UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-QSB

/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001

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

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

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

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

(713) 432-0300
Registrant's telephone number

Securities Registered under 12(g) of the Exchange Act: TITLE OF EACH CLASS
-------------------
Common Stock, $0.01
Par Value

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

Number of shares outstanding of the issuer's Capital Stock as of November 11,
2001: 9,805,356

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
-September 30, 2001 (Unaudited) and
June 30, 2001...........................................3
Unaudited Condensed Consolidated
Statements of Operations -
For the three months ended September 30,
2001 and 2000...........................................4
Unaudited Condensed Consolidated
Statements of Cash Flows -
For the three months ended September
30, 2001 and 2000.......................................5
Notes to Unaudited Condensed Consolidated
Financial Statements ...................................6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................7

PART II OTHER INFORMATION

Item 1. Legal Proceedings.......................................9

Item 6. Exhibits and Reports on Form 8-K........................9

SIGNATURE.......................................................10

PART I FINANCIAL INFORMATION

ITEM 1......FINANCIAL STATEMENTS

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, JUNE 30,
ASSETS 2001 2001
----------- -----------

(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 144,365 $ 107,275
Short-term investments .............................................. 194,510 237,941
Accounts receivable, net ............................................ 628,168 709,274
Inventory ........................................................... 243,594 223,207
Prepaids and other .................................................. 119,183 149,740
----------- -----------

Total current assets ..................................... 1,329,820 1,427,437

PROPERTY AND EQUIPMENT, net ........................................... 227,349 221,427

INTANGIBLE ASSETS, net ................................................ 35,429 40,490

NOTE RECEIVABLE FROM STOCKHOLDER ...................................... 320,000 320,000

OTHER ASSETS .......................................................... 18,095 11,695
----------- -----------

Total assets ............................................. $ 1,930,693 $ 2,021,049
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:

Accounts payable .................................................... $ 533,056 $ 560,954
Accrued liabilities ................................................. 187,042 131,948
Current portion of accrued disposal costs ........................... 720,832 662,632
Current portion of deferred revenue ................................. 97,274 85,843
Current maturities of notes payable ................................. 79,995 129,299
----------- -----------
Total current liabilities ................................ 1,618,199 1,570,676

LONG TERM ACCRUED DISPOSAL COSTS, net of current portion .............. 272,127 253,518
LONG TERM DEFERRED REVENUE, net of current portion .................... 45,776 40,396
NOTES PAYABLE, net of current maturities .............................. 1,164 2,745
----------- -----------

Total liabilities ........................................ 1,937,266 1,867,335

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value per share; 1,000,000 shares authorized;
-0- shares issued and outstanding .............................. -- --
Common stock, $.01 par value per share; 20,000,000 shares authorized;
8,705,356 shares issued and outstanding ........................ 87,053 87,053
Additional paid-in capital .......................................... 5,572,598 5,572,598
Accumulated deficit ................................................. (5,666,224) (5,505,937)
----------- -----------

Total stockholders' equity (deficit) ..................... (6,573) 153,714
----------- -----------

Total liabilities and stockholders' equity (deficit) ..... $ 1,930,693 $ 2,021,049
=========== ===========

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

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
----------------------------------------
2001 2000
----------- -----------

REVENUES:
Distribution, net .................................. $ 1,495,758 $ 948,125
Environmental ...................................... 203,356 6,547
Consulting services ................................ 3,296 35,001
----------- -----------
Total revenues ............................... 1,702,410 989,673

COSTS AND EXPENSES:

Cost of revenues ................................... 1,144,177 536,229
Selling, general and administrative ................ 698,782 717,199
Depreciation and amortization ...................... 32,190 25,339
----------- -----------
Operating loss ............................... (172,739) (289,094)

INTEREST INCOME, net ................................... 12,452 10,267
----------- -----------
Net loss ..................................... $ (160,287) $ (278,827)
=========== ===========

BASIC AND DILUTED NET LOSS PER SHARE ................... $ (.02) $ (.04)
=========== ===========

SHARES USED IN COMPUTING NET LOSS PER
SHARE, BASIC AND DILUTED ........................... 8,705,356 7,952,531
=========== ===========

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

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
-----------------------------------
2001 2000
----------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $ (160,287) $ (278,827)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization ..................................... 32,190 25,339
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable ........................ 81,106 (5,425)
(Increase) decrease in inventory .................................. (20,387) 21,658
(Increase) decrease in prepaids and other assets ................. 24,157 (12,390)
Increase in accounts payable and
accrued liabilities ......................................... 27,196 95,758
Increase in accrued disposal costs ................................ 76,809 3,397
Increase in deferred revenue ...................................... 16,811 43,909
----------- -----------
Net cash provided by (used in) operating activities .............. 77,595 (106,581)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................ (33,051) (61,818)
Sales of short-term investments .................................... 50,000 40,984
Purchases of short-term investments ................................ (6,569) (500,000)
----------- -----------
Net cash provided by (used in) investing activities ............. 10,380 (520,834)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable .......................................... (50,885) (20,140)
Issuance of common stock ........................................... -- 1,000,000
----------- -----------
Net cash provided by (used in) financing activities ............. (50,885) 979,860
----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS ........................................................ 37,090 352,445
CASH AND CASH EQUIVALENTS, beginning of period ........................ 107,275 153,346
----------- -----------
CASH AND CASH EQUIVALENTS, end of period .............................. $ 144,365 $ 505,791
=========== ===========

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

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2001

1. ORGANIZATION AND BUSINESS:

ORGANIZATION

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

BUSINESS

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

Waste generators who use the Sharps Disposal by Mail (TM) System are
responsible for mailing the systems to the Panola County Resource Recovery
Facility (the "Disposal Facility") for incineration. Effective July 1, 2000,
the Company entered into an agreement with the City of Carthage, Texas and
Panola County (collectively, the "City") to manage and operate the Disposal
Facility. The length of the agreement is three years, and Sharps is
responsible for maintaining the Disposal Facility as required by federal,
state, local and/or regulatory agencies. Prior to July 1, 2000, Sharps paid
the City to perform the incineration services. Sharps is also responsible for
paying the postage costs associated with the Sharps Disposal by Mail (TM)
System being mailed to the Disposal Facility by the waste generators.

Prior to July 1, 2000, Sharps recorded accrued disposal costs for both
postage and incineration based on the number of Sharps Disposal by Mail(TM)
Systems sold that management estimated would eventually be returned for
incineration. However, for sales subsequent to June 30, 2000, Sharps accrues
only for estimated postage costs as the Company assumed operation of the
Disposal Facility effective July 1, 2000. For sales subsequent to June 30,
2000, deferred revenue is recorded for non-refundable payments received for
which the incineration services have not been performed, and incineration
costs are expensed as incurred. The amount deferred is based on objective
evidence of the value of the services not performed. Sharps estimates returns
of the Sharps Disposal by Mail(TM) Systems based on historical experience.
The amount and timing of accrued disposal costs are adjusted prospectively
for revisions in the estimated disposal costs and return rate, if any.
Depending upon the experience of Sharps, such revisions could be significant.
As of September 30, 2001, the Company has reclassified a portion of its
disposal liability as long-term, based on historical experience and
management's estimate of when returns of the Sharps Disposal by Mail System
will occur. During the three months ended September 30, 2001 and 2000, the
Company accrued $228,915 and $176,977, respectively, for estimated disposal
costs and funded $152,106 and $173,580, respectively, of actual disposal
costs.

Sharps continues to sole-source each of its transportation and software
development functions. Sharps may be affected by its dependence on the suppliers
of these functions. Management believes the risk is mitigated by the
long-standing business relationships with and reputation of Sharps' suppliers.
Although there are no assurances with regard to the continued future business
associations after expirations of certain agreements between Sharps and its
suppliers, management believes that alternative sources would be available at
similar costs due to the generic nature of the products and services offered.

identification and penetration of additional markets for its products and
services. On October 12, 2001, the Company completed a private placement of
1,100,000 shares of its common stock for net proceeds of $1.2 million.
Management believes that the Company's current resources, including its
October private placement proceeds, will be sufficient to fund operations
through at least fiscal year 2002.

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 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 financial position of the Company as of September 30, 2001,
the results of its operations for the three months ended September 30, 2001 and
2000, and its cash flows for the three months ended September 30, 2001 and 2000.
The results of operations for the three months ended September 30, 2001, are not
necessarily indicative of the results to be expected for the entire fiscal year
ending June 30, 2002. 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, 2001.

3. REVENUE RECOGNITION

Sharps has adopted Staff Accounting Bulletin No. 101, "Revenue Recognition"
("SAB No. 101"), which provides guidance related to revenue recognition based on
interpretations and practices followed by the Securities and Exchange
Commission. Adoption of SAB No. 101 did not have a material effect on the
Company's financial position or results of operations, although its revenue
recognition has been modified for a change in business that occurred in July
2000 (See Note 1).

Prior to July 1, 2000, product sales were recognized as revenue when the Sharps
Disposal by Mail(TM) System was delivered and accepted by the customer.
Effective July 1, 2000, the Company assumed responsibility for operation of the
Disposal Facility and, accordingly, began deferring a portion of the product
sales revenue associated with providing the incineration service. Deferred
revenue is recognized when the Sharps Disposal by Mail(TM) Systems sold are
returned to the Disposal Facility and incinerated. The deferral amount is based
on objective evidence of fair value for the incineration function, based on
sales of this service to other third parties. Further, the deferral amount is
based on the number of Sharps Disposal by Mail(TM) Systems that management
estimates will eventually be incinerated at the Disposal Facility. Deferred
revenue will be adjusted prospectively for revisions in the estimated return
rate, if any. Depending upon the experience of the Company, such revisions could
be significant.

4. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 covers all
legally enforceable obligations associated with the retirement of tangible
long-lived assets and provides the accounting and reporting requirements for
such obligations. SFAS No. 143 is effective for the Company's fiscal year
beginning July 1, 2002. The Company is currently evaluating the impact that
adoption of this standard will have on its financial statements.

In August 2001, the FASB Issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long Lived Assets". The FASB's new rules on asset impairment
supersede SFAS No. 121. "Accounting for the Impairment of Long Lived Assets
and for Long Lived Assets to be Disposed Of" and will be effective for the
Company's fiscal year beginning July 1, 2002. The Company is currently
evaluating the impact that adoption of this standard will have on its
financial statements.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
AND INFORMATION RELATING TO SCC AND ITS SUBSIDIARIES THAT ARE BASED ON THE
BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND
INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED IN THIS
REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "INTEND" AND WORDS OR
PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO SCC OR ITS SUBSIDIARIES OR COMPANY
MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
REFLECT THE CURRENT RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN
FACTORS INCLUDING, WITHOUT LIMITATIONS, COMPETITIVE FACTORS, GENERAL ECONOMIC
CONDITIONS, CUSTOMER

RELATIONS, RELATIONSHIPS WITH VENDORS, GOVERNMENTAL REGULATION AND SUPERVISION,
SEASONALITY, DISTRIBUTION NETWORKS, PRODUCT INTRODUCTIONS AND ACCEPTANCE,
TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY PRACTICES, ONETIME EVENTS AND OTHER
FACTORS DESCRIBED HEREIN. BASED UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE
OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY UNDERLYING
ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE
DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED OR INTENDED. THE
COMPANY DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS.

GENERAL

The Company's total revenues were approximately $1.7 million for the quarter
ended September 30, 2001, compared to revenue of approximately $1.3 million
for the quarter ended June 30, 2001, for an increase of $370,000. The
increase in revenue is attributed primarily to the increased acceptance of
the Company's Sharps Disposal by Mail System with the addition of one new
distributor in the homecare market and entering the retail market by adding
three new distributors to service the residential customer. Additionally,
revenues increased for Environmental (Incinerator Services) due to a
short-term service contract with a third party.

Cost of Revenue increased 2% (as a percentage of revenue) during the quarter
ended September 30, 2001 compared to the quarter ended June 30, 2001. The
increase is due to operational inefficiencies and incremental costs
associated with a short-term service contract for Incinerator Services with a
third party.

Selling, general and administrative expenses decreased approximately $217,000
in the quarter ended September 30, 2001 compared to the quarter ended June
30, 2001. The reduction of expenses is a result of overhead cost
restructuring initiatives and the timing of expenses. Further, during the
quarter ended June 30, 2001 an expense of $138,000 was recorded for option
grants to non-employees.

The Company reported a net loss of ($160,287) or ($0.02) per share in the
quarter ended September 30, 2001, compared to a net loss of ($459,622) or
($0.05) per share in the quarter ended June 30, 2001.

RESULTS OF OPERATIONS

The discussion below analyzes changes in the consolidated operating results and
financial condition of the Company during the three months ended September 30,
2001 and 2000.

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

THREE MONTHS ENDED
SEPTEMBER 30,
2001 2000
--------- ---------

Net revenues ................................ 100% 100%
Costs and expenses:
Cost of revenues ......................... (67%) (54%)
Selling, general and administrative ...... (41%) (72%)
Depreciation and amortization ............ (2%) (3%)
--------- ---------
Total operating expenses .................... (110%) (129%)
--------- ---------
Loss from operations ................... (10%) (29%)
Total other income .......................... 1% 1%
--------- ---------
Net loss .................................... (9%) (28%)
========= =========

QUARTER ENDED SEPTEMBER 30, 2001 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2000

The Company's distribution revenues were approximately $1.5 million for the
quarter ended September 30, 2001, compared to revenues of approximately
$948,000 for the quarter ended September 30, 2000. The increase in revenue is
attributed primarily to the increased acceptance of the Company's Sharps
Disposal by Mail System with the addition of one new distributor in the
homecare market and entering the retail market by adding three new
distributors to service the residential customer. Also, revenue for the
quarter ended September 30, 2000 was low due to fluctuations between periods
based upon the timing and level of sales to distributors.

Incinerator Services revenue was approximately $203,000 for the quarter ended
September 30, 2001 compared to $6,500 for the quarter ended September 30,
2000. The increase was due to a short-term service contract with a third
party that ended in September 2001. Additionally, the period ended September
30, 2000 was the first period of operation of the Disposal facility by the
Company.

Cost of Revenue increased 13% (as a percentage of revenue) during the quarter
ended September 30, 2001 compared to the quarter ended September 30, 2000.
The increase is due to operational inefficiencies and incremental costs
associated with a short-term service contract with a third party for
Incinerator Services and higher shipping costs.

Selling, general and administrative expenses decreased to approximately $699,000
(or 41% of revenue) for the quarter ended September 30, 2001 from $717,000 (or
72% of revenue) for the quarter ended September 30, 2000. The $18,000 decrease
is a result of overhead cost restructuring initiatives.

The Company narrowed the net loss from operations from 2000 to 2001 by
approximately $118,000, or 43%. This improvement is a result of continued
revenue growth of the Sharps Disposal by Mail(TM) Systems and increased
incinerator services revenue, which was partially offset by an increase in
cost of revenue, primarily related to incineration activities with third
parties and higher shipping costs.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2001, the Company had approximately $339,000 in cash and
short-term investments and current assets were exceeded by current liabilities
by approximately $288,000. On October 12, 2001, the Company significantly
improved its working capital position through the completion of a private
placement of 1,100,000 shares of its common stock for net proceeds of $1.2
million. As of November 5, 2001, the Company had approximately $1.3 million in
cash and short-term investments.

Capital expenditures during the quarter ended September 30, 2001 were
approximately $33,000 and consisted primarily of purchases for improvements to
the Disposal Facility.

At September 30, 2001, total long-term debt outstanding was approximately
$1,200 for the Company.

Sharps has incurred significant losses from operations since its inception
and has a working capital deficit at September 30, 2001. There can be no
assurance that Sharps will ever attain profitable operations or will be able
to generate sufficient revenue levels to support operations. The future
success of Sharps is dependent upon many factors, including environmental
regulation, continuity of its distributorship agreements, maintaining an
agreement with a disposal facility, successful completion of its product
development activities and the identification and penetration of additional
markets for its products and services. On October 12, 2001, the Company
completed a private placement of 1,100,000 shares of its common stock for net
proceeds of $1.2 million. Management believes that the Company's current
resources, including its October private placement proceeds, will be
sufficient to fund operations through at least fiscal year 2002.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

The following exhibit is filed as part of this report.

EXHIBIT NO. DESCRIPTION
----------- -----------

None

b) Reports on Form 8-K

None.

ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

SIGNATURE

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 14, 2001 By: /s/ Gary L.Shell
----------------------------
Vice President and
Chief Financial Officer

Dated: November 14, 2001 By: /s/ Dr. Burt Kunik
----------------------------
President and Chief
Executive Officer