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 March 31, 2004



[  ]

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 May 7, 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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|                             
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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

|                                                        | March 31,
2004 |  | September 30,
2003
|------------------------------------------------------- | -------------- |  | ------------------
|                                                        | (unaudited)    |  | (audited)         
|ASSETS                                                 
|CURRENT ASSETS                                          |                |  |                   
|Cash and cash equivalents                               | $   807,360    |  | $1,762,819        
|Accounts receivable, net                                | 1,775,484      |  | 994,629           
|Inventories, net                                        | 3,231,430      |  | 3,176,910         
|Deferred income taxes                                   | 144,000        |  | 144,000           
|Other current assets                                    | 404,809        |  | 270,501           
|Total Current Assets                                    | 6,363,083      |  | 6,348,859         
|PROPERTY AND EQUIPMENT, NET                             | 3,709,951      |  | 1,568,847         
|OTHER ASSETS                                            |                |  |                   
|Intangible assets, net                                  | 1,227,064      |  | 118,105           
|Goodwill                                                | 429,455        |  | 356,439           
|Cash surrender value of life insurance, net of loans    | 12,865         |  | 41,351            
|Total Other Assets                                      | 1,669,384      |  | 515,895           
|                                                        |                |  |                   
|Total Assets                                            | $11,742,418    |  | $8,433,601        
|                                                       
|LIABILITIES AND STOCKHOLDERS' EQUITY                   
|CURRENT LIABILITIES                                     |                |  |                   
|Line of credit, bank                                    | $1,259,608     |  | $             -   
|Current portion of long-term debt                       | 309,555        |  | 116,820           
|Accounts payable                                        | 737,256        |  | 731,300           
|Accrued payroll and related taxes                       | 288,747        |  | 244,892           
|Deferred revenue and service cost liability             | 486,756        |  | -                 
|Other accrued expenses                                  | 485,603        |  | 57,658            
|Total Current Liabilities                               | 3,567,525      |  | 1,150,670         
|LONG-TERM LIABILITIES                                   |                |  |                   
|Long-term debt, net of current portion                  | 1,936,395      |  | 1,236,933         
|Deferred income taxes                                   | 44,000         |  | 44,000            
|Total Liabilities                                       | 5,547,920      |  | 2,431,603         
|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                     | 17,386         |  | 17,384            
|Additional paid-in capital                              | 3,482,923      |  | 3,144,494         
|Retained earnings                                       | 2,899,424      |  | 2,914,997         
|Deferred compensation                                   | (205,235)      |  | (74,877)          
|Total Stockholders' Equity                              | 6,194,498      |  | 6,001,998         
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY              | $11,742,418    |  | $8,433,601        





See accompanying notes to consolidated financial statements.

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STERION INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)



|                                                                  | For the Three Months Ended |  | For the Six Months Ended
|----------------------------------------------------------------- | -------------------------- |  | ------------------------
|                                                                  | March 31,                  |  | March 31,               
|                                                                  | 2004                       |  | 2003                    
|                                                                  |                            |  |                         
|Sales, net                                                        | $2,520,191                 |  | $2,467,885              
|                                                                  |                            |  |                         
|Cost of goods sold                                                | 1,412,388                  |  | 1,377,717               
|Gross profit                                                      | 1,107,803                  |  | 1,090,168               
|                                                                  |                            |  |                         
|Selling, general and administrative expenses                      | 1,058,717                  |  | 1,010,828               
|Income from operations                                            | 49,086                     |  | 79,340                  
|                                                                  |                            |  |                         
|Other income (expense)                                            |                            |  |                         
|Interest expense                                                  | (49,299)                   |  | (34,245)                
|Other income                                                      | 1,619                      |  | 42                      
|Total other income (expense)                                      | (47,680)                   |  | (34,203)                
|                                                                  |                            |  |                         
|Income (loss) before income taxes                                 | 1,406                      |  | 45,137                  
|                                                                  |                            |  |                         
|Provision for (benefit from) income taxes                         | -                          |  | 16,000                  
|Net income  (loss)                                                | 1,406                      |  | 29,137                  
|                                                                  |                            |  |                         
|                                                                  |                            |  |                         
|Net income (loss) per share:                                      |                            |  |                         
|Basic                                                             | $.00                       |  | $.02                    
|Diluted                                                           | $.00                       |  | $.02                    
|Weighted average common and common equivalent shares outstanding: |                            |  |                         
|Basic                                                             | 1,738,618                  |  | 1,729,537               
|Diluted                                                           | 1,879,806                  |  | 1,786,849               



See accompanying notes to consolidated financial statements.

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STERION INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                           | For the Six Months Ended
March 31,                  
|-------------------------------------------------------------------------- | ----------------------------------------------------
|                                                                           | 2004                                                
|                                                                           |                                                     
|Cash flows from operating activities:                                      |                                                     
|Net loss                                                                   | $  (15,573)                                         
|Adjustments to reconcile net loss to cash flows
from operating activities: |                                                     
|Depreciation and amortization                                              | 270,682                                             
|Compensation related to non-employee stock options                         | 32,273                                              
|Amortization of debt issuance costs                                        | 11,667                                              
|Deferred income taxes                                                      | -                                                   
|Changes in operating assets and liabilities:                               |                                                     
|Accounts receivables, net                                                  | (408,064)                                           
|Inventories, net                                                           | (1,630)                                             
|Other current assets                                                       | (135,907)                                           
|Accounts payable                                                           | (22,701)                                            
|Accrued payroll and related taxes                                          | (1,144)                                             
|Deferred revenue and service cost liability                                | 63,090                                              
|Accrued income taxes                                                       | -                                                   
|Other accrued expenses                                                     | (24,711)                                            
|Net cash flows from operating activities                                   | (232,018)                                           
|                                                                           |                                                     
|Cash flows from investing activities:                                      |                                                     
|Proceeds from sale of property and equipment                               | 650                                                 
|Purchase of intangibles                                                    | (33,819)                                            
|Acquisition of certain assets of Oxygen Business                           |                                                     
|of Complient Corporation, net of liabilities assumed                       | (2,700,000)                                         
|Purchases of property and equipment                                        | (169,828)                                           
|Prepaid interest and cash value of life insurance                          | 28,486                                              
|Net cash flows from investing activities                                   | (2,874,511)                                         
|                                                                           |                                                     
|Cash flows from financing activities:                                      |                                                     
|Net increase in line of credit, bank                                       | 1,259,608                                           
|Proceeds from long-term debt                                               | 1,500,000                                           
|Payments on long-term debt                                                 | (607,803)                                           
|Payments on capital lease obligation                                       | (3,135)                                             
|Proceeds from exercise of stock warrants                                   | 2,400                                               
|Net cash flows provided by financing activities                            | 2,151,070                                           
|                                                                           |                                                     
|Decrease in cash and cash equivalents                                      | (955,459)                                           
|                                                                           |                                                     
|Cash and cash equivalents, beginning of period                             | 1,762,819                                           
|                                                                           |                                                     
|Cash and cash equivalents, end of period                                   | $  807,360                                          
|                                                                           |                                                     
|                                                                           | Non-cash financing activities:                      
|                                                                           | Stock options issued for guarantee of long term debt
|                                                                           |                                                     



See accompanying notes to consolidated financial statements

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STERION INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004 and 2003



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 $118,200 and $92,300 at March 31, 2004 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 six months ended March 31, 2004, the Company issued two five-year options to purchase 100,000 shares of its common stock, vested immediately, with an exercise price of $6.00, which were valued at $175,000 as debt issuance costs. These options were granted to two directors of the Company for their guarantee of the Companys indebtedness to Citizens Independent Bank. Amortization expense for the three and six months ended March 31, 2004 was $8,750 and $11,667, respectively. Future estimated amortization expense for debt issuance costs are $29,167, $35,000, $35,000, $35,000 and $35,000 for the years ending September 30, 2004, 2005, 2006, 2007 and 2008.



Income taxes - The Company has adopted Statement of Financial Accounting Standards 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 all costs related to product research and development as incurred.  Research and development expense was $15,281 and $6,210 for the three months ended March 31, 2004 and 2003, respectively, and  $28,807 and $22,415 for the six months ended March 31, 2004 and 2003.



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.

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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 income (loss) would have changed to the pro forma amounts indicated below:



|                                            |  | Three Months Ended
March 31, |  | Six Months Ended
March 31, | 
|------------------------------------------- |  | ---------------------------- |  | -------------------------- | 
|                                            |  | 2004                         |  | 2003                       | 
|Net income (loss):                          |  |                              |  |                            | 
|As reported                                 |  | $1,406                       |  | $29,137                    | 
|Pro forma                                   |  | (14,427)                     |  | 18,450                     | 
|Basic net income (loss) per common share:   |  |                              |  |                            | 
|As reported                                 |  | .00                          |  | .02                        | 
|Pro forma                                   |  | (.01)                        |  | .01                        | 
|Diluted net income (loss) per common share: |  |                              |  |                            | 
|As reported                                 |  | .00                          |  | .02                        | 
|Pro forma                                   |  | (.01)                        |  | .01                        | 
|Stock based compensation:                   |  |                              |  |                            | 
|As reported                                 |  | $22,913                      |  | $         0                | 
|Pro forma                                   |  | 15,833                       |  | 10,687                     | 
|                                            |  |                              |  |                            | 



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:





|                                 |  | Three Months Ended
March 31, |  | Six Months Ended
March 31, | 
|-------------------------------- |  | ---------------------------- |  | -------------------------- | 
|                                 |  | 2004                         |  | 2003                       | 
|                                 |  |                              |  |                            | 
|Risk-free interest rate          |  | 5.00%                        |  | 3.25%                      | 
|Expected life of options granted |  | 3-5 years                    |  | N/A                        | 
|Expected volatility              |  | 50.0%                        |  | 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 the lower of cost, using the first in, first out (FIFO) method, or market.

|                           | March 31, 2004 |  | September 30, 2003
|-------------------------- | -------------- |  | ------------------
|Inventories consisting of: |                |  |                   
|Raw materials              | $1,658,740     |  | $1,759,391        
|Work in process            | 471,729        |  | 524,213           
|Finished Goods             | 1,100,961      |  | 893,306           
|Total inventories          | $3,231,430     |  | $3,176,910        



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Note 4 - Net Income (Loss) Per Share



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



For the three months ended March 31, 2004 and 2003, there were outstanding options to purchase 141,188 and 57,312 shares of common stock, respectively, all of which were included as common share equivalents in the computation of diluted net income (loss) per share.  For the six months ended March 31, 2004, there were outstanding options and warrants to purchase 250,000 shares of common stock with a weighted average exercise price of $6.51, none of which were included in the computation of diluted net income (loss) per share for the six months ended because the respective exercise prices were greater than the average market price of the Companys common stock during the period.



Note 5 - Income Taxes



The Company recorded a provision for (benefit from) income taxes of $0 and $16,000 for the three months ended March 31, 2004 and 2003, and $(9,000) and $(7,000) for the six months ended March 31, 2004 and 2003, 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 March 31, 2004 and September 30, 2003 was $144,000. The deferred tax liability as of March 31, 2004 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 certain assets of SOS International, Inc. (SOS) and Complient Corporation (Complient) by LifeSafe Services, Inc., the Companys wholly-owned subsidiary (LifeSafe Services). Intangible assets 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 $25,417 and $0 for the three months ended March 31, 2004 and 2003, respectively, and $33,889 and $0 for the six months ended March 31, 2004 and 2003, respectively. The future 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.  See Note 11 - Acquisition and Disposition of Assets regarding the valuation of these intangible assets.



Note 8 - Deferred Revenue and Service Cost Liability



With the acquisition as of November 26, 2003 of certain assets from, and the assumption of certain liabilities of, SOS and Complient by LifeSafe Services, LifeSafe assumed the obligation to provide on-going service to existing customers and, in the course of business, will enter into new service agreements or leases. Such leases are accounted for by the Company 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 March 31, 2004 was $59,114, which included $486,756 in revenue deferred for the six months ended March 31, 2004, representing the net amount of service contract revenue received since the acquisition that will be realized in future periods, and $427,642 in deferred expenses which represented the remainder of $806,000 associated with servicing the acquired accounts, which was reflected in the total purchase consideration at the time of acquisition by LifeSafe. Net deferred revenue for the three months ended March 31, 2004 was $359,448. The Company had no deferred revenue at March 31, 2003.

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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 March 31, 2004 and September 30, 2003). The line is collateralized by substantially all assets of the Company. On November 26, 2003, concurrent with the asset acquisition by LifeSafe Services, the Company and Citizens Independent Bank entered into an amendment to the line of credit agreement to increase the amount of borrowings available on the line of credit agreement from $1,000,000 to $1,800,000. As of March 31, 2004, outstanding borrowings under the line of credit agreement were $1,259,608.



During July 2003, the Company also 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 March 31, 2004) through November 1, 2008. The loan is collateralized 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 March 31, 2004, the outstanding balance was $1,388,939. The Company was not in compliance as of March 31, 2004 on two loan covenants relating to working capital and tangible net worth and obtained a waiver for the three-month period ended March 31, 2004 on May 10, 2004.



The Companys indebtedness to Citizens Independent Bank under the line of credit agreement and the term loan is guaranteed by Mr. Kenneth W. Brimmer, the Companys Chief Executive Officer and a director and Mr. Gary C. Copperud, a director of the Company.



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 March 31, 2004 and 2003, the Company has repurchased 55,400 shares of common stock for $398,286. No shares were repurchased during the three and six months ended March 31, 2004.



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 SOS and 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 required based upon the appraisal. However, if any adjustments to the values of the intangible assets are required based upon the independent appraisal, the Company expects to make such adjustments in the three-month period ending June 30, 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    | $   372,791  
|Inventories            | 52,890       
|Property and equipment | 2,204,414    
|Intangibles            | 950,000      
|Goodwill               | 73,016       
|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 March 31, 2004. 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:





|                                              | March 31, 2004 |  |              |  | September 30, 2003 |  |             
|--------------------------------------------- | -------------- |  | ------------ |  | ------------------ |  | ------------
|                                              | Gross Carrying |  | Accumulated  |  | Gross Carrying     |  | Accumulated 
|                                              | Amount         |  | Amortization |  | Amount             |  | Amortization
|Intangible assets subject to amortization     |                |  |              |  |                    |  |             
|Customer lists                                | $  350,000     |  | $   11,668   |  | $            -     |  | $         - 
|Franchise fees                                | 400,000        |  | 8,888        |  | -                  |  | -           
|Covenant not to compete                       | 200,000        |  | 13,332       |  | -                  |  | -           
|Debt Issuance Costs                           | 175,000        |  | 11,667       |  |                    |  |             
|Patents and trademarks                        | 75,243         |  | -            |  | 69,767             |  | -           
|Design, layout and artwork costs              | 76,680         |  | 4,304        |  | 48,338             |  | -           
|Total                                         | $1,276,923     |  | $49,859      |  | $118,105           |  | -           
|Intangible assets not subject to amortization |                |  |              |  |                    |  |             
|Goodwill                                      | $   429,455    |  | $         -  |  | $356,439           |  | $         - 





The increase in goodwill amounts of $73,016 during the three and six months ended March 31, 2004 relates to an adjustment of assets acquired from the SOS acquisition. In addition, the increases in customer lists, franchise fees, the covenant not to compete amounts and the debt issuance costs during the six months ended March 31, 2004 relate to the SOS acquisition.



The following unaudited pro forma condensed results of operations for the three and six months ended March 31, 2004 and 2003, 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:

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|                       | For the Three Months Ended March 31, |  | For the Six Months Ended March 31,
|---------------------- | ------------------------------------ |  | ----------------------------------
|                       | 2004                                 |  | 2003                              
|                       |                                      |  |                                   
|Sales, net             | 2,520,191                            |  | 3,093,467                         
|                       |                                      |  |                                   
|Income from operations | 49,086                               |  | 284,444                           
|                       |                                      |  |                                   
|Net income             | 1,406                                |  | 234,241                           
|                       |                                      |  |                                   
|Net income per share:  |                                      |  |                                   
|Basic                  | $.00                                 |  | $0.14                             
|Diluted                | $.00                                 |  | $0.13                             
|                       |                                      |  |                                   
|Shares outstanding     |                                      |  |                                   
|Basic                  | 1,738,618                            |  | 1,729,537                         
|Diluted                | 1,879,806                            |  | 1,786,849                         



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 subsidiary of Complient Corporation relating to SOSs business of buying, leasing and servicing emergency oxygen tanks.



Net sales for the Company for the six-month period ended March 31, 2004 were $4,903,953 as compared to $4,696,622 for the six-month period ended March 31, 2003. For the three-month period ended March 31, 2004, net sales were $2,520,191 as compared to $2,467,885 for the three-month period ended March 31, 2003. Net sales for the Sterion brand of core products were $2,700,986 and $2,633,718 for the six-month period ended March 31, 2004 and 2003, respectively, and $1,349,302 and $1,345,768 for the three-month period ended March 31, 2004 and 2003, respectively. Net sales for the container products produced under the manufacturing agreement with STERIS were $1,197,415 and $1,560,370 for the six-month period ended March 31, 2004 and 2003, respectively, and $492,702 and $806,416 for the three-month period ended March 31, 2004 and 2003, respectively. For the six-month period ended March 31, 2004 and March 31, 2003, net sales for the Surgidyne product line were $167,096 and $180,975, respectively, and net sales for the private label line were $492,259 and $321,559, respectively. For the three-month period ended March 31, 2004 and 2003, net sales for the Surgidyne product line were $88,861 and $92,807 respectively, and net sales for the private label line were $273,789 and $222,894, respectively. Net sales for the Companys newly created and wholly owned subsidiary, LifeSafe, were $346,197 for the six-month period and $315,537 for the three-month period ended March 31, 2004. (See Note 11 - Acquisitions and Dispositions of Assets.)

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Net sales increased 4.4% overall for the six-month period ended March 31, 2004 as compared to the corresponding period ended March 31, 2003. This increase was mainly the result of the Companys newly created subsidiary LifeSafe contributing $346,194, or 7.1%, in net sales for the period. In addition, slightly higher net sales of the Companys original core products and a 53% increase in net sales of private label products offset the decrease in net sales for the Companys container products and the Surgidyne Line for the six months ended March 31, 2004 compared to the same period ended March 31, 2003. LifeSafes net sales and deferred revenue will continue to grow as the product line cycles through it first fiscal year. The Company believes additional net sales in the LifeSafe product line will come from expanded training programs and new service contracts. The small growth in the Companys original core products was due to increased volume in the Sterion Distribution Marketing Channel. The Company expects this growth to continue for the balance of fiscal 2004. Net sales of the private label product line increased $170,702, or 53%, from the six-month period ended March 31, 2004, as new product introductions and increased sales efforts started taking effect. Net sales in the container line for the six-month period ended March 31, 2004 declined $362,955, or 39%, compared to the same period in 2003, as expected, because of the transition from manufacturing and selling the products through the Companys regular sales marketing channels to manufacturing them exclusively for STERIS.  The $13,879, or 8%, decrease in the Surgidyne Line net sales for the six-month period ended March 31, 2004 as compared to the same period ended March 31, 2003 were the results of declining sales volume with the continuing erosion of the product lines original customer base. However, new product introductions scheduled for release in the third quarter are expected to significantly increase net sales for the Surgidyne product line.



Gross profit for the six-month period ended March 31, 2004 was $1,953,545 as compared to $2,216,674 for the corresponding period in fiscal 2003. For the three-month period ended March 31, 2004, gross profits were $1,107,803 as compared to $1,090,168 for the corresponding period in fiscal 2003. Gross profit as a percent of net sales for the first six months of fiscal 2004 and 2003 was 39.8% and 47.2%, respectively. Gross profit as a percent of net sales for the three months ended March 31, 2004 and 2003 was 44.0% and 44.2% respectively. The decrease in gross profit for the comparative six-month period ended March 31, 2004 and 2003 resulted from the expected lower margins in the container product line and the lower gross profit percentage associated with the Companys private label products. The Company expects to improve margins in the private label product line by installing a piece of capital equipment in May 2004 that will lower the cost of manufacturing the products. The gross profit percentages for the comparable three-month period ended March 31, 2004 and 2003 were relatively flat as the gross profit percentage increase attributed to LifeSafe helped to offset the decline of the gross profit percentage in container and private label product lines.



Net loss for the first six months of fiscal year 2004 was $15,573 as compared to a net loss of $13,931 in the same period of fiscal 2003. For the three-month period ended March 31, 2004, net income was $1,406 as compared to $29,137 for the corresponding period in fiscal 2003. In February 2004, the Company reviewed its selling, general and administrative expenses and made some adjustments which helped decrease the expenses from $2,168,737 for the six-month period ended March 31, 2003 to $1,901,609 for the six-month period ended March 31, 2004. This decrease in SG&A expenses during the six-month period ended March 31, 2004 helped offset the decrease in net income in the comparative years. A slight increase of $3,999 in operating income for the six-month period ended March 31, 2004 compared to the same period of 2003 is primarily related to the increase in sales from the LifeSafe product line for four full months.



Liquidity and Capital Resources



The Company has typically financed its operations through internal working capital, a bank line of credit and a five-year term loan. 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 March 31, 2004, the Company had working capital of $2,795,558 as compared to $5,198,189 at September 30, 2003, and long-term debt of $1,936,395 at March 31, 2004 compared to $1,236,933 at September 30, 2003. As of March 31, 2004, the Company had $807,360 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 six months ended March 31, 2004, the Company paid $2,700,000 as the purchase price for the acquisition of assets from SOS and Complient, which was offset by the five-year term loan in the amount of $1,500,000 and line of credit borrowings in the amount of $1,259,608. The decrease in working capital from September 30, 2003 to March 31, 2004 principally relates to the increase in current liabilities related the SOS purchases, plus a reduction in cash and cash equivalents related to the SOS purchase. The Company purchased a new piece of equipment in April 2004 for approximately $130,000, which will be funded from cash.



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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 financial information contained on Form 10-QSB are the same as those described in our Annual Report.  Refer to the Annual Report for detailed information on accounting policies.



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) long-lived assets, and (d) inventories.



(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) 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 March 31, 2004 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 March 31, 2004, but future changes in circumstances may cause an impairment charge to be recorded, which could be significant.



(d) 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.





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 2003 Annual Report on Form 10-KSB 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 integrate newly acquired products and introduce 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, changes in management of the Company, maintenance of operating capital and bank financing, the effect of government regulation of our products, continuing relationships with our third party suppliers, and overall economic conditions, including stock market fluctuation, inflation and consumer buying patterns.

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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 Financial 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.



32

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



(b)

Reports on Form 8-K:



During the quarter covered by this report, the Company filed an Amendment No. 1 on Form 8-K/A to Current Report on Form 8-K dated November 26, 2003 to include financial statements and pro forma financial information required by Item 7 of Form 8-K relating to the purchase by LifeSafe Services, Inc. of substantially all of the assets and certain liabilities of SOS International, Inc. and certain assets of Complient Corporation on November 26, 2003.



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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: May 13, 2004 | By: /s/ Kenneth W. Brimmer

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

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