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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q


Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934


For the Quarterly Period Ended: June 30, 2004


Commission File No. 1-4436


THE STEPHAN CO.
(Exact Name of Registrant as Specified in its Charter)



Florida 59-0676812
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)


1850 West McNab Road, Fort Lauderdale, Florida 33309
(Address of principal executive offices) (Zip Code)



Registrant's Telephone Number, including Area Code: (954) 971-0600



Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X



Approximate number of shares of Common Stock outstanding
as of August 31, 2004


4,369,557



THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2004


INDEX

PAGE NO.
PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Unaudited Condensed Consolidated Balance Sheets
as of June 30, 2004 and December 31, 2003 4-5

Unaudited Condensed Consolidated Statements
of Operations for the six months ended
June 30, 2004 and 2003 6

Unaudited Condensed Consolidated Statements
of Operations for the three months ended
June 30, 2004 and 2003 7

Unaudited Condensed Consolidated Statements
of Cash Flows for the six months ended
June 30, 2004 and 2003 8-9

Notes to Unaudited Condensed Consolidated
Financial Statements 10-18

ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 19-22

ITEM 3. Quantitative and Qualitative
Disclosure About Market Risk 22

ITEM 4. Controls and Procedures 22


PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings 23

ITEM 6. Exhibits and Reports on Form 8-K 23


SIGNATURES 24




2


THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2004


CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995


This quarterly report contains certain "forward-looking"
statements. The Stephan Co. (the "Company") desires to take advantage of
the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of such safe harbor with respect to all
such forward-looking statements. Such forward-looking statements involve
risks, uncertainties and other factors which may cause the actual results,
condition (financial or otherwise), performance, trends or achievements of
the Company and its subsidiaries to be materially different from any
results, condition, performance, trends or achievements projected,
anticipated or implied by such forward-looking statements.

Such factors include, but are not limited to, the following: general
economic and business conditions; competition; relative success of
operating initiatives; development and operating costs; advertising and
promotional efforts; brand awareness; the existence or absence of adverse
publicity; acceptance of any new product offerings; changing trends in
customer tastes; the success of multi-branding; changes in business
strategy or development plans; quality of management; costs and expenses
incurred by the Company in pursuing strategic alternatives; availability,
terms and deployment of capital; Stephan's ability to come into compliance
with AMEX's continued listing requirements; regulatory approvals of the
going-private transaction; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs;
availability and cost of raw materials and supplies; changes in or newly-
adopted accounting principles; changes in, or failure to comply with, law;
changes in product mix and associated gross profit margins; and other
factors or events referenced in this Form 10-Q.

The Company does not undertake, subject to applicable law, any
obligation to publicly release the results of any revisions which may be
made to any forward-looking statements to reflect events or circumstances
occurring after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Therefore, the Company cautions each
reader of this report to carefully consider the specific factors and
qualifications discussed herein with respect to such forward-looking
statements, as such factors and qualifications could affect the ability of
the Company to achieve its objectives and may cause actual results to
differ materially from those projected, anticipated or implied herein.




3


PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


ASSETS



June 30, December 31,
2004 2003
____________ ____________

CURRENT ASSETS

Cash and cash equivalents $12,701,724 $ 13,302,159

Accounts receivable, net 1,710,995 1,444,508

Inventories 7,377,961 7,497,262

Prepaid expenses and
other current assets 130,355 784,601
____________ ____________

TOTAL CURRENT ASSETS 21,921,035 23,028,530

CERTIFICATES OF DEPOSIT 5,087,500 5,642,500

PROPERTY, PLANT AND EQUIPMENT, net 1,658,549 1,702,330

GOODWILL, net 5,857,980 5,857,980

TRADEMARKS, net 8,664,809 8,664,809

DEFERRED ACQUISITION COSTS, net 257,013 298,773

OTHER ASSETS, net 3,044,339 2,867,958
____________ ____________

TOTAL ASSETS $ 46,491,225 $ 48,062,880
============ ============




See notes to unaudited condensed consolidated financial statements

4


THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


LIABILITIES AND STOCKHOLDERS' EQUITY


June 30, December 31,
2004 2003
___________ ____________
CURRENT LIABILITIES

Accounts payable and
accrued expenses $ 2,450,390 $ 2,614,731

Current portion of
long-term debt 1,110,000 2,442,273

Income taxes payable 28,576 28,270
____________ ____________

TOTAL CURRENT LIABILITIES 3,588,966 5,085,274

DEFERRED INCOME TAXES, net 1,399,652 1,133,051

LONG-TERM DEBT 3,792,500 4,347,500
____________ ____________

TOTAL LIABILITIES 8,781,118 10,565,825
____________ ____________

COMMITMENTS AND CONTINGENCIES (NOTE 3)

STOCKHOLDERS' EQUITY

Common stock, $.01 par value 44,106 44,106
Additional paid in capital 18,417,080 18,417,080
Retained earnings 20,600,484 20,387,432
____________ ____________
39,061,670 38,848,618
LESS:
125,000 CONTINGENTLY
RETURNABLE SHARES (1,351,563) (1,351,563)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 37,710,107 37,497,055
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 46,491,225 $ 48,062,880
============ ============


See notes to unaudited condensed consolidated financial statements

5


THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


Six Months Ended June 30,
______________________________

2004 2003
____________ ____________

NET SALES $ 11,514,539 $ 13,350,355

COST OF GOODS SOLD 6,668,422 7,331,263
___________ ___________
GROSS PROFIT 4,846,117 6,019,092

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,586,692 4,965,568
___________ ____________
OPERATING INCOME 259,425 1,053,524

OTHER INCOME(EXPENSE)
Interest income 98,811 127,330
Interest expense (49,933) (213,927)
Other income, net 318,145 25,000
___________ ___________

INCOME BEFORE INCOME TAXES 626,448 991,927

INCOME TAX EXPENSE 236,973 377,870
___________ ___________

NET INCOME $ 389,475 $ 614,057
=========== ===========


BASIC AND DILUTED
EARNINGS PER SHARE $ .09 $ .14

=========== ===========

WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,360,043 4,302,076
=========== ===========




See notes to unaudited condensed consolidated financial statements




6


THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



Three Months Ended June 30,
_____________________________

2004 2003
____________ ____________

NET SALES $ 5,555,554 $ 6,401,297

COST OF GOODS SOLD 3,213,060 3,407,071
___________ ___________

GROSS PROFIT 2,342,494 2,994,226

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,175,998 2,745,217
___________ ____________

OPERATING INCOME 166,496 249,009

OTHER INCOME(EXPENSE)
Interest income 47,720 62,112
Interest expense (24,302) (111,877)
Other income, net 305,645 12,500
___________ ___________

INCOME BEFORE INCOME TAXES 495,559 211,744

INCOME TAX EXPENSE 183,865 78,168
___________ ___________


NET INCOME $ 311,694 $ 133,576
=========== ===========

BASIC AND DILUTED
EARNINGS PER SHARE $ .07 $ .03
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,365,376 4,303,254
=========== ===========





See notes to unaudited condensed consolidated financial statements


7


THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



Six Months Ended June 30,
___________________________

2004 2003
___________ ____________

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 389,475 $ 614,057
___________ ____________


Adjustments to reconcile net income
to cash flows provided by
operating activities:

Depreciation 81,007 163,920
Amortization of intangible assets 41,760 46,728
Deferred income tax provision 266,601 285,510
Provision for
doubtful accounts 39,932 33,389

Changes in operating assets and
liabilities:

Accounts receivable (306,419) (266,521)
Inventories 119,301 (718,791)
Income taxes payable 306 4,684
Prepaid expenses
and other current assets 654,246 149,981
Other assets (176,381) 694,247
Accounts payable and accrued expenses (164,341) 513,019
___________ ___________

Total adjustments 556,012 906,166
___________ ___________
Net cash flows provided
by operating activities 945,487 1,520,223
___________ ___________




See notes to unaudited condensed consolidated financial statements




8


THE STEPHAN CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,
____________________________

2004 2003
____________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property, plant
and equipment (37,226) (7,782)
___________ ___________
Net cash flows used in
investing activities (37,226) (7,782)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:

Repayments of long-term debt (1,887,273) (675,908)
Dividends paid (176,423) (176,423)
Change in certificates
of deposit 555,000 555,000
___________ ___________
Net cash flows used in
financing activities (1,508,696) (297,331)
___________ ___________
(DECREASE)/INCREASE IN CASH
AND CASH EQUIVALENTS (600,435) 1,215,110

CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 13,302,159 10,785,995
___________ ___________
CASH AND CASH EQUIVALENTS,
END OF PERIOD $12,701,724 $12,001,105
=========== ===========

Supplemental Disclosures of
Cash Flow Information:

Interest paid $ 152,681 $ 187,475
=========== ===========
Income taxes paid $ 46,595 $ 55,004
=========== ===========

Supplemental Disclosure of Non-Cash
Investing and Financing Activities:

In connection with the retirement of the outstanding Colgate-Palmolive
debt in April 2004, the $1,332,000 obligation was settled by a payment of
$914,000.

See notes to unaudited condensed consolidated financial statements

9


THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2004 AND 2003


NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


BASIS OF PRESENTATION: In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the financial position and results of operations of
The Stephan Co. and Subsidiaries (the "Company") are reflected in these
unaudited interim financial statements.

The results of operations for the six-month period ended June 30, 2004
is not necessarily indicative of the results to be achieved for the year
ending December 31, 2004. The December 31, 2003 condensed consolidated
balance sheet was derived from the audited consolidated financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America ("generally
accepted accounting principles"). These interim financial statements
should be read in conjunction with the audited consolidated financial
statements and accompanying notes appearing in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003, previously filed with
the Securities and Exchange Commission.

NATURE OF OPERATIONS: The Company is engaged in the manufacture,
sale and distribution of hair and personal care grooming products
principally throughout the United States. SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", requires the reporting
of segment information using a "management approach" as it relates to the
operating segments of a business. The Company manages its business in
three segments: (1) professional hair care products and distribution; (2)
retail personal care products; and (3) manufacturing.

USE OF ESTIMATES: The preparation of condensed consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the condensed
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates and assumptions.

CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
cash, money market investment accounts and short-term municipal bonds
having maturities of 90 days or less. The Company maintains cash deposits
at certain financial institutions in amounts in excess of the federally
insured limit. Cash and cash equivalents held in interest bearing accounts
as of June 30, 2004 and December 31, 2003 were approximately $11,639,000
and $12,698,000, respectively.


10


THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2004 AND 2003

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

INVENTORIES: Inventories are stated at the lower of cost (deter-
mined on a first-in, first-out basis) or market, and are as follows:

June 30, December 31,
2004 2003
____________ ____________
Raw materials $ 1,990,364 $ 2,007,174
Packaging and components 2,658,298 2,612,798
Work in progress 256,000 257,476
Finished goods 5,370,223 5,338,369
____________ ____________
10,274,885 10,215,817
Less: Amount included in
other assets (2,896,924) (2,718,555)
____________ ____________

$ 7,377,961 $ 7,497,262
============ ============

Raw materials principally include surfactants, chemicals and
fragrances used in the production process. Packaging materials include
cartons, inner sleeves and boxes used in the actual product, as well as
outer boxes and cartons used for shipping purposes. Components are the
actual bottles or containers (plastic or glass), jars, caps, pumps and
similar materials that become part of the finished product. Finished goods
include hair dryers, electric clippers, lather machines, scissors and salon
furniture.

Included in other assets is inventory not anticipated to be utilized
within one year and is comprised primarily of packaging, components and
finished goods. The Company reduces the carrying value of slow moving
inventory, including the estimated costs of disposal, that may ultimately
become unusable or obsolete. For the six months ended June 30, 2004, no
additional write-down of this inventory was deemed necessary.

BASIC AND DILUTED EARNINGS PER SHARE: Basic and diluted earnings
per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding. For the six months ended
June 30, 2004 and 2003, the Company had 597,570 and 669,682 outstanding
stock options, respectively, a significant portion of which were not
materially dilutive. The inclusion of these dilutive stock options in the
calculation of earnings per share did not have any impact on the earnings
per share amounts for the six and three months ended June 30, 2004 and
2003.



11


THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2004 AND 2003


NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

STOCK-BASED COMPENSATION: The Company adopted the disclosure
requirements of SFAS No. 148, "Accounting for Stock-Based Compensation-
Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternate methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based compensation and to require prominent disclosures in both
annual and interim financial statements about the methods of accounting for
stock-based compensation and the effect of the method used on reported
results. As permitted by SFAS No. 148 and 123, the Company continues to
apply the accounting provisions of APB No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, with regard to the measurement
of compensation cost for options granted under the Company's existing
plans. No stock-based compensation cost is reflected in net income as all
options granted under the plans had an exercise price not less than the
market value of the underlying common stock on the date of grant. Had
expense been recognized using the fair value method described in SFAS No.
123, using the Black-Scholes option-pricing model, the Company would have
reported the following results of operations (in thousands, except per
share amounts):


Six Months Three Months
Ended June 30, Ended June 30,
_________________ _______________

2004 2003 2004 2003
_______ _______ _______ _______

Net income, as reported $ 389 $ 614 $ 312 $ 134

Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects 63 83 33 41
_______ _______ _______ _______
Pro forma net income $ 326 $ 531 $ 279 $ 93
======= ======= ======= =======
Net income per share:

As reported $ .09 $ .14 $ .07 $ .03
Pro forma $ .07 $ .12 $ .06 $ .02




12


THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2004 AND 2003


NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

NEW FINANCIAL ACCOUNTING STANDARDS: In January 2003, the
Financial Accounting Standards Board ("FASB") issued FASB Interpretation
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), an
interpretation of ARB 51. FIN 46, as revised in December 2003, provides
guidance on identifying entities for which control is achieved through
means other than through voting rights, variable interest entities ("VIE"),
and how to determine when and which business enterprises should consolidate
the VIE. In addition, FIN 46 requires both the primary beneficiary and all
other enterprises with a significant variable interest in a VIE to make
additional disclosures. The consolidation provisions of FIN 46 are
effective immediately for variable interests in VIE's created after January
31, 2003. For variable interests in VIE's created before February 1, 2003,
the provisions of FIN 46 are effective for the first interim or annual
period ending after December 15, 2003. The adoption of FIN 46 did not
require a change in accounting treatment since the Company has no
investments in any VIE's.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". This statement establishes standards for the classification and
measurement of financial instruments that possess characteristics similar
to both liability and equity instruments. SFAS No. 150 also addresses the
classification of certain financial instruments that include an obligation
to issue equity shares. On October 29, 2003, the FASB voted to defer, for
an indefinite period, the application of certain provisions of the guidance
in SFAS No. 150 until it could consider some of the resulting
implementation issues. The Company has adopted certain provisions of SFAS
No. 150 which did not have a material impact on the Company's financial
condition or results of operations. The Company does not believe the
effect of the provisions of SFAS No. 150 that have been deferred to future
periods will have a material impact on the Company's financial statements.

NOTE 2: SEGMENT INFORMATION

In accordance with the guidelines established by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company has identified three reportable operating segments based upon how
its management evaluates its business. These segments are Professional
Hair Care Products and Distribution ("Professional"), Retail Personal Care
Products ("Retail") and "Manufacturing". The Professional segment has a
customer base consisting generally of distributors that purchase the
Company's hair products and beauty and barber supplies for sale to salons
and barbershops. The customer base for the Retail segment consists of mass
merchandisers, chain drug stores and supermarkets that sell products to
end-users. The Manufacturing segment manufactures products for different

13


THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2004 AND 2003


NOTE 2: SEGMENT INFORMATION (continued)

subsidiaries of the Company and manufactures private label brands for
customers.

The Company conducts operations principally in the United States and
sales to international customers are not material to its consolidated net
sales. Income Before Income Taxes as shown below reflects an allocation of
corporate overhead expenses incurred by the Manufacturing segment. The
following tables, in thousands, summarize Net Sales and Income Before
Income Taxes:


NET SALES NET SALES
_______________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
_______________ _______________
Professional $ 8,604 $ 8,632 $ 4,218 $ 4,067
Retail 2,624 4,510 1,177 2,259
Manufacturing 2,763 3,660 1,519 1,879
_______ _______ _______ _______
Total 13,991 16,802 6,914 8,205

Intercompany
Manufacturing (2,476) (3,452) (1,358) (1,804)
_______ _______ _______ _______
Consolidated $11,515 $13,350 $ 5,556 $ 6,401
======= ======= ======= =======


INCOME BEFORE INCOME BEFORE
INCOME TAXES INCOME TAXES
_______________ _______________
Six Months Three Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
_______________ _______________

Professional $ 630 $ 624 $ 330 $ 255
Retail 378 551 344 99
Manufacturing (382) (183) (178) (142)
_______ _______ ______ ______

Consolidated $ 626 $ 992 $ 496 $ 212
======= ======= ====== ======

14


THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2004 AND 2003

NOTE 3: COMMITMENTS AND CONTINGENCIES

In addition to the matters set forth below, the Company is involved in
other litigation matters arising in the ordinary course of business. It is
the opinion of management that none of such matters, at June 30, 2004,
would likely, if adversely determined, have a material adverse effect on
the Company's financial position, results of operations or cash flows.
Additionally, there has been no material change in the status of any other
pending litigation since the Company's last filing of Form 10-K with the
Securities and Exchange Commission for the year ended December 31, 2003.

As indicated in the Company's Form 10-K for the year ended December
31, 2003, on April 7, 2004, the Company and Colgate-Palmolive mutually
agreed to settle all outstanding claims and issues between them. The net
result of this settlement was a reduction of the liability to Colgate-
Palmolive for the acquisition of certain brands by approximately $418,000,
and this amount is included in other income.

In June 2004, the Company settled litigation with a customer in
connection with that customer's failure to perform on a purchase order
issued by them to the Company in 2002. The Company received a lump sum
payment of $150,000 (included in other income). In addition, the customer
agreed to purchase merchandise at a sales price of approximately $124,000,
to be delivered in the third quarter of 2004.

On July 15, 2004, with respect to the action commenced by New Image
Laboratories, Inc. against the Company in the United States District Court
for the Central District of California, the parties reached a settlement
pursuant to a stipulation of settlement and amendments thereto which
provided, among other things, as follows: (i) New Image will relinquish
title to 65,000 of the 125,000 shares held in escrow and New Image will
receive from the Company approximately $275,000, net of offsets below, in
exchange for the remaining 60,000 shares, (ii) Stephan shall receive
$44,000 in damages from New Image, (iii) dividends, and interest accrued
thereon, held in the escrow account (which is currently estimated to be
approximately $70,000) will be distributed with Stephan receiving 52% of
such funds and New Image receiving 48% of such funds, and (iv) New Image's
claim for diminution of the value of the shares held in escrow shall be
heard before a special master in October 2004. As a result of this
settlement, the Company has recorded an expense of approximately $275,000
in the second quarter. In the third quarter of 2004, the amount of the
contingently returnable shares carried on the books of the Company will be
reflected as treasury stock when the shares are received by the Company and
then offset against additional paid in capital when the shares are retired.
In connection with the diminution claim, the parties have agreed that any
recovery recommended by the special master shall be limited to the
diminution in the value of 60,000 shares of the Company's stock. The
parties have reserved the right to challenge and appeal the recommendation

15


THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2004 AND 2003


NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)

of the special master in the federal court. The Company intends to
vigorously defend the diminution claim and believes the claim lacks merit.

In the fourth quarter of 2003, Sorbie Acquisition Co. ("SAC"), a
wholly-owned subsidiary of the Company, and Trevor Sorbie International,
Plc. ("TSI") commenced arbitration proceedings against each other before
the American Arbitration Association in Pittsburgh, Pennsylvania. In TSI's
statement of claim, TSI alleges claims for breach of contract, trademark
infringement and breach of certain implied covenants. Specifically, TSI
alleges that SAC owes past due royalty payments and interest. TSI also
alleges that SAC breached the contract between the parties by various acts
and omissions which have diminished sales of Sorbie products and the value
of the Sorbie trademarks. TSI further alleges that SAC has diverted
product outside of SAC's territory. TSI seeks damages in the amount of the
royalties allegedly due, termination of the agreement between the parties
and cancellation and forfeiture of SAC's rights in the Sorbie Trademarks.
SAC denies the allegations raised in the TSI statement of claim. In SAC's
statement of claim against TSI, SAC alleges causes of action for
declaratory relief, diversion, breach of contract for failure to support
the brand, trademark infringement and injunctive relief. SAC alleges that
TSI has been engaged in diversion of TSI product into SAC's territory and
that TSI and Trevor Sorbie have failed to render assistance to SAC in
violation of the parties' agreement. SAC further alleges that TSI and
Trevor Sorbie have engaged in intentional and detrimental infringement of
SAC's exclusive rights in the Sorbie Trademarks and rights to publicity to
the name, likeness and image of Trevor Sorbie in SAC's territory. Among
other things, SAC alleges that Trevor Sorbie and TSI infringed SAC's rights
by appearing at shows in North and South America that promote Trevor Sorbie
and non-SAC products. SAC seeks damages for the diversion, infringement
and permanent injunctive relief. In addition, SAC further alleges that
TSI's claim for royalties is premised upon an incorrect reading of the
agreement and is at odds with the method by which the parties have
calculated royalties since the inception of the agreement. SAC has also
filed a claim against Trevor Sorbie individually, premised upon his
involvement in certain of the acts alleged above. The Company intends to
actively pursue its claims and aggressively defend itself against the
claims asserted by TSI. The Company believes that this action will not
have a material effect on its financial position and/or results of
operations. Due to the complexities of the issues involved, however,
discovery is ongoing and the Company is currently unable to predict the
outcome of this proceeding.

As previously reported, on April 16, 2002, the Company announced that
the previously-formed Special Committee (consisting of two outside
directors) had accepted a bid by a management-led group to purchase all of

16


THE STEPHAN CO. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 2004 AND 2003


NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)

the shares of common stock of the Company not already owned by such group.
The acquisition group's initial bid was to purchase all of the Company's
common stock at $4 per share in cash, which offer was later revised to
$4.50 per share with $3.25 to be paid in cash, and $1.25 to be paid by a
42-month, unsecured debt instrument providing for interest at an annual
rate of 4 1/2%. On March 22, 2004, the Company announced that the bid was
further revised to an all cash price of $4.60 per share, to reflect the
updated fairness opinion received from SunTrust Robinson Humphrey. On
September 19, 2003, at no cost to shareholders, the Company entered into a
Working Capital Management Account ("WCMA") agreement with Merrill Lynch
Business Financial Services Inc. providing for the creation of a WCMA line
of credit not to exceed $5,000,000. Borrowings against the line of credit
will be collateralized by the Company's accounts receivable and inventories
and the debt will bear a variable interest rate using a 1-month LIBOR rate
plus 2.25%. The provisions of the credit line include periodic accounting
and reporting requirements, maintenance of certain business and financial
ratios as well as restrictions on additional borrowings. As of June 30,
2004, the credit line remains unused.

On April 30, 2003, the Board of Directors approved a definitive merger
agreement (the "Merger Agreement") pursuant to which the Company would be
acquired by Gunhill Enterprises, Inc., a wholly-owned subsidiary of
Eastchester Enterprises, Inc. Eastchester Enterprises, Inc. is owned by
Frank F. Ferola, Thomas M. D'Ambrosio, John DePinto and Shouky A. Shaheen
(all of whom are current Board members) together with their affiliates (the
"Acquisition Group"). The Company entered into the Merger Agreement
following approval by its Board of Directors based in part upon the
unanimous recommendation of the Special Committee comprised of two non-
management and disinterested directors of the Company's Board of Directors.
The Special Committee had received an opinion from SunTrust Robinson
Humphrey that the consideration to be paid pursuant to the Merger Agreement
was fair from a financial point of view to the stockholders other than the
Acquisition Group. On October 24, 2003, the Company executed an Amended
and Restated Merger Agreement extending certain dates and making minor
changes to the original Merger Agreement and on November 4, 2003, in
connection with the "going-private" transaction, the Company filed a
Preliminary Proxy with the Securities and Exchange Commission. In March
2004, the Company executed a further amendment to the Merger Agreement
which, among other things, incorporated the new consideration offered by
the acquisition group of $4.60 per share in cash.

On August 25, 2004, the Merger Agreement was terminated and the
Acquisition Group withdrew its offer to acquire the shares of Stephan
common stock not owned by it and informed Stephan that it has decided not
to pursue such an acquisition at this time.

17

THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2004 AND 2003


NOTE 3: COMMITMENTS AND CONTINGENCIES (continued)

Independent legal counsel and investment banking advisors have been
retained to advise the Special Committee in connection with the
transaction. The Company has incurred over $650,000 of expenses through
June 30, 2004. The Company is unable, at this time, to continue to
estimate the future remaining costs associated with the "going-private"
process due to anticipated legal costs exceeding original estimates. As
discussed above, the Company has secured a $5,000,000 line of credit with
Merrill Lynch, a portion of which may be used in the "going-private"
transaction.

As previously reported, due to the length of time for the "going
private" transaction to be consummated, the Company has not submitted any
matters to a vote of its security holders since the Company's September 1,
2000 Annual Meeting. In accordance with the rules and regulations of the
American Stock Exchange (AMEX), the Company was required to promptly notify
its stockholders and AMEX, in writing, indicating the reasons for the
failure to have a meeting and to use good faith efforts to ensure that an
annual meeting is held as soon as reasonably practicable. The Company
included annual meeting materials in its revised proxy statement, filed
with the Securities and Exchange Commission on April 13, 2004. In a press
release issued by the Company on August 25, 2004, the Company indicated
that it tentatively set November 10, 2004 as the date of its next annual
meeting of shareholders, and it expects to formally notify all shareholders
of the definitive date and location of such meeting in the near future. In
addition, the Company believed it was in violation of certain AMEX rules
with respect to the composition of the Board of Directors and the Audit
Committee which could subject the Company to civil penalties and/or the
delisting of the Company's stock. The Company, based upon on-going
discussions with AMEX and the Company's legal counsel, now believes that
none of the aforementioned issues are of a material nature and any
penalties, if levied, would not be material to the Company's financial
position or results of operations.

NOTE 4: SPECIAL DIVIDEND

On August 25, 2004, the Company announced that its Board of Directors
approved the payment of a special dividend of $2.00 per share to all
shareholders of record as of September 8, 2004, to be paid on September 15,
2004.






18


THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2004 AND 2003


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

RESULTS OF OPERATIONS

For the six months ended June 30, 2004, net sales were $11,515,000,
compared to $13,350,000 achieved in the corresponding six months of 2003.
The overall decrease in sales was principally due to the return to a normal
level of military orders for Quinsana Medicated Talc. As indicated in
previous filings, the first and second quarters of 2003 were favorably
impacted by military orders as troops were deployed to the Middle East
conflict. In addition, and for largely the same reason as above, the gross
margin for the six months ended June 30, 2004 declined to 42.1% as compared
to 45.1% for the six months ended June 30, 2003. Sales of other Retail
products, as well as sales of the Professional segment, declined for the
six-month period ended June 30, 2004, when compared to the sales achieved
for the corresponding six-month period ended June 30, 2003.

Gross profit for the six months ended June 30, 2004, was $4,846,000
compared to gross profit of $6,019,000 achieved for the corresponding six-
month period in 2003. Cost of sales for the six months ended June 30, 2004
was $6,668,000, when compared to the cost of sales of $7,331,000 for the
six months ended June 30, 2003. Gross profit decreased overall as
discussed above.

Selling, general and administrative expenses for the six months ended
June 30, 2004 decreased by $379,000, to $4,587,000, when compared to the
corresponding 2003 six-month period total of $4,966,000. This decrease was
due, in large part, to a decline in expenses incurred in connection with
the "going-private" transaction. The Company continues its efforts to
control selling, general and administrative expenses even with the on-going
costs associated with the Company's decision to evaluate strategic
alternatives to enhance shareholder value, as discussed in Note 3 of the
unaudited condensed consolidated financial statements. No assurance can be
given that it can continue reducing these expenses.

Interest expense for the six months ended June 30, 2004 was $50,000, a
decrease of approximately $164,000 from the $214,000 incurred in the
corresponding period of 2003, primarily because the obligation to Colgate-
Palmolive was paid in full on April 2, 2004. As indicated in previously
filed reports, on April 7, 2004, the Company and Colgate-Palmolive mutually
agreed to settle all outstanding claims and issues between them. The net
result of this settlement was a reduction of the outstanding obligation by
approximately $418,000. This amount is reflected in other income in the
second quarter of 2004. Interest income of $99,000 for the six months
ended June 30, 2004 was lower than the $127,000 earned in the corresponding

19


THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2004 AND 2003


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

six months of 2003. Although the Company had more cash invested in 2004,
it received lower interest rates on its investments as overall interest
rates remained low. In addition to the Colgate-Palmolive settlement above,
other income was impacted by the settlement of two lawsuits. In one case,
the Company received payment of $150,000 in connection with a customer's
failure to perform on a purchase order issued by them to the Company. In
July 2004, the Company also settled a portion of the New Image litigation
by agreeing to pay New Image approximately $275,000, net of offsets, for
60,000 of the 125,000 shares of stock held in escrow. The Company will
retain the balance of the shares and anticipates retiring all 125,000
shares in the third quarter of 2004. Other income also includes royalty
fees received from the licensing of Frances Denney products.

As a result of reduced income for the six-month period ended June 30,
2004, the provision for income taxes decreased $141,000, to $237,000 from
the $378,000 incurred for the corresponding period in 2003. Net income for
the six-month period ended June 30, 2004 was $389,000, compared to $614,000
for the six months ended June 30, 2003. Basic and diluted earnings per
share were $0.09 for the six months ended June 30, 2004, compared to $0.14
for the six months ended June 30, 2003, based on a weighted average number
of shares of 4,360,043 and 4,302,076 for the six months ended June 30, 2004
and 2003, respectively.

For the three months ended June 30, 2004, net sales were $5,556,000,
compared to $6,401,000 for the three months ended June 30, 2003, a decline
of $846,000. Sales of the Professional segment increased slightly, but the
Retail segment declined significantly due to the reduced sales of Quinsana
Medicated Talc to the military. Gross profit for the three months ended
June 30, 2004 was $2,342,000, compared to gross profit of $2,994,000
achieved for the corresponding three-month period in 2003. The gross
profit margin decreased to 42.2% for the three months ended June 30, 2004,
from 46.8% for the corresponding period in 2003 as discussed above.

Selling, general and administrative expenses for the three months
ended June 30, 2004 decreased by $569,000, from $2,745,000 to $2,176,000,
when compared to the corresponding three-month period of 2003, largely as a
result of the "going-private" expenses discussed previously.

Interest income for the three-month period ended June 30, 2004 was
$48,000, a decrease of approximately $14,000 when compared to $62,000
earned in the corresponding three-month period of 2003, as a result of
lower interest rates. Due in large part to the retirement of the Colgate
debt, interest expense for the three-month period ended June 30, 2004 was

20


THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2004 AND 2003


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

$24,000, a decrease of $88,000 from the $112,000 in the corresponding
three-month period of 2003.

Income taxes for the three months ended June 30, 2004 was $184,000
compared to $78,000, an increase of $106,000 over the corresponding period
in 2003. Net income of $312,000 for the three months ended June 30, 2004,
increased from $134,000 achieved in the three months ended June 30, 2003.
Income taxes and net income increased as a direct result of the settlements
reached in the second and third quarters, as discussed above. Basic and
diluted earnings per share were $0.07 for the three months ended June 30,
2004 and $0.03 for the three months ended June 30, 2003, based on a
weighted average number of shares of 4,365,376 and 4,303,254 for the three
months ended June 30, 2004 and 2003, respectively.


LIQUIDITY & CAPITAL RESOURCES

Cash and cash equivalents decreased $600,000 from December 31, 2003,
to $12,701,000 at June 30, 2004. Total cash of $17,789,000 at June 30,
2004 includes $5,088,000 of cash invested in a certificate of deposit
pledged as collateral for a bank loan. As indicated in the Company's Form
10-Q filed for the first quarter ended March 31, 2004, the decline in cash
was due to payments made in the second quarter of 2004 for officers bonuses
and the retirement of the Colgate-Palmolive debt, which totaled $1,681,000.
Accounts receivable were $1,711,000 at June 30, 2004, an increase of
$266,000 from the $1,445,000 at December 31, 2003; inventories decreased
approximately $119,000 from $7,497,000 at December 31, 2003 to $7,378,000
at June 30, 2004.

Total current assets at June 30, 2004 were $21,921,000 compared to
$23,029,000 at December 31, 2003. Working capital increased $389,000 when
compared to December 31, 2003, due to a decrease in the current portion of
long-term debt as a result of the settlement with Colgate-Palmolive
referred to above. In addition to renewal premiums due in July 2004 on the
Company's insurance policies and the New Image settlement discussed above,
(both totaling approximately $600,000), the Company will also utilize
approximately $8,750,000 of cash to pay a special dividend of $2.00 per
share to all shareholders of record as of September 8, 2004, to be paid on
September 15, 2004.

The Company does not have any off-balance sheet financing or similar
arrangements.


21


THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2004 AND 2003


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

NEW FINANCIAL ACCOUNTING STANDARDS

See Note 1 to the Financial Statements included in Part I, Item 1 for
a discussion of new financial accounting standards.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results would
differ significantly from those estimates if different assumptions were
used or unexpected events transpire. Please see Item 7 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003 filed with
the Securities and Exchange Commission.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company does not participate in derivative or other financial
instruments for which fair value disclosure would be required under SFAS
No. 107. In addition, the Company does not invest in securities that would
require disclosure of market risk, nor does it have floating rate loans or
foreign currency exchange rate risks.


ITEM 4. CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: Based upon an
evaluation of the Company's disclosure controls and procedures, which was
completed as of June 30, 2004 (the "Evaluation Date"), the Company's
principal executive officer and chief financial officer have concluded that
the disclosure controls and procedures in place were effective as of the
Evaluation Date.

(b) CHANGES IN INTERNAL CONTROLS: To the best of the Company's
knowledge and belief, there have been no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the Evaluation Date.




22




THE STEPHAN CO. AND SUBSIDIARIES
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
JUNE 30, 2004 AND 2003


PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

See Note 3 to the Financial Statements included in Part I, Item 1 for
a discussion of legal proceedings.

Other than the above, there has been no material change in the status
of any other pending litigation since our last periodic report.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

10.18 Employment Agreement between David Spiegel and The
Stephan Co. dated April 29, 2004.

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.

32.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.

32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.


(b) Reports on Form 8-K during the quarter ended June 30, 2004:

Current report on Form 8-K filed on April 15, 2004, in connection
with the receipt of a warning letter from the American Stock Exchange
regarding the previously disclosed failure to hold an annual meeting of
stockholders.

Current report on Form 8-K filed on June 10, 2004, in connection
with the response, by Counsel to the Special Committee, to a stock
acquisition proposal by Richard L. Scott Investments, LLC.



23




SIGNATURES



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



THE STEPHAN CO.




/s/ Frank F. Ferola
_____________________________________
Frank F. Ferola
President and Chief Executive Officer
August 31, 2004




/s/ David A. Spiegel
____________________________________
David A. Spiegel
Chief Financial Officer
August 31, 2004






















24