<PAGE>   1

===============================================================================


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549


                                   FORM 10-Q


(Mark One)

         [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended SEPTEMBER 30, 1999

                                       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: 000-20997


                            STERILE RECOVERIES, INC.
             (Exact name of Registrant as specified in its Charter)


           FLORIDA                                           59-3252632
   (State of incorporation)                               (I. R. S. Employer
                                                          Identification No.)


                     28100 U.S. HIGHWAY 19 NORTH, SUITE 201
                           CLEARWATER, FLORIDA 33761
                    (Address of Principal Executive Offices)


                                 (727) 726-4421
                        (Registrant's Telephone Number)

         Indicate by check 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 [X]  No [ ]

Number of outstanding shares of each class of Registrant's Common Stock as of
November 1, 1999:

                   Common Stock, par value $.001 - 5,676,794


===============================================================================

<PAGE>   2

                                     INDEX

<TABLE>
<CAPTION>

                                                                                    PAGE
                                                                                    ----
<S>      <C>      <C>                                                               <C>

PART I            FINANCIAL INFORMATION

         Item 1   Condensed Consolidated Financial Statements

                  Condensed Consolidated Statements of Earnings for the three
                  months and nine months ended September 30, 1999 (unaudited)
                  and the three months and nine months ended September 30, 1998
                  (unaudited).......................................................  1

                  Condensed Consolidated Balance Sheets as of September 30, 1999
                  (unaudited) and December 31, 1998.................................  2

                  Condensed Consolidated Statements of Cash Flows for the nine
                  months ended September 30, 1999 and September 30, 1998
                  (unaudited).......................................................  3

                  Notes to Condensed Consolidated Financial Statements
                  (unaudited).......................................................  4


         Item 2   Management's Discussion and Analysis of Financial
                  Condition and Results of Operations...............................  8


PART II           OTHER INFORMATION

         Item 1   Legal Proceedings................................................. 16

         Item 2   Changes in Securities............................................. 16

         Item 3   Defaults Upon Senior Securities................................... 16

         Item 4   Submission of Matters to a Vote of Security Holders............... 16

         Item 5   Other Information................................................. 16

         Item 6   Exhibits and Reports on Form 8-K.................................. 16

SIGNATURE........................................................................... 17

</TABLE>



<PAGE>   3

                         PART I - FINANCIAL INFORMATION


Item 1.  Condensed Consolidated Financial Statements

                            STERILE RECOVERIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
                     (In thousands, except per share data)
                                  (unaudited)

<TABLE>
<CAPTION>
                                             Three Months Ended          Nine Months Ended
                                               September 30,               September 30,
                                             1999        1998           1999        1998
                                             ----        ----           ----        ----
<S>                                        <C>          <C>          <C>          <C>

Revenues                                   $17,152      $13,021      $51,380      $37,036
Cost of revenues                            11,748        8,983       34,642       24,851
                                           -------      -------      -------      -------
     Gross profit                            5,404        4,038       16,738       12,185

Distribution expenses                        1,242          940        3,800        2,687
Selling and administrative expenses          2,474        1,728        7,090        5,192
                                           -------      -------      -------      -------
     Income from operations                  1,688        1,370        5,848        4,306

Interest expense, net                           67           20          210            8
                                           -------      -------      -------      -------
     Income before income tax expense        1,621        1,350        5,638        4,298

Income tax expense                             632          531        2,183        1,681
                                           =======      =======      =======      =======
     Net income                            $   989      $   819      $ 3,455      $ 2,617

Dividends on preferred stock                    51           16          157           16
                                           -------      -------      -------      -------
Net income available for common
  shareholders                                $938         $803       $3,298       $2,601
                                           =======      =======      =======      =======
Net income per common share - basic        $  0.17      $  0.14      $  0.58      $  0.46
                                           =======      =======      =======      =======
Net income per common share - diluted      $  0.16      $  0.14      $  0.55      $  0.44
                                           =======      =======      =======      =======
Weighted average common shares
outstanding - basic                          5,677        5,663        5,676        5,661
                                           =======      =======      =======      =======
Weighted average common shares
outstanding - diluted                        6,330        5,994        6,335        5,916
                                           =======      =======      =======      =======

</TABLE>


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



                                 Page 1 of 17

<PAGE>   4

                            STERILE RECOVERIES, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                  Sept. 30,     Dec. 31,
                                                    1999          1998
                                                  ---------     --------
                                                 (unaudited)
<S>                                                <C>          <C>

              ASSETS

Cash                                               $    34      $   172
Accounts receivable, net                             9,148        7,580
Reimbursable construction costs                        506          331
Inventories                                          2,791        2,324
Prepaid expenses and other assets                      999        1,339
Reusable surgical products, net                     16,648       14,705
Property, plant and equipment, net                  14,380       12,042
Goodwill, net                                        5,593        5,127
                                                   -------      -------
         Total assets                              $50,099      $43,620
                                                   =======      =======


LIABILITIES AND SHAREHOLDERS' EQUITY

Note payable to bank                               $ 5,779      $ 3,698
Accounts payable                                     3,348        2,898
Employee related accrued expenses                    1,338          974
Other accrued expenses                                 980          786
Deferred tax liability                                 142          142
                                                   -------      -------
         Total liabilities                          11,587        8,498


Shareholders' equity
 Preferred stock                                         1            1
 Common stock                                            6            6
Additional paid-in capital                          27,413       27,321
Retained earnings                                   11,092        7,794
                                                   -------      -------
   Total shareholders' equity                       38,512       35,122
                                                   -------      -------
   Total liabilities and shareholders' equity      $50,099      $43,620
                                                   =======      =======

</TABLE>


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



                                 Page 2 Of 17


<PAGE>   5

                            STERILE RECOVERIES, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                            Nine Months Ended
                                                                         Sept. 30,      Sept. 30,
                                                                            1999           1998
                                                                         ---------      ---------
<S>                                                                      <C>            <C>
Cash flows from operating activities
  Net income                                                             $  3,455       $ 2,617
  Adjustments to reconcile net income to net
   cash provided by operating activities:
    Depreciation and amortization                                           1,172           691
    Amortization of reusable surgical products                              2,971         2,014
    Provision for reusable surgical products shrinkage                      1,409           921
    Change in assets and liabilities (net of business
     combination):
      Accounts receivable                                                  (1,418)         (562)
      Inventories                                                            (466)          102
      Prepaid expenses and other assets                                       340            26
      Accounts payable                                                        489         1,458
      Other accrued expenses                                                  585            (2)
                                                                         --------       -------
        Net cash provided by operating activities                           8,537         7,265
                                                                         --------       -------

Cash flows from investing activities
  Purchases of property, plant and equipment                               (3,541)       (2,639)
  Purchases of reusable surgical products                                  (6,323)       (5,411)
  Reimbursable construction costs                                            (176)           --
  Payment for acquisition of business, net of cash acquired                  (604)       (1,340)
                                                                         --------       -------
        Net cash used in investing activities                             (10,644)       (9,390)
                                                                         --------       -------

Cash flows from financing activities
   Net change in note payable to bank                                       2,080         1,734
   Net proceeds from issuance of common stock                                  93            11
   Dividends paid                                                            (204)           --
                                                                         --------       -------
        Net cash provided by financing activities                           1,969         1,745
                                                                         --------       -------

   Decrease in cash                                                          (138)         (380)
   Cash and cash equivalents at beginning of period                           172           380
                                                                         --------       -------
   Cash and cash equivalents at end of period                            $     34       $    --
                                                                         ========       =======

Supplemental cash flow information
   Cash paid for interest                                                $    203       $    30
                                                                         ========       =======
   Cash paid for income taxes                                            $  2,013       $ 1,661
                                                                         ========       =======

</TABLE>


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



                                 Page 3 Of 17

<PAGE>   6

                            STERILE RECOVERIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

1.       BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
of Sterile Recoveries, Inc. (the "Company") have been prepared in accordance
with the Securities and Exchange Commission's instructions to Form 10-Q and,
therefore, omit or condense footnotes and certain other information normally
included in financial statements prepared in accordance with generally accepted
accounting principles. The accounting policies followed for quarterly financial
reporting conform with generally accepted accounting principles for interim
financial statements and include those accounting policies disclosed in the
Company's Form 10-K for the year ended December 31, 1998 filed with the
Securities and Exchange Commission. In the opinion of management, all
adjustments of a normal recurring nature that are necessary for a fair
presentation of the financial information for the interim periods reported have
been made. The results of operations for the nine months ended September 30,
1999 are not necessarily indicative of the results that can be expected for the
entire year ending December 31, 1999. The unaudited financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Form 10-K.

         The Company operates on a 52-53 week fiscal year ending the Sunday
nearest December 31. There are 40 weeks and 39 weeks included for the nine
month periods ended September 30, 1999 and September 30, 1998, respectively.

2.       ACQUISITIONS

         On August 31, 1998, the Company acquired all the stock of RePak
Surgical Enterprises, Inc. ("RePak"), a wholly owned subsidiary of Standard
Textile Co., Inc.("Standard Textile"), in exchange for 566,667 shares of its
convertible Series A Preferred Stock. The Company also purchased the RePak
facility's real estate for $1.5 million cash from Standard Textile's
affiliates. The Company has accounted for the acquisition as a purchase and
RePak's operating results are included in the Company's operating results since
the date of acquisition.

         The following unaudited pro forma information combines the Company's
results of operations with RePak's results of operations as if the acquisition
had occurred at the beginning of the respective period.

<TABLE>
<CAPTION>

                                     Three Months Ended   Nine Months Ended
                                        Sept. 30,1998      Sept. 30, 1998
                                        -------------      --------------
                                                 (In thousands,
                                             except per share data)
                                                  (unaudited)
<S>                                  <C>                  <C>

Revenues                                  $  14,580          $42,980
                                          =========          =======
Net income                                $     893          $ 2,942
                                          =========          =======
Net income available for common
         shareholders                     $     846          $ 2,789
                                          =========          =======
Net income per common share, basic        $    0.15          $  0.49
                                          =========          =======
Net income per common share, diluted      $    0.14          $  0.47
                                          =========          =======

</TABLE>

         This pro forma financial information does not necessarily reflect the



                                 Page 4 of 17

<PAGE>   7

Company's actual operating results if the transaction had been effective during
the periods shown and does not necessarily reflect future results.

         On February 26, 1999, the Company acquired NPAC, the reusable surgical
product business of the textile rental segment of National Service Industries,
Inc. The Company purchased the NPAC customer relationships and certain other
assets of the business exclusive of property, plant and equipment for cash
consideration of approximately $604,000, of which $449,000 has been allocated
to goodwill. Goodwill is amortized over 30 years. The Company has accounted for
the acquisition as a purchase and NPAC's operating results are included in the
Company's operating results since the date of acquisition. Pro forma results
are not material and therefore are not presented.

3.       LINE OF CREDIT

         The Company had approximately $5.8 million outstanding at September
30, 1999 under its $15.0 million revolving credit facility with First Union
National Bank. This credit facility is secured by substantially all of the
Company's assets and has a maturity date of February 28, 2002. The credit
facility's interest rate varies between 100 and 150 basis points over LIBOR
(6.084% as of September 30, 1999), depending on the Company's leverage. The
credit facility requires the Company to maintain (a) consolidated net worth of
$34.9 million plus 75% of cumulative consolidated net income for each fiscal
quarter occurring after February 24, 1999; (b) a consolidated leverage ratio of
not more than 2.5 to 1.0; and (c) a fixed charge coverage ratio of not less
than 2.8 to 1.0. The credit facility restricts the Company's payment of
dividends, acquisition transactions, additional indebtedness, and encumbering
of assets.

4.       COMMITMENTS AND CONTINGENCIES

         OPERATING LEASES

         As of February 1, 1999, the Company secured a $10.0 million lease
financing agreement to provide financing for land, building and equipment for
new processing facilities. The principal amount of this facility has recently
been increased by an additional $573,000. The lease financing margins are
substantially the same as under the Company's revolving line of credit. Under
the agreement, the lessor purchases land, reimburses the Company for the
facility's construction and equipment costs, and leases the completed facility
to the Company for three years. The Company guarantees all lease payments and a
substantial residual value for the facility when the lease term ends. Each
lease agreement includes a purchase option for the Company at the original cost
of the leased facility. The Company accounts for these leases as operating
leases. Construction of two facilities that were financed under this agreement
were completed in the third quarter of 1999 at a cost of approximately $5.0
million for each facility. The Company had outstanding construction costs,
reimbursable by the lessor, of $506,000 as of September 30, 1999. The Company
incurred $26,750 and $12,513 in lease payments for its Stockton, California and
Chattanooga, Tennessee facilities, respectively, in the three month period
ended September 30, 1999.



                                 Page 5 of 17

<PAGE>   8

5.       WEIGHTED AVERAGE COMMON SHARES

         Historical net income per common share is computed by dividing
historical net income by the basic and diluted weighted average number of
shares of common stock outstanding. For diluted weighted average shares
outstanding, the Company used the treasury stock method to calculate the Common
Stock equivalents that the stock options would represent.

         The following table sets forth the computation of historical basic and
diluted earnings per share:

<TABLE>
<CAPTION>

                                                      Three Months                Nine Months
                                                    Ended Sept. 30,             Ended Sept. 30,
                                                  1999          1998          1999          1998
                                                -------       -------       -------       -------
                                                              (In thousands, except
                                                                 per share data)
                                                                   (Unaudited)
<S>                                             <C>           <C>           <C>           <C>
BASIC

         Numerator:
            Net income                          $   989       $   819       $ 3,455       $ 2,617
            Less effect of dividends of
              preferred stock                       (51)          (16)         (157)          (16)
                                                -------       -------       -------       -------
            Net income available to
              common shareholders               $   938       $   803       $ 3,298       $ 2,601
                                                =======       =======       =======       =======

         Denominator:
            Weighted average shares
              outstanding                         5,677         5,663         5,676         5,661
                                                =======       =======       =======       =======
         Net income per common share
              - basic                           $  0.17       $  0.14       $  0.58       $  0.46
                                                =======       =======       =======       =======

DILUTED

         Numerator:
            Net income                          $   989       $   819       $ 3,455       $ 2,617
                                                =======       =======       =======       =======

         Denominator:
            Weighted average shares
              outstanding                         5,677         5,663         5,676         5,661
            Effect of dilutive securities:
            Employee stock options                   86           157            92           197
            Convertible preferred stock             567           174           567            58
                                                -------       -------       -------       -------
                                                  6,330         5,994         6,335         5,916
                                                =======       =======       =======       =======

         Net income per common share
            - diluted                           $  0.16       $  0.14       $  0.55       $  0.44
                                                =======       =======       =======       =======

</TABLE>


                                 Page 6 of 17




<PAGE>   9


         Options to purchase 518,000 and 363,000 shares of common stock for the
three month periods ended September 30, 1999 and September 30, 1998,
respectively, and options to purchase 518,000 and 260,000 shares of common
stock for the nine month periods ended September 30, 1999 and September 30,
1998, respectively, were not included for all or a portion of the computation
of diluted net income per common share because the options' exercise prices
were greater than the average market price of the common shares on September
30, 1999, and therefore their exercise would have an anti-dilutive effect.



                                 Page 7 of 17

<PAGE>   10

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

OVERVIEW

         The Company provides hospitals and surgery centers with a
comprehensive surgical procedure-based delivery and retrieval service for
reusable gowns, towels, drapes, and basins and provides other disposable
products necessary for surgery. At eleven regional facilities, the Company
collects, sorts, cleans, inspects, packages, sterilizes, and delivers its
reusable products on a just-in-time basis. The Company offers an integrated
"closed-loop" reprocessing service that uses two of the most technologically
advanced reusable textiles: (i) a GORE(R) Surgical Barrier Fabric for gowns and
drapes that is breathable yet liquidproof and provides a viral/bacterial
barrier and (ii) an advanced microfiber polyester surgical fabric for gowns and
drapes that is liquid and bacterial resistant. The Company believes that its
reusable surgical products made from these fabrics provide protection and
comfort that are superior to disposable alternatives.

         The Company is using its trademarked name SRI/Surgical Express to
market its platform of services including delivery and retrieval of reusable
gowns, drapes, towels and basins, and other disposable products necessary for
surgery. The Company expects to expand its services to include reusable
instrument reprocessing and additional disposable products as part of its daily
service.

         The Company's two new reprocessing facilities opened in Stockton,
California and Chattanooga, Tennessee in the third quarter of 1999. These new
facilities now serve a portion of the customers previously served by the Long
Beach, California and Raleigh, North Carolina facilities.

         The Company purchased RePak Surgical Enterprises, Inc. on August 31,
1998 and the NPAC division of National Service Industries on February 26, 1999.
RePak's and NPAC's results of operations are included in the Company's results
of operations since the respective dates of acquisition.






















GORE(R) Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.



                                 Page 8 of 17

<PAGE>   11


RESULTS OF EARNINGS

         The following table sets forth for the periods shown the percentage of
revenues represented by certain items reflected in the statement of earnings of
the Company.

<TABLE>
<CAPTION>

                                           Three Months Ended      Nine Months Ended
                                                Sept. 30,              Sept. 30,
                                            1999        1998        1999        1998
                                           -----       -----       -----       -----
<S>                                        <C>         <C>         <C>         <C>

Revenues                                   100.0%      100.0%      100.0%      100.0%
Cost of revenues                            68.5        69.0        67.4        67.1
                                           -----       -----       -----       -----
   Gross profit                             31.5        31.0        32.6        32.9
Distribution expenses                        7.2         7.2         7.4         7.3
Selling and administrative expenses         14.5        13.3        13.8        14.0
                                           -----       -----       -----       -----
   Income from operations                    9.8        10.5        11.4        11.6
Interest expense, net                        0.4         0.1         0.4         0.0
                                           -----       -----       -----       -----
   Income before income taxes                9.4        10.4        11.0        11.6
Income tax expense                           3.6         4.1         4.3         4.5
                                           -----       -----       -----       -----
Net income                                   5.8%        6.3%        6.7%        7.1%
                                           =====       =====       =====       =====

</TABLE>


THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 1998

         REVENUES. The Company's revenues increased $4.1 million, or 31.7%, to
$17.2 million in the three months ended September 30, 1999, from $13.0 million
in the three months ended September 30, 1998. In the nine months ended
September 30, 1999, the Company's revenues increased $14.3 million, or 38.7%,
to $51.4 million, from $37.0 million in the nine months ended September 30,
1998. The revenue increases were attributable in roughly equal amounts to new
customers, increased revenues from current customers, and added revenues from
the RePak and NPAC acquisitions.

         GROSS PROFIT. Gross profit increased $1.4 million, or 33.8%, to $5.4
million in the three months ended September 30, 1999 from $4.0 million in the
three months ended September 30, 1998; and $4.6 million, or 37.4%, to $16.7
million in the nine months ended September 30, 1999, from $12.2 million in the
nine months ended September 30, 1998. Gross profit as a percentage of revenues
increased by 0.5% to 31.5% in the three months ended September 30, 1999, from
31.0% in the three months ended September 30, 1998; and decreased 0.3% to 32.6%
in the nine months ended September 30, 1999, from 32.9% in the nine months
ended September 30, 1998. Gross profit increases for both the three month and
nine month periods ended September 30, 1999 were primarily due to increased
revenues. The benefits of increased revenues were partially offset by higher
amortization and shrinkage expense of reusable surgical products and by
additional expenses incurred in opening a new disposable products facility,
continued implementation costs of the Company's new information systems, and a
lower than anticipated revenue increase for the quarter.

         DISTRIBUTION EXPENSES. Distribution expenses increased $302,000, or
32.1%, to $1.2 million in the three months ended September 30, 1999, from
$940,000 in the three months ended September 30, 1998; and $1.1 million, or
41.4%, to $3.8 million in the nine months ended September 30, 1999, from $2.7
million in the nine months ended September 30, 1998. Distribution expenses as a
percentage of revenues



                                 Page 9 of 17

<PAGE>   12

remained the same at 7.2% in the three months ended September 30, 1999 and
September 30, 1998; and increased 0.1% to 7.4% in the nine months ended
September 30, 1999, from 7.3% in the nine months ended September 30, 1998.
Distribution expense increased because of truck routes added for new customers
as the Company continues to expand its geographic reach.

         SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased $746,000, or 43.2%, to $2.5 million in the three months
ended September 30, 1999, from $1.7 million in the three months ended September
30, 1998; and increased $1.9 million, or 36.6%, to $7.1 million in the nine
months ended September 30, 1999, from $5.2 million in the nine months ended
September 30, 1998. As a percentage of revenues, selling and administrative
expenses increased 1.2% to 14.5% in the three months ended September 30, 1999
from 13.3% in the three months ended September 30, 1998; and decreased 0.2% to
13.8% in the nine months ended September 30, 1999, from 14.0% in the nine
months ended September 30, 1998. The increase in selling and administrative
expenses as a percentage of revenues resulted primarily from expenses incurred
by the Company in adding sales representatives and implementing its new
information systems.

         INCOME FROM OPERATIONS. Income from operations increased $318,000, or
23.2%, to $1.7 million in the three months ended September 30, 1999, from $1.4
million in the three months ended September 30, 1998; and increased $1.5
million, or 35.8%, to $5.8 million in the nine months ended September 30, 1999,
from $4.3 million in the nine months ended September 30, 1998. Income from
operations as a percentage of revenues decreased from 0.7% to 9.8% for the
three months ended September 30, 1999 from 10.5% for the three months ended
September 30, 1998; and decreased 0.2% to 11.4% for the nine months ended
September 30, 1999 from 11.6% for the nine months ended September 30, 1998 as a
result of the increased costs described above.

         INTEREST EXPENSE , NET. Interest expense increased $47,000 to $67,000
in the three months ended September 30, 1999 compared to $20,000 in the three
months ended September 30, 1998, and increased $202,000 to $210,000 in the nine
months ended September 30, 1999 compared to $8,000 in the nine months ended
September 30, 1998, due to higher borrowings under the Company's revolving
credit facility.

         INCOME TAX EXPENSE. Income tax expense increased $101,000 to $632,000
in the three months ended September 30, 1999, compared to $531,000 in the three
months ended September 30, 1998; and increased $502,000 to $2.2 million in the
nine months ended September 30, 1999, compared to $1.7 million in the nine
months ended September 30, 1998. The Company's effective tax rate is 39.0%.

         NET INCOME PER SHARE. The Company's net income per share is $0.17 on a
basic per share basis and $0.16 on a diluted per share basis for the three
months ended September 30, 1999, compared with $0.14 for both basic and diluted
per share net income for the three months ended September 30, 1998; and net
income per share of $0.58 on a basic per share basis and $0.55 on a diluted per
share basis for the nine months ended September 30, 1999, compared with a net
income per share of $0.46 on a basic per share basis and $0.44 on a diluted per
share basis for the nine months ended September 30, 1998.



                                 Page 10 of 17

<PAGE>   13

LIQUIDITY AND CAPITAL RESOURCES

         The Company's positive cash flow from operating activities was $8.5
million during the nine months ended September 30, 1999, compared to $7.3
million during the nine months ended September 30, 1998. The increase in cash
flows from operating activities resulted primarily from increased net income
before amortization, shrinkage, and depreciation expense, and a decrease in
accounts payable, partially offset by an increase in accounts receivable and
inventories. The Company's positive cash flow from operating activities
exceeded its purchases of reusable surgical products during the nine months
ended September 30, 1999 and the cost of the NPAC acquisition.

         The Company used approximately $1.3 million more net cash in investing
activities in the nine months ended September 30, 1999 than in the nine months
ended September 30, 1998. The Company has made capital expenditures in the nine
months ended September 30, 1999 for equipment of $3.5 million and for reusable
surgical products of $6.3 million compared to $2.6 million for equipment and
$5.4 million for reusable surgical products during the nine months ended
September 30, 1998. These expenditures were funded primarily by cash provided
by operating activities and the balance from borrowings under the Company's
revolving credit facility.

         The Company continues to invest in more reusable surgical products,
primarily to support anticipated increases in business. The Company's business
is capital intensive and will require substantial capital expenditures for
additional surgical products and equipment during the next several years to
achieve its operating and expansion plans. To adequately service a new
customer, the Company estimates that it makes an investment in new reusable
surgical products and carts equal to approximately 45% of the projected first
year revenue from the customer. The Company estimates capital expenditures for
new carts and reusable surgical products will be approximately $1.5 million per
month for the next 12 months, although the amount will fluctuate with the
growth of its business. The Company also expects to make additional
expenditures of approximately $5.0 million during the last quarter of 1999 and
the first quarter of 2000 for equipment upgrades to increase the aggregate
capacity of its facilities, including approximately $4.0 million to expand and
further equip its Cincinnati, Ohio facility. The Company spent $800,000 in the
nine months ended September 30, 1999 for new information systems and expects to
spend $200,000 more during the balance of 1999, as it substantially completes
its current upgrade of these systems. See "Year 2000 Compliance" below. The
Company expects to fund these expenditures primarily from cash provided by
operating activities and borrowings under its revolving credit facility.

         The Company had approximately $5.8 million outstanding at September
30, 1999 under its $15.0 million revolving credit facility with First Union
National Bank. This credit facility is secured by substantially all of the
Company's assets and has a maturity date of February 28, 2002. The credit
facility's interest rate varies between 100 and 150 basis points over LIBOR
(6.084% as of September 30, 1999), depending on the Company's leverage. The
credit facility requires the Company to maintain (a) consolidated net worth of
$34.9 million plus 75% of cumulative consolidated net income for each fiscal
quarter occurring after February 24, 1999; (b) a consolidated leverage ratio of
not more than 2.5 to 1.0; and (c) a fixed charge coverage ratio of not less
than 2.8 to 1.0. The credit facility restricts the Company's payment of
dividends, acquisition transactions, additional indebtedness, and encumbering
of assets.



                                 Page 11 of 17

<PAGE>   14

         As of February 1, 1999, the Company secured a $10.0 million lease
financing arrangement to finance land, building, and equipment for its two new
reprocessing facilities in Stockton, California and Chattanooga, Tennessee,
each estimated to cost approximately $5.0 million. The principal amount of the
facility has recently been increased by an additional $573,000. The lease
financing margins are substantially the same as under the Company's credit
facility. Under the arrangement, a lessor purchases land, reimburses the
Company for the facility's construction and equipment costs, and leases the
completed facility to the Company for three years. The Company guarantees all
lease payments and a substantial residual value for the facility when the lease
term ends. The lease agreement includes a purchase option for the Company at
the original cost of the leased facility. The Company accounts for these leases
as operating leases. Construction of two facilities that were financed under
this agreement were completed in the third quarter of 1999 at a cost of
approximately $5.0 million for each facility. The Company had outstanding
construction costs, reimbursable by the lessor, of $506,000 as of September 30,
1999. The Company incurred $26,750 and $12,513 in lease payments for its
Stockton, California and Chattanooga, Tennessee facilities, respectively, in
the three months ended September 30, 1999.

         As of September 30, 1999, the Company had cash of approximately
$34,000. The Company believes this current cash balance, combined with its cash
flows from operating activities and funds available under its credit facility,
will be sufficient to fund its growth and anticipated capital requirements for
the next twelve months. The Company expects to fund additional capital
expenditures from a combination of internal cash flows, its credit facility,
and other capital sources.

YEAR 2000 COMPLIANCE

         The Company has developed and is implementing a comprehensive program
to address year 2000 issues for its information technology and non-information
technology systems. The program consists of identification, compliance, and
post-implementation phases, and considers the effects of the year 2000 on the
Company's internal systems, customers, products, and services, as well as its
effects on suppliers and other critical business partners.

         The Company has been replacing its financial and operational systems
with enterprise-wide systems that are year 2000 compliant and that facilitates
its growth. The Company has and will continue to incur staff, consulting, and
other expenses to prepare its information systems and applications for this
implementation. The Company had implemented this system in ten of its eleven
reprocessing facilities as of September 30, 1999. The Company had spent $2.0
million for this project through September 30, 1999, and estimates that it will
spend an additional $200,000 for this project by its estimated completion time
of mid-December 1999.

         The Company has also distributed questionnaires and conducted
follow-up meetings with critical suppliers and other business partners to
determine the extent that their year 2000 issues might affect the Company.
These parties' timely year 2000 compliance is beyond the Company's control, and
their failure to achieve timely compliance could materially adversely affect
the Company.

         The Company has developed contingency plans for year 2000 compliance
and will implement them if necessary. Because of the difficulty of fully
anticipating all potential crises and problems that might arise, these plans
might not fully address the Company's risk of year 2000 non-compliance. A
significant interruption in its business due to year 2000 non-compliance could
materially adversely affect the Company.



                                 Page 12 of 17

<PAGE>   15

CERTAIN CONSIDERATIONS

         This report, other documents that are publicly disseminated by the
Company, and oral statements that are made on behalf of the Company contain or
might contain both statements of historical fact and forward-looking
statements. Examples of forward-looking statements include: (a) projections of
revenue, earnings, capital structure, and other financial items, (b) statements
of the plans and objectives of the Company and its management, (c) statements
of future economic performance, and (d) assumptions underlying statements
regarding the Company or its business. The cautionary statements set forth
below discuss important factors that could cause actual results to differ
materially from any forward-looking statements.

         Sales Process and Market Acceptance of Products and Services. The
Company's future performance depends on its ability to increase revenues to new
and existing customers. The Company's sales process for new customers is
typically between six and twelve months in duration from initial contact to
purchase commitment. The extended sales process is typically due to the
complicated approval process within hospitals for purchases from new suppliers,
the long duration of existing supply contracts, and implementation delays
pending termination of a hospital's previous supply relationships. The long
sales process inhibits the ability of the Company to quickly increase revenues
from new and existing customers or enter new markets. The Company's future
performance will also depend on market acceptance of its combination of
reusable surgical products, disposable accessory packs, and direct delivery and
retrieval service. The Company's market is now dominated by disposable
products, and the Company's primary strategic emphasis on reusable surgical
products and reprocessing services requires its customers to change their
customary purchasing patterns. There is no assurance that a significant portion
of the market will shift from disposable products to the Company's reusable
surgical products and reprocessing services. The Company's inability to gain
wider market acceptance of its reusable products and reprocessing services
would have a material adverse effect on the Company's operating and expansion
plans.

         Need for Capital. The Company's business is capital intensive and will
require substantial capital expenditures for additional surgical products and
equipment during the next several years to achieve its operating and expansion
plans. In the longer term, the Company expects that its needs for capital
expenditures will be substantial and will depend on its growth and
opportunities. The Company's inability to obtain adequate capital could have a
material adverse effect on the Company. See -- "Liquidity and Capital
Resources."

         Dependence on Significant Customers and Market Consolidation. During
the third quarter of 1999, Columbia/HCA Healthcare Corporation ("Columbia") and
Premier, Inc. ("Premier") hospitals, with which the Company currently does
business, accounted for approximately 11.5% and 18.1% of the Company's revenues
respectively, compared to 15.0% and 21.2% respectively in the third quarter of
1998. Although each Columbia and Premier hospital currently makes its
purchasing decisions on an individual basis, and no single hospital accounted
for more than 2.6% of the Company's revenues, the Company believes the
executive managements of Columbia and Premier have the ability to influence the
selection of particular vendors. The loss of a substantial portion of the
Columbia or Premier hospitals' business would have a material adverse effect on
the Company. Additionally, hospitals are increasingly buying products and
services in groups to improve efficiency and lower costs. Although the Company
is increasingly targeting these groups for its sales efforts, a change of its
customers' purchasing patterns could have a material adverse effect on the
Company.



                                 Page 13 of 17

<PAGE>   16

         Competition. The Company's business is highly competitive. The
Company's competitors include a number of distributors and manufacturers, as
well as the in-house reprocessing operations of hospitals. Certain of the
Company's existing and potential competitors possess substantially greater
resources than the Company, and the Company's market is dominated by their
disposable products. Some of the Company's competitors, including the
Convertors Division of Allegiance Corporation, serve as the sole supplier of a
wide assortment of products to a significant number of hospitals. The Company
does not provide an array of products as complete as those provided by some of
its competitors, which in some instances is a competitive disadvantage. There
is no assurance that the Company will be able to compete effectively with
existing or potential competitors.

         Dependence on Key Executives. The Company is largely dependent upon
the management expertise and experience of Richard T. Isel, Bertram T. Martin,
Jr., Wayne R. Peterson, and James T. Boosales, its principal officers. The loss
of the services of one or more of these key executives could have a material
adverse effect on the Company.

         Increased Replacement and Amortization Costs. The Company acquired its
equipment and surgical products at a cost substantially below both their
original cost and current replacement cost, which has resulted in lower
depreciation, amortization, and shrinkage expense for those assets since the
Acquisition, as compared to the expenses incurred by Amsco Sterile. Since the
Acquisition, the Company has purchased equipment and surgical products at
current replacement cost, resulting in increased depreciation, amortization,
and shrinkage expense. SRI amortizes its reusable surgical products on a per
use basis. If the products' actual number of uses proves to be shorter than
SRI's current estimates, the Company's annual product amortization expense
would increase, which would adversely affect its profitability. The amount of
shrinkage (loss and scrap of reusable surgical products) experienced by the
Company is influenced by a variety of factors including the customers' surgical
product rotation and operating room control procedures, the Company's internal
tracking of reusable surgical products through bar coding and the Company's
increased use of standardized surgical packs.

         Recent Acquisitions and Implementation of Acquisition Strategy. The
Company acquired RePak Surgical Enterprises, Inc., a surgical products
reprocessing company located in the Cincinnati, Ohio area, on August 31, 1998,
and NPAC, the reusable surgical product business of the textile rental segment
of National Service Industries, Inc., on February 26, 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview". The Company might make other acquisitions in the future.
Acquisitions involve risks to the Company, including (a) diversion of
management's attention to identifying and negotiating the acquisitions and
integrating the acquired businesses; (b) costs incurred in integrating the
acquired company's financial, operating, and other systems; (c) unforeseen
liabilities or operating difficulties of the acquired businesses; (d) the
adverse earnings impact of amortizing goodwill and other acquired intangible
assets; and (e) the potentially dilutive effect on per share earnings of any
new issuance of equity securities to the seller.

         New Facilities. The Company might in the future construct new
facilities. This expansion program involves risks that could materially
adversely affect the Company, including (a) diversion of management's
attention; (b) unforeseen costs or delays in construction; (c) customers lost
in their transition to new facilities; (d) unanticipated (although
non-recurring) start-up expenses; and (e) unforeseen operating difficulties of
the facilities.


                                 Page 14 of 17

<PAGE>   17

         Government Regulation. Significant aspects of the Company's businesses
are subject to state and federal statutes and regulations governing, among
other things, medical waste-disposal and workplace health and safety. In
addition, most of the products furnished or sold by the Company are subject to
regulation as medical devices by the U.S. Food and Drug Administration (FDA),
as well as by other federal and state agencies. The Company's facilities are
subject to regular inspections by FDA officials. The FDA has the power to
enjoin future violations, seize adulterated or misbranded devices, require the
manufacturer to remove products from the market, and publicize relevant facts.
Federal or state governments might impose additional restrictions or adopt
interpretations of existing laws that could materially adversely affect the
Company.



                                 Page 15 of 17

<PAGE>   18

                          PART II - OTHER INFORMATION


Item 1.  Legal Proceedings

         Neither the Company nor any of its property is subject to any
litigation or other legal proceeding that is expected to have a material effect
on the Company or its business.


Item 2.  Changes in Securities

         None.


Item 3.  Defaults Upon Senior Securities

         None.


Item 4.  Submission of Matters to a Vote of Security Holders

         None.

Item 5.  Other Information

         None.


Item 6.  Exhibits and Reports on Form 8-K

EXHIBIT
NUMBER   EXHIBIT DESCRIPTION


4.3      Trust Indenture dated as of June 1, 1999, between First Union National
         Bank and First Security Bank, National Association (lease facility).

10.32    Lease Agreement dated as of June 15, 1999, between the Company and
         ProLogis Limited Partnership IV.

27       Financial Data Schedules  (for SEC use only).



                              REPORTS ON FORM 8-K

The Company did not file a report on Form 8-K during the third quarter of 1999.


                                 Page 16 of 17

<PAGE>   19

                                   SIGNATURE

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

                                       STERILE RECOVERIES, INC.


Date: November 11, 1999                By: /s/ James T. Boosales
                                          -------------------------------------
                                               Executive Vice President
                                               Chief Financial Officer



                                 Page 17 of 17