##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB (Mark
One) [X]
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarter ended October 31, 2004
 [   ]
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission file number 0-28698 SETO HOLDINGS, INC.  Nevada
    
    77-0082545(State or other jurisdiction of
    
    (I.R.S.) Employerincorporation or organization)
    
    Identification Number
 554 North State Road, Briarcliff Manor, New York, 10510 
  Registrants telephone number, including area code (914) 923-5000 Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
   [X]   No   [   ] Class
    
    Outstanding at October 31, 2004Common stock $.001 par Value
    
    12,473,879




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED CONDENSED BALANCE SHEET  OCTOBER 31, 2004CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS NINE AND THREE MONTHS ENDED OCTOBER 31, 2004 AND 2003CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS NINE MONTHS ENDED OCTOBER 31, 2004 AND 2003NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESITEM 5. SIGNATURES AND CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND THE CHIEF FINANCIAL OFFICER OF THE COMPANYITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESEX-31.1 302 CertificationEX-31.2 302 CertificationEX-32.1 906 CertificationEX-32.2 906 Certification    Table of Contents  
 PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS
 
 SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET  OCTOBER 31, 2004 ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    198,739Accounts receivable, net
    
    
    620,846Inventory
    
    
    1,030,997Prepaid expenses and other current assets
    
    
    28,094Deferred tax asset, current portion
    
    
    64,500TOTAL CURRENT ASSETS
    
    
    1,943,176PROPERTY, PLANT AND EQUIPMENT, NET OF DEPRECIATION
    
    
    759,606OTHER ASSETSGoodwill
    
    
    85,453Other intangible asset, net
    
    
    195,402Investments
    
    
    500,000Security deposits and other assets
    
    
    16,240Deferred tax asset, net of current portion
    
    
    300,595TOTAL OTHER ASSETS
    
    
    1,097,690TOTAL ASSETS
    
    $
    3,800,472LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent portion of long-term debt
    
    $
    9,682Note payable, line of credit
    
    
    954,455Accounts payable and accrued expenses
    
    
    584,916TOTAL CURRENT LIABILITIES
    
    
    1,549,053OTHER LIABILITIESDeferred lease liability
    
    
    30,408Long-term debt
    
    
    28,242TOTAL OTHER LIABILITIES
    
    
    58,650MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
    
    
    14,876STOCKHOLDERS EQUITYCommon stock par value $.001; 100,000,000 shares authorized; 12,533,801 shares issued
    
    
    12,534Additional paid in capital
    
    
    4,202,266Accumulated other comprehensive income
    
    
    (150,522
    )Retained earnings (deficit)
    
    
    (1,874,376
    )2,189,902Less common shares held in treasury, 59,922 shares at cost
    
    
    (12,009
    )TOTAL STOCKHOLDERS EQUITY
    
    
    2,177,893TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    3,800,472
 See notes to consolidated condensed financial statements.




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SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
NINE AND THREE MONTHS ENDED OCTOBER 31, 2004 AND 2003
(UNAUDITED) Nine Months Ended
    
    Three Months EndedOctober 31
    
    October 312004
    
    2003
    
    2004
    
    2003Net revenues
    
    $
    3,479,223
    
    
    $
    2,888,063
    
    
    $
    1,035,010
    
    
    $
    927,455Cost of sales
    
    
    1,491,494
    
    
    
    1,100,458
    
    
    
    392,563
    
    
    
    357,667Gross margin
    
    
    1,987,729
    
    
    
    1,787,605
    
    
    
    642,447
    
    
    
    569,788Operating expenses:Selling, general and administrative expenses
    
    
    2,027,576
    
    
    
    1,621,284
    
    
    
    711,172
    
    
    
    549,287Amortization of intangibles
    
    
    45,548
    
    
    
    45,000
    
    
    
    15,548
    
    
    
    15,000Operating expenses
    
    
    2,073,124
    
    
    
    1,666,284
    
    
    
    726,720
    
    
    
    564,287Operating income (loss)
    
    
    (85,395
    )
    
    
    121,321
    
    
    
    (84,273
    )
    
    
    5,501Interest and other, net
    
    
    (26,619
    )
    
    
    (336,139
    )
    
    
    (11,742
    )
    
    
    (375,769
    )Minority interest in loss from consolidated subsidiary
    
    
    30,037
    
    
    
    
    
    
    
    30,037Loss before income taxes
    
    
    (81,977
    )
    
    
    (214,818
    )
    
    
    (65,978
    )
    
    
    (370,268
    )Income taxes
    
    
    33,231
    
    
    
    45,037
    
    
    
    (39,174
    )
    
    
    17,526Loss from continuing operations
    
    
    (115,208
    )
    
    
    (259,855
    )
    
    
    (26,804
    )
    
    
    (387,794
    )Discontinued operations:Loss from operations of subsidiaries
    
    
    0
    
    
    
    (1,608
    )
    
    
    0
    
    
    
    0Loss on disposal of subsidiaries
    
    
    0
    
    
    
    (36,127
    )
    
    
    0
    
    
    
    (36,396
    )0
    
    
    
    (37,735
    )
    
    
    0
    
    
    
    (36,396
    )Net loss
    
    ($
    115,208
    )
    
    ($
    297,590
    )
    
    ($
    26,804
    )
    
    ($
    424,190
    )Earning per share information:Income (loss) from continuing operationsBasic
    
    ($
    0.01
    )
    
    ($
    0.02
    )
    
    ($
    0.00
    )
    
    ($
    0.03
    )Diluted
    
    ($
    0.01
    )
    
    ($
    0.02
    )
    
    ($
    0.00
    )
    
    ($
    0.03
    )Discontinued operations:Basic
    
    $
    0.00
    
    
    ($
    0.00
    )
    
    $
    0.00
    
    
    ($
    0.00
    )Diluted
    
    $
    0.00
    
    
    ($
    0.00
    )
    
    $
    0.00
    
    
    ($
    0.00
    )Weighted average common shares outstanding
    
    
    12,795,553
    
    
    
    14,083,925
    
    
    
    12,687,876
    
    
    
    13,642,604Weighted average common shares outstanding,
assuming dilution
    
    
    12,795,553
    
    
    
    14,083,925
    
    
    
    12,687,876
    
    
    
    13,642,604
 See notes to consolidated condensed financial statements.




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SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 2004 AND 2003 2004
    
    2003OPERATING ACTIVITIESLoss from continuing operations
    
    
    ($115,208
    )
    
    
    ($259,855
    )Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    171,679
    
    
    
    104,055Amortization and impairment of intangibles and other acquisition-related costs
    
    
    45,548
    
    
    
    45,000Gain on sale of equipment
    
    
    
    
    
    
    (31,749
    )Provision for deferred income taxes
    
    
    19,527
    
    
    
    35,304Minority interest
    
    
    14,876Write off of note receivable
    
    
    
    
    
    
    364,193Changes in assets and liabilities:Accounts receivable
    
    
    (61,592
    )
    
    
    491,701Inventories
    
    
    (164,981
    )
    
    
    (19,134
    )Prepaid expenses and other current assets
    
    
    (20,257
    )
    
    
    (1,634
    )Deferred product development costs
    
    
    
    
    
    
    (15,017
    )Other assets
    
    
    (10,240
    )
    
    
    (5,039
    )Accounts payable, and accrued expenses
    
    
    143,825
    
    
    
    (185,612
    )Deferred lease liability
    
    
    408
    
    
    
    1,500NET CASH PROVIDED BY CONTINUING OPERATIONS
    
    
    23,585
    
    
    
    523,713NET CASH USED IN DISCONTINUED OPERATIONS
    
    
    
    
    
    
    (9,678
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    23,585
    
    
    
    514,035INVESTING ACTIVITIESProceeds from sale of equipment
    
    
    
    
    
    
    45,960Purchase of investments
    
    
    (300,000
    )Purchase of intangibles
    
    
    (10,950
    )Purchase of property and equipment
    
    
    (172,854
    )
    
    
    (133,599
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (483,804
    )
    
    
    (87,639
    )FINANCING ACTIVITIESIncrease (decrease) in short-term debt, net
    
    
    557,535
    
    
    
    (375,662
    )Repayments of and retirement of long-term debt
    
    
    (7,193
    )
    
    
    (61,924
    )Repurchase and retirement of common stock
    
    
    (38,134
    )
    
    
    (317,752
    )NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    512,208
    
    
    
    (755,338
    )NET INCREASE (DECREASE) IN CASH
    
    
    51,989
    
    
    
    (328,942
    )CASH, BEGINNING OF PERIOD
    
    
    146,750
    
    
    
    508,414CASH, END OF PERIOD
    
    $
    198,739
    
    
    $
    179,472
 See notes to consolidated condensed financial statements.




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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)  1.
    
    PREPARATION OF INTERIM FINANCIAL STATEMENTSThe consolidated financial statements have been prepared by SETO
Holdings, Inc. (the Company) in conformity with accounting
principles generally accepted in the United States and are consistent
in all material respects with those applied in the Companys Annual
Report on Form 10-KSB for the year ended January 31, 2004. In the
opinion of management, the Companys interim financial statements
include all adjustments (consisting of normal recurring accruals and
adjustments necessary for adoption of new accounting standards)
necessary to present fairly the results of the interim periods shown.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
Securities and Exchange Commission rules. Management believes that
the disclosures made are adequate to make the information presented
not misleading. The results for the interim periods are not
necessarily indicative of results for the full year. The unaudited
financial statements contained herein should be read in conjunction
with the consolidated financial statements and notes thereto included
in the Companys January 31, 2004 Annual Report on Form 10-KSB.
Certain amounts presented for the nine months ended October 31, 2003
have been reclassified to conform to the current presentation.The consolidated financial statements include the accounts of the
Company and its subsidiaries, which are wholly owned. All
significant intercompany transactions are eliminated in the
consolidation process.2.
    
    NATURE OF OPERATIONS, RISKS AND UNCERTAINTIESThe Company currently has a minuscule share of the dicing blade and
ceramics market. There can be no assurance that the Company will be
able to increase its market share or that the market demand will
increase. Furthermore, the Company faces the possibility of adverse
market conditions from technological changes, shifting product
emphasis among competitors and the entry of new competitors in the
market.Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. The Company places its cash and
cash equivalents with high quality financial institutions.Currency Risk. The Company transacts business in currencies other
than the U.S. dollar, primarily the Malaysian Ringgit. The Malaysian
Ringgit is pegged to the U.S. dollar therefore the Company has not
established any transaction or balance sheet risk management
programs. For foreign subsidiaries whose functional currency is the
local foreign currency, balance sheet accounts are translated at
exchange rates in effect at the end of the year and income statement
accounts are translated at average exchange rates for the year.
Acquisition related translation gains or losses are included as a
separate component of shareholders equity. Exchange differences
arising from foreign currency translation are included in the profit
and loss account.




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3.
    
    INVENTORYInventory at October 31, 2004 consists of: Finished goods
    
    $
    604,233Work in Process
    
    
    146,894Raw Materials
    
    
    256,239Supplies
    
    
    23,631$
    1,030,997
  4.
    
    GOODWILLThe Company adopted SFAS No. 142 effective January 31, 2002 and
accordingly, has ceased amortizing amounts related to goodwill
starting January 31, 2002. The balance of goodwill is related to the
Companys East Coast Sales Company segment. In accordance with SFAS
No. 142, the Company has evaluated the fair value of its East Coast
Sales segment and determined that none of the goodwill recorded was
impaired. The fair value was determined using a reasonable estimate
of future cash flows of the segment and a risk adjusted discount rate
to compute a net present value of future cash flows.5.
    
    IDENTIFIED INTANGIBLE ASSETSOn December 1, 2002, the Company acquired the customer lists from a
Malaysian Company for $300,000, to be amortized over a period of 5
years. During the third quarter of fiscal 2005 the Company incurred
trademark costs of $10,950 which were related to their safety helmet
and are being amortized over a period of 5 years. The Companys
identified intangible assets are subject to amortization.
Amortization of identified intangible assets amounted to $45,548 for
the nine months ended October 31, 2004 and 2003.6.
    
    INVESTMENTSInvestee companies not accounted for under the consolidation or the
equity method of accounting are accounted for under the cost method
of accounting. Under this method, the Companys share of earnings or
losses of such Investee companies is not included in the consolidated
balance sheet or statement of income (loss). However, impairment
charges are recognized in the consolidated statement of income
(loss). If circumstances suggest that the value of the Investee
company has subsequently recovered, such recovery is not recorded.When a cost method Investee company initially qualifies for use of
the equity method, the Companys carrying value is adjusted for the
Companys share of the past results of the Investees operations.
Therefore, prior losses could significantly decrease the Companys
carrying value in that Investee company at that time.As of October 31, 2004, the Company has invested $300,000 in
Slamdance Media Group, LLC (Slamdance). The Company
agreed to invest an additional $200,000 by January 15, 2005 for a total
ownership interest in Slamdance of 12.5% which is included in accrued
expenses on the balance sheet. This investment is at risk and the
Company could lose its investment is Slamdance. On December 10, 2004
the Company notified Slamdance that it decided not to invest the
remaining $200,000, and the Company has
asked Slamdance to cancel the agreement and return the $300,000
already paid.




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##### Table of Contents



Slamdance is comprised of distribution and talent-management units,
and has an agreement for a home-entertainment output deal with
Ventura Entertainment to sell new entertainment products under the
Slamdance label.Slamdance is a U.S. limited liability company who utilizes U.S.
generally accepted accounting principles and has a year-end of
December 31st. At October 31, 2004, Slamdances quarterly financial
statements were not available. Because the company does not have
significant influence over Slamdance, the investment is being
accounted for under the cost method of accounting.7.
    
    VARIABLE INTEREST ENTITIESIn December 2003, the FASB issued Interpretation
No. 46(R) (Fin-46R),
Consolidation of Variable Interest Entities. Fin 46R clarifies the
application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from
other parties. It separates entities into two groups: (1) those for
which voting interests are used to determine consolidation and (2)
those for which variable interests are used to determine
consolidation (the subject of FIN-46R). FIN-46R clarifies how to
identify a variable interest entity and how to determine when a
business enterprise should include the assets, liabilities,
noncontrolling interests and results of activities of a variable
interest entity in its consolidated financial statements.The consolidation requirements of FIN-46R becomes effective, for all
financial statements issued after December 15, 2004, the nature
purpose, size, and activities of the variable interest entity and the
enterprises maximum exposure to loss as a result of its involvement
with the variable interest entity.On June 25, 2004, the Company formed a joint venture with Prestan
Products, LLC (Prestan) for the design of new products,
distribution and the upgrade and repair of existing safety products.
Prestan is a Delaware limited liability company, who utilizes U.S.
generally accepted accounting principles and has a year-end of
December 31st.As of October 31, 2004, the Company invested a total of $300,000 for
a 20 percent ownership interest in Prestan. The Company intended on
investing an additional $200,000 during forth quarter fiscal 2005 for
an additional 13% interest in Prestan, but as of December 10, 2004
the Company has decided stop its investment in Prestan.




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##### Table of Contents



At October 31, 2004, the Company adopted FIN-46R for its investment
in Prestan and the consolidated financial statements include the
accounts of Prestan in which the Company holds a minority interest.
At October 31, 2004 the Company owned 20% of Prestan but according to
Prestans operating agreement the Company would have absorbed 85% of
Prestans losses. All significant intercompany accounts and
transactions have been eliminated. Summarized financial information
of Prestan is presented below. Balance SheetCurrent assets, primarily cash
    
    $
    102,585Equipment, net
    
    
    51,015Other assets
    
    
    2,865Total assets
    
    $
    156,465Accounts payable
    
    
    8,776Members capital
    
    
    147,689Total liabilities and members capital
    
    $
    156,465Income StatementRevenues
    
    $
    14,875Cost of sales
    
    
    10,520Gross margin
    
    
    4,355General and administrative expenses
    
    
    197,805Depreciation expense
    
    
    3,774201,579Net loss
    
    ($
    197,224
    )
  8.
    
    NOTES PAYABLE AND LONG-TERM DEBTAt October 31, 2004, the Company had an available line-of-credit with
a financial institution in the amount $1,200,000. The line-of-credit
carried an annual rate of 2.9% plus the 30-day commercial paper rate
with an expiration date of December 7, 2004. As of October 31, 2004,
the Company had utilized $954,455 of the line-of-credit. The
personal guarantee of the Companys president and the assets of the
Company secure the line-of-credit.




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On December 7, 2004 $460,000 of the line-of-credit was converted to a
term loan. The loan term is 24 months and amortization of the loan
will be based upon a term of 60 months, with a balloon payment due at
maturity. Interest is stated at 3.75% plus the one-month LIBOR
published in the Wall Street Journal and based upon actual days
elapsed over a 360-day year. In addition, the line of credit has
been reduced to $500,000 and as of December 7, 2004, the Company had
utilized the full amount of the line-of-credit. Future minimum
payments on the new 2 year term loan are as follows: October 31, 2005
    
    $
    67,272October 31, 2006
    
    
    85,368October 31, 2007
    
    
    307,360$
    460,000
  9.
    
    INTEREST AND OTHER, NETInterest and Other, net included: Nine Months Ended
    
    Three Months EndedOctober 31
    
    October 312004
    
    2003
    
    2004
    
    2003Interest income
    
    $
    6
    
    
    $
    11,958
    
    
    $
    1
    
    
    ($
    7,920
    )Gain on sale of asset
    
    
    (324
    )
    
    
    31,749Interest expense
    
    
    (25,078
    )
    
    
    (14,595
    )
    
    ($
    11,230
    )
    
    
    (3,204
    )Loss on write off of note receivable
    
    
    
    
    
    
    (364,193
    )
    
    
    
    
    
    
    (364,193
    )Foreign currency exchange income (loss)
    
    
    (1,223
    )
    
    
    (1,058
    )
    
    ($
    513
    )
    
    
    (452
    )Total
    
    ($
    26,619
    )
    
    ($
    336,139
    )
    
    ($
    11,742
    )
    
    ($
    375,769
    )
  10.
    
    COMMITMENTS AND CONTINGENCIESThe Company is obligated under a lease agreement with an entity owned
by an officer of the Company, which expires on April 30, 2013.
Annual rent expense is as follows; $60,000 for each of the first
five years, $66,000 for each of the second five years and $72,000 for
each of the final five years. The Company is also obligated for
insurance and the increase in real estate taxes over the base year as
stipulated in the lease. This lease requires the following future
minimum rental payments: October 31, 2005
    
    $
    66,000October 31, 2006
    
    
    66,000October 31, 2007
    
    
    69,000October 31, 2008
    
    
    72,000October 31, 2009
    
    
    72,000Thereafter
    
    
    252,000$
    597,000
  Rent expense charged to operations was $49,500 and $49,500 at October
31, 2004 and 2003, respectively.




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During the second quarter, as result of joint venture with Prestan
Products LLC, the Company entered into an operating lease to lease
office and warehouse space in Ohio under a long-term, non-cancelable
operating lease. The lease expires on August 23, 2009, and provides
for a renewal option for an additional five years. Annual rent
expense is as follows; $54,544 for each of the first three years and
$58,620 for each of the final two years. The Company is subleasing
50% of space to Prestan Products. This lease requires the following
future minimum rental payments: October 31, 2005
    
    $
    54,544October 31, 2006
    
    
    54,544October 31, 2007
    
    
    55,563October 31, 2008
    
    
    58,620October 31, 2009
    
    
    43,965$
    267,236
  Rent expense charged to operations amounted to $6,818 at October 31,
2004.The Company is committed to investing an additional $200,000 in
Slamdance Media Group, LLC as mentioned in Note 6. As of December
10, 2004 the Company has ceased investing in Slamdance and is
negotiating with Slamdances management team to get its investment of
$300,000 returned.11.
    
    EARNINGS PER SHAREThe following table reconciles the number of common shares
outstanding at October 31, 2004 and 2003 to the weighted average
number of common shares outstanding for the purposes of calculating
basic and diluted earnings per share: Nine Months Ended
    
    Three Months EndedOctober 31
    
    October 312004
    
    2003
    
    2004
    
    2003Weighted average common shares outstanding
    
    
    12,795,553
    
    
    
    14,083,925
    
    
    
    12,687,876
    
    
    
    13,642,604Effect of using diluted securities:Weighted average common equivalent shares from
stock optionsDiluted number of common shares outstanding
    
    
    12,795,553
    
    
    
    14,083,925
    
    
    
    12,687,876
    
    
    
    13,642,604
  At October 31, 2004 there were approximately six million shares of
common stock potentially issuable with respect to stock options,
which could dilute basic earnings per share in the future.12.
    
    STOCK REPURCHASE PROGRAMDuring the first nine months of fiscal 2005, the Company repurchased
219,200 shares of common stock under the Companys authorized
repurchase program at a cost of $38,134. In addition, on March 25,
2004, the Company cancelled 475,000 shares of treasury stock. On
June 27, 2003 the Company with unanimous consent of its board of
directors, increased its stock repurchase program from one million shares to
two and a half million shares. As of October 31, 2004 a
total of 531,500 shares remained available for repurchase under the
program.




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##### Table of Contents



13.
    
    DISPOSITION OF SUBSIDIARYOn February 1, 2001, the Company adopted a formal plan to sell Fuji
Fabrication, SDN, BHD (Fuji). On October 1, 2001, the assets of
Fuji Fabrication, which consisted primarily of inventory and
equipment, were sold for $290,547 with the Company assuming a note
for the full amount of the selling price. On October 1, 2002 the
Company recast the note for $396,693, which included the sales of
additional inventory and previously accrued interest. Interest on
the note was stated at 10% (annually) and was payable in 12 monthly
installments. On July 1, 2003 the company received equipment valued
at $32,500 which was offset against the note receivable at July 31,
2003. The note was payable in full on September 30, 2003. On
October 1, 2003, the payee, G Com Net, defaulted on the note and the
Company wrote off the remaining note balance of $364,193.Fuji Fabrication had no sales for the nine months ended October 31,
2003. General and administrative expenses for the nine months ended
October 31, 2003 totaled $1,608. The company ceased Fujis
operations on October 31, 2003.14.
    
    PRINCIPAL PRODUCTS AND SEGMENTATION OF SALESThe Company has adopted FASB Statement No. 131, Disclosures about
Segments of a Business Enterprise and Related Information. The
Company is engaged in three principal operating segments, which are
(1) custom cut and fabricated ceramic parts for the aircraft,
aerospace, defense, detection/protection industries, (2) the
manufacturing of disposable precision diamond cutting tools for the
semiconductor and electronics industries, and (3) contract
manufacturing of personal safety devices. These operating segments
were determined based on the nature of the products and services
offered. Operating segments are defined as components of an
enterprise about which separate financial information is available
and is evaluated regularly by the chief operating decision-maker
(CEO) to decide how to allocate resources and to assess performance.Operating segments do not record inter-segment revenue, and
accordingly, none is recorded. The accounting policies for segment
reporting are the same as for the Company as a whole. Financial
information relating to the principal industry segments and classes
of products are as follows: Nine Months Ended
    
    Three Months EndedOctober 31
    
    October 312004
    
    2003
    
    2004
    
    2003Sales to customers:Industry A - Ceramics
    
    $
    2,434,033
    
    
    $
    2,199,280
    
    
    $
    641,346
    
    
    $
    693,115Industry B - Diamond tools
    
    
    577,762
    
    
    
    354,946
    
    
    
    116,987
    
    
    
    92,373Industry C - Safety devices
    
    
    467,428
    
    
    
    333,837
    
    
    
    276,677
    
    
    
    141,967$
    3,479,223
    
    
    $
    2,888,063
    
    
    $
    1,035,010
    
    
    $
    927,455
 Nine Months Ended
    
    Three Months EndedOctober 31
    
    October 312004
    
    2003
    
    2004
    
    2003Operating income or (loss):Industry A - Ceramics
    
    $
    647,495
    
    
    $
    426,536
    
    
    $
    209,523
    
    
    $
    141,655Industry B - Diamond tools
    
    
    (306,497
    )
    
    
    (276,127
    )
    
    
    (67,097
    )
    
    
    (112,670
    )Industry C - Safety devices
    
    
    (426,393
    )
    
    
    (29,088
    )
    
    
    (226,699
    )
    
    
    (23,484
    )($
    85,395
    )
    
    $
    121,321
    
    
    ($
    84,273
    )
    
    $
    5,501




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##### Table of Contents



Nine Months Ended
    
    Three Months EndedOctober 31
    
    October 312004
    
    2003
    
    2004
    
    2003Sales to customers:United States
    
    $
    2,048,306
    
    
    $
    2,043,465
    
    
    $
    776,835
    
    
    $
    838,033Far East
    
    
    431,200
    
    
    
    93,993
    
    
    
    144,240
    
    
    
    26,023Canada
    
    
    999,717
    
    
    
    750,605
    
    
    
    113,935
    
    
    
    63,399$
    3,479,223
    
    
    $
    2,888,063
    
    
    $
    1,035,010
    
    
    $
    927,455
 Net property, plant and equipment by country were as follows: October 31, 2004
    
    October 31, 2003United States
    
    $
    380,960
    
    
    $
    217,359Malaysia
    
    
    378,646
    
    
    
    431,944Total property, plant and equipment, net
    
    $
    759,606
    
    
    $
    649,303
  Three customers each accounted for more than 10% of total sales and
together accounted for approximately 60% of total sales for the nine
months ended October 31, 2004.




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS This document includes statements that may constitute forward-looking
statements made pursuant to the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company would like to caution
readers regarding certain forward-looking statements in this document and in
all of its communications to stockholders and others, press releases,
securities filings, and all other documents and communications. Statements
that are based on managements projections, estimates and assumptions are
forward-looking statements. The words believe, expect, anticipate,
intend, will, should, may and similar expressions generally identify
forward-looking statements. While the Company believes in the veracity of all
statements made herein, forward-looking statements are necessarily based upon a
number of estimates and assumptions that, while considered reasonable by the
Company, are inherently subject to significant business, economic and
competitive uncertainties and contingencies and known and unknown risks. Many
of the uncertainties and contingencies can effect events and the Companys
actual results and could cause its actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company. The Companys future operating results are subject to risks and
uncertainties and are dependent on many factors including, without limitation,
the risks identified in this report. Please see the Risk Factors in
Financial Condition. Except as otherwise required by the applicable
securities laws, the Company disclaims any intention or obligation publicly to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The Strategy, Critical Accounting Estimates and Outlook sections all
contain a number of forward-looking statements, all of which are based on our
current expectations. Our actual results may differ materially. These
statements do not reflect the potential impact of any mergers, acquisitions,
divestitures or other business combinations that had not closed as of December
14, 2004. Recent Developments On December 7, 2004, our line of credit was reduced from $1,200,000 to
$500,000, and we currently do not have a line of credit available until we pay
part or all of it down. The line has not been terminated, just reduced. At
December 7, 2004 we had balance of $960,000 on our line of credit of which
$460,000 was converted to a term loan. The term loan payments are based on a
five year term with a balloon payment due at the end of two years. The first
scheduled term loan payment is due on January 10, 2005. During the second and third quarters, we invested $300,000 in Slamdance
Media Group, LLC (Slamdance). Slamdance is comprised of distribution and
talent-management units, and has an agreement for a home-entertainment output
deal with Ventura Entertainment to sell new entertainment products under the
Slamdance label. The Company agreed to invest an additional $200,000
by January 15, 2005 for a total ownership interest in Slamdance
of 12.5%. This investment is at risk and the Company could lose its
$300,000 investment. On December 10, 2004, the Company notified
Slamdance that it decided not to invest the remaining $200,000, and
the Company has asked Slamdance to cancel the agreement and return
the $300,000 already paid. On June 25, 2004 we formed a joint venture with Prestan Products LLC
(Prestan) for the design of new products, distribution and the upgrade and
repair of our existing safety products. Prestan began operations in August 2004.
The engineering, design and distribution of products will be from our full
service hub in Ohio with the manufacturing being performed by our SETO
Technology operating segment in Malaysia. As of December 10, 2004, we have
funded a total of $300,000 to Prestan for a 20% interest and we were scheduled
to invest another $200,000 for an additional 13% interest which we have since
cancelled until further notice. On March 15, 2004, we filed a report on Form 8-K containing a press
release announcing an odd-lot purchase program for stockholders of less than
100 shares of the Companys common stock, whereby stockholders will have the
opportunity to sell their shares to the Company for a price of $0.20 per share
with no brokerage fees. According to management, in the event that the odd-lot
program reduces the
number of the Companys registered stockholders to less than 300, the
Company may deregister its common stock and suspend its reporting obligation
under the Securities Exchange Act of 1934, which would result among other
things, in the Company common stock being de-listed from the Bulletin Board and
only being quoted on the Pink Sheets®, which is a centralized quotation service
that collects and publishes market maker quotations in real time. The odd-lot
program expired on June 15, 2004.




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##### Table of Contents



Strategy Our goal is to be a niche company, with the ability to provide products
and services to a variety of larger corporations who need contract
manufacturing and/or made-to-order products. Our primary areas of focus are
the fabrication of ceramic parts for the airline security business and jet
engine manufacturing, the manufacture and distribution of cutting blades for
silicon wafers and contract manufacturing of safety, rescue and CPR training
devices. All of our businesses operate in competitive environments characterized by
the introduction of new products with lower prices. As part of our overall
strategy, we use our relatively small size and ability to provide niche
services for larger companies in order to compete vigorously in each relevant
market segment. Our competition comes from established businesses as well as
new entrants to the marketplace. The trend in the United States (U.S.) toward
Homeland Security will offer us new opportunities, but will result in more
competition. Competition tends to increase pricing pressure on our products,
which may mean that we must offer our products at lower prices than we had
anticipated, resulting in lower profits. Because some of our competitors
already have established products, it is inherently difficult for us to compete
against them. In addition, certain market segments in which we compete, such
as dicing blade products, have experienced an overall economic decline,
increasing the degree of competition within this market segment. When we
believe it is appropriate, we will take various steps, including discontinuing
older products and reducing prices, in order to increase acceptance of our
products and to be competitive within each relevant market segment. We plan to continue to cultivate new businesses and work with the security
and chip making industries to expand our product lines. East Coast Sales Company East Coast Sales Company (ECS) operating
segment specializes in the distribution and value added fabrication of
technical ceramic products for the airline security industry and jet engine
manufacturers, and distributes clean room supplies and tools. Our strategy for
ceramic fabrication is to increase our production efficiency by utilizing our
foreign subsidiarys labor force and updating our machinery. After September
11th, East Coast Sales experienced an increase in demand for its ceramic
products used in the manufacture of airport safety and detection devices. Our
three major customers are developing new products which will require our
ceramic products. In addition to airport security devices, our ceramic
products are used in military defense equipment such as missiles, and by
manufacturers of jet engines for both commercial and military use. In order to
increase the acceptance and deployment of our ceramic products, we are focused
on providing our customers with the highest quality products and services. Semicon Tools and DTI Technology Semicon Tools and DTI Technology
operating segments strategy is to produce quality diamond cutting tools for
the semiconductor industry. These cutting tools have diamond particles
captured in a nickel metal or resin matrix, each with micron size diamond
particles to form very small precision cutting edges made to close tolerances.
The diamond blades are used as the dicing/cutting saw blades of precision
computer controlled electronic cutting devices that are needed in the
electronic and semiconductor industries to cut and separate integrated circuits
and discrete devices from processed wafers. Complimenting our dicing blade
line, we manufacture other supplementary products including diamond scribing
tools for specialty coated glass such as mirrors and sapphire substrates for LED
chips. We also manufacture natural and synthetic diamond tips known as
Thermodes and Synthrodes which are used in the tape automated bonding process.
We are currently consulting with an outside source in Taiwan to improve our
manufacturing process and diamond tool technology. The diamond tool segment is
very dependent on the semiconductor industry which over the last three years
has experienced economic
decline and started to show signs of growth. The diamond blades manufactured
by DTI Technology are a vital part of East Coast Sales ceramic fabrication
process.




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##### Table of Contents



SETO Technology SETO Technologys strategy is to provide
contract-manufacturing services for personal electronic safety devices and to
produce medical, automotive and mining safety devices. This segment is
currently developing and/or selling medical training products, personal safety
devices and safety helmets. Currently this segments main product is a CPR
training device used by the medical industry. We have five different models
under contract on an exclusive basis. SETO Technology has also contracted with
a third party to develop and manufacture a safety helmet that we expect to
bring to market some time in calendar year 2005. Due to some negative
responses from our market survey, the Underwriter Laboratories approval testing
was halted until our redesigned products are completed and tested internally.
Our new joint venture with Prestan Products LLC will provide additional
engineering services for new safety products, aid in reconfiguring current
product designs and the distribution of our safety products from Ohio. In
addition, during the second quarter we hired a new national sales manager who
will be responsible for the marketing of our safety products. As of December
10, 2004, we are reevaluating our investment in Prestan and we have decided not
to invest any more money in the Joint venture until we reach a final
conclusion. Critical Accounting Estimates The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results reported in our financial
statements. Some of these accounting policies require us to make difficult and
subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Our most critical accounting estimates
include the assessment of recoverability of goodwill, which impacts write-offs
of goodwill; valuation of inventory, which impacts gross margin; assessment of
recoverability of long-lived assets, which primarily impacts gross margin when
we impair assets or accelerate their depreciation; and recognition and
measurement of current and deferred income tax assets and liabilities, which
impacts our tax provision. Below, we discuss these policies further, as well
as the estimates and judgments involved. We also have other policies that we
consider to be key accounting policies, such as our policy for revenue
recognition; however, this policy does not meet the definition of critical
accounting estimates because they generally require us to make estimates or
judgments that are difficult or subjective. Goodwill According to our accounting policy we perform an annual
impairment review in the fourth quarter of each year, or more frequently if
indicators of potential impairment exist. Our most recent review was in the
fourth quarter of fiscal 2004 (January 31, 2004). Our impairment review
process is based on a discounted future cash flow approach that uses our
estimates of revenue for the reporting unit, driven by assumed market growth
rates and assumed segment share, and estimated costs as well as appropriate
discount rates. These estimates are consistent with the plans and estimates
that we use to manage the underlying business. In the future, we may incur
charges for impairment of goodwill if the ceramic fabrication business
experiences an economic downturn, new technology becomes available, we lose
market acceptance, we fail to deliver new products, or if we fail to achieve
our assumed revenue growth rates or assumed gross margin. Inventory Our policy for valuation of inventory, including the
determination of obsolete or excess inventory, requires us to estimate the
future demand for our products within specific time horizons, generally one
year or less. If our demand forecast for specific products is greater than
actual demand and we fail to reduce manufacturing output accordingly, we could
be required to record additional inventory reserves, which would have a
negative impact on our gross margin. Non-Marketable Equity Securities We invested in non-marketable securities of
private companies; the proceeds from our investments contribute a portion of
the funds required for these companies to grow.




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##### Table of Contents



We also invest for strategic reasons, and each investment is
evaluated for potential financial returns. However, these types of
investments involve a great deal of risk, and there can be no assurance that
any specific company, whether at an early stage or mature stage, or somewhere
in between, will grow or will be successful, and consequently, we could lose
all or part of our investment. When the strategic objectives of an investment
have been achieved, or if the investment or business diverges from our
objectives, we may decide to dispose of the investment. However, our
investments in non-marketable equity securities are not liquid, and there can
be no assurance that we will be able to dispose of these investments on
favorable terms or at all. We
formed a joint venture and have a 20% interest in Prestan Products
LLC, a development stage US
designer, developer and marketer of personal medical training devices and
supplies among other products, with a carrying value of $300,000 at October 31,
2004. During the second quarter of fiscal 2005, we paid $300,000 in
cash for a 20% equity interest and we are scheduled to invest an
additional $200,000. However, our investment in Prestan was consolidated according to Financial
Interpretation No. 46(R) (Fin 46) and the investment account, along with any
other intercompany transactions were eliminated. This investment is intended
to provide SETO with an opportunity to design, develop, market and distribute
our personal safety products. On December 10, 2004, we decided not to invest
any more money in Prestan until we reevaluate our financial condition. We
also invested $300,000 in cash in Slamdance Media Group LLC, a
US distributor of entertainment products, with a carrying value of $500,000 at
October 31, 2004. This investment is intended to provide SETO with additional
investment income. We agreed to invest an additional $200,000 in
Slamdance Media LLC by January 15, 2005. On December 10,
2004, we notified Slamdance that we decided
to not invest the remaining $200,000 in Slamdance and we are trying
to get our $300,000 deposit returned. Our ability to recover our strategic investments in non-marketable equity
securities and to earn a return on these investments is primarily dependent on
how successfully these companies are able to execute their business plans and
how well their products and services are accepted, as well as their ability to
obtain financing for continued operations, to grow and to take advantage of
liquidity events. In the current equity market environment, the companies
ability to obtain additional funding as well as to take advantage of liquidity
events, such as mergers and private sales, remain constrained. We review all of investments quarterly for impairment; however, for
non-marketable equity securities, the impairment analysis requires significant
judgment to identify events or circumstances that would likely have a
significant adverse effect on the fair value of the investment. The indicators
we use to identify those events or circumstances include (a) the investees
revenue and earnings trends relative to predefined milestones and overall
business prospects, (b) the general market conditions in the investees
industry, and (c) the investees liquidity, debt ratios and the rate at which
the investee is using its cash. Investments identified as having an indicator of impairment are subject to
further analysis to determine if the investment is other than temporarily
impaired, in which case we write the investment down to its impaired value.
When an investee is not considered viable from a financial point of view, we
write down the entire investment since we consider the estimated fair market
value to be nominal. If an investee obtains additional funding at a valuation
lower than our carrying amount or requires a new round of equity funding to
stay in operation and the funding does not appear imminent, we presume that the
investment is other than temporarily impaired, unless specific facts and
circumstances indicate otherwise. Investments in non-marketable securities are inherently risky and our
investments can fail. Their success (or lack thereof) is dependent upon
product development, market acceptance, operational efficiency and other key
business success factors. In addition, depending on their future prospects,
they may not be
able to raise additional financings when needed or they may receive lower
valuations, with less favorable investments terms than previous financings, and
the investments would likely be impaired. Long-Lived Assets We assess the impairment of long-lived assets when
events or changes in circumstances indicate that the carrying value of the
assets or the asset grouping is not recoverable. Factors that we consider in
deciding when to perform impairment review include significant
under-performance of a business or product line in relation to expectations,
significant negative industry or economic trends, and significant changes in
our use of the assets. Recoverability of assets that will continue to be used
in our




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operations is measured by comparing the carrying amount of the assets
grouping to the related total future net cash flows. If an assets grouping
carrying value is not recoverable through those cash flows, the asset grouping
is considered to be impaired. The impairment is measured by the difference
between the assets carrying amount and their fair value, based on the best
information available, including market prices or discounted cash flow
analysis. Revenue recognition- The Company recognizes net revenue when the earnings
process is complete, as evidenced by an agreement with the customer, transfer
of title and acceptance, if applicable, as well as fixed pricing and probable
collectibility. When the Company sells its products to distributors, the
distributors have substantial independent operations under sales arrangements
whose terms do not allow for rights of return or price protection on unsold
products held by them. In these instances, the Company recognizes revenue when
it ships the product directly to the distributors. Shipping and handling costs
billed to customers are included in net revenue and the related shipping costs
are included in cost of sales. Income Taxes In determining income for financial statement purposes, we
must make certain estimates and judgments. These estimates and judgments occur
in the calculation of certain tax liabilities and in the determination of the
recoverability of certain tax assets, which arise from temporary differences
between the tax and financial statement recognition of revenue and expense. We must assess the likelihood that we will be able to recover our deferred
tax assets. If recovery is not likely, we must increase our provision for
taxes by recording a reserve, in the form of a valuation allowance, for the
deferred tax assets that we estimate will not ultimately be recoverable. As of
October 31, 2004, we believe that our recorded deferred tax assets will
ultimately be recovered. However, should there be a change in our ability to
recover our deferred tax assets; our tax provision would increase in the period
in which we determine that the recovery is not probable. In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We recognize
potential liabilities for anticipated tax audit issues in the U.S. and other
tax jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If payment of these amounts ultimately proves to
be unnecessary, the reversal of the liabilities would result in tax benefits
being recognized in the period when we determine the liabilities are no longer
necessary. If our estimate of tax liabilities proves to be less than the
ultimate assessment, a further charge to expense would result. Results of Operations Third Quarter of Fiscal 2005 Compared to third Quarter of Fiscal 2004 The following table sets forth certain consolidated statements of income
data as a percentage of net revenue for the periods indicated: Three Months EndedOctober 31,
    
    October 31,2004
    
    2003Net revenues
    
    
    100.00
    %
    
    
    100.00
    %Cost of sales
    
    
    37.92
    %
    
    
    38.56
    %Gross margin
    
    
    62.08
    %
    
    
    61.44
    %Selling, general and administrative expenses
    
    
    68.71
    %
    
    
    59.22
    %Amortization & impairment of acquisition-related intangibles
    
    
    1.50
    %
    
    
    1.61
    %Operating income (loss)
    
    
    (8.13
    %)
    
    
    0.61
    %




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##### Table of Contents



Our net revenue for Q3 2005 of $1,035,010 was up approximately 12%
compared to Q3 2004, primarily due to the increase in demand for our diamond
cutting tools and safety products. Net revenue for our diamond tool segment
increased 95% compared with Q3 2004 which is primarily due to higher sales
volume and lower unit prices. Our contract ceramics revenues were down 7%
compared with Q3 2004, primarily due to less sales orders from the airline
security industry. Our gross margin percentage in Q3 2005 of 62% was 1% higher compared to Q3
2004. The gross margin for our diamond tool segment of 35% was lower compared
to 54% during Q3 2004, which was primarily due to lower unit prices in Q3 2005;
our gross margin for our ceramics division increased to 68% compared to 58% in
Q3 2004, which was primarily due higher unit prices; and our gross margin for
our contract manufacturing segment increased from 22% in Q3 2004 to 31% in Q3
2005, which was primarily due to an increase in sales volume. See Outlook
for a discussion of gross margin expectations. Our Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) for Q3 2005 was $31,066 compared to ($337,624) for Q3 2004. If we
exclude the consolidated loss from Prestan Products, LLC of $167,187, our
EBITDA would have been $198,253 for the third quarter of fiscal 2005. Ceramics - East Coast Sales Company The revenue and operating income for the East Coast Sales Company
operating segment for the third quarter of 2005 and 2004 were as follows: October 31,
    
    October 31,2004
    
    2003Revenue
    
    $
    641,346
    
    
    $
    693,115Operating income
    
    $
    209,523
    
    
    $
    141,655
 The East Coast Sales Company operating segment is our ceramics division,
which experienced a decrease in sales due to the decrease in demand from the
airline security manufacturing industry. Net revenues for this segment
decreased $51,769 or 7% in Q3 2005 compared to Q3 2004. The decrease in
revenue was due to lower sales of custom cut ceramics that is used in airport
security devices. Net operating income for the East Coast Sales Company operating segment
increased by $67,868 or 48% compared to Q3 2004 primarily due to the allocation
of certain overhead costs to DTI and SETO Technology. Diamond Tools  Semicon Tools/DTI Technology The revenue and operating income for the diamond tool operating segment
for the third quarter of 2005 and 2004 were as follows: October 31,
    
    October 31,2004
    
    2003Revenue
    
    $
    116,987
    
    
    $
    92,373Operating loss
    
    ($
    67,097
    )
    
    ($
    112,670
    )
 Net revenue for Q3 2005 was up compared to Q3 2004. The net operating
loss for Q3 2005 decreased $45,573 or 40%, compared to Q3 2004. The decrease
in the net operating loss from fiscal Q3 2004 to Q3 2005 was primarily due to
Semicon Tools allocating a significant percentage of the Companys overhead
expenses to other segments. These overhead expenses include officers and
administrative salaries, rent, professional fees, public relations expense,
insurance expense, regulatory fees, stock administrative costs and travel
expenses all of which have all increased from Q3 2004.




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Contract Manufacturing  SETO Technology The revenue and operating income for the contract manufacturing operating
segment for the third quarter of 2005 and 2004 were as follows: October 31,
    
    October 31,2004
    
    2003Revenue
    
    $
    276,677
    
    
    $
    141,967Operating income (loss)
    
    ($
    226,699
    )
    
    ($
    23,484
    )
 Net revenue for Q3 2005 was up $134,710 or 95%, compared to Q3 2004,
primarily due to an increase in sales from a major customer who redesigned one of
their products. Operating loss for the third quarter fiscal 2005 increased
$203,215 which was primarily due to the application FIN 46(R) which
required the
consolidation of Prestan Products, LLC (Prestan), whose loss amounted to
$197,224 for the third quarter. Prestan is a development stage company who
offers engineering services for medical training devices and warehousing for
SETO Safety products. We also experienced increased marketing,
consulting and travel expenses regarding our safety helmet and the
allocation of certain overhead expenses from Semicon Tools and East
Coast Sales Co. Operating Expenses Operating expenses for the third quarter of 2005 and 2004 were as follows: October 31,
    
    October 31,2004
    
    2003Selling, general and administrative expenses
    
    $
    711,172
    
    
    $
    549,287Amortization & impairment of acquisition-related intangibles
    
    $
    15,548
    
    
    $
    15,000
 Selling, general and administrative expenses increased $161,885 or 29%
compared to Q3 2004. This increase was primarily due to the consolidation of
Prestan Products, LLC (See Note No. 7 in the financial
statements) and higher overhead costs. Amortization and impairment of acquisition-related intangibles was $15,548
and $15,000 in Q3 2005 and Q3 2004, respectively. This expense is related to
our purchase of customer lists in 2002 and trademark costs incurred during the
third quarter of fiscal 2005 related to our safety helmet. If market
conditions change and it is deemed that the customer lists and safety helmet do
not have any future benefit and become impaired, we may write off the entire
amount, which would have a negative effect on our operating income. Interest and Other, Net Interest and other, net and taxes for the third quarter of 2005 and 2004
were as follows: October 31,
    
    October 31,2004
    
    2003Interest income
    
    $
    1
    
    
    ($
    7,920
    )Loss on write off of a note receivable
    
    
    
    
    
    ($
    364,193
    )Interest expense
    
    ($
    11,230
    )
    
    ($
    3,204
    )Foreign currency exchange loss
    
    ($
    513
    )
    
    ($
    357
    )Provision for income taxes (benefit)
    
    ($
    39,174
    )
    
    $
    17,526
 In Q3 2005, interest income increased primarily due to the write of off
interest receivable from G-Com Net which was written off in the third quarter of fiscal 2004.




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Interest expense increased $8,026 or 250%, in Q3 2005 compared to $3,204
in Q3 2004. This increase was primarily due to us drawing down on our
line-of-credit during the third quarter of fiscal 2005. See Financial
Condition section for a more detailed discussion of our financing activities. Foreign currency exchange loss was relatively flat compared to Q3 2004.
We experience currency translation gains or losses when we purchase items from
foreign countries (other than Malaysia) whose currencies are not pegged to the
U.S. Dollar. Historically, these gains and losses have been insignificant and
therefore we do not expect any significant losses in the future. Our effective income tax benefit on our US income was -28% in Q3 2005
compared to an effective income tax rate of 2% for Q3 2004. The decrease in
the effective tax rate in Q3 2005 is primarily due to the decrease in net
income from our U.S. operating segment East Coast Sales Company. The reduction
in U.S. net income will absorb less of a portion than we originally
anticipated, of our federal net operating loss carryforward. Our deferred tax
benefit amounted to $39,174 in third quarter of fiscal 2005. We expect to
realize the full benefit of our net operating loss carryover by fiscal 2010. Discontinued Operations On February 1, 2001, the Company adopted a formal plan to sell Fuji
Fabrication, SDN, BHD. On October 1, 2001, the assets of Fuji Fabrication,
which consisted primarily of inventory and equipment, were sold for $290,547
and we assumed a note for the full amount of the selling price. On October 1,
2002 we recast the note for $396,693, which included the sales of additional
inventory and previously accrued interest. Interest on the note is stated at
10% (annually) and was payable in 12 monthly installments. On July 1, 2003 we
received $32,500 in equipment which was offset against the note receivable at
July 31, 2003. The note was payable in full on September 30, 2003. On October
1, 2003, the payee, G Com Net, defaulted on the note and we ultimately wrote
off the remaining note balance of $364,193. Fuji Fabrication had no sales for the three months ended October 31, 2003.
There were no general and administrative expenses for the three months ended
October 31, 2003. The Company ceased Fujis operations on October 31, 2003. First Nine months of Fiscal 2005 Compared to the First Nine Months of Fiscal
2004 The following table sets forth certain consolidated statements of income data
as a percentage of net revenue for the periods indicated: Nine Months EndedOctober 31,
    
    October 31,2004
    
    2003Net revenues
    
    
    100.00
    %
    
    
    100.00
    %Cost of sales
    
    
    42.86
    %
    
    
    38.10
    %Gross margin
    
    
    57.14
    %
    
    
    61.90
    %Selling, general and administrative expenses
    
    
    58.27
    %
    
    
    56.13
    %Amortization & impairment of acquisition-related intangibles
    
    
    1.30
    %
    
    
    1.55
    %Operating income (loss)
    
    
    (2.43
    %)
    
    
    4.22
    %
 Our net revenue for the first nine months of fiscal 2005 of $3,479,223 was
up approximately 20% compared to the first nine months of fiscal 2004,
primarily due to the increase in demand for our diamond cutting tools and
safety devices. Net revenue for our diamond tool segment increased 63%
compared with
first nine months of fiscal 2004 which is primarily due to higher sales volume.
Our contract manufacturing




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revenues were up 40% compared with the first nine
months of fiscal 2004, primarily due to a customer redesigning their product
which we are now manufacturing for them. Our gross margin percentage for the first nine months of fiscal 2005 of
57% was 5% lower compared to 2004. The gross margin for our diamond tool
segment was slightly lower compared to the first nine months of fiscal 2004,
which was primarily due to an increase material cost and lower margins; our
gross margin for our ceramics division did not change from 59% during the first
nine months of fiscal 2004; and our gross margin for our contract manufacturing
segment slightly increased, which was primarily due to an increase in sales
which was offset slightly by Prestans cost of sales. See Outlook for a
discussion of gross margin expectations. Our Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) for the first nine months of 2005 was $160,328 compared to ($88,903)
for the first nine months of fiscal 2004. If we exclude the consolidated loss
from Prestan Products, LLC of $167,187, our EBITDA would have been $327,515 for
the first nine months of fiscal 2005. Ceramics - East Coast Sales Company The revenue and operating income for the East Coast Sales Company
operating segment for the first nine months of 2005 and 2004 were as follows: October 31,
    
    October 31,2004
    
    2003Revenue
    
    $
    2,434,033
    
    
    $
    2,199,280Operating income
    
    $
    647,495
    
    
    $
    426,536
 The East Coast Sales Company operating segment is our ceramics division,
which experienced an increase in sales due to the increased demand from the jet
engine manufacturing industry and the airline security manufacturing industry.
Net revenues for this segment increased $234,753 or 10% in the first nine
months of fiscal 2005 compared to 2004. The increase in revenue was due to
higher sales of custom cut ceramics that are both used in the manufacturing of
jet engines and airport security devices. Net operating income for the East Coast Sales Company operating segment
increased by $220,959 or 52% compared to the first nine months of fiscal 2004
primarily due to the increased in demand from industries mentioned above and
the allocation of certain overhead costs to DTI and SETO Technology. Diamond Tools  Semicon Tools/DTI Technology The revenue and operating income for the diamond tool operating segment
for the first nine months of 2005 and 2004 were as follows: October 31,
    
    October 31,2004
    
    2003Revenue
    
    $
    577,762
    
    
    $
    354,946Operating loss
    
    ($
    306,497
    )
    
    ($
    276,127
    )
 Net revenue for the first nine months of fiscal 2005 was up compared to
2004. The net operating loss for the first nine months of fiscal 2005
increased $30,370 or 11%, compared to 2004. The increase in the net operating
loss from the first nine month of fiscal 2004 to 2005, was primarily due to
lower margins and increased selling expenses.




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Contract Manufacturing  SETO Technology The revenue and operating income for the contract manufacturing operating
segment for the first nine months of 2005 and 2004 were as follows: October 31,
    
    October 31,2004
    
    2003Revenue
    
    $
    467,428
    
    
    $
    333,837Operating income (loss)
    
    ($
    426,393
    )
    
    ($
    29,088
    )
 Net revenue for the first nine months of fiscal 2005 was up 133,591 or 40%
compared to 2004. This was primarily due to a customer increasing their sales
order for a product they redesigned in the past year. However, we are still
experiencing delays with our new safety helmet and are redesigning our new
helmet that was to be released this quarter. Operating loss for the first nine
months of fiscal 2005 increased $397,305 which was primarily due to the
application of FIN No. 46(R) which required us to consolidate our investment in
Prestan Products LLC. Prestans loss from operations for the nine months ended
amounts to $193,450. We also experienced increased marketing, consulting and
travel expenses regarding our safety helmet and the allocation of certain
overhead expenses from Semicon Tools and East Coast Sales. Operating Expenses Operating expenses for the first nine months of fiscal 2005 and 2004 were
as follows: October 31,
    
    October 31,2004
    
    2003Selling, general and administrative expenses
    
    $
    2,027,576
    
    
    $
    1,621,284Amortization & impairment of acquisition-related intangibles
    
    $
    45,548
    
    
    $
    45,000
 Selling, general and administrative expenses increased $406,292 or 25%
compared to the first nine months of fiscal 2004. This increase was primarily
due the consolidation of Prestan Products LLC and higher salaries and wages,
consulting expense, insurance expense, depreciation expense, travel expense and
professional fees relating to the introduction of our new safety products. Amortization and impairment of acquisition-related intangibles was $45,548
in the first nine months of fiscal 2005 and 2004. This expense is related to
our purchase of customer lists in 2002 and for trademark costs incurred this
year. If market conditions change and it is deemed that the customer lists do
not have any future benefit and become impaired, we may write off the entire
amount, which would have a negative effect on our operating income. Interest and Other, Net Interest and other, net and taxes for the first nine months of fiscal 2005
and 2004 were as follows: October 31,
    
    October 31,2004
    
    2003Interest income
    
    $
    6
    
    
    $
    11,958Gain (loss) on sale of assets
    
    ($
    324
    )
    
    
    31,749Interest expense
    
    ($
    25,078
    )
    
    ($
    14,595
    )Foreign currency exchange loss
    
    ($
    1,223
    )
    
    ($
    1,058
    )Loss on write off of a note receivable
    
    
    
    
    
    
    (364,193
    )Provision for income taxes
    
    $
    33,231
    
    
    $
    45,037




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In the first nine months of fiscal 2005, interest income decreased
primarily due to the absence of the payments we received on our note receivable
from G-Com Net in the first nine months of fiscal 2004. Interest expense increased $10,483 or 72%, to $25,078 in first nine months
of 2005 compared to $14,595 in 2004. This increase was primarily due to us
drawing down on our line-of-credit during the first nine months of fiscal 2005.
See Financial Condition section for a more detailed discussion of our
financing activities. Foreign currency exchange loss was relatively flat compared to the first
nine months of fiscal 2004. We experience currency translation gains or losses
when we purchase items from foreign countries (other than Malaysia) whose
currencies are not pegged to the U.S. Dollar. Historically, these gains and
losses have been insignificant and therefore we do not expect any significant
losses in the future. Our effective income tax rate on our US income was 9% in the first nine
months of fiscal 2005 compared to an effective income tax rate of 2% for 2004.
The increase in the effective tax rate in first nine months of fiscal 2005 is
primarily due to the net income from our U.S. operating segment East Coast
Sales Company. This net income will absorb a portion of our federal net
operating loss carryforward. Deferred tax expense amounted to $19,527 during
the first nine months of fiscal 2005. We expect to realize the full benefit of
our net operating loss carryover by fiscal 2010. Discontinued Operations On February 1, 2001, the Company adopted a formal plan to sell Fuji
Fabrication, SDN, BHD. On October 1, 2001, the assets of Fuji Fabrication,
which consisted primarily of inventory and equipment, were sold for $290,547
and we assumed a note for the full amount of the selling price. On October 1,
2002 we recast the note for $396,693, which included the sales of additional
inventory and previously accrued interest. Interest on the note is stated at
10% (annually) and was payable in 12 monthly installments. On July 1, 2003 we
received $32,500 in equipment which was offset against the note receivable at
July 31, 2003. The note was payable in full on September 30, 2003. On October
1, 2003, the payee, G Com Net, defaulted on the note and we ultimately wrote
off the remaining note balance of $364,193. Fuji Fabrication had no sales for the nine months ended October 31, 2003.
The company ceased Fujis operations on October 31, 2003. Financial Condition At October 31, 2004, cash totaled $198,739, up from $146,750 at January
31, 2004. At October 31, 2004, total short-term and long-term debt was
$1,607,703. an increase of $894,575 compared to January 31, 2004. These
increases are attributable primarily to us drawing down $373,050 on our line of
credit, which was used to fund our investments in Prestan Products LLC and
Slamdance Media Group LLC and also includes the accrual for the additional
$200,000 we possibly could owe Slamdance. At October 31, 2004, total debt
represented 73% of stockholders equity. On December 7, 2004, $460,000 of our
credit line was converted to a term loan. The loan term is 24 months and
amortization of the loan will be based upon a term of 60 months, with a balloon
payment due at maturity. Interest is stated at 3.75% plus the one-month LIBOR
published in the Wall Street Journal and based upon actual days elapsed over a
360-day year. In addition, our line of credit has been reduced to $500,000 and
as of December 7, 2004, we had utilized the full amount of our line-of-credit.
We are currently making efforts to pay down our line of credit and we will cut
certain administrative expenses in order to cover our higher monthly debt service. For the first nine months of fiscal 2005, cash provided by operating
activities was $23,585, compared to $514,035 in 2004. This decline was mainly
due to the increase in our accounts receivable balance from January 31, 2004 to
October 31, 2004 compared to a decrease in accounts receivable from January 31,
2003 to October 31, 2003 which resulted in more cash. Cash was provided by net
income adjusted for non-cash related items. Working capital uses of cash
included an increase in accounts
receivable, inventories, prepaid expenses and other assets. For the first
nine months of fiscal 2005, our three largest customers accounted for
approximately 60% of net revenue, with one of these customers accounting for
approximately 29% of net




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revenue. At October 31, 2004, these three largest
customers accounted for approximately 33% of net accounts receivable. We used $483,804 in net cash for investing activities during the first
nine months of fiscal 2005, compared to $87,639 during 2004. The increase in
cash used for investing activities as compared to the first nine months of
fiscal 2004 was due to the $300,000 investment made in Slamdance
Media Group LLC and the $300,000 cash investment in Prestan Products, LLC which was
consolidated and eliminated on our balance sheet according to FIN
46(R) otherwise cash used for investing activities would have been
$783,804. Capital expenditures for the first nine months of fiscal 2005 increased $39,255
compared to fiscal 2004. We anticipate capital expenditures of $200,000 for
fiscal 2005. Cash provided by financing activities amounted to $512,208 in the first
nine months of fiscal 2005, compared to cash used by financing activities of
($755,338) in 2004. The major financing source of cash was the $557,535 we
drew down on our line of credit to finance the two investments we made in June.
The major financing uses of cash for the first nine months of fiscal 2005 and
2004 were the repayment of long-term debt and repurchase of our common stock.
In first nine months of fiscal 2005, we purchased 219,200 shares of our common
stock for $38,134. As of December 7, 2004, we no longer have our line of
credit available for another source of liquidity, but we are taking measures to
pay down the line of credit. We believe that we have the financial resources needed to meet our
anticipated business requirements for the next 12 months, including capital
expenditures for the expansion or upgrading of our manufacturing capacity and
working capital requirements. Risk Factors Our activities may require additional financing, which may not be
available on acceptable terms, if at all. As our business expands, we expect to increase our expenses for sales,
marketing and product development efforts. Although there can be no assurance,
we believe that we have sufficient capital resources from operations to finance
our operational requirements through January 31, 2005. If we incur operating
losses, or if unforeseen events occur that would require additional funding, we
may need to raise additional capital or incur debt to fund our operations. We
would expect to seek such capital through sales of additional equity or debt
securities and/or loans from banks, but there can be no assurance that such
funds will be available to us on acceptable terms, if at all. Failure to
obtain such financing or obtaining it on term not favorable to us could have a
material adverse affect on future operating prospects and continued growth, as
well as diluting investors in an offering. Approximately 60% of our sales for the nine months ended October 31, 2004
were generated from three (3) customers and, accordingly, the loss of any one
such customer could have a material adverse effect. As of October 31, 2004, three customers accounted for 60% of our sales.
We are seeking to broaden our customer base by introducing new products and
introducing a new cutting blade; however, no assurance can be given that our
efforts will be successful or that these three customers will not continue to
account for a large concentration of our sales. The loss of one or more of
these three customers, or any other customer that accounts for a significant
portion of our sales, could materially adversely effect our business, operating
results, and financial condition. We depend heavily on our executive officers and would have difficultly
replacing them. Our future success depends to a significant degree on the skills,
experience and efforts of executive officers. We currently have employment
agreements with our executive officers, but the loss of these personnel could
materially adversely affect our business and our ability to achieve
profitability. We are controlled by a small number of stockholders, some of which are key
members of our executive management, and such control could prevent the taking
of certain actions that may be beneficial to other stockholders. A significant portion of our voting securities are owned by various
members of the Pian family. Although each member of the Pian family may vote
their respective shares independently, due to their




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substantial ownership of
our voting securities, together they control the outcome of substantially all
matters which may be submitted to a vote of our stockholders, including but not
limited to the selection of certain members to our Board of Directors and the
adoption of measures that could delay or prevent a change in control or impede
a merger, takeover or other business combination we may potentially be involved
in. Additionally, Eugene Pian is our Chief Executive Officer and Craig Pian is
our Chief Financial Officer, thereby also giving them substantial control over
matters considered by the officers and directors of the Company without
approval of the stockholders. Our common stock is subject to penny stock regulation, which may limit the
liquidity of our common stock and the ability of our stockholders to sell
shares. Our common stock is subject to regulations of the SEC relating to the
market for penny stocks. These regulations generally require that a disclosure
schedule explaining the penny stock market and the risks associated with the
penny stock market be delivered to purchasers of penny stocks and imposes
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors. Moreover,
broker-dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our
common stock to sell shares to third parties or to otherwise dispose of them.
Accordingly, there can be no assurance that an active trading market in the
Companys shares will be developed or sustained. Our common stock is thinly traded, and the public market may provide
little or no liquidity for holders of our common stock. There is currently a limited volume of trading in our common stock and on
many days there is no trading activity in our common stock. Holders of our
common stock may find it difficult to find buyers for their shares at prices
quoted in the market, or at all. Our stock price may be volatile, which could result in substantial losses
for investors. Volatility in the market could cause our stockholders to incur substantial
losses. An active public market for our common stock may not develop and the
market price of our common stock may become highly volatile. The market price
of our common stock may fluctuate significantly in response to the following
factors, some of which are beyond our control:  
    
    Changes in market valuations of similar companies;
    
    Announcements by us of new or improved products,
significant contracts, acquisitions, strategic relationships,
joint ventures or capital commitments;
    
    Regulatory developments;
    
    Additions or departures of key personnel;
    
    Deviations in our results of operations from the estimates of security analysts; and
    
    Future issuances of our common stock or other securities. Our
investments in non-marketable securities are at risk At
October 31, 2004, we held $600,000 in non-marketable equity
securities. We have decided not to meet our future obligations to fund
these entities of $200,000 by January 15, 2005 in Slamdance and
an additional $200,000 in Prestan. This could result in breach of
contract actions against us as well as impairment of these
investments, both of which would have a material adverse effect on us. If we are not current in our periodic filings with the SEC, we could lose
our eligibility to trade our securities on the OTC Bulletin Board, which
would have an effect on our ability to raise additional funds. We are required to file annual and quarterly reports with the SEC,
pursuant to the Securities Exchange Act of 1934, as amended, and the rules
promulgated thereunder. To the extent we do not file such reports timely, our
securities may not longer be permitted to be traded on the OTC Bulletin Board,
and would then be listed on the pink sheets. Such action would have an
adverse affect on our ability to raise additional




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funds in the future since
many potential investors will not invest in companies whose securities are
traded on the pink sheets. Outlook In general, as we look ahead to the last quarter of fiscal 2005, the
outlook continues to be uncertain, and we anticipate a quarter that will be
largely driven by the airline security, military, jet engine, semiconductor
industries, the need for medical training devices and supplies as well as the
global economy. Although it is difficult to predict product demand for the
rest of fiscal 2005, we expect a 15% to 20% increase in revenue from our
ceramic segment, East Cost Sales Company. The outlook for the diamond tools
industry is showing some strength, and with the acceptance of our new three new
cutting blades, sales could increase 5%-15% during the next quarter of fiscal
2005. The diamond tool industry is very dependent on the semiconductor
industry, which over the last three years has experienced economic decline and
is now starting to show signs of growth. The outlook for the contract
manufacturing segment for the rest of fiscal 2005 should be stronger than
fiscal 2004. With the increase in medical training products and supplies, and
the hiring of a new national sales manager, sales for our contract
manufacturing segment should grow 20%-25% in the final quarter of fiscal 2005.
In this environment, revenue growth for our new safety helmet is largely
dependent on the commercial acceptance of our current designs and successfully
marketing the designs to the safety and rescue industries, which we can not
assure. Our financial results are substantially dependent on sales of ceramics and
related products by the East Coast Sales Company operating segment. Revenue is
partly a function of the mix of products we offer, all of which are difficult
to forecast. Because of the changing conditions throughout the world our
revenue is subject to the impact of economic conditions in various geographic
regions. Our gross margin expectation for the rest of fiscal 2005 is approximately
57% plus or minus a few points, which is a slight increase from the fiscal 2004
gross margin of 56%. Our gross margin varies depending on unit sales volumes
and product mixes. Our policy for valuation of inventory, including the
determination of obsolete inventory, requires us to estimate the future demand
for our products within six months or less. The estimates of future demand
that we use in the valuation of inventory are also used for near-term factory
planning. If our demand forecast is greater than actual demand and we fail to
reduce manufacturing output accordingly, we would likely be required to record
additional inventory reserves, which would have a negative impact on our gross
margin. Various other factors including unit sales volumes and new
technologies will also continue to affect cost of sales and the variability of
gross margin percentages. We do not expect net gains from equity securities for fiscal 2005. It is
not possible to know at the present time whether specific investments are
likely to be impaired or the extent or timing of individual impairments. At
October 31, 2004, we held non-marketable equity securities with a carrying
value of $600,000. These investments could fail or be rescinded in
full or in part. Their success (or lack
thereof) is dependent upon product development, market acceptance, operational
efficiency and other key business success factors. In addition, depending on
their future prospects, they may not be able to raise additional financings
when needed or they may receive lower valuations, with less favorable
investment terms than in previous financings, and the investments would likely
become impaired. However, we are not able to determine at the present time
which specific investments are likely to be impaired in the future, or the
extent or timing of individual impairments In fiscals 2003 and 2004 we improved our cutting blade facility and
updated our ceramics fabrication facility. We expect that capital spending
will be $200,000 for fiscal 2005 which is up from $156,319 in fiscal 2004. The
increase is primarily due to the expected equipment needed to upgrade our
ceramics cutting equipment. If market demand does not grow or our new products
are not accepted, revenues and gross margins may also be adversely affected. Depreciation for fiscal 2005 is expected to be approximately $220,000,
compared to $196,501 in fiscal 2004. We expect amortization of other intangible assets to be approximately
$61,096 in fiscal 2005, as compared to $60,000 in fiscal 2004. As of October
31, 2004 amortization expense totaled $45,548.




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We review our acquisition-related intangible assets for impairment
whenever indicators of potential impairment exist. We also review goodwill for
impairment in the fourth quarter of each year, or earlier if indicators of
potential impairment exist. If we fail to deliver products, if our new
products fail to gain market acceptance, or if market conditions in the ceramic
business decline, our revenue and cost forecasts may not be achieved and we may
incur charges for impairment of goodwill. We expect our effective tax rate to be approximately 25% for fiscal 2005.
This estimate is higher than the rate in fiscal 2004, primarily due to the
anticipated increase in net income from our East Coast Sales Company operating
segment and the use of our available net operating loss carryover for federal
income tax purposes. The expected rate is based on current tax law and is
subject to change. Our future results of operations and the other forward-looking statements
contained in this Outlook section and in our Strategy and Critical
Accounting Estimates sections involve a number of risks and uncertainties, in
particular the statements regarding our strategies, our expectations regarding
new products, future economic conditions, revenues, gross margin and costs,
capital spending and depreciation and amortization. In addition to the factors
discussed above, among the other factors that could cause actual results to
differ materially are the following: business and economic conditions and
trends in the airline security business, jet engine manufacturers, microchip
industry, and safety industries in various geographic regions; possible
disruption in commercial activities related to terrorist activity and armed
conflict, such as change in logistics and security arrangements, and reduced
end-user purchases relative to expectations; the impact of events outside the
United States, such as the business impact of fluctuating currency rates,
unrest or political instability in a locale; changes in customer order
patterns; competitive factors and acceptance of new products in specific market
segments; pricing pressures; excess or obsolete inventory and variations in
inventory valuation and the spread of SARS illness could adversely affect our
business and our customer order patterns. We believe that we have the products, facilities, personnel and financial
resources for continued business success, but future revenues, costs, margins
and profits are all influenced by a number of factors, including those
discussed above, all of which are inherently difficult to forecast. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, including changes in currency
exchange rates and interest rates. We do not try to mitigate these risks by
utilizing derivative financial instruments or other risky strategies. A substantial majority of our revenue, expense, and capital purchasing
activities are transacted in U. S. dollars. However, we do enter into these
transactions in other currencies, primarily the Malaysian Ringgit. The
Malaysian Ringgit is pegged to the U.S. Dollar and is translated to U.S.
dollars for consolidated purposes. In first nine months of fiscal 2005 we
reported a foreign currency exchange loss of $1,223, compared to a loss of
$1,058 in 2004, neither of which materially impacted the financial statements. Inflation has not had a material effect on our revenues and income from
continuing operations in the past four years. Inflation is not expected to
have a material future effect. 
 ITEM 4. CONTROLS AND PROCEDURES Quarterly Controls Evaluation and Related CEO and CFO Certifications Within
the 90 days prior to the date of this Quarterly Report on Form
10-QSB, the Company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures (Disclosure Controls), and its
internal controls and procedures for financial reporting (Internal Controls).
The controls evaluation was done under the supervision and with the
participation of management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO). Immediately following the Signature Page of this Quarterly Report are
certifications of the CEO and the CFO, which are required in accord with Rule
13a-14 of the Securities Exchange Act of 1934 (the Exchange




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Act). This
Controls and Procedures section includes the information concerning the
controls evaluation referred to in the certifications and it should be read in
conjunction with the certifications for a more complete understanding of the
topics. Disclosure Controls and Internal Controls Disclosure Controls are procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act, such as
this Quarterly Report, is recorded, processed, summarized and reported within
the time periods specified in the U.S. Securities and Exchange Commissions
rules and forms. Disclosure Controls are also designed to ensure that such
information is accumulated and communicated to our management, including the
CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure. Internal Controls are procedures which are designed to provide
reasonable assurance that (1) our transactions are properly authorized; (2) our
assets are safeguarded against unauthorized or improper use; and (3) our
transactions are properly recorded and reported, all to permit the preparation
of our financial statements in conformity with generally accepted accounting
principles. Limitations on the Effectiveness of Controls The Companys management, including the CEO and CFO, does not expect that our
Disclosure Controls or our Internal Controls will prevent all error and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control systems objectives
will be met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected. Scope of the Controls Evaluation The evaluation of our Disclosure Controls and our Internal Controls
included a review of the Controls objectives and design, the companys
implementation of the Controls and the effect of the Controls on the
information generated for use in this Quarterly Report. In the course of the
Controls evaluation, we sought to identify data errors, control problems or
acts of fraud and confirm the appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation is performed on a quarterly basis so that the conclusions of
management, including the CEO and CFO, concerning controls effectiveness can be
reported in Quarterly Reports on Form 10-QSB and Annual Reports on Form 10-KSB.
Our Internal Controls are also evaluated on an ongoing basis by our CEO and
CFO as well as our independent auditors, who evaluate them in connection with
determining their auditing procedures related to their report on our annual
financial statements and not to provide assurance on our Internal Controls.
The overall goals of these various evaluation activities are to monitor our
Disclosure Controls and our Internal Controls, and to modify them as necessary;
our intent is to maintain the Disclosure Controls and the Internal Controls as
dynamic systems that change as conditions warrant. Among other matters, we sought in our evaluation to determine whether
there were any significant deficiencies or material weaknesses in the
companys Internal Controls, and whether the company identified any acts of
fraud involving personnel with a significant role in the companys Internal
Controls. This information was important for both the Controls evaluation
generally, and because item 4 in the certifications of the CEO and CFO require
that the CEO and CFO disclose that information to our audit committee, if any,
and independent auditors, and report on related matters in this section of the
Quarterly Report. In the professional auditing literature, significant
deficiencies are referred to as reportable conditions which are




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issues that
could have a significant adverse effect on the ability to record, process,
summarize and report financial data in the financial statements. Auditing
literature defines material weakness as a particularly serious reportable
condition where internal control does not reduce to a relatively low level the
risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and the risk of such
misstatements would not be detected within a timely period by employees in the
normal course of performing their assigned functions. We also sought to deal
with other Controls matters in the controls evaluation, and in each case if a
problem was identified, we considered what revision, improvement and/or
correction to make in accordance with our ongoing procedures. From the date of the Controls evaluation to the date of this Quarterly
Report, there have been no significant changes in Internal Controls or in other
factors that could significantly affect Internal Controls, including corrective
actions with regard to significant deficiencies and material weaknesses.




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Conclusions Based upon the Controls evaluation, our CEO and CFO have concluded that,
subject to the limitations noted above, our Disclosure Controls are effective
to ensure that material information relating to SETO Holdings, Inc. and its
consolidated subsidiaries is made known to management, including the CEO and
CFO, particularly during the period when our periodic reports are being
prepared, and that our Internal Controls are effective to provide reasonable
assurance that our financial statements are fairly presented in conformity with
generally accepted accounting principles.




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ITEM 5. SIGNATURES AND CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND THE CHIEF FINANCIAL OFFICER OF THE COMPANY The following pages include the Signatures page for this Form 10-QSB, and
certain certifications of the Chief Executive Officer (CEO) and the Chief
Financial Officer (CFO) of the Company. The certifications include references to an evaluation of the
effectiveness of the design and operation of the companys disclosure controls
and procedures and its internal controls and procedures for financial
reporting. Item 4 of part I of the Quarterly Report presents the conclusions
of the CEO and the CFO about the effectiveness of such controls based on and as
of the date of such evaluation of the companys Audit Committee and independent
auditors with regard to the deficiencies in internal controls and fraud and
related matters (Items 5 and 6 of the certifications).




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  a)
    
    Exhibits.The following exhibits are filed in connection with this Report: No.
    
    Description31.1
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  b)
    
    Reports on 8-K:None.




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SIGNATURES Pursuant to the requirements of the Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereto
duly authorized. SETO Holdings, Inc.RegistrantBy: /s/ Eugene J. PianEugene J. Pian, President
President and Chief Executive
Officer
Date: December 14, 2004
 In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated. /s/ Eugene J. PianEugene J. PianPresident and Chief Executive OfficerDate: December 14, 2004/s/ Craig A. PianCraig A. PianExecutive Vice President andChief Financial OfficerDate: December 14, 2004