SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q


                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934



For Quarter Ended       SEPTEMBER 30, 1997           Commission File No. 0-24866
                        ------------------                               -------





                             ISOLYSER COMPANY, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


              Georgia                                             58-1746149
   (State or other jurisdiction of                             (IRS Employer 
    incorporation or organization)                           Identification No.)

                              650 Engineering Drive
                                 Technology Park
                             Norcross, Georgia 30092
                    (Address of principal executive offices)


                                 (770) 582-6363
              (Registrant's telephone number, including area code)


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 at least the past 90 days.

Yes   X       No
    ----         ----

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common equity, as of the latest practicable date.

Class                                           Outstanding at November 13, 1997
-----                                           --------------------------------

Common Stock, $.001 par value                             39,380,152

489587.2

<PAGE>



                                     PART I
                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                             ISOLYSER COMPANY, INC.
                      Condensed Consolidated Balance Sheets
                                 (in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>


                            ASSETS                             SEPTEMBER 30, 1997       DECEMBER 31, 1996
                            ------                             -------------------------------------------  
<S>                                                            <C>                      <C> 
                                                         
Current Assets
         Cash and cash equivalents                             $        9,477           $  20,925
         Accounts receivable-net                                       27,437              27,691
         Inventories                                                   44,590              62,824
         Prepaid expenses and other assets                              5,215               3,562
                                                               -------------------------------------------
                  Total Current Assets                                 86,719             115,002
                                                               -------------------------------------------

Property, plant and equipment                                          93,258              88,289
         Less accumulated depreciation                               (18,617)            (12,279)
                                                               -------------------------------------------
                  Net property, plant, and equipment                   74,641              76,010
                                                               -------------------------------------------

Assets held for sale                                                    1,739               1,642
Intangibles and other assets, net                                      55,660              58,281
                                                               -------------------------------------------
                                                               $      218,759           $ 250,935
                                                               ===========================================

             LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
         Current installments of long term debt                $       40,165           $   4,497
         Accounts payable                                              10,244              10,982
         Bank overdraft                                                   251               3,229
         Accrued expenses                                               6,938               5,975
                                                               ------------------------------------------
                  Total current liabilities                            57,598              24,683
                                                               ------------------------------------------

Long term debt, excluding current installments                          5,403              47,028
         Other liabilities                                                337                 420
                                                               ------------------------------------------
                  Total liabilities                                    63,338              72,131
                                                               ------------------------------------------

Shareholders' equity
         Common stock                                                      40                  39
         Additional paid in capital                                   203,739             203,346
         Retained earnings                                           (46,492)            (21,840)
         Cumulative translation adjustment                                117                  15
         Unearned shares restricted to employee stock
         ownership plan                                                 (360)               (360)
                                                               -----------------------------------------
                                                                      157,044             181,200
Treasury shares                                                       (1,623)             (2,396)
                                                               -----------------------------------------
         Total shareholders' equity                                   155,421             178,804
                                                               -----------------------------------------
                                                               $      218,759           $ 250,935
                                                               =========================================
</TABLE>

See accompanying notes.

489587.2


                                       -2-
<PAGE>



                             ISOLYSER COMPANY, INC.
                 Condensed Consolidated Statement of Operations
                      (in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>

                                          THREE MONTHS ENDED THREE  MONTHS ENDED  NINE MONTHS ENDED NINE MONTHS ENDED
                                          SEPTEMBER 30, 1997 SEPTEMBER 30, 1996  SEPTEMBER 30, 1997SEPTEMBER 30, 1996
                                          --------------------------------------------------------------------------
<S>                                       <C>                <C>                <C>               <C>
Net sales                                 $           41,877 $           41,956 $         124,314 $          122,981
Cost of goods sold                                    46,492             31,666           110,300             88,515
                                          --------------------------------------------------------------------------
         Gross profit                               ( 4,615)             10,290            14,014             34,466

Operating expenses:
         Selling & marketing                           6,316              7,178            19,898             20,247
         General & administrative                      3,843              3,481            11,339              9,868
         Research & development                          595                580             1,982              1,534
         Amortization of intangibles                     961              1,083             2,878              3,196
         Merger costs                                                     3,232                 -              3,341
         Restructuring cost                                -              1,390                 -              1,390
                                          --------------------------------------------------------------------------
                  Total operating expenses            11,715             16,943            36,097             39,575
                                          --------------------------------------------------------------------------
Loss from operations                                (16,330)            (6,653)          (22,083)            (5,109)
Interest income                                          118                337               458              1,467
Interest expense                                       (946)              (689)           (2,977)            (1,899)
Losses in joint venture                                 (14)               (19)              (33)               (60)
                                          --------------------------------------------------------------------------
Income (loss) before income tax expense             (17,171)            (7,024)          (24,635)            (5,601)
Income tax expense (benefit)                               6              (489)                17                228
                                          --------------------------------------------------------------------------
Income (loss) before extraordinary items  $         (17,177) $          (6,535) $        (24,652) $          (5,829)

                                          --------------------------------------------------------------------------
Extraordinary loss for refinancing of credit
facilities, net of tax benefit of $214    $                - $              578 $               - $              575
                                          --------------------------------------------------------------------------
Net loss                                  $         (17,177) $          (7,107) $        (24,652) $          (6,404)

Net loss per common share                 $           (0.44) $          (0.185) $          (0.63) $          (0.165)

                                          ==========================================================================
Weighted average number of common shares
outstanding                                           39,308             38,484            39,240             38,769
                                          ==========================================================================

</TABLE>
See accompanying notes.

489587.2


                                       -3-

<PAGE>



                             ISOLYSER COMPANY, INC.
                        Condensed Statement of Cash Flows
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                      NINE MONTHS ENDED        NINE MONTHS ENDED
                                                                      SEPTEMBER 30, 1997       SEPTEMBER 30, 1996
                                                                     ---------------------------------------------------
<S>                                                                   <C>                      <C> 
                                                                     
Cash flows from operating activities:
         Net loss                                                     $   (24,652)             $    (6,405)
         Net income for Microtek Medical, Inc. for December 1995                 -                       27

Adjustments  to  reconcile  net income 
(loss) to net cash (used in) provided by
operating activities:
         Depreciation                                                        5,571                    5,297
         Amortization                                                        2,879                    3,189
         Provision for doubtful accounts                                       206                       27
         Loss on disposal of property, plant & equipment                      (27)                        -
         Changes in assets and liabilities, net of acquisitions             16,617                 (25,875)
                                                                     -----------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:                           594                 (23,740)
                                                                     -----------------------------------------

Cash flows from investing activities
         Additions to property, plant and equipment net of acquisitions    (4,273)                 (16,273)
         Acquisitions, net of cash acquired                                      -                  (5,874)
                                                                     -----------------------------------------
NET CASH USED IN INVESTING ACTIVITIES:                                     (4,273)                 (22,147)
                                                                     -----------------------------------------

Cash flows from financing activities:
         Net borrowings under credit agreements                            (5,957)                   10,937
         Changes in bank overdraft                                         (2,978)                      284
         Proceeds from exercised stock options                                 574                    1,787
         Proceeds from issuance of stock                                       333                      118
         Direct costs relating to issuance of common stock                     269                     (20)
                                                                     -----------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES:                       (7,769)                   13,106
                                                                     -----------------------------------------
Net decrease in cash and cash equivalents                                 (11,448)                 (32,781)
Cash and cash equivalents at beginning of period                            20,925                   54,819
                                                                     -----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                            $      9,477                   22,038
                                                                     =========================================
</TABLE>

See accompanying notes.



489587.2


                                       -4-

<PAGE>



                             ISOLYSER COMPANY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

     (1) In the opinion of management,  the information  furnished  reflects all
adjustments  (consisting only of normal recurring  adjustments)  necessary for a
fair  presentation  of the financial  position,  results of operations  and cash
flows  for  the  interim  periods.  Results  for  the  interim  periods  are not
necessarily  indicative  of results  to be  expected  for the full  year.  These
consolidated  financial  statements  should  be read  in  conjunction  with  the
consolidated  financial  statements and notes thereto contained in the Company's
Annual  Report on Form 10-K for the year ended  December  31, 1996 (the  "Annual
Report").

     (2)  Inventories  are  stated  at the  lower  of  cost  or  market  and are
summarized as follows:

<TABLE>
<CAPTION>
<S>                                            <C>                         <C>  
                                               September 30, 1997          December 31, 1996

Raw materials and supplies                         $   26,767,000            $   20,936,000
Work in process                                         6,865,700                23,267,000
Finished goods                                         34,489,700                29,346,000
                                               ---------------------       -------------------
     Total                                             68,122,300                73,549,000
Excess, slow moving and obsolete
inventory                                            (23,517,800)              (10,041,000)
Reserve for LIFO inventory                               (14,900)                 (684,000)
                                               ---------------------       -------------------
     Total                                         $   44,589,600            $   62,824,000
                                               ---------------------       -------------------

</TABLE>
The first-in  first-out  ("FIFO") valuation method is used to determine the cost
of inventories  except for inventories held by the Company's  subsidiary,  White
Knight  Healthcare,  Inc.  ("White  Knight").  White  Knight  uses  the  last-in
first-out  ("LIFO")  inventory  valuation  method.  At  September  30,  1997 and
December 31, 1996,  LIFO  inventories  approximated  $24,146,000 and $28,324,000
respectively.

     (3) At  September  30,  1997,  the Company was not in  compliance  with the
covenants of its credit  facility  pertaining  to net income and net worth.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Liquidity and Capital Resources."

     (4) Loss per common share is computed using the weighted  average number of
common shares outstanding during the respective periods. There is no significant
difference  between  primary  and  fully  diluted  per share  amounts  for these
periods.

     (5) Certain prior period  amounts have been  reclassified  for  comparative
purposes.


489587.2


                                       -5-

<PAGE>



ITEM 2.

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

RESULTS OF OPERATIONS

Net sales for the three months  ended  September  30, 1997 (the "1997  Quarter")
were $41.9 million  compared to $42 million for the three months ended September
30, 1996 (the "1996 Quarter"). Net sales for the nine months ended September 30,
1997 (the "1997  Period") were $124.3  million  compared to $123 million for the
nine months ended September 30, 1996 (the "1996  Period"),  an increase of 1.1%.
Net sales during the 1997 Quarter and 1997 Period over the corresponding periods
of 1996  reflect  the 7.3% and 13.6%  increase in sales of  procedure  trays and
related  products,  respectively,  the  7.1%  and  10.2%  increase  in  sales of
specialty  drape  and  related  products,  respectively,  and the 15.5% and 8.6%
increase in sales of safety  products,  respectively.  The Company believes that
increased sales for procedure  trays,  safety products and specialty  drapes are
primarily  attributable  to  a  combination  of  new  business  development  and
increased product usage by existing customers. Management anticipates that sales
of procedure  trays and related  products will be adversely  affected during the
fourth quarter by the Company's  implementation of and conversion to an upgraded
manufacturing system at the Company's procedure tray operation during the fourth
quarter of 1997, which is the continuation of an implementation process begun in
the  third  quarter  of 1997.  Sales  of the  Company's  pack and gown  products
declined  26.1% and 24.8%  during  the 1997  Quarter  and 1997  Period  over the
corresponding periods of the previous year,  respectively.  The decline in sales
of pack and gown healthcare  products is attributable in significant part to the
acquisition in July,  1996 of Sterile  Concepts,  a significant  customer of the
Company, by Maxxim, which is a product competitor of the Company in the pack and
gown  business.  While  Sterile  Concepts  remains  contractually  obligated  to
purchase  from the Company a yearly  minimum of $5.1  million of products  until
June 30, 1998, such  acquisition is expected to continue to adversely affect the
Company's sales for the remainder of 1997 and future  periods.  The Company also
attributes its reduced sales of pack and gown products to a declining market for
the Company's pack and gown products.

As the Company previously reported in its Annual Report, the State of California
is  reviewing  the  regulatory  restrictions  currently  in effect  on  customer
landfilling of LTS-treated  waste in California.  The Company has also been made
aware that other states, including Florida and Georgia, are reviewing regulatory
restrictions  applicable on customer  landfilling of LTS-treated  waste in those
states,  possibly  as a result of certain  efforts of a product  competitor.  To
date, these regulatory review processes have had no discernable  impact on sales
of safety products.  In the event such processes result in further  restrictions
on the landfilling of such waste, such  restrictions  could adversely affect the
Company's  sales of LTS.  Gross  margin on sales of LTS for the 1997 Quarter and
Period were in excess of 10% of corporate gross margin for such periods.

Included  in the  foregoing  sales  figures  are $1.5  million  in sales of OREX
Degradables  during the 1997  Quarter and $5.5  million  during the 1997 Period,
unchanged from the corresponding  periods of 1996. Management believes that this
flat growth rate in OREX Degradable sales is

489587.2


                                       -6-

<PAGE>



attributable  to  having  only a small  group of  hospitals  converted  to using
degradable versus traditional  product and that the Company's ability to convert
additional  hospitals  to  degradable  products has been  adversely  affected by
product  performance  and quality  concerns and delays in bringing  OREX catalog
items to market.  The Company does not yet  manufacture for commercial sale OREX
Degradables  film (and related  laminates of OREX film products  with  non-woven
products)  or  thermoformed  and extruded  products  (such as bowls and basins).
Sales of OREX Degradables  during the 1997 Quarter and Period did not contribute
any gross profits to the Company's  operating results.  Management  believes the
Company  will  continue to fail to receive  profitable  margins on sales of OREX
Degradables  pending a  combination  of  selling  OREX in greater  volumes,  the
operation of the Company's OREX manufacturing  plants at higher efficiencies and
increasing  the unit price for OREX  Degradables  to an amount  which takes into
account the disposal  cost  savings  provided by such  products.  The Company is
undertaking  a thorough  review and analysis of the market  position of its OREX
Degradables and related  modifications  to its OREX operations and growth plans,
and has accordingly deemphasized the Company's sales efforts on OREX products on
a temporary basis. The Company's future performance will depend to a substantial
degree upon  market  acceptance  of and the  Company's  ability to  successfully
manufacture, market, deliver and expand its OREX Degradables line of products at
acceptable  profit margins.  The Company's ability to achieve such objectives is
subject to a number of risks described in the Company's Annual Report including,
without limitation,  those described in such Annual Report under "Risk Factors -
Risks of New Products" and "-Manufacturing and Supply Risks".

At September 30, 1997,  the Company  recorded  $44.6 million of inventory on its
balance  sheet,  net of a reserve of $23.5  million for excess,  slow moving and
obsolete  inventory.  Based on  information  available to the Company  (such as,
without  limitation,  the quality  and aging of and current  sales rates for the
Company's  inventories,  their  expected  useful  life,  and  existing  reserves
recorded with respect to such inventory) and judgments and estimates made by the
Company  concerning future events (such as, without  limitation,  the prices and
volumes at which the  Company  will be able to dispose of such  inventory),  the
Company  regularly  evaluates  the net  amounts  recorded by the Company for its
inventory to ensure that such amount fairly  states the value of such  inventory
in accordance with generally accepted accounting principles.  The ability of the
Company to make accurate judgments and estimates necessary to establish the fair
value of its  inventory  is  inherently  subject  to  certain  risks  which  are
exacerbated in the case of the Company's  OREX  inventories by the novel aspects
of the  Company's  OREX products and absence of a  significant  prior  operating
history with respect to such  products.  Various of these risks are described in
the Company's Annual Report including,  without  limitation,  those described in
such  Annual   Report  under  "Risk   Factors  -  Risks  of  New  Products"  and
"Manufacturing  and Supply  Risks".  As a part of the  Company's  processes  for
recording the net value of the Company's  inventories at September 30, 1997, the
Company   recorded  a  $13.0  million  reserve  for   potentially   excess  OREX
inventories.

Gross profit (loss) for the 1997 Quarter and 1997 Period was ($4.6)  million and
$14.0 million, respectively, compared to $10.3 million and $34.5 million for the
1996 Quarter and 1996 Period,  respectively.  Included in cost of goods sold for
the 1997 Quarter and Period is the  aforementioned  reserve of $13.0 million for
potentially excess inventories. Exclusive of such

489587.2


                                       -7-

<PAGE>



reserve,  gross  profit for the 1997  Quarter  and  Period  would have been $8.4
million and $27.0 million, respectively.  Included in cost of goods sold for the
1996 Quarter and Period are charges of $531,000 for inventory  shrinkage related
to product quality deficiencies in the OREX non-woven  manufacturing  operation,
and a $1 million  reserve for slow  moving and  potentially  obsolete  inventory
throughout the Company.  In addition to the impact of  nonrecurring  charges for
inventory  reserves,  the  decline in gross  margin is  primarily  due to excess
capacity of the  Company's  Abbeville and Arden OREX  manufacturing  facilities.
During the latter  portions  of 1996,  the  Company  reduced  production  at its
Abbeville and Arden  manufacturing  plants to more closely align production with
product  demand.  During the 1997  Quarter and 1997  Period,  the  Company  sold
product  from  existing  inventory,  increasing  excess  capacities  and further
negatively  affecting  margin.  Pending  increased  utilization of the Company's
existing manufacturing capacity at its Abbeville and Arden manufacturing plants,
the  overhead  of the Company  incurred  through  such  plants will  continue to
negatively  impact profit margin. In an effort to improve  short-term  operating
results and cash flow, the Company has decided to explore the  possibilities  of
converting a portion of these  capacities to manufacture  on a short-term  basis
traditional  woven and non-woven  products such as polyester and  polypropolene.
The  Company  does  not  anticipate   entering  into   long-term   manufacturing
commitments for traditional products. So long as the Company does not enter into
long-term   manufacturing   commitments  for  traditional  products,   any  such
conversion  should  not  affect  the  ability  of the  Company  to  satisfy  its
requirements for OREX Degradable  products.  There can be no assurances that the
Company  will be able to increase  utilization  of the  Company's  manufacturing
capacity  at its  Abbeville  and  Arden  manufacturing  plants,  either  for the
manufacture  of OREX  Degradables  or  traditional  products.  Gross  margin was
negatively  affected by other  factors  during the 1997  Quarter and Period,  as
compared to comparable periods in 1996. These other factors include a decline in
sales by the  Company's  pack and gown  operations  as a result of the loss of a
significant customer and a general decline in that business which created excess
capacity,  and  start-up  expenses  incurred by the Company and excess  capacity
associated with its Jacksonville distribution and manufacturing facility and its
Empalme, Mexico manufacturing facility.

Consistent with Statement of Financial Accounting Standards No. 121, "Accounting
for the  Impairment of Long-Lived  Assets and  Long-Lived  Assets to be Disposed
of," the Company has reviewed the carrying value of the Company's  Abbeville and
Arden  manufacturing  plants.  Based on  forecasted  usage of such  plants,  the
Company  believes  that it  would  be  inappropriate  under  generally  accepted
accounting  principles  to record any  impairment  charges  with respect to such
assets.  If, however,  the Company were in the future to determine to dispose of
such assets or new information or improved  judgments resulted in a reduction of
the  Company's  forecasted  usage  of  such  plants  causing  the  plants  to be
considered to be impaired, the Company would be required to record an impairment
loss equal to the excess of the  carrying  value of such  assets over their fair
value, thereby adversely affecting operating results.

Selling and  marketing  expenses  were $6.3 million or 15.1% of net sales in the
1997 Quarter compared to $7.2 million or 17.1% of net sales in the 1996 Quarter.
Selling and  marketing  expenses were $19.9 million or 16.0% of net sales in the
1997 Period compared to $20.2 million

489587.2


                                       -8-

<PAGE>



or 16.5% of net sales in the 1996 Period.  The decrease  during the 1997 Quarter
is a result of  decreased  salaries and benefits  associated  with  reducing the
Company's sales and marketing personnel.

General and  administrative  expenses  were $3.8 million or 9.2% of net sales in
the 1997  Quarter  compared  to $3.5  million  or 8.3% of net  sales in the 1996
Quarter.  General and administrative expenses were $11.3 or 9.1% of net sales in
the  1997  Period  compared  to $9.9  million  or 8.0% of net  sales in the 1996
Period.  The  increase  in general and  administrative  expenses  was  primarily
attributed to costs related to several software and hardware installations,  and
costs related to the Company's corporate office.

Research and development expenses were $595,000 or 1.4% of net sales in the 1997
Quarter compared to $580,000 or 1.4% of net sales in the 1996 Quarter.  Research
and  development  expenses  were $2.0  million  or 1.6% of net sales in the 1997
Period  compared to $1.5  million or 1.2% of net sales in the 1996  Period.  The
increase in research and  development  expense was  primarily  attributed to the
Company's development of fiber and compounding technology.

Amortization  of  intangibles  in the 1997 Quarter and 1996 Quarter was $961,000
and $1.1 million,  respectively.  Amortization of intangibles in the 1997 Period
and 1996 Period was $2.9 million and $3.2 million, respectively.

The resulting loss from operations  during the 1997 Quarter was $16.3 million as
compared to loss from  operations of $6.7 million during the 1996 Quarter.  Loss
from  operations  was $22.1 million for the 1997 Period as compared to loss from
operations  of $5.1  million  during  the 1996  Period.  Included  in loss  from
operations  during the 1997  Quarter  and Period is $13.0  million in  inventory
reserves.  Included in loss from  operations  during the 1996 Quarter and Period
are  $1.5  million  in  inventory  write-offs  and  reserves,  $1.4  million  in
restructuring  charges  associated  with the Microtek merger and $3.2 million in
the 1996  Quarter  and $3.3  million in the 1996  Period of  nonrecurring  costs
associated with such merger. After excluding these non-recurring  expenses,  the
resulting loss from operations for the 1997 Quarter was $3.3 million compared to
$500,000 for the 1996 Quarter,  and $9.1 million in the 1997 Period  compared to
operating income in the 1996 Period of $1.2 million.

Interest  income was  $118,000 in the 1997  Quarter  compared to $337,000 in the
1996  Quarter,  and $458,000 in the 1997 Period  compared to $1.5 million in the
1996  Period.  The  decrease in interest  income is  primarily  attributed  to a
reduction of the Company's cash position as a result of the  acquisition of OREX
Degradable inventory and manufacturing capabilities during 1996.

Interest  expense was $946,000 in the 1997  Quarter  compared to $689,000 in the
1996  Quarter,  and $3.0 million in the 1997 Period  compared to $1.9 million in
the 1996 Period. The increase in interest expense is primarily attributed to the
Company's   acquisition   of  OREX   Degradable   inventory  and   manufacturing
capabilities during 1996.


489587.2


                                       -9-

<PAGE>



Provision  for income  taxes  reflect an expense for the 1997  Quarter of $6,000
compared to a tax benefit of $489,000 for the 1996  Quarter.  The  provision for
income  taxes  reflects an expense for the 1997 Period of $17,000 as compared to
an expense of $228,000 for the 1996 Period.

The resulting  net loss was $17.2  million for the 1997 Quarter  compared to net
loss of $7.1 million for the 1996  Quarter.  The net loss was $24.7  million for
the 1997 Period as compared to net loss of $6.4 million for the 1996 Period.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1997, the Company's cash and  equivalents  totaled $9.5 million
as compared to $20.9 million at December 31, 1996.

During the 1997  Period,  the Company  generated  $594,000 of cash in  operating
activities as compared to a cash use of $23.7  million in the 1996 Period.  Cash
generated during the 1997 Quarter and Period is primarily attributable to better
management  of working  capital.  The  Company  used $4.3  million in  investing
activities  during the 1997 Period,  primarily for several computer hardware and
software  implementations,  as  compared  to  $22.1  million  used in  investing
activities during the 1996 Period. During the 1997 Period, the Company used $7.8
million  in cash for  financing  activities  as  compared  to cash  provided  by
financing  activities of $13.1 million during the 1996 Period. The Company's use
of cash during the 1997 Period for  financing  activities  is primarily due to a
net  reduction of debt of $8.9 million  between  December 31, 1996 and September
30, 1997.

As more fully  described in the Company's  Annual Report,  the Company has a $55
million credit  agreement (the "Credit  Agreement")  consisting of a $40 million
revolving  credit  facility  maturing on August 31, 1999 and a $15 million  term
loan  facility  maturing  on  August  31,  2001.  Current  additional  borrowing
availability  under the  revolving  credit  facility at  September  30, 1997 was
approximately  $8.6 million.  Outstanding  borrowings under the revolving credit
facility were  approximately  $24.5  million at September 30, 1997.  Outstanding
borrowings  under the term loan facility were $13 million at September 30, 1997.
The Credit Agreement provides for the issuance of up to $3 million in letters of
credit.  Outstanding  letters of credit were $50,000 at September  30, 1997.  At
September 30, 1997,  the Company was in violation of covenants  contained in the
Credit  Agreement  concerning net income and net worth  primarily as a result of
additional  inventory  reserves  recorded at September 30, 1997. The Company has
requested  but has not yet  received a waiver from its lenders  with  respect to
such violation and has accordingly  classified its indebtedness under the Credit
Agreement as short-term  debt in the  accompanying  balance sheet. No assurances
can be  provided  that  the  Company  will  obtain  a  waiver  of  the  covenant
violations,  and the failure to obtain such waiver would have a material adverse
effect upon the Company. At September 30, 1997,  outstanding  indebtedness under
the Credit  Agreement  exceeded the  Company's  cash and cash  equivalents.  The
Company  has  violated  certain  financial  covenants  contained  in its  Credit
Agreement  in its prior  three  fiscal  quarters  and  obtained  waivers of such
violations. No assurances can be provided that violations of covenants contained
in the  Company's  Credit  Agreement  will not occur in the  future  or, if such
violations occur, that those violations will be waived. In addition, such Credit
Agreement

489587.2


                                      -10-

<PAGE>



currently  requires the Company to operate during 1998 on a monthly basis with a
positive net income. While the Company's lenders have agreed to discuss with the
Company a modification of such covenant, no assurances can be provided that such
covenant  will be modified  or that the  Company  will not default in the future
under its Credit Agreement. Any unwaived default by the Company under the Credit
Agreement would be expected to have a material adverse effect upon the Company.

Based upon its current business plan and assuming the continued  availability of
its  existing  credit  facility,   the  Company   currently  expects  that  cash
equivalents  and short term  investments on hand, the Company's  existing credit
facility and funds budgeted to be generated from  operations will be adequate to
meet its  liquidity  and  capital  requirements  over the next  year.  Currently
unforeseen future  developments and increased  working capital  requirements may
require  additional  debt  financing or issuance of common  stock in  subsequent
years.  There can be no  assurances  that the Company  could obtain any required
additional debt financing or successfully consummate an issuance of common stock
on terms favorable to the Company, if at all.

Statements  made in this  Management's  Discussion  and  Analysis  of  Financial
Condition  and  Results  of  Operations,  including  those  in  the  immediately
preceding  paragraph,   include  forward-  looking  statements  made  under  the
provisions of the Private Securities Litigation Reform Act. The Company's actual
results could differ  materially from such  forward-looking  statements and such
results  will be affected by risks  described  in the  Company's  Annual  Report
including,  without limitation, those described in the Annual Report under "Risk
Factors - Limited  Operating  History;  Net Losses",  "-Risks of New  Products",
"-Risks of Expansion", "-Manufacturing & Supply Risks" and "-Liquidity Risks".

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.



                                     PART II

                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         The Company is involved in routine  litigation  and  proceedings in the
ordinary cause of business.  Management believes that pending litigation matters
will not have a material adverse effect on the Company's  financial  position or
results of operations.


489587.2


                                      -11-

<PAGE>



ITEM 2.  CHANGES IN SECURITIES

     During  the  quarter  for which  this  report is filed,  there have been no
material  modifications in the instruments  defining the rights of shareholders.
During the quarter for which this report is filed,  none of the rights evidenced
by the shares of the  Company's  common  stock have been  materially  limited or
qualified by the  issuance or  modifications  of any other class of  securities.
During the quarter for which this  report is filed,  the Company  sold no equity
securities of the Company that were not  registered  under the Securities Act of
1933, as amended.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

     At September 30, 1997, the Company was not in compliance with the covenants
of its credit facility pertaining to net income and net worth. See "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity and Capital Resources."

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

         None.

ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits:

Exhibit No.     Description
-----------     -----------

3.1(1)          Articles of Incorporation of Isolyser Company, Inc.

3.2(2)          Articles of Amendment to Articles of Incorporation of Isolyser
                Company, Inc.

3.3(1)          Amended and Restated Bylaws of Isolyser Company, Inc.

3.4(3)          First Amendment to Amended and Restated Bylaws of Isolyser
                Company, Inc.

3.5(4)          Second Amendment to Amended and Restated Bylaws of Isolyser
                Company, Inc.

4.1(1)          Specimen Certificate of Common Stock

27.1            Financial Data Schedule

489587.2


                                      -12-

<PAGE>






     (1)  Incorporated by reference to the Company's  Registration  Statement on
          Form S-1 (File No. 33-83474).

     (2)  Incorporated  by  reference  to Exhibit  3.2 of the  Company's  Annual
          Report on Form 10-K for the year ended December 31, 1996.

     (3)  Incorporated  by  reference  to Exhibit 3.1 to the  Company's  Current
          Report on Form 8-K filed July 29, 1996. 

     (4)  Incorporated by reference to  Exhibit  3.1 to the  Company's  Current
          Report on Form 8-K filed December 20, 1996.

         (b)      No current  reports on Form 8-K were filed  during the quarter
                  for which this report is filed.



489587.2


                                      -13-

<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the registrant has caused this quarterly report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized on November 14, 1997.

                                        ISOLYSER COMPANY, INC.


                                        By:/s/ Gene R. McGrevin
                                           Gene R. McGrevin
                                           President
                                           (principal executive officer)

                                        By:/s/ Peter A. Schmitt
                                           Peter A. Schmitt
                                           Chief Financial Officer
                                           (principal financial officer)

                                      -14-
489587.2