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 September 30, 2006

[_] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to .

Commission File Number: 0-22390
-----------------------

SHARPS COMPLIANCE CORP.
(Exact name of small business issuer as specified in its charter)

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

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

(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:
10,652,298 shares of Common Stock, $0.01 par value as of November 7, 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..................................................3

Condensed Consolidated Statements of Income............................................4

Condensed Consolidated Statements of Cash Flows .......................................5

Notes to Condensed Consolidated Financial Statements ..................................6

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 ...................................................................16

Item 6. Exhibits and Reports on Form 8-K......................................................17

SIGNATURES.....................................................................................18

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, June 30,
2006 2006
--------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS

Cash and cash equivalents ...............................................................$ 354,463 $ 296,959

Restricted cash ......................................................................... 10,010 10,010
Accounts receivable, net of allowance for doubtful accounts of $20,210 and 20,024,
respectively ........................................................................... 1,211,731 935,283
Inventory .............................................................................. 400,508 325,688

Prepaid and other assets ............................................................... 130,189 88,348
--------------- ----------------
TOTAL CURRENT ASSETS ................................................................. 2,106,901 1,656,288

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $839,141 and $790,397,
respectively ............................................................................. 466,850 473,387

INTANGIBLE ASSETS, net of accumulated amortization of $112,273 and $116,805, respectively.... 66,029 60,427
--------------- ----------------

TOTAL ASSETS ................................................................................$ 2,639,780 $ 2,190,102
=============== ================

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable ........................................................................$ 503,086 $ 526,582
Accrued liabilities ..................................................................... 322,035 262,219
Deferred revenue......................................................................... 913,289 826,764
Current maturities of capital lease obligations.......................................... 28,265 40,260
--------------- ----------------
TOTAL CURRENT LIABILITIES ............................................................ 1,766,675 1,655,825

LONG-TERM DEFERRED REVENUE .................................................................. 241,552 211,568

OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities ................................. 465 1,809

RENT ABATEMENT .............................................................................. 69,750 69,000
--------------- ----------------

TOTAL LIABILITIES..................................................................... 2,078,442 1,938,202

COMMITMENTS .................................................................................
- -

STOCKHOLDERS' EQUITY
Common stock, $0.01 par value per share; 20,000,000 shares authorized; 10,586,310 and
10,551,310 shares issued and outstanding, respectively ................................. 105,863 105,513
Additional paid-in capital .............................................................. 7,495,768 7,478,268
Accumulated deficit ..................................................................... (7,040,293) (7,331,881)
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY............................................................ 561,338 251,900
--------------- ----------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................................$ 2,639,780 $ 2,190,102
=============== ================

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

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three Months
Ended September 30,
------------------------------------
2006 2005
---------------- --------------
(Unaudited)
REVENUES

Product ............................................................. $ 2,921,298 $ 2,604,385
Environmental services .............................................. 69,586 55,727
----------------- ---------------
TOTAL REVENUES ................................................... 2,990,884 2,660,112

COSTS AND EXPENSES
Cost of revenues .................................................... 1,693,588 1,560,919
Selling, general and administrative ................................. 954,422 894,524
Depreciation and amortization ....................................... 44,212 32,863
----------------- ---------------
TOTAL COSTS AND EXPENSES ......................................... 2,692,222 2,488,306
----------------- ---------------

OPERATING INCOME ...................................................... 298,662 171,806

OTHER INCOME (EXPENSE)
Interest income ..................................................... 3,549 2,147
Interest expense .................................................... (1,909) (3,916)
----------------- ---------------

NET INCOME BEFORE INCOME TAXES ........................................ 300,302 170,037

INCOME TAXES .......................................................... (8,714) (5,505)
----------------- ---------------

NET INCOME............................................................. $ 291,588 $ 164,532
================= ===============

NET INCOME PER COMMON SHARE

Basic ............................................................... $ .03 $ .02
================= ===============

Diluted ............................................................. $ .03 $ .02
================= ===============

WEIGHTED AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON
SHARE:

Basic ............................................................... 10,562,723 10,547,311
Diluted ............................................................. 10,991,339 10,732,740

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

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

For the Three Months Ended September 30,
---------------------------------------
2006 2005
---------------- ----------------
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income ............................................................. $ 291,588 $ 164,532
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ........................................ 44,212 32,863
Bad debt expense ..................................................... 186 425
Changes in operating assets and liabilities:
Increase in accounts receivable ...................................... (276,634) (237,807)
(Increase) decrease in inventory ..................................... (74,820) 46,703
Increase in prepaid and other assets ................................. (41,841) (85,466)
Increase in accounts payable and accrued liabilities ................. 37,070 2,979
Increase in deferred revenue ......................................... 116,509 99,222
--------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 96,270 23,451

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment .................................. (42,207) (7,905)
Purchase of intangible assets......................................... (1,070) -
--------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES ............................... (43,277) (7,905)

CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations ................................ (13,339) (11,326)
Proceeds from exercising of stock options ............................ 17,850 -
--------------- ----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,511 (11,326)
--------------- ----------------

NET INCREASE IN CASH AND CASH EQUIVALENTS ................................. 57,504 4,220

CASH AND CASH EQUIVALENTS, beginning of period ............................ 296,959 258,427
--------------- ----------------

CASH AND CASH EQUIVALENTS, end of period .................................. $ 354,463 $ 262,647
=============== ================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ................................................. $ 1,909 $ 3,916
=============== ================

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

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

NOTE 1 - ORGANIZATION AND BACKGROUND

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

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") for interim financial information and with
instructions to Form 10-QSB. Accordingly, do not include all information and
footnotes required under accounting principles generally accepted in the United
States of America 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 September 30, 2006 and the results of its operations and cash
flows for the three months ended September 30, 2006 and 2005. The results of
operations for the three months ended September 30, 2006, are not necessarily
indicative of the results to be expected for the entire fiscal year ending June
30, 2007. These unaudited 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, 2006. Certain prior year amounts have been reclassified to
conform to current period presentation.

NOTE 3 - SIGNIFICANT ACCOUNT POLICIES

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 - RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

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

In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," SAB 108 provides
interpretive guidance on the SEC's views regarding the process of quantifying
materiality of financial statement misstatements. SAB 108 is effective for
fiscal years ending after November 15, 2006, with early application for the
first interim period ending after November 15, 2006. The Company does not expect
that the application of SAB 108 will any material impact on its financial
position and results of operations.

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

NOTE 5 - INCOME TAXES

During the three months ended September 30, 2006 the Company recorded a
provision of $8,714 for estimated Alternative Minimum Tax (AMT). The Company
anticipates net operating profits for the year ended June 30, 2007, 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,
2007.

NOTE 6 - 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 incineration services provided by the Company in
2002. In November 2003, Ameritech sold its assets representing collateral for
the judgments to MedSolutions, Inc. of Dallas, Texas ("MedSolutions"). During
January 2004, the Company secured a Garnishment Order against MedSolutions
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%, subject to the terms of the agreement by which MedSolutions purchased the
Ameritech assets. A balloon payment of $137,721 due November 7, 2004, under the
Garnishment Order, was not made by MedSolutions to the Company. This represented
the then outstanding remaining amount due to the Company.

In August 2006, the Company filed an amended suit against Ameritech, its
officers and directors (Jasper S. Howard, Alton H. Howard and Jonathon S.
Howard) alleging fraudulent conveyance, fraud on creditors, civil conspiracy,
breach of court order and conversion. In October 2006, the Company sold certain
assets secured by the above noted Garnishment Order for $50,000 cash, $17,500 of
which was paid to an attorney under a contingency fee arrangement. In
conjunction with this transaction, the Company and MedSolutions entered into a
mutual release whereby the Company agreed to dismiss MedSolutions from the
litigation. The Company will record the impact of this partial recovery in its
December 31, 2006 financials statements as other income.

Prior to the year ending June 30, 2003, the Company wrote-off all outstanding
amounts due from Ameritech. Any recovery that may be received by the Company
will be reduced by collection-related legal fees computed at thirty-five percent
of any amounts collected plus expenses. Although the Company will continue to
aggressively pursue collection of the remaining outstanding amount of
approximately $90,000 (plus interest and attorney fees), no assurances can be
made regarding ultimate collection.

NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT

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

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

NOTE 8 - OBLIGATIONS UNDER CAPITAL LEASES

Capital lease obligations consist of the following:

September 30, June 30,
2006 2006
------------------ -------------------

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 ......................................................... $ 19,349 $ 30,160

Capital lease for purchase of phone system due in monthly installments of $455,
interest imputed at 12% through August 2007 ................................... 4,717 5,916

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

Capital lease for purchase of phone system upgrades due in monthly installments of
$157, interest imputed at 16% through December 2007............................ 2,150 2,530

Capital lease for purchase of forklift due in monthly installments of $290,
interest imputed at 11% through June 2007 ..................................... 2,514 3,308
------------------ -------------------
28,730 42,069
Less: current portion ........................................................... 28,265 40,260
------------------ -------------------

$ 465 $ 1,809
================== ===================

NOTE 9 - STOCK-BASED COMPENSATION

The Company sponsors a Stock Plan (the "Plan") covering employees, consultants
and non-employee directors. The Plan is more fully described in Note 9 in the
Company's 2006 Annual Report on Form 10-KSB. Prior to July 1, 2006, awards
granted under the Plan were accounted for under the recognition and measurement
principles of Accounting Principles Bulletin (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB 25") and related interpretations. Under
APB 25, no compensation expense was reflected in the Consolidated Statement of
Operations for the Company's stock options, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
shares on the date of grant. The pro forma effects on income for stock options
were instead disclosed in a footnote to the unaudited consolidated financial
statements.

Effective July 1, 2006, the Company adopted the fair value recognition
provisions for FASB Statement of Financial Accounting Standard No. 123(R),
"Share-Based Payment," ("SFAS 123(R)"), using the modified prospective
transition method. Under this transition method, the Company is required to
record compensation expense for all stock option awards granted after the date
of adoption as well as any unvested portion of previously granted options. There
is no compensation expense related to the unvested portion of previously granted
stock option awards that remain outstanding at the date of adoption since the
Company's Board of Directors approved, in June 2006, the acceleration of all
unvested stock options previously awarded.

The most significant difference between the fair value approaches
prescribed by SFAS No. 123 and SFAS No. 123(R) and the intrinsic value method
prescribed by APB No. 25 relates to the recognition of compensation expense for
stock option awards based on their grant date fair value. Under SFAS No. 123,
the Company used the following weighted-average assumptions for the quarter
ended September 30, 2005 as follows: risk-free interest rates of 4.07% expected
annual dividend yield of 0%; volatility factors of the expected market price of
the Company's common stock of approximately 80.0%; and a weighted-average
expected life of the options of 4.5 years. The Company estimates the fair value
of stock option grants using the Black-Scholes-Merton option-pricing model. The
fair value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model that uses the assumptions for the risk-free
interest rate, volatility, dividend yield and the expected term of the options.
The risk-free interest rate is based on the U.S. Treasury interest rates in
effect at the time of grant for a period equal to the expected term of the
option. Expected volatilities are based on implied volatilities from historical
trades of the Company's common shares and other applicable factors. Historical
data is used to estimate the expected term of the options and employee
terminations within the option-pricing model; separate groups of employees that
have similar historical exercise behavior are considered separately for
valuation purposes. The expected term of the options represents the period of
time that the options granted are expected to be outstanding.

The following table reflects the pro forma effect on net income and income per
share for the three months ended September 30, 2005 if we had applied the fair
value recognition provision of SFAS 123(R):

Three
Months Ended
September 30,
--------------------
2005
--------------------
(Unaudited)

Net income, as reported ............................ $ 164,532
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects ....................... $ (67,907)
--------------------

Net income, pro forma ............................. $ 96,625
====================

Basic and diluted net income per share, as reported $ 0.02
====================

Basic and diluted net income per share, pro forma .. $ 0.01
====================

No stock options were granted under the Plan during the quarter ending September
30, 2006. Therefore, no SFAS 123(R) compensation expense is reflected in the
Company's condensed consolidated statement of income for the quarter ending
September 30, 2006.

NOTE 10 - EARNINGS PER SHARE

Earnings per share are 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:

Three Months Ended September 30,
----------------------------------------
2006 2005
---------------- -----------------
(Unaudited)

Net income, as reported ......................................... $ 291,588 $ 164,532
---------------- ----------------

Weighted average common shares outstanding....................... 10,562,723 10,547,311
Effect of Dilutive stock options................................. 428,616 185,429
---------------- ----------------
Weighted average diluted common shares outstanding............... 10,991,339 10,732,740
---------------- ----------------

Net income per common share
Basic......................................................... $ 0.03 $ 0.02

Diluted....................................................... $ 0.03 $ 0.02

Employee stock options excluded from computation of diluted per
share amounts because their effect would be anti-dilutive...... 947,500 2,882,390

NOTE 11 - STOCK TRANSACTIONS

On September 28, 2006 stock options to purchase 35,000 of common shares were
exercised. Total proceeds to the Company were $17,850 ($0.51 per share).

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

Sharps is a leading developer of cost effective solutions for improving safety,
efficiency and costs 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 ended September 30,
2006 and 2005.

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

Three Months Ended
September 30,
---------------------------
2006 2005
------------ ------------

Net revenues 100% 100%
Costs and expenses:
Cost of revenues (57%) (59%)
Selling, general and administrative (32%) (34%)
Depreciation and amortization (1%) (1%)
------------ ------------
Total operating expenses (90%) (94%)
------------ ------------
Income from operations 10% 6%
Total other income 0% 0%
------------ ------------
Net income 10% 6%
============ ============

THREE MONTHS ENDED SEPTEMBER 30, 2006, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2005

Total revenues for the three months ended September 30, 2006 of $2,990,884
increased by $330,772, or 12%, over the total revenues for the three months
ended September 30, 2005 of $2,660,112. The increase in revenues is primarily
attributable to increased billings in the Retail ($251,527), and Government
($45,219), Commercial ($39,498), Professional ($34,837) and Healthcare ($29,711)
markets. These increases were partially offset by decreased billings in the
Hospitality market of $94,416. The increase in the billings in the Retail market
is a result of the use of the Company's Sharps Disposal By Mail System (R)
products in grocery stores and retail pharmacies to properly dispose of syringes
utilized to administer flu and other inoculations. The increase in the billings
in the Government market is attributable to the billings associated with a three
year award received by the Company awarded during the third quarter of fiscal
year 2006 from an agency of the United States Government. The increase in the
Commercial, Professional, and Healthcare markets is being driven by higher
demand for the Company's products as industry and consumers become more aware of
the proper disposal of medical sharps (syringes, lancets, etc.). The decrease in
the billings in the Hospitality market is primarily attributable to a $100,000
order billed during the first quarter of fiscal year 2006 from one of the
nation's largest contract food service providers for the Company's biohazard
spill clean-up kit. No such order was billed during the first quarter of fiscal
year 2007.

Cost of revenues for the three months ended September 30, 2006 of $1,693,588 was
57% of revenues. Cost of revenues for the three months ended September 30, 2005
of $1,560,919 was 59% of revenues for the corresponding period. The improvement
in the gross margin (reduced cost of revenue) is a result of increased revenue
and the mix of products sold.

Selling, general and administrative ("S, G & A") expenses for the three months
ended September 30, 2006 of $954,422, increased by $59,898, or 7%, over the SG&A
expenses for the three months ended September 30, 2005. The increase in the SG&A
expenses is primarily a result of increases in the following expenses: (i)
professional fees of $19,580, and (ii) travel expenses of $18,521. The increase
in professional fees is related to the now settled Attentus Medical litigation
and advisory fees. The increase in Travel is directly related to the Company's
increased marketing efforts.

PROSPECTS FOR THE FUTURE

The Company continues to take advantage of the many opportunities in the markets
served as communities, consumers and industries become more aware of the proper
disposal of medical sharps (syringes, lancets, etc.). This education process was
enhanced in March 2004 when the U. S. Environmental Protection Agency ("EPA")
issued its new guidelines for the proper disposal of medical sharps (see
www.epa.gov/epaoswer/other/medical/sharps.htm). Additionally, in July 2006 both
the states of California and Massachusetts passed legislation designed to
mandate appropriate disposal of sharps waste necessary to protect the general
public and workers from potential exposure to contagious diseases and health and
safety risks. Among the methods of disposal recommended as part of the above
noted regulatory actions are mail-back programs such as those marketed by the
Company. The Company believes its future growth will be driven by, among other
items, (i) the positive impact and awareness created by the above noted
regulatory actions as well as additional potential future legislation and (ii)
the effects of the Company's extensive direct marketing efforts.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $57,504 to $354,463 at September 30, 2006
from $296,959 at June 30, 2006. The increase in cash and cash equivalents is
primarily a result of cash generated from operations of $96,270 plus proceeds
from options exercised of $17,850, partially offset by, (i) additions to
property and equipment of $42,207 and (ii) payments on capital lease obligations
of $13,339.

Accounts receivable increased by $276,638 to $1,211,731 at September, 2006 from
$935,283 at June 30, 2006. The increase is a direct result of the increase in
billings generated by the Company for the quarter ended September 30, 2006
versus the quarter ended June 30, 2006.

Property and equipment decreased by $6,537 to $466,850 at September 30, 2006
from $473,387 at June 30, 2006. This decrease is attributable to depreciation
expense of $48,744 for the three months ended September 30, 2006, partially
offset by capital expenditures for the same period of $42,207. The capital
expenditures are attributable to the purchase of, (i) custom software
programming of $25,325, (ii) computer equipment $4,708, and (iii) office and
other equipment of $12,174. The custom software program was incurred to
accommodate the change from FedEx to UPS and an upgrade to the Company's
financial and operations system. The computer equipment was purchased to
facilitate the upgrade of outdated equipment. Other equipment purchased was
related to equipment necessary to accommodate the in-house assembly of the
Company's products.

Stockholder's equity increased by $309,438 from $251,900 to $561,338. This
increase is attributable to (i) net income for the three months ended September
30, 2006 of $291,588 and (ii) the effect of stock options exercised.

As disclosed above in Note 6 of the notes the condensed consolidated financial
statements, the Company sold certain assets, in October 2006, for $50,000 cash
($17,500 of which was paid to an attorney under a contingency fee arrangement).

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

TRENDS

Consistent with the recent revenue growth (12% for the three months ended
September 30, 2006), the trend of earnings and cash from operations continues to
be 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 consistent with the November 2005 amended EPA Clean Air Act (see
Government Regulation - Operations and Incinerator 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. 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 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.

Governmental Regulation

Operations and Incinerator

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

In November 2005, the EPA amended the Clean Air Act which will affect the
operations of the leased incineration facility located in Carthage, Texas. The
regulation modifies the emission limits and monitoring procedures required to
operate an incineration facility. The new rules will necessitate changes to the
Company's leased incinerator and pollution control equipment at the facility or
require installation of an alternative treatment method to ensure compliance.
Such change would require the Company to incur significant capital expenditures
in order to meet the requirements of the regulations. The regulation allows a
minimum period of three years and a maximum of five years to comply after the
date the final rule was published. The Company has studied the amended EPA Clean
Air Act and its options, but has not yet made a decision regarding how it will
comply with the new rules. Should the Company decide to upgrade its incineration
facility to comply with the new regulations or install alternative technology,
it would do so not only to comply with the new regulations but also to
potentially generate additional revenue sources including medical waste disposal
(in additional to the incineration of sharps, syringes, lancets, etc.).

Proper Disposal of Medical Sharps

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

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

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

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

RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," SAB 108 provides
interpretive guidance on the SEC's views regarding the process of quantifying
materiality of financial statement misstatements. SAB 108 is effective for
fiscal years ending after November 15, 2006, with early application for the
first interim period ending after November 15, 2006. The Company does not expect
that the application of SAB 108 will have any material impact on its financial
position and results of operations.

In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements."
SFAS 157 defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands disclosers
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company does not expect the new standard to have
a material impact on its 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

Ameritech Environmental, Inc.
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 incineration services provided by the Company in
2002. In November 2003, Ameritech sold its assets representing collateral for
the judgments to MedSolutions, Inc. of Dallas, Texas ("MedSolutions"). During
January 2004, the Company secured a Garnishment Order against MedSolutions
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%, subject to the terms of the agreement by which MedSolutions purchased the
Ameritech assets. A balloon payment of $137,721 due November 7, 2004, under the
Garnishment Order, was not made by MedSolutions to the Company. This represented
the then outstanding remaining amount due to the Company.

Ronald E. Pierce Matter
On June 14, 2004, the Company provided Mr. Ronald E. Pierce, its then current
Chief Operating Officer ("Mr. Pierce"), with notice of non-renewal of his
employment agreement. As such, July 14, 2004 was Mr. Pierce's last day of
employment. The Company has advised Mr. Pierce that under the terms of the
employment contract no further compensation (including services) was due. The
Company then received various letters from Mr. Pierce's attorney advising that
Mr. Pierce is taking the position that the non-renewal of the employment
agreement was not timely and, therefore, Mr. Pierce was terminated without
cause. Additionally, Mr. Pierce claims that the Company had no right to
terminate him on the anniversary date of his Agreement without the obligation of
paying Mr. Pierce as if he were terminated without cause. Mr. Pierce has
demanded severance related payments totaling approximately $280,000 (including
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.

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

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

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, 4, 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 thereto duly authorized.

REGISTRANT:

SHARPS COMPLIANCE CORP.

Dated: November 9, 2006 By: /s/ Dr. Burton J. Kunik
-------------------------------------
Chairman of the Board of Directors,
Chief Executive Officer and President

Dated: November 9, 2006 By: /s/ David P. Tusa
-------------------------------------
Executive Vice President,
Chief Financial Officer,
Business Development and
Corporate Secretary