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, 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 May 14, 2003, 1,729,537 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.   Consolidated Financial Statements (unaudited)



Consolidated Balance Sheets at March 31, 2003 (unaudited) and

September 30, 2002  (audited)



Consolidated Statements of Operations and Comprehensive Income (Loss) for

the Three Months and Six Months Ended March 31, 2003 and 2002 (unaudited)



Consolidated Statements of Cash Flows for the Six Months Ended March 31,

2003 and 2002 (unaudited)



Notes to Consolidated Financial Statements (unaudited)



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



Item 3.   Controls and Procedures



PART IIOTHER INFORMATION:



Item 5.   Other Information



Item 6.   Exhibits and Reports on Form 8-K



SIGNATURES



CERTIFICATIONS





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STERION INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                  | March 31,
2003 |  | September 30,
2002
|------------------------------------------------- | -------------- |  | ------------------
|                                                  | (unaudited)    |  | (audited)         
|ASSETS                                           
|Current Assets:                                   |                |  |                   
|Cash and cash equivalents                         | $  277,509     |  | $  591,263        
|Accounts receivables, net                         | 1,599,448      |  | 1,395,262         
|Inventories, net                                  | 3,504,485      |  | 3,147,076         
|Deferred income taxes                             | 211,000        |  | 204,000           
|Other current assets                              | 332,943        |  | 180,783           
|Total current assets                              | 5,925,385      |  | 5,518,384         
|                                                  |                |  |                   
|Property and equipment, net                       | 2,137,033      |  | 2,212,602         
|                                                  |                |  |                   
|Other assets:                                     |                |  |                   
|Goodwill                                          | 356,439        |  | 331,802           
|Intangible assets, net                            | 994,684        |  | 1,039,466         
|Cash surrender value of officers life insurance, |                |  |                   
|net of loans                                      | 23,513         |  | 20,064            
|Total other assets                                | 1,374,636      |  | 1,391,332         
|                                                  |                |  |                   
|Total assets                                      | $9,437,054     |  | $9,122,318        
|                                                  |                |  |                   
|LIABILITIES AND STOCKHOLDERS EQUITY             
|Current liabilities:                              |                |  |                   
|Line of credit, bank                              | $  600,000     |  | $  300,000        
|Current portion of long-term debt                 | 353,880        |  | 345,281           
|Current portion of capital lease obligation       | 5,365          |  | 5,365             
|Accounts payable                                  | 949,417        |  | 728,230           
|Accrued payroll and related taxes                 | 249,312        |  | 238,412           
|Accrued income taxes                              | 27,253         |  | 27,753            
|Other accrued expenses                            | 92,898         |  | 162,515           
|Total current liabilities                         | 2,278,125      |  | 1,807,556         
|                                                  |                |  |                   
|Long-term debt, net of current portion            | 1,161,390      |  | 1,341,389         
|Capital lease obligation, net of current portion  | 1,546          |  | 4,681             
|Deferred income taxes                             | 65,000         |  | 65,000            
|Total liabilities                                 | 3,506,061      |  | 3,218,626         
|                                                  |                |  |                   
|Stockholders equity:                             |                |  |                   
|Common stock, $0.01 par value                     | 17,295         |  | 17,295            
|Additional paid-in capital                        | 3,109,059      |  | 3,109,059         
|Deferred Compensation                             | (74,877)       |  | (116,109)         
|Retained Earnings                                 | 2,879,516      |  | 2,893,447         
|Total stockholders' equity                        | 5,930,993      |  | 5,903,692         
|                                                  |                |  |                   
|Total liabilities and stockholders equity        | $9,437,054     |  | $9,122,318        
|                                                  |                |  |                   



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,               
|                                              | 2003                       |  | 2002                    
|                                              |                            |  |                         
|Sales, net                                    | $2,467,885                 |  | $2,539,648              
|                                              |                            |  |                         
|Cost of goods sold                            | 1,377,717                  |  | 1,205,483               
|Gross profit                                  | 1,090,168                  |  | 1,334,165               
|                                              |                            |  |                         
|Selling, general and                          |                            |  |                         
|administrative expenses                       | 1,010,828                  |  | 1,149,936               
|Income (loss) from operations                 | 79,340                     |  | 184,229                 
|                                              |                            |  |                         
|Other income (expense)                        |                            |  |                         
|Interest expense                              | (34,245)                   |  | (32,311)                
|Other income                                  | 42                         |  | 4,450                   
|Gain on sale of available-for-sale securities | 0                          |  | 0                       
|Total other income (expense)                  | (34,203)                   |  | (27,861)                
|                                              |                            |  |                         
|Income (loss) before income taxes             | 45,137                     |  | 156,368                 
|                                              |                            |  |                         
|Provision for (benefit from) income taxes     | 16,000                     |  | 48,475                  
|Net income  (loss)                            | 29,137                     |  | 107,893                 
|                                              |                            |  |                         
|Other comprehensive loss                      | 0                          |  | 0                       
|                                              |                            |  |                         
|Comprehensive income (loss)                   | $29,137                    |  | $107,893                
|                                              |                            |  |                         
|Net income per share:                         |                            |  |                         
|Basic                                         | $.02                       |  | $.06                    
|Diluted                                       | .02                        |  | .05                     
|                                              |                            |  |                         
|Weighted average common and common            |                            |  |                         
|equivalent shares outstanding:                |                            |  |                         
|Basic                                         | 1,729,537                  |  | 1,764,932               
|Diluted                                       | 1,786,849                  |  | 2,050,178               
|                                              |                            |  |                         



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,               
|                                                      | 2003                    
|                                                      |                         
|Cash flows from operation activities:                 |                         
|Net income (loss)                                     | $  (13,931)             
|Adjustments to reconcile net income (loss)            |                         
|to cash flows from operating activities:              |                         
|Depreciation and amortization                         | 318,263                 
|Gain on sale of available securities                  | 0                       
|Provision for (benefit from) deferred taxes           | (7,000)                 
|Compensation related to non-employee stock options    | 41,232                  
|Compensation related to stock options                 |                         
|issued below fair market value                        | 0                       
|Changes in operating assets and liabilities:          |                         
|Accounts  receivables, net                            | (204,186)               
|Inventories, net                                      | (368,778)               
|Income taxes receivable                               | 0                       
|Other current assets                                  | (152,160)               
|Accounts payable                                      | 221,187                 
|Accrued payroll and related taxes                     | 10,900                  
|Accrued income taxes                                  | (500)                   
|Other accrued expenses                                | (82,886)                
|Cash flows from operating activities                  | (237,859)               
|                                                      |                         
|Cash flows from investing activities:                 |                         
|Purchases of property and equipment                   | (143,587)               
|Purchase of Intangibles                               | (54,325)                
|Purchase of Surgidyne                                 | 0                       
|Purchase of Bellingham                                | 0                       
|Proceeds from sale of available-for-sale securities   | 0                       
|Change in other assets                                | (3,449)                 
|Cash flows from investing activities                  | (201,361)               
|                                                      |                         
|Cash flows from financing activities:                 |                         
|Net increase in line of credit, bank                  | 300,000                 
|Payments on long-term debt                            | (174,534)               
|Proceeds from rights and warrants exercised and stock |                         
|options exercised                                     | 0                       
|Repurchase of common shares                           | 0                       
|Cash flows from financing activities                  | 125,466                 
|Decrease in cash and cash equivalents                 | (313,754)               
|                                                      |                         
|Cash and cash equivalents, beginning of period        | 591,263                 
|                                                      |                         
|Cash and cash equivalents, end of period              | $  277,509              
|                                                      |                         



|Non-cash financing activities:                               |    |  |        
|------------------------------------------------------------ | -- |  | -------
|Stock options issued below fair market value                 | $0 |  | $22,000
|                                                             |    |  |        
|Deferred consulting services related to stock options issued |    |  |        
|to non-employee                                              | $0 |  | $27,066
|                                                             |    |  |        

See accompanying notes to consolidated financial statements

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STERION INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 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



Stock-Based Compensation-In accordance with Accounting Principles Board (APB) Opinion No. 25 and related interpretations, the Company uses the intrinsic value-based method for measuring stock-based compensation cost which measures compensation cost as the excess, if any, of quoted market price of the Companys common stock at the grant date over the amount the employee must pay for the stock.  The Companys general policy is to grant stock options at fair value at the date of grant.



Had compensation cost been recognized based on the fair values of options at the grant dates consistent with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation, the Companys net income (loss) and basic and diluted net income (loss) per common share would have been changed to the following pro forma amounts:



|                                            | Three Months Ended |  | Six Months Ended
|------------------------------------------- | ------------------ |  | ----------------
|                                            | March 31,          |  | March 31,       
|                                            | 2003               |  | 2002            
|Net income (loss):                          |                    |  |                 
|As reported                                 | $29,137            |  | $107,893        
|Pro forma                                   | 18,450             |  | 24,803          
|Basic net income (loss) per common share:   |                    |  |                 
|As reported                                 | .03                |  | .06             
|Pro forma                                   | .01                |  | .01             
|Diluted net income (loss) per common share: |                    |  |                 
|As reported                                 | .03                |  | .05             
|Pro forma                                   | .01                |  | .01             
|Stock based compensation:                   |                    |  |                 
|As reported                                 | 0                  |  | 0               
|Pro forma                                   | 10,687             |  | 83,090          
|                                            |                    |  |                 
|                                            |                    |  |                 



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In determining the compensation cost of options granted during the three and six months ended March 31, 2003 and 2002, as specified by SFAS No. 123, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model and the weighted average assumptions used in these calculations are summarized as follows:



|                                 | Three Months Ended |  | Six Months Ended
|-------------------------------- | ------------------ |  | ----------------
|                                 | March 31,          |  | March 31,       
|                                 | 2003               |  | 2002            
|                                 |                    |  |                 
|Risk-free interest rate          | 3.25%              |  | 4.0%            
|Expected life of options granted | N/A                |  | 5 years         
|Expected volatility              | 51.9%              |  | 51.9%           
|Expected dividend yield          | 0%                 |  | 0%              
|                                 |                    |  |                 





Principles of consolidation -The consolidated financial statements include the accounts of Sterion Incorporated and its subsidiaries, Oxboro, Inc. and Sterion, Inc. (beginning effective May 24, 2001). Effective May 17, 2002, Sterion, Inc. was merged with and into Sterion Incorporated. All significant intercompany transactions and balances have been eliminated in consolidation.



Accounts receivable-Accounts receivable are shown net of an allowance for doubtful accounts of $80,500 and $52,500 at March 31, 2003 and September 30, 2002, respectively.



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



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 $6,210 and $28,074 for the three months ended March 31, 2003 and 2002, respectively, and  $22,415 and $44,950 for the six months ended March 31, 2003 and 2002.



Note 3 - Inventories



|                        | March 31,  |  | September 30,
|----------------------- | ---------- |  | -------------
|                        | 2003       |  | 2002         
|Inventories consist of: |            |  |              
|Raw materials           | $1,715,681 |  | $1,318,737   
|Work in process         | 550,427    |  | 653,778      
|Finished Goods          | 1,402,613  |  | 1,230,464    
|Total                   | 3,668,721  |  | 3,202,979    
|Less: valuation reserve | (164,236)  |  | (55,903)     
|Inventories, net        | 3,504,485  |  | $3,147,076   
|                        |            |  |              



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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, 2003 and 2002, 142,000 and 312,859 shares of common stock equivalents were included in the computation of diluted net income (loss) per share. For the six months ended March 31, 2003 and 2002, 0 and 340,823 shares of common stock equivalents were included in the computation of diluted net income per share.



Options to purchase 202,400 shares of common stock with a weighted average exercise price of $6.44 were outstanding at March 31, 2003, but were excluded from the computation of common share equivalents for the three months ended because their exercise prices were greater than the average market price of the common shares for the period. All options and warrants for the six months ended March 31, 2003 were anti-dilutive. All options and warrants were dilutive for the three months and six months ended March 31, 2002



Note 5 - Income Taxes



The Company recorded a provision for (benefit from) income taxes of $(7,000) and $119,475 for the six months ended March 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 March 31, 2003 and September 30, 2002 was $211,000 and $204,000, respectively.  The deferred tax liability as of March 31, 2003 and September 30, 2002 was $65,000.



Note 7 - Intangible Assets



Intangible assets consist primarily of patent costs acquired with the purchase of the assets by Sterion, Inc., and are being amortized using the straight-line method over their estimated useful lives of 30 to 166 months (weighted average life of 7.33 years).  The amortization expense related to those assets was $99,107 and $165,180 for the six months ended March 31, 2003 and 2002. The estimated amortization expense for the intangible assets for years ending September 30, 2003, 2004, 2005, 2006 and 2007 is $198,216, $134,578, $128,590, $126,262 and $100,583 respectively.



Note 8 - Long-term Debt



During May 2001, the Company entered into a $675,000 revolving line of credit with Crown Bank. The line of credit is subject to a defined borrowing base. Amounts outstanding are due upon demand or if no demand is made, on May 31, 2003 and bear interest at prime (4.25% at March 31, 2003). The line is secured by substantially all of the assets of the Company. Outstanding borrowings were $600,000 and $300,000 as of March 31, 2003 and September 30, 2002, respectively.  See Note 11  Subsequent Event regarding the payoff of the outstanding balance on the Crown Bank revolving line of credit on May 7, 2003.



Note 9 - Commitments and Contingencies



Stock repurchase program -On September 14, 2001, the Board of Directors authorized a stock repurchase program under which the Company is authorized to repurchase up to 175,000 shares of its common stock. Through March 31, 2003, the Company repurchased 61,700 common shares for an aggregate price of $442,708, excluding commissions or other expenses associated with the repurchase. No shares were repurchased during the six months ended March 31, 2003.

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Note 10 - Acquisitions



On January 22, 2002, the Company acquired substantially all the assets and assumed certain liabilities of Surgidyne, Inc. (Surgidyne).  The total purchase price for the assets acquired and liabilities assumed from Surgidyne was $200,000. On February 10, 2002, the Company acquired substantially all the assets and assumed certain liabilities of Bellingham Medical, Inc. (Bellingham).  The total purchase price for the assets acquired and liabilities assumed from Bellingham was $350,000.



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 Surgidyne and Bellingham 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. Following table is a condensed balance sheet summarizing the amounts assigned to the assets acquired and liabilities assumed at the various dates of acquisition:





|                       | Surgidyne |  | Bellingham
|---------------------- | --------- |  | ----------
|Accounts receivable    | $41,893   |  | $0        
|Inventories            | 100,892   |  | 44,426    
|Property and equipment | 20,000    |  | 65,000    
|Intangibles            | 4,000     |  | 0         
|Goodwill               | 103,671   |  | 252,768   
|Liabilities assumed    | (70,456)  |  | (12,194)  
|Net purchase price     | $200,000  |  | $350,000  
|                       |           |  |           





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 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, 2003.  The estimated fair value of the reporting unit was estimated using the expected present value of future cash flows.   Components of intangible assets are as follows:







|                                 | March 31, 2003 |  | September 30, 2002
|-------------------------------- | -------------- |  | ------------------
|                                 | Gross Carrying |  | Accumulated       
|                                 | Amount         |  | Amortization      
|Intangible assets subject to     |                |  |                   
|amortization                     |                |  |                   
|Patents and trademarks           | $1,323,840     |  | $379,915          
|                                 |                |  |                   
|Intangible assets not subject to |                |  |                   
|amortization                     |                |  |                   
|Goodwill                         | $356,439       |  | $0                



The following unaudited pro forma condensed results of operations for the six months ended March 31, 2003 and 2002, give effect to the acquisitions of Surgidyne and Bellingham as if such transactions had occurred on October 1, 2001.

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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 |  | For the Six Months Ended
|----------------------------- | -------------------------- |  | ------------------------
|                              | March 31,                  |  | March 31,               
|                              | 2003                       |  | 2002                    
|                              |                            |  |                         
|Sales, net                    | $2,467,885                 |  | $2,579,368              
|                              |                            |  |                         
|Income (loss) from operations | $79,340                    |  | $184,998                
|                              |                            |  |                         
|Net income (loss)             | $29,137                    |  | $108,662                
|                              |                            |  |                         
|Net income (loss) per share:  |                            |  |                         
|Basic                         | $.02                       |  | $.06                    
|Diluted                       | $.02                       |  | $.05                    





NOTE 11  Subsequent Event - Steris Sale



On May 7, 2003 the Company sold certain of its assets, and assigned certain of its liabilities, relating to the Companys sterile container product line to STERIS Corporation for $2,900,000 in cash pursuant to an Asset Purchase Agreement dated May 7, 2003. The purchase price is subject to adjustment within 60 days of the closing 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 $518,763 outstanding as of May 7, 2003 relating to the revolving line of credit and $647,500 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. Principal medical products produced and sold under the Sterion brand name include silicone loops, silicone and fabric clamp covers, instrument guards, suture aid booties, identification sheet and roll tape, and various holders and organizers for instruments used in the operating room. Sterion also manufactures several lines of sterile containers under the Sterion® name. The Sterion® product line was acquired from Johnson & Johnson Medical division of Ethicon, Inc. in May 2001 through the Companys wholly-owned subsidiary called Sterion, Inc. Effective May 17, 2002, this wholly-owned subsidiary Sterion, Inc. was merged with and into Sterion Incorporated. On January 22, 2002, Sterion completed the purchase of a line of surgical drainage and fluid containment systems from Surgidyne, Inc.  On February 10, 2002, Sterion completed the purchase of a line of wound closure strips and related products from Bellingham Medical, Inc., which are now a part of the Companys private label product line. On May 7, 2003, the Company completed the sale of its sterile container product line to STERIS Corporation and entered into a manufacturing agreement with STERIS pursuant to which the Company will continue to manufacture the sterile container product line at a reduced gross profit percentage.



Net sales for the six-month period ended March 31, 2003 were $4,696,622 as compared to $4,771,886 for the corresponding period in fiscal 2002. For the three-month period ended March 31, 2003 net sales were $2,467,885 as compared to $2,539,648 for the corresponding period in fiscal 2002.  Second quarter sales for the Sterion brand name products were $1,345,767 for fiscal year 2003 as compared to $1,346,202 for the same period in fiscal year 2002.  Net sales for the same period, ending March 31, 2003 and 2002, were $806,415 and $1,076,610 for the Sterion Container products.  Net sales for the three-month period ended March 31, 2003, for the Surgidyne and private label product lines, were $92,807 and $222,896 as compared to $63,908 and $52,858 for the same period in fiscal year 2002.  Sales for the private label product line increased as a result of newly developed products. The Surgidyne and private label product lines were acquired during the second quarter of fiscal year 2002.

---



Continued competition and pricing pressure have constrained revenue growth in the Companys original product lines. However, the new wound closure strip products developed by the Company and being sold through the private label product line, having started to ship in the second quarter of fiscal 2003, are expected to expand significantly and contribute to sales growth in the future.



Gross profit for the six month period ended March 31, 2003 was $2,216,674 as compared to $2,569,449 for the corresponding period in fiscal 2002. Gross profit as a percent of net sales for the first six months of fiscal 2003 and 2002 was 47.2% and 53.8%, respectively. For the three-month period ended March 31, 2003, gross profits were $1,090,168 as compared to $1,334,165 for the corresponding period in fiscal 2002. The decrease in gross profit percentage for the comparative periods resulted from increased costs associated with the introduction of the new wound closure strip products and the lower gross profit percentage associated with our private label products.



Net loss for the first six months of fiscal year 2003 was $13,931 as compared to net income of $238,988 in the same period of fiscal 2002. For the three month period ended March 31, 2003, net income was $29,137 as compared to $107,893 for the corresponding period in fiscal 2002. Selling, general and administrative expenses for the six-month period ended March 31, 2003 were $2,168,737 compared to $2,210,071 for the corresponding period in fiscal 2002. This decrease in SG&A helped offset the decrease in net income in comparative years. The decline in operating income, for fiscal 2003, is primarily related to costs associated with new product development and introduction costs associated with a series of new wound closure products.



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. As of March 31, 2003, the Company had working capital of $3,647,260 as compared to $3,710,828 at September 30, 2002, and long-term debt of $1,522,181 at March 31, 2003 compared to $1,696,716 at September 30, 2002. As of March 31, 2003, the Company had $277,509 in cash and cash equivalents as compared to $591,263 at September 30, 2002.  The decrease in cash and cash equivalents is a result of an increase in accounts receivables and inventories relating to the Companys introduction of its wound closure products.



On May 7, 2003 the Company sold certain of its assets, and assigned certain of its liabilities, relating to the Companys sterile container product line to STERIS Corporation for $2,900,000 in cash pursuant to an Asset Purchase Agreement dated May 7, 2003. The purchase price is subject to adjustment within 60 days of the closing 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 $518,763 outstanding as of May 7, 2003 relating to the revolving line of credit and $647,500 outstanding as of May 7, 2003 relating to the promissory note.



The Company believes it has adequate capital to meet its cash requirements for the next twelve months from its internal working capital.  The Company is in the process of establishing a new line of credit to replace the Crown Bank line of credit which was repaid in its entirety on May 7, 2003.



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, 2002. The accounting policies used in preparing our interim 2003 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) long-lived assets, and (d) inventories.

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(a) Revenue Recognition - The Companys revenues are recognized when products are shipped to unaffiliated customers.  The Securities and Exchange Commissions Staff Accounting Bulletin (SAB) No. 101, 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. 101.



(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.



(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 during the year ended September 30, 2002 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, 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 2002 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.



Item 3. Controls and Procedures



Evaluation of Disclosure Controls and Procedures - The Companys President, J. David Berkley, and Chief Financial Officer, Mark Buckrey, have reviewed the Company's disclosure controls and procedures within 90 days prior to the filing of this report.  Based upon this review, these officers believe that the Companys disclosure controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.



Changes in Internal Controls - There were no significant changes in the Companys internal controls or in other factors that could significantly affect these controls during the quarter covered by this report or from the end of the reporting period to the date of this Form 10-QSB.



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PART II

OTHER INFORMATION







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



(a)

Exhibits:



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



(b)

Reports on Form 8-K:



None



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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 15, 2003 | By: /s/ J. David Berkley                    
|                   | J. David Berkley, President                 
|                   | (Principal Executive Officer)               
|                   |                                             
|Date: May 15, 2003 | By:/s/  Mark Buckrey                        
|                   | Mark Buckrey, Chief Financial Officer       
|                   | (Principal Financial and Accounting Officer)



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CERTIFICATIONS

I, J. David Berkley, certify that:

1.

I have reviewed this quarterly report on Form 10-QSB of Sterion Incorporated;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:

May 15, 2003

/s/  J. David Berkley



J. David Berkley, President

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I, Mark Buckrey, certify that:

1.

I have reviewed this quarterly report on Form 10-QSB of Sterion Incorporated;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date:  May 15, 2003

/s/  Mark Buckrey

Mark Buckrey, Chief Financial Officer