##### Table of Contents



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

FORM 10-Q

|                   |  |                                                                                         
|------------------ |  | ----------------------------------------------------------------------------------------
|                   |  | (Mark One)                                                                              
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|(BOX WITH AN X)    |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 
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|                   |  | For the quarterly period ended SEPTEMBER 30, 2001                                       
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|OR                
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|(EMPTY BALLOT BOX) |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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|                   |  |                                                                                         
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|                   |  | For the transition period from  to                                                      

Commission File Number: 000-20997

SRI/SURGICAL EXPRESS, INC.
(Exact name of Registrant as specified in its Charter)

|                         |  |                                     
|------------------------ |  | ------------------------------------
|Florida                  |  | 59-3252632                          
|                        
|                        
|                        
|                        
|(State of Incorporation) |  | (I.R.S. Employer
Identification No.)

12425 Racetrack Road
Tampa, Florida 33626
(Address of Principal Executive Offices)

(813) 891-9550
(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 (BOX WITH AN X)   No (EMPTY BALLOT BOX)

Number of outstanding shares of each class of Registrants Common Stock as of October 10, 2001:

Common Stock, par value $.001  6,316,977





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TABLE OF CONTENTS



|                               |                                                                                               |                                         |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Condensed Financial Statements                                                       
|                               |                                                                                               | CONDENSED STATEMENTS OF INCOME         
|                               |                                                                                               | CONDENSED BALANCE SHEETS               
|                               |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONDENSED FINANCIAL STATEMENTS
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                    
|                               | Item 2. Changes in Securities                                                                
|                               | Item 3. Defaults Upon Senior Securities                                                      
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                               | Item 5. Other Information                                                                    
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                     



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##### Table of Contents



INDEX

|          |                       |                                                                                                                                             |  |     
|--------- | --------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|          |                       |                                                                                                                                             |  | Page
|PART I    | Financial Information |                                                                                                                                             | 
|         
|         
|         
|         
|          | Item 1                | Condensed Financial Statements                                                                                                              |  |     
|         
|         
|         
|         
|          |                       | Condensed Statements of Income for the three
months and nine months ended September 30,
2001 (unaudited) and September 30, 2000 (unaudited) |  | 1   
|         
|         
|         
|         
|          |                       | Condensed Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000                                                         |  | 2   
|         
|         
|         
|         
|          |                       | Condensed Statements of Cash Flows for the
nine months ended September 30, 2001 (unaudited)
and September 30, 2000 (unaudited)              |  | 3   
|         
|         
|         
|         
|          |                       | Notes to Condensed Financial Statements
(unaudited)                                                                                         |  | 4   
|         
|         
|         
|         
|          | Item 2                | Managements Discussion and Analysis of Financial
Condition and Results of Operations                                                       |  | 5   
|         
|         
|         
|         
|PART II   | OTHER INFORMATION     |                                                                                                                                             | 
|         
|         
|         
|         
|          | Item 1                | Legal Proceedings                                                                                                                           |  | 11  
|         
|         
|         
|         
|          | Item 2                | Changes in Securities                                                                                                                       |  | 11  
|         
|         
|         
|         
|          | Item 3                | Defaults Upon Senior Securities                                                                                                             |  | 11  
|         
|         
|         
|         
|          | Item 4                | Submission of Matters to a Vote of Security Holders                                                                                         |  | 11  
|         
|         
|         
|         
|          | Item 5                | Other Information                                                                                                                           |  | 11  
|         
|         
|         
|         
|          | Item 6                | Exhibits and Reports on Form 8-K                                                                                                            |  | 11  
|         
|         
|         
|         
|SIGNATURE |                       | 12                                                                                                                                         





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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Condensed Financial Statements




SRI/SURGICAL EXPRESS, INC.
CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)

|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |        | 
|---------------------------------------------------- | -------------------------- | - | ------------------ | ----- | ----------------- | - | ------ | ----- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                     |                            |   | Three Months Ended |       | Nine Months Ended
|                                                     |                            |   | September 30,      |       | September 30,    
|                                                     |                            |   |                    |       |                  
|                                                     |                            |   | 2001               |       | 2000              |   | 2001   |       | 2000
|                                                     |                            |   |                    |       |                   |   |        |       |     
|Revenues                                             |                            | $ | 22,374             |       |                   | $ | 19,493 |       |      | $ | 66,141 |        |  | $ | 57,487 |       
|                                                    
|                                                    
|                                                    
|                                                    
|Cost of revenues                                     |                            |   | 14,623             |       |                   |   | 13,269 |       |      |   | 44,186 |        |  |   | 39,619 |       
|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|                                                     | Gross profit               |   |                    | 7,751 |                   |   |        | 6,224 |      |   |        | 21,955 |  |   |        | 17,868 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Distribution expenses                                |                            |   | 1,365              |       |                   |   | 1,266  |       |      |   | 4,053  |        |  |   | 3,936  |       
|                                                    
|                                                    
|                                                    
|                                                    
|Selling and administrative expenses                  |                            |   | 3,307              |       |                   |   | 2,594  |       |      |   | 9,217  |        |  |   | 8,222  |       
|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|                                                     | Income from operations     |   |                    | 3,079 |                   |   |        | 2,364 |      |   |        | 8,685  |  |   |        | 5,710  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Interest expense, net                                |                            |   | 348                |       |                   |   | 264    |       |      |   | 1,091  |        |  |   | 780    |       
|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|                                                     | Income before income taxes |   |                    | 2,731 |                   |   |        | 2,100 |      |   |        | 7,594  |  |   |        | 4,930  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Income tax expense                                   |                            |   | 976                |       |                   |   | 819    |       |      |   | 2,848  |        |  |   | 1,923  |       
|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|                                                     | Net income                 |   | $                  | 1,755 |                   |   | $      | 1,281 |      |   | $      | 4,746  |  |   | $      | 3,007  | 
|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|Dividends on preferred stock                         |                            |   |                   |       |                   |   | 51     |       |      |   | 57     |        |  |   | 153    |       
|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|Net income available for common shareholders         |                            | $ | 1,755              |       |                   | $ | 1,230  |       |      | $ | 4,689  |        |  | $ | 2,854  |       
|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|Net income per common share  basic                  |                            | $ | 0.28               |       |                   | $ | 0.22   |       |      | $ | 0.78   |        |  | $ | 0.50   |       
|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|Net income per common share  diluted                |                            | $ | 0.26               |       |                   | $ | 0.20   |       |      | $ | 0.72   |        |  | $ | 0.48   |       
|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|Weighted average common shares
outstanding  basic   |                            |   | 6,287              |       |                   |   | 5,677  |       |      |   | 5,992  |        |  |   | 5,677  |       
|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       
|Weighted average common shares
outstanding  diluted |                            |   | 6,789              |       |                   |   | 6,373  |       |      |   | 6,611  |        |  |   | 6,304  |       
|                                                     |                            |   |                    |       |                   |   |        |       |      |   |        |        |  |   |        |       

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

1



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##### Table of Contents






SRI/SURGICAL EXPRESS, INC.
CONDENSED BALANCE SHEETS
(In thousands)

|                                   |                                            |              |                                      |        |        |               |        |              |        |  |  | 
|---------------------------------- | ------------------------------------------ | ------------ | ------------------------------------ | ------ | ------ | ------------- | ------ | ------------ | ------ |  |  | 
|                                   |                                            |              |                                      |        |        | September 30, |        | December 31,
|                                   |                                            |              |                                      |        |        | 2001          |        | 2000        
|                                   |                                            |              |                                      |        |        |               |        |             
|                                   |                                            |              |                                      |        |        | (unaudited)   |        |              |        | 
|                                   |                                            |              |                                      | ASSETS |        |               |        |              |        |  |  | 
|                                  
|                                  
|                                  
|                                  
|Cash and cash equivalents          |                                            | $            | 599                                  |        |        | $             | 132    |             
|                                  
|                                  
|                                  
|                                  
|Accounts receivable, net           |                                            |              | 12,551                               |        |        |               | 9,825  |             
|                                  
|                                  
|                                  
|                                  
|Inventories, net                   |                                            |              | 5,577                                |        |        |               | 5,569  |             
|                                  
|                                  
|                                  
|                                  
|Prepaid expenses and other assets  |                                            |              | 2,555                                |        |        |               | 1,381  |             
|                                  
|                                  
|                                  
|                                  
|Reusable surgical products, net    |                                            |              | 23,095                               |        |        |               | 24,168 |             
|                                  
|                                  
|                                  
|                                  
|Property, plant and equipment, net |                                            |              | 23,555                               |        |        |               | 19,979 |             
|                                  
|                                  
|                                  
|                                  
|Goodwill, net                      |                                            |              | 5,299                                |        |        |               | 5,462  |             
|                                   |                                            |              |                                      |        |        |               |        |             
|                                   |                                            | Total assets |                                      | $      | 73,231 |               |        | $            | 66,516 | 
|                                   |                                            |              |                                      |        |        |               |        |             
|                                   |                                            |              | LIABILITIES AND SHAREHOLDERS EQUITY |        |        |               |        |              |        |  | 
|                                  
|                                  
|                                  
|                                  
|Notes payable to bank              |                                            | $            | 14,911                               |        |        | $             | 15,593 |             
|                                  
|                                  
|                                  
|                                  
|Accounts payable                   |                                            |              | 5,958                                |        |        |               | 4,325  |             
|                                  
|                                  
|                                  
|                                  
|Employee related accrued expenses  |                                            |              | 1,259                                |        |        |               | 1,402  |             
|                                  
|                                  
|                                  
|                                  
|Other accrued expenses             |                                            |              | 1,728                                |        |        |               | 1,462  |             
|                                  
|                                  
|                                  
|                                  
|Deferred tax liability, net        |                                            |              | 882                                  |        |        |               | 882    |             
|                                   |                                            |              |                                      |        |        |               |        |             
|                                   | Total liabilities                          |              |                                      | 24,738 |        |               |        | 23,664       |       
|                                  
|                                  
|                                  
|                                  
|Shareholders equity               |                                            |              |                                      |        |        |               |        |             
|                                  
|                                  
|                                  
|                                  
|Preferred stock                    |                                            |              |                                     |        |        |               | 1      |             
|                                  
|                                  
|                                  
|                                  
|Common stock                       |                                            |              | 6                                    |        |        |               | 6      |             
|                                  
|                                  
|                                  
|                                  
|Additional paid-in capital         |                                            |              | 27,841                               |        |        |               | 26,889 |             
|                                  
|                                  
|                                  
|                                  
|Retained earnings                  |                                            |              | 20,646                               |        |        |               | 15,956 |             
|                                   |                                            |              |                                      |        |        |               |        |             
|                                   | Total shareholders equity                 |              |                                      | 48,493 |        |               |        | 42,852       |       
|                                   |                                            |              |                                      |        |        |               |        |             
|                                   | Total liabilities and shareholders equity |              | $                                    | 73,231 |        |               | $      | 66,516       |       
|                                   |                                            |              |                                      |        |        |               |        |             

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

2



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##### Table of Contents






SRI/SURGICAL EXPRESS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |        |     |       |         |  
|------------------------------------ | --------------------------------------------------------------------------------- | -------------------------- | -------------------------------------------------- | ------------------------------------------- | ----- | ------------------------------- | ------ | ------ | --- | ----- | ------- | -
|                                     |                                                                                   |                            |                                                    |                                             |       | Nine Months Ended September 30,
|                                     |                                                                                   |                            |                                                    |                                             |       |                                
|                                     |                                                                                   |                            |                                                    |                                             |       | 2001                            |        | 2000  
|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|Cash flows from operating activities |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Net income                                                                        |                            | $                                                  | 4,746                                       |       |                                 | $      | 3,007  |    
|                                    
|                                    
|                                    
|                                    
|                                     | Adjustments to reconcile net income to net
cash provided by operating activities: |                            |                                                    |                                             |       |                                 |        |        |    
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                   |                            | Depreciation and amortization                      |                                             |       | 2,097                           |        |        |     | 1,703 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                   |                            | Amortization of reusable surgical products         |                                             |       | 3,055                           |        |        |     | 3,602 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                   |                            | Provision for reusable surgical products shrinkage |                                             |       | 1,254                           |        |        |     | 1,472 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                   |                            | Change in assets and liabilities:                  |                                             |       |                                 |        |        |     |       |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                   |                            |                                                    | Accounts receivable, net                    |       |                                 | (2,726 | )      |     |       | (1,226  | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                   |                            |                                                    | Inventories, net                            |       |                                 | (8     | )      |     |       | (1,507  | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                   |                            |                                                    | Prepaid expenses and other assets           |       |                                 | (1,175 | )      |     |       | 740     |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                   |                            |                                                    | Accounts payable                            |       |                                 | 2,610  |        |     |       | (2,034  | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                   |                            |                                                    | Employee related and other accrued expenses |       |                                 | 123    |        |     |       | 1,227   |  
|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|                                     |                                                                                   |                            |                                                    | Net cash provided by operating activities   |       |                                 | 9,976  |        |     |       | 6,984   |  
|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|Cash flows from investing activities |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Purchases of property, plant and equipment                                        |                            |                                                    | (5,510                                      | )     |                                 |        | (4,302 | )  
|                                    
|                                    
|                                    
|                                    
|                                     | Purchases of reusable surgical products                                           |                            |                                                    | (4,194                                      | )     |                                 |        | (7,628 | )  
|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|                                     |                                                                                   |                            |                                                    | Net cash used in investing activities       |       |                                 | (9,704 | )      |     |       | (11,930 | )
|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|Cash flows from financing activities |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Net borrowings on notes payable to bank                                           |                            |                                                    | (682                                        | )     |                                 |        | 5,148  |    
|                                    
|                                    
|                                    
|                                    
|                                     | Net proceeds from issuance of common stock                                        |                            |                                                    | 953                                         |       |                                 |        |       |    
|                                    
|                                    
|                                    
|                                    
|                                     | Dividends paid                                                                    |                            |                                                    | (76                                         | )     |                                 |        | (153   | )  
|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|                                     |                                                                                   |                            |                                                    | Net cash provided by financing activities   |       |                                 | 195    |        |     |       | 4,995   |  
|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|                                     | Increase in cash and cash equivalents                                             |                            |                                                    | 467                                         |       |                                 |        | 49     |    
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents at beginning of period                                  |                            |                                                    | 132                                         |       |                                 |        | 37     |    
|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|                                     | Cash and cash equivalents at end of period                                        |                            | $                                                  | 599                                         |       |                                 | $      | 86     |    
|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|Supplemental cash flow information   |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                   | Cash paid for interest     |                                                    | $                                           | 1,027 |                                 |        | $      | 825 |      
|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |       
|                                     |                                                                                   | Cash paid for income taxes |                                                    | $                                           | 2,385 |                                 |        | $      | 523 |      
|                                     |                                                                                   |                            |                                                    |                                             |       |                                 |        |       

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

3



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##### Table of Contents






SRI/SURGICAL EXPRESS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements of SRI/Surgical
Express, Inc. (the Company), formerly Sterile Recoveries, Inc., 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 accounting principles generally accepted in the United States.
The accounting policies followed for quarterly financial reporting conform with
accounting principles generally accepted in the United States for interim
financial statements and include those accounting policies disclosed in the
Companys Form 10-K for the year ended December 31, 2000 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,
2001 are not necessarily indicative of the results that can be expected for the
entire year ending December 31, 2001. The unaudited financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Form 10-K.

The Company operates on a 52-53 week fiscal year ending the Sunday nearest
December 31. There are 39 weeks included for the nine-month periods ended
September 30, 2001 and September 30, 2000.

2. LINE OF CREDIT

The Companys outstanding balance under its $45.0 million revolving credit
facility was approximately $14.9 million and $14.0 million on September 30,
2001 and September 30, 2000, respectively.

The credit facility is secured by substantially all of SRIs assets and
has a maturity date of June 30, 2003. The credit facilitys interest rate
varies between 225 and 275 basis points over LIBOR (2.637% as of September 30,
2001), depending on the Companys leverage. The credit facility requires the
Company to maintain (a) minimum consolidated net worth of not less than $37.0
million plus 75% of cumulative consolidated net income for each fiscal quarter
beginning with the fiscal quarter ending March 31, 2000; (b) a consolidated
leverage ratio of not more than 2.5 to 1.0; and (c) a fixed charge coverage
ratio of 2.25 to 1.0 through December 31, 2002, and 2.35 to 1.0 thereafter.
The credit facility restricts the Company in paying dividends, engaging in
acquisition transactions, incurring additional indebtedness, and encumbering
its assets.

The credit facility allows the Company to repurchase up to $5 million of
its stock from time to time through open market purchases at prevailing market
prices. As of March 31, 2001, the Company had repurchased 75,400 shares of its
common stock for $1,118,100. The Company has not repurchased shares since the
first quarter of 2001, and does not anticipate repurchasing any additional
shares at this time.

3. COMMITMENTS AND CONTINGENCIES

On March 24, 2001, the Company entered into a new operating lease
arrangement for its new corporate offices located in Tampa, Florida. The
monthly lease payments are $38,300 and the lease term is 20 years. In
addition, the Company incurred and capitalized approximately $2.4 million as of
September 30, 2001 for leasehold improvements, furniture and equipment for its
corporate offices. The Company has completed this project.

4



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##### Table of Contents



4. EARNINGS PER SHARE

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

|        |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |   |      |       |     | 
|------- | ------------ | ------------------------------------- | -------------------------------------------- | --------------------------- | ---- | ------------------------------------- | ----- | ----------------- | ---- | ----- | ----- | ---- | ---- | ----- | ----- | - | ---- | ----- | --- | 
|        |              |                                       |                                              |                             |      | Three Months Ended                    |       | Nine Months Ended
|        |              |                                       |                                              |                             |      | September 30,                         |       | September 30,    
|        |              |                                       |                                              |                             |      |                                       |       |                  
|        |              |                                       |                                              |                             |      | 2001                                  |       | 2000              |      | 2001  |       | 2000
|        |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |     
|        |              |                                       |                                              |                             |      | (In thousands, except per share data)
|        |              |                                       |                                              |                             |      | (unaudited)                          
|Basic   |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |  
|       
|       
|       
|       
|        | Numerator:   |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |   |     
|       
|       
|       
|       
|        |              |                                       | Net income                                   |                             | $    | 1,755                                 |       |                   | $    | 1,281 |       |      | $    | 4,746 |       |   | $    | 3,007 |    
|       
|       
|       
|       
|        |              |                                       | Less effect of dividends on preferred stock  |                             |      |                                      |       |                   |      | (51   | )     |      |      | (57   | )     |   |      | (153  | )  
|        |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |  
|        |              |                                       | Net income available for common
shareholders |                             | $    | 1,755                                 |       |                   | $    | 1,230 |       |      | $    | 4,689 |       |   | $    | 2,854 |    
|        |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |  
|        | Denominator: |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |   |     
|       
|       
|       
|       
|        |              |                                       | Weighted average common shares
outstanding   |                             |      | 6,287                                 |       |                   |      | 5,677 |       |      |      | 5,992 |       |   |      | 5,677 |    
|        |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |  
|        |              |                                       | Net income per common share  basic          |                             | $    | 0.28                                  |       |                   | $    | 0.22  |       |      | $    | 0.78  |       |   | $    | 0.50  |    
|        |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |  
|Diluted |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |  
|       
|       
|       
|       
|        |              | Numerator:                            |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |   |      |      
|       
|       
|       
|       
|        |              |                                       | Net income                                   |                             | $    | 1,755                                 |       |                   | $    | 1,281 |       |      | $    | 4,746 |       |   | $    | 3,007 |    
|        |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |  
|        |              | Denominator:                          |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |   |      |      
|       
|       
|       
|       
|        |              |                                       | Weighted average common shares
outstanding   |                             |      | 6,287                                 |       |                   |      | 5,677 |       |      |      | 5,992 |       |   |      | 5,677 |    
|       
|       
|       
|       
|        |              |                                       | Effect of dilutive securities:               |                             |      |                                       |       |                   |      |       |       |      |      |       |       |   |      |       |    
|       
|       
|       
|       
|        |              |                                       |                                              | Employee stock options      |      |                                       | 502   |                   |      |       | 129   |      |      |       | 411   |   |      |       | 60  | 
|       
|       
|       
|       
|        |              |                                       |                                              | Convertible preferred stock |      |                                       |      |                   |      |       | 567   |      |      |       | 208   |   |      |       | 567 | 
|        |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |  
|        |              |                                       | 6,789                                        |                             |      |                                       | 6,373 |                   |      |       | 6,611 |      |      |       | 6,304 |  
|        |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |  
|        |              | Net income per common share  diluted |                                              | $                           | 0.26 |                                       |       | $                 | 0.20 |       |       | $    | 0.72 |       |       | $ | 0.48 |      
|        |              |                                       |                                              |                             |      |                                       |       |                   |      |       |       |      |      |       |       |  

Options to purchase 0 and 620,900 shares of common stock for the three
month periods ended September 30, 2001 and September 30, 2000, respectively,
and options to purchase 12,000 and 643,710 shares of common stock for the nine
month periods ended September 30, 2001 and September 30, 2000, respectively,
were not included for all or a portion of the computation of diluted net income
per common share because those options exercise prices were greater than the
average market price of the common shares, and therefore the effect would be
anti-dilutive.




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

Overview

From 18 service centers, the Company provides hospitals and surgery
centers with a comprehensive surgical procedure-based delivery and retrieval
service for reusable gowns, towels, drapes, basins, and instruments, and
provides other disposable products necessary for surgery. At 11 reprocessing
facilities and one disposable products division, 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® 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 also offers state of the art
reusable laparoscopic

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

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##### Table of Contents



instruments from Aesculap, Inc., one of the oldest and largest worldwide
suppliers of surgical instruments. The surgical instruments have been designed
either to be taken apart or with flush ports to allow complete cleaning and
decontamination.

The Company offers its Surgical Express® program, which uses daily
delivery and retrieval to provide customers an expanded program of products and
services. Surgical Express is an outsourced Surgical Case Cart Management
Program that the Company expects will reduce hospital and surgery centers
processing costs and their investment in surgical products. With its Surgical
Express program, the Company supplements its core reusable products offering
with disposable accessory packs containing smaller surgical items that are not
reusable, such as needles, syringes, and tubing. Since the fourth quarter of
2000, the Company has offered customers its first complete procedure-based
service, Surgical Express for Laparoscopy, which combines the Companys core
reusable products offering with disposable products and laparoscopic
instruments required for laparoscopic surgical procedures. Aesculap, Inc.
furnishes laparoscopic instruments for this program under a joint marketing
arrangement with the Company. In 2001, the Company introduced additional
instrument procedures and expects to continue developing new instrument
programs on a regular basis. As of September 30, 2001, the Company was
servicing 30 instrument projects from eight of its facilities. The Company
believes that its unique product and service offerings improves its competitive
position in the marketplace.

In May 2001, the Company announced its contract with HealthTrust
Purchasing Group (HPG), a group purchasing organization representing over 600
hospitals and surgery centers. The contract with HPG designates SRI as its
primary outsource vendor for reusable surgical products including instruments.
The Company was servicing 40 HPG hospitals and 18 surgery centers when the HPG
contract was signed, and 20 new hospitals have been added through the end of
the third quarter 2001. In addition, through its relationship with Standard
Textile Co., Inc., the Company has the opportunity to provide Surgical Express
to Novation member hospitals. With its acceptance by HPG and Novation,
Surgical Express is an available contracted alternative for over 2000 hospitals
and surgery centers across the country. The Company continues to pursue
additional GPO contracts that will allow it to further penetrate the surgical
supply market.

Results of Earnings

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

|                                    |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |      |  
|----------------------------------- | -------------------------- |  | ------------------ | ---- | ----------------- |  | ----- | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                                    |                            |  | Three Months Ended |      | Nine Months Ended
|                                    |                            |  | September 30,      |      | September 30,    
|                                    |                            |  |                    |      |                  
|                                    |                            |  | 2001               |      | 2000              |  | 2001  |      | 2000
|                                    |                            |  |                    |      |                   |  |       |      |     
|Revenues                            |                            |  | 100.0              | %    |                   |  | 100.0 | %    |      |  | 100.0 | %    |   |  | 100.0 | %   
|                                   
|                                   
|                                   
|                                   
|Cost of revenues                    |                            |  | 65.4               |      |                   |  | 68.1  |      |      |  | 66.8  |      |   |  | 68.9  |     
|                                    |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     
|                                    | Gross profit               |  |                    | 34.6 |                   |  |       | 31.9 |      |  |       | 33.2 |   |  |       | 31.1 |  
|                                   
|                                   
|                                   
|                                   
|Distribution expenses               |                            |  | 6.1                |      |                   |  | 6.5   |      |      |  | 6.1   |      |   |  | 6.9   |     
|                                   
|                                   
|                                   
|                                   
|Selling and administrative expenses |                            |  | 14.7               |      |                   |  | 13.3  |      |      |  | 14.0  |      |   |  | 14.3  |     
|                                    |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     
|                                    | Income from operations     |  |                    | 13.8 |                   |  |       | 12.1 |      |  |       | 13.1 |   |  |       | 9.9  |  
|                                   
|                                   
|                                   
|                                   
|Interest expense, net               |                            |  | 1.6                |      |                   |  | 1.3   |      |      |  | 1.6   |      |   |  | 1.3   |     
|                                    |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     
|                                    | Income before income taxes |  |                    | 12.2 |                   |  |       | 10.8 |      |  |       | 11.5 |   |  |       | 8.6  |  
|                                   
|                                   
|                                   
|                                   
|Income tax expense                  |                            |  | 4.4                |      |                   |  | 4.2   |      |      |  | 4.3   |      |   |  | 3.4   |     
|                                    |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     
|                                    | Net income                 |  |                    | 7.8  | %                 |  |       | 6.6  | %    |  |       | 7.2  | % |  |       | 5.2  | %
|                                    |                            |  |                    |      |                   |  |       |      |      |  |       |      |   |  |       |     

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Three Months and Nine Months Ended September 30, 2001 Compared to Three Months and Nine Months Ended September 30, 2000

Revenues.Revenues increased $2.9 million, or 14.8%, to $22.4 million in
the three months ended September 30 2001, from $19.5 million in the three
months ended September 30, 2000. In the nine months ended September 30, 2001,
the Companys revenues increased $8.6 million, or 15.1%, to $66.1 million, from
$57.5 million in the nine months ended September 30, 2000. Revenue increased
14.8% over last years third quarter due to increased Surgical Express business
and the expansion of the Companys instrument program (including Surgical
Express for Laparoscopy), partially offset by the continuing effect of the
planned reductions in the Companys customer base of smaller, less profitable
accounts.

Gross Profit.Gross profit increased $1.5 million, or 24.5%, to $7.7
million in the three months ended September 30, 2001, from $6.2 million in the
three months ended September 30, 2000; and $4.1 million, or 22.9%, to $22.0
million in the nine months ended September 30, 2001, from $17.9 million in the
nine months ended September 30, 2000. As a percentage of revenues, gross
profit increased by 2.7% to 34.6% in the three months ended September 30, 2001,
from 31.9% in the three months ended September 30, 2000; and increased 2.1% to
33.2% in the nine months ended September 30, 2001, from 31.1% in the nine
months ended September 30, 2000. The increase in gross profit reflects
increased productivity as a result of improved methods and leveraged fixed
costs, coupled with the Companys elimination of smaller, less profitable
customers, and was aided in the third quarter by reduced shrinkage expense.

Distribution Expenses.Distribution expenses increased $99,000, or 7.8%,
to $1.4 million in the three months ended September 30, 2001, from $1.3 million
in the three months ended September 30, 2000; and increased $117,000, or 3.0%,
to $4.1 million in the nine months ended September 30, 2001, from $3.9 million
in the nine months ended September 30, 2000. As a percentage of revenues,
distribution expenses decreased 0.4% to 6.1% in the three months ended
September 30, 2001, from 6.5% in the three months ended September 30, 2000; and
decreased 0.8% to 6.1% in the nine months ended September 30, 2001, from 6.9%
in the nine months ended September 30, 2000. The Company benefited from
increased volume per shipment and use of efficient truck routes.

Selling and Administrative Expenses.Selling and administrative expenses
increased $713,000, or 27.5%, to $3.3 million in three months ended September
30, 2001, from $2.6 million in the three months ended September 30, 2000; and
increased $1.0 million, or 12.1%, to $9.2 million in the nine months ended
September 30, 2001, from $8.2 million in the nine months ended September 30,
2000. As a percentage of revenues, selling and administrative expenses
increased 1.4% to 14.7% for the three months ended September 30, 2001, from
13.3% in the three months ended September 30, 2000, and decreased 0.3% to 14.0%
in the nine months ended September 30, 2001, from 14.3% in the nine months
ended September 30, 2000. The Companys expenses increased due to
administrative fees for new GPO contracts, its new corporate offices, and
growth in its sales and marketing personnel. The increased expense, which
started in the second quarter and continued in the third quarter, resulted in
an increase in selling and administrative expense as a percentage of revenues
for the three months ended September 30, 2001.

Income from Operations.Income from operations increased $715,000, or
30.2%, to $3.1 million in the three months ended September 30, 2001, from $2.4
million in the three months ended September 30, 2000; and increased $3.0
million, or 52.1%, to $8.7 million in the nine months ended September 30, 2001,
from $5.7 million in the nine months ended September 30, 2000. As a percentage
of revenues, income from operations increased 1.7% to 13.8% for the three
months ended September 30, 2001 from 12.1% for the three months ended September
30, 2000; and increased 3.2% to 13.1% in the nine months

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ended September 30,
2001, from 9.9% in the nine months ended September 30, 2000, as a result of the
decreased costs described above.

Interest Expense, Net.Interest expense increased $84,000 to $348,000 in
the three months ended September 30, 2001, compared to $264,000 in the three
months ended September 30, 2000; and increased $311,000 to $1.1 million in the
nine months ended September 30, 2001, from $780,000 in the nine months ended
September 30, 2000, primarily due to higher borrowings under the Companys
revolving credit facility.

Income Tax Expense.Income tax expense increased $157,000 to $1.0 million
in the three months ended September 30, 2001, compared to $819,000 in the three
months ended September 30, 2000; and increased $925,000 to $2.8 million in the
nine months ended September 30, 2001, from $1.9 million in the nine months
ended September 30, 2000. The Companys effective tax rate is 37.5%.

Liquidity and Capital Resources

The Companys principal sources of capital have been cash flows from
operations and borrowings under its revolving credit facility.

The Companys positive cash flow provided by operating activities was
$10.0 million during the first nine months of 2001, compared to $7.0 million
during the first nine months of 2000. The increase in cash from operating
activities resulted primarily from increased net income before amortization,
shrinkage and depreciation, slower growth in inventories, and increased
accounts payable, and was partially offset by increased accounts receivable,
decreased employee related and other accrued expenses, and increased prepaid
expenses.

The Companys net cash used in investing activities decreased to $9.7
million in the nine months ended September 30, 2001, from $11.9 million in the
nine months ended September 30, 2000. The Company continues to make
substantial capital expenditures to improve its facilities and to purchase
reusable surgical products to support anticipated increases in business. The
Company made equipment expenditures of $5.5 million during the nine months
ended September 30, 2001, primarily for new corporate offices, facility
equipment and expansion, including upgrading its facilities for instrument
processing. The Company expects to spend an additional $2.5 million for
property, plant and equipment during the balance of 2001, primarily for
facility equipment and major expansions to its facilities in Tampa, Florida,
Baltimore, Maryland, and Raleigh, North Carolina. The Companys expenditures of
$4.2 million for reusable surgical products during the nine months ended
September 30, 2001 were substantially lower than the first nine months of 2000
expenditures of $7.6 million. The Companys level of reusable surgical
products exceeded its needs at the close of 2000, and management accordingly
adjusted its new product expenditures this year. The Company expects to spend
an additional $3.0 million for reusable surgical products during the balance of
2001.

A new operating lease for the Companys new corporate offices located in
Tampa, Florida commenced on March 24, 2001. The monthly lease payments are
$38,300 and the lease term is 20 years. In addition, the Company incurred and
capitalized approximately $2.4 million as of September 30, 2001 for leasehold
improvements, furniture and equipment for its corporate offices. The Company
has completed this project.

As of September 30, 2001, the Companys outstanding balance under its
$45.0 million revolving credit facility was approximately $14.9 million. The
credit facility is secured by substantially all of the Companys assets and
matures on June 30, 2003. The credit facilitys interest rate varies between
225 and 275 basis points over LIBOR (2.637% as of September 30, 2001),
depending on the Companys leverage. The credit facility requires the Company
to maintain (a) minimum net worth of not less than $37.0 million plus 75% of
cumulative net income for each fiscal quarter beginning with the fiscal quarter
ending March 31, 2000; (b) a leverage ratio of not more than 2.5 to 1.0; and
(c) a fixed charge coverage

8



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ratio of 2.25 to 1.0 through December 31, 2002, and
2.35 to 1.0 thereafter. The credit facility restricts the Company in paying
dividends, engaging in acquisition transactions, incurring additional
indebtedness, and encumbering its assets.

The credit facility allows the Company to repurchase up to $5 million of
its stock from time to time through open market purchases at prevailing market
prices. As of March 31, 2001, the Company had repurchased 75,400 shares of its
common stock for $1,118,100. The Company has not repurchased shares since the
first quarter of 2001, and does not anticipate repurchasing any additional
shares at this time.

As of September 30, 2001, the Company had cash of approximately $599,000.
The Company believes that its cash flows from operating activities and funds
available under its credit facility will be sufficient to fund its growth and
anticipated capital requirements for the next twelve months.

Certain Considerations

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

Sales Process and Market Acceptance of Products and Services.The
Companys future performance depends on its ability to increase revenues to new
and existing customers. The Company has an extended sales process due to the
complicated approval process within hospitals for purchases from new suppliers,
the long duration of existing supply contracts, and implementation delays
pending termination of a hospitals previous supply relationships. The long
sales process inhibits the ability of the Company to quickly increase revenues
from new and existing customers or enter into new markets. The Companys
future performance will also depend on market acceptance of its combination of
reusable surgical products, disposable accessory packs, instruments, and direct
delivery and retrieval service.

Need for Capital.The Companys business is capital intensive and may
require substantial capital expenditures during the next several years to
achieve its expansion plans. In the longer term, the Company expects that its
needs for capital expenditures 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.

New Product Offering; Dependence on a Supplier.Surgical Express for
Laparoscopy is the Companys first instrument offering. The Company is
implementing this and other instrument programs and remains subject to a risk
that the market will not broadly accept them. Further, the Company is relying
on Aesculap, Inc. as its major source of supply of laparoscopic instruments for
its first program. The Joint Marketing Agreement between SRI and Aesculap
provides for Aesculap to furnish instruments to the Company for at least three
years, subject to terms and conditions stated in the agreement. Any failure of
Aesculap to furnish instruments for any reason would have a materially adverse
effect on the Companys ability to implement this program.

Dependence on Significant Customers.During the nine months ended
September 30, 2001, revenues from three hospital groups (Novation, Premier,
Inc. and HPG) accounted for approximately 28%, 14% and 12% of the Companys
revenues, respectively, compared to 19%, 17% and 12%, respectively, in the nine
months ended September 30, 2000. No single hospital or surgery center

9



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accounted for more than 9% of the Companys revenues for the nine months ended
September 30, 2001 and 2000, respectively. Although each Novation, Premier and
HCA hospital currently make purchasing decisions on an individual basis, loss
of a substantial portion of the Novation, Premier or HCA hospitals business
would 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. Some of the Companys competitors, including Allegiance
Corporation, serve as the sole supplier of a wide assortment of products to a
significant number of hospitals. Although the Company offers a substantial
array of surgical products, many of its competitors have a greater number of
products for the entire hospital, which in some instances is a competitive
disadvantage for the Company. There is no assurance that the Company will be
able to compete effectively with existing or potential competitors.

Government Regulation.Significant aspects of the Companys businesses
are subject to state and federal statutes and regulations governing, among
other things, medical waste-disposal and workplace health and safety. In
addition, most of the products furnished or sold by the Company are subject to
regulation as medical devices by the U.S. Food and Drug Administration (FDA),
as well as by other federal and state agencies. The Companys facilities are
subject to regular inspections by FDA officials. The FDA has authority 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.

10



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##### Table of Contents






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 third quarter of
2001.

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##### Table of Contents






SIGNATURE

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

|                       |  |     |  |                           
|---------------------- |  | --- |  | --------------------------
|                       |  |     |  | SRI/SURGICAL EXPRESS, INC.
|                      
|Date: October 25, 2001 |  | By: |  | /s/    James T. Boosales  
|                       |  |     |  |                           
|                       |  |     |  | Executive Vice President  
|                      
|                      
|                      
|                      
|                       |  |     |  | Chief Financial Officer   

12