Stericycle, Inc.

Table of Contents

PART I. – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

1

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

2

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

3

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

March 31, 2010 (Unaudited) and

Year Ended December 31, 2009 (Audited)

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

4

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Unless the context requires otherwise, “we”, “us” or “our” refers to Stericycle, Inc. and its subsidiaries on a consolidated basis.

NOTE 1 – BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; but the Company believes the disclosures in the accompanying condensed consolidated financial statements are adequate to make the information presented not misleading.  In our opinion, all adjustments necessary for a fair presentation for the periods presented have been reflected and are of a normal recurring nature.  These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto for the year ended December 31, 2008,2009, as filed wit hwith our Annual Report on Form 10-K for the year ended December 31, 2008.2009.  The results of operations for the three months ended March 31, 20092010 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2009.2010.

NOTE 2 – ACQUISITIONS AND DIVESTITURES

During the quarter ended March 31, 2009,2010, we acquired selected assets of threetwo domestic medicalregulated waste businesses, 100% of the stock of two regulated waste businesses in the UK, 70% of the stock of a regulated waste business in Brazil, and completed100% of the funding onstock of a 2008 acquisition.regulated waste business in Chile.  We also increased our majority share in a previous acquisition in Chile.

.  

The aggregate purchase price of our acquisitions during the quarter ended March 31, 20092010, was approximately $18.2$66.9 million, of which approximately $12.9 million in cash payments related to transactions that closed in 2008 and were disbursed in early January 2009, and three acquisitions closed at the end of the quarter ended March 31, 2009 for $5.3 million, of which $3.4$50.4 million was paid in cash, and $1.9$10.0 million was paid by the issuance of promissory notes.notes, and $6.5 million was recorded as part of contingent consideration.  For financial reporting purposes, our 20092010 acquisitions were accounted for using the acquisition method of accounting.  The purchase prices of these acquisitions, in excess of acquired tangible assets, have been primarily allocated to goodwill and other intangibles and are preliminary pending completion of certain intangible asset valuations. 

5

The results of operations of these acquired businesses have been included in the consolidated statements of income from the dates of acq uisition.acquisition.  These acquisitions resulted in recognition of goodwill in our financial statements reflecting the complementary strategic fit that the acquired businesses brought to us.

4

NOTE 3 – INCOME TAXES

Our acquisition of MedServe in December of 2009 required us to divest of certain acquired assets.  We have assigned a value of $4.2 million to these assets, made up primarily of fixed assets and our subsidiaries file U.S. federal income tax returns and income tax returns in various states and foreign jurisdictions.  With a few exceptions, wegoodwill, which are no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations by tax authorities for years before 2002.  The Internal Revenue Service (“IRS”) concluded an examinationrecorded as part of the Company's U.S. income tax return for 2004; subsequent tax years remain open and subject to examination by the IRS. Our subsidiaries in foreign countries have tax years open ranging from 2002 through 2008.current assets.

The total amount of unrecognized tax benefits as of March 31, 2009 and 2008 was $8.2 million and $3.7 million, respectively, which included immaterial amounts of interest and penalties reflected as a liability on the balance sheet. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $8.2 million. We recognize interest and penalties accrued related to income tax reserves in income tax expense.  This method of accounting is consistent with prior years.

The following table summarizes the changes in unrecognized tax positions during the quarter ended March 31, 2009:

NOTE 43 – STOCK BASED COMPENSATIONNEW ACCOUNTING STANDARDS

At March 31, 2009 we had stock options outstanding under the following plans:

(i)

The 2008 Incentive Stock Plan, which our stockholders approved in May 2008;

(ii)

the 2005 Incentive Stock Plan, which our stockholders approved in April 2005;

(iii)

the 2000 Nonstatutory Stock Option Plan, which our Board of Directors adopted in February 2000;

(iv)

the 1997 Stock Option Plan, which expired in January 2008;

(v)

the Directors Stock Option Plan, which expired in May 2006;

(vi)

the 1995 Incentive Compensation Plan, which expired in July 2005;

(vii)

our Employee Stock Purchase Plan, which our stockholders approved in May 2001.Accounting Standards Recently Adopted

The following table sets forthConsolidation

On January 1, 2010, Stericycle adopted changes issued by the expenseFASB related to stock compensation:

5amendments to previous guidance on the consolidation of variable interest entities (“VIE”).  This standard clarifies the characteristics that identify a VIE and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance.  This statement requires the primary beneficiary assessment to be performed on a continuous basis.  It also requires additional disclosures about an entity’s involvement with a VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s consolidated balance sheet , significant risk exposures due to the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s consolidated financial statements.  Our adoption of the standard did not have an impact to our financial statements.

The following table sets forth the tax benefits related to stock compensation:

The Black-Scholes option-pricing model is used in determining the fair value of each option grant using the assumptions noted in the table below.  The expected term of options granted is based on historical experience and represents the period of time that awards granted are expected to be outstanding.  Expected volatility is based upon historical volatility of the company’s stock.  The expected dividend yield is zero.  The risk-free interest rate is based upon the U.S. Treasury yield rates of a comparable period.Accounting Standards not yet adopted

The assumptions that we used inRevenue Recognition

In October 2009, the Black-Scholes model are as follows:

The weighted average grant date fair value of the stock options granted during the three months ended March 31, 2009 and 2008 was $11.70 and $13.00, respectively.

Stock option activityFASB issued an update to existing guidance on revenue recognition for the three months ended March 31, 2009, was as follows:

The total intrinsic value of options exercised for the three months ended March 31, 2009 and 2008 was $4.2 million and $6.4 million, respectively.  Intrinsic value is measured using the fair market value at the date of the exercise (for options exercised) or at March 31, 2009 (for outstanding options), less the applicable exercise price.arrangements with multiple deliverables.  This update will allow

6

Ascompanies to allocate consideration received for qualified separate deliverables using estimated selling price for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable.  Additional disclosures discussing the nature of March 31, 2009, there was $29.0 millionmultiple element arrangements, the types of total unrecognized compensation expense, relateddeliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used to non-vested stock options, which is expecteddetermine estimated selling prices are required.  We will adopt this update for new revenue arrangements entered into or materially modified beginning January 1, 2011.  We do not generally have arrangements with multiple deliverables and therefore do not expect any material impact to be recognized over a weighted-average period of 2.09 years.our financial statements upon adoption.

NOTE 5 – COMMON STOCK

During the quarters ended March 31, 2009 and 2008, we repurchased on the open market, and subsequently cancelled, 536,346 and 1,482,185 shares of common stock, respectively.  The weighted average repurchase price was $47.59 and $53.56 per share, respectively.

During the quarter ended March 31, 2009, we settled in cash $2.5 million of share repurchases that were executed in December 2008.  In addition, there was $0.5 million of current quarter share repurchases that were not settled as of March 31, 2009.

NOTE 64 – NET INCOME PER COMMON SHAREFAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The following table sets forthfair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the computationbest information available in the circumstances (unobservable inputs).  The fair value hierarchy consists of basicthree broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and diluted net income per share:the lowest priority to unobservable inputs (Level 3).  The three levels of the fair value hierarchy are described below:

NOTE 7 – COMPREHENSIVE INCOME

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.  The componentsimpact of total comprehensive income are net income,our creditworthiness has been considered in the change in cumulative currency translation adjustments and gains and losses on derivative instruments qualifying as cash flow hedges.The following table sets forthfair value measurements noted below.  In addition, the fair value measurement of a liability must reflect the nonperformance risk of an entity.

7

components of total comprehensive income for the three months ended

Level 1: At March 31, 2010, we have $22.9 million in cash and cash equivalents, and $1.8 million of short-term investments that we carry on our books at fair value using Level 1 inputs.  At December 31, 2009, we had $15.8 million in cash and 2008:cash equivalents and $1.1 million of short-term investments on our books at fair value using market price inputs.

Level 2: In October 2008, we entered into three interest rate swap contracts, covering $225 million of our borrowings outstanding under our senior credit facility.  The objective of the swaps is to reduce the risk of volatile interest expense by fixing the rate.  The interest rate swaps are designated as cash flow hedges; the notional amounts and all other significant terms of the swap agreement are matched to the provisions and terms of the variable rate debt hedged.  We apply hedge accounting to these instruments with changes in the fair value of the swap agreements recorded as a component of other comprehensive income.  The fair value was determined using market data inputs to calculate expected future interest rates.  The cash streams attributable to the difference between expected future rates and the fixed rate payable is discounted to arrive at the fair value of the two hedges.

Level 3: As part of our acquisition accounting, we assign fair values to identifiable intangible assets; primarily customer relationships and operating permits.  We use a discounted income approach whereby the expected after tax cash flows of the acquired entity are present valued.  We use the financial information provided by the

8

NOTE 8 – GUARANTEEacquired company, and management assumptions related to future growth to determine expected future cash flows.  We use data provided by unaffiliated external parties as well as internal financial information to calculate a weighted average cost of capital (“WACC”) for the acquired company.  The expected cash flows and the calculated WACC are significant inputs in determining the fair value of our intangibles. 

We have guaranteedAt March 31, 2010, the fair value of the Company’s debt obligations was estimated at $1.0 billion, compared to a loancarrying amount of $996.7 million.  At December 31, 2009, the fair value of the Company’s debt obligations was estimated at $985.0 million, compared to JPMorganChase Bank N.A. on behalfa carrying amount of Shiraishi-Sogyo Co. Ltd (“Shiraishi”).  Shiraishi is$988.9 million.  This fair value was estimated using market interest rates for comparable instruments.  The Company has no current plans to retire a customer in Japan that is expanding their medical waste management business and has a six month loan with a current balancesignificant amount of $5.1 million with JPMorganChase Bank N.A. that expires in May 2009.  The loan with JPMorganChase and our associated guarantee is in the processits debt prior to maturity.

There were no movements of being extended beyond May 2010.  items between fair value hierarchies.

NOTE 95 – GOODWILLDERIVATIVE INSTRUMENTS

As of March 31, 2010 we have two interest rate swap contracts covering $100 million of our borrowings outstanding under our senior credit facility.  The objective of the swap is to reduce the risk of volatile interest expense by fixing the rate.  The details of these two contracts are as follows:

We entered into the interest rate swaps in order to manage the risk of interest rate changes to our interest expense.  The interest rate swaps are designated as cash flow hedges; the notional amounts and all other significant terms of the swap agreement are matched to the provisions and terms of the variable rate debt hedged.  The fair market of the two hedges is recorded as a current liability of $0.6 million at March 31, 2010.  At March 31, 2010, the hedges were determined to be 100% effective.  Gains or losses on hedges are reclassified into interest expense when the effect of the hedged item is recognized in earnings.  The fair market value was determined using market data inputs to calculate expected future interest rates.  The cash streams attributable to the difference between expected future rates and the fixed rate payable is discounted to arrive at the fair value of the two hedg es.

NOTE 6 – INCOME TAXES

We and our subsidiaries file U.S. federal income tax returns and income tax returns in various states and foreign jurisdictions.  With a few exceptions, we are no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations by tax authorities for years before 2003.  The Internal Revenue Service (“IRS”) concluded an examination of the Company's U.S. income tax return for 2004.  Tax years after 2005

9

remain open and subject to examination by the IRS.  In addition, our subsidiaries in foreign countries have two geographical reporting segments, United Statestax years open ranging from 2003 through 2009.

The Company has recorded accruals to cover certain unresolved tax issues.  Such contingent liabilities relate to additional taxes and Foreign Countries, bothinterest the Company may be required to pay in various tax jurisdictions.  During the course of examinations by various taxing authorities, proposed adjustments may be asserted.  The Company evaluates such items on a case-by-case basis and adjusts the accrual for contingent liabilities as deemed necessary.

The total amount of unrecognized tax benefit reserve as of March 31, 2010 is $9.0 million, which have goodwill.includes immaterial amounts of interest and penalties and is reflected as a liability on the balance sheet.  The amount of income tax contingency reserve that, if recognized, would affect the effective tax rate is approximately $9.0 million.  We recognize interest and penalties accrued related to income tax reserves in income tax expense.

The following table summarizes the changes in unrecognized tax positions during the carrying amount of goodwill, net of amortization, for the three monthsquarter ended March 31, 2009 were as follows:2010:

NOTE 107 – LEGAL PROCEEDINGSSTOCK BASED COMPENSATION

We operateAt March 31, 2010 we had stock options outstanding under the following plans:

(i)

The 2008 Incentive Stock Plan, which our stockholders approved in a highly regulated industry and must deal with regulatory inquiries or investigations from timeMay 2008;

(ii)

the 2005 Incentive Stock Plan, which our stockholders approved in April 2005;

(iii)

the 2000 Nonstatutory Stock Option Plan, which our Board of Directors adopted in February 2000;

(iv)

the 1997 Stock Option Plan, which expired in January 2008;

(v)

the Directors Stock Option Plan, which expired in May 2006;

(vi)

the 1995 Incentive Compensation Plan, which expired in July 2005;

(vii)

our Employee Stock Purchase Plan, which our stockholders approved in May 2001.

The following table sets forth the expense related to time that may be instituted for a variety of reasons.  We are also involved in a variety of civil litigation from time to time.stock compensation:

10

8The following table sets forth the tax benefits related to stock compensation:

The Black-Scholes option-pricing model is used in determining the fair value of each option grant using the assumptions noted in the table below.  The expected term of options granted is based on historical experience and represents the period of time that awards granted are expected to be outstanding.  Expected volatility is based upon historical volatility of the company’s stock.  The expected dividend yield is zero.  The risk-free interest rate is based upon the U.S. Treasury yield rates of a comparable period.  

The assumptions that we used in the Black-Scholes model are as follows:

The weighted average grant date fair value of the stock options granted during the three months ended March 31, 2010 and 2009 was $13.13 and $11.70, respectively.

Stock option activity for the three months ended March 31, 2010, was as follows:

The total intrinsic value of options exercised for the three months ended March 31, 2010 and 2009 was $4.3 million and $4.2 million, respectively.  Intrinsic value is measured using the fair market value at the date of the exercise (for options exercised) or at March 31, 2010 (for outstanding options), less the applicable exercise price.

11

As of March 31, 2010, there was $28.8 million of total unrecognized compensation expense, related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.09 years.

NOTE 118 – NEW ACCOUNTING STANDARDSCOMMON STOCK

Effective January 1, 2009 we adopted Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) requiresDuring the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction; requires certain contingent assets and liabilities acquired to be recognized at their fair values on the acquisition date; requires contingent consideration to be recognized at its fair value on the acquisition date and changes in the fair value to be recognized in earnings until settled; requires the expensing of most transaction and restructuring costs; and generally requires the reversals of valuation allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties to also be recognized in ea rnings.  This new accounting standard requires the company to recognize expenses to the income statement that were previously accounted for as acquisition accounting and reflected on the balance sheet.  Net income for the first quarter of 2009 included the effect of $0.4 million of charges related to the adoption of SFAS No. 141(R).  Because of the inherent uncertainty of the number, structure and complexity of the acquisitions that we may complete in the future and the magnitude of the transaction expenses that we may incur in completing these acquisitions, the future impact of the adoption of SFAS No. 141(R) is not reasonably estimable.

Effective January 1, 2009 we adopted SFAS Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”).  The objective of SFAS No. 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements.  SFAS No. 160 requires that minority interests be identified and presented on the consolidated statements of income in the equity section, but separate from the parent’s equity;  that changes in the parent’s ownership interest be accounted for consistently and similarly as equity transactions; in a deconsolidation situation, any remaining noncontrolling equity investment and gain or loss on the deconsolidation is to be measured at fair value; that entities provide sufficient disclosures that clearly distinguish between the ownership interests of the parent and the interests of the noncontrolling owner.  For the quarterquarters ended March 31, 2010 and 2009, we repurchased on the adoptionopen market, and subsequently cancelled, 207,114 and 536,346 shares of SFAS No. 160 did not result in a material impact to our financial statements.common stock, respectively.  The weighted average repurchase price was $54.36 and $47.59 per share, respectively.

Effective January 1, 2009 we adopted SFAS Statement No. 161, “Disclosures about Derivative InstrumentsThere was $0.6 million of current quarter share repurchases that were not settled as of March 31, 2010.

NOTE 9 – NET INCOME PER COMMON SHARE

The following table sets forth the computation of basic and Hedging Activities” (“SFAS No. 161”), to enhance the disclosure regarding the Company’s derivative and hedging activities to improve the transparency of financial reporting.  diluted net income per share:

NOTE 10 – COMPREHENSIVE INCOME

The components of total comprehensive income are net income, net income attributable to non-controlling interests, the change in cumulative currency translation adjustments, and gains and losses on derivative instruments qualifying as cash flow hedges.The following table sets forth the components of total comprehensive income for the three months ended March 31, 2010 and 2009:

12

NOTE 11 – GOODWILL

We have two geographical reporting segments, United States and Foreign Countries, both of which have goodwill.  The changes in the carrying amount of goodwill, net of amortization, for the three months ended March 31, 2010 were as follows:

The changes to goodwill for 2009 acquisitions are primarily due to the finalization of intangible valuations and allocation of goodwill to the asset group held for sale.

NOTE 12 – GEOGRAPHIC INFORMATION

Management has determined that we have two reportable segments, United States (includes Puerto Rico) and Foreign Countries based on our consideration of the criteria detailed in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”Foreign.  Revenues

9

are attributed to countries based on the location of customers.  Inter-company revenues recorded by the United States for work performed in Canada, which are immaterial, are eliminated prior to reporting United States revenues.  The same accounting principles and critical accounting policies are used in the preparation of the financial statements for both reporting segments.

13

Detailed information for our United States reporting segment is as follows:

Detailed information for our Foreign Countries reporting segment is as follows:

NOTE 13 – FAIR VALUE MEASUREMENTS

We adopted SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”) on January 1, 2008, which clarifies that fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. Under SFAS No. 157, fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of our company. Unobservable inputs are those that reflect the company’s assumptions about what market p articipants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:

10

As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. The impact of our creditworthiness has been considered in the fair value measurements noted below. In addition, under SFAS No. 157, the fair value measurement of a liability must reflect the nonperformance risk of an entity.

At March 31, 2009, we have $9.1 million in cash and cash equivalents, and $3.0 million of short-term investments that we carry on our books at fair value using Level 1 inputs.  

We have a cash flow hedge with an objective to offset foreign currency exchange risk to the U.S. dollar equivalent cash inflows on the settlement of a GBP denominated intercompany loan.  The fair value of the hedge was calculated using Level 2 inputs and was recorded as a current asset of $2.5 million as of March 31, 2009 and as a liability of $2.3 million as of March 31, 2008.

We have three cash flow hedges with the objective to offset variable interest rate expense on a portion of our revolver debt with fixed rate expense.  The notional amount of our three hedges is $225.0 million.  The fair value of the hedge is calculated using Level 2 inputs and is recorded as a liability of $4.1 million.

There were no movements of items between fair value hierarchies.

NOTE 13 – LEGAL PROCEEDINGS

We operate in a highly regulated industry and must deal with regulatory inquiries or investigations from time to time that may be instituted for a variety of reasons.  We are also involved in a variety of civil litigation from time to time.

On November 30, 2009, we entered into an agreement with the United States Department of Justice (“DOJ”) and the States of Missouri and Nebraska providing clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 that allowed us to complete our pending acquisition of MedServe, Inc., which we closed on December 4, 2009.

Our agreement with the DOJ and the States of Missouri and Nebraska agreement requires us to divest certain assets that we acquired from MedServe consisting of an autoclave treatment facility in Newton, Kansas, four transfer stations in Kansas, Oklahoma, Nebraska and Missouri and certain large customer accounts and associated assets related to these facilities. We have completed this required divestiture (see Note 16 – Subsequent Events).  In addition, our agreement requires us for a period of ten years to notify the DOJ and the States of Missouri and Nebraska before acquiring any business

14

that is engaged in both the collection and treatment of infectious waste in Kansas, Missouri, Nebraska or Oklahoma.

NOTE 14 – DERIVATIVE INSTRUMENTSGUARANTEE

We have guaranteed a loan to JPMorganChase Bank N.A. on behalf of Shiraishi-Sogyo Co. Ltd (“Shiraishi”).  Shiraishi is a customer in Japan that is expanding their medical waste management business and has a one year loan with a current balance of $5.4 million with JPMorganChase Bank N.A. that expires in May 2010.  The loan with JPMorganChase and our associated guarantee is in the process of being extended beyond May 2011.  We also have notes receivable to Shiraishi for approximately $14.9 million in support of their medical waste business.  These amounts are collateralized with the assets of Shiraishi and related companies.  

NOTE 15 – RESTRUCTURING CHARGES

In July 2004,December of 2009, we entered into four forward contracts,announced the consolidation of which three have settled, to hedge a GBP Sterling-based intercompany loan betweenoperations within our US-based subsidiary, Stericycle International L.L.C. and our subsidiaryReturns Management Services business.  This consolidation will result in the United Kingdom, Stericycle International Ltd.closure of our facilities in Boynton Beach, Florida and Conyers, Georgia.  The subsidiary borrowedoperations of those facilities will be moved to our Indianapolis, Indiana location.  We have recognized $1.6 million in expense during the funds forfourth quarter of 2009 and $0.7 million in expense during the purchasefirst quarter of White Rose.  The remaining forward contract aligns with2010 related to this restructuring.  We have an accrual balance of $0.8 million related to the anticipated repayment schedulerestructuring at March 31, 2010.  We estimate an additional $0.9 million in expense during the remainder of 2010.  We expect that our restructuring will be completed by the loanend of 2010.  We believe this restructuring will allow us to maximize the efficiency of our Returns Management Services business at a single location and expires in July 2009.  Initially, we did not elect hedge accounting on the forward contracts and had recognized the change in value of the hedges through other income

11management infrastructu re.

(expense).  This amount was generally offset by the currency adjustment to the intercompany receivable.NOTE 16 – SUBSEQUENT EVENT

On October 1, 2005, we prospectively designated these existing forward contracts as cash flow hedges and are using hedge accounting.  The objective of our cash flow hedges is to offset the foreign exchange risk to the U.S. dollar equivalent cash inflows on the settlement of the GBP denominated intercompany loan.  At March 31, 2009, the fair market value of the hedge was recorded asApril 23, 2010, an interest rate swap contract with a current asset of $2.5 million.  As of March 31, 2009, the total notional amount of hedges outstanding is GBP 8.0 million.  At March 31, 2009, the hedges were determined to be 100% effective.$75 million expired.

In October 2008, Stericycle entered into three interest rate swap contracts covering $225On April 30, 2010, we completed the required divestiture of selected assets related to the MedServe acquisition for $8.0 million of our borrowings outstanding under our senior credit facility.  The objective of the swap is to reduce the risk of volatile interest expense by fixing the rate.  The contracts are as follows:(see Note 13 – Legal Proceedings).

The Company evaluated subsequent events through the date of filing this Quarterly Report on Form 10-Q.

We entered into the interest rate swaps in order to manage the risk of interest rate changes to our interest expense.  The interest rate swaps are designated as cash flow hedges; the notional amounts and all other significant terms of the swap agreement are matched to the provisions and terms of the variable rate debt hedged.  The fair market of the three hedges is recorded as a liability of $4.1 million.  At March 31, 2009, the hedges were determined to be 100% effective.  Gains or losses on hedges are reclassified into interest expense when the effect of the hedged item is recognized in earnings.  The fair market value was determined using market data inputs to calculate expected future interest rates.  The cash streams attributable to the difference between expected future rates and the fixed rate payable is discounted to arrive at the fair value of the three hedges.

15

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We were incorporated in 1989 and presently serve a very diverse customer base of approximately 420,000465,000 customers throughout the United States, Argentina, Brazil, Canada, Chile, Ireland, Mexico, Portugal, Puerto Rico, Romania, and the United Kingdom, Canada, Mexico, Ireland, Argentina, Chile and Puerto Rico.Kingdom.  We have fully integrated networks including processing centers, and transfer and collection sites.  We use these networks to provide a broad range of services to our customers including regulated medical waste management services, and regulated return management services.  Regulated medical waste management services include servicing a variety of customers to removeregulated waste removal services, sharps management services, products and process waste while regulatedservices for infection control, and safety and compliance programs. Regulated return management services are physical services provided to companies and individual businesses that assist with the handling of products that are being removed from the supply chain due to recalls and expiration.  

12

These services also include advanced notification technology that is used to communicate specific instructions to the users of the product.  Our waste treatment technologies include autoclaving, incineration, chemical treatment, and our proprietary electro-thermal-deactivation system.  In addition, we have technology licensing agreements with companies located in Japan, Brazil, and South Africa.

Other than the adoption of SFAS No. 141 (R) Business Combinations, (see Note 11 – New Accounting Standards, for the impact on the financial statements), thereThere were no material changes in the Company’s critical accounting policies since the filing of its 20082009 Form 10-K.  As discussed in the 20082009 Form 10-K, the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported.  Actual results may differ from those estimates.

Highlights of our first quarter results for 2010 include the following:

·

revenues for the first quarter 2010 grew to $335.2 million, a 21.0% increase over $277.1 million for the first quarter 2009

·

gross margins improved to 46.3% in 2010 from 46.1% in 2009

·

operating income before acquisition-related costs and restructuring charges increased 19.8% to $89.7 million for the first quarter 2010 from $74.9 million in the first quarter 2009

·

cash flow from operations was $81.1 million

16

THREE MONTHS ENDED MARCH 31, 20092010 COMPARED TO THREE MONTHS ENDED MARCH 31, 20082009

The following summarizes the Company’s operations: