-2
<PAGE>   16


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                    ASSETS                                            JUNE 30,
                                                                             --------------------------
                                                                                2000           1999
                                                                             -----------    -----------
<S>                                                                          <C>            <C>
CURRENT ASSETS:
   Cash and cash equivalents                                                 $   153,346    $    15,452
   Short-term investments                                                         40,984      1,300,000
   Accounts receivable, net of allowance for doubtful accounts of
     $30,381 and $21,373, respectively                                           794,643        473,702
   Inventory                                                                     221,105        132,166
   Prepaids and other                                                             80,831         83,143
                                                                             -----------    -----------

             Total current assets                                              1,290,909      2,004,463

PROPERTY AND EQUIPMENT, net of accumulated depreciation of
     $134,793 and $63,290, respectively                                          180,736        189,063

INTANGIBLE ASSETS, net of accumulated amortization
     of $40,489 and $20,244, respectively                                         60,736         80,981

NOTE RECEIVABLE FROM STOCKHOLDER                                                 320,000        320,000
                                                                             -----------    -----------

             Total assets                                                    $ 1,852,381    $ 2,594,507
                                                                             ===========    ===========

                   LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
   Accounts payable                                                          $   354,538    $   161,985
   Accrued liabilities                                                           129,087        148,534
   Accrued disposal costs                                                      1,371,193      1,072,782
   Current maturities of notes payable                                            64,718         23,089
                                                                             -----------    -----------

             Total current liabilities                                         1,919,536      1,406,390

NOTES PAYABLE, net of current maturities                                           8,780         14,817
                                                                             -----------    -----------

             Total liabilities                                                 1,928,316      1,421,207

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT):
   Common stock, $.01 par value per share; 20,000,000 shares authorized;
    7,626,444 shares issued and outstanding                                       76,264         76,264
   Additional paid-in capital                                                  4,392,188      4,370,886
   Deferred compensation                                                              --        (11,000)
   Accumulated deficit                                                        (4,544,387)    (3,262,850)
                                                                             -----------    -----------

             Total stockholders' equity (deficit)                                (75,935)     1,173,300
                                                                             -----------    -----------

             Total liabilities and stockholders' equity (deficit)            $ 1,852,381    $ 2,594,507
                                                                             ===========    ===========
</TABLE>


                    The accompanying notes are an integral part
                    of these consolidated financial statements.


                                       F-3
<PAGE>   17


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                       YEARS ENDED JUNE 30,
                                                  -----------------------------
                                                     2000               1999
                                                  -----------       -----------
<S>                                               <C>               <C>
REVENUES:
   Sales, net                                     $ 4,051,598       $ 2,286,183
   Consulting services and other                      150,124            48,564
                                                  -----------       -----------

                     Total revenues                 4,201,722         2,334,747

COSTS AND EXPENSES:
   Cost of revenues                                 2,269,029         1,426,311
   Selling, general and administrative              3,168,543         2,918,262
   Depreciation and amortization                       91,748            66,057
                                                  -----------       -----------

                     Operating loss                (1,327,598)       (2,075,883)

INTEREST INCOME                                        47,536           139,081

INTEREST EXPENSE                                       (1,475)           (1,617)
                                                  -----------       -----------

                      Net loss                    $(1,281,537)      $(1,938,419)
                                                  ===========       ===========

BASIC AND DILUTED NET LOSS PER SHARE              $      (.17)      $      (.25)
                                                  ===========       ===========

SHARES USED IN COMPUTING BASIC AND
   DILUTED NET LOSS PER SHARE                       7,626,444         7,615,567
                                                  ===========       ===========
</TABLE>


                   The accompanying notes are an integral part
                   of these consolidated financial statements.


                                      F-4
<PAGE>   18


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>

                              PREFERRED STOCK           COMMON STOCK         ADDITIONAL                                   TOTAL
                        ------------------------  ------------------------    PAID-IN      DEFERRED    ACCUMULATED   STOCKHOLDERS'
                          SHARES       AMOUNT        SHARES       AMOUNT      CAPITAL    COMPENSATION    DEFICIT    EQUITY (DEFICIT)
                        -----------  -----------  -----------  -----------   ----------  ------------  -----------  ----------------
<S>                     <C>          <C>          <C>          <C>           <C>          <C>          <C>          <C>
BALANCE, June 30, 1998    1,000,000  $    10,000      583,944  $     5,839   $4,287,311   $        --  $(1,324,431)   $ 2,978,719
  Conversion of
     preferred stock
     to common stock
     in July 1998        (1,000,000)     (10,000)   7,000,000       70,000      (60,000)           --           --             --
  Issuance of common
     stock for services
     provided                    --           --       42,500          425       84,575            --           --         85,000
  Deferred compensation          --           --           --           --       59,000       (59,000)          --             --
  Amortization of
     deferred
     compensation                --           --           --           --           --        48,000           --         48,000
  Net loss                       --           --           --           --           --            --   (1,938,419)    (1,938,419)
                        -----------  -----------  -----------  -----------   ----------   -----------  -----------    -----------

BALANCE, June 30, 1999           --           --    7,626,444       76,264    4,370,886       (11,000)  (3,262,850)     1,173,300
  Amortization of
     deferred
     compensation and
     stock based
     compensation                --           --           --           --       21,302        11,000           --         32,302
  Net loss                       --           --           --           --           --            --   (1,281,537)    (1,281,537)
                        -----------  -----------  -----------  -----------   ----------   -----------  -----------    -----------

BALANCE, June 30, 2000           --  $        --    7,626,444  $    76,264   $4,392,188   $        --  $(4,544,387)   $   (75,935)
                        ===========  ===========  ===========  ===========   ==========   ===========  ===========    ===========
</TABLE>


                  The accompanying notes are an integral part
                  of these consolidated financial statements.


                                      F-5
<PAGE>   19


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                        YEARS ENDED JUNE 30,
                                                     --------------------------
                                                         2000          1999
                                                     -----------    -----------
<S>                                                  <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                           $(1,281,537)   $(1,938,419)
  Adjustments to reconcile net loss to net cash
    used in operating activities-
    Depreciation and amortization                         91,748         66,057
    Amortization of deferred compensation and
       stock based compensation                           32,302         48,000
    Changes in operating assets and liabilities-
       Increase in accounts receivable                  (320,941)      (270,094)
       (Increase) decrease in inventory                  (88,939)        39,339
       Decrease (increase) in other current assets         2,312         (1,885)
       Increase (decrease) in accounts payable and
         accrued liabilities                             173,106        (23,038)
       Increase in accrued disposal costs                298,411        426,300
                                                     -----------    -----------

   Net cash used in operating activities              (1,093,538)    (1,653,740)
                                                     -----------    -----------


CASH FLOWS FROM INVESTING ACTIVITIES:
  Payments on note receivable
     from stockholder                                         --         80,000
  Purchases of property and equipment                    (63,176)      (112,525)
  Sales of short-term investments                      5,535,332      2,600,000
  Purchases of short-term investments                 (4,276,316)    (1,300,000)
                                                     -----------    -----------

   Net cash provided by investing activities           1,195,840      1,267,475
                                                     -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on notes payable                              (28,661)       (42,781)
  Borrowings on notes payable                             64,253             --
                                                     -----------    -----------

   Net cash used in financing activities                 (35,592)       (42,781)
                                                     -----------    -----------


NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS:                                          137,894       (429,046)

CASH AND CASH EQUIVALENTS,
   beginning of year                                      15,452        444,498
                                                     -----------    -----------

CASH AND CASH EQUIVALENTS, end of year               $   153,346    $    15,452
                                                     ===========    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
   INFORMATION:
    Cash paid for interest                           $     1,388    $     1,617
                                                     ===========    ===========

SUPPLEMENTAL DISCLOSURE OF NONCASH
   INVESTING AND FINANCING ACTIVITY:
     Issuance of common stock for services           $        --    $    85,000
                                                     ===========    ===========
</TABLE>


                   The accompanying notes are an integral part
                   of these consolidated financial statements.


                                      F-6
<PAGE>   20


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2000

1. ORGANIZATION AND BACKGROUND:

Organization and Business

The accompanying consolidated financial statements include the accounts of
Sharps Compliance Corp. ("SCC") (formerly U.S. Medical Systems, Inc.) and its
wholly owned subsidiaries, Sharps Compliance, Inc. of Texas, dba Sharps
Compliance, Inc. ("SCI"), Sharps e-Tools.com, Inc. ("Sharps e-Tools"), and
Sharps Environmental Services, Inc., dba Sharps Environmental Services of Texas,
Inc. ("Sharps Environmental Services") (collectively, "Sharps" or the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.

On February 27, 1998, SCC and SCI entered into an agreement and plan of
reorganization (the "Agreement"). SCC acquired all of the issued and outstanding
common stock, $.01 par value, of SCI in consideration for the issuance of
1,000,000 shares of preferred stock, $.01 par value, such that each share of
SCI's common stock outstanding on the closing date was exchanged for 0.142858
shares of preferred stock. Under the terms of the Agreement, in July 1998, SCC's
stockholders approved a 1-for-5.032715 reverse stock split of its common stock,
which has been given retroactive effect in the financial statements.
Simultaneously with the reverse stock split, each share of preferred stock was
converted into seven shares of common stock of SCC, resulting in the existing
stockholders of SCC holding 583,944 shares and the former stockholders of SCI
holding 7,000,000 shares.

The Agreement is treated as a reverse acquisition for accounting and financial
reporting purposes. As such, SCI was considered the accounting acquiror for
accounting and financial reporting purposes, and the net assets of SCC were
combined with those of SCI at their historical basis, which approximated their
fair market value on the effective date of the Agreement. We have reflected the
ongoing results of operations of SCC in its financial statements from the
effective date of the Agreement.

Sharps focuses on developing effective cost, logistical and educational
solutions for healthcare and non-healthcare institutional markets. These
solutions include Sharps Disposal by Mail(TM) System, Trip LesSystem(TM), Pitch
It(TM) IV Poles, Sharps e-Tools and Sharps Environmental Services. Sharps
products and services are provided primarily to create cost and logistical
efficiencies. These products and services facilitate compliance with state and
federal regulations by tracking, incinerating and documenting the disposal of
medical waste. Additionally, these services facilitate compliance with
educational and training requirements required by federal, state, local and
regulatory agencies.

The Sharps Disposal by Mail(TM) System is a comprehensive solution for the
containment, transportation, destruction and tracking of medical waste for the
commercial, industrial and home healthcare industries. The Sharps Disposal by
Mail(TM) System contains a securely sealed, leak and puncture resistant sharps
container in several sizes; U.S. Postal Service approved shipping carton with
priority mail postage; absorbent material inside the container that can hold up
to 150 milliliters of waste; a red bag for additional containment; and complete
documentation and tracking manifest. When the container is full, the customer
closes the container, places it in the red bag, places it inside the approved
prepaid shipping carton and deposits the container with the mail carrier who
sends the authorized shipping carton through the U.S. Postal Service routing to
a municipally owned incinerator for destruction. After destruction of the Sharps
Disposal by Mail(TM) System, the incinerator sends verification of such
destruction to the customer.

Sharps is responsible for the postage and burn costs associated with the
customer mailing the mail disposal systems directly to the incineration site.
Sharps records accrued disposal costs for estimated future postage and burn
costs based on mail disposal systems sold that management estimates will
eventually be returned for incineration. The estimated returns are based on
historical experience. During fiscal year 2000, the estimated return factor was
revised downward, resulting in the reversal of approximately $150,000 of accrued
disposal costs. This reversal has been reflected as a reduction to cost of
revenues in the accompanying Statement of Operations. The accrued disposal costs


                                      F-7
<PAGE>   21


will continue to be adjusted prospectively for revisions in the estimated burn
costs and return rate, if any. Depending upon the experience of the Company,
such revision could be significant. During the years ended June 30, 2000 and
1999, the Company accrued $788,075 (net of reversal) and $715,874, respectively,
for estimated disposal costs, and funded, $489,664 and $289,574, respectively,
of actual disposal costs.

During fiscal year 2000, Sharps launched an additional service line through
Sharps e-Tools. Sharps e-Tools will provide a range of electronic solutions
improving profitability for the healthcare and hospitality industries, including
employee centered training and education programs designed to facilitate
compliance with federal, state and local regulations. The Sharps e-Tools online
services include SharpsTracer(TM), AssetTracer(TM) and ComplianceTrak.
SharpsTracer(TM) is a manifest imaging and tracking program for registered
customers with the purpose of tracking and certifying the transportation and
disposal of regulated medical waste. SharpsTracer(TM) eliminates traditional
paper-based methods of manifest tracking and is designed to enhance customer
efficiencies and is designed to complement the Sharps Disposal by Mail(TM)
System. AssetTracer(TM) allows its registered subscribers to effectively manage
all types of capital assets through a single, organized database. The program
can be used in conjunction with other Sharps products or independently and
includes management reporting for regulatory compliance, preventative
maintenance and asset status and/or location. ComplianceTrak services offer a
broad range of employee centered compliance and education programs. The programs
range from policy and procedure development to specialized training and
certification for all employees required to meet certain Occupational Safety and
Health Administration ("OSHA") standards.

Effective July 1, 2000, the Company entered into an agreement with the City of
Carthage, Texas and Panola County to manage and operate the Panola County
Resources Recovery Facility, the municipally owned incinerator to which the
Sharps Disposal by Mail(TM) System is mailed for destruction. The length of the
agreement is three years, and Sharps is responsible for maintaining the facility
as required by federal, state, local and/or regulatory agencies. Sharps
Environmental Services will provide environmental solutions for customers with a
wide variety of waste disposal needs. Primary services will be 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(TM) Systems and allows the Company to provide its proprietary
SharpsTracer(TM) discussed above.

Although Sharps has experienced growth in revenues over the past few years,
there is an inherent concentration of credit risk associated with accounts
receivable arising from sales to its major customers, which are primarily
distributors. For the years ended June 30, 2000 and 1999, four customers
represented approximately 68% and 76% of revenues, respectively. Four customers
comprised approximately 72% (or $568,220) of the total accounts receivable
balance at June 30, 2000 and 79% (or $373,236) at June 30, 1999. Sharps may be
affected by its dependence on a limited number of high volume customers.
Management believes that the risk is mitigated by (i) the contractual
relationships with and reputation of Sharps' major customers, (ii) a loss of any
distributor does not necessarily mean the loss of the underlying customer base
of that distributor for the Company's products and services and (iii) the
Company's continued diversification of its products and services.

Sharps continues to sole-source each of its manufacturing, assembly,
transportation, disposal and software development functions. Sharps may be
affected by its dependence on the suppliers of these functions. Management
believes the risk is mitigated by the long-standing business relationships with
and reputation of Sharps' suppliers. The Company also has entered into
agreements, effective July 2000, with a strategic partner to provide online
education programs related to the Company's e-Tools service line and the City of
Carthage, Texas to manage and operate the Panola County Resources Recovery
Facility. Although there are no assurances with regard to the continued future
business associations, after expirations of certain agreements between Sharps
and its suppliers, management believes that alternative sources would be
available at similar costs due to the generic nature of the products and
services offered.

Sharps has received limited revenues to date, has incurred cumulative losses
since its inception and has a working capital deficit at June 30, 2000. The
future success of Sharps is dependent upon many factors, including environmental
regulation, continuity of its license agreements, maintaining an agreement with
an incineration facility, successful completion of its product development
activities, the identification and penetration of markets for its products and
services and obtaining funds necessary to complete these activities. Management
cannot accurately predict when Sharps will be required to fund its disposal


                                      F-8
<PAGE>   22


costs, but management believes it will not have to pay all of the accrued
disposal costs within one year of June 30, 2000; however, the Company does not
have sufficient information to classify any amounts as long term. If Sharps is
unable to achieve its fiscal year 2001 projected results of operations or if the
actual return of mail disposal systems exceeds those estimated by management,
additional financing may be required to fund Sharps' operations. Management
believes Sharps' current resources will be sufficient to fund operations through
at least December 2001. There can be no assurance that the Company will be able
to obtain financing on acceptable terms to fund operations beyond that time
frame; however, management believes that it will be successful in raising such
financing, if necessary.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash Equivalents and Short-term Investments

The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. Short-term
investments consist of certificates of deposit with original maturities greater
than three months but less than one year. Short-term investments are classified
as held-to-maturity and are classified at amortized cost, which approximates
fair value.

Inventory

Inventory primarily represents finished goods and supplies and is stated at cost
using the first-in, first-out method. Cost is not in excess of market.

Property and Equipment

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

Intangible Assets

Intangible assets consist of costs related to two patents acquired in June 1998.
The patents are being amortized over their estimated useful lives of five years.
During the years ended June 30, 2000 and 1999, the Company recorded amortization
expense of $20,245 and $20,244, respectively.

Realization of Long-lived Assets

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

Revenue Recognition

Through June 30, 2000, product sales were recognized as revenue when the
finished product was shipped to customers. Sales are presented net of estimated
discounts. Sharps also recognizes costs, including estimated disposal costs for
incineration and postage, at the time the product is shipped. Consulting revenue
is recognized as the related services are performed.

New Accounting Pronouncement on Revenue Recognition

In December 1999, the United States Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), which
provides guidance related to revenue recognition based on interpretations and
practices followed by the SEC. SAB 101 is effective for the Company's fiscal


                                      F-9
<PAGE>   23


year 2001, and requires companies to report any changes in revenue recognition
as a cumulative change in accounting principle at the time of implementation.
Management is currently evaluating the impact of SAB 101 on the Company's
financial position and results of operations, coupled with the services provided
by Sharps Environmental Services. The impact on the timing of future revenue
recognition may be material.

Income Taxes

The Company's deferred tax liabilities and assets are determined based on the
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using currently enacted tax rates in effect for the years
in which the differences are expected to reverse. Deferred tax assets are
evaluated for realization based on a more-likely-than-not criteria in
determining whether a valuation allowance should be provided.

Net Loss Per Share

Earnings per share 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 earnings per share ("basic EPS")
and diluted earnings per share ("diluted EPS"). 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. Diluted
EPS reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
Options outstanding during each year have not been included in the calculation
of diluted EPS, as they would have an anti-dilutive effect on EPS. There are no
differences in basic EPS and diluted EPS for either year presented.

Financial Instruments

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

Segment Reporting

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires that a public business enterprise report financial and
descriptive information about its operating segments. Generally, financial
information is required to be reported on the basis used internally for
evaluating segment performance and resource allocation. Sharps 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 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 financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.

Specifically, Sharps has estimated the cost and related liability for postage
and incineration costs associated with the mail-back of full sharps containers
for disposal. These estimates are based on Sharps' experience to date and are
reflected in accrued disposal costs on the accompanying consolidated balance
sheets. Future results may differ from these estimates.

3. NOTE RECEIVABLE FROM STOCKHOLDER:

Sharps has a $320,000 personal, full recourse note receivable with a stockholder
and officer of Sharps. The note, as amended, bears interest at 8 percent with
interest due annually beginning in November 2000, and principal and accrued but
unpaid interest due in November 2002. During the years ended June 30, 2000 and
1999, the stockholder paid approximately $26,000 and $32,000, respectively, of


                                      F-10
<PAGE>   24


accrued interest. At June 30, 2000 and 1999, approximately $16,000 and $18,000,
respectively, of accrued interest was owed under the note.

4. PROPERTY AND EQUIPMENT:

At June 30, 2000 and 1999, property and equipment consisted of the following:


<TABLE>
<CAPTION>
                                                           JUNE 30,
                                                    ----------------------
                                     USEFUL LIFE       2000         1999
                                     -----------    ---------    ---------
<S>                                  <C>            <C>          <C>
Furniture and fixtures               3 to 5 years   $  32,819    $  28,519
Equipment                            5 years          114,350       89,500
Computers and software               3 to 5 years     137,602      103,576
Automobiles                          5 years           30,758       30,758
                                                    ---------    ---------
                                                      315,529      252,353
Less - Accumulated depreciation                      (134,793)     (63,290)
                                                    ---------    ---------

        Net property and equipment                  $ 180,736    $ 189,063
                                                    =========    =========
</TABLE>


5. NOTES PAYABLE:

The Company has a promissory note to finance the purchase of an automobile which
bears interest at 7.75 percent. The note matures in October 2002, is due in
monthly installments and is secured by the automobile. The balance outstanding
on the note at June 30, 2000 and 1999, was $14,808 and $20,406, respectively.

The Company finances certain of its insurance premiums through a note payable
with a finance company. The note payable bears interest at approximately 5.0
percent, and interest and principal are due monthly through May 2001. During the
year ended June 30, 2000, the Company borrowed $64,253 to finance such premiums.
As of June 30, 2000, $58,690 was outstanding on the note payable.

Future maturities on notes payable as of June 30, 2000, are as follows:


<TABLE>
<CAPTION>
YEAR ENDING JUNE 30-
<S>                         <C>
         2001               $64,718
         2002                 6,523
         2003                 2,257
                            -------

                            $73,498
                            =======
</TABLE>


6. INCOME TAXES:

The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended June 30, 2000 and June 30, 1999,
is as follows:

<TABLE>
<CAPTION>
                                  YEARS ENDED JUNE 30,
                                  --------------------
                                  2000            1999
                                  ----            ----
<S>                              <C>             <C>
Statutory rate                   (34.0)%         (34.0)%
State income taxes, net           (2.8)           (2.9)
Meals and entertainment            3.0             0.9
Increase in valuation allowance   33.8            36.0
                                  ----            ----

                                    --%             --%
                                  ====            ====
</TABLE>


                                      F-11
<PAGE>   25


Significant components of Sharps' net deferred tax asset at June 30, 2000 and
1999 are as follows:

<TABLE>
<CAPTION>
                                            YEARS ENDED JUNE 30,
                                        ----------------------------
                                           2000              1999
                                        -----------      -----------
<S>                                     <C>              <C>
Deferred tax assets relating to-
   Net operating loss carryforwards     $ 3,247,843      $ 2,932,885
   Accrued disposal costs                   319,625          255,514
   Deferred compensation                     29,702           17,760
   Accounts receivable reserve               11,241               --
                                        -----------      -----------
       Total deferred tax assets          3,608,411        3,206,159

Deferred tax liability relating to-
   Cash to accrual adjustment                (4,814)         (35,884)

Deferred tax valuation reserve           (3,603,597)      (3,170,275)
                                        -----------      -----------

       Net deferred tax asset           $        --      $        --
                                        ===========      ===========
</TABLE>


At June 30, 2000, Sharps had net operating loss carryforwards for federal income
tax purposes of approximately $8.8 million, of which approximately $5.6 million
was acquired in the acquisition in February 1998. Sharps' ability to utilize
these net-operating losses to reduce future taxable income may be limited upon a
change of ownership and amounts of separate Company taxable income, as defined
by the Internal Revenue Code. The carryforwards will begin to expire in 2008 if
not otherwise used. A valuation allowance has been established to fully offset
the Company's deferred tax assets due to its history of losses since inception.
The valuation reserve relates primarily to Sharps' net losses. Sharps has not
made any income tax payments since inception.

7. STOCKHOLDERS' EQUITY:

Common Stock

In August and October 1998, SCC issued a total of 42,500 shares of common stock
to two consultants for services provided during fiscal 1998. Management valued
the shares at $85,000, which was the estimated fair market value of the
Company's stock on the date the shares were issued.

1993 Stock Plan

SCC sponsors the 1993 Stock Plan ("the Plan") covering employees, consultants
and non-employee directors. The Plan, as amended, provides for the granting of
options, either incentive or nonstatutory, to purchase up to 1,000,000 shares of
Sharps' common stock. Options granted vest over a period of up to four years.
Options expire five to seven years after the date of grant.

SFAS No. 123 "Accounting for Stock-Based Compensation," allows companies to
adopt one of two methods for accounting for stock options. Sharps has elected
the method that requires disclosure of stock based compensation only. Because of
this election, Sharps continues to account for its employee stock-based
compensation plans under Accounting Principles Board Opinion No. 25 and the
related interpretations. Accordingly, deferred compensation is recorded for
stock based compensation grants based on the market value of the common stock on
the measurement date over the exercise price. The deferred compensation is
amortized over the vesting period of each unit of stock based compensation
grant, generally three to four years. If the exercise price of the stock based
compensation grants is equal to the estimated fair value of Sharps' stock on the
date of the grant, no compensation expense is recorded. During the years ended
June 30, 2000 and 1999, Sharps recorded aggregate deferred compensation of $0
and $59,000, respectively. Sharps recognized $11,000 and $48,000 of these
amounts as compensation expense during the years ended June 30, 2000 and 1999,
respectively.

Sharps records the fair value of options issued to non-employee consultants at
the fair value of the options issued. Any expense is recognized over the service
period or at the date of issuance if the options are fully vested and no
performance obligation exists. During the year ended June 30, 2000, compensation
expense of $21,302 was recorded for option grants to non-employees that were
fully vested at the date of the grant.


                                      F-12
<PAGE>   26

A summary of the activity of the Plan during the years ended June 30, 2000 and
1999, is presented in the table below:

<TABLE>
<CAPTION>
                                                WEIGHTED
                                 OPTIONS        AVERAGE
                                OUTSTANDING  EXERCISE PRICE
                                -----------  --------------
<S>                             <C>          <C>
Balance, June 30, 1998             75,140      $   3.02
    Granted                       242,500          2.03
    Forfeited or Canceled        (203,333)         2.00
                                 --------
Balance, June 30, 1999            114,307          2.74
    Granted                       367,500          1.23
    Forfeited or Canceled         (61,667)         1.45
                                 --------
Balance, June 30, 2000            420,140          1.61
                                 ========

Exercisable at June 30, 2000      142,640          2.43
                                 ========
</TABLE>

The weighted average fair values of options granted during the years ended June
30, 2000 and 1999 were $.66 and $1.15, respectively. As of June 30, 2000 and
1999, there were 579,860 options and 885,693 options, respectively, available
for grant under the Plan.

Pursuant to the provisions of SFAS No. 123, the fair value of each option grant
was estimated on the date of grant using the Black-Scholes option-pricing model.
The following weighted average assumptions were used for the fiscal year 2000
and 1999 grants: risk-free rates of return ranging from 5.21% to 5.86%; expected
annual dividend rate of $0; expected life of five to seven years; and expected
volatility ranging from 93.6% to 53.5%. Had compensation expense for stock based
compensation been determined consistent with the provisions of SFAS No. 123,
Sharps' net loss would have been increased to the following pro forma amounts:

<TABLE>
<CAPTION>
                               YEARS ENDED JUNE 30,
                          ------------------------------
                              2000               1999
                          ------------        ----------
<S>                       <C>                 <C>
Net Loss
  As reported             $ (1,281,537)       (1,938,419)
  Proforma                $ (1,319,281)       (1,946,211)
                          ============      ============

Basic and diluted EPS
  As reported             $       (.17)             (.25)
                          ============      ============
  Proforma                $       (.17)             (.26)
                          ============      ============
</TABLE>

8. COMMITMENTS AND CONTINGENCIES:

Litigation

Sharps is involved in certain legal actions and claims arising in the normal
course of business. While the outcome of these matters cannot be predicted with
certainty, management believes these matters will not have a material adverse
effect on Sharps' consolidated financial position, results of operations or
liquidity.

Distributor Agreements

Sharps has entered into an agreement with Ecolab, Inc., for it to be Sharps'
exclusive U.S. distributor of the Sharps Disposal by Mail(TM) System in
commercial and industrial markets. The price is reviewed quarterly and adjusted
upon the mutual agreement of the parties. The term of the agreement is for one
year with an automatic renewal for one-year periods, unless either party
provides notice of termination to the other within 120 days prior to expiration
of the then current term.

Sharps entered into a five-year agreement with a supplier for Sharps to be the
exclusive domestic distributor of certain of the supplier's medical waste
containers. The agreement provides for automatic renewals for two-year periods,
unless either party provides notice of termination to the other within 90 days
prior to the expiration of the then current term. Exclusivity rights will lapse
unless annual non-guaranteed purchase volumes are met.


                                      F-13
<PAGE>   27


Sales Representation Agreements

Sharps has a sales representation agreement with a sales agency for promotion of
the Sharps Disposal by Mail(TM) System exclusively in the veterinary market. The
agreement is for a two-year period with automatic two-year renewal periods,
unless either party notifies the other 90 days prior to expiration of the
current period of its intent to terminate. The agreement further specifies a 15
percent commission on net sales as defined in the agreement. Commission expense
related to this agreement was $5,383 and $2,818 for the years ended June 30,
2000 and 1999, respectively.

Operating Leases

Sharps leases office space and equipment under certain operating lease
agreements, which expire at various dates through March 2004. Rent expense for
the years ended June 30, 2000 and 1999 were $70,534 and $63,500, respectively.
Future minimum lease payments under non-cancelable operating leases as of June
30, 2000, are as follows:

<TABLE>
<CAPTION>
 YEAR ENDING JUNE 30-
<S>                           <C>
         2001                 $  67,796
         2002                    67,796
         2003                    10,497
         2004                     3,966
                              ---------

                              $ 150,055
                              =========
</TABLE>

9. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED):

On August 31, 2000, the Company completed a private placement of 1,000,000
shares of common stock for gross proceeds of $1,000,000.


                                      F-14
<PAGE>   28


                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
EXHIBIT
NUMBER       DESCRIPTION
-------      -----------
<S>          <C>
2.2          Agreement and Plan of Reorganization dated as of February 27, 1998,
             between and among U.S. Medical Systems, Inc., Sharps Compliance,
             Inc. and its Stockholders (incorporated by reference from Exhibit
             2.2 to 2/27/98 Form 8-K)

3.4          Bylaws of Company (incorporated by reference from Exhibit 3.4 to
             6/30/94 Form 10-KSB)

3.6          Certificate of Elimination of the Series "A" Voting Convertible
             Preferred Stock (incorporated by reference from Exhibit 3.6 to
             6/30/98 Form 10-KSB)

4.4          Specimen Stock Certificate (incorporated by reference from Exhibit
             4.4 to 6/30/98 Form 10-KSB)

10.29        Employment Agreement effective January 1, 1998 by and between
             Sharps Compliance, Inc. and Dr. Burt Kunik, and First Amendment to
             Employment Agreement (incorporated by reference from Exhibit 10.29
             to 6/30/98 Form 10-KSB)

10.30        Second Amendment to Employment Agreement dated May 15, 1998
             (incorporated by reference from Exhibit 10.30 to 6/30/98 Form
             10-KSB)

10.31        Exclusive Distributorship Agreement dated April 1, 1998 between
             Pro-Tec Containers, Inc. and Sharps Compliance, Inc. (incorporated
             by reference from Exhibit 10.31 to 6/30/98 Form 10-KSB)

10.32        Purchase Agreement between IVY Green Corporation and Sharps
             Compliance, Inc., dated June 19, 1998 (incorporated by reference
             from Exhibit 10.32 to 6/30/98 Form 10-KSB)

10.33        Lease Agreement between Lakes Technology Center, Ltd. and Sharps
             Compliance, Inc. dated August 1, 1998 (incorporated by reference
             from Exhibit 10.33 to 6/30/98 Form 10-KSB)

10.34        Severance Agreement dated September 2, 1998, between C. Lee Cooke,
             Jr. and Sharps Compliance Corp. (formerly known as - U.S. Medical
             Systems, Inc.) (incorporated by reference from Exhibit 10.34 to
             6/30/98 Form 10-KSB)

16.4         Letter regarding changes in Certifying Accountant to Arthur
             Andersen LLP (incorporated by reference from Exhibit 16.4 to
             6/30/98 Form 10-KSB)

21.1         Subsidiaries (filed herewith)

27.1         Financial Data Schedule (filed herewith)
</TABLE>