<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549


                                   FORM 10-Q

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

                  For the quarterly period ended SEPTEMBER 30, 1998

                                       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
October 30, 1998:

                   Common Stock, par value $.001 - 5,663,694


<PAGE>   2

                                     INDEX

<TABLE>
<CAPTION>

                                                                              PAGE
                                                                              ----
<S>      <C>      <C>                                                         <C>         
PART I            FINANCIAL INFORMATION

         Item 1   Financial Statements

                  Condensed Consolidated Statements of Earnings for
                  the three month period and nine month period ended
                  September 30, 1998 (unaudited) and the three month
                  period and nine month period ended September 30,
                  1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . .  1

                  Condensed Consolidated Balance Sheets as of September 30, 
                  1998 (unaudited) and December 31, 1997 . . . . . . . . . . . .  2

                  Condensed Consolidated Statements of Cash Flow for
                  the nine month period ended September 30, 1998
                  (unaudited) and nine month period ended September 30,
                  1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . .  3

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


         Item 2   Management's Discussion and Analysis of Financial
                  Condition and Results of Operations  . . . . . . . . . . . . .  6


PART II           OTHER INFORMATION

         Item 1   Legal Proceedings  . . . . . . . . . . . . . . . . . . . . . . 12

         Item 2   Changes in Securities  . . . . . . . . . . . . . . . . . . . . 12

         Item 3   Defaults Upon Senior Securities  . . . . . . . . . . . . . . . 12

         Item 4   Submission of Matters to a Vote of Security Holders  . . . . . 12

         Item 5   Other Information  . . . . . . . . . . . . . . . . . . . . . . 12

         Item 6   Exhibits and Reports on Form 8-K   . . . . . . . . . . . . . . 12

SIGNATURE    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14


</TABLE>


<PAGE>   3

                         PART I - FINANCIAL INFORMATION


Item 1.  Condensed 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,
                                             1998        1997           1998        1997
                                             ----        ----           ----        ----
<S>                                       <C>          <C>           <C>          <C> 
Revenues                                  $ 13,021     $ 10,110      $ 37,036     $ 28,822
Cost of revenues                             8,983        6,627        24,851       19,048
                                          --------     --------      --------     --------
     Gross profit                            4,038        3,483        12,185        9,774

Distribution expenses                          940          811         2,687        2,296
Selling and administrative expenses          1,728        1,581         5,192        4,303
                                          --------     --------      --------     --------
     Income from operations                  1,370        1,091         4,306        3,175

Interest expense (income), net                  20          (24)            8         (105)
                                          --------     --------      --------     --------
     Income before income tax expense        1,350        1,115         4,298        3,280

Income tax expense                             531          429         1,681        1,278
                                          --------     --------      --------     --------
     Net income                           $    819     $    686      $  2,617     $  2,002
                                          ========     ========      ========     ========

Dividends on preferred stock                    16           --            16           --
                                          --------     --------      --------     --------
Net income available for common
 shareholders                             $    803     $    686      $  2,601     $  2,002
                                          ========     ========      ========     ========


Net income per common share - basic       $   0.14     $   0.12      $   0.46     $   0.36
                                          ========     ========      ========     ========

Net income per common share - diluted     $   0.14     $   0.12      $   0.44     $   0.34
                                          ========     ========      ========     ========

Weighted average common shares
outstanding - basic                          5,663        5,658         5,661        5,629
                                          ========     ========      ========     ========

Weighted average common shares
outstanding - diluted                        5,994        5,865         5,916        5,866
                                          ========     ========      ========     ========

</TABLE>


     See accompanying Notes to Condensed Consolidated Financial Statements



                                                                   Page 1 of 14

<PAGE>   4


                            STERILE RECOVERIES, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>


                                                September 30,  Dec. 31,
                                                    1998         1997
                                                -------------  --------
                                                 (unaudited)
<S>                                              <C>          <C> 
                   ASSETS

Cash                                              $    --     $   380
Accounts receivable, net                            7,264       6,016
Inventories                                         1,896       1,979
Prepaid expenses and other assets                   1,241       1,203
Reusable surgical products, net                    13,805      10,034
Property, plant and equipment, net                 11,702       7,253
Goodwill, net                                       5,196         521
Deferred income taxes                                 160         160
                                                  -------     -------

         Total assets                             $41,264     $27,546
                                                  =======     =======


    LIABILITIES AND SHAREHOLDERS' EQUITY

Notes payable                                     $ 2,515     $    --
Accounts payable                                    2,673       1,603
Employee related accrued expenses                     939         926
Other accrued expenses                              1,036         669
                                                  -------     -------

         Total liabilities                          7,163       3,198

Commitments and contingencies                          --          --

Shareholders' equity
 Preferred stock                                        1          --
 Common stock                                           6           6
 Additional paid-in capital                        27,318      20,167
 Retained earnings                                  6,776       4,175
                                                  -------     -------

   Total shareholders' equity                      34,101      24,348
                                                  -------     -------

   Total liabilities and shareholders' equity     $41,264     $27,546
                                                  =======     =======

</TABLE>



     See accompanying Notes to Condensed Consolidated Financial Statements



                                                                   Page 2 of 14

<PAGE>   5


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

<TABLE>
<CAPTION>

                                                                             Nine Months Ended
                                                                        September 30,   September 30,
                                                                             1998           1997
                                                                        ------------    ------------
<S>                                                                     <C>             <C>
Increase (decrease) in cash
Cash flows from operating activities
  Net income                                                              $ 2,617      $ 2,002
  Adjustments to reconcile net income to net
   cash provided by operating activities:
    Depreciation and amortization                                             691          481
    Amortization of reusable surgical products                              2,014        1,447
    Provision for reusable surgical products shrinkage                        921          433

    Change in assets and liabilities (net of business combination):
      Accounts receivable                                                    (562)        (214)
      Inventories                                                             102         (692)
      Prepaid expenses and other assets                                        26         (262)
      Accounts payable                                                      1,458          514
      Accrued expenses                                                         (2)        (674)
                                                                          -------      -------
        Net cash provided by operating activities                           7,265        3,035
                                                                          -------      -------

Cash flows from investing activities
  Purchases of property, plant and equipment                               (2,639)      (2,292)
  Purchases of reusable surgical products                                  (5,411)      (4,525)
  Payment for acquisition of business, net of cash acquired                (1,340)           0
                                                                          -------      -------
        Net cash used in investing activities                              (9,390)      (6,817)
                                                                          -------      -------
Cash flows from financing activities
   Borrowings from line of credit                                           1,734         (250)
   Net proceeds from issuance of common stock                                  11          (12)
                                                                          -------      -------
        Net cash provided by (used in) financing
        activities                                                          1,745         (262)
                                                                          -------      -------

   Increase (decrease) in cash                                               (380)      (4,044)
   Cash and cash equivalents at beginning of period                           380        5,199
                                                                          -------      -------
   Cash and cash equivalents at end of period                             $    (0)     $ 1,155
                                                                          =======      =======

   Supplemental cash flow information
     Cash paid for interest                                               $    30      $    44
                                                                          =======      =======
     Cash paid for income taxes                                           $ 1,661      $ 1,577
                                                                          =======      =======

   Conversion of Convertible Demand Note into 128,205
    shares of Common Stock                                                $    --      $   750
                                                                          =======      =======
Non-cash activities
   During 1998 the Company acquired $9.4 million in assets and assumed $761,000
    in liabilities in exchange for cash of $1,510,047 and Series A Preferred
    Stock with a value of $7,140,000.

</TABLE>



     See accompanying Notes to Condensed Consolidated Financial Statements
    


                                                                   Page 3 of 14

<PAGE>   6

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

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         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, 1997 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, 1998
         are not necessarily indicative of the results that can be expected for
         the entire year ending December 31, 1998. The unaudited financial
         statements should be read in conjunction with the financial statements
         and the notes thereto included in the Form 10-K.


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. From its
         facility located in the Cincinnati area, Repak provides reusable
         surgical product services similar to the Company's reprocessing
         services to the Ohio and Michigan markets. The Series A Preferred
         Stock is convertible by its holder at any time into the same number of
         shares of the Company's common stock. Under certain conditions,
         including the Company's common stock having an average closing trading
         price of $18.00 per share for a specified time period, the preferred
         stock is mandatorily convertible into the Company's common stock. The
         Series A Preferred Stock was valued at $7,140,000 by an independent
         business valuation expert.

         The Company also purchased the Repak facility's real estate for $1.5
         million cash from Standard Textile's affiliates (see Note 3).

         The Company has accounted for the acquisition as a purchase and
         included Repak's operating results in the Company's operating results
         since September 1, 1998. Of the approximately $8.6 million total costs
         it incurred to complete the acquisition, the Company allocated
         approximately $4.7 million to tangible assets, incurred approximately
         $760,000 in liabilities, and allocated approximately $4.7 million to
         goodwill. Goodwill will be amortized over 




                                                                   Page 4 of 14

<PAGE>   7

         thirty years based upon various factors including historical and
         projected operating results.

         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 each respective period.


<TABLE>
<CAPTION>

                                                    Three Months Ended         Nine Months Ended
                                                       September 30,             September 30,
                                                   1998          1997          1998          1997
                                                 ---------     ---------     ------ --     --------
<S>                                              <C>           <C>           <C>           <C>
Revenues                                         $  14,580     $  12,132     $  42,980     $35,067
                                                 =========     =========     =========     =======
Net income                                       $     893     $     778     $   2,942     $ 2,231
                                                 =========     =========     =========     =======
Net income available for common
 shareholders                                    $     846     $     727     $   2,789     $ 2,078
                                                 =========     =========     =========     =======
Net income per common share, basic               $    0.15     $    0.13     $    0.49     $  0.37
                                                 =========     =========     =========     =======
Net income per common share, diluted             $    0.14     $    0.12     $    0.47     $  0.35
                                                 =========     =========     =========     =======
</TABLE>

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


3.      INDEBTEDNESS

        The Company has established with First Union National Bank a $15
        million unsecured revolving credit facility that is scheduled to mature
        in August 1999. The facility imposes certain financial covenants.
        Currently total outstanding borrowings are limited to two and one-half
        times the Company's earnings before interest, taxes, depreciation, and
        amortization (EBITDA) for the previous four quarters. The facility also
        requires the Company to maintain a minimum tangible net worth of
        $23,745,000. The Company may elect to convert up to $5 million of the
        available facility into term loans for capital expenditures that are
        ratably payable over five years, and secured by the equipment acquired
        with these loans. All borrowings accrue interest at the London
        Interbank Offering Rate (LIBOR) plus 190 basis points through October
        15, 1998 (7.28% as of September 30, 1998), and 175 basis points
        thereafter until maturity. The facility generally prohibits the Company
        from encumbering its assets.

        As of September 30, 1998, the Company had borrowings of $1.7 million,
        of which approximately $1.5 million was incurred to fund the Company's
        purchase of the Repak facility real estate.



                                                                   Page 5 of 14

<PAGE>   8


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 nine 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.

         On August 31, 1998, the Company acquired all the shares of 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. From a facility in the Cincinnati
area, Repak provides the Ohio and Michigan markets with reusable surgical
product services similar to the Company's reprocessing service. In the twelve
months ended December 31, 1997, Repak had annual revenues of approximately $8.3
million from its reusable surgical products reprocessing service. The Company
also purchased the Repak facility's real estate for $1.5 million cash from
affiliates of Standard Textile.

         The newly issued Series A Preferred Stock is convertible by its holder
at any time into the same number of shares of the Company's common stock. Under
certain conditions, including the Company's common stock having an average
closing trading price of $18.00 for a specified time period, the Series A
Preferred Stock is mandatorily convertible into the Company's common stock. The
Series A Preferred Stock accrues a 2% dividend on its liquidation preference of
$18.00 per share, payable quarterly, until the earlier of September 1, 2004 or
the date the shares are converted into shares of common stock.



                                                                   Page 6 of 14
<PAGE>   9

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
                                       September 30,          September 30,
                                     1998       1997        1998       1997
                                    ------     ------      ------      -----
<S>                                 <C>        <C>         <C>        <C>   
Revenues                            100.0%     100.0%      100.0%      100.0%
Cost of revenues                     69.0       65.5        67.1        66.1
                                    -----      -----       -----       -----
   Gross profit                      31.0       34.5        32.9        33.9
Distribution expense                  7.2        8.0         7.3         8.0
Selling and administrative
 expenses                            13.3       15.7        14.0        14.9
                                    -----      -----       -----       -----
   Income from operations            10.5       10.8        11.6        11.0
Interest expense (income), net        0.1       (0.2)       (0.0)       (0.4)
                                    -----      -----       -----       -----
   Income before income taxes        10.4       11.0        11.6        11.4
Income tax expense                    4.1        4.2         4.5         4.5
                                    -----      -----       -----       -----
Net income                            6.3%       6.8%        7.1%        6.9%
                                    =====      =====       =====       =====

</TABLE>

NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED 
SEPTEMBER 30, 1997

         REVENUES. The Company's revenues increased $2.9 million, or 28.8%, to
$13.0 million in the three months ended September 30, 1998 from $10.1 million
in the three months ended September 30, 1997. In the nine months ended
September 30, 1998, the Company's revenues increased $8.2 million, or 28.5%, to
$37.0 million, from $28.8 million in the nine months ended September 30, 1997.
The revenue increases were attributable in roughly equal amounts to new
customers, increased revenues from current customers, and added revenues from
the Repak acquisition.

         GROSS PROFIT. Gross profit increased $555,000, or 15.9%, to $4.0
million in the three months ended September 30, 1998 from $3.5 million in the
three months ended September 30, 1997; and $2.4 million, or 24.7%, to $12.2
million in the nine months ended September 30, 1998, from $9.8 million in the
nine months ended September 30, 1997. Gross profit as a percentage of revenues
decreased by 3.5% to 31.0% in the three months ended September 30, 1998, from
34.5% in the three months ended September 30, 1997; and decreased by 1.0% to
32.9% in the nine months ended September 30, 1998, from 33.9% in the nine
months ended September 30, 1997. The Company's gains in labor efficiencies and
its economies of scale from spreading fixed costs over more revenues in the
third quarter of 1998 were not as much as expected, and therefore did not fully
offset increases during that quarter in its amortization expense and shrinkage
of reusable surgical products.

         DISTRIBUTION EXPENSES. Distribution expenses increased $129,000, or
15.9%, to $940,000 in the three months ended September 30, 1998, from $811,000
in the three months ended September 30, 1997; and $391,000, or 17.0%, to $2.7
million in the nine months ended September 30, 1998, from $2.3 million in the
nine months ended September 30, 1997.

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




                                                                   Page 7 of 14
<PAGE>   10

Distribution expenses as a percentage of revenues decreased by .8% to 7.2% in
the three months ended September 30, 1998 from 8.0% in the three months ended
September 30, 1997; and decreased .7% to 7.3% in the nine months ended
September 30, 1998, from 8.0% in the nine months ended September 30, 1997. The
improvement in distribution expenses as a percentage of revenues resulted
primarily from efficiencies derived from delivering more volume over existing
routes and from adding additional routes and equipment at a slower pace than
revenue growth.

         SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased $147,000, or 9.3%, to $1.7 million in the three months ended
September 30, 1998, from $1.6 million in the three months ended September 30,
1997; and increased $889,000, or 20.7%, to $5.2 million in the nine months
ended September 30, 1998, from $4.3 million in the nine months ended September
30, 1997. As a percentage of revenues, selling and administrative expenses
decreased 2.4% to 13.3% in the three months ended September 30, 1998 from 15.7%
in the three months ended September 30, 1997; and decreased .9% to 14.0% in the
nine months ended September 30, 1998, from 14.9% in the nine months ended
September 30, 1997. Improvement in selling and administrative expenses as a
percentage of revenues resulted primarily from the Company's continuing ability
to leverage administrative costs over more revenues.

         INTEREST EXPENSE (INCOME), NET. Interest expense increased $44,000 to
interest expense of $20,000 in the three months ended September 30, 1998, from
interest income of $24,000 in the three months ended September 30, 1997, and
increased $113,000 to interest expense of $8,000 in the nine months ended
September 30, 1998, from interest income of $105,000 in the nine months ended
September 30, 1997. The increased interest expense was primarily a consequence
of borrowings under the Company's revolving credit facility to fund the
Company's $1.5 million cash purchase of the Repak facility real estate.

         INCOME BEFORE INCOME TAX EXPENSE. As a result of the foregoing, the
Company's income before taxes increased to $1.4 million in the three months
ended September 30, 1998, from income before taxes of $1.1 million in the three
months ended September 30, 1997; and increased to $4.3 million in the nine
months ended September 30, 1998, from an income before taxes of $3.3 million in
the nine months ended September 30, 1997. As a percentage of revenues, income
before taxes in the three months ended September 30, 1998 was 10.4% of
revenues, compared to income before taxes of 11.0% of revenues in the three
months ended September 30, 1997; and income before taxes of 11.6% of revenue in
the nine months ended September 30, 1998, compared to income before taxes of
11.4% of revenues in the nine months ended September 30, 1997.

         INCOME TAX EXPENSE. Income tax expense increased $102,000 to $531,000
in the three months ended September 30, 1998, compared to $429,000 in the three
months ended September 30, 1997; and increased $403,000 to $1.7 million in the
nine months ended September 30, 1998, compared to $1.3 million in the nine
months ended September 30, 1997. The Company's effective tax rate is 40.0%.

         NET INCOME PER SHARE. The Company recorded a net income per share of
$0.14 on a basic and diluted per share basis for the three months ended
September 30, 1998, compared with $0.12 basic and diluted per share net income
for the three months ended September 30, 1997; and net income per share of
$0.46 on basic per share basis and $0.44 on a diluted per share basis for the
nine months ended September 30, 1998, compared with a net income per share of
$0.36 on a basic per share basis and $0.34 on a diluted per share basis for the
nine months ended September 30, 1997.


                                                                   Page 8 of 14
<PAGE>   11

LIQUIDITY AND CAPITAL RESOURCES

         The Company's positive cash flow from operating activities was $6.5
million during the nine months ended September 30, 1998, compared to $3.0
million during the nine months ended September 30, 1997. The increase in cash
from operating activities resulted primarily from increased net income before
amortization and depreciation expense and a decrease in prepaid expenses and
inventories, offset by an increase in accounts receivable. The Company's
positive cash flow covered the required purchases of reusable surgical products
during the first nine months of this year.

         The Company used approximately $2.6 million more net cash in investing
activities in the nine months ended September 30, 1998 than in the nine months
ended September 30, 1997. The Company has made capital expenditures in the nine
months ended September 30, 1998 for equipment of $2.6 million and for reusable
surgical products of $5.4 million compared to $2.3 million for equipment and
$4.5 million for reusable surgical products during the nine months ended
September 30, 1997. The Company also used $1.3 million, net of cash acquired,
for the purchase of real estate in connection with the acquisition of Repak
Surgical Enterprises, Inc. on August 31, 1998. These expenditures were funded
primarily by cash provided by operating activities and from borrowings under
the Company's revolving credit facility.

         The Company continues to increase its expenditures for 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 50% of the
projected first year revenue from the customer. The Company estimates capital
expenditures for new carts and reusable surgical products will be approximately
$750,000 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 $500,000 in 1998 for equipment upgrades and
maintenance to increase the aggregate capacity of its facilities and $1.0
million for new technology software and related computer hardware. The Company
plans to add facilities in Stockton, California and Chattanooga, Tennessee in
the first half of 1999, at an estimated cost of approximately $4.5 and $4.3
million, respectively, for each facility.

         As of September 30, 1998 the Company had borrowings of $1.7 million
from its $15.0 million unsecured credit facility with First Union National
Bank, of which approximately $1.5 million was incurred by the Company to fund
its acquisition of the Repak facility real estate.

         As of September 30, 1998, the Company had a zero cash balance, but
believes its cash flow 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. In the longer term, the Company
expects to fund additional capital expenditures from a combination of internal
cash flow, its credit facility, and other new capital sources.


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 





                                                                   Page 9 of 14

<PAGE>   12

statements of historical fact and forward-looking statements. Examples of
forward-looking statements include: (i) projections of revenue, earnings,
capital structure, and other financial items, (ii) statements of the plans and
objectives of the Company and its management, (iii) statements of future
economic performance, and (iv) 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. SRI'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. SRI'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. 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 a Significant Customer and Market Consolidation. During
the third quarter of 1998, Columbia/HCA Healthcare Corporation ("Columbia")
hospitals, with which the Company currently does business, accounted for
approximately 15% of SRI's revenues, compared to 17% in the third quarter of
1997. Although each Columbia hospital currently makes its purchasing decisions
on an individual basis, and no single hospital accounted for more than 3.5% of
the Company's revenues, the Company believes the executive management of
Columbia has the ability to influence the selection of particular vendors. The
loss of a substantial portion of the Columbia 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 SRI 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.

         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 




                                                                  Page 10 of 14


<PAGE>   13

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. SRI 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, SRI 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, SRI'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 Acquisition 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.
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.

         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, 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 11 of 14
<PAGE>   14
                          PART II - OTHER INFORMATION


Item 1.  Legal Proceedings

        The Company is not subject to any litigation or other legal proceeding
        that it expects will materially affect the Company.


Item 2.  Changes in Securities

        On August 31, 1998, in connection with its acquisition of Repak
        Surgical Enterprises, Inc., the Company authorized and issued to
        Standard Textile 566,667 shares of its convertible Series A Preferred
        Stock. The Series A Preferred Stock is convertible by its holder at any
        time into the same number of shares of the Company's common stock. The
        Series A Preferred Stock is mandatorily convertible into common stock
        on certain conditions, including when the average trading price of the
        Company's common stock measured over 20 consecutive days has been $18
        or more. The Series A Preferred Stock votes together with the common
        shareholders as one class on an as-converted basis, and does not have
        any special voting rights as a class, except as provided by law. The
        Series A Preferred Stock accrues a 2% dividend on its liquidation
        preference of $18.00 per share, payable quarterly, until the earlier of
        September 1, 2004, or the date that it is converted into common stock.
        The Company granted to Standard Textile incidental and, under limited
        circumstances, demand registration rights with respect to the common
        stock issuable on conversion of the Series A Preferred Stock.

        No person acted as an underwriter with respect to this transaction. The
        Company relied on Section 4(2) of the Securities Act of 1933 for its
        exemption from the registration requirements of that Act. The
        transaction did not involve a public offering.


Item 3.  Defaults Upon Senior Securities

         None.


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

         None.

Item 5.  Other Information

         In connection with the Company's acquisition of Repak Surgical
         Enterprises, Inc. Gary Heiman, President and Chief Executive Officer
         of Standard Textile Co., Inc. became a director of the Company on
         August 31, 1998.




                                                                  Page 12 of 14
<PAGE>   15


Item 6.  Exhibits and Reports on Form 8-K


                                    EXHIBITS

Exhibit 10.30              Procurement Agreement dated August 31, 1998, between 
                           the Company and Standard Textile Co., Inc.

Exhibit 27                 Financial Data Schedule


                              REPORTS ON FORM 8-K


        The Company filed a Form 8-K with the Securities and Exchange
        Commission on September 8, 1998, reporting its acquisition of Repak
        Surgical Enterprises, Inc., which closed on August 31, 1998. On
        November 10, 1998, the Company filed a Form 8-K/A, amending the initial
        filing to include required financial statements and pro forma financial
        information for this acquisition.





                                                                  Page 13 of 14
<PAGE>   16



                                   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, 1998                     By:   /s/ James T. Boosales
                                                  -----------------------
                                                  Executive Vice President and
                                                  Chief Financial Officer




                                                                  Page 14 of 14