The discussion and analysis presented below should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. See "Information Regarding Forward Looking Statements."

RESULTS OF OPERATIONS

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

                                          Year Ended June 30,
                                          2009            2008


Net revenues                                 100 %           100 %
Costs and expenses
  Cost of revenues                           (48 %)          (60 %)
  Selling, general and administrative        (33 %)          (37 %)
  Depreciation and amortization               (2 %)           (3 %)
Total costs and expenses                     (83 %)         (100 %)
  Income from operations                      17 %             0 %
Total other income                             0 %             1 %
  Income tax expense (benefit)                (4 %)            0 %
Net income                                    21 %             1 %

YEAR ENDED JUNE 30, 2009 COMPARED TO YEAR ENDED JUNE 30, 2008

Total revenues for the fiscal year ended June 30, 2009 of $20,297,207 increased
by $7,456,296, or 58%, over the total revenues for the fiscal year ended June
30, 2008, of $12,840,911. Billings by market are as follows:

                                    Year Ended June 30,
                          2009             2008           Variance
                      (Unaudited)      (Unaudited)      (Unaudited)
BILLINGS BY MARKET:
Health Care           $  7,454,100     $  7,293,267     $    160,833
Government               6,254,346          204,403        6,049,943
Retail                   1,932,951        1,124,040          808,911
Pharmaceutical           1,558,211          889,766          668,445
Professional             1,058,759          748,919          309,840
Hospitality                916,850        1,202,330         (285,480 )
Non-Mailable               517,227          457,788           59,439
Commercial                 479,255          617,390         (138,135 )
Agriculture                360,115          502,878         (142,763 )
Other                      143,300          144,120             (820 )
Subtotal                20,675,114       13,184,901        7,490,213
GAAP Adjustment *         (377,907 )       (343,990 )        (33,917 )
Revenue Reported      $ 20,297,207     $ 12,840,911     $  7,456,296

*Represents the net impact of the revenue recognition adjustment required to arrive at reported GAAP revenue. Customer billings include all invoiced amounts associated with products shipped during the period reported. GAAP revenue includes customer billings as well as numerous adjustments necessary to reflect,
(i) the deferral of a portion of current period sales and (ii) recognition of certain revenue associated with products returned for treatment and destruction. The difference between customer billings and GAAP revenue is reflected in the Company's balance sheet as deferred revenue. See Note 2 "Revenue Recognition" in "Notes to Consolidated Financial Statements".

The increase in revenues is primarily attributable to increased billings in the Government ($6,049,943), Retail ($808,911), Pharmaceutical ($668,445), Professional ($309,840), Health Care ($160,833) and Non-Mailable ($59,439) markets. These increases were partially offset by decreased billings in the Hospitality ($285,480), Agriculture ($142,763) and Commercial ($138,135) markets. The increase in the Government market is a result of $6.0 million in billings recorded in the third and fourth quarters of fiscal year 2009 related to the sale of the Company's Sharps®MWMS™ to an agency of the United States Government under the contract announced in February 2009. The increase in the billings in the Retail market is a result of, (i) increased market and customer penetration, (ii) a strong and early start to the 2009 flu shot season (i.e., purchases of the

Sharps Disposal By Mail Systems® by retail clinics who use the products to collect, store and properly dispose of syringes used to administer flu and year-round shots) and (iii) increased purchases of the Sharps Disposal By Mail Systems® by community support programs, primarily in California. The increase in Pharmaceutical market billings is due to the continued sale of the Company's Sharps Disposal By Mail System® products to pharmaceutical manufacturers for use in their patient support and compliance programs. The increase in the Health Care market billings is related to the growing number of patients in the healthcare industry and the success of the Company's recent expansion of its distributor network in the home infusion market. The increase in the Professional market billings is being driven by higher demand for the Company's products as professional offices (doctors, dentists, veterinarians, etc.) are made aware of the Company's Sharps Disposal By Mail System® products as cost-effective and convenient alternatives to the traditional medical waste pick up service. The decrease in the Hospitality market billings is a result of a large order of Biohazard Spill Clean-Up Kits fulfilled during the first and second quarters of fiscal year 2008. The decrease in the Agriculture market is primarily attributable to decreased demand of the Sharps Disposal by Mail System by a customer who provides the product to facilitate the disposal of syringes used to inject dairy cattle due to growing public concern over the use of hormones. The decrease in the Commercial market is a result of several large orders in fiscal year 2008.

Cost of revenues for the year ended June 30, 2009 of $9,840,965 was 48.5% of revenues. Cost of revenues for the year ended June 30, 2008 of $7,770,366 was 60% of revenues. The higher gross margin for the fiscal year ended June 30, 2009 of 51.5% (versus 39.5% for the prior fiscal year) was a result of (i) the higher revenue (i.e. higher coverage of fixed cost components in cost of goods sold, or operating leverage) and (ii) the mix of products and services sold in fiscal year 2009 versus fiscal year 2008.

Selling, general and administrative ("S, G & A") expenses for the twelve months ended June 30, 2009 of $6,092,308, increased by $1,309,776, or 27%, over the S, G & A expenses for the twelve months ended June 30, 2008. The increase in S, G & A expense is primarily due to higher, (i) non-cash 123(R) stock based compensation expense of $332,073, (ii) accrual for management incentive compensation of $329,000, (iii) compensation and benefit expense of $285,971,
(iv) professional fees of $162,988, (v) investor relations expenses of $59,378,
(vi) expenses related to the offsite server hosted facility which facilitates security and disaster recovery, server backup services and enhanced internet service of $59,806, (vii) NASDAQ listing-related expenses of $55,000, (viii) housing-related costs for the Company's former President and Chief Opearting Officer ("COO") of $50,860, (ix) payroll taxes of $33,591, (x) costs related to software post-implementation support of $27,300, (xi) property and casualty insurance expenses of $19,801, (xii) facility expenses of $18,209 and (xiii) general office expenses of $17,734. The increase in non-cash 123(R) stock-based award expense was primarily due to the expense associated with the award of restricted stock in October 2008 to the Company's former President and COO and the award of options in November 2008 to the Chief Financial Officer and the Senior Vice President of Sales. The increase in compensation expense is due primarily to the hiring of the former President and COO in October 2008 (departed in April 2009), increased headcount to support the growth experienced by the Company and increased sales and marketing-related activities. The increase in professional fees was a result of expenses associated with, (i) various regulatory filings, (ii) outside consultation related to the recent U.S. Government contract award, (iii) Form S-8 (Sharps Compliance Corp. 1993 Stock Plan) preparation and related filing expenses, and (iv) legal fees associated with the Ronald Pierce arbitration and general corporate matters. Payroll taxes increased resulting from (i) increased compensation expense and corresponding Company paid portion of payroll tax, (ii) the Company portion of payroll taxes generated from the imputed income related to the October 2008 restricted stock award to the Company's former President and COO (83(b) election) and (iii) the Company portion of payroll taxes generated by the imputed income related to the exercise of employee stock options.

During the fourth quarter of fiscal year 2009, the Company recorded a special charge of $512,372, or $0.02 per diluted share, which represents expenses incurred with the resignation and corresponding termination of employment of the Company's former President and COO. The special charge consists of (i) non-cash 123(R) expense of $300,909 (resulting from accelerated vesting of restricted stock awards), (ii) severance-related items totaling $143,720 (including severance pay and insurance coverage) and (iii) a cash payment of $67,743. During the fiscal year ended June 30, 2008, the Company recorded a special charge of $67,541, $0.00 per diluted share, for severance related costs incurred in conjunction with the termination of a sales person (former Senior Vice President of Sales and Marketing).

The Company generated operating income of $3,464,007 for the year ended June 30, 2009 compared to an operating loss of $696 for the year ended June 30, 2008. The operating margin was 17.1% for the year ended June 30, 2009 compared to 0.0% for the year ended June 30, 2008. The increase in operating income and operating margin is a result of the above mentioned increase in revenue and operating leverage inherent in the Company's business model.

The Company generated income before tax of $3,497,239 (17.2% of revenue) for the year ended June 30, 2009 versus a pre-tax income of $85,019 (1% of revenue) for the year ended June 30, 2008. The increase in pre-tax income is a result of higher operating income (discussed above).

The Company generated net income of $4,197,090 for the year ended June 30, 2009 compared to net income of $81,573 for the year ended June 30, 2008. The increase in net income is a result of higher operating income (discussed above) and the reduction in the deferred tax valuation allowance of $1,806,292 and corresponding credit to tax expense recorded in the quarter ending December 31, 2008 which was a result of the Company's evaluation of the future realization of deferred tax assets and related valuation allowance.

The Company reported diluted earnings per share of $0.30 for the year ended June 30, 2009 versus diluted earnings per share of $0.01 for the year ended June 30, 2008. The increase in diluted earnings per share is a result of higher net income (discussed above).

PROSPECTS FOR THE FUTURE

The Company continues to take advantage of the many opportunities in the markets served as communities, consumers, government and industries become more aware of the proper disposal of medical sharps (syringes, lancets, etc.) and unused dispensed medications. 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. Currently there are a total of seven states with legislation banning the disposal of used syringes in the trash, five states considering similar legislation, while the remaining states operate under the EPA guidance noted above. In August 2008, the U.S. House of Representatives and U.S. Senate introduced bills 3251 and 1909, respectively, which would provide for Medicare reimbursement, under part D, for the safe and effective disposal of used needles and syringes. Among the methods of disposal recommended as part of the above noted regulatory actions are mail-back programs such as those marketed by the Company. The Company estimates that there are an estimated two to three billion used syringes disposed of in the United States outside of the hospital setting. Additionally, the Company estimates that it would require 30 to 40 million Sharps Disposal by Mail System® products to properly dispose of all such syringes, which would equate to a $1 billion small quantity generator market opportunity. Based upon the current level of sales, the Company estimates that this $1 billion market has only been penetrated by approximately 1% or less.

The Company continues to develop new products and services including the Sharps® MWMS™, the RxTakeAway™ line of products and 18 gallon Medical Professional Sharps Disposal by Mail System®. The Company continues to develop products and services designed to facilitate the proper and cost effective disposal of medical waste generated outside the hospital and large healthcare facilities and of unused dispensed medications. The Company believes its future growth will be driven by, among other items, (i) the positive impact and awareness created by the existing and above noted regulatory actions as well as additional potential future legislation, (ii) the effects of the Company's extensive direct marketing efforts and (iii) the Company's leadership position in the development and sale of products and services designed to properly and cost effectively dispose of medical waste generated outside the hospital and large healthcare setting and unused dispensed medications..

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

The Company anticipates a strong flu shot business (included in the Retail market billings) in light of the global concern over the H1N1 flu virus. While the flu shot business traditionally positively impacts the quarter ended September 30, the Company believes that both the September 30, 2009 and December 31, 2009 quarters could be positively impacted by the flu shot season. Additionally, the Company recorded higher flu shot related billings in the quarter ended June 30, 2009 in

conjunction with the early start of the flu shot season related orders.

The Company is actively marketing its Sharps®MWMS™ to federal, state and local agencies as well as to large corporations. On February 2, 2009, the Company announced a $40 million contract award (the "U.S. Government Contract") award to provide its Sharps®MWMS™ to an agency of the United States Government. The total contract is valued at approximately $40 million and is expected to be executed over a five year period. The Company has received a purchase order for $28.5 million which represents products and services to be provided during the first contract year of which $3.0 million was billed in the quarter ended March 31, 2009 and $3 million in the quarter ended June 30, 2009. The following four option years represent payment for program maintenance (see description of Services below).

The Sharps®MWMS™, a Medical Waste Management System, is a comprehensive medical waste solution which includes an array of products and services necessary to effectively collect, store and dispose of medical waste in the alternate site market (i.e., outside of the hospital or large healthcare facility setting) . The System, which is designed for rapid deployment, features the Sharps Disposal By Mail System® products (the "Products") combined with warehousing, inventory management, training, data and other services (the "Services") necessary to provide a comprehensive solution. The Sharps®MWMS™ is designed to be an integral part of governmental and commercial emergency preparedness programs.

The Company recognizes revenue for the Product portion of the contract in accordance with the revenue recognition policy for the Sharps Disposal By Mail System® products. The Services portion of the contract, described above, is recognized as revenue as services are performed.

The Company recognized $3 million from the above mentioned contract in the quarter ended March 31, 2009 and $3 million in the quarter ended June 30, 2009. Based upon the current production schedule, the Company expects to recognize revenue of about $11.1 million in the first fiscal year 2010 quarter ending September 30, 2009 and an additional $11.5 million of revenue in the second fiscal year 2010 quarter ending December 31, 2009. The remaining $11.5 million is expected to be earned over the fiscal years 2011 through 2014.

The Company serves many markets including, but not limited to, Healthcare, Government, Professional, Pharmaceutical, Industrial, Agriculture and Hospitality. As shown in the results for the fiscal year ended June 30, 2009, the Company has not experienced any downturn in its overall business, rather an increase in the majority of markets in which it serves. Order activity and purchase trends remain positive. Additionally, the Company (i) expects a very strong flu shot business for the 2009 flu season as a result of the recent concerns regarding the H1N1 virus (as discussed above) and (ii) believes it will experience significant growth over the next two quarters (ending September 30, 2009 and December 31, 2009) as it continues to execute on its recently announced $40 million U.S. Government project. While the Company's current earnings, cash flows and liquidity are strong, they are expected to increase significantly over the next two quarters. The Company currently has no debt, an undrawn $2.5 million line of credit and does not expect to raise funds (debt or equity) for the foreseeable future.

The above amounts are estimates only and are subject to change. Although the Company believes the amounts above to be reasonable based upon its current project plan, it makes no assurances regarding the actual recognition of revenue by fiscal year, which could vary significantly from that noted above.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $2,756,651 to $4,791,870 at June 30, 2009 from $2,035,219 at June 30, 2008. The increase in cash is due to cash generated by operating activities of $4,795,918 plus proceeds from the exercise of stock options of $451,470 and excess tax benefits from stock-based award activity of $15,036 partially offset by additions to property and equipment (i.e. capital expenditures) and intangible assets of $2,505,773.

Accounts receivable increased by $422,440 to $1,606,415 at June 30, 2009 from $1,183,975 at June 30, 2008. The increase is primarily due to a $426,000 billing in the fourth quarter of the 2009 fiscal year related to the launch of the Company's latest patient support and compliance program for a major pharmaceutical manufacturer.

Inventory increased by $1,701,643 to $2,282,504 at June 30, 2009 from $580,861 at June 30, 2008. The increase in inventory is attributable to (i) the production of products in conjunction with the U.S. Government Contract (ii) the build up of inventory in advance of the anticipated growth in the 2009 flu season and (iii) bulk purchases of Sharps Secure® and

Pitch-It™ IV Poles which are manufactured overseas (six to eight weeks of product sales ordered at a time).

Deferred income tax benefits of $3,123,742 were recorded in the quarter ended December 31, 2008 due to the Company's decision to reduce the deferred tax valuation allowance to zero. The decision was made after evaluation of the following circumstances (i) recent $40 million U.S. Government contract award to the Company and the corresponding anticipated taxable income, (ii) the anticipated taxable income for third and fourth quarters of fiscal 2009 and the full fiscal year 2010 and (iii) the expected utilization in fiscal 2009 and 2010 of the remaining net operating loss carry forward. At the fiscal year ended June 30, 2009 the deferred income tax benefit balance was $2,138,007.

Property and equipment increased by $2,069,396 to $3,445,053 at June 30, 2009 from $1,375,657 at June 30, 2008 due to capital expenditures of $2,461,085 partially offset by depreciation expense of $391,689. The capital expenditures are attributable primarily to, (i) warehouse racking, warehouse equipment and assembly equipment of $973,668 related to the expansion of the Company's warehouse facilities and corresponding growth, (ii) autoclave installation of $494,085, (iii) new operating and accounting system software implementation and enhancement fees of $389,945, (iv) treatment facility improvements of $371,873,
(v) molds, dies and printing plates for production of $98,231, (vi) computer and phone equipment of $51,533, (vii) office furniture and equipment of $44,352 and
(viii) other capital expenditures of $37,398.

Accounts payable increased by $1,720,723 to $2,499,146 at June 30, 2009 from $778,423 at June 30, 2008. The increase is a result of additional raw materials purchases and equipment needed to facilitate growth in the Company's fourth quarter of fiscal year 2009.

Accrued liabilities increased by $755,618 to $1,188,589 at June 30, 2009 from $432,971 at June 30, 2008. The increase is a result of (i) accrual for management incentive compensation of $329,000 recorded in June 2009, (ii) accrual for customer rebates of approximately $140,000, (iii) accrual for special charge related costs of $78,000, (iv) accrued federal (AMT) and Georgia state income taxes of $58,143, (v) increase in year-end payroll accrual of $41,034 and (vi) accrued sales-related commissions of $36,894.

Stockholder's equity increased by $6,684,852 from $2,885,536 to $9,570,388. This increase is attributable to, (i) net income for the year ended June 30, 2009 of $4,197,090, (ii) the increase in additional paid-in capital of $1,317,450 resulting from the reduction of the deferred tax valuation allowance from tax benefits of stock compensation was recorded in the quarter ended December 31, 2008 (iii) the effect of the exercise of stock options to purchase 435,100 common stock with proceeds of $451,470 (average exercise price of $1.04) to the Company, (iv) the effect on equity of SFAS 123R non-cash stock-based compensation expense of $703,806 and (v) the excess tax benefits from stock-based award activity of $15,036.

Management believes that the Company's current cash resources (cash on hand and cash generated from operations) along with its $2.5 million line of credit with JPMorgan Chase Bank, N.A. will be sufficient to fund operations for the twelve months ending June 30, 2010. Terms of the line of credit are expected to be renewed in March 2010 under similar terms currently in place.

Disposal Facility

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

In February 2009, the Company installed an autoclave system and technology capable of treating up to seven tons per day of medical waste at the same facility. Autoclaving is a process that treats medical waste with steam at high temperature and pressure to kill pathogens. The autoclave is a technology that is a cost-effective alternative to traditional incineration. It also supplements the disposal treatment capacity of the Company and is an integral part of the disposal operations as the Company utilizes both incineration and autoclave technology in its day-to-day operations. The autoclave system is not impacted by the EPA amended Clean Air Act (discussed below).

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

In November of 2005 and September of 2009, the EPA amended the Clean Air Act which will affect the operations of the

incineration facility located in Carthage, Texas. The regulation modifies the emission limits and monitoring procedures required to operate an incineration facility. The new rules will necessitate changes to the Company's owned incinerator and pollution control equipment at the facility or require installation of an alternative treatment method to ensure compliance. Such change would require the Company to incur significant capital expenditures in order to meet the requirements of the regulations. The regulation allows a minimum period of three years and a maximum of five years to comply after the date the final rule was published. The Company has studied the current amended EPA Clean Air Act and its options, and decided in the interim to move forward with the process of adding alternative technology, autoclaving, which meets the EPA Clean Air Act requirements (see above), for medical waste disposal which became fully operational in February 2009 at its current facility in Carthage, Texas. Autoclaving is a process that treats regulated waste with steam at high temperature and pressure to kill pathogens. Combining the autoclaving with a shredding or grinder process allows the waste to be disposed in a landfill operation. The Company believes autoclaving is environmentally cleaner and a less costly method of treating medical waste than incineration. Due to its continued growth, the Company has decided that it will incur additional capital expenditures needed in order to meet the new regulations. The additional capital expenditures are estimated to range from approximately $1.0 to approximately $2.5 million and would increase its permitted incineration capacity from eleven tons per day to forty tons per day (limited to four tons per day, or 10% of permitted capacity, of medical waste treatment).

INFLATION

The Company does not believe that inflation has had a material effect on the results of operations during the past three years. However, there can be no assurance that the Company's business will not be affected by inflation in fiscal year 2010 and beyond.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following tables set forth selected quarterly information for fiscal years
2009 and 2008. We believe that all necessary adjustments have been included in
the amounts below to present fairly the results of such periods.

                                                                             Quarter Ended
                                                September 30,     December 31,
. . .