<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, 1996

                                       OR

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

    For the transition period from __________________ to __________________


                       Commission File Number:  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  34621
                    (Address of Principal Executive Offices)


                                 (813) 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 12, 1996:

                   Common Stock, par value $.001 - 5,521,189
<PAGE>   2

                                     INDEX



<TABLE>
<CAPTION>
                                                                                                                     PAGE
                                                                                                                     ----
<S>                      <C>                                                                                         <C>    
PART I           -       FINANCIAL INFORMATION                                                                             
                                                                                                                           
         Item 1  -       Condensed Financial Statements                                                                    
                                                                                                                           
                         Condensed Statements of Operations for the three and                                              
                         nine month periods ended September 30, 1996 and 1995 (unaudited)  . . . . . . . . . . . . .  3    
                                                                                                                           
                         Condensed Balance Sheets as of September 30, 1996 (unaudited)                                     
                         and December 31, 1995   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4    
                                                                                                                           
                         Condensed Statements of Cash Flow for the nine month                                              
                         periods ended September 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . .  5    
                                                                                                                           
                         Notes to Condensed Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . .  6    
                                                                                                                           
                                                                                                                           
Item 2           -       Management's Discussion and Analysis of Financial                                                 
                         Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10    
                                                                                                                           
                                                                                                                           
PART II          -       OTHER INFORMATION                                                                                  
                                                                                                                        
         Item 1  -       Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 
                                                                                                                        
         Item 2  -       Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 
                                                                                                                        
         Item 3  -       Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 
                                                                                                                        
         Item 4  -       Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 13 
                                                                                                                        
         Item 5  -       Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 
                                                                                                                        
         Item 6  -       Exhibits and Reports on Form 8-K  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 


SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>





                                                                   Page 2 of 14 
<PAGE>   3

                         PART I - FINANCIAL INFORMATION


Item 1.  Condensed Financial Statements

                            STERILE RECOVERIES, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                          Three Months Ended               Nine Months Ended
                                                              September 30,                   September 30,
                                                          1996        1995                1996          1995    
                                                      ----------    ----------        ------------  ------------
<S>                                                  <C>            <C>               <C>           <C>
Revenues                                             $     8,230    $    6,527        $  23,513     $     18,407
Cost of revenues                                           5,610         4,464           16,032           12,867
                                                     -----------    ----------        ---------     ------------

     Gross profit                                          2,620         2,063            7,481            5,540

Distribution expenses                                        773           690            2,245            2,075
Selling and administrative expenses                        1,180           962            3,446            2,987 
                                                     -----------    ----------        ---------     ------------ 

     Income from operations                                  667           411            1,790              478

Interest expense, net                                         22           371              714            1,124
                                                     -----------    ----------        ---------     ------------

     Income (loss) before income tax expense                 645            40           1,076              (646)
                                                     -----------    ----------        --------      ------------ 
                                                                                                  
Income tax expense (benefit)                                 (14)           -              (14)                -    
                                                    ------------   -----------        --------      ------------ 
                                                                                                                  
     Net income (loss)                               $       659    $       40        $  1,090      $       (646) 
                                                     ===========    ==========        ========      ============  
                                                                                                                  
                                                                                                                  
Pro forma information                                                                             
                                                                                                  
     Historical net income (loss)                    $       645    $       40        $   1,076     $       (646)
                                                                                                  
     Pro forma income tax expense                             -            -                  -               -    
                                                    -------------  -----------        ---------     ------------ 
                                                                                                  
     Pro forma net income (loss)                     $       645    $       40        $   1,076     $       (646)
                                                     ===========    ==========        =========     ============  
                                                                                                  
     Pro forma net income (loss) per common share    $      0.12    $     0.01        $    0.26     $      (0.18)
                                                     ===========    ==========        =========     ============  
                                                                                                  
     Weighted average common shares outstanding            5,203         3,513            4,076            3,513
                                                     ===========    ==========        =========     ============ 
</TABLE>





           See accompanying Notes to Condensed Financial Statements

                                                                    Page 3 of 14
<PAGE>   4

                            STERILE RECOVERIES, INC.
                            CONDENSED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                   September 30,               December 31,
                                                                        1996                      1995      
                                                                   ----------------           ---------------
                                                                     (unaudited)
         <S>                                                        <C>                        <C>
                                       -- ASSETS --

         Cash                                                       $   6,581,367              $    251,444    
         Accounts receivable, net                                       4,763,508                 3,389,243    
         Inventories                                                      820,103                   305,450    
         Prepaid expenses and other assets                                510,411                   303,309    
         Reusable surgical products, net of accumulated                                                        
           amortization of $2,154,889 and $l,137,603,                                                          
           respectively                                                 6,338,062                 4,924,271    
         Property, plant and equipment, net                             4,767,468                 4,318,840    
         Goodwill, net                                                    557,311                    -         
         Deferred income taxes                                            200,000                    -         
                                                                    -------------              ------------    
                                                                                                               
              Total assets                                          $  24,538,230              $ 13,492,557    
                                                                    =============              ============    
                                                                                     
                                                                                     
                                  -- LIABILITIES AND SHAREHOLDERS' EQUITY --        
                                                                                     
 LIABILITIES:                                                                        
          Notes payable - working capital loan facility             $       -                  $  1,810,119
          Notes payable - related parties                               1,000,000                    -
          Accounts payable                                              1,477,767                 1,166,657
          Employee related accrued expenses                               792,037                   652,990
          Other accrued expenses                                        1,177,500                   568,084
          Acquisition debt                                                   -                    9,080,832
                                                                    -------------              ------------
                                                                                         
               Total liabilities                                        4,447,304                13,278,682
                                                                    -------------              ------------
                                                                                     
 SHAREHOLDERS' EQUITY:                                                               
          Preferred Stock - $.001 par value;                                         
            authorized, 5,000,000 shares;                                            
            issued, none                                                      -                        -            
          Common Stock - $.001 par value;                                                                           
            authorized, 30,000,000 shares;                                                                          
            issued and outstanding, 5,517,689 and                                                                   
            3,225,807 shares, respectively                                  5,518                     3,226         
          Additional paid-in capital                                   19,453,252                 2,008,774         
          Accumulated earnings                                            632,156                (1,798,125)        
                                                                    -------------               -----------         
                                                                                                                    
               Total shareholders' equity                              20,090,926                   213,875         
                                                                    -------------               -----------         
                                                                                                                    
                  Total liabilities and shareholders' equity        $  24,538,230               $13,492,557         
                                                                    =============               ===========         
</TABLE>





           See accompanying Notes to Condensed Financial Statements

                                                                    Page 4 of 14
<PAGE>   5

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


<TABLE>
<CAPTION>
                                                                                    Nine Months Ended September 30, 
                                                                                    --------------------------------
                                                                                      1996                    1995   
                                                                                  ------------            -----------
 <S>                                                                               <C>                   <C>
 Increase (decrease) in cash
 Cash flows from operating activities
   Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .           $ 1,090,193           $  (645,681)
   Adjustments to reconcile net income (loss)
     to net cash provided by operating activities:
     Depreciation and intangible amortization  . . . . . . . . . . . . .               361,867               316,800
     Amortization of reusable surgical products  . . . . . . . . . . . .               862,537               536,704
     Provision for reusable surgical products shrinkage  . . . . . . . .               289,691                   -
     Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . .              (200,000)                  -
     Change in assets and liabilities:
       Accounts receivable . . . . . . . . . . . . . . . . . . . . . . .            (1,302,616)               97,363
       Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . .              (308,408)             (103,374)
       Prepaid expenses and Other  . . . . . . . . . . . . . . . . . . .               (73,615)              (13,242)
       Accounts payable  . . . . . . . . . . . . . . . . . . . . . . . .               189,611               143,194
       Accrued expenses  . . . . . . . . . . . . . . . . . . . . . . . .               339,189               250,858
                                                                                   -----------           -----------
         Net cash flows provided by operating activities . . . . . . . .             1,248,449               582,622
                                                                                   -----------           -----------

 Cash flows used in investing activities
   Purchases of property, plant and equipment  . . . . . . . . . . . . .              (783,869)             (173,880)
   Purchases of reusable surgical products . . . . . . . . . . . . . . .            (2,566,019)             (305,809)
   Payment for acquisition of business, net of cash acquired . . . . . .                 5,633                     - 
                                                                                   -----------           ----------- 
       Net cash used in investing activities . . . . . . . . . . . . . .            (3,344,255)             (479,689)
                                                                                   -----------           ----------- 

 Cash flows from financing activities
   Proceeds from convertible demand notes  . . . . . . . . . . . . . . .             1,000,000                   -
   Payments on related party debt  . . . . . . . . . . . . . . . . . . .              (167,025)                  -
   Payments on acquisition debt  . . . . . . . . . . . . . . . . . . . .            (9,080,832)             (600,000)
   Payments on (net proceeds from) working capital loan  . . . . . . . .            (1,810,119)              413,059
   Net proceeds from issuance of common stock  . . . . . . . . . . . . .            18,483,705                    -  
                                                                                   -----------           ----------- 
       Net cash provided by (used in) financing activities . . . . . . .             8,425,729              (186,941)
                                                                                   -----------           ----------- 

 Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . .             6,329,923               (84,009)
 Cash and cash equivalents at beginning of period  . . . . . . . . . . .               251,444               287,881
                                                                                   -----------           -----------
 Cash and cash equivalents at end of period  . . . . . . . . . . . . . .           $ 6,581,367           $   203,872
                                                                                   ===========           ===========
 Supplemental cash flow information
   Cash paid for interest  . . . . . . . . . . . . . . . . . . . . . . .           $   876,459           $ 1,037,865
                                                                                   ===========           ===========
 Supplemental schedule of non-cash investing activities:
   Purchase of Surgipro (1996)
     Fair value of assets acquired . . . . . . . . . . . . . . . . . . .           $   952,000           $       -
     Cash received . . . . . . . . . . . . . . . . . . . . . . . . . . .                 6,000                   -
     Common stock issued . . . . . . . . . . . . . . . . . . . . . . . .              (526,000)                  -  
                                                                                   -----------           -----------

     Liabilities incurred or assumed . . . . . . . . . . . . . . . . . .           $   432,000           $       -  
                                                                                   ===========           ===========
</TABLE>




           See accompanying Notes to Condensed Financial Statements

                                                                    Page 5 of 14
<PAGE>   6

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


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a)     Basis of Presentation.  The accompanying unaudited condensed
                 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 Note 1 to the Notes to
                 Financial Statements included in the Company's Registration
                 Statement on Form S-1, as amended (the "Registration
                 Statement"), filed with the Securities and Exchange
                 Commission in connection with the Company's initial public
                 offering (the "Offering").  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 three and nine months ended September 30,
                 1996 are not necessarily indicative of the results that can be
                 expected for the entire year ending December 31, 1996.  The
                 unaudited condensed financial statements should be read in
                 conjunction with the financial statements and the notes
                 thereto included in the Registration Statement.

         (b)     Pro Forma Income Taxes.   On completion of the Offering on
                 July 24, 1996, the Company terminated its S Corporation
                 election and became subject to corporate income taxes from
                 that date forward.  The statements of operations for all
                 periods presented reflect the pro forma effect on income taxes
                 (benefits) as if the Company's earnings (losses) had been
                 subject to federal and state income taxes as a C Corporation
                 since the inception of the Company (see Note 5).

         (c)     Pro Forma Net Income (Loss) Per Common Share.  Pro forma net
                 income (loss) per common share is computed by dividing pro
                 forma net income (loss) by the weighted average number of
                 shares of Common Stock outstanding.  Pro forma net income
                 (loss) includes a pro forma provision for income taxes
                 assuming the Company had been subject to income taxes during
                 the period it was an S Corporation for income tax purposes.
                 All Common Stock and options issued within one year before the
                 Offering are deemed outstanding for all periods prior to the
                 Offering.  Pro forma net income per common share after the
                 offering has been computed using the weighted average of the
                 outstanding Common Stock plus the dilutive Common Stock
                 equivalents (stock options), using the treasury stock method.
                 Primary and fully diluted calculations result in the same net
                 income per common share.


<TABLE>
<CAPTION>
                                      Three Months     Nine Months     Three Months    Nine Months
                                          Ended           Ended           Ended            Ended
                                      September 30,   September 30,   September 30,   September 30,
                                          1996             1996            1995            1995
                                     --------------- --------------- --------------- --------------
     <S>                               <C>              <C>            <C>             <C>
     Actual weighted average
       shares outstanding  . . . .     5,057,399        3,893,432      3,150,538       3,050,179
     Additional shares . . . . . .       145,726          182,820        362,277         462,636
                                       ---------        ---------      ---------       ---------
     Weighted average shares
       used in income per share
       calculation . . . . . . . .     5,203,125        4,076,252      3,512,815       3,512,815
                                       =========        =========      =========       =========
</TABLE>





                                                                   Page 6 of 14 
<PAGE>   7

STERILE RECOVERIES, INC.
Notes to Condensed Financial Statements (Cont'd.)


2.       PUBLIC OFFERING

         On July 24, 1996, the Company completed the Offering of 2,000,000
         shares of its Common Stock priced at $9.50 per share.  The net
         proceeds of the Offering, after deducting commissions of $1,330,000
         and approximately $1,000,000 in expenses, were $16,670,000.  In
         addition, the underwriters on August 9, 1996 exercised their
         overallotment option to purchase 150,000 additional shares of the
         Company's Common Stock.  Proceeds to the Company of the underwriters'
         purchase of shares pursuant to their exercise of the overallotment
         option were $1,325,250 after commissions.  The Company used
         approximately $11,000,000 of the proceeds to retire debt, including
         $8,380,832 of debt owed to AMSCO Sterile and $2,139,759 of debt owed
         to a lender, Metro Factors, Inc.  The supplementary pro forma income
         per common share for the three months and nine months ended September
         30, 1996, as if this debt has been retired at the beginning of the
         respective periods, would be $0.14 and $0.39 per share, assuming
         5,441,919 and 4,659,231 weighted average common shares outstanding,
         respectively.

         The underwriters also on August 9, 1996, exercised their overallotment
         option to purchase 150,000 additional shares of Common Stock granted
         to them by shareholders Richard T. Isel, Wayne R. Peterson and James
         T. Boosales.  The Company did not receive any proceeds from these
         transactions with its shareholders.


3.       INDEBTEDNESS

         Acquisition debt consisted of the following as of the following dates:

<TABLE>
<CAPTION>
                                                                             SEPTEMBER 30,       DECEMBER 31,          
                                                                                 1996               1995               
                                                                             --------------      -------------        
         <S>                                                                  <C>                  <C>                 
         Purchase money note - AMSCO Sterile Recoveries,                                                               
         Inc., monthly principal payments of $100,000                                                                  
         through July 1997 with a balloon payment due                                                                  
         August 1997; interest at a bank's prime rate                                                                  
         (8.75% and 8.25% at December 31, 1995 and                                                                     
         September 30, 1996, respectively) plus 1.5%;                                                                  
         collateralized by all Company assets, excluding                                                               
         accounts receivable and real and personal                                                                     
         property at the Houston, Texas facility  . . . . . . . . . . . .     $     -0-            $ 9,080,832         
                                                                              ============         ===========         
</TABLE>


         The Purchase Money Security Agreement with AMSCO Sterile Recoveries,
         Inc. ("AMSCO Sterile") contained various financial related covenants,
         including, among other things, limiting in 1996 the Company's total
         allowed capital expenditures and general indebtedness to approximately
         $4,400,000 and $18,600,000, respectively.  In addition, certain
         limitations existed as to the permitted amount of Common Stock
         dividends and distributions.  During the period ending September 30,
         1996, the entire debt to AMSCO Sterile was paid from proceeds of the
         Offering and AMSCO Sterile released its liens on the Company's assets.

         In March 1996, the Company borrowed $1,000,000 from a director for
         working capital pursuant to a secured Convertible Demand Promissory
         Note (the "Convertible Note") that is not redeemable before March 1,
         1997.  The Convertible Note bears interest at an annual rate of 8.5%,
         and the entire principal amount of the Convertible Note is payable on
         demand on or after March 1, 1997.  At any time before that date, up to
         $750,000 of the principal amount of the Convertible Note is convertible
         into Common Stock at $5.85 per share.  The Convertible Note is secured
         by a first lien on the Company's Houston facility and the equipment 
         located there.





                                                                   Page 7 of 14 
<PAGE>   8

STERILE RECOVERIES, INC.
Notes to Condensed Financial Statements (Cont'd.)


         The Company has established with First Union National Bank of Florida
         a $15.0 million unsecured revolving credit facility that will expire
         in July 1999.  The facility imposes certain financial covenants.
         Beginning January 1, 1997, total outstanding borrowings under the
         facility are limited to three times the Company's earnings before
         interest, taxes, depreciation, and amortization (EBITDA) for the
         previous four quarters (declining to two and one-half times by the
         third year).  The facility also imposes a covenant concerning the
         maintenance during the 1996 year of minimum tangible net worth of
         $18,750,000.  The minimum net worth requirement increases to
         $19,245,000 for 1997 and to $20,745,000 for 1998.  Thereafter, the
         minimum net worth requirement will be $23,745,000.  Pursuant to the
         terms of the credit facility, the Company may elect to convert up to
         $5.0 million of the available facility into term loans for capital
         expenditures that are ratably payable over five years.  All borrowings
         accrue interest at the London Interbank Offering Rate (LIBOR) plus 200
         basis points (7.625% as of October 28, 1996).  The facility restricts
         the declaration of dividends and prohibits the Company from
         encumbering its assets.  Currently, there are no borrowings under this
         credit facility.


4.       ACQUISITION TRANSACTION

         In February 1996, the Company purchased the operations of Surgipro.
         The Company paid consideration of approximately $600,000, consisting
         of 90,000 shares of the Company's Common Stock valued at $526,000 and
         a note payable of approximately $109,000 that was paid on the
         completion of the Offering, for approximately $500,000 of assets and
         the assumption of approximately $400,000 of liabilities.  This
         acquisition was accounted for as a purchase transaction and,
         accordingly, the purchase price was allocated to the assets and
         liabilities based upon their estimated fair values at the time of the
         acquisition, with the excess of approximately $540,000 being allocated
         to goodwill.

         The following unaudited pro forma financial information assumes that
         the acquisition of Surgipro had occurred at the beginning of the
         respective periods after giving effect to certain pro forma
         adjustments including, among others, adjustments to reflect
         amortization of goodwill.  The pro forma information is presented for
         informational purposes only and may not be indicative of actual
         results had the purchase occurred at the beginning of the respective
         periods.


<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                    SEPTEMBER 30,                  SEPTEMBER 30,
                                                                         1995                 1996           1995     
                                                               -----------------------   -------------    --------------
                  <S>                                               <C>                  <C>              <C>
                  Revenues  . . . . . . . . . . . . . . . .         $ 6,826,762          $23,627,193      $19,221,968
                  Net income (loss) . . . . . . . . . . . .         $    49,940          $ 1,042,211      $  (625,942)
                  Net income (loss) per common share  . . .         $       .01          $       .26      $      (.18)
</TABLE>


5.       INCOME TAXES

         Pro forma income taxes.  For pro forma income tax purposes only, the S
         Corporation's cumulative net operating losses as of December 31, 1995
         of approximately $1.3 million have been treated as C Corporation net
         operating losses, and accordingly, used to reduce pretax earnings in
         1996.  For all periods presented, the Company chose to recognize only
         the tax benefit equivalent to the amount used to eliminate the pro
         forma income tax expense, and no additional tax benefits (deferred tax
         assets) for the remaining or unused net operating loss carryforward
         have been recognized for any of the periods presented, because the
         Company's operating profit history has been limited.  As of September
         30, 1996, for pro forma income tax purposes





                                                                   Page 8 of 14 
<PAGE>   9

STERILE RECOVERIES, INC.
Notes to Condensed Financial Statements (Cont'd.)


         only, approximately $200,000 of net operating loss carryforwards exist
         which will be used to reduce taxable income during the fourth quarter
         of 1996.

         Reconciliation of the income tax expense (benefit) calculated using
         the federal statutory income tax rate of 34% to the income tax expense
         recorded is as follows:


<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED                 NINE MONTHS ENDED
                                                                SEPTEMBER 30,                     SEPTEMBER 30,
                                                             1996         1995               1996             1995   
                                                          ----------   ----------         ----------       ----------
                  <S>                                     <C>          <C>               <C>              <C>
                  Federal income taxes (benefit) at
                  statutory rate  . . . . . . . . .       $ 219,000    $  14,000         $ 366,000        $(220,000)
                                                            


                  State income taxes, net of federal
                  benefit . . . . . . . . . . . . .          29,000        2,000            48,000          (29,000)


                  Net operating losses not currently
                  utilizable  . . . . . . . . . . .               -             -              -            249,000

                  Utilization of net operating loss
                    carryforwards . . . . . . . . .        (248,000)     (16,000)         (414,000)               -   
                                                           --------    ---------         ---------        ---------


                       Income tax expense . . . . .       $       -    $       -         $       -        $       -      
                                                          =========    =========         =========        =========   
</TABLE>



         Historical income taxes.  In accordance with the provisions of the
         Internal Revenue Code, upon the conversion to a C Corporation, a
         portion of the income earned after the conversion will be allocated to
         the S Corporation.  As a result of this allocation, the effective rate
         for calculating income taxes is lower than the statutory rates.  In
         addition, the accounting rules require the establishment of deferred
         taxes for all existing temporary differences in the Company's assets'
         and liabilities' basis for income and financial reporting purposes at
         the date of conversion to a C Corporation.  The Company recorded
         deferred tax assets of approximately $200,000 at the date of
         conversion.

         Recorded income tax expense for the three and nine months ended
         September 30, 1996 is as follows:

<TABLE>
                       <S>                                                                          <C>
                       Income taxes at effective rate  . . . . . . . . . . . . . . . . . .          $ 186,000

                       Income tax benefit from recording deferred tax asset  . . . . . . .           (200,000)
                                                                                                    --------- 

                       Income tax expense (benefit)  . . . . . . . . . . . . . . . . . . .          $ (14,000)
                                                                                                    ========= 
</TABLE>





                                                                   Page 9 of 14 
<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 seven 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 purchased the assets of its business from AMSCO Sterile
Recoveries, Inc., an indirect wholly-owned subsidiary of AMSCO International,
Inc., on July 31, 1994 (the "Acquisition").

RESULTS OF OPERATIONS

         The following table sets forth for the periods indicated the
percentage of revenues represented by certain items reflected in the statements
of operations of the Company.

<TABLE>
<CAPTION>
                                                    Three Months Ended                      Nine Months Ended
                                                       September 30,                          September 30,
                                                      1996        1995                     1996        1995    
                                                  ----------   -----------             ----------    ----------
<S>                                                  <C>          <C>                     <C>            <C>
Revenues                                             100.0%       100.0%                  100.0%         100.0%
Cost of revenues                                      68.2         68.4                    68.2           69.9
                                                     -----        -----                   -----          -----
         Gross profit
                                                      31.8         31.6                    31.8           30.1

Distribution expenses                                  9.4         10.6                     9.6           11.3
Selling and administrative expenses                   14.3         14.7                    14.6           16.2
                                                     -----        -----                   -----          -----

         Income from operations                        8.1          6.3                     7.6            2.6

Interest expense                                        .3          5.7                     3.0            6.1
                                                     -----        -----                   -----          -----

Net income (loss)                                      7.8%          .6%                    4.6%          (3.5)%
                                                     =====       ======                   =====          =====  
</TABLE>


         REVENUES.  The Company's  revenues increased $1.7 million, or 26.1%,
to $8.2 million in the third quarter of 1996 from $6.5 million in the third
quarter of 1995.  Revenues for the first nine months of 1996 increased $5.1
million, or 27.7%, to $23.5 million from $18.4 million in the first nine months
of 1995.  The revenue increases in each period were equally attributable to new
customers and increased revenues from current customers.

         GROSS PROFIT.  Cost of revenues increased $1.1 million, or 25.7%, to
$5.6 million in the third quarter of 1996 from $4.5 million in the third
quarter of 1995.  Cost of revenues increased $3.2 million, or 24.6%, to $16.0
million in the first nine months of 1996 from $12.9 million in the first nine
months of 1995.  Gross profit for the third quarter increased 0.2% to 31.8%
from 31.6% in the third quarter of 1995.  Gross profit increased 1.7% to 31.8%
in the first nine months of 1996, compared to 30.1% in the first nine months of
1995.  The improvement in gross profit is largely attributable to labor
efficiencies in the pack room and the economies of scale associated with
spreading fixed costs over more revenues.  These favorable developments were
partially offset by increased costs for amortization of reusable surgical
products and the Company's relatively lower gross profit on its distribution of
a third party vendor's disposable products.

GORE  is a registered trademark of W. L. Gore & Associates, Inc.
                                                                  Page 10 of 14 
<PAGE>   11


         DISTRIBUTION EXPENSES.  Distribution expenses increased $83,000, or
12.0%, to $773,000 in the third quarter of 1996 from $690,000 in the third
quarter of 1995.  Distribution expenses increased $170,000, or 8.2%, to $2.2
million in the first nine months of 1996 from $2.1 million in the first nine
months of 1995.  Distribution expenses as a percentage of revenues decreased
1.2% to 9.4% in the third quarter of 1996 from 10.6% in the third quarter of
1995.  For the first nine months of 1996, distribution expenses decreased 1.7%
to 9.6% from 11.3% in the first nine months of 1995.  The Company incurs
distribution expenses both in transporting its reusable surgical products
locally and to outlying metropolitan areas.  The improvement in distribution
expenses as a percentage of revenues resulted primarily from efficiencies
derived from delivering more volume over existing routes.

         SELLING AND ADMINISTRATIVE EXPENSES.  Selling and administrative
expenses increased $218,000, or 22.7%, to $1.2 million in the third quarter of
1996 from $1.0 million in the third quarter of 1995.  Selling and
administrative expenses increased $459,000, or 15.4%, to $3.5 million in the
first nine months of 1996 from $3.0 million in the first nine months of 1995.
As a percentage of revenues, selling and administrative expenses decreased 0.4%
to 14.3% during the third quarter of 1996 from 14.7% during the third quarter
of 1995, and decreased 1.6% to 14.6% during the first nine months of 1996 from
16.2% during the first nine months of 1995, primarily due to the leveraging of
fixed administrative expenses over additional revenues.

         INTEREST EXPENSE.   Interest expense decreased $349,000, or 94.1%, to
$22,000 in the third quarter of 1996 from $371,000 in the third quarter of
1995.  Interest expense decreased $410,000, or 36.5%, to $714,000 in the first
nine months of 1996 from $1.1 million in the first nine months of 1995.  As a
percentage of revenues, interest expense decreased 5.4% to 0.3% during the
third quarter of 1996 from 5.7% during the third quarter of 1995, and decreased
3.1% to 3.0% during the first nine months of 1996 from 6.1% during the first
nine months of 1995.  These decreases occurred as a result of retiring the
AMSCO Sterile note and the working capital loan facility, and the recognition
of interest income from the Offering proceeds that remained after payment of
debt.

         INCOME BEFORE INCOME TAX EXPENSE.  As a result of the foregoing, the
Company's income before taxes increased to $645,000 in the third quarter of
1996, from an income before taxes of $40,000 in the third quarter of 1995.  For
the first nine months of 1996, income before taxes increased to $1.1 million,
from a net loss of $646,000 in the first nine months of 1995.  As a percentage
of revenues, income before taxes in the third quarter of 1996 was 7.8% of
revenues compared to an income before taxes of 0.6% of revenues in the third
quarter of 1995, and income before taxes in the first nine months of 1996 was
4.6% of revenues compared to a net loss of 3.5% of revenues in the first nine
months of 1995.

         INCOME TAX EXPENSE.  During the third quarter of 1996, the Company
changed from an S Corporation to a C Corporation for federal income tax
purposes.  This change required the Company to record a deferred tax asset to
account for the differences between book and tax basis of assets and
liabilities.  The result was a tax benefit of approximately $200,000 which
offset the income tax expense for the quarter (see Note 5).

         NET INCOME PER SHARE.  The Company recorded a pro forma net income per
share of $0.12 for the third quarter, which reflects the effect of a $248,000
tax benefit from the utilization of net operating loss carryforwards.  Earnings
for the third quarter would have been $0.08 per share if fully taxed at an
effective rate of 38.5% (see Note 5).

LIQUIDITY AND CAPITAL RESOURCES

         The Company's principal sources of capital have been from sales of
debt and equity securities, cash flows from operations, operating leases for
facilities and distribution vehicles, and available borrowings under its
working capital loan facility.  In July and August 1996, the Company raised
$17.9 million through the sale of 2,150,000 shares of its Common Stock in an
initial public offering (the "Offering").

         The Company's positive cash flow from operating activities was
$1,248,449 during the first nine months of 1996, compared to $582,622 during
the first nine months of 1995.  The increase in cash from operating activities
from 1995 to 1996 resulted primarily from increased net income before
amortization and depreciation expense.  This increase was partially offset by
cash used for increased accounts receivable.  Inventories at September 30, 1996
were $820,103, compared to $305,450 at December 31, 1995.  The increase in
inventory reflects the introduction and





                                                                  Page 11 of 14 
<PAGE>   12

continued growth of disposable surgical products to supplement the Company's
delivery and retrieval service for reusable surgical products.

         The Company used approximately $2.9 million more net cash in investing
activities in the first nine months of 1996 than in the first nine months of
1995.  The Company has made capital expenditures in 1996 for equipment of
$784,000 and for reusable surgical products of $2.6 million to support sales
growth, as compared to $174,000 for equipment and $306,000 for reusable
surgical products in the first nine months of 1995.  These expenditures were
funded primarily by cash provided by financing and operating activities.  The
Company received approximately $19.2 million during the first nine months of
1996 from the Offering, a private sale of Common Stock of $300,000, and a
$1,000,000 loan from a director pursuant to a secured convertible note.  These
funds were used to retire debt of approximately $11.0 million and to purchase
additional assets.

         During 1996, the Company has substantially increased 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.  Until the beginning
of 1996, the Company minimized its new purchases of reusable surgical products
by using excess stocks of reusable surgical fabrics and products that were
included in the Acquisition at a relatively low cost.  The Company estimates
that its capital expenditures for new carts and reusable surgical products will
continue at a relatively increased rate for the next 12 months, although the
amount will fluctuate depending on the growth rate of its business.

         The Company amortizes its reusable surgical products on a per use
basis, based on estimates of the products' useful lives.  The Company's
purchase of used reusable surgical products in the Acquisition at approximately
17% of AMSCO Sterile's net book value has resulted in lower amortization
expense since the Acquisition.  The Company's purchases of new reusable
surgical products at current replacement cost will increase future amortization
and shrinkage expense for those assets.

         The Company used approximately $11 million of the net proceeds of the
Offering to retire its working capital loan facility and acquisition debt
during the third quarter.  Before the Offering, the business of the Company was
financed primarily with interest-bearing borrowings that negatively impacted
its earnings during those periods.  The Company's interest expense in the first
nine months of 1996 was $714,000.  The use of a portion of the Offering
proceeds to retire most of the Company's outstanding indebtedness will, on an
annualized basis, eliminate interest expense of approximately $1.3 million and
principal payments to AMSCO Sterile of approximately $1.2 million.  Subsequent
to the Offering, the Company has cash of approximately $6.5 million, which it
invests to earn interest income.  The excess cash and cash generated from
operations will be used to fund purchases of additional stocks of reusable
surgical products, primarily to support anticipated growth in revenues, and
other capital expenditures as necessary to support additional facility
capacity.

         The Company has established with First Union National Bank of Florida
a $15.0 million unsecured revolving credit facility that will expire in July
1999.  The facility imposes certain financial covenants.  Beginning January 1,
1997, total outstanding borrowings under the facility are limited to three
times the Company's earnings before interest, taxes, depreciation, and
amortization (EBITDA) for the previous four quarters (declining to two and
one-half times by the third year).  The facility also imposes a covenant
concerning the maintenance during 1996 of minimum tangible net worth of at
least $18,750,000.  The Company currently complies with these covenants.  The
minimum tangible net worth requirement increases to $19,245,000 for 1997 and
$20,745,000 for 1998.  Thereafter, the minimum net worth requirement will be
$23,745,000.  Pursuant to the terms of the credit facility, the Company may
elect to convert up to $5.0 million of the available facility into term loans
for capital expenditures that are ratably payable over five years.  All
borrowings accrue interest at the London Interbank Offering Rate (LIBOR) plus
200 basis points (7.625% as of October 28, 1996).  The facility restricts the
declaration of dividends and prohibits the Company from encumbering its assets.





                                                                  Page 12 of 14 
<PAGE>   13

                          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


                              Reports on Form 8-K

         The Company did not file a report on Form 8-K during the three months
ended September 30, 1996.


                                    Exhibits

         The following exhibits are filed as part of this report:

         Exhibit No.                               Exhibit Description

         10.32            Loan Agreement dated October 15, 1996, between the
                          Company and First Union National Bank of Florida

         10.33            Revolving Line of Credit Promissory Note dated
                          October 15, 1996, executed by the Company in favor of
                          First Union National Bank of Florida

         10.34            Security Agreement dated October 15, 1996, executed
                          by the Company in favor of First Union National Bank
                          of Florida

         27               Financial Data Schedule (for SEC use only)





                                                                  Page 13 of 14 
<PAGE>   14

                                   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 12, 1996          By:     /s/ James T. Boosales  
                                          ---------------------------------
                                          James T. Boosales
                                          Executive Vice President and
                                          Chief Financial Officer





                                                                  Page 14 of 14