UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-QSB





[x]

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2003



[  ]

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from ______ to _______



Commission file number 0-18785

_________





STERION INCORPORATED

(Exact name of small business issuer as specified in its charter)



Minnesota

41-1391803

(State or other jurisdiction of incorporation                               (IRS Employer Identification No.)

or organization)





13828 Lincoln Street N.E., Ham Lake, Minnesota 55304(Address of principal executive offices)





(763) 755-9516(Issuers telephone number)



Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [x]  NO [  ]



At February 13, 2004, 1,738,618 shares of the issuers Common Stock were outstanding.



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STERION INCORPORATED
INDEX TO FORM 10-QSB





|PART I-FINANCIAL INFORMATION:
|-----------------------------
|                             
|Item 1.                      
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|                             
|                             
|Item 2.                      
|                             
|Item 3.                      
|                             
|PART II - OTHER INFORMATION: 
|                             
|Item 6.                      
|                             
|SIGNATURES                   
|                             





















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STERION INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                     | December 31,
2003 |  | September 30,
2003
|---------------------------------------------------- | ----------------- |  | ------------------
|                                                     | (unaudited)       |  | (audited)         
|ASSETS                                              
|CURRENT ASSETS                                       |                   |  |                   
|Cash and cash equivalents                            | $619,062          |  | $1,762,819        
|Accounts receivable, net                             | 1,447,081         |  | 994,629           
|Inventories, net                                     | 3,098,274         |  | 3,176,910         
|Deferred income taxes                                | 144,000           |  | 144,000           
|Other current assets                                 | 406,055           |  | 270,501           
|Total Current Assets                                 | 5,714,472         |  | 6,348,859         
|PROPERTY AND EQUIPMENT, NET                          | 3,744,084         |  | 1,568,847         
|OTHER ASSETS                                         |                   |  |                   
|Debt issuance costs, net                             | 172,083           |  | -                 
|Intangible assets, net                               | 1,132,077         |  | 118,105           
|Goodwill                                             | 506,439           |  | 356,439           
|Cash surrender value of life insurance, net of loans | 41,351            |  | 41,351            
|Total Other Assets                                   | 1,851,950         |  | 515,895           
|                                                     |                   |  |                   
|Total Assets                                         | $11,310,506       |  | $8,433,601        



|LIABILITIES AND STOCKHOLDERS' EQUITY                   
|-------------------------------------------------------
|CURRENT LIABILITIES                                    
|Line of credit, bank                                   
|Current portion of long-term debt                      
|Accounts payable                                       
|Accrued payroll and related taxes                      
|Deferred revenue                                       
|Other accrued expenses                                 
|Total Current Liabilities                              
|LONG-TERM LIABILITIES                                  
|Long-term debt, net of current portion                 
|Deferred income taxes                                  
|Total Liabilities                                      
|STOCKHOLDERS' EQUITY                                   
|Capital stock, $.01 par value, 20,000,000 common shares
|authorized, 5,000,000 undesignated shares authorized,  
|1,800,318 and 1,800,118 common shares issued and       
|1,738,618 and 1,738,418 outstanding                    
|Additional paid-in capital                             
|Retained earnings                                      
|Deferred compensation                                  
|Total Stockholders' Equity                             
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             



See accompanying notes to consolidated financial statements







STERION INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)



|                                                                  | For the Three Months Ended
|----------------------------------------------------------------- | --------------------------
|                                                                  | December 31,              
|                                                                  | 2003                      
|                                                                  |                           
|Sales, net                                                        | $2,383,762                
|                                                                  |                           
|Cost of goods sold                                                | 1,538,020                 
|Gross profit                                                      | 845,742                   
|                                                                  |                           
|Selling, general and administrative expenses                      | 842,892                   
|Income (loss) from operations                                     | 2,850                     
|                                                                  |                           
|Other income (expense)                                            |                           
|Interest expense                                                  | (32,910)                  
|Investment income                                                 | 4,081                     
|Total other expense                                               | (28,829)                  
|                                                                  |                           
|Loss before income taxes                                          | (25,979)                  
|                                                                  |                           
|Benefit from income taxes                                         | (9,000)                   
|Net loss                                                          | $  (16,979)               
|                                                                  |                           
|Net loss per share:                                               |                           
|Basic                                                             | $(0.01)                   
|Diluted                                                           | (0.01)                    
|Weighted average common and common equivalent shares outstanding: |                           
|Basic                                                             | 1,738,435                 
|Diluted                                                           | 1,738,435                 



See accompanying notes to consolidated financial statements.



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STERION INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                               | For the Three Months Ended
|------------------------------------------------------------------------------ | --------------------------
|                                                                               | December 31,              
|                                                                               | 2003                      
|                                                                               |                           
|Cash flows from operation activities:                                          |                           
|Net loss                                                                       | $  (16,979)               
|Adjustments to reconcile net loss to net cash flows
from operating activities: |                           
|Depreciation and amortization                                                  | 104,672                   
|Compensation related to non-employee stock options                             | 9,360                     
|Amortization of debt issuance costs                                            | 2,917                     
|Deferred income taxes                                                          | -                         
|Changes in certain assets and liabilities:                                     |                           
|Accounts  receivables, net                                                     | (156,645)                 
|Inventories, net                                                               | 131,526                   
|Other current assets                                                           | (137,154)                 
|Accounts payable                                                               | (24,969)                  
|Accrued payroll and related taxes                                              | (71,781)                  
|Deferred revenue                                                               | 13,650                    
|Other accrued expenses                                                         | (23,554)                  
|Net Cash flows from operating activities:                                      | (168,957)                 
|                                                                               |                           
|Cash flows from investing activities:                                          |                           
|Proceeds from sale of property and equipment                                   | 650                       
|Purchase of intangibles                                                        | (72,444)                  
|Acquisition of certain assets of Oxygen Business                               |                           
|of Complient Corporation                                                       | (2,700,000)               
|Purchases of property and equipment                                            | (67,673)                  
|Increase in loans on cash surrender value of life insurance                    | -                         
|Net Cash flows from investing activities                                       | (2,839,467)               
|                                                                               |                           
|Cash flows from financing activities:                                          |                           
|Net increase in line of credit, bank                                           | 901,000                   
|Proceeds from long-term debt                                                   | 1,500,000                 
|Payments on long-term debt                                                     | (537,165)                 
|Payments on capital lease obligation                                           | (1,568)                   
|Proceeds from exercise of stock warrants                                       | 2,400                     
|Net Cash flows from financing activities:                                      | 1,864,667                 
|                                                                               |                           
|Net decrease in cash and cash equivalents                                      | (1,143,757)               
|                                                                               |                           
|Cash and cash equivalents - beginning of period                                | 1,762,819                 
|Cash and cash equivalents - end of period                                      | $    619,062              
|                                                                               |                           
|Supplemental cash flow information:                                            |                           
|Cash paid for interest                                                         | $      34,753             
|Cash paid for income taxes                                                     | $                -        
|                                                                               |                           
|Noncash investing and financing activities:                                    |                           
|Stock options issued for guarantee of long-term debt                           | $   175,000               



See accompanying notes to consolidated financial statements

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STERION INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003 AND 2002



Note 1 - Basis of Financial Statement Presentation



The accompanying unaudited 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 financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been consolidated or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.



In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and results of operations. Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or of the results for any future periods.



In preparation of the Companys consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses.  Actual results could differ from the estimates used by management.



Note 2 - Significant Accounting Policies



Principles of Consolidation -The consolidated financial statements include the accounts of Sterion Incorporated and its subsidiaries, Oxboro, Inc. (formerly known as Oxboro Medical, Inc.) and its newly created subsidiary LifeSafe Services, Inc. (created November 26, 2003). All significant intercompany transactions and balances have been eliminated in consolidation.



Accounts ReceivableAccounts receivables are shown net of an allowance for doubtful accounts of approximately $85,700 and $92,300 at December 31, 2003 and September 30, 2003, respectively.



Amortization - Patents and trademarks are being amortized over their estimated useful lives using the straight-line method.



Debt Issuance Costs Debt issuance costs are amortized over the life of the loan using the straight-line method, which approximates the interest method. During the three months ended December 31, 2003, the Company issued 100,000 five-year options, vested immediately, with an exercise price of $6.00, which were valued at $175,000. These options were granted to two directors of the Company for their guarantee of the indebtedness to Citizens Independent Bank.



Income Taxes - The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, under which deferred income tax assets and liabilities are recognized for the temporary differences between the financial statement and income tax reporting bases of assets and liabilities based on currently enacted rates and laws.  These temporary differences include depreciation and related party accruals.



Research and Development - The Company expenses costs all related to product research and development as incurred.  Research and development expense was $13,526 and $16,205 for the three months ended December 31, 2003 and 2002, respectively.



Stock-Based Compensation - The Company uses the intrinsic value-based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for employee stock options and stock based compensation.  Under the intrinsic value method, compensation expense is recorded only to the extent that the market price of common stock exceeds the exercise price of the stock option on the date of grant.



In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148 as an amendment to SFAS No. 123 providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also provides required additional disclosures about the method of accounting for stock-based employee compensation. The amendments are effective for financial statements for fiscal years ending after December 31, 2002 and for interim periods beginning after December 15, 2002.  The Company adopted the annual disclosure provision of SFAS No. 148 during the year ended September 30, 2003.  The Company has currently chosen to not adopt the voluntary change to the fair value based method of accounting for stock-based employee compensation, pursuant to SFAS No. 148.



The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized with respect to stock options. Had compensation cost for the Company's stock options been determined based on fair value at the grant dates consistent with the method as defined under SFAS No. 123, the Company's net loss would have changed to the pro forma amounts indicated below:



|                            | Three Months Ended Dec. 31,
|--------------------------- | ---------------------------
|                            | Fiscal 2003                
|Net loss:                   |                            
|As reported                 | $    (16,979)              
|Pro forma                   | $    (96,479)              
|Net loss per share basic:   |                            
|As reported                 | $        (0.01)            
|Pro forma                   | $        (0.06)            
|Net loss per share diluted: |                            
|As reported                 | $        (0.01)            
|Pro forma                   | $        (0.06)            
|                            |                            
|Stock based compensation:   |                            
|As reported                 | $       9,360              
|Pro forma                   | $     79,500               



The pro forma amounts may not be representative of the effects on reported net loss for future years. The per share, weighed-average fair value of each option granted is calculated using the Black-Scholes pricing model with the following weighted-average assumptions used for grants in the following years:



|                                 | Fiscal 2003 |  | Fiscal 2002
|-------------------------------- | ----------- |  | -----------
|Risk free interest rate          | 3-4.25%     |  | 3-5%       
|Expected life of options granted | 5-10 years  |  | 5-10 years 
|Expected volatility range        | 42.4%       |  | 51.9%      
|Expected dividend yield          | 0%          |  | 0%         



Note 3  Inventories -Inventories consist of medical and operating room supplies, wound closure strips, surgical wound drainage supplies, sterilization containers and filters, first aid supplies and training materials and are valued at lower of cost using the first-in, first-out (FIFO) method or market.



Inventories consisted of the following at:



|                        | December 31,
2003 |  | September 30,
2003
|----------------------- | ----------------- |  | ------------------
|                        |                   |  |                   
|Raw materials           | $1,904,096        |  | $1,770,694        
|Work in process         | 312,078           |  | 524,213           
|Finished goods          | 922,273           |  | 893,306           
|Total                   | 3,138,447         |  | 3,188,213         
|Less: valuation reserve | (40,173)          |  | (11,303)          
|Inventories, net        | $3,098,274        |  | $3,176,910        



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Note 4 - Net Loss Per Share



The Companys basic net loss per share amounts have been computed by dividing net loss by the weighted average number of outstanding common shares. The Companys diluted net loss per share is computed by dividing net loss by the weighted average number of outstanding common shares and common share equivalents relating to stock options and warrants, when dilutive.



All options and warrants were anti-dilutive for the three months ended December 31, 2003 and 2002.



Note 5 - Income Taxes



The Company recorded a benefit from income taxes of $(9,000) and $(23,000) for the three months ended December 31, 2003 and 2002, respectively.



Note 6 - Deferred Income Taxes



The Companys deferred income tax assets and liabilities are recognized for the differences between the financial statement and income tax reporting basis of assets and liabilities based on currently enacted rates and laws.  These differences include depreciation, net operating loss carryforwards, capital loss carryforwards, allowance for accounts receivable, inventory valuation adjustments and accrued liabilities.



The Companys deferred tax asset as of December 31, 2003 and September 30, 2003 was $144,000. The deferred tax liability as of December 31, 2003 and September 30, 2003 was $44,000.



Note 7 - Intangible Assets



Intangible assets primarily consist of franchise licenses, customer lists, covenants not to compete and debt issuance costs associated with the purchase of assets of SOS International, Inc. (SOS) by LifeSafe Services, Inc. and are being amortized using the straight-line method over their estimated useful lives of 60 to 180 months (weighted average life of 10.15 years.) The amortization expense related to the assets, not including the debt issuance costs, was $8,472 and $0 for the three months ended December 31, 2003 and 2002. The estimated amortization expense for the related intangible assets for years ending September 30, 2004, 2005, 2006, 2007, and 2008 is $84,722, $101,667, $101,667, $101,667 and $101,667, respectively.



Note 8  Deferred Revenue and Service Cost Liability



With the acquisition of certain assets and liabilities of SOS and Complient Corporation (Complient), by the Companys LifeSafe Services subsidiary, the Company assumed the obligation to provide on-going service to existing customers and in the course of business enter into new service agreements or leases. Such leases are accounted for as operating leases. In addition to leasing the equipment, the Company also provides training and equipment servicing over the lease term. These service agreements or operating leases generally require payments in advance that are deferred as reported revenue and are recognized as revenue on a pro-rated basis over the term of the service agreement. In addition to lease payment advances, deferred revenue also consists of customer deposits and prepayments for services not yet rendered. Deferred revenues are recognized ratably over the term of the contracts, typically 3 to 12 months. The net amount of deferred revenue at December 31, 2003 was $819,650, $806,000 of which represented the portion recognized at the time of acquisition and $13,650 deferred during December 2003. Deferred revenue was $0 at December 31, 2002.



Note 9 - Long-term Debt



During July 2003, the Company entered into a $1,000,000 line of credit agreement with Citizens Independent Bank. The line of credit is subject to a defined borrowing base. Amounts outstanding are due on July 1, 2004 and bear interest at prime plus .5% (4.5% at December 31, 2003 and September 30, 2003). The line is secured by substantially all assets of the Company. On November 26, 2003, concurrent with the SOS purchase, the Company increased the amount of borrowings available on the line of credit agreement with Citizens Independent Bank from $1,000,000 to $1,800,000. As of December 31, 2003, outstanding borrowings were $901,000.



During July 2003 the Company obtained a term loan from Citizens Independent Bank in the amount of $500,000. On November 26, 2003, the Company paid off the term loan balance of $473,000 with Citizens Independent Bank and entered into a new five-year term loan in the amount of $1,500,000. The terms of the loan require monthly principal and interest payments of approximately $27,900 at an interest rate of prime plus 0.5% (4.5% at December 31, 2003) through November 1, 2008. The loan is secured by substantially all assets of the Company.The Company entered into this $1,500,000 loan to finance the SOS and Complient purchase described in Note 11  Acquisition and Disposition of Assets. As of December 31, 2003 the outstanding balance was $1,456,433. The Company was not in compliance with the covenants of this loan and obtained a waiver at December 31, 2003.



Note 10 - Commitments and Contingencies



Stock Repurchase Program -In September 2001, the Board of Directors authorized a stock repurchase program under which the Company is authorized to repurchase up to 175,000 shares of the Company's common stock.  As of December 31, 2003 and 2002, the Company has repurchased 55,400 shares of common stock for $398,286.



Note 11  Acquisitions and Disposition of Assets



On November 26, 2003, Sterion Incorporated (Sterion or the Company) completed the purchase through its newly-created, wholly-owned subsidiary, LifeSafe Services, Inc., a Minnesota corporation (LifeSafe), of certain assets and liabilities of SOS International, Inc. (SOS) a subsidiary of Complient Corporation (Complient).  As a result of this acquisition the Company is in the business of leasing and servicing emergency oxygen tanks.



The acquisition of assets from Complient was pursuant to an Asset Purchase Agreement with a purchase price for the net assets acquired of $2.7 million. The Company in part financed the acquisition with net proceeds from its borrowings as arranged with Citizens Independent Bank (See Note 9  Long Term Debt) plus the assumption of certain liabilities. In addition, the company acquired certain intangible assets including rights under SOSs franchise agreement and customer lists. The company assumed the obligation to service the existing customers. Such obligation is reflected as assumed liabilities in the following table. The Company has engaged an outside appraiser to confirm the value of the intangible assets. Although the report was not finished as of the date of this filing, the Company feels that there will be no significant adjustments. However, the Company does expect to make any adjustments to the values of the intangible assets, based on the independent appraisal, in the three-month period ending March 31, 2004. The consideration for the purchase was determined through arm's-length negotiations between the Company, LifeSafe, SOS and Complient.  The purchase also included the assumption by LifeSafe from Complient of a Lease dated December 21, 2000, as amended, for approximately 5,000 square foot portion of a building located in Jacksonville, Florida.



Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations requires that all business combinations after June 30, 2001 be accounted for under the purchase method of accounting. The acquisition of assets and assumed liabilities of Oxygen leasing and servicing business of Complient were accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair value as of the acquisition date. The following table is a condensed balance sheet summarizing the amounts assigned to the assets acquired and liabilities assumed:





|                       | SOS/Complient
|---------------------- | -------------
|Accounts receivable    | $   295,807  
|Inventories            | 52,890       
|Property and equipment | 2,204,414    
|Intangibles            | 950,000      
|Goodwill               | 150,000      
|Liabilities assumed    | (953,111)    
|Net purchase price     | $ 2,700,000  



SFAS No. 141 includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations. SFAS No. 142 Goodwill and Other Intangible Assets indicates that goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests. Other intangible assets with identifiable lives will continue to be amortized over their useful lives.  The Company performed the required goodwill impairment test and determined an impairment charge was not required at December 31, 2003. The estimated fair value of the reporting unit was estimated using the expected present value of future cash flows. Components of all intangible assets are as follows:





|                                              | December 31, 2003 |  |              |  | September 30, 2003 |  |             
|--------------------------------------------- | ----------------- |  | ------------ |  | ------------------ |  | ------------
|                                              | Gross Carrying    |  | Accumulated  |  | Gross Carrying     |  | Accumulated 
|                                              | Amount            |  | Amortization |  | Amount             |  | Amortization
|Intangible assets subject to amortization     |                   |  |              |  |                    |  |             
|Customer lists                                | $  350,000        |  | $   2,917    |  | $            -     |  | $         - 
|Franchise fees                                | 400,000           |  | 2,222        |  | -                  |  | -           
|Covenant not to compete                       | 200,000           |  | 3,333        |  | -                  |  | -           
|Patents and trademarks                        | 139,111           |  | -            |  | 69,767             |  | -           
|Design, layout and artwork costs              | 59,050            |  | 7,612        |  | 55,950             |  | 7,612       
|Total                                         | $1,148,161        |  | $16,084      |  | $125,717           |  | $7,612      
|Intangible assets not subject to amortization |                   |  |              |  |                    |  |             
|Goodwill                                      | $   506,439       |  | $         -  |  | $356,439           |  | $         - 





The increase in recorded goodwill of $150,000 during the months ended December 31, 2003 relates to the SOS acquisition. In addition, the increase in customer lists, franchise fees and the covenant not to compete during the three months ended December 31, 2003 relates to the SOS acquisition.



The following unaudited pro forma condensed results of operations for the three months ended December 31, 2003 and 2002, give effect to the acquisitions of the Oxygen Business of Complient as if such transactions had occurred on October 1, 2002.



The unaudited pro forma information does not purport to represent what the Companys results of operations would actually have been if such transactions in fact had occurred at such date or to project the Companys results of future operations:



|                       | For the Three Months Ended December 31,
|---------------------- | ---------------------------------------
|                       | 2003                                   
|                       |                                        
|Sales, net             | $2,898,989                             
|                       |                                        
|Income from operations | $   155,987                            
|                       |                                        
|Net income             | $    57,939                            
|                       |                                        
|Net income per share:  |                                        
|Basic                  | $0.02                                  
|Diluted                | $0.02                                  



On May 7, 2003 the Company sold certain assets, and assigned certain liabilities, relating to the Company's sterile container product line to STERIS Corporation (STERIS) for $2,900,000 in cash pursuant to an Asset Purchase Agreement dated May 7, 2003. The purchase price was subject to adjustment within 60 days of the closing for the value of net finished goods inventory. However, under the terms of the Asset Purchase Agreement no adjustment was made to the purchase price for the value of net finished goods inventory. In connection with the closing of the sale to STERIS Corporation, the Company repaid its outstanding indebtedness to Crown Bank of $1,166,263 as of May 7, 2003, representing $647,500 outstanding as of May 7, 2003 relating to the revolving line of credit and $518,763 outstanding as of May 7, 2003 relating to the promissory note.



Item 2. Managements Discussion and Analysis or Plan of Operation



Overview



Sterion Incorporated (Sterion or the Company), formerly known as Oxboro Medical, Inc. develops, manufactures, and markets medical and surgical devices. The Company changed its name to Sterion Incorporated in January 2002. The Company has broadened its product offerings, originally consisting of silicone loops, clamp covers, instrument guards, suture aid booties and identification sheet and roll tape, with the January 2002 acquisition of a line of surgical drainage and fluid containment systems from Surgidyne, Inc. and with the February 2002 acquisition of the private-label wound closure strip manufacturing business from Bellingham Medical, Inc. in. The Company acquired a product line consisting of sterilization containers from Johnson & Johnson Medical Division of Ethicon, Inc. in April 2001 and on May 6, 2003 the Company sold the majority of these assets including all product rights to STERIS Corporation (STERIS) of Mentor, OH. The Company continues to manufacture the products for STERIS under a manufacturing agreement. On November 26, 2003, Sterion completed the purchase, through its newly-created wholly-owned subsidiary LifeSafe Services, Inc (LifeSafe) of certain assets and liabilities of SOS International, Inc., a wholly owned subsidiary of Complient Corporation relating to SOSs business of buying, leasing and servicing emergency oxygen tanks.



Net sales for the Company were $2,383,762 for the three-month period ended December 31, 2003 as compared to $2,228,737 for the three-month period ended December 31, 2002. Net sales for the Sterion brand of core products were $1,351,684 and $1,287,593 for the three month periods ended December 31, 2003 and 2002, respectively. Net sales for the container products produced under the manufacturing agreement with STERIS for those same three-month periods were $704,715 and $753,954, respectively, reflecting in part the transition to a contract manufacturing arrangement following the sale of the product line to STERIS in May 2003. For the three month period ended December 31, 2003 and December 31, 2002, net sales for the Surgidyne product line were $78,236 and $88,168, respectively, and net sales for the private label line were $218,471 and $98,662, respectively. Net sales for the newly created and wholly owned subsidiary LifeSafe were $30,656 for the period ended December 2003 with actual sales commencing after the November 26, 2003 acquisition. (See Note 11  Acquisitions and Dispositions of Assets.)



Net sales as a percentage increased 7.0% overall for the three-month period ended December 31, 2003 as compared to the corresponding period ended December 31, 2002. This increase was mainly the result of significantly higher net sales of private label products and slightly higher net sales of the Companys original core products, offset by decreased net sales of the Companys Sterion Container products and the Surgidyne line for the period ended December 31, 2003 compared to the same period 2002. The small growth in net sales of the Companys original core products was due to increased volume in the Sterions Distribution marketing channel. Net sales of private label products increased 121% from the three-months ended December 31, 2002 as compared to the three-months ended December 31, 2002. New product introductions and increased sales efforts were responsible for the higher private label net sales. The 11% decrease in Surgidyne net sales for the period ended December 31, 2003 as compared to the same three month period ended 2002 were the results of the continuing erosion of the product lines original customer base. However, new product introductions scheduled for release in the second quarter, are expected to significantly increase net sales for the Surgidyne product line. Net sales in the Sterion container line were somewhat lower when comparing the three months ended December 31, 2003 and 2002. The container product line, as expected, is still transforming into a contract manufacturer for STERIS.



Gross profit for the three-month period ended December 31, 2003 was $845,742 as compared to $1,126,506 for the corresponding period in fiscal 2002.  Gross profit as a percentage of net sales for the three months ended December 31, 2003 and 2002 was 35.5% and 50.5%, respectively. The decrease in gross profit percentage for the comparative periods resulted from the continued expansion of our private label business and the conversion of our container facility into a contract manufacturer for STERIS.



Net loss for the three-month period ended December 31, 2003 was $16,979 as compared to a net loss of $43,068 in the same period of fiscal 2003. The reduction in net loss is primarily related to the Companys continuing efforts to reduce operating expenses. Operating income was $2,850 for the three-month period ended December 31, 2003 as compared to a loss of $31,403 in the three-month period ended December 31, 2002. The selling, general and administrative expenses for the period ended December 31, 2003 were $842,892 compared to $1,157,909 for the same period of 2002. The reduction of $315,017 in expenses, however, was offset by higher costs in our manufacturing process as the Company continued to expand its private label product lines, the continued conversion of the container division into a contract manufacturer and the costs associated with the start-up of a new Surgidyne product line.



Liquidity and Capital Resources





The Company has typically financed its operations through internal working capital and a bank line of credit. Financing of its building has been through a long-term mortgage. The Company believes it has adequate capital to meet its cash requirements for the next twelve months from its internal working capital and bank line of credit. As of December 31, 2003, the Company had working capital of $2,629,194 as compared to $5,198,189 at September 30, 2003, and long-term debt of $2,011,049 at December 31, 2003 compared to $1,236,933 at September 30, 2003. As of December 31, 2003, the Company had $619,062 in cash and cash equivalents as compared to $1,762,819 at September 30, 2003.  The decrease in cash and cash equivalents is a result of the purchase of certain assets from Complient Corporation (See Note 11). During the three months ended December 31, 2003, the Company paid $2,700,000 as the purchase price for the acquisition of assets, which was offset by the long-term debt agreement in the amount of $1,500,000 and line of credit borrowings in the amount of $901,000. The decrease in working capital from September 30, 2003 principally relates to the increase in current liabilities related the SOS purchases, plus a reduction in cash and cash equities related to the SOS purchase.



Critical Accounting Policies and Estimates



Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-KSB for the year ended September 30, 2003. The accounting policies used in preparing our interim 2004 consolidated financial statements are the same as those described in our Annual Report.



Our critical accounting policies and estimates are those both having the most impact to the reporting of our financial condition and results, and requiring significant judgments and estimates. Our critical accounting policies include those related to (a) revenue recognition (b) allowance for uncollectible accounts receivable (c) inventories and (d) long-lived assets.



(a) Revenue Recognition - The Companys revenues are recognized when products are shipped to unaffiliated customers.  Revenues from lease programs are recognized on a straight-line basis over the life of the lease. The Securities and Exchange Commissions Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition provides guidance on the application of accounting principles generally accepted in the United States of America to selected revenue recognition issues.  The Company has concluded that its revenue recognition policy is appropriate and in accordance with accounting principles generally accepted in the United States of America and SAB No. 104.



(b) Allowance for Uncollectible Accounts Receivable -Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future.  The estimated allowance for uncollectible amounts is based primarily on managements evaluation of the financial condition of the customer.  Future changes in the financial condition of a customer may require an adjustment to the allowance for uncollectible accounts receivable.



(c) Inventories and Related Allowance for Obsolete and Excess Inventory - Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories.  The estimated allowance is based on managements review of inventories on hand compared to estimated future usage and sales for the next twelve months. Future changes in products ordered by our customers may require an adjustment to the allowance for obsolete and excess inventory.



(d) Goodwill, Intangible and Other Long-Lived Assets -Property, equipment, and intangible assets are amortized over their useful lives.  Useful lives are based on managements estimates of the period that the assets will generate revenue. In addition, goodwill recorded at December 31, 2003 is not subject to amortization. Property and equipment, goodwill and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company believes no impairment charges need to be recorded as of December 31, 2003.



Forward-Looking Statements



This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. In addition, forward-looking statements may be made orally in the future by or on behalf of the Company.  When used in this report, the words believe, expect, will, can, estimate, anticipate and similar expressions are intended to identify such forward-looking statements.  The Company wishes to caution readers not to place undue reliance on any forward-looking statements and to recognize that the statements are not predictions of actual future results.  Actual results could differ materially from those anticipated in the forward-looking statements due to the risks and uncertainties set forth in our Annual Report for the on Form 10-KSB for the year ended September 30, 2003 under the caption Risks Related to Our Business, as well as others not now anticipated.  These risks and uncertainties include, without limitation: our ability to successfully operate and as appropriate, to integrate acquired businesss products and introduce new products; our ability to increase sales of new products; pricing strategies of competitors; the success of competitive products; general conditions in the industries served by our products, including consolidation of customers and the potential loss of those customers or their ability to demand discounted pricing on our products; the effect of government regulation of our products; continuing relationships with our third party suppliers; and overall economic conditions, including stock market fluctuation or disruption, inflation and consumer buying patterns.



Item 3. Controls and Procedures



(a) Disclosure Controls and Procedures.  The Companys Chief Executive Officer, Kenneth W. Brimmer, and Chief Financial Officer, Mark Buckrey, have evaluated the Companys disclosure controls and procedures as of the end of the period covered by this report.  Based upon that review, they have concluded that these controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.



(b) Internal Control Over Financing Reporting.There have been no significant changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



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PART II

OTHER INFORMATION







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



(a)

Exhibits:



31.1

Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.



31.2

Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.



99.1

Certification pursuant to 18 U.S.C. §1350





(b)

Reports on Form 8-K:



During the quarter covered by this report, the Company filed a Current Report on Form 8-K dated November 26, 2003 reporting under Item 2 the acquisition by the Companys wholly-owned subsidiary, LifeSafe Services, Inc., of certain assets and liabilities of SOS International, Inc. and Complient Corporation and filing under Item 7 certain exhibits relating to this transaction.



During the quarter covered by this report, the Company also furnished a Current Report on Form 8-K dated December 17, 2003 reporting, under Item 12, the disclosure of information regarding its results of operations for its quarter ended September 30, 2003 and attaching as an exhibit a press release regarding its results of operations for that period under Item 7.



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SIGNATURES



In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        | STERION INCORPORATED                                                                                    
|----------------------- | --------------------------------------------------------------------------------------------------------
|Date: February 13, 2004 | By: /s/ Kenneth W. Brimmer

Kenneth W. Brimmer, Chief Executive Officer
(Principal Executive Officer)   
|Date: February 13, 2004 | By: /s/ Mark Buckrey

Mark Buckrey, Chief Financial Officer
(Principal Financial and Accounting Officer)