10-Q

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from		_____________	To ______________
STEINER LEISURE LIMITED (Exact name of Registrant as Specified in its Charter)
Commission File Number: 0-28972
Commonwealth of The Bahamas				98-0164731
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)
Suite 104A, Saffrey Square
Nassau, The Bahamas				Not Applicable
(Address of principal executive offices)				(Zip Code)
(242) 356-0006 (Registrant's telephone number, including area code)
		(Former name , former address and former fiscal year, if changed since last report)
Indicate by check 4 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.           [4 ]  Yes    [   ]  No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).             [4 ]  Yes    [   ]  No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class			Outstanding
Common Shares, par value (U.S.) $.01 per share			16,913,366 which excludes 1,866,406 treasury shares as of August 3, 2004

STEINER LEISURE LIMITED
INDEX
PART I. FINANCIAL INFORMATION		Page No.
ITEM 1.	Unaudited Financial Statements
	Condensed Consolidated Balance Sheets as of December 31, 2003 and June 30, 2004		3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2004		4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2004		5
	Notes to Condensed Consolidated Financial Statements		7
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		14
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		24
ITEM 4.	Controls and Procedures		25
PART II. OTHER INFORMATION
			26
ITEM 4.	Submission of Matters to a Vote of Security Holders
ITEM 6.	Exhibits and Reports on Form 8-K		27
SIGNATURES AND CERTIFICATIONS			28

2

PART I. - FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

STEINER LEISURE LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31,			June 30,
	2003			2004
ASSETS					(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	20,434,000		$	27,180,000
Accounts receivable, net		14,118,000			13,877,000
Accounts receivable - students, net		4,409,000			4,040,000
Inventories		16,644,000			21,603,000
Assets held for sale		557,000			557,000
Other current assets		3,848,000			5,003,000
Total current assets		60,010,000			72,260,000
PROPERTY AND EQUIPMENT, net		49,838,000			50,511,000
GOODWILL, net		46,590,000			46,590,000
OTHER ASSETS:
Intangible assets, net		4,936,000			4,656,000
Deferred financing costs, net		637,000			213,000
Other		3,594,000			3,872,000
Total other assets		9,167,000			8,741,000
Total assets	$	165,605,000		$	178,102,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	8,687,000		$	8,811,000
Accrued expenses		16,577,000			17,864,000
Current portion of long-term debt		9,214,000			5,451,000
Liabilities related to assets held for sale		2,921,000			2,144,000
Current portion of deferred tuition revenue		5,516,000			4,622,000
Gift certificate liability		962,000			912,000
Income taxes payable		2,115,000			2,858,000
Total current liabilities		45,992,000			42,662,000
LONG-TERM DEBT, net of current portion		19,158,000			13,896,000
LONG-TERM DEFERRED RENT		910,000			865,000
LONG-TERM DEFERRED TUITION REVENUE		213,000			212,000
MINORITY INTEREST		47,000			--
SHAREHOLDERS' EQUITY:
Preferred shares, $.0l par value; 10,000,000 shares authorized, none
issued and outstanding		--			--
Common shares, $.0l par value; 100,000,000 shares authorized,
18,330,000 shares issued in 2003 and 18,711,000 shares issued
in 2004		183,000			187,000
Additional paid-in capital		40,850,000			45,975,000
Accumulated other comprehensive income		1,881,000			1,449,000
Retained earnings		85,742,000			102,227,000
Treasury shares, at cost, 1,866,000 shares in 2003 and 2004		(29,371,000	)		(29,371,000	)
Total shareholders' equity		99,285,000			120,467,000
Total liabilities and shareholders' equity	$	165,605,000		$	178,102,000

The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets.

3

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2004
(Unaudited)

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2003			2004			2003			2004
REVENUES: REVENUES:
Services	$	45,897,000		$	56,805,000		$	91,772,000		$	112,772,000
Products		19,935,000			26,223,000			39,225,000			51,161,000
Total revenues		65,832,000			83,028,000			130,997,000			163,933,000
COST OF REVENUES:
Cost of services		37,350,000			44,796,000			74,082,000			89,045,000
Cost of products		14,950,000			19,367,000			29,418,000			37,629,000
Total cost of revenues		52,300,000			64,163,000			103,500,000			126,674,000
Gross profit		13,532,000			18,865,000			27,497,000			37,259,000
OPERATING EXPENSES:
Administrative		3,337,000			4,384,000			6,705,000			8,688,000
Salary and payroll taxes		4,197,000			4,856,000			8,417,000			9,683,000
Total operating expenses		7,534,000			9,240,000			15,122,000			18,371,000
Income from operations		5,998,000			9,625,000			12,375,000			18,888,000
OTHER INCOME (EXPENSE):
Interest expense		(852,000	)		(600,000	)		(1,819,000	)		(1,254,000	)
Other income		412,000			25,000			425,000			41,000
Total other income (expense)		(440,000	)		(575,000	)		(1,394,000	)		(1,213,000	)
Income from continuing operations before provision        for income taxes, minority interest and equity        investment		5,558,000			9,050,000			10,981,000			17,675,000
PROVISION FOR INCOME TAXES		309,000			671,000			642,000			1,284,000
Income from continuing operations before minority        interest and equity investment		5,249,000			8,379,000			10,339,000			16,391,000
MINORITY INTEREST		4,000			--			6,000			--
INCOME IN EQUITY INVESTMENT		38,000			75,000			140,000			191,000
Income from continuing operations before        discontinued operations		5,291,000			8,454,000			10,485,000			16,582,000
LOSS FROM DISCONTINUED OPERATIONS (which includes loss on disposal of $715,000 and $1,548,000 for the three and six months ended 2003 and $2,000 and $7,000 for the three and six months ended 2004, respectively), net of taxes		(1,303,000	)		(25,000	)		(3,134,000	)		(97,000	)
Net income	$	3,988,000		$	8,429,000		$	7,351,000		$	16,485,000
Income (loss) per share-basic:
Income before discontinued operations	$	0.32		$	0.51		$	0.64		$	1.00
Loss from discontinued operations		(0.08	)		--			(0.19	)		--
	$	0.24		$	0.51		$	0.45		$	1.00
Income (loss) per share-diluted:
Income before discontinued operations	$	0.32		$	0.49		$	0.64		$	0.97
Loss from discontinued operations		(0.08	)		--			(0.19	)		(0.01	)
	$	0.24		$	0.49		$	0.45		$	0.96

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

4

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2004

(Unaudited)

	Six Months Ended
	June 30,
	2003			2004
CASH FLOWS FROM OPERATING ACTIVITIES   OF CONTINUING OPERATIONS:
Net income	$	7,351,000		$	16,485,000
Loss from discontinued operations		1,586,000			90,000
Loss on disposal of discontinued operations		1,548,000			7,000
Income from continuing operations		10,485,000			16,582,000
Adjustments to reconcile income from continuing   operations to net cash provided by operating activities   of continuing operations:
Depreciation and amortization		3,609,000			4,354,000
Provision for doubtful accounts		133,000			119,000
Minority interest		(6,000	)		--
Income in equity investment		(140,000	)		(191,000	)
(Increase) decrease in:
Accounts receivable		2,263,000			633,000
Inventories		1,770,000			(4,878,000	)
Other current assets		1,559,000			(1,151,000	)
Other assets		216,000			(54,000	)
Increase (decrease) in:
Accounts payable		(3,540,000	)		54,000
Accrued expenses		375,000			1,244,000
Income taxes payable		(335,000	)		742,000
Deferred tuition revenue		(276,000	)		(895,000	)
Gift certificate liability		78,000			(50,000	)
Net cash provided by operating activities of    continuing operations		16,191,000			16,509,000
CASH FLOWS FROM INVESTING ACTIVITIES   OF CONTINUING OPERATIONS:
Capital expenditures		(3,189,000	)		(4,312,000	)
Net cash used in investing activities of    continuing operations		(3,189,000	)		(4,312,000	)

(Continued)

5

STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2004

(Unaudited)

	Six Months Ended
	June 30,
	2003			2004
CASH FLOWS FROM FINANCING ACTIVITIES   OF CONTINUING OPERATIONS:
Payments on long-term debt	$	(5,407,000	)	$	(9,058,000	)
Debt issuance costs		(298,000	)		(26,000	)
Proceeds from share option exercises		158,000			5,129,000
Net cash used in financing activities    of continuing operations		(5,547,000	)		(3,955,000	)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH		154,000			(622,000	)
NET CASH USED IN DISCONTINUED OPERATIONS		(7,659,000	)		(874,000	)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS		(50,000	)		6,746,000
CASH AND CASH EQUIVALENTS,
Beginning of period		15,175,000			20,434,000
CASH AND CASH EQUIVALENTS,
End of period	$	15,125,000		$	27,180,000
SUPPLEMENTAL DISCLOSURES OF    CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	1,099,000		$	790,000
Income taxes	$	1,057,000		$	585,000

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

6

STEINER LEISURE LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) BASIS OF PRESENTATION OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

The unaudited condensed consolidated statements of operations of Steiner Leisure Limited (including its subsidiaries, "Steiner Leisure," the "Company," "we" and "our") for the three and six months ended June 30, 2003 and 2004 reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly present the results of operations for these interim periods. The results of operations for any interim period are not necessarily indicative of results for the full year.

The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and the Company's other filings with the Securities and Exchange Commission.

(2) ORGANIZATION:

Steiner Leisure is a worldwide provider of spa services. The Company, incorporated in the Bahamas, commenced operations effective November 1995 with the contributions of substantially all of the assets and certain of the liabilities of the Maritime Division (the "Maritime Division") of Steiner Group Limited, now known as STGR Limited ("Steiner Group"), a U.K. company and an affiliate of the Company, and all of the outstanding common stock of Coiffeur Transocean (Overseas), Inc. ("CTO"), a Florida corporation and a wholly owned subsidiary of Steiner Group. These operations consisted almost entirely of offering spa services and products on cruise ships. The contributions of the net assets of the Maritime Division and CTO were recorded at historical cost in a manner similar to a pooling of interests.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(a) Inventories

Inventories, consisting principally of beauty products, are stated at the lower of cost (first-in, first-out) or market. Manufactured finished goods include the cost of raw material, labor and overhead. Inventories consist of the following:

		December 31,		June 30,
		2003		2004
Finished Goods	$	13,117,000	$	16,684,000
Raw Materials		3,527,000		4,919,000
	$	16,644,000	$	21,603,000

(b) Goodwill

Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. The impairment loss is the amount, if any, by which the implied fair value of goodwill is less than the carrying or book value. In January 2004, the Company performed the required annual impairment test and determined there was no impairment.

7

(c) Income Taxes

The Company files a consolidated tax return for its domestic subsidiaries. In addition, the Company's foreign subsidiaries file income tax returns in their respective countries of incorporation, where required. The Company follows SFAS 109, "Accounting for Income Taxes." SFAS 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. SFAS 109 permits the recognition of deferred tax assets. Deferred income tax provisions and benefits are based on the changes to the asset or liability from period to period. For any partnership interest (including limited liability companies), the Company records its allocable share of income, gains, losses, deductions and credits of the partnership.

(d) Translation of Foreign Currencies

Assets and liabilities of foreign subsidiaries are translated at the rate of exchange in effect at the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are reflected in the accumulated other comprehensive income in the condensed consolidated balance sheets. Foreign currency gains and losses resulting from transactions, including intercompany transactions, are included in the condensed consolidated statements of operations. The transaction gains (losses) reflected in administrative expenses were approximately $7,000 and $176,000 for the three months ended June 30, 2003 and 2004, and approximately $(20,000) and $74,000 for the six months ended June 30, 2003 and 2004, respectively. The majority of the Company's income is generated outside of the United States.

(e) Earnings Per Share

Basic earnings per share is computed by dividing the net income available to shareholders by the weighted average number of outstanding common shares. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator includes dilutive common share equivalents such as share options. The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share is as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2003	2004	2003	2004
Weighted average shares outstanding used in
calculating basic earnings per share	16,393,000	16,668,000	16,389,000	16,574,000
Dilutive common share equivalents	110,000	692,000	95,000	580,000
Weighted average common and common equivalent
shares used in calculating diluted earnings per share	16,503,000	17,360,000	16,484,000	17,154,000
Options outstanding which are not included in the
calculation of diluted earnings per share because
their impact is anti-dilutive	3,271,000	863,000	2,713,000	1,247,000

For the six months ended June 30, 2004, the Company issued 380,429 shares of its common stock upon the exercise of stock options.

(f) Stock-Based Compensation

The Company follows the provisions of SFAS 123, "Accounting for Stock-Based Compensation," in accounting for stock-based transactions with non-employees and, accordingly, records compensation expense in the consolidated statements of operations for such transactions. The Company applies the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations for stock-based transactions with employees, as permitted by SFAS 123.

8

The Company applies APB 25 and related interpretations in accounting for options granted to employees. Accordingly, no compensation cost has been recognized related to such grants. Had compensation cost for the Company's shares been based on fair value at the grant dates for awards under the Company's option plan consistent with the methodologies of SFAS 123, the Company's three and six months ended June 30, 2003 and 2004 net income and diluted earnings per share would have been reduced to the pro forma amounts indicated below:

			Three Months Ended June 30,				Six Months Ended June 30,
			2003		2004		2003		2004
Compensation expense	As reported	$	-	$	-	$	-	$	-
	Pro forma		2,240,000		1,331,000		4,410,000		2,758,000
Net income	As reported		3,988,000		8,429,000		7,351,000		16,485,000
	Pro forma		1,748,000		7,098,000		2,941,000		13,727,000
Basic earnings per share	As reported		0.24		0.51		0.45		1.00
	Pro forma		0.11		0.43		0.18		0.83
Diluted earnings per share	As reported		0.24		0.49		0.45		0.96
	Pro forma		0.11		0.41		0.18		0.80

The fair value of each option grant is estimated on the date of grant using the Black-Scholes model with the following assumptions: expected volatility of 59.1% and 57.7%, risk-free interest rate of 6.0% and 4.0%, expected dividends of $0 and expected term of 6.5 years and 6 years for the three and six months ended June 30, 2003 and 2004, respectively.

(g) Advertising Costs

Substantially all of our advertising costs are charged to expense as incurred, except costs which result in tangible assets, such as brochures, which are recorded as prepaid expenses and charged to expense as consumed. Advertising costs were approximately $1,115,000 and $1,516,000 for the three months ended June 30, 2003 and 2004, and approximately $2,550,000 and $3,001,000 for the six months ended June 30, 2003 and 2004, respectively. At December 31, 2003 and June 30, 2004, the amounts of advertising costs included in prepaid expenses were not material.

(h) Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities an Interpretation of ARB No. 51" ("FIN 46"), to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In December 2003, the FASB issued FIN 46(R) to clarify certain provisions of FIN 46 and to modify the effective date of such provisions for public companies. Previously, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changed that by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the expected losses (as defined) from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variab le interest entities that the company is not required to consolidate but in which it has a significant variable interest. Based on the revised guidance, all public companies must apply the provisions of FIN 46(R) to variable interests commonly referred to as special-purpose entities (an "SPE"), where such interests were created prior to February 1, 2003, no later than periods ending after December 15, 2003. Interests created in non-SPE variable interest entities after January 31, 2003 but before December 31, 2003 were subject to the provisions of the original FIN 46 in 2003.  The provisions of FIN 46(R) must be applied to all variable interests created after December 31, 2003 upon initial involvement with the variable interest entity. We have determined that we have no variable interest entities. As a result, the adoption of FIN 46 did not have an effect on our consolidated financial position or results of operations.

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(4) DISCONTINUED OPERATIONS:

In 2002 and 2003, the Company sold and/or disposed of its day spa segment, with the exception of two of its day spas. The day spa segment primarily consisted of the financial position and results of operations of the Greenhouse and C.Spa day spa chains. In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the operating results of the day spa segment, excluding the day spas that are being kept, are reported in discontinued operations and the remaining assets and liabilities are classified as assets held for sale and liabilities related to assets held for sale, respectively, in the condensed consolidated balance sheets as of December 31, 2003 and June 30, 2004.

Additional information regarding the Company's discontinued day spa operations is as follows:

		Three Months Ended June 30,				Six Months Ended June 30,
		2003		2004		2003		2004
Revenues	$	141,000	$	--	$	2,788,000	$	--
Loss from operations, net of taxes		588,000		23,000		1,586,000		90,000
Loss on disposal, net of taxes		715,000		2,000		1,548,000		7,000

		December 31,		June 30,
		2003		2004
Assets held for sale
Current assets	$	557,000	$	557,000
	$	557,000	$	557,000
Liabilities related to assets held for sale
Accounts payable & accrued expenses	$	1,279,000	$	781,000
Gift certificate liability		1,351,000		1,280,000
Other liabilities		291,000		83,000
	$	2,921,000	$	2,144,000

In connection with the sales of the Company's day spa assets to third parties, the Company remains liable under certain leases for those day spas in the event third party lease assignees fail to pay rent under such leases. The total amount that the Company remains liable for under such assigned leases, if the assignees fail to make the required payments, was approximately $3.8 million as of June 30, 2004.

In connection with the discontinued day spa operations, the President and Chief Executive Officer of the day spas segment terminated her employment with the Company and received options to purchase 100,000 common shares of the Company and a severance payment of $748,000 during the second quarter of 2003.

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(5) DERIVATIVE FINANCIAL INSTRUMENT:

Effective September 28, 2003, the Company entered into an interest rate swap agreement to reduce its exposure to market risks from changing interest rates. Under the swap agreement, the Company agreed to exchange the difference between fixed and variable interest amounts calculated by reference to a notional principal amount. Any differences paid or received on interest rate swap agreements were recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the underlying obligation. The Company did not hold or issue such financial instruments for trading purposes. Derivatives used for hedging purposes must be designated as, and effective as, a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in the fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.

The interest rate swap agreement matured on July 2, 2004. The interest rate swap agreement effectively converted a portion of the Company's London Interbank Offered Rate ("LIBOR") based variable rate borrowings into fixed rate borrowings with a pay rate of 4.1%. The Company recorded unrealized gains of $81,000 and $0 in accumulated other comprehensive income for the three months ended June 30, 2003 and 2004 and $162,000 and $4,000 for the six months ended June 30, 2003 and 2004, respectively, in connection with this swap. There was no gain or loss on the swap as a result of ineffectiveness. Prepayment of the loan, changes in counterparty creditworthiness and changing market conditions could result in the reclassification into earnings of gains and losses that are reported in accumulated other comprehensive income (loss). The Company reclassified losses of $80,000 and $3,000 related to the interest rate swap into interest expense in the first three months ended June 30, 2003 and 2004, and $216,000 and $8,000 in the six months ended June 30, 2003 and 2004, respectively.

(6) ACCRUED EXPENSES:

Accrued expenses consists of the following:

		December 31,		June 30,
		2003		2004
Operative commissions	$	2,821,000	$	3,059,000
Minimum line commissions		4,952,000		5,851,000
Payroll and bonuses		3,454,000		3,375,000
Rent		884,000		884,000
Interest		123,000		123,000
Other		4,343,000		4,572,000
Total	$	16,577,000	$	17,864,000

(7) LONG-TERM DEBT:

Long-term debt consists of the following:

		December 31,			June 30,
		2003			2004
Term loan	$	9,000,000		$	--
Revolving loan		9,796,000			9,796,000
Subordinated notes		5,170,000			5,342,000
Note payable		4,100,000			4,100,000
Other debt		306,000			109,000
Total long-term debt		28,372,000			19,347,000
Less: current portion		(9,214,000	)		(5,451,000	)
Long-term debt, net of current portion	$	19,158,000		$	13,896,000

11

In July 2001, the Company entered into a credit agreement with a syndicate of banks that provides for a term loan of $45 million and a revolving facility of up to $10 million. Borrowings under the credit agreement are secured by substantially all of the assets of the Company and bear interest primarily at LIBOR based rates plus a spread that is dependent upon the Company's financial performance. Borrowings under the term loans was used to fund the Company's July 2001 acquisitions of land-based spas and under the revolving facility have been used for working capital needs. In the first quarter of 2003, the credit agreement was amended to permit the Company to forego making a portion of the principal payments under the term loan during the quarter. Those unpaid principal payments were amortized over the remainder of the term of the loan. In December 2003, the Company entered into an amended and restated credit agreement. The terms and conditions of the new agreement are substantially t he same as the former agreement except that the maturity date of the revolving loan has been extended one year to July 2, 2005. The term loan was scheduled to mature on July 2, 2004 and was repaid in June 2004. The interest rate as of June 30, 2004 was 3.9% for the revolving facility. As of June 30, 2004, there was no availability under the revolving facility.

The credit agreement contains customary affirmative, negative and financial covenants, including limitations on dividends, capital expenditures and funded debt, and requirements to maintain prescribed interest expense and fixed charge coverage ratios. As of June 30, 2004, the Company was in compliance with all of these financial covenants.

The subordinated notes are due to the former owners of a 60% interest in Mandara Spa. Interest on the $3.9 million notes accrues quarterly, but is payable on the maturity date. Interest on the $1.4 million notes accrues and is payable quarterly. The interest rate on all of the notes is 9% per annum and they all mature on January 2, 2005.

The note payable is due to the company that formerly owned a 40% minority interest in Mandara Spa. That note bears interest at the rate of approximately 9%, per annum, payable quarterly and matures on various dates through March 31, 2006.

All of the long-term debt is denominated in US dollars.

(8) COMPREHENSIVE INCOME:

SFAS 130, "Reporting Comprehensive Income," establishes standards for reporting and disclosure of comprehensive income and its components in financial statements. The components of the Company's comprehensive income are as follows:

		Three Months Ended June 30,					Six Months Ended June 30,
		2003		2004			2003		2004
Net income	$	3,988,000	$	8,429,000		$	7,351,000	$	16,485,000
Unrealized gain on interest rate
swap, net of taxes		81,000		--			162,000		4,000
Foreign currency translation adjustments,
net of taxes		678,000		(546,000	)		509,000		(436,000	)
Comprehensive income	$	4,747,000	$	7,883,000		$	8,022,000	$	16,053,000

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(9) SEGMENT INFORMATION:

Information about the Company's Spa Operations and Schools segments for the three and six months ended June 30, 2003 and 2004 is as follows:

		Three Months Ended June 30,				Six Months Ended June 30,
		2003		2004		2003		2004
Revenues:
Spa Operations	$	61,818,000	$	78,911,000	$	122,979,000	$	155,460,000
Schools		4,014,000		4,117,000		8,018,000		8,473,000
	$	65,832,000	$	83,028,000	$	130,997,000	$	163,933,000
Operating Income:
Spa Operations	$	5,739,000	$	9,134,000	$	11,820,000	$	17,638,000
Schools		259,000		491,000		555,000		1,250,000
	$	5,998,000	$	9,625,000	$	12,375,000	$	18,888,000

		December 31,		June 30
		2003		2004
Identifiable Assets:
Spa Operations	$	142,180,000	$	153,777,000
Schools		23,425,000		24,325,000
	$	165,605,000	$	178,102,000

Included in identifiable assets of the Spa Operations segment at December 31, 2003 and June 30, 2004 are assets held for sale of $557,000.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Steiner Leisure Limited is a worldwide provider of spa services. We sell our services and products to cruise passengers and at luxury resort and day spas primarily in the United States, the Caribbean, the Pacific, Asia and Mexico. Payments to cruise lines, resort spa owners and day spa landlords are based on a percentage of our revenues and, in certain cases, a minimum annual rental or a combination of both. In 2003, we completed the disposition of our discontinued day spa operations, leaving us with our two Elemis flagship luxury day spas - one in London, England and one in Coral Gables, Florida.

Our revenues are generated principally from our cruise ship operations. Accordingly, our success and our growth is dependent to a significant extent on the success and growth of the travel and leisure industry in general and on the cruise industry in particular.

The cruise industry is subject to significant risks that could affect our results of operations. Accidents and other incidents involving cruise ships and other unscheduled withdrawals of ships from service, adverse international developments reducing travel generally, delays in new ship introductions, restricted access of cruise ships to environmentally sensitive regions, increases in fuel costs, shipboard illness outbreaks and potential overcapacity could materially adversely impact the cruise industry.

Our resort spas are dependent on the resort hotel industry for their success. The hotel resort industry is subject to risks that are, in many ways, similar to that of the cruise industry, including the following risks: changes in the national, regional and local economic and/or political climate (including major national or international terrorism, hostilities or other events), local conditions, including oversupply of hotel properties, illnesses, labor unrest, changes in popular travel patterns and other causes of reduced hotel occupancy.

A significant factor in our financial results is the amounts we are required to pay under our agreements with the cruise lines. Certain cruise line agreements provide for increases in percentages of revenues payable over the terms of those agreements. These payments may also be increased under new agreements with cruise lines (and land-based lessors) that replace expiring agreements. In general, we have experienced increases in these payments as a percentage of revenues upon renewing new agreements with cruise lines.

An increasing amount of revenues has come from our third party retail product sales. We distribute these products through mail order, our web sites, third party retail outlets and other channels.

We also offer post secondary degree and non-degree programs in massage therapy, skin care and related areas at our schools in Florida (comprised of four campuses) and our two schools (comprised of a total of three campuses) in Maryland, Pennsylvania and Virginia.

A significant portion of our operations is conducted on ships through entities that are not subject to income taxation. Historically, a significant amount of our income has not been subject to tax in the United States or other jurisdictions. To the extent that our non-shipboard revenues increase as a percentage of our overall revenues, the amount of our income that will be subject to tax would increase.

Key Performance Indicators

Cruise Industry Operations. A measure of performance we have used in connection with our periodic financial disclosure relating to our cruise line operations is that of revenue per staff per day. In using that measure we have differentiated between our revenue per staff per day on ships with large spas and other ships we serve. Our revenue per staff per day has been affected by the increasing requirements of cruise lines that we place additional non-revenue producing staff on ships with large spas to help maintain a high quality guest experience. We also utilize, as measures of performance for our cruise line operations, our average revenue per week and our revenue per passenger per day.

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Resort Spas. With respect to our resort spas we measure our performance primarily through average weekly revenue over applicable periods of time.

Schools. With respect to our massage therapy schools, we measure performance by the number of new student enrollments. A new student enrollment occurs each time a new student commences classes at one of our schools.

Products. With respect to sales of our products other than on cruise ships and at our resort and day spas, we measure performance by revenues.

Critical Accounting Policies

We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. This discussion is not intended to be a comprehensive description of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. The impact on our business operations and any associated risks related to these policies is discussed under results of operations, below, where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements in Item 15 of Steiner Leisure's Annual Report on Form 10-K for 2003 filed with the Securities and Exchange Commission. Note that our preparation of this Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Cost of revenues includes:

• cost of services, including an allocable portion of wages paid to shipboard and land-based spa employees, payments to cruise lines and land-based spa lessors and other staff-related shipboard expenses, spa facilities depreciation, as well as, with respect to our schools, directly attributable campus costs such as rent and employee wages; and
• cost of products, including an allocable portion of wages paid to shipboard and land-based spa employees, payments to cruise lines and land-based spa lessors and other staff-related shipboard expenses, as well as costs associated with development, manufacturing and distribution of products.

Cost of revenues may be affected by, among other things, sales mix, production levels, exchange rates, changes in supplier prices and discounts, purchasing and manufacturing efficiencies, tariffs, duties, freight and inventory costs. Certain cruise line agreements provide for increases in the percentages of services and products revenues and/or, as the case may be, the amount of minimum annual line commissions payable over the terms of such agreements. These payments may also be increased under new agreements with cruise lines and land-based lessors that replace expiring agreements.

Cost of products includes the cost of products sold through our various methods of distribution. To a lesser extent, cost of products also includes the cost of products consumed in rendering services. This amount would not be a material component of the cost of services rendered and would not be practicable to identify separately.

Operating expenses include administrative expenses, salary and payroll taxes. In addition, operating expenses include amortization of intangibles relating to our acquisitions of resort spas in 2001.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets in question. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. For certain properties, leasehold improvements are amortized over the lease term which includes renewal periods that may be obtained at our option

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and that are considered significant to the continuation of our operations and to the existence of leasehold improvements the value of which would be impaired by our discontinuing use of the leased property. We perform ongoing evaluations of the estimated useful lives of our property and equipment for depreciation purposes. The estimated useful lives are determined and continually evaluated based on the period over which services are expected to be rendered by the asset, industry practice and asset maintenance policies. Maintenance and repair items are expensed as incurred.

Goodwill

Pursuant to SFAS 142 goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. The impairment loss is the amount, if any, by which the implied fair value of goodwill is less than the carrying or book value. As of June 30, 2004, we had unamortized goodwill and intangibles of $51.2 million. In January 2004, we performed the required annual impairment test and determined there was no impairment.

Accounting for Income Taxes

As part of the process of preparing our interim consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with an assessment of temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $24.5 million as of June 30, 2004, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of net operating losses carried forward, before they expire. The valuation allowance is based on our estimates of taxable income and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could impact our financial position and results of operations.

Recently Issued Accounting Standards

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities an Interpretation of ARB No. 51" ("FIN 46"), to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In December 2003, the FASB issued FIN 46(R) to clarify certain provisions of FIN 46 and to modify the effective date of such provisions for public companies. Previously, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changed that by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the expected losses (as defined) from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about va riable interest entities that the company is not required to consolidate but in which it has a significant variable interest. Based on the revised guidance, all public companies must apply the provisions of FIN 46(R) to variable interests commonly referred to as special-purpose entities (an "SPE"), where such interests were created prior to February 1, 2003, no later than periods ending after December 15, 2003. Interests created in non-SPE variable interest entities after January 31, 2003 but before December 31, 2003 were subject to the provisions of the original FIN 46 in 2003.  The provisions of FIN 46(R) must be applied to all variable interests created after December 31, 2003 upon initial involvement with the variable interest entity. We have determined that we have no variable interest entities. As a result, the adoption of FIN 46 did not have an effect on our consolidated financial position or results of operations.

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Results of Operations

The following table sets forth for the periods indicated, certain selected income statement data expressed as a percentage of revenues:

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2004		2003		2004
Revenues:
Services	69.7	%	68.4	%	70.1	%	68.8	%
Products	30.3		31.6		29.9		31.2
Total revenues	100.0		100.0		100.0		100.0
Cost of Revenues:
Cost of services	56.7		54.0		56.5		54.3
Cost of products	22.7		23.3		22.5		23.0
Total cost of revenues	79.4		77.3		79.0		77.3
Gross profit	20.6		22.7		21.0		22.7
Operating expenses:
Administrative	5.1		5.3		5.1		5.3
Salary and payroll taxes	6.4		5.8		6.4		5.9
Total operating expenses	11.5		11.1		11.5		11.2
Income from operations	9.1		11.6		9.5		11.5
Other income (expense):
Interest expense	(1.3	)	(0.7	)	(1.4	)	(0.7	)
Other income	0.6		--		0.3		--
Total other income (expense)	(0.7	)	(0.7	)	(1.1	)	(0.7	)
Income from continuing operations before provision for     income taxes, minority interest and equity investment	8.4		10.9		8.4		10.8
Provision for income taxes	0.4		0.8		0.5		0.8
Income from continuing operations before minority     interest and equity investment	8.0		10.1		7.9		10.0
Minority interest and equity investment	0.1		0.1		0.1		0.1
Income from continuing operations before discontinued     operations	8.1		10.2		8.0		10.1
Loss from discontinued operations, net of taxes	(2.0	)	(0.1	)	(2.4	)	--
Net income	6.1	%	10.1	%	5.6	%	10.1	%

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Revenues. Revenues increased approximately 26.1%, or $17.2 million, to $83.0 million in the second quarter of 2004 from $65.8 million in the second quarter of 2003. Of this increase, $10.9 million was attributable to an increase in services revenues and $6.3 million was attributable to an increase in products revenues. The increase in revenues was attributable to an improving leisure industry in the second quarter of 2004 compared to the second quarter of 2003, during which the hostilities in Iraq and the SARS illness had a more significant adverse effect on the leisure industry and our business. Additionally, the increase in revenues was attributable to an average of 10 additional spa ships in service in the second quarter of 2004 compared to the second quarter of 2003. We had an average of 1,454 shipboard staff members in service in the second quarter of 2004 compared to an average of 1,282 shipboard staff members in service in the second quarter of 2003. Revenues per sh ipboard staff per day increased by 10.8% to $420 in the second quarter of 2004 from $379 in the second quarter of 2003.

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Cost of Services. Cost of services increased $7.4 million to $44.8 million in the second quarter of 2004 from $37.4 million in the second quarter of 2003. Cost of services as a percentage of services revenue decreased to 78.9% in the second quarter of 2004 from 81.4% in the second quarter of 2003. This decrease was primarily attributable to increases in staff productively partially offset by increases in commissions allocable on cruise ships covered by agreements that provide for increases in commissions in the second quarter of 2004 compared to the second quarter of 2003.

Cost of Products. Cost of products increased $4.4 million to $19.4 million in the second quarter of 2004 from $15.0 million in the second quarter of 2003. Cost of products as a percentage of products revenue decreased to 73.9% in the second quarter of 2004 from 75.0% in the second quarter of 2003. This decrease was primarily attributable to the introduction and sale of new products with higher margins, partially offset by the increases in commissions allocable to product sales on cruise ships which provide for increases in commissions in the second quarter of 2004 compared to the second quarter of 2003.

Operating Expenses. Operating expenses increased $1.7 million to $9.2 million in the second quarter of 2004 from $7.5 million in the second quarter of 2003. Operating expenses as a percentage of revenues decreased to 11.1% in the second quarter of 2004 from 11.5% in the second quarter of 2003. This decrease was primarily attributable to increases in staff productivity.

Other Income (Expense). Other income (expense) increased $0.2 million to expense of $0.6 million in the second quarter of 2004 from expense of $0.4 million in the second quarter of 2003. This increase was primarily attributable to the receipt of $0.4 million of business interruption insurance proceeds in the second quarter of 2003 offset by a reduction in interest expense in the second quarter of 2004 as a result of a reduction in the outstanding principal amount of our term loan.

Provision for Income Taxes. Provision for income taxes increased $0.4 million to $0.7 million in the second quarter of 2004 from $0.3 million in the second quarter of 2003. The provision for income taxes increased to an overall effective rate of 7.4% for the second quarter of 2004 from an overall effective rate of 5.6% for the second quarter of 2003 primarily due to the income earned in jurisdictions that tax our income representing a greater percentage of the total income earned for the second quarter of 2004 than such income represented for the second quarter of 2003.

Loss from Discontinued Operations, Net of Taxes. The loss from discontinued operations, net of taxes, decreased $1,278,000 to ($25,000) in the second quarter of 2004 from ($1,303,000) in the second quarter of 2003. The loss on disposal, net of taxes, for the second quarter of 2004 was $2,000 compared to $715,000 for the comparable quarter of 2003. The $1,303,000 loss from discontinued operations in the second quarter of 2003, which included the $715,000 loss on disposal, reflected the impact of four day spas that were sold effective April 15, 2003.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Revenues. Revenues increased approximately 25.1%, or $32.9 million, to $163.9 million in the six months ended June 30, 2004 from $131.0 million in the six months ended June 30, 2003. Of this increase, $21.0 million was attributable to an increase in services revenues and $11.9 million was attributable to an increase in products revenues. The increase in revenues was attributable to an improving leisure industry during the six months ended June 30, 2004 compared to the six months ended June 30, 2003, during which the hostilities in Iraq and the SARS illness had a more significant adverse effect on the leisure industry and our business. Additionally, the increase in revenues was attributable to an average of nine additional spa ships in service in the six months ended June 30, 2004 compared to the six months ended June 30, 2003. We had an average of 1,438 shipboard staff members in service in the six months ended June 30, 2004 compared to an average of 1,283 shipboard staff m embers in service in the six months ended June 30, 2003. Revenues per shipboard staff per day increased by 8.9% to $414 in the six months ended June 30, 2004 from $380 in the six months ended June 30, 2003.

Cost of Services. Cost of services increased $14.9 million to $89.0 million in the six months ended June 30, 2004 from $74.1 million in the six months ended June 30, 2003. Cost of services as a percentage of services revenue decreased to 79.0% in the six months ended June 30, 2004 from 80.7% in the six months ended June 30, 2003. This decrease was primarily attributable to increases in staff productivity partially offset by increases in commissions allocable on cruise ships covered by agreements that provide for increases in commissions in the six months ended June 30, 2004 compared to the six months ended June 30, 2003.

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Cost of Products. Cost of products increased $8.2 million to $37.6 million in the six months ended June 30, 2004 from $29.4 million in the six months ended June 30, 2003. Cost of products as a percentage of products revenue was 73.6% in the six months ended June 30, 2004 compared to 75.0% in the six months ended June 30, 2003. The decrease was primarily attributable to the introduction and sale of new products with higher margins, partially offset by the increase in commissions allocable to product sales on cruise ships which provide for increases in commissions in the six months ended June 30, 2004 compared to the six months ended June 30, 2003.

Operating Expenses. Operating expenses increased $3.3 million to $18.4 million in the six months ended June 30, 2004 from $15.1 million in the six months ended June 30, 2003. Operating expenses as a percentage of revenues decreased to 11.2% in the six months ended June 30, 2004 from 11.5% in the six months ended June 30, 2003. The decrease was primarily attributable to increases in staff productivity.

Other Income (Expense). Other income (expense) decreased $0.2 million to expense of $1.2 million in the six months ended June 30, 2004 from expense of $1.4 million in the six months ended June 30, 2003. The decrease was primarily attributable to a reduction in interest expense as a result of a reduction in the outstanding principle of our term loan and a reduction in other income as $0.4 million of business interruption insurance proceeds were received during the six months ended June 30, 2003.

Provision for Income Taxes. Provision for income taxes increased $0.6 million to $1.3 million in the six months ended June 30, 2004 from $0.7 million in the six months ended June 30, 2003. The provision for income taxes increased to an overall effective rate of 7.3% for the six months ended June 30, 2003 from an overall effective rate of 5.8% for the six months ended June 30, 2003 primarily due to the income earned in jurisdictions that tax our income representing a greater percentage of the total income earned for the first six months of 2004 than such income represented for the first six months of 2003.

Loss from Discontinued Operations, Net of Taxes. The loss from discontinued operations, net of taxes, decreased $3.0 million to ($0.1) million in the six months ended June 30, 2004 from ($3.1) million in the six months ended June 30, 2003. The loss on disposal, net of taxes, for the six months ended June 30, 2004 was $7,000 compared to $1.5 million for the comparable period of 2003. The $3.1 million loss from discontinued operations in the six months ended June 30, 2003, which included the $1.5 million loss in disposal, reflected the impact of 14 day spas (ten of which were disposed of during the first quarter of 2003 and four of which were sold effective April 15, 2003).

Liquidity and Capital Resources

Sources and Uses of Cash

During the six months ended June 30, 2004, cash provided by operating activities of continuing operations was $16.5 million compared with $16.2 million for the six months ended June 30, 2003. This increase was attributable to an increase in net income and changes in working capital items.

During the six months ended June 30, 2004, cash used in investing activities was $4.3 million compared with $3.2 million for the six months ended June 30, 2003. We incurred costs of approximately $2.3 million to complete the buildout of our luxury spa facility at the One&Only Palmilla Resort during the six months ended June 30, 2004.

Steiner Leisure had working capital of approximately $14.0 million at December 31, 2003, compared to working capital of approximately $29.6 million at June 30, 2004.

In October 2003, our premier resort spa division, Mandara Spa, entered into agreements to develop and operate luxury spa facilities at the One&Only Palmilla, a resort in Los Cabos, Mexico, and at the Westin Rio Mar Beach Resort in Puerto Rico. The build-out of the Palmilla spa cost $3.5 million and we estimate that the Westin build-out will cost approximately $1.6 million. The Palmilla spa opened in February 2004 and we estimate that the Westin spa will open by October 2004. We funded the Palmilla build-out, and anticipate funding the Westin build-out, from working capital.

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In October 2000, Steiner Leisure entered into an agreement to build and operate a luxury spa facility at the Aladdin Resort and Casino in Las Vegas, Nevada. That luxury spa opened in November 2001. The term of the lease of the facility is 15 years with a five-year renewal option if certain sales levels are achieved. The build-out of the luxury spa cost approximately $13.7 million. The build-out was funded from our working capital and a term loan. The operator of the Aladdin Resort and Casino has filed for protection under Chapter 11 of the Bankruptcy Code. That resort continues to conduct its operations and we have taken steps in the bankruptcy court to protect our leasehold interest at the resort. While the purchase of the Aladdin by a group that includes, among others, Starwood Hotels and Resorts, has been approved by the bankruptcy court, certain approvals have not yet been obtained and we cannot assure you that our operations at the Aladdin Resort and Casino will not be adversel y affected by Aladdin's bankruptcy filing.

In the fourth quarter of 2002, we decided to dispose of, or otherwise close, 17 of the 18 day spas we acquired in 2001. The remaining day spa is located at a hotel and is continuing to operate as part of our resort spa operations. As of April 15, 2003, all of those 17 day spas had been closed or otherwise disposed of pursuant to agreements with landlords and/or, in some cases, agreements with third party acquirers of the spas' assets, including the leases.

These transactions involved our paying to those landlords amounts representing various portions of the rent for the remaining terms of the leases involved. In the transactions involving transfers of spa assets and assignments of the leases, we typically were required to make payments to those acquirers in consideration of their assuming both the lease in question and certain gift certificate liabilities related to the spas in question. The lease assignments to third parties generally do not include a release from the landlords of the spas in question and, accordingly, to the extent that these third parties fail to pay rent under the leases, we would remain liable for that rent. We would, in those instances, have a cause of action for such rental amounts against those third parties. We remain liable for approximately $3.8 million as of June 30, 2004 under such assigned leases, to the extent the assignees fail to make the required payments.

In addition, in connection with these discontinued operations, Celeste Dunn, the former President and Chief Executive Officer of our Steiner Day Spas, Inc. subsidiary, terminated her employment with us. In connection with that termination, Ms. Dunn received a severance payment of $748,000 and options to purchase 100,000 of our common shares during the second quarter of 2003.

Financing Activities

In July 2001, we entered into a credit agreement with a syndicate of banks that provides for a term loan of $45 million and a revolving credit facility of up to $10 million. In the first quarter of 2003, the credit agreement was amended to permit us to forego making a portion of the principal payments under the term loan during that quarter. Those unpaid principal payments were amortized over the remainder of the term of that loan, which was due and paid in full in June 2004. As a result, we have been, and will be, required to make greater principal payments than would otherwise have been the case had the principal payments for the first quarter of 2003 not been postponed. In December 2003, we entered into an amended and restated credit agreement. The terms and conditions of the new agreement are substantially the same as the former agreement except that the maturity date of the revolving loan was extended one year to July 2, 2005. Borrowings under the credit agreement are se cured by substantially all of our assets and bear interest primarily at LIBOR based rates plus a spread that is dependent upon our financial performance. Borrowings under the term loan were used to fund acquisitions and under the revolving facility have been used for working capital needs. As of June 30, 2004, the term loan had been repaid and approximately $9.8 million was outstanding under the revolving facility. At June 30, 2004, the interest rate on the revolving facility was 3.9%. We anticipate repaying the revolving facility from working capital.

The credit agreement contains customary affirmative, negative and financial covenants, including limitations on dividends, capital expenditures and funded debt, and requirements to maintain prescribed interest expense and fixed charge coverage ratios. As of June 30, 2004, we were in compliance with these covenants.

Other limitations on capital expenditures, or on other operational matters, could apply in the future under the credit agreement.

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Effective September 28, 2003, we entered into an interest rate swap agreement to reduce our exposure to market risks from changing interest rates. Under the swap agreement, we agree to exchange the difference between fixed and variable interest amounts calculated by reference to a notional principal amount. Any differences paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the underlying obligation. We do not hold or issue such financial instruments for trading purposes. Derivatives used for hedging purposes must be designated as, and effective as, a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in the fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.

The interest rate swap matured on July 2, 2004. The interest rate swap agreement effectively converted a portion of our LIBOR-based variable rate borrowings into fixed rate borrowings with a pay rate of 4.1%. We recorded gains of $81,000 and $0 in accumulated other comprehensive income for the three months ended June 30, 2003 and 2004 and $162,000 and $4,000 for the six months ended June 30, 2003 and 2004, respectively. We reclassified losses of $80,000 and $3,000 related to the interest rate swap into interest expense for the three months ended June 30, 2003 and 2004, respectively, and $216,000 and $8,000 in the six months ended June 30, 2003 and 2004, respectively.

During the six months ended June 30, 2004, we received proceeds of $5.1 million from share option exercises.

We believe that cash generated from operations is sufficient to satisfy the cash required to operate our current business for the next 12 months. To the extent there is a significant slow-down in travel resulting from terrorist attacks, the war in Iraq, other hostilities, or any other reasons, cash generated from operations may not satisfy the cash required to operate our business. In that case we would need additional outside financing which may not be available on commercially acceptable terms, or at all.

Inflation and Economic Conditions

We do not believe that inflation has had a material adverse effect on our revenues or results of operations. However, public demand for activities, including cruises, is influenced by general economic conditions, including inflation. Periods of economic recession or high inflation, particularly in North America where a substantial number of cruise passengers reside, could have a material adverse effect on the cruise industry upon which we are dependent. Recurrence of the recent softness of the economy in North America and over-capacity in the cruise industry could have a material adverse effect on our business, results of operations and financial condition.

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Cautionary Statement Regarding Forward-Looking Statements

From time to time, including in this report, we may publish "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current views about future events and are subject to known and unknown risks, uncertainties and other factors which may cause our actual results to differ materially from those expressed or implied by such forward-looking statements.

Such forward-looking statements include statements regarding:

• our proposed activities pursuant to agreements with cruise lines or land-based operators;
• our future land-based activities;
• our ability to secure renewals of agreements with cruise lines upon their expiration;
• scheduled introductions of new ships by cruise lines;
• our ability to generate sufficient cash flow from operations;
• the extent of the taxability of our income;
• the effects of acquisitions and new projects;
• our market sensitive financial instruments;
• our future financial results; and
• our ability to increase sales of our products.

Factors that could cause actual results to differ materially from those expressed or implied by our forward-looking statements include the following:

• our dependence on cruise line concession agreements of specified terms that are, in some cases, terminable by cruise lines with limited or no advance notice under certain circumstances;
• our dependence on the cruise industry and the resort industry and our being subject to the risks of those industries, including operation of facilities in countries with histories of economic and/or political instability;
• increasing numbers of days during cruises when ships are in port, which results in lower revenues to us;
• reductions in revenues during periods of major renovations or closures of resorts where we operate spas;
• economic downturns that could reduce the number of customers on cruise ships and at resorts and that could otherwise reduce consumer demand for our products and services and the continuing effect on the economy in general and the travel and leisure segment in particular of the events of September 11, 2001, the hostilities in Iraq, the bombings in Indonesia in October 2002 and August 2003 and the threat of future terrorist attacks and armed hostilities;
• our dependence on a limited number of companies in the cruise industry and further consolidation of companies in the cruise industry;
• our obligation to make minimum payments to certain cruise lines and lessors of land-based spas, irrespective of the revenues received by us from customers;

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• increases in our payment obligations accompanying renewals of expiring cruise line agreements and land-based spa agreements, or the securing of new agreements;

• our dependence on the continued viability of the cruise lines we serve and the resorts where we operate our land-based spas;
• delays in new ship introductions, a reduction in new spa ship introductions and unscheduled withdrawals from service of ships we serve;
• the effects of outbreaks of illnesses, such as SARS, or the perceived risk of such outbreaks, on our resort spa operations in Asia and in other locations, as well as on our cruise ship operations;
• our dependence for success on our ability to recruit and retain qualified personnel;
• our dependence on a single product manufacturer;
• changes in the taxation of our Bahamas subsidiaries and increased amounts of our income being subject to taxation;
• changing competitive conditions, including increased competition from cruise lines that desire to provide spa services themselves and competition from third party providers of shipboard spa services;
• our limited experience in land-based operations including with respect to the integration of acquired businesses;
• risks relating to our non-U.S. operations;
• possible labor unrest or changes in economics based on collective bargaining activities;
• uncertainties beyond our control that could affect our ability to timely and cost-effectively construct land-based spa facilities;
• our need to seek additional financing and the risk that such refinancing may not be available on satisfactory terms, or at all;
• changes in laws and government regulations applicable to us and the cruise industry;
• product liability or other claims against us by customers of our products or services;
• restrictions imposed on us as a result of our credit facility; and
• currency risk.

These risks and other risks are detailed in our Annual Report on Form 10-K for 2003 filed with the Securities and Exchange Commission. That report contains important cautionary statements and a discussion of many of the factors that could materially affect the accuracy of our forward-looking statements and/or adversely affect our business, results of operations and financial position.

Forward-looking statements should not be relied upon as predictions of actual results. Subject to any continuing obligations under applicable law, we expressly disclaim any obligation to disseminate, after the date of this report, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based.

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Our major market risk exposure is changing interest rates. Our policy is to manage interest rate risk through the use of a combination of fixed and floating rate debt and interest rate derivatives based upon market conditions. Our objective in managing the exposure to interest rate changes is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we use interest rate swaps to manage net exposure to interest rate changes to our borrowings. These swaps are entered into with a group of financial institutions with investment grade credit ratings, thereby reducing the risk of credit loss.

Effective September 28, 2003, we entered into an interest rate swap agreement to reduce our exposure to market risks from changing interest rates. Under the swap agreement, we agreed to exchange the difference between fixed and variable interest amounts calculated by reference to a notional principal amount. Any differences paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the underlying obligation. We do not hold or issue such financial instruments for trading purposes. Derivatives used for hedging purposes must be designated as, and effective as, a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in the fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.

The interest rate swap agreement matured on July 2, 2004. The interest rate swap agreement effectively converted a portion of the Company's LIBOR based variable rate borrowings into fixed rate borrowings with a pay rate of 4.1%. The Company recorded unrealized gains of $81,000 and $0 in accumulated other comprehensive income for the three months ended June 30, 2003 and 2004, respectively, and $162,000 and $4,000 for the six months ended June 30, 2003 and 2004, respectively, in connection with this swap. There was no gain or loss on the swap as a result of ineffectiveness. Prepayment of the loan, changes in counterparty creditworthiness and changing market conditions could result in the reclassification into earnings of gains and losses that are reported in accumulated other comprehensive income (loss). The Company reclassified losses of $80,000 and $3,000 related to the interest rate swap into interest expense in the first three months ended June 30, 2003 and 2004, respectively, and $216,000 and $8,000 in the six months ended June 30, 2003 and 2004, respectively.

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Item 4.  Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

Our Chief Executive Officer and Chief Financial and Accounting Officer have evaluated our disclosure controls and procedures and have concluded, as of June 30, 2004, that they are effective as described above.

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2004, identified in connection with an evaluation performed by management, including our Chief Executive Officer and our Chief Financial and Accounting Officer, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

It should be noted that any system of internal control over financial reporting, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our internal control over financial reporting will succeed in achieving its goals under all potential future conditions.

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PART II - OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders

The annual meeting of shareholders of the Company (the "Annual Meeting") was held on June 17, 2004. At the Annual Meeting, the following matters were considered and voted upon:

Charles D. Finkelstein and Jonathan D. Mariner were elected as Class II directors and David S. Harris was elected as a new Class I director. The votes cast with respect to the election of Messrs. Finkelstein and Mariner were as follows: 14,925,350 shares were voted "for" each of the nominees, and 285,992 shares were voted "against" each of the nominees. There were no votes withheld for either of the nominees. The votes cast with respect to the election of Mr. Harris were as follows: 15,078,175 shares were voted "for" the nominee and 133,167 shares were voted "against" the nominee. There were no votes withheld for the nominee.

A proposal to approve the adoption by the Company of its 2004 Equity Incentive Plan, replacing the Company's Amended and Restated 1996 Share Option and Incentive Plan, was approved based on the following vote: 10,482,565 "for," 3,354,519 "against" and 271,231 abstentions.

A proposal to ratify the appointment of Ernst & Young LLP as independent auditors for the Company for the fiscal year ended December 31, 2004 was approved based on the following vote: 15,210,342 votes "for," 300 votes "against" and 700 abstentions.

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PART II. - OTHER INFORMATION

Item 6.	Exhibits and Reports on Form 8-K
		(a) Exhibits
10.31		2004 Equity Incentive Plan
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		(b) Reports on Form 8-K
		We filed or furnished the following reports on Form 8-K during the fiscal quarter ended June 30, 2004: Report dated April 29, 2004 furnished on Item 12 disclosing our reported earnings for the fiscal quarter ended March 31, 2004. This Report on Form 8-K is not deemed to be incorporated by reference into any of our filings with the Securities and Exchange Commission.

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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.

Dated: August 9, 2004

STEINER LEISURE LIMITED

(Registrant)

/s/ Clive E. Warshaw

Clive E. Warshaw
Chairman of the Board

/s/ Leonard I. Fluxman

Leonard I. Fluxman
President and Chief Executive Officer
(principal executive officer)

/s/ Stephen B. Lazarus

Stephen B. Lazarus
Chief Financial Officer
(principal accounting officer)

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1. The following is a list of all exhibits filed as a part of this report:

Exhibit Number	Description
10.31		2004 Equity Incentive Plan
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10

STEINER LEISURE LIMITED

2004 EQUITY INCENTIVE PLAN

1. PURPOSE.

The purpose of the Steiner Leisure Limited 2004 Equity Incentive Plan (hereinafter referred to as this "Plan") is to (i) assist Steiner Leisure Limited (the "Company") in attracting and retaining highly qualified officers, key employees, directors and consultants for the successful conduct of its business; (ii) provide incentives and rewards for persons eligible for Awards which are directly linked to the financial performance of the Company in order to motivate such persons to achieve long-range performance goals; and (iii) allow persons receiving Awards to participate in the growth of the Company.

2. DEFINITIONS .

2.1. " Award " has the meaning set forth in Section 5.1.

2.2. " Award Agreement " has the meaning set forth in Section 5.1.

2.3. " Board " means the Board of Directors of the Company.

2.4. " Cause ," as a basis for termination of employment, means "cause" (or any similar term) as defined in an applicable employment agreement with the Company or any Subsidiary, with respect to any Employee that is a party to an employment agreement and, with respect to other Employees, means termination based on an act or omission of an Employee determined by a supervisor of the Employee or other management personnel of the Company or the Subsidiary in question to be an appropriate basis for termination.

2.5. " Change in Control " A Change in Control of an entity shall be deemed to occur if any of the following circumstances have occurred:

(i) any transaction as a result of which a change in control of the entity would be required to be reported in response to Item 1(a) of the Current Report on Form 8-K as in effect on the date hereof, pursuant to Sections 13 or 15(d) of the Exchange Act, whether or not the entity is then subject to such reporting requirement, otherwise than through an arrangement or arrangements consummated with the prior approval of the entity's board or directors;

(ii) any "person" or "group" within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act (a) becomes the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of more than 20% of the then outstanding voting securities of the entity, otherwise than through a transaction or transactions arranged by, or consummated with the prior approval of, the entity's board of directors or (b) acquires by proxy or otherwise the right to vote for the election of directors, for any merger or consolidation of the entity or for any other matter or question, more than 20% of the then outstanding voting securities of the entity, otherwise than through an arrangement or arrangements consummated with the prior approval of the entity's board of directors;

(iii) with respect to the Company, during any period of 24 consecutive months (not including any period prior to the adoption of this Plan), Present Directors and/or New Directors cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence, "Present Directors" shall mean individuals who, at the beginning of such consecutive 24 month period, were members of the Board and "New Directors" shall mean any director whose election by the Board or whose nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the Directors then still in office who were Present Directors or New Directors;

(iv) any "person" or "group" within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act that is the "beneficial owner" as defined in Rule 13d-3 under the Exchange Act of 20% or more of the then outstanding voting securities of the entity commences soliciting proxies; and

(v) with respect to a particular Employee, there occurs a "change in control," as such term is defined under any employment agreement or service agreement between the Company or any direct or indirect Subsidiary thereof and such Employee, entered into before or after the date of adoption of this Plan (a "Change in Control Agreement"), which provides for, upon such change in control, the acceleration of the vesting of Share Options or otherwise affects Awards that may be made under this Plan; provided, however, that this Section 2.2.(v) applies only with respect to the Award or Awards accelerated, or otherwise affected by such change in control under such Change in Control Agreement.

2.6. " Code " means the United States Internal Revenue Code of 1986, as currently in effect or hereafter amended.

2.7. " Covered Employee shall mean a "covered employee" as defined in Section 162(m) of the Code.

2.8. " Committee " means the committee appointed to administer this Plan in accordance with Section 4 of this Plan.

2.9. " Disability " means "permanent and total disability" as defined in
Section 22(e)(3) of the Code.

2.10. " Employee " means any employee of the Company or any direct or indirect Subsidiary, including officers of the Company and any Subsidiary, as well as such officers who are also directors of the Company.

2.11. " Exchange Act " means the Securities Exchange Act of 1934, as amended.

2.12. " Exercise Payment " means a payment described in Section 8 upon the exercise of a Share Option.

2.13. " Fair Market Value " unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, means, as of any date, the mean of the high and low prices reported per Share on the applicable date (i) as quoted on the Nasdaq National Market or the Nasdaq Small Cap Market (each, a "Nasdaq Market") or (ii) if not traded on a Nasdaq Market, as reported by any principal national securities exchange in the United States on which it is then traded (or if the Shares have not been quoted or reported, as the case may be, on such date, on the first day prior thereto on which the Shares were quoted or reported, as the case may be), except that in the case of a Share Appreciation Right that is exercised for cash during the first three (3) days of the ten (10) day period set forth in Section 7.4 of this Plan, "Fair Market Value" means the highest daily closing price per Share as reported on such Nasdaq Market or exchange during such ten (10) day period. Notwithstanding the fo regoing, if a Share Appreciation Right is exercised during the sixty (60) day period commencing on the date of a Change in Control, the Fair Market Value for purposes of determining the Share Appreciation shall be the highest of (i) the Fair Market Value per Share, as determined under the preceding sentence; (ii) the highest Fair Market Value per Share during the ninety (90) day period ending on the date of exercise of the SAR; (iii) the highest price per Share shown on Schedule 13D or an amendment thereto filed pursuant to Section 13(d) of the

Exchange Act by any person holding 20% of the combined voting power of the Company's then outstanding voting securities; or (iv) the highest price paid or to be paid per Share pursuant to a tender or exchange offer as determined by the Committee. If the Shares are not reported or quoted on a Nasdaq Market or a national securities exchange, its Fair Market Value shall be as determined in good faith by the Committee.

2.14. " Fiscal Year " means the fiscal year then being utilized by the Company for accounting purposes.

2.15. " Incentive Share Option " or "ISO" means any Share Option granted to an Employee pursuant to this Plan which is designated as such by the Committee and which complies with Section 422 of the Code or any successor provision.

2.16. " Non-qualified Share Option " means any Share Option granted to a Participant pursuant to this Plan, which is not an ISO.

2.17. " Option Price " means the purchase price of one Share upon exercise of a Share Option.

2.18. " Performance Award " means an Award described in Section 10 of this Plan.

2.19. " Performance Based Exception " shall mean the exception for qualified performance-based compensation from the deduction limitations of Code Section 162(m).

2.20. " Performance Goals " shall mean the performance goals that a Participant must satisfy to receive payment of a Performance Award as determined in accordance with Section 10 of the Plan.

2.21. " Reorganization " shall be deemed to occur with respect to an entity if that entity is a party to a merger, consolidation, reorganization, or other business combination with one or more entities in which said entity is not the surviving entity, if such entity disposes of substantially all of its assets, or if such entity is a party to a spin-off, split-off, split-up or similar transaction; provided, however, that the transaction shall not be a Reorganization if the entity in question, the Company or a Subsidiary is the surviving entity.

2.22. " Retirement " means termination of employment with the Company by an Employee reaching the age of 55, and having had ten years of continuous service with the Company or a subsidiary.

2.23. " Restricted Shares " means Shares subject to restrictions on the transfer of such Shares, conditions of forfeitability of such Shares or any other limitations or restrictions as determined by the Committee.

2.24. " Settlement Date " means, (i) with respect to any Share Appreciation Rights that have been exercised, the date or dates upon which cash payment is to be made to the Participant, or in the case of Share Appreciation Rights that are to be settled in Shares, the date or dates upon which such Shares are to be delivered to the Participant; (ii) with respect to Performance Awards, the date or dates upon which Shares are to be delivered to the Participant; (iii) with respect to Exercise Payments, the date or dates upon which payment thereof is to be made; and (iv) with respect to grants of Shares, including Restricted Shares, the date or dates upon which such Shares are to be delivered to the Participant, in each case determined in accordance with the terms of the grant (including any Award Agreement) under which any such Award was made.

2.25. " Share " or " Shares " means the common shares of the Company.

2.26. " Share Appreciation " means the excess of the Fair Market Value per Share over the Option Price of the related Share, as determined by the Committee.

B-3

2.27. " Share Appreciation Right " or " SAR " means an Award that entitles a Participant to receive an amount described in Section 7.2.

2.28. " Share Option " or " Option " means an Award that entitles a Participant to purchase one Share for each Option granted.

2.29. " Subsidiary " shall mean any indirect or direct subsidiary of the Company whose financial statements are consolidated with the financial statements of the Company in accordance with generally accepted accounting principles.

3. PARTICIPATION.

The participants in this Plan ("Participants") shall be those persons who are selected to participate in this Plan by the Committee and who are (i) Employees serving in managerial, administrative or professional positions, (ii) directors of the Company or (iii) consultants to the Company or any Subsidiary.

4. ADMINISTRATION .

This Plan shall be administered and interpreted by a committee of two or more members of the Board appointed by the Board. Members of the Committee shall be "Non-Employee Directors" as that term is defined for purposes of Rule 16b-3(b)(3)(i) under the Exchange Act, and "outside directors" for purposes of Code Section 162(m). All decisions and acts of the Committee shall be final and binding upon all Participants. The Committee shall: (i) determine the number and types of Awards to be made under this Plan; (ii) set the Option Price, the number of Options to be awarded and the number of Shares to be awarded out of the total number of Shares available for Awards; (iii) establish any applicable administrative regulations to further the purpose of this Plan; (iv) approve forms of Award agreements between a Participant and the Company; and (v) take any other action desirable or necessary to interpret, construe or implement the provisions of this Plan. Prior to the appointment of the Committee by the Board, or i f the Committee shall not be in existence at any time during the term of this Plan, this Plan shall be administered and interpreted by the Board and, in such case, all references to the Committee herein shall be deemed to refer to the Board.

5. AWARDS .

5.1. Form of Awards . Awards under this Plan may be in any of the following forms (or a combination thereof): (i) Share Options; (ii) Share Appreciation Rights; (iii) Exercise Payment rights; (iv) grants of Shares, including Restricted Shares; or (v) Performance Awards, provided, however, that ISOs may be granted only to employees of a "parent corporation" or "subsidiary corporation," as such terms are defined in Section 424 of the Code (collectively, "Awards"). The Committee may require that any or all Awards under this Plan be made pursuant to an agreement between the Participant and the Company (an "Award Agreement"). Such Award Agreements shall be in such form as the Committee may approve from time to time. The Committee may accelerate Awards and waive conditions and restrictions on any Awards to the extent it may deem appropriate.

5.2. Maximum Amount of Shares Available . The total number of Shares (including Restricted Shares, if any) granted, or covered by Options granted, under this Plan during the term of this Plan shall not exceed 1,500,000. Solely for the purpose of computing the total number of Shares optioned or granted under this Plan, there shall not be counted any Shares which have been forfeited and any Shares covered by Options which, prior to such computation, have terminated in accordance with their terms or have been canceled by the Participant or the Company. The maximum number of Shares that may be subject to an Award granted to a Covered Employee during any Fiscal Year is 150,000.

5.3. Adjustment in The Event of Recapitalization, Etc. In the event of any change in the outstanding Shares of the Company by reason of any share split, share dividend, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change or in the event of any special distribution to the shareholders, the Committee shall make such equitable adjustments in the number of Shares and prices per Share applicable to Options then outstanding and in the number of Shares which are available thereafter for Option Awards or other Awards, both under this Plan as a whole and with respect to individuals, as the Committee determines are necessary and appropriate. Any such adjustment shall be conclusive and binding for all purposes of this Plan.

5.4. Reorganization or Change in Control . Unless otherwise provided in an Award Agreement, in the event of a Reorganization of the Company or a Change in Control of the Company, the Committee may in its sole and absolute discretion, provide on a case by case basis that (i) some or all outstanding Awards may become immediately exercisable or vested, without regard to any limitation imposed pursuant to this Plan, (ii) that Awards shall terminate; provided that the Participant shall have the right, immediately prior to the occurrence of such Reorganization or Change in Control and during such reasonable period as the Committee in its sole discretion shall determine and designate, to exercise any vested Award in whole or in part, and/or (iii) that Awards shall terminate; provided that Participant shall be entitled to a cash payment equal to the excess of the aggregate fair market value (as determined in good faith by the Board) of the Shares subject to the Awards (to the extent then exercisable) over the aggregate Option Price. In the event that the Committee does not terminate an Award upon a Reorganization of the Company then each outstanding Award shall upon exercise thereafter entitle the holder thereof to such number of Shares or other securities or property to which a holder of Shares would have been entitled upon such Reorganization.

5.5. Change in Status of Subsidiary . Unless otherwise provided in an Award Agreement, in the event of a Change in Control or Reorganization of a Subsidiary, or in the event that a Subsidiary ceases to be a Subsidiary, the Board may, in its sole and absolute discretion, (i) provide on a case by case basis that some or all outstanding Awards held by a Participant employed by or performing service for such Subsidiary may become immediately exercisable or vested, without regard to any limitation imposed pursuant to this Plan and/or (ii) treat the employment or other services of a Participant employed by such Subsidiary as terminated if such Participant is not employed by the Company or Subsidiary immediately after such event.

5.6. Dissolution or Liquidation . Upon the dissolution or liquidation of the Company, the Plan shall terminate, and all Awards outstanding hereunder shall terminate. In the event of any termination of the Plan under this Section 5.6, each individual holding an Award shall have the right, immediately prior to the occurrence of such termination and during such reasonable period as the Board in its sole discretion shall determine and designate, to exercise such Award in whole or in part, whether or not such Award was otherwise exercisable at the time such termination occurs and without regard to any vesting or other limitation on exercise imposed pursuant to the Plan.

6. SHARE OPTIONS.

6.1. Grant of Award . The Company may award Options to purchase Shares, including Restricted Shares (hereinafter referred to as "Share Option Awards") to such Participants as the Committee authorizes and under such terms as the Committee establishes. The Committee shall determine with respect to each Share Option Award, and designate in the grant whether a Participant is to receive an ISO or a Non-qualified Share Option.

6.2. Option Price . The Option Price per Share subject to a Share Option Award shall be specified in the grant, but, in no event shall be less than the Fair Market Value per Share on the date of grant. Notwithstanding the foregoing, if the Participant to whom an ISO is granted owns, at the time of the grant, more than ten percent (10%) of the combined voting power of the Company, the Option Price per Share subject to such grant shall be not less than one hundred ten percent (110%) of the Fair Market Value.

6.3. Terms of Option . A Share Option that is an ISO shall not be transferable by the Participant other than as permitted under Section 422 of the Code or any successor provision, and, during the Participant's lifetime, shall be exercisable only by the Participant. Non-qualified Share Options may be subject to such restrictions on transferability and exercise as may be provided for by the Committee in the terms of the grant thereof. A Share Option shall be of no more than ten (10) years' duration, except that an ISO granted to a Participant who, at the time of the grant, owns Shares representing more than ten percent (10%) of the combined voting power of the Company shall by its terms be of no more than five (5) years' duration. A Share Option shall vest in a Participant to whom it is granted and be exercisable only after the earliest of: (i) such period of time as the Committee shall determine and specify in the grant, but, with respect to Employees, in no event less than one (1) year following th e date of grant of such Award; (ii) the Participant's death; or (iii) a Change in Control.

6.4. Exercise of Option . A Share Option is only exercisable by a Participant while the Participant is in active employment with the Company or a Subsidiary or within thirty (30) days after termination of such employment, except (i) during a one-year period after a Participant's death, where the Option is exercised by the estate of the Participant or by any person who acquired such Option by bequest or inheritance; (ii) during a three-month period commencing on the date of the Participant's termination of employment other than due to death, Disability, or by the Company or a Subsidiary for Cause; or (iii) during a one-year period commencing on the Participant's termination of employment on account of Disability. A Share Option may not be exercised pursuant to this paragraph after the expiration date of the Share Option. The foregoing is intended to comply with Section 422 under the Code. To the extent those requirements change, this Section 6.4 shall be deemed to be amended to reflect such change.

An Option may be exercised with respect to part or all of the Shares subject to the Option by giving written notice to the Company of the exercise of the Option. The Option Price for the Shares for which an Option is exercised shall be paid on or within ten (10) business days after the date of exercise in cash (by certified or bank cashier's check), in whole Shares owned by the Participant prior to exercising the Option, in a combination of cash and such Shares or on such other terms and conditions as the Committee may approve. The value of any Share delivered in payment of the Option Price shall be its Fair Market Value on the date the Option is exercised.

6.5. Limitation Applicable to ISOs . The aggregate Fair Market Value (determined at the time such ISO is granted) of the Common Shares for which any individual may have an ISO which first became vested and exercisable in any calendar year (under all option plans of the Company) shall not exceed $100,000. Options granted to such individual in excess of the $100,000 limitation, and any Options issued subsequently which first become vested and exercisable in the same calendar year, shall be treated as Non-Qualified Share Options.

7. SHARE APPRECIATION RIGHTS.

7.1. General . The Committee may, in its discretion, grant SARs to Participants who have received a Share Option Award. The SARs may relate to such number of Shares, not exceeding the number of Shares that the Participant may acquire upon exercise of a related Share Option, as the Committee determines in its discretion. Upon exercise of a Share Option by a Participant, the SAR relating to the Share covered by such exercise shall terminate. Upon termination or expiration of a Share Option, any unexercised SAR related to that Option shall also terminate. Upon exercise of SARs, such rights and the related Share Options, to the extent of an equal number of Shares, shall be surrendered to the Committee, and such SARs and the related Share Options shall terminate.

7.2. Exercise . Upon a Participant's exercise of some or all of the Participant's SARs, the Participant shall receive an amount equal to the value of the Share Appreciation for the number of SARs exercised, payable in cash, Shares, Restricted Shares, or a combination thereof, at the discretion of the Committee.

7.3. Form of Settlement . The Committee shall have the discretion to determine the form in which payment of an SAR will be made, or to permit an election by the Participant to receive cash in full or partial settlement of the SAR. Unless otherwise specified in the grant of the SAR, if a Participant exercises an SAR during the sixty (60) day period commencing on the date of a Change in Control, the form of payment of such SAR shall be cash, provided that such SAR was granted more than six (6) months prior to the date of exercise, and shall be Shares if such SAR was granted six (6) months or less prior to the date of the exercise. Settlement for exercised SARs may be deferred by the Committee in its discretion to such date and under such terms and conditions as the Committee may determine.

7.4. Restrictions on Cash Exercise . Except in the case of an SAR that was granted at least six (6) months prior to exercise and is exercised for cash during the sixty (60) day period commencing on the date of the Change in Control, any election by a Participant to receive cash in full or partial settlement of the SAR, as well as any exercise by a Participant of the Participant's SAR for such cash, shall be made only during the period beginning on the third business day following the date of release of the quarterly or annual summary statements of sales and earnings and ending on the twelfth business day following such date.

7.5. Restrictions . An SAR is only vested, exercisable and transferable during the period when the Share Option to which it is related is also vested, exercisable and transferable, respectively. If the Participant is a person subject to Section 16 of the Exchange Act, the SAR may not be exercised within six (6) months after the grant of the related Share Option, unless otherwise permitted by law.

8. EXERCISE PAYMENTS .

The Committee may grant to Participants holding Share Options the right to receive payments in connection with the exercise of a Participant's Share Options ("Exercise Payments") relating to such number of Shares covered by such Share Options, and subject to such restrictions and pursuant to such other terms as the Committee may determine. Exercise Payments shall be in an amount determined by the Committee in its discretion, which amount shall not be greater than 60% of the excess of the Fair Market Value (as of the date of exercise) over the Option Price of the Shares acquired upon the exercise of the Option. At the discretion of the Committee, the Exercise Payment may be made in cash, Shares, including Restricted Shares, or a combination thereof.

9. GRANTS OF SHARES .

9.1. General . The Committee may grant, either alone or in addition to other Awards granted under this Plan, Shares (including Restricted Shares) to such Participants as the Committee authorizes and under such terms (including the payment of a purchase price) as the Committee establishes. The Committee, in its discretion, may also make a cash payment to a Participant granted Shares or Restricted Shares under this Plan to allow such Participant to satisfy tax obligations arising out of receipt of such Shares or Restricted Shares.

9.2. Restricted Share Terms . Awards of Restricted Shares shall be subject to such terms and conditions as are established by the Committee. Such terms and conditions may include, but are not limited to, the requirement of continued service with the Company, achievement of specified business objectives and other measurements of individual or business unit performance, the manner in which such Restricted Shares are held, the extent to which the holder of such Restricted Shares has rights of a shareholder and the circumstances under which such Restricted Shares shall be forfeited; provided, however, that with respect to Restricted Shares granted to Covered Employees, any performance measures that the Restricted Share are subject to shall be Performance Goals. The Participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber Shares received pursuant to this Section 9 prior to the date on which any applicable restriction established by the Committee lapses. The Participant shall have, with respect to Restricted Shares, all of the rights of a shareholder of the Company, including the right to vote the Restricted Shares and the right to receive any dividends, unless the Committee shall otherwise provide in the grant of such Restricted Shares. Restricted Shares may not be sold or transferred by the Participant until any restrictions that have been established by the Committee have lapsed. Upon the termination of employment of a Participant who is an Employee during the period any restrictions are in effect, all Restricted Shares shall be forfeited without compensation to the Participant unless otherwise provided in the grant of such Restricted Shares.

The Committee shall impose such restrictions on any Restricted Stock or Restricted Stock Units granted pursuant to the Plan as it may deem advisable including, without limitation; time based vesting restrictions, or the attainment of Performance Goals.

10. PERFORMANCE AWARDS.

The Committee may grant, either alone or in addition to other Awards granted under this Plan, Awards of Shares based on the attainment, over a specified period, of individual Performance Goals as the Committee authorizes and under such terms as the Committee establishes. Performance Awards shall entitle the Participant to receive an Award if the measures of performance established by the Committee are met. The Committee, shall determine the times at which Performance Awards are to be made and all conditions of such Awards. The Participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber Shares received pursuant to this Section 10 prior to the date on which any applicable restriction or performance period established by the Committee lapses. Performance Awards may be paid in Shares, Restricted Shares or other securities of the Company, cash or any other form of property that the Committee shall determine. Unless otherwise provided in the Performance Award, a Participant wh o is an Employee must be an Employee at the end of the performance period in order to receive a Performance Award, unless the Participant dies, has reached Retirement or incurs a Disability or under such other circumstances as the Committee may determine.

11. PERFORMANCE GOALS.

"Performance Goals" means the specified performance goals which have been established by the Committee in connection with an Award. Performance Goals will be based on one or more of the following criteria, as determined by the Committee in its absolute and sole discretion: (i) the attainment of certain target levels of, or a specified increase in, the Company's and/or a Subsidiary's or other operational unit's enterprise value or value creation targets; (ii) the attainment

of certain target levels of, or a percentage increase in, the Company's and/or a Subsidiary's or other operational unit's after-tax or pre-tax profits including, without limitation, that attributable to the Company's and/or a Subsidiary's or other operational unit's continuing and/or other operations; (iii) the attainment of certain target levels of, or a specified increase relating to, the Company's and/or a Subsidiary's or other operational unit's operational cash flow or working capital, or a component thereof; (iv) the attainment of certain target levels of, or a specified decrease relating to, the Company's and/or a Subsidiary's or other operational unit's operational costs, or a component thereof (v) the attainment of a certain level of reduction of, or other specified objectives with regard to limiting the level of increase in all or a portion of bank debt or other of the Company's and/or a Subsidiary's or other operational unit's long-term or short-term public or private debt or other similar fina ncial obligations of the Company and/or Subsidiary or other operational unit, which may be calculated net of cash balances and/or other offsets and adjustments as may be established by the Committee; (vi) the attainment of a specified percentage increase in earnings per share or earnings per share from the Company's and/or a Subsidiary's or other operational unit's continuing operations; (vii) the attainment of certain target levels of, or a specified percentage increase in, the Company's and/or a Subsidiary's or other operational unit's net sales, revenues, net income or net earnings or earnings before income tax or other exclusions; (viii) the attainment of certain target levels of, or a specified increase in, the Company's and/or a Subsidiary's or other operational unit's return on capital employed or return on invested capital; (ix) the attainment of certain target levels of, or a percentage increase in, the Company's and/or a Subsidiary's or other operational unit's after-tax or pre-tax return on stockh older equity; (x) the attainment of certain target levels in the fair market value of the Shares; (xi) the growth in the value of an investment in the Shares assuming the reinvestment of dividends; and (xii) the attainment of certain target levels of, or a specified increase in, EBITDA (earnings before income tax, depreciation and amortization). Further, the Performance Goals may be based upon the attainment by the Company and/or a Subsidiary or other operational unit thereof of specified levels of performance under one or more of the foregoing measures relative to the performance of other corporations. To the extent permitted under Code Section 162(m) of the Code (including, without limitation, compliance with any requirements for stockholder approval), the Committee may (i) designate additional business criteria upon which the Performance Goals may be based; (ii) modify, amend or adjust the business criteria described herein or (iii) incorporate in the Performance Goals provisions regarding changes in acco unting methods, corporate transactions (including, without limitation, dispositions or acquisitions) and similar events or circumstances. Performance Goals may include a threshold level of performance below which no Award will be earned, levels of performance at which an Award will become partially earned and a level at which an Award will be fully earned.

12. GENERAL PROVISIONS.

12.1. Assignment . Any assignment or transfer of any Awards granted under this Plan may be effected only if such assignment or transfer does not violate the terms of the Award or this Plan.

12.2. No Separate Monies . Nothing contained herein shall require the Company to segregate any monies from its general funds, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant for any year.

12.3. No Employment Rights . Participation in this Plan shall not affect the Company's right to discharge a Participant or constitute an agreement of employment between a Participant and the Company.

12.4. Governing Law . This Plan shall be interpreted in accordance with, and the enforcement of this Plan shall be governed by, the laws of The Bahamas, subject to any applicable United States federal or state securities laws.

12.5. Headings . The headings preceding the text of the sections of this Plan have been inserted solely for convenience of reference and do not affect the meaning or interpretation of this Plan.

13. AMENDMENT, SUSPENSION OR TERMINATION.

13.1. General Rule . Except as otherwise required under applicable rules of a Nasdaq Market or a securities exchange or other market where the securities of the Company are traded or applicable law, the Board may suspend, terminate or amend this Plan, including, but not limited to, such amendments as may be necessary or desirable resulting from changes in the United States federal income tax laws and other applicable laws, without the approval of the Company's shareholders or Participants; provided, however, that no such action shall adversely affect any Awards previously granted to a Participant without the Participant's consent.

13.2. Compliance With Rule 16b-3 . With respect to any person subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with the requirements of Rule 16b-3 under the Exchange Act, as applicable during the term of this Plan. To the extent that any provision of this Plan or action of the Committee or its delegates fails to so comply, it shall be deemed null and void.

14. EFFECTIVE DATE AND DURATION OF PLAN.

This Plan shall be effective on the date this Plan is approved by the Company's shareholders (the "Effective Date") in accordance with applicable law. No Award shall be granted under this Plan after the day prior to the tenth anniversary of the Effective Date.

15. TAX WITHHOLDING.

The Company shall have the right to (i) make deductions from any settlement of an Award, including delivery or vesting of Shares, or require that Shares or cash, or both, be withheld from any Award, in each case in an amount sufficient to satisfy withholding of any foreign, federal, state or local taxes required by law or (ii) take such other action as may be necessary or appropriate to satisfy any such withholding obligations. The Committee may determine the manner in which such tax withholding shall be satisfied and may permit Shares (rounded up to the next whole number) to be used to satisfy required tax withholding based on the Fair Market Value of such Shares as of the Settlement Date of the applicable Award.

EX-31

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a),

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Leonard I. Fluxman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Steiner Leisure Limited;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
2. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
3. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2004

/s/ Leonard I. Fluxman

Leonard I. Fluxman
President and Chief Executive Officer

EX-31

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a),

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen B. Lazarus, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Steiner Leisure Limited;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
2. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
3. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2004

/s/ Stephen B. Lazarus

Stephen B. Lazarus
Senior Vice President and Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), the undersigned officers of Steiner Leisure Limited certify that (1) this Quarterly Report of Steiner Leisure Limited (the "Company") on Form 10-Q for the period ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (this "Report"), fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Leonard Fluxman

Leonard Fluxman

President and Chief Executive Officer

/s/ Stephen B. Lazarus

Stephen B. Lazarus

Senior Vice President and Chief Financial Officer

Date: August 9, 2004