<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C.  20549
                                   FORM 10-Q

(Mark One)
  XX   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 ----                                                                    
       EXCHANGE ACT OF 1934
       For the quarterly period ended             September 30, 1996
                                     ---------------------------------------
                                       or
____   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934
       For the transition period from ______________ to ______________

                      Commission file number     1-9603
                                              -------------

                          STEVENS INTERNATIONAL, INC.
              ----------------------------------------------------
             (Exact name of registrant as specified in its charter)

                 Delaware                              75-2159407
       ----------------------------------------------------------------
       (State or other jurisdiction of                (IRS Employer
       incorporation or organization)               Identification No.)

                 5500 Airport Freeway, Fort Worth, Texas 76117
                 ---------------------------------------------
              (Address of principal executive offices) (zip code)

                                  817/831-3911
                                  ------------
              (Registrant's telephone number, including area code)

               __________________________________________________
              (Former name, former address and former fiscal year,
                         if changed since last report)

Indicate by check mark whether the registrant (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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                         Yes    XX         No  _____
                                             --------               

                     APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
 
Title of Each Class                     Outstanding at November 5,1996
---------------------------------       ------------------------------
Series A Stock, $0.10 Par Value                    7,339,468
Series B Stock, $0.10 Par Value                    2,110,634
<PAGE>
 
                               TABLE OF CONTENTS
                               -----------------
                                                                    PAGE NO.

PART I.   FINANCIAL INFORMATION
 
  Item 1. Financial Statements
 
           Consolidated Condensed Balance Sheets                        3
           December 31, 1995 and September 30, 1996
           (unaudited)
 
           Consolidated Condensed Statements of Operations              4
           Three and Nine months ended September 30, 1996
           and 1995 (unaudited)
 
           Consolidated Condensed Statements of                         5
           Stockholders' Equity
           Nine months ended September 30, 1996 (unaudited)
 
           Consolidated Condensed Statements of Cash Flows              6
           Nine months ended September 30, 1996 and 1995
           (unaudited)
 
           Notes to Consolidated Condensed Financial                    7
           Statements (unaudited)
 
Item 2. Management's Discussion and Analysis of                         9
        Financial Condition and Results of Operations

PART II.  OTHER INFORMATION

 Item 1.  Legal Proceedings                                            14

 Item 6.  Exhibits and Reports on Form 8-K                             14

                                      -2-
<PAGE>
 
<TABLE>
<CAPTION>
                    STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES
                       CONSOLIDATED CONDENSED BALANCE SHEETS
                     (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 
                                                DECEMBER 31, 1995    SEPTEMBER 30, 1996
                                                --------------------------------------
                      ASSETS                                             (unaudited)
                      ------
<S>                                                 <C>                   <C> 
Current assets:
   Cash...........................................  $       712            $    221
   Temporary investments..........................          102                  --
   Trade accounts receivable, less allowance for                      
    losses of $655 and $879 in 1995 and 1996, 
    respectively..................................       26,079              21,441 
 Costs and estimated earnings in excess of                            
  billings on long-term contracts.................       18,341               8,946              
   Inventory (Note 3).............................       23,300              25,535
   Deferred and refundable income taxes...........          832               2,958
   Other current assets...........................          666               2,497
                                                        -------            --------
   Total current assets...........................       70,032              61,598
Property, plant and equipment.....................       32,017              30,363
Other assets, net.................................       15,598              13,374
                                                        -------            --------
   Total Assets...................................  $   117,647            $105,335
                                                        =======            ========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
   Trade accounts payable.........................  $    15,117            $ 13,686
   Billings in excess of costs and estimated                           
    earnings on long-term contracts...............          219                 421 
   Other current liabilities......................        9,019               6,555
   Customer deposits..............................        3,851               5,484
   Advances from affiliates.......................           --                 950
   Current portion of long-term debt (Note 4).....        3,699               7,250
                                                        -------            --------
   Total current liabilities......................       31,905              34,346
Long-term debt (Note 4)...........................       33,470              30,457
Deferred income taxes.............................        4,536               1,316
Deferred pension costs............................        2,364               2,364
Commitments and contingencies (Note 6)                                 
Stockholders' equity:                                                  
   Preferred stock, $0.10 par value, 2,000,000                         
    shares authorized, none issued and outstanding           --                  -- 
   Series A common stock, $0.10 par value,                             
    20,000,000 shares authorized, 7,312,000 and 
    7,340,000 shares issued and outstanding at 
    December 31, 1995 and September 30, 1996, 
    respectively..................................          731                 734            
   Series B common stock, $0.10 par value,                             
    6,000,000 shares authorized, 2,139,000 and 
    2,111,000 shares issued and outstanding at 
    December 31, 1995 and September 30, 1996, 
    respectively..................................          214                 211    
   Additional paid-in-capital.....................       39,144              39,844
   Foreign currency translation adjustment........          359                  32
   Excess pension liability adjustment............       (1,036)             (1,036)
   Retained earnings (deficit)....................        5,960              (2,933)
                                                        -------            --------
Total stockholders' equity........................       45,372              36,852
                                                        -------            --------
   Total Liabilities and Stockholders' Equity       $   117,647            $105,335
                                                        =======            ========
</TABLE> 
See notes to consolidated condensed financial statements.

                                      -3-
<PAGE>
 
                 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES
                CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
 
<TABLE> 
<CAPTION> 
                                          THREE MONTHS ENDED    NINE MONTHS ENDED
                                             SEPTEMBER 30,        SEPTEMBER 30,
                                           1995       1996     1995         1996
                                          -------   -------   --------     --------
<S>                                       <C>       <C>       <C>          <C> 
Net sales...............................  $33,962   $12,770   $104,478     $ 54,115
Cost of sales...........................   24,424    13,976     78,224       49,450
                                          -------   -------   --------     --------
Gross profit (loss).....................    9,538    (1,206)    26,254        4,665
 
Selling, general and administrative         5,760     4,457     15,534       13,748
 expenses...............................
Restructuring charge (Note 5)...........       --        --         --        1,000
                                          -------   -------   --------     --------
Operating income (loss).................    3,778    (5,663)    10,720      (10,083)
 
Other income (expense):
   Interest income......................       25        12        148           50
   Interest expense.....................     (917)     (962)    (2,548)      (2,919)
Lawsuit settlement expense (Note 6).....       --        --         --         (700)
   Other, net...........................      (73)     (139)      (103)        (454)
                                          -------   -------   --------     --------
                                             (965)   (1,089)    (2,503)      (4,023)
                                          -------   -------   --------     --------
Income (loss) before income taxes and
   extraordinary item...................    2,813    (6,752)     8,217      (14,106)
Income tax (expense) benefit (Note 7)...   (1,032)    2,685     (3,436)       5,213
                                          -------   -------   --------     --------
Net income (loss).......................  $ 1,781   $(4,067)  $  4,781     $ (8,893)
                                          =======   =======   ========     ========
 
Net income (loss) per common share          $0.19    $(0.43)     $0.50       $(0.94)
 (Note 8)...............................  =======   =======   ========     ========
 
Weighted average number of shares of
 common and common stock equivalents      
 outstanding during the periods (Note 8)    9,583     9,451      9,584        9,451
                                          =======   =======   ========     ========
</TABLE> 
 
           See notes to consolidated condensed financial statements.

                                      -4-
<PAGE>
 
                 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES
           CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                                  (UNAUDITED)
                            (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
 
 
                                          SHARES    AMOUNT
                                          -------  --------
<S>                                       <C>      <C>
Series A Stock
   Balance, December 31, 1995...........   7,312   $   731
   Conversion of Series B stock to            28         3
    Series A stock......................  ------   -------
   Balance, September 30, 1996..........   7,340   $   734
                                          ======   =======
 
Series B Stock
   Balance, December 31, 1995...........   2,139   $   214
   Conversion of Series B stock to           (28)       (3)
    Series A stock......................  ------   -------
   Balance, September 30, 1996..........   2,111   $   211
                                          ======   =======
 
Additional Paid-In Capital
   Balance, December 31, 1995...........           $39,144
   Lawsuit settlement...................               700
                                                   -------
   Balance, September 30, 1996..........           $39,844
                                                   =======
 
Foreign Currency Adjustment.............
   Balance, December 31, 1995...........           $   359
   Translation adjustments..............              (327)
                                                   -------
   Balance, September 30, 1996..........           $    32
                                                   =======
 
Pension Liability Adjustment
   Balance, December 31, 1995...........           $(1,036)
                                                   -------
   Balance, September 30, 1996..........           $(1,036)
                                                   =======
 
Retained Earnings (Deficit)
   Balance, December 31, 1995...........           $ 5,960
   Net (loss) for nine months ended                 (8,893)
    September 30, 1996..................           -------
   Balance, September 30, 1996..........           $(2,933)
                                                   =======
 
Stockholders' Equity at September 30,              $36,852
 1996                                              =======
</TABLE> 
 
 
           See notes to consolidated condensed financial statements.

                                      -5-
<PAGE>
 
                  STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES
                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                             (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
 
                                           NINE MONTHS ENDED
                                             SEPTEMBER 30,
                                            1995       1996
                                          ---------  --------
<S>                                       <C>        <C>
Cash provided by (used in) operations:
   Net income (loss)....................  $  4,781   $(8,893)
 
   Adjustments to reconcile net income
    (loss) to net cash   provided by
    (used in) operating activities:
   Depreciation and amortization........     3,939     4,222
   Deferred and refundable taxes........        --    (5,346)
   Lawsuit settlement expense...........        --       700
   Other................................       282      (327)
   Changes in operating assets and
    liabilities:
      Trade accounts receivable.........    (5,671)    4,638
      Contract costs in excess of           (8,617)    9,596
       billings.........................
      Inventory.........................    (4,211)   (2,235)
      Other assets......................      (641)     (371)
      Trade accounts payable............       105    (1,431)
      Other liabilities.................    (2,184)      119
                                          --------   -------
Total cash provided by (used in)           (12,217)      672
 operating activities...................  --------   -------
 
Cash provided by (used in) investing
 activities:
 Additions to property, plant and           (4,958)   (1,662)
  equipment.............................
 Proceeds from sale of assets...........        60       177
 Deposits and other.....................       (77)      113
                                          --------   -------
Total cash provided by (used in)            (4,975)   (1,372)
 investing activities...................  --------   -------
 
Cash provided by (used in) financing
 activities:
 Addition to (repayment of) long-term       16,079        --
  debt..................................
 Increase in current portion of                 --       107
  long-term debt........................
 Exercise of stock options..............       340        --
                                          --------   -------
Total cash provided by (used in)            16,419       107
 financing activities...................  --------   -------
 
Increase (decrease) in cash and               (773)     (593)
 temporary investments..................
Cash and temporary investments at            1,473       814
 beginning of period....................  --------   -------
Cash and temporary investments at end     $    700   $   221
 of period..............................  ========   =======
 
Supplemental disclosure of cash flow
 information:
    Cash paid during the period for:
   Interest.............................  $  1,778   $ 2,396
   Income taxes.........................     2,644        90
</TABLE> 
 
See notes to consolidated condensed financial statements.

                                      -6-
<PAGE>
 
                  STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                  (Unaudited)



1. The consolidated condensed balance sheet as of September 30, 1996, the
   consolidated condensed statement of stockholders' equity for the nine month
   period ended September 30, 1996, the consolidated condensed statements of
   operations for the three and nine months ended September 30, 1996 and 1995,
   and the consolidated condensed statements of cash flows for the nine month
   periods then ended have been prepared by the Company without audit. In the
   opinion of management, all adjustments (which include only normal recurring
   adjustments) necessary to present fairly the financial position as of
   September 30, 1996 and the results of operations for the three and nine
   months ended September 30, 1996 and 1995 and the cash flows for the nine
   months ended September 30, 1996 and 1995 and changes in stockholders' equity
   for the nine months ended September 30, 1996 have been made. The December 31,
   1995 consolidated condensed balance sheet is derived from the audited
   consolidated balance sheet as of that date. Complete financial statements for
   December 31, 1995 and related notes thereto are included in the Company's
   Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995
   Form 10-K").

   The above financial statements have been prepared in accordance with the
   instructions to Form 10-Q and therefore do not include all information
   included in the 1995 Form 10-K. The results of operations for the three and
   nine months ended September 30, 1996 and 1995 are not necessarily indicative
   of the results to be expected for the full year.

2. The Company designs, manufactures, markets and services web-fed packaging and
   printing systems and related equipment for its customers in the packaging
   industry and in the specialty/commercial and banknote and security segments
   of the printing industry. The Company is also a worldwide leader in the
   manufacture of rotary and platen die cutting and creasing equipment. The
   Company manufactures equipment capable of converting and printing, among
   other items, food and beverage containers, liquid container cartons,
   banknotes, postage stamps, lottery tickets, direct mail inserts, personal
   checks and business forms. The Company has the technological and engineering
   expertise to combine any of the four major printing methods (offset,
   flexography, rotogravure and intaglio) together with die cutters and creasers
   and product delivery systems into a single system. Complete press systems are
   capable of multiple color and multiple size printing and perform such related
   functions as numbering, punching, perforating, slitting, cutting, creasing,
   folding and stacking. The presses can be custom engineered for non-standard
   form size and special auxiliary functions.

                                      -7-
<PAGE>
 
3. Inventories consist of the following:
 
                    December 31,  September 30,
                        1995          1996
                    ------------  -------------
                      (Amounts in thousands)

Finished product..       $ 7,204        $ 6,668
Work in progress..         9,231         10,815
Raw materials.....         6,865          8,052
                         -------        -------
                         $23,300        $25,535
                         =======        =======

4. For a description of the amendment and restatement of the bank credit
   facility in May 1996 and thereafter, see "Liquidity and Capital Resources".
   Substantially all assets of the Company continue to be pledged as collateral
   on the Company's credit facilities. The long term debt is recorded net of
   unamortized debt issue costs of $0.8 million at September 30, 1996.

5. The restructuring charge of $1 million recorded in the second quarter of 1996
   is a result of various actions taken due to the slowdown in orders for
   printing press systems which began in late 1995 and continues. Charges
   consist primarily of approximately $630,000 in employee severance and related
   employee benefit costs for terminated employees, and $300,000 in leased
   facility exit costs. Company employment has decreased by approximately 40%
   since January 1, 1996 as a result of this restructuring effort.

6. The Company is party to a number of legal actions arising in the ordinary
   course of its business and as a result of the Company's continuing liquidity
   problems. In management's opinion, the Company has adequate legal defenses
   and/or insurance coverage in respect to product liability legal actions and
   does not believe that they will materially affect the Company's operations,
   liquidity, or financial position. See "Legal Proceedings" herein for a
   description of liquidity related lawsuits.

   The June 1996 resolution of the Company's class action lawsuit, which had
   been in litigation for five years, resulted in a one-time $700,000, ($0.07)
   per share charge to second quarter earnings. In this settlement, the Company
   paid no cash but agreed to issue warrants valued at $700,000 to purchase the
   Company's Series A stock. The warrants are exercisable over a one-year period
   from October 31, 1996 and represent the right to purchase up to 737,619
   shares of Series A stock from the Company at an exercise price of $2.672 per
   share. If exercised, the warrants would result in $1,970,918 of additional
   equity to the Company.

7. The benefit of recoverable income tax expense for the three and nine months
   ended September 30, 1996 was $2,685,000 and $5,213,000, of which $1,993,000
   was principally related to reductions in currently payable taxes and
   $3,220,000 related to reductions in deferred taxes.

8. Earnings (loss) per common share for 1996 and 1995 are based upon the
   weighted average number of shares of common and common stock equivalents
   (stock options, when dilutive) outstanding during the periods. Since the
   Series A and Series B stock have identical dividend and participation rights
   in the Company's earnings, they have been considered to be comparable in the
   calculation.

                                      -8-
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


RESULTS OF OPERATIONS

General

The Company experienced operating losses for the third quarter and nine months 
ending September 30, 1996.  For the third quarter the Company had a net loss of 
$(4,067,000) or $(0.43) per share; for the nine months, the Company had a net 
loss of $(8,893,000) or $(0.94) per share.  During the third quarter, the 
Company continued to experience a decrease in sales primarily in the packaging 
systems and specialty web product divisions, and to experience high product 
development costs related to a series of new products, as well as the absorption
of fixed costs over a lower volume of sales, changes in product mix and certain 
increased product performance and warranty expenses.  Also, as reported earlier,
the Company continues to respond to product performance issues with respect to 
certain of these newer products which have negatively impacted the Company's 
liquidity, the collection of accounts receivable and the booking of new orders. 
While the Company believes it is making progress in resolving the product 
performance issues, there can be no assurance that the Company will be 
successful in these endeavors.

POSSIBLE SALE OF BERNAL DIVISION

In October 1996, the Company signed a non-binding letter of intent to sell the
operations, assets and certain liabilities of its Bernal Division in Rochester
Hills, Michigan which has been extended to November 20, 1996.  This division
manufactures rotary cutter-creasers for packaging press systems and tool and die
product lines for rotary modules.  The proposed sale to GR Investment Group,
Ltd. of Detroit, Michigan including product technology and related intangibles,
is expected to close in December 1996.

Bernal sales and income before federal income taxes through nine months of 1996
were $14.4 million and $1.1 million, respectively, and the net assets to be sold
totaled approximately $20 million at September 30, 1996.  Proceeds of the sale
are expected to significantly reduce indebtedness of the Company.  The
anticipated reduction of Company debt coupled with no loss of Company basic
printing press technology, and the continued availability of Bernal as an OEM
supplier to the Company makes the anticipated transaction beneficial to the
Company.

Because the anticipated sale is at the approximate book value of Bernal assets
net of liabilities to be sold to the buyer, no significant book gain or loss is
expected.  However, the Company had not previously provided deferred taxes on
$4.3 million of intangibles (goodwill) of Bernal, therefore, a tax charge of
$1.7 million ($0.18 per share) and a reduction of currently refundable taxes
will be recorded when a definitive agreement for sale is consummated.

If the sale is not consummated, the Company will continue to operate Bernal and
seek other available financing alternatives (see "Liquidity and Capital
Resources" herein).

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

Sales  The Company's sales for the nine months ended September 30, 1996
-----                                                                  
decreased by $50.4 million (or 48.2%) compared to sales in the same period in
1995 due primarily to sales decreases in the packaging systems divisions ($39.4
million), the banknote printing equipment division ($0.8 million), and the
specialty web products division ($12.1 million), offset by sales increases at
the Company's French printing press repair and service company of $1.9 million.
The reduction in sales volume is attributed to an overall printing press
machinery industry slowdown, and a dramatic year-over-year reduction in orders
for the nine months ended September 30, 1996 and 1995 of 53%.

Gross Profit  The Company's gross profit for the nine months ended September 30,
------------                                                                    
1996 decreased by $28.9 million compared to gross profit in the same period in
1995 due primarily to decreased sales volume for packaging systems and specialty
web products.  Gross profit margin for 1996 decreased to 8.9% of sales as
compared to 25.1% of sales for 1995.  This decrease in gross profit margin in
1996 was due primarily to approximately $5.4 million in continuing product
development 

                                      -9-
<PAGE>
 
costs related to a series of new products, as well as the absorption of fixed
costs over a lower volume of sales, changes in product mix, and certain
increased product performance and warranty expenses.

Selling, General and Administrative Expenses  The Company's selling, general and
--------------------------------------------                                    
administrative expenses decreased by $1.8 million for the nine months ended
September 30, 1996 compared to the same period in 1995 due to decreases in
advertising, personnel and related costs at operating divisions, and certain
corporate administrative and legal costs.  Selling, general and administrative
expenses for the nine months ended September 30, 1996 were 25.4% of sales
compared to 14.9% of sales for the same period in 1995 due to the $50.4 million
decrease in sales without corresponding expense decreases.

Restructuring Charge  The dramatic continuation of the slowdown in capital
--------------------                                                      
spending by the Company's customers necessitated significant work force and cost
reductions, as well as the consolidation of certain facilities and operating
functions, resulting in a $1 million restructuring charge.  See Note 5 of Notes
to Consolidated Condensed Financial Statements.

Other Income (Expense)   The Company's interest expense increased by $0.4
----------------------                                                   
million for the nine months ended September 30, 1996 compared to the same period
in 1995 due to increased borrowing by the Company to fund operations.  Interest
income decreased by $0.1 million for the nine months ended September 30, 1996 as
compared to interest income in the same period in 1995 due to the use of cash to
minimize the amount borrowed under the Company's credit facilities.

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

Sales  The Company's sales for the three months ended September 30, 1996
-----                                                                   
decreased by $21.2 million (or 62.4%) compared to sales in the same period in
1995 due primarily to sales decreases in the packaging systems divisions ($16.8
million), specialty web products division ($5.0 million ) and the banknote
printing equipment division ($0.6 million), offset by sales increases at the
Company's French printing press repair and service company of $1.2 million.  The
reduction in sales volume is attributed to an overall printing press machinery
industry slowdown, and a dramatic year-over-year reduction in orders for the
nine months ended September 30, 1996 and 1995 of 53%.

Gross Profit (Loss)  The Company's gross profit (loss) for the three months
-------------------                                                        
ended September 30, 1996 decreased by $10.6 million compared to gross profit in
the same period in 1995 due primarily to very high product development costs and
decreased sales volume for packaging systems and specialty web products.  The
Company's cost of sales exceeded its sales by $1.1 million for a gross loss of
8.4% of sales for the three months ended September 30, 1996 as compared to a
gross profit of 22.9% of sales for 1995.  This decrease in margin in 1996 was
due primarily to approximately $2.6 million in continuing product development
costs related to a series of new products, as well as the absorption of fixed
costs over a lower volume of sales, changes in product mix, and certain
increased product performance and warranty expenses.

Selling, General and Administrative Expenses  The Company's selling, general and
--------------------------------------------                                    
administrative expenses decreased by $1.3 million for the three months ended
September 30, 1996 compared to the same period in 1995 due to decreases in
advertising, personnel and related costs at operating divisions, and certain
corporate administrative and legal costs.  Selling, general and administrative
expenses for the three months ended September 30, 1996 were 34.9% of sales
compared to 17.0% 

                                      -10-
<PAGE>
 
of sales for the same period in 1995 due to the $21.2 million decrease in sales
without corresponding expense decreases.

Other Income (Expense)   The Company's interest expense increased by $0.05
----------------------                                                    
million for the three months ended September 30, 1996 compared to the same
period in 1995 due to increased borrowing by the Company to fund operations.
Interest income decreased by $0.01 million for the three months ended September
30, 1996 as compared to interest income in the same period in 1995 due to the
use of cash in Company operations.


TAX MATTERS

The Company's effective state and federal income tax rate ("effective tax rate")
was 37.0% and 41.8% for the nine months ended September 30, 1996 and 1995,
respectively.  The recovery tax rate in 1996 was lower due to various non-
deductible expenses incurred in 1996.


LIQUIDITY AND CAPITAL RESOURCES

The Company requires capital primarily to fund its ongoing operations, to
service its existing debt and to pursue its strategic objectives including new
product development and penetration of international markets.  The Company's
working capital needs typically increase because of a number of factors,
including the duration of the manufacturing process and the relatively large
size of most orders.  During the latter part of 1995 and during 1996, the
Company has experienced an increased need for working capital resulting in
continued high levels of borrowings under its bank credit facility.  The working
capital needs are directly related to the slowness in orders in late 1995 and
1996 and certain product performance issues which have delayed deliveries,
increased costs and delayed cash collections.  Also, the growing international
mix of the Company's new orders which typically have less favorable cash flow
terms than domestic orders, and the introduction of new products have resulted
in increased borrowings.

The Company continues to experience performance issues with respect to certain
of these newer products which has negatively impacted collection of accounts
receivable and the booking of new orders.  The Company believes, however, that
significant progress is being made regarding resolving performance issues.

The reduced liquidity resulting from the order slowdown and collection delays
required the Company to fully draw upon its bank credit facility and did not
allow for the payment of a $3.6 million principal payment due June  30, 1996 to
its Senior Subordinated Note holders.  In addition, the losses incurred by the
Company in the three and nine months ended September 30, 1996 resulted in non-
compliance with a debt coverage ratio in the Company's bank credit facility.
The reduced liquidity has also impacted the Company's ability to make timely
payment with respect to its accounts payable.  As a result, the Company has
experienced delays in its ability to obtain raw materials and inventory.

As a result of negotiations with its senior and senior subordinated lenders, the
Company has obtained a series of temporary waivers from its bank and the holders
of its Senior Subordinated Notes through 

                                      -11-
<PAGE>
 
November 30, 1996. The Company believes it has reached an agreement in principle
with respect to a modification of its credit facility and its Senior
Subordinated Note agreement providing for a restructuring of the Company's bank
and subordinated indebtedness. Final documentation of this restructuring is
anticipated in November 1996. If the restructuring documentation process is
unsuccessful, the Company would be in violation of certain of its loan
covenants.

The Company has retained Rauscher Pierce Refsnes, Inc. to advise the board of
directors on strategic and financial alternatives available to the Company.
Possible strategies include the addition of capital through a merger or business
combination with other companies, raising additional equity, or a restructuring
or possible sale of the Bernal Division of the Company, all in an effort to
maximize shareholder value.  As mentioned above, the Company has entered into a
non-binding letter of intent to sell the assets, operations and certain
liabilities of the Bernal Division.  There can be no assurance that any
transaction will be consummated.

Historically, the Company has funded its capital needs with cash provided by
operating activities, borrowings under bank credit facilities, issuance of long-
term debt and the sale and private placement of common stock.  Net cash provided
by (used in) operating activities was $0.7 million in the nine months of 1996
and ($12.2 million) in the first nine months of 1995.

At September 30, 1996, the Company's indebtedness was comprised primarily of a
bank credit facility and the Company's Senior Subordinated Notes due September
30, 2000.  In addition, the Company's Chairman has loaned the Company $950,000
as described below.  As of September 30, 1996, there was outstanding $15.3
million in Senior Subordinated Notes, bearing interest at the rate of 10.5% per
annum, with principal payments of $3.6 million being due on June 30, 1996 and
each June 30 thereafter, and a final payment of $0.86 million at maturity.  As
previously stated, the June 30, 1996 principal payment was not made.

Under its credit facility, the Company may borrow up to $27 million in the form
of direct borrowings and letters of credit.  As of September 30, 1996 there was
$23.1 million in direct borrowings and $3.9 million in standby letters of credit
outstanding under the credit facility.  The interest rate on direct borrowings
under the credit facility is at the lender's prime rate.

At September 30, 1996, $23.1 million of the Company's borrowings were at the
lender's prime rate of interest (8.25%). The amounts borrowed under the credit
facility have been used for working capital.

Both the agreement concerning the credit facility and the agreement with the
holders of the Senior Subordinated Notes provide for joint and several
guaranties by the domestic operating subsidiaries of the Company. To secure the
indebtedness and the guaranties, a first lien was granted to the lender, and a
second lien was granted to the holders of the Senior Subordinated Notes, on
substantially all the assets of the Company and its domestic divisions.

The borrowings under the credit facility and Senior Subordinated Notes agreement
are subject to various restrictive covenants related to financial ratios as well
as limitations on capital expenditures 

                                      -12-
<PAGE>
 
and additional indebtedness. The credit facility permits the Company to borrow
up to $5 million for domestic acquisitions without lender consent. The Company
is not allowed to pay dividends.

Assuming that the contemplated restructuring of its indebtedness is completed,
the sale of the Bernal Division is completed and that one of several strategic,
financial alternatives presently being pursued by the Company is consummated,
management believes that cash flow from operations will be adequate to fund its
existing operations and repay scheduled indebtedness over the next 12 months.
Although the Company anticipates completing the restructuring of its
indebtedness and the sale of the Bernal Division before December 31, 1996, there
can be no assurance that these events will occur.  If the anticipated
restructuring and sale of the Bernal Division are not consummated, such events
likely will have a material adverse effect on the business and financial
condition of the Company.

In addition, the Company may incur, from time to time, additional short- and
long-term bank indebtedness (under its existing credit facility or otherwise)
and may issue, in public or private transactions, its equity and debt securities
to provide additional funds necessary for the continued pursuit of the Company's
operational strategies.  The availability and terms of any such sources of
financing will depend on market and other conditions.  There can be no assurance
that such additional financing will be available or, if available, will be on
terms and conditions acceptable to the Company.  Through September 30, 1996, the
Company's Chairman and Chief Executive Officer has loaned the Company $950,000
for its short-term cash requirements which is to be mandatorily repaid from
proceeds of the Banque de France receivable ( approximately $1.7 million).  To
date, this amount has not been repaid.

The success of the Company's plans will continue to be impacted by its ability
to achieve a satisfactory resolution of the product performance and warranty
issues, timely deliveries, acceptance of the ACE system by the Bank of England
and final acceptance of the SNOW press by Banque de France, the degree of
international orders (which generally have less favorable cash flow terms and
require letters of credit that reduce credit availability), improved terms of
domestic orders, and timely implementation of cost reduction measures.  While 
the Company believes it is making progress in these areas, there can be no
assurance that the Company will be successful in these endeavors.

Backlog and Orders  The Company's backlog of unfilled orders at September 30,
------------------                                                           
1996 was approximately $27.9 million compared to $40.4 million at December 31,
1995, a decrease of (30.9%).  The backlog decrease included $13.4 million of
packaging and, $1.7 million of banknote related equipment, offset by an increase
of $2.1 million of specialty web equipment and $0.6 million at the Company's
French printing press repair and service company, as compared to year-end 1995.
The backlog at September 30 in each of the preceding five years has ranged from
a low of $40.3 million in 1991 to a high of $70.3 million in 1994.

The reduction in backlog is the result of a reduced order flow in late 1995
which has continued in 1996.  Orders for the nine months ended September 30,
1996 were $43.1 million compared to $92.9 million for the comparable period in
1995, a decrease of $49.8 million while shipments decreased $50.4 million.  The
Company believes the above noted reduced order flow is the result of
fluctuations in the flow of major printing and packaging system orders and
certain product performance issues.  In addition, the Company's liquidity issues
may also impact future order flow. 

                                      -13-
<PAGE>
 
As a result, the Company is continuing to adjust its rate of future production
and accompanying costs to match this reduced order flow.

PART II  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On December 5, 1990, Howard Lasker, as representative of an alleged class
consisting of purchasers of the Company's common stock between October 18, 1989
and October 31, 1990 filed a lawsuit against the Company and certain officers
and directors of the Company.  The suit was certified as a class action in March
1992.  The Company, its officers' and directors' liability insurance carrier,
and the plaintiff negotiated a written settlement of the dispute which was
approved by the court by order dated June 18, 1996.  The settlement resulted in
the dismissal of the litigation and the issuance to the class and the
plaintiff's counsel of warrants to purchase 737,618 shares of Series A Common
Stock of the Company at an exercise price of $2.672 per share.  The aggregate
value of the warrants ($700,000) was charged to the Company's earnings in June
1996, and the warrants were issued to the class and the plaintiff's counsel on
October 31, 1996.  (See Note 5 of Notes to Consolidated Condensed Financial
Statements).

In addition, as a result of the Company's continuing liquidity problems, the
Company has been the subject of lawsuits, from time to time, with respect to the
Company's inability to pay certain vendors on a timely basis.  To date, most of
such actions have been settled, but there can be no assurance that the Company,
if named a defendant in such actions in the future, will be able to settle such
claims in the future.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits:

EXHIBIT
NUMBER   DOCUMENT DESCRIPTION
------   --------------------
  3.1    Second Amended and Restated Certificate of Incorporation of the
         Company. (1)
  3.2    Bylaws of the Company, as amended. (2)
  4.1    Specimen of Series A Common Stock Certificate. (3)
  4.2    Specimen of Series B Common Stock Certificate. (4)
  10.35  Warrant Agreement by and between the Company and American Stock
         Transfer & Trust Company dated October 31, 1996. *
  11.1   Computation of Net Income per Common Share. *
  27.1   Financial Data Schedule. *
_____________________________________________________

  *      Filed herewith.
 (1)     Previously filed as an exhibit to the Company's Annual Report on Form
         10-K for the year ended December 31, 1990 and incorporated herein by
         reference.

                                      -14-
<PAGE>
 
 (2)     Previously filed as an exhibit to the Company's Registration Statement
         on Form S-1 (No. 33-15279) and incorporated herein by reference.

 (3)     Previously filed as an exhibit to the Company's Registration Statement
         on Form S-1 (No. 33-24486) and incorporated herein by reference.

 (4)     Previously filed as an exhibit to the Company's Report on Form 8-A
         filed August 19, 1988 and incorporated herein by reference.

         (b) Reports on Form 8-K.

             None. 

                                     -15-
<PAGE>
 
                                   SIGNATURES


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



                                              STEVENS INTERNATIONAL, INC.

                                                  /s/  Paul I. Stevens

Date:  November 14, 1996                      By:
                                              Paul I. Stevens
                                              Chief Executive Officer
                                              and Acting Chief Financial Officer

                                      -16-