U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[ ] Annual  report under Section 13 or 15(d) of the  Securities  Exchange Act of
    1934 for the fiscal year ended December 31, 1996

[ ] Transition report under Section 13 or 15 (d) of the Securities  Exchange Act
    of 1934 For the transition period from ______________ to _____________
                                        

                       Commission file number: 2-85008-NY

                           Medical Sterilization, Inc.
        (Exact name of Small Business Issuer as specified in its charter)

                    NEW YORK                             11-2621408
         (State or other jurisdiction of              (I.R.S. Employer
          incorporation or organization)             Identification No.)

   225 UNDERHILL BOULEVARD, SYOSSET, NEW YORK                 11791
    (Address of principal executive offices)               (Zip Code)

                                 (516) 496-8822
                (Issuer's telephone number, including area code)

   Securities registered pursuant to Section 12 (b) of the Exchange Act: NONE

    Securities registered pursuant to Section 12(g) of the Exchange Act: NONE


Check  whether  the Issuer:  (1) has filed all  reports  required to be filed by
Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding
12 months (or for such shorter  period that the Issuer was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days.   X  Yes     No

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

The  Issuer's  revenues  for the  fiscal  year  ended  December  31,  1996  were
$8,626,000.  As of March 17, 1997,  the  aggregate  market value of the Issuer's
voting stock (including common stock,  Series B Convertible  Preferred Stock and
Series C Convertible  Preferred Stock) held by non-affliiates  was approximately
$2,446,911 based on the average bid and asked price of the Issuer's Common Stock
on March 17, 1997 as reported on the Nasdaq Bulletin Board System.

As of March 17, 1997,  there were 3,170,496 shares of the Issuer's Common Stock,
par value $.01 per share, issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
Parts of the  following  document are  incorporated  by reference in Part III of
this Form 10-KSB:  (1) Proxy  Statement for the Issuer's 1997 Special Meeting in
Lieu of Annual Meeting of Shareholders - Items 9, 10, 11 and 12.


                                        1




                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

OVERVIEW

         Medical Sterilization,  Inc. ("MSI" or the "Company") provides off-site
reprocessing  and   sterilization  of  the  Company's   standard   containerized
reprocessable sterilized surgical instrument sets ("Instrument Sets") as well as
certain  other  items  requiring   sterilization   ("Sterilizable   Items")  for
healthcare  providers such as hospitals and ambulatory  surgi-centers.  MSI also
provides contract steam and radiation  sterilization  services for manufacturers
of disposable  medical  products such as bandages,  sponges,  tracheotomy  kits,
surgical  gloves and  laboratory  ware.  In addition,  the Company  utilizes its
electron beam  radiation  accelerator  (the  "Accelerator")  to process  various
industrial products and to perform certain  modifications to those products.  In
furtherance  of its  decision  to  focus  on its  Instrument  Set  sterilization
processing  business,  on March 17, 1997, MSI agreed to sell its  Accelerator to
Shamrock Technologies,  Inc. ("Shamrock") with title to pass no later than April
30, 1998. Furthermore,  in order to maximize the value of its remaining contract
sterilization  and industrial  processing  business and to provide stability for
its  accelerator  processing  customers,  on March 19, 1997,  MSI entered into a
Letter of Intent to establish a joint marketing  agreement with E-BEAM Services,
Inc. ("E-BEAM").

         The  Company  provides  its  off-site  reprocessing  and  sterilization
services and  pre-sterilized  reprocessable  Instrument  Sets to  hospitals  and
ambulatory  surgi-centers  within a radius of 75 miles of its Syosset,  New York
facility.  As of March 25, 1997, MSI had 15 contracts with healthcare  providers
in its area of  operations  to provide  its  instrument  services  for labor and
delivery; 22 contracts to provide its instrument services for operating rooms; 4
contracts to provide laparoscopic instruments;  5 contracts to provide basins; 5
contracts  to provide  gowns  and/or  towels;  and 2  contracts  to provide  its
instrument services for open heart surgery. Future revenues from these contracts
as of March 25, 1997 is  approximately  $12,221,000.  The Company  provides  its
contract  steam  and  radiation   sterilization  services  to  manufacturers  of
disposable  medical  products within a 300 mile radius of its Syosset  facility.
The Company  currently  provides  sterilization  services for  approximately  48
medical  products  manufacturers  such  as  Busse  Hospital  Disposables,  Elkay
Products, Inc. and Hermitage Hospital Supply Corp., and estimates that there are
approximately  200 such  manufacturers  in its  operating  area.  MSI  processes
industrial products for approximately 18 industrial companies principally in the
Northeastern United States and processes  polytetrafluoroethylene ("PTFE"), also
known as "Teflon" ( a  registered  trademark  of E.I.  DuPont de Nemours & Co.),
solely for Precision Micron Powders, Inc., ("Precision"),  a distributor of PTFE
owned by Shamrock,  and for Shamrock.  See  "Radiation  Processing of Industrial
Products".

         The  Company  was  founded in May 1982 as a New York  corporation.  Its
principal executive offices are located at 225 Underhill Boulevard, Syosset, New
York 11791, and its telephone number is (516) 496-8822.

         Statements  in  this  Form  10-KSB  which  are  not  historical  facts,
so-called  "forward-looking  statements",  are made  pursuant to the safe harbor
provisions of the Private

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Securities  Litigation  Reform Act of 1995.  Investors  are  cautioned  that all
forward-looking  statements  involve risks and  uncertainties,  including  those
detailed  herein and in the  Company's  other  filings with the  Securities  and
Exchange  Commission.  See "Item 6.  Management's  Discussion  and  Analysis  of
Financial  Condition and Results of  Operations-Certain  Factors That May Affect
Future Results".

STERILIZATION SERVICES FOR HEALTHCARE PROVIDERS

         MSI  provides  off-site  cleaning,  decontamination  and  sterilization
processing  of the Company's  standard  containerized  reprocessable  sterilized
surgical Instrument Sets as well as Sterilizable Items for healthcare  providers
such as hospitals and  ambulatory  surgi-centers  within a radius of 75 miles of
its  Syosset,  New  York  facility.  As of March  25,1997,  the  Company  had 53
sterilization service contracts with hospitals and ambulatory surgi-centers with
approximate future revenues in the aggregate value of $12,221,000. Demonstrating
the Company's range of services to health care  providers,  15 contracts were to
provide instrument services for labor and delivery, 22 contracts were to provide
instrument  services for operating rooms, 2 contracts were to provide instrument
services  for open heart  surgery,  4  contracts  were to  provide  laparoscopic
instruments,  5 contracts were to provide basins and 5 contracts were to provide
gowns and/or towels. The Company estimates that there are approximately 250 such
healthcare providers in its operating area.

         Sterilizable  Items  consist  of  Instrument  Sets,  utensils,  basins,
towels,  surgical gowns and wraps and other items used in healthcare  facilities
which  require  sterilization.  Instrument  Sets  are  prepackaged,  sterilized,
reprocessable  instrument  sets,  each of which is a complete set of instruments
necessary for a given medical procedure.  The Company has designed approximately
85  different  Instrument  Sets for  operating  room  procedures  and  labor and
delivery, including gall bladder,  tonsillectomy and adenoidectomy,  open heart,
vascular,   orthropedic,   endoscopy,   cesarean  sections,   newborn  delivery,
hysterectomy  and dilation and curettage.  MSI packages its  Instrument  Sets in
rigid containers with filters and seals,  thereby  maintaining sterile integrity
without  the risk of  tearing  and  pinholes  which  occur  in more  traditional
wrappers.  The Instrument  Sets aid in the  organization  of the instruments for
ease of use and provide for better instrument  accountability once the procedure
is completed.  Once an Instrument Set has been  utilized,  it is returned to the
Company for cleaning, sterilization and repackaging.

         The  Company's  services  are  designed  to replace or  supplement  the
existing  in-house  sterilization  facilities  of  healthcare  providers.   Many
hospitals  have older,  less  efficient  sterilization  facilities,  staff their
facilities with nurses whose skills could be more effectively used elsewhere and
underutilize  their  sterilization  facilities by operating their equipment only
once per day. Because of the relatively low volume of  sterilization  activities
undertaken at many of these facilities,  worker  productivity may not be as high
as  in  other  areas  of  the  healthcare  organization,   causing  concern  for
administrators.  In addition, as hospitals continue to evaluate ways in which to
utilize  their  available  space better,  many  hospitals are seeking to replace
their in-house  sterilization  facilities with profit generating centers such as
operating  rooms.  Many  hospitals are also looking for ways in which to improve
operating room efficiency by eliminating the sterilization processing delays and
shortages sometimes experienced with their in-house sterilization facilities.

                                        3





         By  utilizing  state  of the art,  industrial  size  equipment,  modern
sterilization technology, less expensive labor, and handling larger volumes, the
Company believes that it offers a cost- effective,  high quality  alternative to
in-house  sterilization  facilities.  The Company processes  Instrument Sets and
Sterilizable Items for numerous  customers and has installed modern,  industrial
size  sterilization  equipment  at its Syosset  facility,  including  ultrasonic
cleaners,  two tunnel  washers,  two 300 cubic foot steam  sterilizers  and an 8
cubic foot Ethylene Oxide ("EtO") sterilizer.

         The Company believes that it offers better  sterility  assurance levels
than those  maintained at many hospitals.  In order to comply with the infection
control  requirements  of the Joint  Commission on  Accreditation  of Healthcare
Organizations ("JCAHO"), the Center for Disease Control ("CDC"), the Association
for  Advancement  of  Medical  Instrumentation   ("AAMI"),  the  Association  of
Operating Room Nurses  ("AORN"),  the policies and procedures of each respective
hospital  as well as the  requirements  of federal,  state and local  government
agencies,  the Company has established rigorous testing measures and procedures,
such as  sterilization  process  monitors  (including  temperature  and pressure
recording),  chemical indicators and bacteriological  spore and culture testing.
The Company is a registered contract  sterilization  facility with the U.S. Food
and Drug Administration ("FDA"), even though neither the Company's activities in
this  area  nor  hospital  sterilization   facilities  are  required  to  be  so
registered. See "Government Regulation."

CONTRACT STERILIZATION OF DISPOSABLE MEDICAL PRODUCTS

         MSI provides  contract  steam and radiation  sterilization  services to
manufacturers of disposable medical products.  The Company sterilizes disposable
medical  products such as adhesive and gauze  bandages,  lap sponges,  absorbent
cotton  balls,  tracheotomy  kits,  trauma  dressings,  operating  room  drapes,
surgical gloves, in vitro diagnostic kits and laboratory ware, such as pipettes,
petri dishes,  flasks,  roller bottles and tissue culture wells. As of March 25,
1997,  the  Company's  customers  in this area  included 48  disposable  medical
products  manufacturers  within  a 300  mile  radius  of its  Syosset,  New York
facility.  MSI estimates that there are  approximately  200  disposable  medical
products manufacturers operating in this geographic area.

         The  Company's   contract   sterilization   services  are  utilized  by
manufactures  of  disposable   medical  products  which  do  not  have  in-house
sterilization  capabilities or which have limited in-house  capacity and utilize
the Company's services to handle overflow.  The Company's services are also used
by  manufacturers  which require  electron beam radiation  sterilization  either
because the nature of the product requires electron beam radiation  treatment to
achieve  acceptable  levels of  sterilization  or because for  certain  products
electron beam  radiation  sterilization  can be more  cost-effective  than other
methods.  The Company believes that  approximately 10% of all disposable medical
products and devices are sterilized using electron beam radiation.  To meet this
need for  contract  sterilization  services,  MSI has  established  a  radiation
facility  featuring a 4.5 million  electron volt, 150 kilowatt  accelerator (the
"Accelerator") which provides either electron or x-ray radiation.


                                        4



         Although the Company provides  sterilization services for approximately
40 manufacturers of disposable medical products and is sterilizing products on a
daily basis,  the Company has  experienced  reduced  orders from  certain  large
customers over the preceding three
 years  and has a  significant  amount of  available  capacity  in its  contract
sterilization  business. The Company's Board of Directors has determined that it
is in the best interests of the Company's shareholders that the Company focus on
its core  Instrument  Set  sterilization  processing  business.  The Company has
entered into an agreement as of March 17, 1997 to sell its  Accelerator  for the
approximate  sum of  $1,250,000  to Shamrock  with transfer of title to occur no
later than April 30, 1998.  The  Company's  licenses to operate the  Accelerator
expire on  December  31, 1997 unless  renewed.  The Company has been  evaluating
opportunities  to maximize  the value of its electron  beam related  businesses,
including its contract sterilization of disposable medical products unit and its
radiation  processing of industrial  products  unit either  through sale,  joint
venture or other commercial  means. As a result,  on March 19, 1997, the Company
signed a Letter of Intent to enter into a joint marketing program with E-BEAM to
provide  stability  for its  remaining  contract  sterilization  and  industrial
processing  business.  The agreement  provides for the transfer of the Company's
contract  sterilization and industrial processing customers to E-BEAM at a price
of 15% of related  revenues up to $350,000.  Upon execution of the agreement the
Company will receive a nonrefundable  down payment  against future  royalties of
$150,000. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition."

RADIATION PROCESSING OF INDUSTRIAL PRODUCTS

         MSI performs radiation  processing  services for a number of industrial
products manufacturers. The Company's Accelerator can be used to link chemically
a long string of molecules of polyethylene and polyvinylchloride, to treat crude
rubber to achieve bonding and hardening and to link undivided chemical compounds
into a larger chemical entity.  As of March 25, 1997, the Company was processing
industrial products for approximately 18 industrial companies principally in the
Northeastern United States,  whose products included fabricated plastic objects,
gaskets,  tubing and plastic sheet and film. As part of its radiation processing
services,  the Company can also  cross-link  the insulation on small gauge wire.
See the previous  paragraph  regarding the proposed joint marketing program with
E-BEAM.

         The Company's primary radiation  processing activity is the irradiation
of  polytetrafluoroethylene  ("PTFE"),  which  is  also  known  as  "Teflon"  (a
registered trademark of E.I. DuPont de Nemours & Co.). Once processed,  the PTFE
can be ground into very small  particles  for use  primarily  as an additive for
printing inks and as a lubricant.  The Company processes PTFE for Precision, and
for Shamrock pursuant to a Toll Processing Agreement,  as previously amended and
further amended on March 17, 1997. Pursuant to the Toll Processing Agreement, as
amended,  MSI will process PTFE only for Precision  and Shamrock,  and Precision
and Shamrock agree to use certain minimum levels of processing  services through
September  30, 1997 at prices which will result in a gross profit to the Company
for providing these services.  The term of the Toll Processing  Agreement may be
extended at Shamrock's  option in one month  increments until December 31, 1997,
after which time MSI must cease  processing  PTFE,  unless  otherwise  agreed by
Shamrock. The Company anticipates that the amended Toll Processing


                                        5





Agreement will result in the purchase by Precision and Shamrock of approximately
$4.7  million  of PTFE  processing  services  for the  period of January 1, 1996
through  September  30, 1997 if the Toll  Processing  Agreement  is performed in
accordance with its terms.

COMPETITION

         The Company's  principal  competition with respect to its sterilization
services  for  healthcare  providers  comes  from  the  in-house   sterilization
facilities of hospitals and  ambulatory  surgi-centers.  Most  hospitals have an
in-house sterilization  capability and many have invested significant capital in
their sterilization facilities.  Also, the in-house sterilization facility staff
may be committed to maintaining the facility and its current staffing levels. As
a result,  healthcare  providers  may be reluctant to shift their  sterilization
activities from in-house to an off-site contractor.  Furthermore, some hospitals
have  union  agreements  that  preclude  or  mitigate  a  hospital's  ability to
outsource. In today's managed care driven, consolidating environment,  hospitals
and  hospital  networks  are  renegotiating  these  agreements  with  yet  to be
determined success.

         MSI has no competitor  operating in an off-site  environment  which can
replicate  MSI's  sterilization  services  program though  variations of the MSI
model potentially exist and/or are announced in traditional  hospital purchasing
news.  V.   Mueller/Convertors,   a  division  of  Allegiance  (formerly  Baxter
Healthcare's U.S.  distribution group) has off-site facilities in several cities
in various  modes of  operation,  but we  understand  that  Allegiance  recently
divested  this group to a private  entity.  It is not clear whether this group's
focus will be instrument or gown reprocessing or both. Steriltek,  a Los Angeles
based  company,  has  announced  plans to build mini  versions of MSI to service
hospital  clusters in dense geographic areas.  Substantial  know-how and capital
intensive barriers could limit competitive interest.

         Several  small  and  large   companies  are   specializing  in  on-site
instrument processing,  consulting and management services,  providing hospitals
and hospital  networks a competitive  choice between MSI's  off-site  instrument
processing and  sterilization  services.  A wholly owned subsidiary of Teleflex,
Inc.  (a  recent  acquirer  of  a  48%  control  position  in  MSI),  Endoscopic
Specialties Inc. (ESI),  specializes in on-site instrument processing.  However,
in January 1997, MSI and ESI started cooperative marketing of a total processing
management solution.

         The market for contract  sterilization  of disposable  medical products
services is highly  competitive.  There are a number of entities,  most of which
have significantly greater financial and other resources than the Company, which
offer contract  sterilization  services. The Company's major competitors in this
area include  Isomedix  Inc.,  E-BEAM and Ethox Corp.  The Company also competes
with  in-house   sterilization   departments  of  disposable   medical  products
manufacturers. There are a number of companies, many of which have significantly
greater  financial  and other  resources  than the Company,  with  sterilization
capabilities,   primarily   Ethylene   Oxide   ("EtO"),   radiation   and  steam
sterilization,  as well as  decontamination  and packaging  capabilities,  which
could  enter  into  the  healthcare  provider  field or the  disposable  medical
products field in the future.

                                        6





         In the  industrial  products  radiation  processing  area,  the Company
competes with a number of competitors,  including Isomedix Inc. and E-BEAM. Most
of these companies have significantly greater financial and other resources than
the  Company.  In the year ended  December 31,  1996,  substantially  all of the
Company's  revenues from radiation  processing of industrial  products  services
were derived from the  provision of PTFE  processing  services for Precision and
Shamrock.  Pursuant to the amended Toll Processing Agreement with Shamrock,  all
of the Company's PTFE processing during 1996 was, and in 1997 will be, performed
for  Precision and Shamrock at  established  minimum  production  levels and the
Company is not permitted to process PTFE for any other party.  As a result,  the
Company  does  not  currently  face  competition  with the  respect  to its PTFE
processing services.

         MSI believes that the principal  bases of  competition  include  price,
quality,  reputation and rapid turnaround. The Company believes that it competes
favorably with respect to these factors, although there can be no assurance that
it will be able to  continue  to do so. As  previously  stated,  the Company has
agreed to sell its Accelerator no later than April 30, 1998. Accordingly,  after
that  date the  Company  will  not be  involved  in  contract  sterilization  of
disposable  medical  products and radiation  processing  of industrial  products
including  PTFE.  However,  on March 19, 1997 MSI signed a Letter of Intent with
E-BEAM  which  contemplates  the  execution  of a Joint  Marketing  Agreement in
several weeks. See "Contract Sterilization of Disposable Medical Products."

CUSTOMERS

         The Company sells its  sterilization  services to healthcare  providers
such as hospitals and  ambulatory  surgi-centers  within a 75 mile radius of its
Syosset facility. As of March 25, 1997, the Company provided Instrument Sets and
sterilization  services  for  Sterilizable  Items  pursuant to 53  sterilization
services contracts with hospitals and ambulatory surgi-centers.  With respect to
contract sterilization  services for disposable medical products  manufacturers,
as of March 25, 1997, the Company provided contract sterilization services to 48
disposable  medical  products  manufacturers  within  a 300 mile  radius  of its
facility in Syosset.  The Company  performs  its PTFE  processing  services  for
Precision  and  Shamrock  and  processes  other  industrial  products  for other
manufacturers.  As of March 25,  1997,  the  Company was  processing  industrial
products for 18 industrial  companies  principally  in the  Northeastern  United
States.  For the fiscal year ended  December  31, 1996,  sales to Precision  and
Shamrock  accounted  for  substantially  all  of  the  Company's  revenues  from
industrial product radiation  processing services and 33% of the Company's total
revenues.  No other single  customer  accounted for 10% or more of the Company's
total  revenues for the fiscal year ended  December 31, 1996.  The  cessation of
contract   sterilization  of  disposable  medical  products  and  processing  of
industrial  products including PTFE in 1998 could have a material adverse effect
on the Company's business, results of operations and financial condition.

SUPPLIERS

       The Company purchases from surgical instrument manufacturers the surgical
instruments  included in  Instrument  Sets that are  provided to  hospitals  and
ambulatory  surgi-centers.  Pursuant to a sales and marketing  agreement entered
into with Pilling Weck, a national surgical instrument 

                                       7






manufacturer  and a  division  of  Teleflex,  Inc.,  the  Company  has agreed to
purchase substantially all of its surgical instrument  requirements from Pilling
Weck, and Pilling Weck has agreed to supply surgical  instruments to the Company
as well as to be the exclusive  sales and marketing  agent for MSI in the United
States. See "Sales and Marketing." Pursuant to this agreement,  the Company will
receive  certain volume pricing  discounts and the Company will utilize  Pilling
Weck supplied  instruments in its Instrument  Sets unless a particular  customer
requires  the use of  another  instrument  vendor.  The  Company  believes  that
surgical instruments are readily available from other suppliers at market prices
should Pilling Weck for any reason be unable to satisfy the Company's instrument
needs in full.

SALES AND MARKETING

         MSI's  sales and  marketing  strategy is to grow  existing  accounts by
service expansion: for example, if the Company is serving the labor and delivery
department  of a hospital it will  attempt to  leverage  its  services  into the
general  operating  room of the hospital  after a period of  successful  product
performance  in the labor and delivery  area. The Company also intends to expand
its portfolio of reprocessing  services to include new service offerings such as
consulting,  on-site management  services and EtO  sterilization.  The Company's
sales and marketing  efforts are  coordinated  by two dedicated  in-house  sales
professionals  who are supported by a third sales coordinator who works with the
hospitals to determine the proper  configuration  of the  Instrument  Sets to be
provided to each hospital. In addition, the Company has entered into a sales and
marketing  agreement with Pilling Weck which provides,  among other things,  for
Pilling  Weck to  represent  and sell MSI's  decontamination,  reprocessing  and
sterilization  services to customers in the United  States.  During the past few
years,  the  Company,  alone and with Pilling  Weck has been  actively  pursuing
negotiations with hospital groups in several cities.

         Furthermore,  the Company is entering into a joint venture with a newly
formed subsidiary of Teleflex, Inc. to sell MSI's decontamination,  reprocessing
and  sterilizingservices  in select highly populated urban centers. In addition,
MSI and  Endoscopic  Specialties,  Inc.,  ("ESI") (a wholly owned  subsidiary of
Teleflex,  Inc.,) a company which specializes in on-site  endoscopic  processing
services  and  consulting,  has agreed to  cooperate  and  comarket  on-site and
off-site  endoscopic  processing  services.   MSI  will  transfer  two  existing
contracts to ESI as well as MSI's  endoscopic  proposal  list.  ESI will pay MSI
commissions  of  5%  of  sales,  derived  from  the  transferred  contracts  and
proposals,  that  convert to  contracts,  totaling  $150,000.  MSI's  endoscopic
instrument inventory will be returned to the supplier, Pilling Weck, for credit.

INTELLECTUAL PROPERTY

         The  Company  does  not  rely on any  patents  for the  conduct  of its
business.  The  Company  does rely upon the  know-how of its  employees  and has
executed non-disclosure and non-competition  agreements with its employees.  The
Company relies in  significant  part upon its hospital  tracking  software which
allows the  Company to monitor and  control  the levels of  Instrument  Sets and
Sterilizable  Items  on-site  with a  given  customer  and to plan  and  control
sterilization activities. The Company's hospital tracking software was purchased
from its developer and the copyrights were assigned to the Company. Although the
Company believes

                                        8







that it has  all  necessary  ownership  and  copyright  rights  in its  hospital
tracking software and that this software does not infringe upon the intellectual
property rights of third parties, any determination to the contrary could have a
material  adverse  effect on the Company's  business,  results of operations and
financial condition.

GOVERNMENT REGULATION

         The Company has obtained a license  from the New York State  Department
of Environmental  Conservation operating through the Nassau County Department of
Health to operate its radiation  sterilization  and  processing  facility.  This
license is currently in force and will remain in force until  December 31, 1997.
The Company  believes  it is in material  compliance  with  applicable  laws and
regulations with respect to its radiation sterilization and processing facility.
The Company  believes that it is in material  compliance with the regulations of
the Nassau County  Department of Public Works with regard to the  disposition of
effluents.

         The  Company  is  registered  with the  Department  of Health and Human
Services,  Public  Health  Service of the FDA,  and  believes  it is in material
compliance  with  the FDA  compliance  program  with  regard  to the  industrial
sterilization  of medical  devices.  The Company complies with this program even
though,  for these purposes,  a hospital (and the Company,  by extension) is not
considered to be a manufacturer  of medical devices and is therefore not subject
to the FDA regulations.

         The Company is also  subject to the  requirements  of the  Occupational
Safety and Health  Administration  ("OSHA") and believes  that it is in material
compliance  with OSHA.  The Company  believes that it is in material  compliance
with all  other  applicable  federal,  state and  local  rules  and  regulations
relating to the conduct of its business.

EMPLOYEES

         As of December 31, 1996,  the Company had 79 full-time and 17 part-time
employees.  Management  believes its relations with its employees are good. None
of its employees are covered by any collective bargaining agreement.

ITEM 2.  DESCRIPTION OF PROPERTY

         The  Company's   headquarters,   including   its   executive   offices,
sterilization facility and radiation processing facility,  occupy 103,000 square
feet of leased space in a building located at 225 Underhill Boulevard,  Syosset,
New York. The Company originally entered into its headquarters lease on March 1,
1984. In February 1994, the Company and the Landlord amended the lease to extend
its term from March 1, 1994 to February 28, 1996,  with annual rent of $432,000.
On November  20,  1995,  the Company  executed a new lease for its  headquarters
which  provides  for a term of March 1, 1996  through  February 28, 2001 with an
annual rent of $456,000  for the first three years and $504,000 for the next two
years.

         The Company  believes  that its  facilities  and  equipment are in good
condition and are suitable for its operations as presently conducted and for its
foreseeable future operations. The

                                        9





Company  currently  believes  that  additional  facilities  and equipment can be
acquired  if  necessary,  although  there can be no  assurance  that  additional
facilities and equipment will be available upon reasonable or acceptable  terms,
if at all.

ITEM 3.  LEGAL PROCEEDINGS

         None

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

         No matters were  submitted  for a vote of  security-holders  during the
Company's fiscal quarter ended December 31, 1996.

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

         The Company's  Common Stock,  $.01 par value per share, has been traded
in the  over-the-counter  market (under the symbol  "MSTI") since  September 26,
1983 and is now quoted on the Nasdaq  Bulletin Board.  Such  quotations  reflect
inter-dealer prices,  without retail mark-up,  mark-down,  or commission and may
not necessarily represent actual transactions.  The approximate number of record
holders  of the  Company's  Common  Stock as of  March  17,  1997  was 278.  The
following  table  sets  forth  the  high and low bid  prices  for a share of the
Company's  Common Stock as reported on the Nasdaq Bulletin Board for each fiscal
quarter in the last two fiscal  years and for the first  fiscal  quarter of 1997
(through March 17, 1997):

         1997                                         High Bid        Low Bid
         ----                                         --------        -------   
         First Quarter (through March 17, 1997)        $2.625         $1.188

         1996
         Fourth Quarter                                 2.625          1.000
         Third Quarter                                  1.375          1.375
         Second Quarter                                 3.000          0.938
         First Quarter                                  1.563          0.938

         1995
         Fourth Quarter                                 1.875          0.6875
         Third Quarter                                  1.250          0.5000
         Second Quarter                                 1.250          0.5000
         First Quarter                                  1.250          0.5000

         The Company has never paid cash dividends with respect to its shares of
Common Stock. The Company currently intends to retain earnings,  if any, for use
in its business and does not  anticipate  paying cash dividends on its shares of
Common Stock in the foreseeable future. The Company is required to pay dividends
at the rate of 8% per annum per share with respect to the outstanding  shares of
Series B Convertible Preferred Stock. At the option of the Company, the

                                       10





dividends may be paid in cash or accrued.  If accrued,  the  dividends  shall be
added to the face amount of the Series B Convertible Preferred Stock at the rate
of $2.00  per  share or at an  adjusted  price  at the  time of  conversion.  In
addition, the Company's loan agreements,  the Financing Agreement with Rosenthal
and  Rosenthal,  Inc.  and the  terms  of the  Company's  outstanding  Series  B
Convertible  Preferred  Stock  and the  Series  C  Convertible  Preferred  Stock
prohibit the payment of dividends on the shares of Common Stock. See Notes 6 and
8 of Notes to Financial Statements.

ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

         The Company incurred a net loss of  approximately  $995,000 in the year
ended  December 31, 1996 compared to a net income of  approximately  $192,000 in
the year ended  December 31,  1995.  The net loss was mainly the result of costs
incurred to implement its National Sales Program,  providing additional reserves
for bad debt losses and costs incurred related to above normal historical levels
of legal expenses from its new legal counsel and additional one time termination
expenses incurred as result of the elimination of an Officer's  position.  Also,
the  Company  added  a  full-time   Chief   Executive   Officer  to  direct  the
nationalization  and other growth programs.  The former Chief Executive  Officer
and  Chairman  of the  Board of  Directors  now  functions  solely  as  Chairman
providing consulting services at 50% of his former salary.

         The Company in 1996 made a significant  investment in a national  sales
program  including sales personnel to introduce its service to other sections of
the country.  This investment made up approximately  $255,000 of the increase in
selling, general and administrative expense. The Company expects to enter into a
joint venture  agreement  with a yet to be formed  subsidiary of Teleflex  which
will pursue the national  program.  The Company will  transfer its  prospects in
several  cities to the  joint  venture  as well as its know how and  proprietary
hospital  tracking  software in consideration  for 37 1/2% interest in the joint
venture.

         For  the  fiscal  year  ended   December   31,  1996,   the   Company's
sterilization  services for  healthcare  providers,  contract  sterilization  of
disposable  medical  products and radiation  processing  of industrial  products
businesses accounted for approximately 55.1%, 11.0% and 33.9%, respectively,  of
the Company's revenues,  as compared with 53.7%, 15.3% and 31.0%,  respectively,
for the fiscal year ended  December 31, 1995.  The Company's  Board of Directors
has determined  that it is in the best  interests of the Company's  shareholders
that the  Company  focus on its core  Instrument  Set  sterilization  processing
business.  Accordingly,  it has  contracted  to sell its  Accelerator  system to
Shamrock  and has  executed a Letter of Intent to enter  into a joint  marketing
agreement  with E-BEAM.  Under the  Agreement  with  Shamrock the Company  would
receive approximately  $1,250,000 for the Accelerator and related equipment with
a Closing  Date of no later than April 30,  1998 at which time title to the beam
would be transferred to Shamrock.  Shamrock has posted a $500,000 standby letter
of credit in escrow.  The  removal of the  Accelerator  would be  commenced  and
diligently completed after the Closing. See" Write Down of Assets".

                                       11





         In  January,  1997,  approximately  45% of  the  voting  shares  of the
Company's stock was acquired by TFX Equities, Inc., a wholly owned subsidiary of
Teleflex,  Inc., a  diversified  publicly  held  Company.  TFX  Equities,  Inc.,
purchased  the Series B  Convertible  Preferred  Stock and Series C  Convertible
Preferred Stock (the "Preferred  Stock") from the previous owners of such stock.
In connection  with this  transaction  and after the resignation of three of the
incumbent Directors,  three nominees of TFX Equities,  Inc., were elected to the
Company's Board of Directors.

         Price  increases  are  governed  by  contract  terms for  sterilization
services to healthcare providers.  These contracts have recognizable  escalation
factors.  The prices for  sterilization  of disposable  medical products and the
processing  of industrial  products are  determined  by  competition  and market
conditions. Price increases normally will be reflected in increased revenues and
profits and price  decreases  normally  will result in  decreased  revenues  and
profits.

         In July 1996, the Company extended the term of its working capital line
of credit (which was due to expire in January 1997),  to January 1998. All other
terms of the  agreement  were  left the same.  See Note 6 of Notes to  Financial
Statements.

         In January,  1997,  the Company  entered into a loan agreement with TFX
Equities Inc. The principal amount of the loan is $500,000 and bears interest at
the rate of prime plus 1%. The note is due and payable on January 31, 1998.

         In January, 1997, the Company issued 150,000 shares of its common stock
to pay $300,000 of accounts payable due to Pilling Weck.

         The March 19,  1997  Letter of Intent to enter  into a joint  marketing
agreement  with  E-BEAM  provides  for the  transfer of the  Company's  contract
sterilization and industrial  processing  customers at a price of 15% of related
revenues up to  $350,000.  Upon  execution  of the  agreement  the Company  will
receive a nonrefundable deposit against future royalties of $150,000.

RESULTS OF OPERATIONS

1996 COMPARED WITH 1995

         Gross profit increased  approximately  $67,000 or 3% from approximately
$2,349,000 in the year ended  December 31, 1995 to  approximately  $2,416,000 in
the year ended  December  31, 1996.  Gross  profit as a  percentage  of revenues
increased  approximately  1.3% from 26.7% in the year ended December 31, 1995 to
28% in the year ended  December 31, 1996.  The increase in the  Company's  gross
profit was  attributable  to improved  production  efficiencies in the Company's
plant. The major components of these efficiencies were a reduction in labor as a
percentage of revenues and a reduction in supplies used in production.


                                       12






SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses increased by approximately
$654,000 from  approximately  $1,788,000 in the year ended  December 31, 1995 to
approximately $2,442,000 in the year ended December 31, 1996. As a percentage of
revenues, selling, general and administrative expenses increased from 20% in the
year ended  December 31, 1995 to 28% in the year ended  December  31, 1996.  The
major portion of the increase was the result of the Company making a significant
investment in its national sales and marketing areas.  The Company  strengthened
these  areas as it  prepared  to expand  from a  Regional  Company to a National
Company.  In addition  the Company had above normal  historical  levels of legal
expenses from its new legal counsel and additional one time termination expenses
incurred  as result of the  elimination  of an  Officer's  position.  Also,  the
Company added a full-time Chief Executive Officer to direct the  nationalization
and other growth  programs.  The former Chief Executive  Officer and Chairman of
the Board of Directors now  functions  solely as Chairman  providing  consulting
services at 50% of his former salary.

BAD DEBT EXPENSE

         Bad debt expense increased by $526,000 from $34,000 in 1995 to $560,000
in 1996.  This  increase is due to  additional  write-offs  and  adjustments  of
$307,000 in 1996 and an  increase  in the  allowance  for  doubtful  accounts of
$219,000.  The increase in write-offs and adjustments is due to the write-off of
a receivable  from a customer in  bankruptcy  and the  settlement  of amounts in
dispute.  The  increase  in the  allowance  for  doubtful  accounts  relates  to
receivables from certain hospitals whose financial condition has deteriorated.

WRITE DOWN OF ASSETS

         In March 1997, the Company  entered into a sales  agreement to sell its
electron  beam  Accelerator  to  Shamrock  Technologies,  Inc.  The title to the
Accelerator  will pass to the  purchaser no later than April 30, 1998,  which is
after the end of the current Toll Processing  Agreement.  The sales price of the
Accelerator was  approximately  $1,250,000.  The Company has charged $103,000 to
its operations to reflect the reduction of the value of the related assets being
sold.

INTEREST EXPENSE

         Interest  expense  remained  approximately  the same for the year ended
December 31, 1995 compared to the year ended December 31, 1996.

NET LOSS

         The Company incurred a net loss of  approximately  $995,000 in the year
ended  December 31, 1996 compared to a net income of  approximately  $192,000 in
the year ended  December 31,  1995.  The net loss was mainly the result of costs
incurred to implement its National Sales Program,  providing additional reserves
for bad debt losses and costs incurred related to


                                       13





above normal  historical levels of legal expenses from its new legal counsel and
additional one time termination  expenses  incurred as result of the elimination
of an Officer's  position.  Also, the Company added a full-time  Chief Executive
Officer to direct the  nationalization  and other  growth  programs.  The former
Chief  Executive  Officer and Chairman of the Board of Directors  now  functions
solely as Chairman providing consulting services at 50% of his former salary.

NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS

         Net loss per share of common stock for the year ended December 31, 1996
was ($.37)  compared to net income per share of $.02 for the year ended December
31,  1995.  The net  loss was  primarily  due to the net  loss  described  above
partially  offset by a decrease in the weighted  average number of common shares
outstanding, due to the exclusion of common stock equivalents in 1996.

1995 COMPARED WITH 1994

REVENUES

         Revenues for the year ended December 31, 1995  increased  approximately
7% to approximately  $8,772,000 from approximately $8,220,000 for the year ended
December 31, 1994. The increase in revenues was  attributable  to an approximate
$685,000 or 8% increase in total revenues related to the Company's sterilization
services to  healthcare  providers  business  and an  approximate  $77,000 or 1%
increase  in total  revenues  related to the  Company's  contract  sterilization
business,  partially  offset by an approximate  $207,000 or 2% decrease in total
revenues related to the Company's  radiation  processing of industrial  products
business. The increase in total revenues related to the Company's  sterilization
services to healthcare  providers was attributable to market  penetration of new
customers and expanded  services to the Company's  existing  customer  base. The
Company's sales strategy is to grow existing accounts by service expansion:  for
example,  if the  Company  is serving  the labor and  delivery  department  of a
hospital it will attempt to leverage its service into the general operating room
of the hospital after a period of successful product performance in the original
labor  and  delivery   area.  MSI  also  intends  to  expand  its  portfolio  of
reprocessing  services  to  include  new  service  offerings  such as  endoscopy
procedure  specific  Instrument  Sets.  The decrease in  radiation  revenues was
primarily attributable to discounted prices given to its largest customer. These
price concessions,  which are basically volume discounts, were given to ensure a
steady  flow of  production  through  its  facility  which  provides  for a more
consistent absorption of the Company's overhead.

GROSS PROFIT

         Gross profit increased approximately $374,000 or 19% from approximately
$1,972,000 in the year ended  December 31, 1994 to  approximately  $2,346,000 in
the year ended  December  31, 1995.  Gross  profit as a  percentage  of revenues
increased  2.8% from 23.9% in the year ended  December  31, 1994 to 26.7% in the
year ended  December 31, 1995.  The increase in the  Company's  gross profit was
attributable to improved  production  efficiencies in the Company's  plant.  The
major components of these efficiencies were a reduction in labor as a

                                       14





percentage  of  revenues,  and a reduction  of  utilities  as the  Company  made
arrangements  to purchase  the major  portion of its  electricity  from New York
State Power Authority at reduced rates.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling,  general  and  administrative  expenses  (including  bad  debt
expense) increased by approximately  $116,000 from  approximately  $1,706,000 in
the year ended December 31, 1994 to  approximately  $1,822,000 in the year ended
December  31,  1995.  As  a  percentage  of  revenues,   selling,   general  and
administrative expenses increased from 20.7% in the year ended December 31, 1994
to 20.8% in the year ended  December 31, 1995. The major portion of the increase
resulted  from the  recruiting  and  eventual  hiring of a new  president of the
Company and the expenses related thereto,  which was a non-recurring expense. In
most other areas of selling,  general and administrative  expenses,  the Company
experienced virtually no increases.

INTEREST EXPENSE

         Interest  expense  increased  from  approximately  $221,000  or 2.7% of
revenues for the year ended December 31, 1994 to approximately  $335,000 or 3.8%
of revenues for the year ended  December 31, 1995.  This increase of $114,000 or
52% was the result of increased borrowing to support the Company's growth and an
increase in the Company's interest rate.

NET INCOME

         Net income increased from approximately  $52,000 or 0.6% of revenues in
1994 to  approximately  $192,000 or 2.2% of revenues in the year ended  December
31, 1995. This represented an increase of approximately $140,000 or 269% for the
year ended  December 31, 1995 compared to the year ended  December 31, 1994. The
increase in net income is basically  attributable to the increased sales volumes
and gross margin increases partially offset by increases in selling, general and
administrative  expenses and interest  expense as the Company  continued to make
investments in these areas.

NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS

         Net income (loss) applicable to common  shareholders for the year ended
December  31,  1995  increased  to  approximately  $77,000  from a net  loss  of
approximately  ($126,000) for the year ended December 31, 1994. This represented
an increase  of  approximately  $203,000  for the year ended  December  31, 1995
compared to the year ended December 31, 1994. The increase was the result of the
increase in net income  described  above and the  decrease in  dividends  on the
Preferred Stock from approximately  $178,000 in the year ended December 31, 1994
to approximately $114,000 in the year ended December 31, 1995. This decrease was
the result of the  restructuring  of the Company's  Preferred  Stock in the year
ended  December  31, 1994 which  reduced the amount of Preferred  Stock  bearing
dividends and also reduced the dividend rate.

                                       15






NET INCOME (LOSS) PER SHARE OF COMMON STOCK

         Net income (loss) per share of common stock for the year ended December
31, 1995  increased to $.02 per share compared to a net loss per share of ($.04)
for the year ended December 31, 1994. The increase was primarily attributable to
the  increased  net income  applicable to common  shareholders  described  above
partially  offset by an increase in the weighted average number of common shares
outstanding.

LIQUIDITY AND CAPITAL RESOURCES

         Current assets have decreased  approximately  $194,000 to approximately
$2,643,000  at December 31, 1996 from  approximately  $2,837,000 at December 31,
1995. The decrease was primarily attributable to an approximate $48,000 decrease
in net  accounts  receivable,  a $100,000  decrease  in cash and an  approximate
$35,000 decrease in prepaid expenses.

         The Company had working capital of  approximately  $293,000 at December
31, 1996,  compared to working capital of  approximately  $1,607,000 at December
31, 1995.  The  Company's  current  ratio at December  31,  1996,  was 1.12 to 1
compared to a current  ratio of 2.31 to 1 at December 31, 1995.  The decrease in
the Company's working capital and current ratio at December 31, 1996 compared to
December 31, 1995 was primarily  the result of the  Company's  loss for the year
and  purchase  of  instruments  which  required  working  capital  but which are
classified  for financial  statement  purposes as fixed assets.  Therefore,  the
Company's  working  capital is reduced as it purchases  instruments for its long
term contracts. In April of 1996, the Company extended its line of credit (which
was to expire in January of 1997) to January 31, 1998.

         The Company  currently  plans to expand its business by increasing  its
portfolio  of  reprocessing  services to include new service  offerings  such as
consulting,  on-site  management  services  and EtO  sterilization.  The Company
believes that the anticipated  future cash flow from operations,  along with its
cash on hand and  available  funds under its working  capital line of credit and
the $500,000 loan in January 1997 from TFX Equities, Inc., will be sufficient to
meet  working  capital  requirements  during  1997.  There can be no  assurance,
however, that the Company will not require additional working capital and, if it
does require such capital, that such capital will be available to the Company on
acceptable terms, if at all.

         In January,  1997,  the Company  entered into a loan agreement with TFX
Equities,  Inc. The principal  amount of the loan is $500,000 and bears interest
at the rate of prime plus 1%. The note is due and payable on January 31, 1998.

         In January, 1997, the Company issued 150,000 shares of its Common Stock
to TFX Equities, Inc. to pay $300,000 of accounts payable due to Pilling Weck.

         In  January,  1997,  approximately  45% of  the  voting  shares  of the
Company's stock was acquired by TFX Equities, Inc., a wholly owned subsidiary of
Teleflex,  Inc., a  diversified  publicly  held  company.  TFX  Equities,  Inc.,
purchased  the  Preferred  Stock  from the  previous  owners of such  stock.  In
connection with this transaction, the nominees of TFX Equities, Inc.,

                                       16






were elected to the Company's  Board of Directors after the resignation of three
(3) incumbent Directors.  The acquisition of Common Stock referred to above will
increase TFX Equities,  Inc. ownership to approximately 48% of the voting shares
of the Company.

         In March 1997,  the Company  entered into a purchase and sale agreement
with  Shamrock   Technologies,   Inc.,  to  sell  the  Company's  electron  beam
accelerator.  Under  the  agreement  the  Company  would  receive  approximately
$1,250,000  for the  Accelerator  and  related  equipment  with  closing  of the
transaction  being  estimated  as  April  1998,  at  which  time  title  to  the
Accelerator  would be  transferred to Shamrock  Technologies,  Inc. In addition,
Shamrock  has  posted a  $500,000  standby  letter  of credit  in  escrow.  Upon
consummation  of the sale of the electron beam  accelerator  to Shamrock and the
remaining contract  sterilization and industrial  processing business to E-BEAM,
the Company will be relying on revenues  from its  sterilization  processing  of
Surgical  Instrument  Sets.  Revenue  generated  by the  Accelerator  to be sold
approximated   $3,900,000  and  $4,061,000  in  1996  and  1995,   respectively.
Management  intends to replace  these  revenues  with revenues from its Surgical
Instrument Set business.

         The March  19,1997  Letter of  Intent to enter  into a joint  marketing
agreement  with  E-BEAM  provides  for the  transfer of the  Company's  contract
sterilization and industrial  processing  customers at a price of 15% of related
revenues up to  $350,000.  Upon  execution  of the  agreement  the Company  will
receive a nonrefundable deposit against future royalties of $150,000.

INFLATION

         The  Company  does  not   anticipate   that  inflation  will  have  any
significant  effect on its business  particularly  since the United States,  the
only market in which the Company  currently  intends to  operate,  is  presently
experiencing a relatively low rate of inflation.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

         From time to time, information provided by the Company, statements made
by its  employees or  information  included in its filings  with the  Securities
Exchange  Commission  (including this Form 10-KSB) may contain  statements which
are not historical facts, so-called "forward-looking  statements," which involve
risks and  uncertainties.  Forward-looking  statements  are made pursuant to the
safe harbor provisions of the Private Securities  Litigation Reform Act of 1995.
In  particular,  statements  made  above in "Item 2.  Description  of  Property"
relating to the suitability of the Company's facilities and equipment for future
operations and the  availability  of additional  facilities and equipment in the
future.  Relating to the sufficiency of funds for the Company's  working capital
requirements  during 1997, the Company's  expectation that future cash flow will
continue  to be  provided  from  operations  and  the  Company's  not  presently
anticipating that inflation will have any significant impact on its business may
be  forward-looking  statements.  The Company's actual future results may differ
significantly from those stated in any forward-looking statements.  Factors that
may  cause  such  differences  include,  but are not  limited  to,  the  factors
discussed below. Each of these factors,  and others,  are discussed from time to
time in the Company's filings with the Securities and Exchange Commission.

                                       17






         The  Company's  future  results  are subject to  substantial  risks and
uncertainties. The Company has operated at a loss or a very small profit for its
entire  history and there can be no assurance of its ever  achieving  consistent
profitability.  The Company may require additional working capital in the future
and there can be no assurance  that such working  capital will be on  acceptable
terms, if at all. The failure of the Company to continue to compete  effectively
with  existing  or new  competitors  could  result in price  erosion,  decreased
margins  and  decreased  revenues,  any or all of which  could  have a  material
adverse  effect on the Company's  business,  results of operations and financial
condition.  The Company  historically has relied on a relatively small number of
customers, including Shamrock and Precision, for a large percentage of its total
revenues. The termination of the Toll Processing Agreement on or before December
31,  1997 could  have a  material  adverse  effect on the  Company's  results of
operations  after 1997.  The  Company's  healthcare  provider  customers are all
located in the New York metropolitan area and Long Island, New York. Any factors
affecting  this market  generally  could have a material  adverse  effect on the
Company's business,  results of operations and financial condition.  The Company
is subject to government regulation in certain aspects of its operations and its
license to operate its Accelerator terminates December 31, 1997 unless extended.
This could have a material adverse effect on the Company's business,  results of
operations and financial condition after 1997.

         The  Company's  future  success  will  depend in part on its ability to
convince  hospitals  and other  healthcare  providers  to utilize the  Company's
off-site  sterilization  services  as opposed to their own  on-site  facilities.
Hospitals  may  resist  this  change  for a number  of  reasons,  including  the
preferences  of  hospital  staffs  which  may wish to  preserve  their  existing
staffing intact,  labor unions which may resist any staffing  reductions and the
ongoing  consolidation of hospitals which may impact the willingness of hospital
administrators  to make  operational  decisions  on a timely basis and which may
affect a  hospital's  decision  to utilize an off-site  processor  as opposed to
retaining one or more of the consolidated hospital group's central sterilization
facilities to provide services for the entire group. The Company relies upon the
know-how of its employees and upon its hospital tracking software to efficiently
conduct its business.  Any invalidation of these intellectual property rights or
lengthy and  expensive  defense of these  rights  could have a material  adverse
effect on the Company.

         The Company's  quarterly and annual operating results are affected by a
wide variety of factors that could  materially and adversely effect revenues and
profitability,  including:  competitive pressures on selling prices and margins;
the timing and cancellation of customer  orders;  the lengthy sales cycle of the
Company's  sterilization  services to  healthcare  organizations;  the Company's
ability  to  maintain   state-of-the-art   sterilization   facilities   and  the
corresponding  timing and amount of capital  expenditures,  particularly  if the
Company executes its plan for expansion; and the introduction of new services by
the Company's  competitors.  As a result of the foregoing and other factors, the
Company may experience  material  fluctuations in future operating  results on a
quarterly  or annual  basis  which could  materially  and  adversely  effect its
business, operating results and stock price.

ITEM 7.  FINANCIAL STATEMENTS

         For the  following  financial  information  required by this Item,  see
Index on Page F-1.

                                       18







         Report of Independent Accountants
         Balance Sheet as at December 31, 1996
         Statements of Operations for the years ended December 31, 1996 and 1995
         Statements  of  Shareholders'  Equity for the years ended  December 31,
           1996 and 1995
         Statements of Cash Flows for the years ended December 31, 1996 and 1995
         Notes to Financial Statements


ITEMS 8. CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  AND  ACCOUNTING  AND
FINANCIAL DISCLOSURE

         There has been no  change of  accountants  nor any  disagreements  with
accountants  on any matter of  accounting  principles  or practices or financial
statement disclosure required to be reported under this Item.

                                    PART III

ITEM 9.  DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL   PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         The  information  required  by this  Item  is  incorporated  herein  by
reference to the  information  in the sections  entitled  "Proposal  Relating to
Election of Directors,"  "Occupations of Directors and Executive  Officers," and
"Compensation and Other Information Concerning Directors and Officers" contained
in the Company's  definitive proxy statement to be filed with the Securities and
Exchange  Commission  not later than 120 days after the close of the fiscal year
ended December 31, 1996.

ITEM 10.  EXECUTIVE COMPENSATION

         The  information  required  by this  Item  is  incorporated  herein  by
reference to the  information in the section  entitled  "Compensation  and Other
Information  Concerning  Directors  and  Officers"  contained  in the  Company's
definitive  proxy  statement  to be  filed  with  the  Securities  and  Exchange
Commission  not later  than 120 days  after the close of the  fiscal  year ended
December 31,
1996.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  required  by this  Item  is  incorporated  herein  by
reference to the information in the section  entitled  "Management and Principal
Shareholders"  contained in the Company's definitive proxy statement to be filed
with the  Securities  and Exchange  Commission not later than 120 days after the
close of the fiscal year ended December 31, 1996.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required  by this  Item  is  incorporated  herein  by
reference to the information in the section entitled "Certain  Relationships and
Related  Transactions"  contained in the Company's definitive proxy statement to
be filed with the  Securities  and Exchange  Commission  not later than 120 days
after the close of the fiscal year ended December 31, 1996.

                                       19







ITEM 13.  EXHIBITS, LIST AND REPORTS ON FORM 8-K

         (A)  EXHIBITS:

                  (3)(1)  Restated  Certificate of  Incorporation  filed May 24,
1989 - filed as Exhibit  (3)(1) to Company's  Annual  Report for the fiscal year
ended December 31, 1995 on Form 10-KSB and incorporated herein by reference.

                  (3)(2)    Certificate   of   Amendment   of   Certificate   of
Incorporation  filed January 4, 1990 filed as Exhibit (3)(2) to Company's Annual
Report  for  the  fiscal  year  ended  December  31,  1995 on  Form  10-KSB  and
incorporated herein by reference.

                  (3)(3)    Certificate   of   Amendment   of   Certificate   of
Incorporation  filed  November 25, 1994 filed as Exhibit (3)(3) to Annual Report
for the year ended December 31, 1995 on Form 10-KSB and  incorporated  herein by
reference.

                  (3)(4)    Certificate   of   Amendment   of   Certificate   of
Incorporation filed June 17, 1996.

                  (3)(5)    Certificate   of   Amendment   of   Certificate   of
Incorporation filed January 6, 1997.

                  (3)(6)  Certificate  of Correction of Certificate of Amendment
of Certificate of Incorporation filed January 10, 1997.

                  (3)(7) Amended and Restated By-Laws dated June 2, 1987 - filed
as Exhibit  3.4 to Annual  Report for the year ended  December  31, 1995 on Form
10-KSB and incorporated herein by reference.

                  (10)(1) 1994 Stock  Option Plan - filed as Exhibit  (10)(a)(1)
to  Annual  Report  for the  year  ended  December  31,  1993 on Form  10-K  and
incorporated herein by reference.

                  (10)(2) 1996 Stock  Option Plan - filed as Exhibit  (10)(2) to
the Annual  Report  for the year  ended  December  31,  1995 on Form  10-KSB and
incorporated herein by reference.

                  (10)(3) Agreement with Mercy Hospital dated November 14, 1988.
This contract is substantially  similar to the other contracts entered into with
hospitals.  The basic  differences  relate to the type of medical sets provided,
the term of the  contract  and the  compensation.  This  Agreement  was filed as
Exhibit (10)(c) to Amendment No. 1 to  Registration  Statement on Form S-1 (File
No. 33-28660) and incorporated herein by reference.

                  (10)(4)  Lease dated  November 20, 1995 with  Barlich  Realty,
Inc. - filed as Exhibit (10)(4) to Annual Report for the year ended December 31,
1995 on Form 10-KSB and incorporated herein by reference.

                                       20






                  (10)(5)  Agreement  with  Oxford  Venture  Fund  III,  Limited
Partnership,  and Oxford Venture Fund III Adjunct,  Limited  Partnership,  dated
January 30, 1989 - filed as Exhibit  (10)(5) to Annual Report for the year ended
December 31, 1995 on Form 10-KSB and incorporated herein by reference.

                  (10)(6)   Agreement  with  Oxford  Venture  Fund  II,  Limited
Partnership,  dated as of December 30, 1989 - filed as Exhibit (10)(6) to Annual
Report for the year ended  December  31,  1995 on Form  10-KSB and  incorporated
herein by reference.

                  (10)(7)  Agreement with Precision  Micron  Powders,  Inc., and
Robert S.  Luniewski,  dated July 25, 1988 as  extended  to December  31, 1991 -
filed as Exhibit  (19)(g) to Annual Report for the year ended  December 31, 1993
on Form 10-K and incorporated herein by reference.

                  (10)(8) Letter agreement with Precision  Micron Powders,  Inc.
extending  agreement dated July 25, 1988 to December 31, 1992 - filed as Exhibit
(19)(h) to Annual  Report for the year ended  December 31, 1991 on Form 10-K and
incorporated herein by reference.

                  (10)(9) Revised agreement with Precision Micron Powders,  Inc.
dated as of February 26, 1993 filed as Exhibit  (19)(i) to Annual Report for the
year ended December 31, 1992 on Form 10-K and incorporated herein by reference.

                  (10)(10)  Settlement  Agreement  among Shamrock  Technologies,
Inc.,  Robert S.  Luniewski  and the Company  dated  November 1, 1994 - filed as
Exhibit  (19)(j) to Annual  Report for the year ended  December 31, 1993 on Form
10-K and incorporated herein by reference.

                  (10)(11)   Toll   Processing    Agreement   between   Shamrock
Technologies,  Inc.,  and the Company dated  November 1, 1994 - filed as Exhibit
(19)(k) to Annual  Report for the year ended  December 31, 1993 on Form 10-K and
incorporated herein by reference.

                  (10)(12) Extension of Toll Processing  Agreement dated October
31,  1995 - filed as Exhibit  (19)(k)(1)  to  Amendment  No. 1 for Form SB-2 and
incorporated herein by reference.

                  (10)(13)  Amendment  to  Toll  Processing   Agreement  and  to
Agreement  Modifying and Extending  Toll  Processing  Agreement  dated March 17,
1997.

                  (10)(14)  Purchase  and Sale  Agreement  dated  March 17, 1997
between the Company and Shamrock Technologies, Inc., dated March 17, 1997.

                  (10)(15)  Release  dated  November 29, 1994 - filed as Exhibit
(19)(1) to Annual  Report for the year ended  December 31, 1993 on Form 10-K and
incorporated herein by reference.

                  (10)(16)  Satisfaction  of Judgment  dated November 29, 1994 -
filed as Exhibit  (19)(m) to Annual Report for the year ended  December 31, 1993
on Form 10-K and incorporated herein by reference.

                                       21







                  (10)(17)  Affidavit of Confession of Judgment  dated  November
29, 1994 - filed as Exhibit (19)(n) to Annual Report for the year ended December
31, 1993 on Form 10-K and incorporated herein by reference.

                  (10)(18)  Letter  dated  June 3, 1996 from  Gibney,  Anthony &
Flaherty,  attorneys  for Shamrock  Technologies,  Inc.,  returning the original
Confession of Judgment.

                  (10)(19) Financing Agreement between the Company and Rosenthal
& Rosenthal,  Inc.,  dated October 17, 1994 - filed as Exhibit (19)(o) to Annual
Report for the year ended December 31, 1993 on Form 10-K and incorporated herein
by reference.

                  (10)(20)  Extension of Financing  Agreement  with  Rosenthal &
Rosenthal,  Inc.,  dated  December  22,  1995 - filed as Exhibit  (19)(o)(1)  to
Amendment No. 4 to Registration  Statement on Form SB-2 (File No.  33-96330) and
incorporated herein by reference.

                  (10)(21)  Extension of Financing  Agreement  with  Rosenthal &
Rosenthal, Inc., dated April 29, 1996.

                  (10)(22) Agreement between Pilling Weck, and the Company dated
January 10, 1996 - filed as Exhibit  (19)(p) to Amendment No. 4 to  Registration
Statement on Form SB-2 (File No. 33-96330) and incorporated herein by reference.

                  (10)(23)  Credit Line and Term Loan Agreements with Apple Bank
for  Savings  dated July 20,  1990 - filed as Exhibit  (25) to  Amendment  No. 1
Registration Statement No. 33-28660 and incorporated herein by reference.

                  (10)(24)  Letter  amending Credit Line and Term Loan Agreement
from Apple Bank for Savings  dated April 4, 1991 - filed as Exhibit  (10)(19) to
Annual  Report  for  the  year  ended  December  31,  1995 on  Form  10-KSB  and
incorporated herein by reference.

                  (10)(25) Letter confirming Term Loan Agreement from Apple Bank
for Savings dated March 24, 1992 - filed as Exhibit (25)(b) to Annual Report for
the year  ended  December  31,  1991 on Form  10-K and  incorporated  herein  by
reference.

                  (10)(26)  Amendment No. 1 to Credit  Agreement with Apple Bank
for Savings dated as of May 12, 1992 - filed as Exhibit (25)(c) to Form 10-K for
the year ended December 31, 1993 and incorporated herein by reference.

                  (10)(27)  Loan  Extension  Agreement  dated  November 29, 1994
between the  Company  and Apple Bank for  Savings - filed as Exhibit  (25)(d) to
Annual Report for the year ended December 31, 1993 on Form 10-K and incorporated
herein by reference.

                  (10)(28)  Agreement  with Dr.  Kennard  H.  Morganstern  dated
February 7, 1995 - filed as Exhibit (26) to  Amendment  No. 1 to Form SB-2 (File
No. 33-96330) and incorporated herein by reference.

                                       22







                  (10)(29) Letter of Intent between the Company and E-BEAM dated
March 19, 1997.

                  23.1  Consent of Coopers & Lybrand L.L.P.

                  27.1  Financial Data Schedule

         (B)  REPORTS ON FORM 8-K

         No reports on Form 8-K were filed by the Company  during the  Company's
fiscal quarter ended December 31, 1996.


                                       23








                                   SIGNATURES

         In accordance with Section 13 or 15 (d) of the Securities  Exchange Act
of 1934,  the  registrant  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


March  31, 1997                    MEDICAL STERILIZATION, INC.

                                   By:/s/ D. Michael Deignan
                                      --------------------------------
                                   Name:  D. Michael Deignan
                                   Title: President and Chief Executive Officer


         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
<S>                                                        <C>                            <C>  
Name and Signature                                       Title(s)                         Date

/s/ D. Michael Deignan                           President, Chief Executive           March 31, 1997
--------------------------
D. Michael Deignan                               Officer and Director
                                                 (principal executive officer)

/s/ Paul V. Rossi                                Treasurer and Chief Financial        March 31, 1997
--------------------------
Paul V. Rossi                                    Officer (principal financial
                                                 and accounting officer)

/s/ Larry C. Buckelew                            Director                             March 31, 1997
--------------------------
Larry C. Buckelew

                                                 Director                             March 31, 1997
--------------------------
John R. Hoover


/s/ Kennard H. Morganstern                       Director                             March 31, 1997
--------------------------
Kennard H. Morganstern


                                                 Director                             March 31, 1997
--------------------------
John J. Sickler


                                                 Director                             March 31, 1997
--------------------------
Forrest R. Whittaker


/s/ Harold L. Zuber, Jr.                         Director                             March 31, 1997
--------------------------
Harold L. Zuber, Jr.

</TABLE>


                                       24







                                   SIGNATURES

         In accordance with Section 13 or 15 (d) of the Securities  Exchange Act
of 1934,  the  registrant  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

March  , 1997                     MEDICAL STERILIZATION, INC.


                                    By:
                                       ------------------------------
                                    Name:  D. Michael Deignan
                                    Title: President and Chief Executive Officer

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
<S>                                                     <C>                             <C>
Name and Signature                                   Title(s)                           Date
------------------                                   --------                           ----

                                                     President, Chief Executive
-------------------------
D. Michael Deignan                                   Officer and Director
                                                     (principal executive officer)

                                                     Treasurer and Chief Financial
-------------------------
Paul V. Rossi                                        Officer (principal financial and
                                                     accounting officer)

                                                     Director
-------------------------
Larry C. Buckelew

                                                     Director
-------------------------
John R. Hoover

                                                     Director
-------------------------
Kennard H. Morganstern


                                                     Director
-------------------------
John J. Sickler

                                                     Director
-------------------------
Forrest R. Whittaker

                                                     Director
-------------------------
Harold L. Zuber, Jr.

</TABLE>

                                       24



                         SUPPLEMENTAL INFORMATION TO BE
                      FURNISHED WITH REPORTS FILED PURSUANT
                        TO SECTION 15(d) OF THE EXCHANGE
                          ACT BY NON-REPORTING ISSUERS

         No  annual  report  or proxy  material  has been  sent to the  Issuer's
security holders with respect to the year ended December 31, 1996. A copy of the
Issuer's  Annual  Report on Form 10-KSB for the fiscal year ended  December  31,
1996  and  the  Issuer's  Proxy   Statement  for  the  1997  Annual  Meeting  of
Shareholders will be furnished to shareholders and filed with the Securities and
Exchange Commission on or about April 26, 1997.

                                       25








                           MEDICAL STERILIZATION, INC.

                          INDEX TO FINANCIAL STATEMENTS


                                                                        Page

Report of Independent Accountants                                        F-2

Balance Sheet as at December 31, 1996                                    F-3

Statements of Operations for the years ended December 31, 1996           F-4
    and 1995

Statements of Shareholders' Equity for the years ended                   F-5
    December 31, 1996 and 1995

Statements of Cash Flows for the years ended December 31, 1996           F-6
    and 1995

Notes to Financial Statements                                            F-8


                                       F-1






                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Medical Sterilization, Inc.:


We have audited the financial statements of Medical  Sterilization,  Inc. listed
in the index on page F-1 of this Form 10K.  These  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Medical Sterilization,  Inc. at
December 31, 1996 and the results of its  operations and its cash flows for each
of the two years in the  period  ended  December  31,  1996 in  conformity  with
generally accepted accounting principles.


                            COOPERS & LYBRAND L.L.P.


Melville, New York
March 28, 1997.



                                      F-2







                           MEDICAL STERILIZATION, INC.

                                  BALANCE SHEET

                                December 31, 1996
                                -----------------
<TABLE>
<CAPTION>
<S>                                                                                           <C>  
      ASSETS:

Current assets
    Cash                                                                                     $75,703
    Trade accounts receivable (net of allowance for
        doubtful accounts of $253,481)                                                     2,409,055
    Inventory                                                                                121,075
    Prepaid expenses                                                                          37,380
         Total current assets                                                              2,643,213
Fixed assets, at cost, net of accumulated depreciation and amortization                    4,950,139
Other assets                                                                                 160,419
         Total assets                                                                     $7,753,771

         LIABILITIES AND SHAREHOLDERS' EQUITY:

Current liabilities:
    Accounts payable and accrued expenses                                                  1,899,550
    Current maturities of long-term debt                                                     283,045
    Obligation under capital leases                                                          168,160
                                                                                         ------------
         Total current liabilities                                                         2,350,755
Long-term debt less current maturites                                                      2,082,920
Obligation under capital leases                                                              706,376
         Total liabilities                                                                 5,140,051

Commitments and contingencies (notes 12 and 13)

Preferred stock:
    Convertible redeemable cumulative preferred stock, par value $.01 per share:
    Series B-authorized 1,000,000 shares, issued and outstanding 687,500 shares            1,667,952

Shareholders' equity:
    Convertible preferred stock, par value $.01 per share: Series C - authorized
      2,000,000 shares, issued and outstanding 1,945,625 shares                            1,945,625

    Common stock, par value $.01 per share; authorized 10,000,000 shares, issued
      and outstanding 3,020,496 shares                                                        30,204
    Additional paid-in capital                                                             7,544,036
    Accumulated deficit                                                                   (8,574,097)
                                                                                          ----------
         Total shareholders' equity                                                          945,768
                                                                                          ----------
         Total liabilities and shareholders' equity                                       $7,753,771
                                                                                          ==========
                        See notes to financial statements

</TABLE>


                                       F-3







                           MEDICAL STERILIZATION, INC.

                            STATEMENTS OF OPERATIONS

                                                   Years ended December 31,
                                                 1996                 1995
Income:

         Revenue                               $ 8,626,482         $  8,772,430 
                                                
         Interest                                        0                2,673
                                               -----------         ------------

                                                 8,626,482            8,775,103
                                               -----------         ------------
Costs and expenses:

         Operating                               6,210,270            6,426,319


         Selling, general and
         administrative                          2,441,665            1,788,012

         Bad debt expense                          559,929               34,000

         Write down of assets                      102,709                    0

         Interest                                  307,351              335,199
                                               -----------         ------------ 

                                                 9,621,924            8,583,530
                                               -----------         ------------

(Loss) income before income taxes                 (995,442)             191,573

Income taxes                                             0                    0
                                               -----------         ------------

Net (loss) income                                 (995,442)             191,573

Preferred stock dividends                         (123,552)            (114,400)
                                               -----------         ------------

Net (loss) income applicable to
common shareholders                            $(1,118,994)         $    77,173
                                               ===========         ============

Net (loss) income per share of
    common stock                               $     (0.37)         $      0.02
                                               ===========         ============

Weighted average number of
    shares of common stock
    outstanding                                  2,991,893            5,099,415
                                               ===========         ============ 



                        See notes to financial statements


                                       F-4





                           MEDICAL STERILIZATION, INC.
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                 for the years ended December 31, 1996 and 1995

<TABLE>
<CAPTION>

                                                                                       Additional
                                          Common stock           Preferred stock        paid-in       Accumulated
                                       Shares      Amount      Shares       Amount      capital         deficit         Total
                                      --------    --------    --------     --------    ----------     -----------      --------
<S>                                      <C>         <C>        <C>           <C>         <C>             <C>            <C>
Balance,
    December 31, 1994                2,980,496    $29,804    1,945,625    $1,945,625   $7,834,678     ($7,770,228)    $2,039,879
    Accrual of preferred stock
        dividends                                                           (114,400)                                  ( 114,400)
    Costs incurred with stock
        registration                                                         (32,134)                                    (32,134)
    Net income for year                                                                                   191,573        191,573
                                     ---------   ---------   ---------    -----------  ----------      -----------    -----------
Balance,
December 31, 1995                    2,980,496     $29,804   1,945,625    $1,945,625   $7,688,144     ($7,578,655)    $2,084,918
  Accrual of preferred stock
    dividends                                                                            (123,552)                      (123,552)
    Conversion of options               40,000         400                                  3,600                          4,000
    Costs incurred with stock
      registration                                                                        (24,156)                       (24,156)
    Net loss for year                                                                                    (995,442)      (995,442)
                                     ---------   ---------   ---------    -----------  ----------      -----------    -----------
Balance,
  December 31, 1996                  3,020,496     $30,204   1,945,625    $1 ,945,625  $7,544,036     ($8,574,097)     $ 945,768
                                   ===========     =======   =========    ===========  ==========     ============     ==========

</TABLE>





                        See notes to financial statements


                                       F-5







                           MEDICAL STERILIZATION, INC.

                            STATEMENTS OF CASH FLOWS


                                                       Years ended December 31,
                                                      -------------------------
                                                       1996               1995
                                                       ----               ----

Cash flows from operating activities:

    Net Income                                    $   (995,442)     $   191,573

     Adjustments to reconcile net 
      income to net cash  
      provided by  
      operating activities:
        Depreciation and
          amortization                                 642,123          647,762
        Provision for bad debt                         559,929           34,000
        Write down of assets                           102,709                0 
        Changes in assets and
          liabilities:
            (Increase) in receivables                 (614,986)         (84,644)
            Decrease (increase) in inventory            11,589          (61,007)
            Decrease in prepaid expenses                34,376           36,018
            Decrease in other assets                    34,910          133,353
            Increase in accounts payable
              and accrued expenses                     906,129            7,270

    Net cash provided by
      operating activities                             681,337          904,325
                                                 -------------      -----------

Cash flows from investing activities:

    Capital expenditures                              (849,547)        (682,976)
                                                --------------      -----------
    Net cash used in
        investing activities                          (849,547)        (682,976)
                                                --------------      -----------




                        See notes to financial statements


                                       F-6







                           MEDICAL STERILIZATION, INC.

                             STATEMENTS OF CASH FLOW


                                                        Years ended December 31,
                                                        ------------------------
                                                          1996            1995
                                                        -------          ------
(Continued)

Cash flows from financing activities:
  Net proceeds from revolving
    line of credit                                      333,978         503,877
  Repayment of long-term debt                          (171,121)       (285,838)
  Proceeds from issuance of debt                         50,000        (225,000)
  Principal payments under capital lease obligations   (124,178)        (53,376)
  Proceeds from stock options exercised                   4,000               0
  Costs incurred in connection with
    stock registration                                  (24,156)        (32,134)
                                                       ---------       ---------

        Net cash provided by (used in)
          financing activities                           68,523         (92,471)
                                                       ---------      ----------

Net (decrease) increase in cash                         (99,687)        128,878

Cash at beginning of year                               175,390          46,512
                                                       ---------      ----------

Cash at end of year                                  $   75,703      $  175,390
                                                     ==========      ===========

Supplemental disclosures:

  Interest  payments during the years ended  December 31, 1996 were $303,000 and
    $335,000 respectively

  Taxes paid during the years ended  December  31, 1996 and 1995 were  $11,774
    and $6,498, respectively.

During 1996 and 1995,  the Company  accrued  dividends  of $123,552 and $114,400
  respectively  on Series B Preferred  Stock,  in  accordance  with the Series B
  Preferred Stock agreement.

During 1996 the Company recorded capital lease obligations of $969,693.


                        See notes to financial statements



                                       F-7






                           MEDICAL STERILIZATION, INC.

                          NOTES TO FINANCIAL STATEMENTS

1.       Formation and Business:

         Medical  Sterilization,  Inc. (the  "Company") was  incorporated in New
York State on May 27, 1982. The Company  completed  construction of its expanded
facility in 1985 and initiated  off-site  sterilization  services to health care
providers and to manufacturers of disposable  medical  products,  principally in
the New York metropolitan area. The Company also provides contract sterilization
services  to other  customers.  In  addition,  the  Company  uses its  radiation
facility at Syosset to irradiate  polytetraflouoroethylene  ("PTFE"),  which can
then be ground into very small  particles  for use  primarily  as an additive to
printing  inks and as a lubricant.  The Company  leases its facility in which it
has installed steam and radiation sterilization equipment.

         For  the  fiscal  year  ended   December   31,  1996,   the   Company's
sterilization  services for  healthcare  providers,  contract  sterilization  of
disposable  medical  products and radiation  processing  of industrial  products
businesses accounted for approximately 55.1%, 11.0% and 33.9%, respectively,  of
the Company's revenues,  as compared with 53.7%, 15.3% and 31.0%,  respectively,
for the fiscal year ended December 31, 1995.

         One customer  accounted for  approximately 33% and 30% of total revenue
for 1996 and 1995, respectively.  One customer accounted for 40% of revenue from
contract  sterilization  services in 1995. One customer accounted for all of the
revenue from PTFE processing service in 1996 and 1995 (See Note 13).

2.       Summary of Significant Accounting Policies:

         Inventory:

         Inventory is stated at the lower of first-in, first-out cost or market.

         Fixed Assets:

         Depreciation  and  amortization  are computed  using the  straight-line
method over the estimated  useful lives of the related assets (ranging from 5 to
15 years) and, for leasehold  improvements,  over the shorter of the useful life
of the  improvement  or  the  term  of the  lease.  Shrinkage-loss  of  surgical
instruments and containers is provided based upon incurred losses.

         Maintenance  and repairs  are  charged to income in the year  incurred.
Expenditures  which  significantly  improve or extend the life of the assets are
capitalized.

         Upon  disposal,  the  cost and  related  accumulated  depreciation  are
removed from the respective  accounts and any resulting gain or loss is included
in income.

                                       F-8







         Accounting for Long-Lived Assets:

         On January 1, 1996, the Company  adopted SFAS No. 121,  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
Of," which requires that long-lived assets and certain identifiable  intangibles
to be held and used by an entity be reviewed for impairment  whenever  events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be  recoverable.   Impairment  is  evaluated  by  comparing  future  cash  flows
(undiscounted  and without interest  charges) expected to result from the use or
sale of the asset and its eventual  disposition,  to the carrying  amount of the
asset.  The  adoption  of SFAS No.  121 did not have a  material  impact  on the
Company's financial position or results of operations.

         Accounting for Stock-Based Compensation:

         The Company  adopted  Statement of Financial  Accounting  Standards No.
123,  "Accounting  for Stock-Based  Compensation"  ("SFAS") No. 123, in 1996. As
permitted by SFAS No. 123, the Company continues to measure compensation cost in
accordance  with  Accounting  Principles  Board Opinion No. 25,  "Accounting for
Stock Issued to Employees," but provides pro forma disclosures of net income and
earnings  per share as if the fair value method (as defined in SFAS No. 123) had
been applied beginning 1995.

         Earnings Per Share Calculation:

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statements  of Financial  Accounting  Standards  No. 128,  "Earnings  per Share"
("SFAS No. 128"),  which  establishes  standards  for  computing and  presenting
Earnings  per  share  (EPS).  SFAS  No.  128  will be  effective  for  financial
statements   issued  for  periods  ending  after  December  15,  1997.   Earlier
application  is not  permitted.  Management has not yet evaluated the effects of
this change on the Company's financial statements.

         Revenue Recognition:

         The  Company  records  revenue  for  hospital  services   monthly,   in
accordance  with  contractual  terms.   Revenues  for  other  sterilization  and
radiation  services  are  recorded  upon the  completion  of  processing  and/or
shipment.

         Concentration of Credit Risk:

         Trade  receivables  arise from long-term and short-term  contracts with
healthcare providers in its area of operations.  The Company provides instrument
sterilization  services  pursuant to contracts  with 53 hospitals and ambulatory
surgi-centers.  In addition,  the Company sterilizes disposable medical products
for 48 disposable  medical products  manufacturers.  Receivables also arise from
the  processing of  polytetrafluoroethylene  ("PTFE"),  also know as ("Teflon.")
This  process is solely  performed  for  Shamrock  Technologies,  Inc. To reduce
credit risk, the Company  performs credit  evaluations of its customers but does
not  generally  require  collateral.  Credit risk is affected by  conditions  of
occurrences  within  the  economy  and  the  healthcare  industry.  The  Company
establishes an allowance for doubtful  accounts  based upon factors  surrounding
the credit risk of specific customers, historical trends and other information.

                                       F-9







         At December 31, 1996,  four customers  represented  44% of the accounts
receivable balance. The loss of any one customer could have a significant impact
on the Company's financial position or results of operations.

         Income Taxes:

         The Company  accounts for income taxes in accordance  with Statement of
Financial  Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes",
which requires that deferred income taxes be recognized for the tax consequences
in future years of differences  between the tax bases of assets and  liabilities
and their financial reporting amounts at each year-end based on enacted tax laws
and  statutory  rates  applicable  to the periods in which the  differences  are
expected to effect taxable income.  Valuation  allowances are  established  when
necessary to reduce deferred tax assets to the amount expected to be realized.

         Estimates:

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. The most significant  estimate related to the realizability of
Accounts  Receivable.  Actual results could differ from those estimates.  In the
fourth  quarter of 1996,  the  Company  increased  the  allowance  for  doubtful
accounts by $219,000 and recorded additional write-offs of $307,000.

         Net Income (Loss) Per Share of Common Stock:

         Net income  (loss) per share of common  stock is based on the  weighted
average  number of common  shares  outstanding  during each period  adjusted for
dividends on preferred  stock.  Common stock  equivalents  have been excluded in
1996 from the computation of net loss per share of common stock since the result
would be  anti-dilutive.  Common stock  equivalents of 2,118,919  resulting from
Series C  Convertible  Preferred  Stock and the effects of options and  warrants
have been included in the calculation of weighted average shares  outstanding in
1995.

         Reclassification:

         Certain items in the 1995 financial statement have been reclassified to
conform to the 1996 presentation.


3.       Fixed Assets:

         At December 31, 1996, fixed assets consists of:

         Machinery and equipment                                    $ 4,708,639
         Leasehold improvements                                       1,921,044
         Surgical instruments                                         4,908,690
         Containers                                                     912,176
         Furniture and fixtures                                         252,220
                                                                    -----------
                                                                     12,702,769
         Less, accumulated depreciation and amortization              7,752,630
                                                                    -----------
                                                                    $ 4,950,139
                                                                    ===========


                                      F-10




         Included in fixed assets at December 31, 1996 are assets recorded under
capital leases comprised of:

         Machinery and equipment                                     $  821,635
         Containers                                                      72,245
         Surgical instruments                                           529,089
         Leasehold improvements                                           7,640
                                                                     ----------
                                                                      1,410,609
         Less, accumulated amortization                                 430,560
                                                                     $  980,049
         See Note 7.

         Repairs  and  maintenance  charged to  operations  for the years  ended
December 31, 1996 and 1995 was approximately $91,000 and $180,000, respectively.

4.       Employee Benefit Plans:

         The Company adopted a 401(k) defined  contribution plan commencing with
the 1995 fiscal year which allows  participants to make contributions based on a
percentage of their earnings.  The Company's  contribution  for the fiscal years
ended  December  31,  1996  and  1995  was  approximately  $34,000  and  $22,000
respectively.

5.       Income Taxes:

         Reconciliation  of the federal  statutory tax rate to the effective tax
rate is as follows:

                                                            1996           1995
                                                           -------        ------
         Expected federal statutory tax rate                (34%)           34%
         State and local taxes, net                         ( 6%)            6%
         Limitation (utilization) of net operating losses    40%           (40%)
                                                           -------        ------
         Effective tax rate                                   0%             0%
                                                           =======        ======


         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
differences  between the carrying amount of assets and liabilities for financial
reporting  purposes  and the amounts used for income tax  purposes.  Significant
components of the Company's  deferred tax assets and liabilities at December 31,
1996 are as follows:

         Deferred tax liability:
                  Fixed Assets                                  ($1,055,886)
                           Total deferred tax liability         ( 1,055,886)

         Deferred tax assets:
                  Net operating loss carryforwards                4,230,887
                  Other                                             129,892
                                                                 ----------
                           Total deferred tax assets              4,360,779

         Less valuation allowance                                (3,304,893)
                                                                 ----------
                           Net deferred tax assets            $           0
                                                             ===============


                                      F-11






         The Company has  established  a  valuation  allowance  equal to the net
deferred  tax asset  amount as it is more likely than not that the  deferred tax
asset will not be realized.  The net change in the total valuation allowance for
the year ended December 31, 1996 was an increase of $362,589  related  primarily
to current year net operating loss carryforwards.

         During  1995,  the  Company  utilized  approximately  $320,000  of  net
operating loss carry forwards for income tax purposes.  Such utilization  served
to eliminate the Company's current tax liability.

         At December  31,  1996,  the Company  had  federal net  operating  loss
carryforwards of approximately $10,577,000, which expire in varying amounts from
1998 through 2012.

<TABLE>
<CAPTION>
<S>            <C>                                                                    <C>
6.       Long-Term Debt:

         At December 31, 1996, long-term debt consists of:

         Notepayable to officer and shareholder,  payable in annual installments
             of $50,000 with interest  payable  monthly at the prime rate (8.25%
             at December 31, 1996) plus 1% (a)                                    $ 166,378

         Note payable to director and shareholder, on demand,
             interest payable monthly at the rate of 2% per annum
             over the prime rate (a)                                                 33,334

         Note payable to bank, payable in monthly installments of
             $12,500, with final payment due October 1998 with interest
             at the rate of 2 1/2% per annum over the prime rate (b)                615,008

         Notepayable  to  commercial  lender,  due  January  1998 with  interest
             payable monthly at the rate of 3 1/2% per annum over
             the prime rate (c)                                                   1,501,245

         Note payable to officer, due on demand, at the rate of 2% per
             annum over the prime rate.                                              50,000
                                                                                 ----------

                                                                                  2,365,965

                  Less, current maturities (including $133,045 due
                      to related parties)                                           283,045
                                                                                 ----------

                  Long-term debt (including $116,667 due to
                      related parties)                                           $2,082,920
                                                                                 ==========
</TABLE>


         (a) During 1991, the Board of Directors  approved a resolution to repay
the debt to the  President  and the  Director at a rate not to exceed 10% of the
profits  in any  quarter  and  to be  limited  further  by  the  Company's  cash
availability. The loans are subordinate to the bank borrowing.

                                      F-12







         (b) In November of 1994, the Company  renegotiated the term of its bank
borrowing  facilities.  The existing bank loan of $1,514,000 was replaced with a
new loan  agreement.  In  connection  with this new  loan,  the  Company  made a
$600,000 payment against the existing principal balance. The remaining principal
balance of  $914,000  was  converted  to a four (4) year term loan  which  bears
interest at a rate of prime plus 2 1/2%. The principal is amortized on a monthly
basis at the rate of $12,500 per month with a balloon payment of $326,836 due in
October,  1998. In addition,  the bank exchanged its first lien on the Company's
assets for a second lien  position.  The Company  also  extended the term of the
warrants  being held by the bank for an  additional  three (3) years and reduced
the exercise price to $2.00 per share. (See Note 9).

         (c) In November of 1994,  simultaneously  with the restructuring of its
bank loan agreement  described  above, the Company entered into a line of credit
arrangement with a lending  institution.  The agreement provides for a revolving
collateralized  line  of  credit  up  to  $2,000,000.  The  line  of  credit  is
collateralized  by  substantially  all assets of the  Company.  The  Company can
borrow up to 70% of its eligible accounts  receivable.  The interest rate on the
facility is prime plus 3 1/2%. The expiration  date has been extended to January
1998.

         Average monthly borrowings under the revolving line of credit described
above for the year ended  December  31,  1996  amounted  to  $1,558,400  and the
related  weighted  average  interest rate was 11.9%.  Maximum  borrowings at any
month end were $1,810,225 in 1996.

         The approximate  aggregate principal payment requirements for long-term
debt are as follows: 1997 - $283,045; 1998 - $2,016,542;  1999 - $50,000; 2000 -
$16,378, and thereafter - $0. 

         Fair value of long-term debt  approximates  recorded amounts as similar
borrowings have been offered to the Company at comparable rates and maturities.

7.       Capital Leases:

         Future  minimum  payments as of December 31, 1996 under capital  leases
for fixed assets are as follows:

         1997                                                  $  283,985
         1998                                                     264,207
         1999                                                     237,189
         2000                                                     218,967
         2001                                                      86,011
                                                               ----------

         Total minimum lease payments                          $1,090,359

         Less, amount representing interest                       215,823
                                                               ----------
         Present value of minimum lease payments, including
             $168,160 currently payable at December 31, 1996.  $  874,536
                                                               ==========



                                      F-13






8.       Preferred Stock (See Note 9):

         In November  1994,  the Company  restructured  its Series A Convertible
Preferred  Stock (as of June 30,  1994  values)  which was due to be redeemed on
December 31, 1994. Of the 800,000 shares  ($2,400,000 face value) of outstanding
Series A Convertible  Preferred Stock,  50,000 outstanding shares ($150,000 face
value) and accrued dividends  aggregating $225,000 were converted into a one (1)
year term loan with monthly  principal  and interest  payments.  This loan bears
interest at the rate of prime plus 3 1/2%.  This note was paid off in 1995.  The
Company also granted  warrants to purchase  10,000 shares of its Common Stock at
$2.00 per share expiring in 1999. The remaining 750,000 shares  ($2,250,000 face
value) plus accrued  dividends of  approximately  $1,071,000  were exchanged for
$1,375,000 of Series B Convertible  Preferred  Stock and  $1,945,625 of Series C
Convertible  Preferred  Stock.  The  Series  B  Convertible  Preferred  Stock is
convertible at $2.00 per share into 687,500 shares of Common Stock.  This Series
B Convertible  Preferred  Stock is  convertible at the option of the holder into
Common Stock or cash, at $2.00 per share maturing  December 31, 1999.  Dividends
accrue on this Series B Convertible  Preferred Stock at the rate of 8% per year.
These dividends may be paid in cash or accrued at the option of the Company.  If
not  paid,  accrued  dividends  are  added to the face  amount  of the  Series B
Convertible Preferred Stock.

         In the  event  prior to  October  31,  1999,  the  market  price of the
Company's  Common  Stock as quoted on Nasdaq  attains a price of $6.00 per share
and  maintains  such  price  for at  least  90 days,  the  Series B  Convertible
Preferred Stock will be automatically converted into Common Stock.

         The Series C Convertible  Preferred Stock is automatically  convertible
at $1.00 per share into  1,945,625  shares of Common Stock on December 30, 2004,
or earlier at the  option of the  holder.  There are no  dividends  payable  nor
accrued on the Series C Convertible Preferred Stock.

         In the  event  prior to  October  31,  1999,  the  market  price of the
Company's  Common  Stock as quoted on Nasdaq  attains a price of $3.00 per share
and  maintains  such  price  for at  least  90 days,  the  Series C  Convertible
Preferred Stock will be automatically converted into Common Stock.

9.       Common Stock Warrants (See Note 13):

         In February  1993,  for his  guarantee  for the  issuance of a $100,000
bond, the Company issued  warrants to purchase 2,500 shares of Common Stock at a
price of $2.00 per share exercisable through February 1998, to a director of the
Company.

         In November 1994, as part of the settlement of the Shamrock  litigation
(Note 13) the Company  issued  warrants to purchase  75,000 shares of its Common
Stock at $2.00 per share to Shamrock  which expire in 1999.  Also in conjunction
with the  settlement,  the Company issued  warrants to purchase 40,000 shares of
its Common  Stock at $2.00 per share to each of two  directors of the Company in
consideration of their efforts in achieving the settlement.  The warrants expire
in 1999.

                                      F-14






         In March 1994, the Company issued warrants to purchase 25,000 shares of
stock at $2.00 per share to a new board member. Such warrants become exercisable
as follows:  25% in 1995,  50% in 1996 and 25% in 1997.  The warrants  expire in
2000.

         In connection  with the financing  described in Note 6(b),  the Company
extended  the term of a warrant to purchase an  aggregate  of 100,000  shares of
common  stock for three (3) years (to expire in 1998) and reduced  the  exercise
price to $2.00 per share.

         In  November  1994,  the  Company  issued  to a  financial  institution
warrants  to  purchase  50,000  shares of its  common  stock at $2.00 per share,
expiring in 1999.

         In December 1994, in connection with the conversion of 50,000 shares of
Class A convertible  stock into debt,  the Company  issued  warrants to purchase
10,000 shares at $2.00 per share, which warrants expire in January 1997.

         In January 1996, the Company issued  warrants to purchase 25,000 shares
of  stock  at $2.00  per  share to a new  board  member.  Such  warrants  become
exercisable  as follows:  25% in 1996, 25% in 1997, 25% in 1998 and 25% in 1999.
The warrants expire in 2001.

         At December 31, 1996, the Company had outstanding  warrants to purchase
367,500 shares of common stock at a price of $2.00 per share with the expiration
dates through January 2001.


10.      Stock Option Plan:

         On September 29, 1994,  the Board of Directors  approved the 1994 Stock
Option Plan (the "1994  Plan") and  authorized  the  issuance to up to 1,000,000
shares of  Common  Stock of the  Company  upon the  exercise  of  Incentive  and
Non-Statutory  Stock Options which may be granted pursuant to the Plan. The Plan
was approved by the  shareholders  at a meeting held on July 20, 1995.  In 1996,
the Board of Directors  authorized  another 500,000 shares of Common Stock to be
issued under the 1996 Plan which was approved by shareholders on May 25, 1996.

         Incentive Stock Options may be granted only to key employees, including
officers or directors  who are  employees of the  Company,  and are  exercisable
immediately or in  installments  following a period of two (2) years after grant
but within ten (10) years from the date of grant  (five (5) years in the case of
options granted to holders of more than 10% of the Company's voting stock).  The
exercise  price must be at least equal to the fair market value of the Company's
common  stock on the date  granted  (110% in the case of 10%  shareholders).  At
December 31, 1996, Incentive Stock Options for an aggregate of 418,420 shares of
common stock at exercise prices ranging from $.74 to $1.06 were outstanding.

         Non-Qualified  Stock Options may be granted under the Plan or otherwise
to officers,  consultants,  and key employees. The exercise price is not limited
and may be below the fair market value of the Company's common stock on the date
of grant.  At December  31,  1996,  Non-Qualified  Options for an  aggregate  of
662,500  shares of common stock at exercise  prices  ranging from $.74 to $9.00,
were outstanding.

                                      F-15





         A summary of activity under the stock option plans follows:

                                                              1996        1995
                                                          ----------   ---------

Shares under option, beginning of year                      894,750     612,250
Options cancelled                                            (1,000)     (2,500)
Options granted:  Stock options, at exercise prices
    ranging from $ .74 to $1.19                             227,170     285,000
Options exercised at excise price of $.10 per share         (40,000)
                                                          ----------   ---------
Shares under option, end of the year ranging from
    $.74 to $9.00 per share                               1,080,920     894,750
                                                          ==========   =========
Unoptioned shares available for future grants               379,080     105,250
                                                          ==========   =========

         At December 31,  1996,  options  under the 1996 Plan and previous  plan
were exercisable for 953,043 shares. In connection with the aforementioned plan,
1,500,000  shares of the  Company's  common stock have been  reserved for future
issuance.

         As  discussed  in Note 1, the Company  has applied the  disclosure-only
provision  SFAS 123. Had  compensation  cost been  determined  based on the fair
value  at the  grant  date  consistent  with the  provisions  of SFAS  123,  the
Company's  net income  (loss)  and  earnings  (loss)  per share  would have been
reduced to the pro forma amounts  indicated  below for the years ended  December
31, 1996 and 1995:


                                                        1996              1995

Net (loss) income attributable to common
    shareholders as reported                         (1,118,994)         77,173 
                                                     ===========       =========
Pro forma (loss)                                     (1,216,201)        (76,227)
                                                     ===========       =========
(Loss) earnings per share as reported                      (.37)            .02
                                                     ===========       =========
Pro forma (loss) per share                                 (.41)           (.03)
                                                     ===========       =========

         The weighted  average  fair value of each option has been  estimated on
the date of  grant  using  the  Black-Scholes  options  pricing  model  with the
following  weighted  average  assumptions  used for  grants  in 1996  and  1995,
respectively;  no dividend yield; expected volatility of 90%; risk-free interest
rate (ranging from 5.07% - 6.57%); and expected lives ranging from approximately
1.5 to 5 years.  Weighted  averages are used because of varying assumed exercise
dates.

         A summary  of the  status of the  Company's  stock  option  plans as of
December 31, 1996 and 1995, and changes during the years ended on those dates is
presented below.

                                      F-16





<TABLE>
<CAPTION>

                                                 December 31, 1996                   December 31, 1995
                                            ----------------------------------------------------------
                                                               Weighted                            Weighted
                                                                Average                            Average
                                                               Exercise                            Exercise
                                            Shares              Price           Shares             Price

<S>                                        <C>                   <C>            <C>                <C>
Outstanding at beginning of year           894,750               .76            612,250            .77
    Granted                                227,170              1.03            285,000            .83
    Exercised                              (40,000)              .10             (2,500)          9.00
    Canceled                                (1,000)              .74
                                        -----------                           ----------
Outstanding at end of year               1,080,920               .84            894,750            .76
                                        ===========                           ==========
Options exercisable at year end            953,043                              701,000
                                        ===========                           ==========
Weighted average fair value of
    options granted during the year     $      .73                            $     .54
                                        ===========                           ==========

</TABLE>

         The  following  table  summarizes   information   about  stock  options
outstanding at December 31, 1996 (shares in thousands):


<TABLE>
<CAPTION>
                                    Weighted
                                     Average        Weighted                       Weighted
Range of                            Remaining        Average                       Average
Exercise            Shares         Contractual      Exercise      Shares         Exercisable
 Prices           Outstanding         Life            Price       Exercisable       Price
<C>                <C>                  <C>        <C>            <C>           <C>      
$.74 to $.75        841,250              8          $   .74        816,250       $     .74
$1.06               137,170              4             1.06         34,293            1.06
$1.19 to $1.25      100,000             10             1.22        100,000            1.22
$9.00                 2,500              2             9.00          2,500            9.00
                    ---------      -----------     ---------      ----------    -------------
$ .74 to $9.00      1,080,920            8          $   .84        953,043      $      .82
</TABLE>



11.      Related Party Transactions:

         As of December  31, 1996 and 1995,  members of the law firm  previously
serving as general  counsel for the Company owned 48,057 shares of common stock.
Fees for  legal  services  rendered  by the law firm  approximated  $20,500  and
$80,000 for the years ended December 31, 1996 and 1995, respectively.

         See Notes 6 and 9 for other related party transactions.

12.      Commitments and Contingencies:

         The Company leases its operating  facility and certain  equipment under
operating leases.  The lease for the facility in Syosset,  New York, was renewed
in November 1995,  with the following  terms:  (a) term of the lease is five (5)
years until March 2001, (b) annual rental to be $456,000 for the first three (3)
years and $504,000 for the remaining two (2) years.


                                      F-17







         The equipment leases have terms up to five (5) years.

         Minimum annual rental commitments for  non-cancelable  operating leases
at December 31, 1996, are as follows:

                   Year ending
                   December 31,                     Amount
                  -------------               --------------
                       1997                      $  646,000
                       1998                         606,000
                       1999                         593,000
                       2000                         519,000
                       2001                          87,000
                                               ------------
                                                 $2,451,000
                                               ============


         The  accompanying  financial  statements  reflect  rent  expense  on  a
straight  line  basis  over the terms of the  leases as  required  by  generally
accepted  accounting  principles.  Rent expense was  approximately  $705,000 and
$684,000 and for the years ended December 31, 1996 and 1995, respectively.

         The  Company  purchases  from  surgical  instrument  manufacturers  the
surgical  instruments included in Instrument Sets that are utilized in providing
the Company's services. Pursuant to a sales and marketing agreement entered into
with Pilling Weck, a national surgical instrument manufacturer and a division of
Teleflex,  Inc., the Company has agreed to purchase the majority of its surgical
instrument requirements from Pilling Weck, and Pilling Weck has agreed to supply
surgical  instruments to the Company,  as well as to be the exclusive  sales and
marketing agent for MSI in the United States.


13.      Litigation:

         (a) In  November  1994,  the  Company  reached  an  agreement  with the
plaintiff,  Shamrock Technologies Inc. ("Shamrock"),  in which the judgment that
had been awarded in the approximate  amount of $3,500,000,  including  interest,
was satisfied.  The Company had given to Shamrock,  as security, a confession of
judgment in the amount of $1,250,000.  In June 1996,  the Company  received from
Shamrock the release of the Confession of Judgment.

         As part of the settlement,  Shamrock agreed to purchase $3.3 million of
tolling or processing  services for 18 months beginning November 1994, at prices
which provide a gross margin to the Company on such services.  At the end of the
tolling  agreement,  the Company  must refrain  from  participating  in the PTFE
processing business.

         In November  1995,  the Company and Shamrock  entered into an agreement
modifying  and  extending  the Toll  Processing  Agreement.  The  agreement  was
extended  through  June 30,  1997 with  Shamrock  having  the right to extend it
further to December 31, 1997.

                                      F-18






14.      Subsequent Events:

         In  January  1997,  approximately  45%  of  the  voting  shares  of the
Company's stock was acquired by TFX Equities, Inc., a wholly owned subsidiary of
Teleflex,  Inc., a  diversified  publicly  held  company.  TFX  Equities,  Inc.,
purchased  the  Series  B and  Series C  Convertible  Preferred  Stock  from the
previous  owners  of such  stock.  In  connection  with  this  transaction,  TFX
Equities,  Inc.,  received  three  (3)  seats  out of the seven (7) seats on the
Company's Board of Directors.

         In January 1997,  the Company  entered into a loan  agreement  with TFX
Equities,  Inc. The principal  amount of the loan is $500,000 and bears interest
at the rate of prime plus 1%. The note is due and payable on January 31, 1998.

         In February 1997,  the Company  issued an additional  150,000 shares of
its common stock to TFX  Equities,  Inc.,  for $2.00 per share.  The shares were
used to reduce accounts  payable owed to another  subsidiary of Teleflex,  Inc.,
incurred for instrument purchases.

         In March 1997,  the Company  entered into a purchase and sale agreement
with  Shamrock   Technologies,   Inc.,  to  sell  the  Company's  electron  beam
accelerator.  Under the  agreement  the  Company,  would  receive  approximately
$1,250,000  for the beam and related  equipment  with closing of the sale of the
beam being  estimated as April 30,  1998,  at which time title to the beam would
transfer  to Shamrock  Technologies,  Inc. In  addition,  Shamrock  has posted a
$500,000 standby letter of credit in escrow.

         In conjunction  with this sale, the Company has expensed  approximately
$103,000 in 1996 as a reduction of the recorded  amount of the assets to be sold
to Shamrock Technologies, Inc.

         The March 19,  1997  Letter of Intent to enter  into a joint  marketing
agreement  with  E-BEAM  provides  for the  transfer of the  Company's  contract
sterilization and industrial  processing  customers at a price of 15% of related
revenues up to  $350,000.  Upon  execution  of the  agreement  the Company  will
receive a nonrefundable deposit against future royalties of $150,000.

         Upon  consummation  of the sale of the  electron  beam  accelerator  to
Shamrock and the remaining  contract  sterilization  and  industrial  processing
business  to  E-BEAM,   the  Company  will  be  relying  on  revenues  from  its
sterilization  processing of Surgical  Instrument Sets. Revenue generated by the
Accelerator to be sold approximated  $3,900,000 and $4,061,000 in 1996 and 1995,
respectively.  Management  intends to replace these  revenues with revenues from
its Surgical Instrument Set business.


                                      F-19



                                                     Registration No. 2-85008-NY

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                       SECURITIES AND EXCHANGE COMMISSION


                             Washington, D.C. 20549

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                                    EXHIBITS

                                   Filed With

                                  FORM 10-KSB

                                     Under

                           THE SECURITIES ACT OF 1934

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

                          MEDICAL STERILIZATION, INC.


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