Edgar Filing: SHARPS COMPLIANCE CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-QSB

[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended December 31, 2005

[ ] 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 as specified in its Charter)

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

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

(713) 432-0300
(Issuer's telephone number)

Check whether the issuer (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 []

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 10,547,311 shares of Common Stock,
$0.01 par value as of February 1, 2006.

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

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

INDEX
PAGE

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of December 31, 2005 (Unaudited) and
June 30, 2005......................................................................3

Unaudited Condensed Consolidated Statements of Operations
for the three months ended December 31, 2005 and 2004..............................4

Unaudited Condensed Consolidated Statements of Operations
for the six months ended December 31, 2005 and 2004................................5

Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended December, 2005 and 2004...................................6

Notes to Unaudited Condensed Consolidated Financial Statements ........................7

Item 2. Management's Discussion and Analysis or Plan of Operation.............................11

Item 3. Controls and Procedures...............................................................15

PART II OTHER INFORMATION

Item 1. Legal Proceedings ...................................................................15

Item 4. Submission of Matters to a Vote of Security Holders...................................16

Item 6. Exhibits..............................................................................16

SIGNATURES.....................................................................................17

PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS December 31, June 30,
2005 2005
----------------- -------------
(Unaudited)
CURRENT ASSETS:

Cash and cash equivalents......................................................................... $ 407,640 $ 258,427
Restricted cash................................................................................... 10,010 10,010
Accounts receivable, net of allowance for doubtful accounts of $21,352 and $21,757, respectively.. 1,063,875 964,148
Inventory......................................................................................... 423,305 368,495
Prepaid and other assets.......................................................................... 134,447 79,320
------------- ----------
TOTAL CURRENT ASSETS........................................................................... 2,039,277 1,680,400

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $715,003 and $650,532,
respectively..................................................................................... 450,425 438,064

INTANGIBLE ASSETS, net of accumulated amortization of $105,827 and $102,195, respectively........... 61,771 11,779
------------- ----------

TOTAL ASSETS............................................................................. $ 2,551,473 $2,130,243
============= ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable.................................................................................. $ 485,802 $ 567,398
Accrued liabilities............................................................................... 386,738 283,953
Current portion of deferred revenue - incineration................................................ 203,824 171,300
Current portion of deferred revenue - transportation.............................................. 861,671 825,297
Current maturities of capital lease obligations................................................... 52,599 48,558
------------- ----------
TOTAL CURRENT LIABILITIES............................................................... 1,990,634 1,896,506

LONG-TERM DEFERRED REVENUE - INCINERATION, net of current portion................................... 55,876 47,142

LONG-TERM DEFERRED REVENUE - TRANSPORTATION, net of current portion................................. 237,709 225,639

OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities......................................... 14,906 42,112

OTHER LIABILITIES................................................................................... 64,500 62,500
------------- ----------

TOTAL LIABILITIES........................................................................ 2,636,625 2,273,899

COMMITMENTS AND CONTINGENCIES....................................................................... - -

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value per share; 20,000,000 shares authorized ; 10,547,311
shares issued and outstanding ................................................................. 105,473 105,473
Additional paid-in capital........................................................................ 7,464,381 7,464,381
Accumulated deficit............................................................................... (7,382,006) (7,713,510)
------------- ----------

TOTAL STOCKHOLDERS' EQUITY (DEFICIT)..................................................... 187,848 (143,656)
------------- ----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)..................................... $ 2,551,473 $2,130,243
============= ==========

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

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months
Ended December 31,
---------------------------------
2005 2004
--------------- --------------
(Unaudited)
REVENUES:

Distribution, net.......................................................................... $ 2,572,563 $ 2,142,616
Consulting services........................................................................ 2,774 2,338
Environmental services..................................................................... 88,039 84,091
------------- -------------
TOTAL REVENUES........................................................................ 2,663,376 2,229,045

COSTS AND EXPENSES:
Cost of revenues........................................................................... 1,496,692 1,330,947
Selling, general and administrative........................................................ 957,484 861,021
Depreciation and amortization.............................................................. 35,240 40,355
------------- -------------
TOTAL COSTS AND EXPENSES............................................................. 2,489,416 2,232,323
------------- -------------

OPERATING INCOME (LOSS)....................................................................... 173,960 (3,278)

Interest expense.............................................................................. (3,678) (5,364)

INCOME (LOSS) BEFORE INCOME TAXES............................................................. 170,282 (8,642)

Income Taxes.................................................................................. (3,310) (493)
------------- -------------

NET INCOME (LOSS)............................................................................. $ 166,972 $ (9,135)
============= =============

NET INCOME (LOSS) PER COMMON SHARE

Basic....................................................................................... $ .02 $ .00
============= =============
Diluted..................................................................................... $ .02 $ .00
============= =============

WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME (LOSS) PER COMMON SHARE
Basic................................................................................... 10,547,311 10,538,144
============= =============
Diluted................................................................................. 10,698,545 10,538,144
============= =============

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

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Six Months
Ended December 31,
----------------------------------
2005 2004
--------------- ----------------
(Unaudited)
REVENUES:

Distribution, net.......................................................................... $ 5,175,207 $ 4,495,212
Consulting services........................................................................ 4,515 14,109
Environmental services..................................................................... 143,766 139,110
------------- -------------
TOTAL REVENUES........................................................................ 5,323,488 4,648,431

COSTS AND EXPENSES:
Cost of revenues........................................................................... 3,057,611 2,718,491
Selling, general and administrative........................................................ 1,849,860 1,728,926
Depreciation and amortization.............................................................. 68,104 83,256
------------- -------------
TOTAL COSTS AND EXPENSES............................................................. 4,975,575 4,530,673
------------- -------------

OPERATING INCOME.............................................................................. 347,913 117,758

Interest Expense.............................................................................. (7,594) (13,288)
------------- -------------

INCOME BEFORE INCOME TAXES.................................................................... 340,319 104,470

Income Taxes.................................................................................. (8,815) (4,693)
------------- -------------

NET INCOME ................................................................................... $ 331,504 $ 99,777
============= =============

NET INCOME PER COMMON SHARE
Basic...................................................................................... $ .03 $ .01
============= =============
Diluted.................................................................................... $ .03 $ .01
============= =============

WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE
Basic...................................................................................... 10,547,311 10,538,144
============= =============
Diluted.................................................................................... 10,709,344 10,869,494
============= =============

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

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months
Ended December 31,
----------------------------------
2005 2004
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)

Net Income.................................................................................. $ 331,504 $ 99,777
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 68,104 83,256
Change In allowance for doubtful accounts (406) -
Loss on disposal of equipment............................................................. - 275
Changes in operating assets and liabilities: -
Decrease in restricted cash............................................................... - (52,315)
(Increase) decrease in accounts receivable................................................. (99,322) 185,399
Increase in inventory...................................................................... (54,810) (22,497)
(Increase) decrease in prepaids and other assets........................................... (55,127) 32,766
Increase (decrease) in accounts payable and accrued liabilities............................ 23,189 (224,813)
Increase in deferred revenue............................................................... 89,702 74,062
------------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................................. 302,834 175,910

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................................................... (76,832) (19,787)
Disposal of fixed asset..................................................................... - 17,876
Additions to intangible assets.............................................................. (53,624) -
------------- --------
NET CASH USED IN INVESTING ACTIVITIES..................................................... (130,456) (1,911)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on notes payable.................................................................. - (31,675)
Net payments on factoring agreement........................................................ - (165,083)
Payments on capital lease obligations...................................................... (23,165) (19,249)
------------- --------
NET CASH USED IN FINANCING ACTIVITIES..................................................... (23,165) (216,007)
------------- --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................... 149,213 (42,008)

CASH AND CASH EQUIVALENTS, beginning of period................................................. 258,427 242,803
------------- --------

CASH AND CASH EQUIVALENTS, end of period....................................................... $ 407,640 $ 200,795
============= ========

NONCASH INVESTING AND FINANCING ACTIVITIES:

Property and equipment additions acquired under capital lease............................. $ - $ 8,931
============= ========

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

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005

NOTE 1. ORGANIZATION AND BACKGROUND

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

NOTE 2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC") and, accordingly, do not include all information and
footnotes required under accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, these
interim condensed consolidated financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation of the consolidated financial position of the Company as of
December 31, 2005 and the results of its operations and cash flows for the three
and six months ended December 31, 2005 and 2004. The results of operations for
the three and six months ended December 31, 2005, are not necessarily indicative
of the results to be expected for the entire fiscal year ending June 30, 2006.
These condensed consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-KSB for the year ended June 30,
2005. Certain prior year amounts have been reclassified to conform to current
year presentation.

NOTE 3. REVENUE RECOGNITION

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

NOTE 4. INCOME TAXES

During the three and six months ended December 31, 2005 the Company recorded a
provision of $3,310 and $8,815, respectively, for estimated Alternative Minimum
Tax (AMT). The Company anticipates net operating profits for the year ended June
30, 2006, although no assurance can be given. The Company expects to utilize its
net operating loss carryforwards to offset any ordinary taxable income for the
year ended June 30, 2006.

NOTE 5. ACCOUNT RECEIVABLE

During September and October 2003, the Company secured judgments against
Ameritech Environmental, Inc. ("Ameritech") totaling $176,958 related to the
non-payment by Ameritech for services provided by the Company in 2002. Ameritech
sold the assets of Ameritech representing collateral for the judgments to
MedSolutions, Inc. of Dallas, Texas ("MedSolutions") in November 2003. During
January 2004, the Company secured a Garnishment Order against MedSolutons
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%. Payments under the Garnishment Order were scheduled to be made monthly in
the amount of $4,375 (inclusive of interest) with a balloon payment of $137,721
due November 7, 2004. MedSolutions is currently in breach of the Garnishment
Order. During January 2005, the Company filed suit against MedSolutions and
Ameritech in the 234th Judicial District Court of Harris County, Texas. The suit
alleges collusion, fraudulent conveyance and fraudulent inducement by and
between MedSolutions and Ameritech to defraud payment to the Company for amounts
owed, as described above. The Company has also requested the Court to appoint a
Receiver for all sums owed to protect assets pending review by the Court. The
Company has recently joined two additional creditors for the purpose of
petitioning the Court for the involuntary bankruptcy of Ameritech. The Company
and the two additional creditors would attempt to recover amounts owed through a
court appointed bankruptcy trustee.

In the quarters ending March 31, 2003 and June 30, 2003, the Company wrote-off
all outstanding amounts, $75,996 and $106,397 respectively, due from Ameritech.
Therefore, any potential future recoveries of receivables would be recorded as a
credit to the allowance for bad debts. Collection-related legal fees estimated
at one-third of any amounts collected will reduce any recovery that may be
received by the Company. Although the Company will continue to aggressively
pursue collection of the outstanding amounts under the Garnishment Orders, no
assurances regarding collection can be made.

NOTE 6. NOTES PAYABLE AND LONG-TERM DEBT

The Company maintains an arrangement with a financial institution for a $1.25
million asset-based line of credit. The agreement allows the Company to factor
customer receivables generated out of its ordinary course of business. The
maximum amount available under the line of credit is $1.0 million (or $1.25
million of its gross receivable balance). The agreement automatically renews on
an annual basis (August 30 of each year) unless terminated by either party. The
Company may borrow up to 80% of the eligible receivables presented and incurs
interest on gross invoices financed at a prime rate of interest plus 2%, plus
administrative fees of .25% on gross receivables presented. The interest rate
decreases to prime plus 1.25% (versus 2%) at such times as the Company's
Adjusted Quick Ratio is 1.25 to 1.00 or greater. Adjusted Quick Ratio is defined
as cash plus accounts receivable (less than 90 days from invoice date), divided
by current liabilities less deferred revenue. During the six-months ended
December 31, 2005, there were no borrowings under the arrangement.

NOTE 7. OBLIGATIONS UNDER CAPITAL LEASES

Capital lease obligations consist of the following:

December 31, June 30,
2005 2005
-------------- --------------

Capital lease for the purchase of accounting and operating system software and
hardware, due in monthly installments of $4,061, interest imputed at 21%
through February 2007 ......................................................... $ 50,193 $ 68,313

Capital lease for purchase of phone system due in monthly installments of $455,
interest imputed at 12% through August 2007 ................................... 8,209 10,368

Capital lease for purchase of copier/printer due in monthly installments of $157,
interest imputed at 21% through August 2006 ................................... 1,026 1,811

Capital lease for purchase of phone system upgrades due in monthly installments of
$157, interest imputed at 16% through December 2007............................
3,246 3,905

Capital lease for purchase of forklift due in monthly installments of $290,
interest imputed at 11% through July 2007 ..................................... 4,831 6,273
--------------- ---------------
Less: current portion ........................................................... 67,505 90,670
52,599 48,558
--------------- ---------------

$ 14,906 $ 42,112
=============== ===============

NOTE 8. STOCK-BASED COMPENSATION

The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", but elected to continue to
account for its employee stock-based compensation plan under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations in accounting for its stock option
plan. While the Company continues to use APB No. 25, pro forma information
regarding net income (loss) and earnings per share is required under SFAS No.
123 and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS Statement No. 123", including that the
information be determined as if the Company had accounted for its stock options
under the fair value method prescribed by SFAS No. 123.

The Company uses the Black-Scholes option valuation model to value options
granted. Because changes in input assumptions can materially affect the fair
value estimate, the existing model may not necessarily provide the only measure
of fair value for the employee stock options. The Company used the following
weighted-average assumptions for options granted during the quarters ended
December 30, 2005 and 2004, as follows: risk-free interest rates of 4.33% and
4.04%, respectively; expected annual dividend yield of 0%; volatility factors of
the expected market price of the Company's common stock of approximately 116%
and 45%, respectively; and a weighted-average expected life of the options of
approximately 2.0 and 4.5 years, respectively.

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

Three Months Ended December 31,
------------------------------------------
2005 2004
------------------ ----------------
(Unaudited) (Unaudited)

Net income (loss), as reported ..................... $ 166,972 $ (9,135)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects ....................... $ (82,203) $ (66,110)
---------------- -------------

Net loss, pro forma ............................... $ 84,769 $ (75,245)
================ =============

Basic and diluted net loss per share, as reported .. $ .01 $ .00
================ =============

Basic and diluted net loss per share, pro forma .... $ .01 $ (.01)
================ =============

Six Months Ended December 31,
-----------------------------------------
2005 2004
------------------ ----------------
(Unaudited) (Unaudited)

Net income, as reported ............................ $ 331,504 $ 99,777
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects ....................... $ (150,110) $ (131,047)
---------------- ------------------

Net loss, pro forma ............................... $ 181,394 $ (31,270)
================ ==================

Basic and diluted net loss per share, as reported .. $ .02 $ .01
================ ==================

Basic and diluted net loss per share, pro forma .... $ .02 $ .00
================ ==================

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

In December 2004, the FASB issued Statement No. 123 (revised 2004) ("FAS 123
(R)"), Share-Based Payments. FAS 123 (R) requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments, such as stock options granted to employees. The Company is required to
apply FAS 123 (R) on a modified prospective method. Under this method, the
Company is required to record compensation expense (as previous awards continue
to vest) for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. In addition, the Company may elect to adopt
FAS 123 (R) by restating previously issued financial statements, basing the
amounts on the expense previously calculated and reported in their pro forma
disclosures that had been required by FAS 123. For public entities that file as
small business issuers (such as the Company), FAS 123 (R) is effective as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005 (quarter ended September 30, 2006).

NOTE 9. EARNINGS PER SHARE

Earnings per share is measured at two levels: basic per share and diluted per
share. Basic per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted per share
is computed by dividing net income by the weighted average number of common
shares after considering the additional dilution related to common stock
options. In computing diluted per share, the outstanding common stock options
are considered dilutive using the treasury stock method. The following
information is necessary to calculate per share for the periods presented:

Six Months Ended December 31,
----------------------------------------
2005 2004
---------------- -----------------

Net income, as reported ......................................... $ 331,504 $ 99,777

Weighted average common shares outstanding....................... 10,547,311 10,538,144
Effect of Dilutive stock options................................. 162,033 331,350
---------------- -----------------
Weighted average diluted common shares outstanding............... 10,709,344 10,869,494
---------------- -----------------

Net income per common share
Basic......................................................... $ 0.03 $ 0.01

Diluted....................................................... $ 0.03 $ 0.01

Employee stock options excluded from computation of diluted per
share amounts because their effect would be anti-dilutive...... 2,925,890 2,737,295

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-QSB contains certain forward-looking statements
and information relating to Sharps 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," "estimate" and "intend" and words or phrases of similar
import, as they relate to Sharps 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.

GENERAL

Sharp is a leading developer of cost effective solutions for improving safety,
efficiency and cost related to the proper disposal of medical waste by industry
and consumers. Sharps primary markets include healthcare, agriculture,
hospitality, professional, industrial, commercial, and pharmaceutical. The
Company's products and services represent solutions for industries and consumers
dealing with the complexity of managing regulatory compliance, environmental
sensitivity, employee and customer safety, corporate risk and operating costs
related to medical waste disposal. Sharps is a leading proponent and participant
in the development of public awareness and solutions for the safe disposal of
needles, syringes and other sharps in the community setting.

The Company's primary products include Sharps Disposal by Mail System(R),
Pitch-It(TM) IV Poles, Trip LesSystem(R), Sharps Pump Return Box, Sharps Enteral
Pump Return Box, Sharps Secure(R), Sharps SureTemp Tote(R), IsoWash(R) Linen
Recovery System, Biohazard Spill Clean-Up Kit and Disposal System, Sharps
e-Tools, Sharps Environmental Services and Sharps Consulting. Some products and
services facilitate compliance with state and federal regulations by tracking,
incinerating and documenting the disposal of medical waste. Additionally, some
products and services facilitate compliance with educational and training
requirements required by federal, state, and local regulatory agencies.

RESULTS OF OPERATIONS

The following analyzes changes in the consolidated operating results and
financial condition of the Company during the three months and six months ended
December 31, 2005 and 2004.

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

Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------

Net revenues 100% 100% 100% 100%
Costs and expenses:
Cost of revenues (56%) (60%) (57%) (58%)
Selling, general and administrative (36%) (38%) (35%) (37%)
Depreciation and amortization (1%) (2%) (1%) (2%)
----------- ----------- ----------- ---------
Total operating expenses (93%) (100%) (93%) 97%
----------- ----------- ------------ --------
Income (loss) from operations 7% 0% 7% 3%
Total other income (expense) (1)% 0% (1%) (1%)
----------- ----------- ------------ ---------
Net income 6% 0% 6% 2%
=========== =========== =========== ========

THREE MONTHS ENDED DECEMBER 31, 2005, COMPARED TO THREE MONTHS ENDED DECEMBER
31, 2004

Total revenues for the three months ended December 31, 2005 of $2,663,376
increased by $434,331, or 19%, over the total revenues for the three months
ended December 31, 2004 of $2,229,045. The increase in revenues is attributable
to increased billings in the Agriculture ($132,720), Healthcare ($118,124),
Pharmaceutical ($95,172), Retail ($47,864) and Professional ($40,250) markets.
The increase in billings in all markets is being driven by higher demand for the
Company's products as a result of the Company's marketing efforts and as
industry and consumers become more aware of the proper disposal of medical
sharps (syringes, lancets, etc.). Additionally, the increase in billings in the
Retail market is a result of the use of our products in grocery store and
pharmacies to properly dispose of syringes utilized to administer flu shots and
other inoculations. The increase in billings in the Pharmaceutical market is a
result of the demand for our products in the clinical trial setting.

Cost of revenues for the three months ended December 31, 2005 of $1,496,692 were
56% of revenues which were lower than the cost of sales of 60% during the
corresponding period of the prior year. The reduction in cost of sales (and
corresponding increase in the gross margin) is due to the increase in revenues
as described in the preceding paragraph and the mix of product sold.

Selling, general and administrative ("S, G & A") expenses for the three months
ended December 31, 2005 of $957,484, increased by $96,463, or 11%, versus
$861,021 for the corresponding period of the previous year. The increase in the
S, G & A is primarily a result of increases in the following expenses: (i)
professional fees ($41,687), (ii) compensation related ($26,102), and (iii)
travel ($19,543). The increase in professional fees is related to Company
litigation and advisory fees. The increase in compensation and travel expenses
are a result of the increase in the Company's sales and marketing efforts.

SIX MONTHS ENDED DECEMBER 31, 2005, COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2004

Total revenues for the six months ended December 31, 2005 of $5,323,488
increased by $675,057, or 15%, over the total revenues for the six months ended
December 31, 2004 of $4,648,431. The increase in revenues is primarily
attributable to increased billings in the Retail ($237,237), Hospitality
($159,658), Agriculture ($122,788) and Pharmaceutical ($95,172) markets. The
increase in billings in all markets is being driven by higher demand for the
Company's products as industry and consumers become more aware of the proper
disposal of medical sharps (syringes, lancets, etc.). Additionally, the increase
in billings in the Retail market is a result of the use of our products in
grocery store and pharmacies to properly dispose of syringes utilized to
administer flu shots and other inoculations. The increase in the Hospitality
market billings is a result of an approximate $100,000 order from one of the
nation's largest contract food service providers for the Company's biohazard
spill clean-up kit. The increase in billings in the Pharmaceutical market is a
result of the demand for our products in the clinical trial setting.

Cost of revenues for the six months ended December 31, 2005 of $3,057,611 were
57% of revenues which were lower than the cost of sales of 60% during the
corresponding period of the prior year. The reduction in cost of sales (and
corresponding increase in the gross margin) is due to the increase in revenues
as described in the preceding paragraph and the mix of product sold.

Selling, general and administrative ("S, G & A") expenses for the six months
ended December 31, 2005 of $1,849,860, increased by $120,934, or by 7%, versus
$1,728,926 for the corresponding period of the prior year. . The increase in the
S, G & A is primarily a result of increases in the following expenses: (i)
professional fees ($55,552), (ii) compensation related ($30,365), and (iii)
travel ($8,814). The increase in professional fees is related to Company
litigation and advisory fees. The increase in compensation and travel expenses
are a result of the increase in the Company's sales and marketing efforts.

PROSPECTS FOR THE FUTURE

The Company continues to take advantage of the many opportunities in the markets
served as consumers and industries become more aware of the proper disposal of
medical sharps (syringes, lancets, etc.). This education process was
substantially strengthened in December 2004 when the U. S. Environmental
Protection Agency ("EPA") issued its new guidelines for the proper disposal of
medical sharps (see www.epa.gov/epaoswer/other/medical/sharps.htm). Among the
recommended methods of disposal are mail-back programs and products such as that
marketed by the Company.

Although the Company's largest market has historically been Healthcare, we
believe the most significant long-term growth opportunities are in the
Agriculture, Pharmaceutical, Retail, Commercial and Hospitality markets. In
order to more effectively address these opportunities, the Company has recently
re-aligned its sales force whereby each regional sales director markets all
Company products across multiple market segments within his or her geographic
territory.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $149,213 to $407,640 at December 31, 2005
from $258,427 at June 30, 2005. The increase in cash and cash equivalents is
primarily a result of the strong operating earnings and corresponding cash flow
from operations of $302,834, offset by, (i) additions to property and equipment
of $76,832, (ii) additions to intangible assets of $53,624 and (iii) payments on
capital lease obligations of $23,165.

Accounts receivable increased by $99,322 to $1,063,875 at December 31, 2005 from
$964,148 at June 30, 2005. The increase was consistent with the increase in
revenues during the quarter ending December 2005 of $2,663,376 as compared to
the revenues during the quarter ending June 2005 of $2,120,102.

Property and equipment increased by $12,361 to $450,425 at December 31, 2005
from $438,064 at June 30, 2005. This increase is attributable to capital
expenditures of $76,832 for the six months ended December 31, 2005 offset by the
depreciation expense for the same period of $64,471. The capital expenditures
represent capital costs spent on the Company's incineration facility in
Carthage, Texas as well as computer, software and other equipment at the
Company's corporate offices in Houston, Texas.

Intangible assets increased by $49,992 to $61,771 at December 31, 2005 from
$11,779 at June 30, 2005. This increase is attributable to permit-related
expenditures totaling $53,624 associated with the Company's incineration
facility in Carthage, Texas offset by amortization expense of $3,632.

Management believes that the Company's current cash resources along with cash
from operations and its asset-based factoring line of credit will be sufficient
to fund operations for the twelve months ended December 31, 2006.

TRENDS

Consistent with the recent revenue growth (19% and 15% for the three and six
months ended December 31, 2005, respectively), the trend of earnings and cash
from operations has been very positive. The Company's internal plans contemplate
additional growth in all of its markets served. While the Company has no
material expected change in the level of capital expenditures in the near-term,
it may incur significant capital costs should it decide to upgrade its current
incineration facility in Carthage, Texas in order to comply with the November
2005 amended EPA Clean Air Act (see INCINERATOR FACILITY- REGULATORY
DEVELOPMENTS below). The Company could avoid such upgrade and the associated
capital costs should it decide to install alternative technology (at a much
lower cost) or outsource its incineration needs (no additional capital costs).
The Company has studied the amended EPA Clean Air Act and its options, but has
not yet made a decision as to which alternative it will pursue. It is important
to note that should the Company decide to upgrade its incineration facility to
comply with the new regulations or install alternative technology, it would open
up the opportunity for additional revenue sources including hospital medical
waste disposal. As noted below, the new regulation allows a minimum period of
three years and a maximum of five years to comply.

CRITICAL ACCOUNTING ESTIMATES

Certain products offered by the Company have revenue producing components that
are recognized over multiple delivery points and can consist of up to three
separate elements as follows: (1) the sale of the container system, (2) the
transportation of the container system and (3) the treatment and disposal
(incineration) of the container system. Since the transportation element and the
incineration elements are undelivered services at the point of initial sale of
the container, the revenue is deferred until the services are performed. The
current and long-term portions of deferred revenues are determined through
regression analysis and historical trends. Furthermore, through regression
analysis of historical data, the Company has determined that a certain
percentage of all container systems sold may not be returned. Accordingly, a
portion of the transportation and incineration elements is recognized at the
point of sale.

INCINERATOR FACILITY- REGULATORY DEVELOPMENTS

In November 2005, the EPA amended the Clean Air Act which will effect the
operations of the Company's leased incineration facility located in Carthage,
Texas. The regulation modifies the emission limits and monitoring procedures
required to operate an incineration facility. The new rules will necessitate
changes to the Company's leased incinerator and pollution control equipment at
the facility or require installation of an alternative treatment method to
ensure compliance. Such change would require the Company to incur significant
capital expenditures in order to meet the requirements of the regulations. The
regulation allows a minimum period of three years and a maximum of five years to
comply. The Company has studied the amended EPA Clean Air Act and its options,
but has not yet made a decision. It is important to note that should the Company
decide to upgrade its incineration facility to comply with the new regulations
or install alternative technology, it would open up the opportunity for
additional revenue sources including hospital medical waste disposal.

RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, the FASB issued FASB Statement No. 151, which revised ARB
No.43, relating to inventory costs. This revision is to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). This Statement requires that these items be
recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date of this Statement is issued. Management believes this
Statement will have no impact on the financial statements of the Company once
adopted.

In December 2004, the FASB issued FASB Statement No. 152, which amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends
FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of
Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to
real-estate time-sharing transactions. The accounting for those operations and
costs is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Management
believes this Statement will have no impact on the financial statements of the
Company once adopted.

In December 2004, the FASB issued FASB Statement No. 153. This Statement
addresses the measurement of exchanges of nonmonetary assets. The guidance in
APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this Statement is issued. Management believes
this Statement will have no impact on the financial statements of the Company
once adopted.

In December 2004, the FASB issued Statement No. 123 (revised 2004) ("FAS 123
(R)"), Share-Based Payments. FAS 123 (R) requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments, such as stock options granted to employees. The Company is required to
apply FAS 123 (R) on a modified prospective method. Under this method, the
Company is required to record compensation expense (as previous awards continue
to vest) for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. In addition, the Company may elect to adopt
FAS 123 (R) by restating previously issued financial statements, basing the
amounts on the expense previously calculated and reported in their pro forma
disclosures that had been required by FAS 123. For public entities that file as
small business issuers, FAS 123 (R) is effective as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005
(quarter ended September 30, 2006). Management has not completed its evaluation
of the effect that FAS 123 (R) will have, but believes that the effect will be
consistent with the application disclosed in its pro forma disclosures (Note 8
of the Notes to the Condensed Consolidated Financial Statements).

In May 2005, the FASB issued Statement No. 154, Accounting Changes & Error
Corrections, which replaced APB Opinion No. 20 and FASB Statement No. 3. This
statement changes the requirement for accounting and reporting of a voluntary
change in accounting principle and changes required by an accounting
pronouncement when the specific transition provisions are absent. This statement
requires retrospective application to prior periods' financial statements of
changes in accounting principle. If it is impracticable to determine either the
period-specific effect or the cumulative effect of the change, this statement
requires that the new accounting principle be adopted prospectively from the
earliest practicable date. SFAS No. 154 is effective in the period that begins
after December 15, 2005, and early adoption is permitted in the fiscal years
beginning after SFAS No. 154 was issued. The Company does not expect the new
standard to have any material impact on our financial position and results of
operations.

ITEM 3. CONTROLS AND PROCEDURES

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the quarters ending March 31, 2003 and June 30, 2003, the Company wrote-off
all outstanding amounts, $75,996 and $106,397 respectively, due from Ameritech.
Therefore, any potential future recoveries of receivables would be recorded as a
credit to the allowance for bad debts. Collection-related legal fees, estimated
at one-third of any amounts collected, will reduce any recovery that may be
received by the Company. Although the Company will continue to aggressively
pursue collection of the outstanding amounts under the Garnishment Orders, no
assurances regarding collection can be made.

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

On or about February 25, 2003, Jason Jodway, a then employee of the Company
since April 1999, resigned in lieu of termination of employment by the Company.
Thereafter, Mr. Jodway formed Attentus Medical Sales, Inc., a competing entity
of the Company. In March 2005, the Company's wholly-own subsidiary Sharps
Compliance, Inc., filed a lawsuit in Harris County District Court, Texas against
Mr. Jodway and Attentus Medical Sales, Inc. The lawsuit claims, (i) breach of a
confidentiality agreement, (ii) misappropriation of trade secrets and (iii)
tortious interference with the Company's existing and prospective contracts and
business relationships. On April 7, 2005, the defendant filed its answer and
counter claims against Sharps Compliance, Inc. asserting breach of contract,
quantum merit and violation of the Texas Payday Act alleging that his last day
of employment was March 29, 2003 and that he is entitled to receive two weeks of
back wages and commissions. On September 19, 2005, the Company amended its
pleadings and added claims asserting conversion, unjust enrichment, unfair
competition and trademark infringement in violation of the Lanham Act, false
advertising in violation of the Lanham Act, trademark dilution under the Texas
Business and Commerce Code, and tortious interference with existing and/or
prospective customers. On April 28, 2005, Defendants filed an Amended Answer and
Counterclaims adding counter claims asserting slander, business disparagement
and tortious interference with contractual and prospective relationships. On
April 29, 2005, Mr. Jodway and Attentus Medical Sales, Inc. filed a Notice of
Removal of the action from Harris County Circuit Court to the United States
District Court, Southern District of Texas. The Company denies any obligation to
Mr. Jodway for his back wages, commissions and denies all other allegations. The
Company intends to vigorously pursue its affirmative claims against Mr. Jodway
and Attentus Medical Sales, Inc., seek injunctive relief for violations of the
Lanham Act, money damages and attorneys fees, although the Company has not
quantified its damages to date.

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

On November 17, 2005, the Company held its Annual Meeting of shareholders
whereby the following items were voted upon, (i) the election of six directors
to hold office until the next annual shareholders meeting, (ii) an amendment to
the Company's 1993 Stock Plan to increase the shares available under the Plan by
500,000 and (iii) other matters that may be presented at the meeting for action.

The following Directors were elected at the meeting, (i) Dr. Burt Kunik, (ii)
Ramsay Gillman, (iii) John R. Grow, (iv) Parris H. Holmes, Jr., (v) F. Gardner
Parker and (vi) Philip C. Zerrillo. Additionally, the shareholders approved the
amendment to the Company's 1993 Stock Plan to increase the shares available
under the Plan by 500,000 to 3.5 million.

As of September 29, 2005, the record date of the Annual Meeting, 10,547,311
shares of common stock were outstanding. At the Annual Meeting, holders of
8,287,288 shares of common stock were present in person or represented by proxy.
The following sets forth information regarding the results of the voting at the
Annual Meeting.

Proposal I - Election of Directors

Votes in Favor Votes Withheld
-------------- --------------

Dr. Burt Kunik 8,287,288 67,069
Ramsay Gillman 8,287,288 67,069
John R. Grow 8,287,288 67,069
Parris H. Holmes, Jr. 8,104,288 250,069
F. Gardner Parker 8,287,288 67,069
Philip C. Zerrillo 8,287,288 67,069

Proposal II - Amendment to the Company's 1993 Stock Plan

Votes in favor 7,980,576
Votes against 373,624
Abstentions 157

ITEM 6. EXHIBITS

(a) Exhibits:

31.1 Certification of Chief Executive Officer in Accordance with
Section 302 of the Sarbanes-Oxley Act (filed herewith)
31.2 Certification of Chief Financial Officer in Accordance with
Section 302 of the Sarbanes-Oxley Act (filed herewith)
32.1 Certification of Chief Executive Officer in Accordance with
Section 906 of the Sarbanes-Oxley Act (filed herewith)
32.2 Certification of Chief Financial Officer in Accordance with
Section 906 of the Sarbanes-Oxley Act (filed herewith)

ITEMS 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

REGISTRANT:

SHARPS COMPLIANCE CORP.

Dated: February 1, 2006 By: /s/ Dr. Burton J. Kunik
-----------------------------------------
Chairman of the Board, Chief
Executive Officer and President

Dated: February 1, 2006 By: /s/ David P. Tusa
----------------------------------------
Executive Vice President,
Chief Financial Officer
Business Development &
Corporate Secretary