TABLE OF CONTENTS




|                                                         |  |  |  |  |  |  |  | 
|-------------------------------------------------------- |  |  |  |  |  |  |  | 
|CONSOLIDATED BALANCE SHEET  JULY 31, 2001              
|CONSOLIDATED STATEMENT OF INCOME                        
|SIX AND THREE MONTHS ENDED JULY 31, 2001 AND 2000       
|CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME          
|SIX AND THREE MONTHS ENDED JULY 31, 2001 AND 2000       
|CONSOLIDATED STATEMENT OF CASH FLOWS                    
|SIX MONTHS ENDED JULY 31, 2001 AND 2000                 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              
|MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|SIGNATURES                                              



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##### Table of Contents



SECURITIES AND EXCHANGE
COMMISSIONWashington, D.C. 20549



---



FORM 10-QSB

| |      |  |                                                                                          | 
| | ---- |  | ---------------------------------------------------------------------------------------- | 
| | (X)  |  | Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 
|
|
|
|
|
| |      |  | For the quarterly period ended July 31, 2001                                            
|
|
|
|
| |      |  | or                                                                                      
|
|
|
|
| | (  ) |  | Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1939

| |                                |  |  |  |    |  |  |  | 
| | ------------------------------ |  |  |  | -- |  |  |  | 
| | For the transition period from |  |  |  | to |  | 
| |                                |  |  | 

Commission File Number: 33-5820-LA



SETO HOLDINGS, INC. (Formerly Semicon Tools, Inc)(Exact name of small business issuer as specified in its charter)


|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Nevada                                                         |  | 77-0082545                             
|                                                               |  |                                        
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification Number)



554 North State Road, Briarcliff
Manor, New York 10510  (Address of principal executive offices)


|                                                |  |                | 
|----------------------------------------------- |  | -------------- | 
|Issuers telephone number, including area code: |  | (914) 923-5000
|                                                |  |               

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

YesX
No

Indicate the number of Shares outstanding of each of the Issuers classes of
common stock, as of the latest practicable date.

|                                        |  |                              |            | 
|--------------------------------------- |  | ---------------------------- | ---------- | 
|Class                                   |  | Outstanding at July 31, 2001
|                                        |  |                             
|Common Stock, par value $.001
per share |  |                              | 14,241,600 | 





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##### Table of Contents



INDEX

|                              |                                                                     |                                                                                             |  |  |            | 
|----------------------------- | ------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- |  |  | ---------- | 
|Part I. Financial Information |                                                                     |                                                                                             |  | 
|                             
|                             
|                             
|                             
|                              |                                                                     |                                                                                             |  | 
|                             
|                             
|                             
|                             
|                              | Item 1. Consolidated financial statements:                          |                                                                                             |  |  |           
|                             
|                             
|                             
|                             
|                              |                                                                     |                                                                                             |  | 
|                             
|                             
|                             
|                             
|                              |                                                                     | Balance sheet as of July 31, 2001                                                           |  |  | F-2        | 
|                             
|                             
|                             
|                             
|                              |                                                                     |                                                                                             |  | 
|                             
|                             
|                             
|                             
|                              |                                                                     | Statement of income for the six and three months ended
July 31, 2001 and 2000               |  |  | F-3        | 
|                             
|                             
|                             
|                             
|                              |                                                                     |                                                                                             |  | 
|                             
|                             
|                             
|                             
|                              |                                                                     | Statement of comprehensive income for the six and
three months ended July 31, 2001 and 2000 |  |  | F-4        | 
|                             
|                             
|                             
|                             
|                              |                                                                     |                                                                                             |  | 
|                             
|                             
|                             
|                             
|                              |                                                                     | Statement of cash flows for the six and three
months ended July 31, 2001 and 2000           |  |  | F-5        | 
|                             
|                             
|                             
|                             
|                              |                                                                     |                                                                                             |  | 
|                             
|                             
|                             
|                             
|                              |                                                                     | Notes to consolidated financial statements                                                  |  |  | F-6 - F-11 | 
|                             
|                             
|                             
|                             
|                              |                                                                     |                                                                                             |  | 
|                             
|                             
|                             
|                             
|                              | Item 2. Managements discussion and analysis of financial condition |                                                                                             |  |  |           
|                             
|                             
|                             
|                             
|                              |                                                                     |                                                                                             |  | 
|                             
|                             
|                             
|                             
|Part II. Other information    |                                                                     |                                                                                             |  | 
|                             
|                             
|                             
|                             
|                              |                                                                     |                                                                                             |  | 
|                             
|                             
|                             
|                             
|                              | Signatures                                                          |                                                                                             |  |  |           





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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEET  JULY 31, 2001

|                                       |                                                                                       |                                            |                           |            |         |           | 
|-------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------- | ---------- | ------- | --------- | 
|ASSETS                                 |                                                                                       |                                            |                           |           
|                                      
|                                      
|                                      
|                                      
|Current assets:                        |                                                                                       |                                            |                           |           
|                                      
|                                      
|                                      
|                                      
|                                       | Cash                                                                                  |                                            | $                         | 763,184    |        
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts receivable, less allowance
for doubtful accounts of $10,350                  |                                            |                           | 661,479    |        
|                                      
|                                      
|                                      
|                                      
|                                       | Inventory                                                                             |                                            |                           | 883,282    |        
|                                      
|                                      
|                                      
|                                      
|                                       | Prepaid expenses and other assets                                                     |                                            |                           | 89,561     |        
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred tax asset, current portion                                                   |                                            |                           | 114,209    |        
|                                       |                                                                                       |                                            |                           |           
|                                       |                                                                                       |                                            | Total current assets      |            |         | 2,511,715 | 
|                                       |                                                                                       |                                            |                           |           
|Property and equipment                 |                                                                                       |                                            | 684,533                   |           
|                                       |                                                                                       |                                            |                           |           
|                                       |                                                                                       |                                            |                           |           
|                                      
|                                      
|                                      
|                                      
|Other assets:                          |                                                                                       |                                            |                           |           
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                       | Goodwill, net of amortization              |                           |            | 822,717 |          
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                       | Security deposits                          |                           |            | 53,929  |          
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                       | Deferred tax asset, net of current portion |                           |            | 220,917 |          
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                       | Net assets of discontinued operations      |                           |            | 277 779 |          
|                                       |                                                                                       |                                            |                           |           
|                                       |                                                                                       |                                            | 1,375,342                 |           
|                                       |                                                                                       |                                            |                           |            |        
|                                       |                                                                                       | $                                          | 4,571,590                 |           
|                                       |                                                                                       |                                            |                           |            |        
|                                       |                                                                                       |                                            |                           |           
|                                      
|                                      
|                                      
|                                      
|LIABILITIES AND SHAREHOLDERS EQUITY   |                                                                                       |                                            |                           |           
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                       |                                            |                           |           
|                                      
|                                      
|                                      
|                                      
|Current liabilities:                   |                                                                                       |                                            |                           |           
|                                      
|                                      
|                                      
|                                      
|                                       | Current portion of long-term debt                                                     |                                            | $                         | 82,679     |        
|                                      
|                                      
|                                      
|                                      
|                                       | Notes payable                                                                         |                                            |                           | 1,000,000  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts payable                                                                      |                                            |                           | 665,650    |        
|                                      
|                                      
|                                      
|                                      
|                                       | Accrued expenses                                                                      |                                            |                           | 199,884    |        
|                                       |                                                                                       |                                            |                           |           
|                                       |                                                                                       |                                            | Total current liabilities |            |         | 1,948,213 | 
|                                       |                                                                                       |                                            |                           |           
|Long-term debt, net of current portion |                                                                                       |                                            | 62,186                    |           
|                                       |                                                                                       |                                            |                           |           
|Deferred lease liability               |                                                                                       |                                            | 19,500                    |           
|                                       |                                                                                       |                                            |                           |           
|Deferred income taxes payable          |                                                                                       |                                            | 41,189                    |           
|                                       |                                                                                       |                                            |                           |           
|Commitments and contingencies          |                                                                                       |                                            |                           |           
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                       |                                            |                           |           
|                                      
|                                      
|                                      
|                                      
|Shareholders equity:                  |                                                                                       |                                            |                           |           
|                                      
|                                      
|                                      
|                                      
|                                       | Common stock par value $.001; 100,000,000
shares authorized; 14,271,000 shares issued |                                            |                           | 14,271     |        
|                                      
|                                      
|                                      
|                                      
|                                       | Additional paid in capital                                                            |                                            |                           | 4,364,035  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Currency translation adjustment                                                       |                                            |                           | (219,119   | )      
|                                      
|                                      
|                                      
|                                      
|                                       | Retained earnings (deficit)                                                           |                                            |                           | (1,649,659 | )      
|                                       |                                                                                       |                                            |                           |           
|                                       |                                                                                       |                                            | 2,509,528                 |           
|                                      
|                                      
|                                      
|                                      
|                                       | Less common shares held in treasury, 29,400
shares at cost                            |                                            |                           | (9,026     | )      
|                                       |                                                                                       |                                            |                           |           
|                                       |                                                                                       |                                            | 2,500,502                 |           
|                                       |                                                                                       |                                            |                           |           
|                                       |                                                                                       | $                                          | 4,571,590                 |           
|                                       |                                                                                       |                                            |                           |           

See notes to consolidated financial statements.

F- 2



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF INCOME




SIX AND THREE MONTHS ENDED JULY 31, 2001 AND 2000

|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |         |       |  
|-------------------------------------------- | --------------------------------------------- | ------- | --------- | ---------------- | ---- | ------------------ | --------- | ------- | ---- | -------- | --------- | ------- | ---- | ---- | --------- | ------- | ----- | -
|                                             |                                               |         |           | Six Months Ended |      | Three Months Ended
|                                             |                                               |         |           | July 31,         |      | July 31,          
|                                             |                                               |         |           |                  |      |                   
|                                             |                                               |         |           |                  |      |                    |           | 2000    |      |          |           |         |      | 2000
|                                             |                                               |         |           | 2001             |      | Restated           |           | 2001    |      | Restated
|                                             |                                               |         |           |                  |      |                    |           |         |      |         
|Net sales                                    |                                               | $       | 2,641,362 |                  |      | $                  | 2,321,025 |         |      | $        | 1,238,522 |         |      | $    | 1,208,738 |        
|                                            
|                                            
|                                            
|                                            
|Cost of sales                                |                                               |         | 1,432,123 |                  |      |                    | 1,230,660 |         |      |          | 644,751   |         |      |      | 723,704   |        
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|Gross profit                                 |                                               |         | 1,209,239 |                  |      |                    | 1,090,365 |         |      |          | 593,771   |         |      |      | 485,034   |        
|                                            
|                                            
|                                            
|                                            
|Selling, general and
administrative expenses |                                               |         | 862,052   |                  |      |                    | 845,593   |         |      |          | 393,596   |         |      |      | 394,291   |        
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|Income from operations                       |                                               |         | 347,187   |                  |      |                    | 244,772   |         |      |          | 200,175   |         |      |      | 90,743    |        
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|Other income (expenses):                     |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|                                            
|                                            
|                                            
|                                            
|                                             | Interest income                               |         |           | 7,830            |      |                    |           | 5,968   |      |          |           | 3,991   |      |      |           | 5,673   |      
|                                            
|                                            
|                                            
|                                            
|                                             | Interest expense                              |         |           | (44,767          | )    |                    |           | (63,133 | )    |          |           | (15,864 | )    |      |           | (35,004 | )    
|                                            
|                                            
|                                            
|                                            
|                                             | Foreign currency
exchange                     |         |           | (188             | )    |                    |           | (23     | )    |          |           | (190    | )    |      |           | 2,378   |      
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|                                             |                                               |         | (37,125   | )                |      |                    | (57,188   | )       |      |          | (12,063   | )       |      |      | (26,953   | )      
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|Income before income taxes                   |                                               |         | 310,062   |                  |      |                    | 187,584   |         |      |          | 188,112   |         |      |      | 63,790    |        
|                                            
|                                            
|                                            
|                                            
|Income tax                                   |                                               |         | 3,279     |                  |      |                    | 2,639     |         |      |          | 1,979     |         |      |      | 14,976    |        
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|Income from continuing
operations            |                                               |         | 306,783   |                  |      |                    | 184,945   |         |      |          | 186,133   |         |      |      | 48,814    |        
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|Discontinued operations:                     |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|                                            
|                                            
|                                            
|                                            
|                                             | Income (loss) from
operations of
subsidiaries |         |           | 27,102           |      |                    |           | 110,333 |      |          |           | 48,482  |      |      |           | (26,407 | )    
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|Net income                                   |                                               | $       | 333,885   |                  |      | $                  | 295,278   |         |      | $        | 234,615   |         |      | $    | 22,407    |        
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|Earnings per share information:              |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|                                            
|                                            
|                                            
|                                            
|                                             | Income from continuing
operations             |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |         |      
|                                            
|                                            
|                                            
|                                            
|                                             |                                               | Basic   |           | $                | 0.02 |                    |           | $       | 0.01 |          |           | $       | 0.01 |      |           | $       | 0.00  |  
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|                                             |                                               | Diluted |           | $                | 0.02 |                    |           | $       | 0.01 |          |           | $       | 0.01 |      |           | $       | 0.00  |  
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|                                             | Discontinued operations:                      |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |         |      
|                                            
|                                            
|                                            
|                                            
|                                             |                                               | Basic   |           | $                | 0.00 |                    |           | $       | 0.01 |          |           | $       | 0.00 |      |           | $       | (0.00 | )
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        
|                                             |                                               | Diluted |           | $                | 0.00 |                    |           | $       | 0.00 |          |           | $       | 0.00 |      |           | $       | (0.00 | )
|                                             |                                               |         |           |                  |      |                    |           |         |      |          |           |         |      |      |           |        

See notes to consolidated financial statements.

F- 3



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME




SIX AND THREE MONTHS ENDED JULY 31, 2001 AND 2000

|                                      |                                         |   |                  |  |                    |   |         |         |          |   |         |  |      |   |        |       | 
|------------------------------------- | --------------------------------------- | - | ---------------- |  | ------------------ | - | ------- | ------- | -------- | - | ------- |  | ---- | - | ------ | ----- | 
|                                      |                                         |   | Six Months Ended |  | Three Months Ended
|                                      |                                         |   | July 31,         |  | July 31,          
|                                      |                                         |   |                  |  |                   
|                                      |                                         |   |                  |  |                    |   | 2000    |         |          |   |         |  | 2000
|                                      |                                         |   | 2001             |  | Restated           |   | 2001    |         | Restated
|                                      |                                         |   |                  |  |                    |   |         |         |         
|Net income                            |                                         | $ | 333,885          |  |                    | $ | 295,278 |         |          | $ | 234,615 |  |      | $ | 22,407 |      
|                                     
|                                     
|                                     
|                                     
|Other comprehensive loss, net of tax: |                                         |   |                  |  |                    |   |         |         |          |   |         |  |      |   |        |      
|                                     
|                                     
|                                     
|                                     
|                                      | Foreign currency
translation adjustment |   |                  |  |                    |   |         | (53,300 | )        |   |         |  |      |   |        | 8,772 | 
|                                      |                                         |   |                  |  |                    |   |         |         |          |   |         |  |      |   |        |      
|Comprehensive income                  |                                         | $ | 333,885          |  |                    | $ | 241,978 |         |          | $ | 234,615 |  |      | $ | 31,179 |      
|                                      |                                         |   |                  |  |                    |   |         |         |          |   |         |  |      |   |        |      

See notes to consolidated financial statements.

F- 4



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF CASH FLOWS




SIX MONTHS ENDED JULY 31, 2001 AND 2000

|                                        |                                                                                |                                                    |                                                        |          |         |          |           |          |        |           |  
|--------------------------------------- | ------------------------------------------------------------------------------ | -------------------------------------------------- | ------------------------------------------------------ | -------- | ------- | -------- | --------- | -------- | ------ | --------- | -
|                                        |                                                                                |                                                    |                                                        |          |         |          |           |          | 2000  
|                                        |                                                                                |                                                    |                                                        |          | 2001    |          | Restated 
|                                        |                                                                                |                                                    |                                                        |          |         |          |          
|Operating activities:                   |                                                                                |                                                    |                                                        |          |         |          |           |         
|                                       
|                                       
|                                       
|                                       
|                                        | Income from continuing operations                                              |                                                    | $                                                      | 306,783  |         |          | $         | 184,945  |       
|                                       
|                                       
|                                       
|                                       
|                                        | Adjustments to reconcile net income to cash
provided by continuing operations: |                                                    |                                                        |          |         |          |           |          |       
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                | Depreciation and amortization                      |                                                        |          | 55,151  |          |           |          | 57,996 |          
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                | Compensatory stock surrendered                     |                                                        |          | (25,200 | )        |           |          |        |          
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                | Changes in other operating assets and
liabilities: |                                                        |          |         |          |           |          |        |          
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                |                                                    | Accounts receivable                                    |          |         | 28,560   |           |          |        | (185,901  | )
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                |                                                    | Inventories                                            |          |         | (74,630  | )         |          |        | (59,268   | )
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                |                                                    | Prepaid expenses and other current assets              |          |         | 32,546   |           |          |        | 57,760    |  
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                |                                                    | Deferred tax assets                                    |          |         |          |           |          |        | (7,500    | )
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                |                                                    | Other assets                                           |          |         | (46,982  | )         |          |        | (159,516  | )
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                |                                                    | Accounts payable, and accrued expenses                 |          |         | 80,985   |           |          |        | (256,137  | )
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                |                                                    | Deferred lease liability                               |          |         | 3,000    |           |          |        | 3,000     |  
|                                        |                                                                                |                                                    |                                                        |          |         |          |           |         
|                                        |                                                                                |                                                    | Net cash used in continuing operations                 |          |         | 360,213  |           |          |        | (364,621  | )
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                |                                                    | Net cash provided by (used in)
discontinued operations |          |         | (26,678  | )         |          |        | 322,048   |  
|                                        |                                                                                |                                                    |                                                        |          |         |          |           |         
|                                        |                                                                                |                                                    | Net cash provided by (used in)
operating activities    |          |         | 333,535  |           |          |        | (42,573   | )
|                                        |                                                                                |                                                    |                                                        |          |         |          |           |         
|Investing activities:                   |                                                                                |                                                    |                                                        |          |         |          |           |         
|                                       
|                                       
|                                       
|                                       
|                                        | Purchase of property and equipment                                             |                                                    |                                                        | (108 405 |         |          |           | (153,659 | )     
|                                        |                                                                                |                                                    |                                                        |          |         |          |           |         
|                                        |                                                                                |                                                    | Net cash used in investing activities                  |          |         | (108,405 | )         |          |        | (153,659  | )
|                                        |                                                                                |                                                    |                                                        |          |         |          |           |         
|Financing activities:                   |                                                                                |                                                    |                                                        |          |         |          |           |         
|                                       
|                                       
|                                       
|                                       
|                                        | Proceeds from issuance of common stock                                         |                                                    |                                                        |          |         |          |           | 945,287  |       
|                                       
|                                       
|                                       
|                                       
|                                        | Proceeds from financing                                                        |                                                    |                                                        | 18,847   |         |          |           | 750,000  |       
|                                       
|                                       
|                                       
|                                       
|                                        | Payment of debt                                                                |                                                    |                                                        | (80,022  | )       |          |           | (654,569 | )     
|                                        |                                                                                |                                                    |                                                        |          |         |          |           |         
|                                        |                                                                                |                                                    | Net cash provided by (used in)
financing activities    |          |         | (61,175  | )         |          |        | 1,040,718 |  
|                                        |                                                                                |                                                    |                                                        |          |         |          |           |         
|Effect of exchange rate changes on cash |                                                                                |                                                    |                                                        |          |         |          | 40,473    |         
|                                        |                                                                                |                                                    |                                                        |          |         |          |           |         
|Net increase in cash                    |                                                                                |                                                    | 163,955                                                |          |         |          | 884,959   |         
|                                       
|                                       
|                                       
|                                       
|Cash, beginning of period               |                                                                                |                                                    | 599,229                                                |          |         |          | 349,547   |         
|                                        |                                                                                |                                                    |                                                        |          |         |          |           |         
|Cash, end of period                     |                                                                                | $                                                  | 763,184                                                |          |         | $        | 1,234,506 |         
|                                        |                                                                                |                                                    |                                                        |          |         |          |           |         

See notes to consolidated financial statements.

F- 5



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. |  | The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. The results of
operations for the three months ended is not necessarily indicative of the
results to be expected for the full year. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Companys annual report for the year ended January 31, 2001 included in its
Annual Report filed on Form 10-KSB.
|  
|2. |  | Principles of consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|  
|  
|  
|  
|   |  | The consolidated financial statements of Seto Holdings, Inc. and
subsidiaries include all the accounts of Seto Holdings, Inc., East Coast
Sales Company, DTI Technology, SDN BHD, Fuji Fabrication and SDN BHD, Hong
Kong Batteries Industries, Ltd. after elimination of all significant
intercompany transactions and accounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|  
|  
|  
|  
|   |  | The financial statements for the six and three months ended July 31, 2000
have been restated to give effect to the disposition of Fimas SDN BHD and
the discontinuation of Fuji Fabrication, SDN BHD. (See Note 12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|  
|  
|  
|  
|3. |  | Nature of operation, risks and uncertainties:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|  
|  
|  
|  
|   |  | The Company currently has a minuscule share of the dicing blade, ceramics
and cellular phone battery markets. There can be no assurance that the
Company will be able to increase its market share or that the market 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 into the market.                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|  
|  
|  
|  
|4. |  | Property and equipment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|  
|  
|  
|  
|   |  | Major classifications of property and equipment are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                              |  |   |         | 
|----------------------------- |  | - | ------- | 
|Leasehold improvements        |  | $ | 150,961 | 
|                             
|                             
|                             
|                             
|Manufacturing equipment       |  |   | 701,115 | 
|                             
|                             
|                             
|                             
|Office equipment              |  |   | 128,486 | 
|                              |  |   |         | 
|                              |  |   | 980,562 | 
|                             
|                             
|                             
|                             
|Less accumulated depreciation |  |   | 296,029 | 
|                              |  |   |         | 
|                              |  | $ | 684,533 | 
|                              |  |   |         | 

F- 6



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. |  | Commitments and contingencies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|  
|  
|  
|  
|   |  | The 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:

|              |  |   |         | 
|------------- |  | - | ------- | 
|July 31, 2002 |  | $ | 61,500  | 
|             
|             
|             
|             
|July 31, 2003 |  |   | 66,000  | 
|             
|             
|             
|             
|July 31, 2004 |  |   | 66,000  | 
|             
|             
|             
|             
|July 31, 2005 |  |   | 66,000  | 
|             
|             
|             
|             
|July 31, 2006 |  |   | 66,000  | 
|             
|             
|             
|             
|Thereafter    |  |   | 469,500 | 
|              |  |   |         | 
|              |  | $ | 795,000 | 
|              |  |   |         | 

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  | Rent expense amounted to $34,561 and $36,477 for the six months ended July
30, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                   
|  
|  
|  
|  
|  
|6. |  | Notes payable and long-term debt:                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|  
|  
|  
|  
|   |  | The Company had an outstanding line of credit with a financial institution
in the amount of $1,000,000. The line of credit carries interest at an
annual rate of 2.9% plus the 30 day dealer commercial paper rate with an
expiration date of October 31, 2001. As of July 31, 2001, the Company had
utilized $1,000,000 of the line of credit. The loan is secured by the
personal guarantee of the Companys president and the assets of Seto
Holdings, Inc.
|  
|  
|  
|  
|  
|   |  | Long-term debt of the domestic companies consists of the following:                                                                                                                                                                                                                                                                                                                                                                                           

|                     |  |  |    |   |  |      |    |      |        |          |         |  |  |  |      | 
|-------------------- |  |  | -- | - |  | ---- | -- | ---- | ------ | -------- | ------- |  |  |  | ---- | 
|                     |  |  |    |   |  |      |    |      |        | Balance  |         |  |  | 
|                     |  |  |    |   |  |      |    |      |        | July 31, |         |  |  | 
|                     |  |  |    |   |  | Rate |    | 2000 |        | Maturity
|                     |  |  |    |   |  |      |    |      |        |         
|Equipment loan       |  |  | (a | ) |  |      | 15 | %    |        | $        | 44,114  |  |  |  | 2004 | 
|                    
|                    
|                    
|                    
|Shareholder          |  |  | (b | ) |  |      | 15 | %    |        |          | 79,575  |  |  |  | 2003 | 
|                    
|                    
|                    
|                    
|Shareholder          |  |  | (b | ) |  |      | 10 | %    |        |          | 21,176  |  |  |  | 2002 | 
|                     |  |  |    |   |  |      |    |      |        |          |         |  |  |  |      | 
|                     |  |  |    |   |  |      |    |      |        |          | 144,865 |  |  |  |      | 
|                    
|                    
|                    
|                    
|Less current portion |  |  |    |   |  |      |    |      | 82,679 |          |         |  |  | 
|                     |  |  |    |   |  |      |    |      |        |          |         |  |  |  |      | 
|                     |  |  |    |   |  |      |    |      |        | $        | 621,863 |  |  |  |      | 
|                     |  |  |    |   |  |      |    |      |        |          |         |  |  |  |      | 

|                                              |  |                                                                                                                                  
|--------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------
|(a)                                           |  | The note is payable in monthly installments of $1,607, including interest.
Equipment which cost $57,426 is pledged as collateral.
|                                             
|                                             
|                                             
|                                             
|(b)                                           |  | The notes are payable to shareholders in monthly amounts aggregating
$8,364, including interest.                                 
|                                             
|                                             
|                                             
|                                             
|The maturities of these loans are as follows:

|     |  |                   |  |   |        |   |         | 
|---- |  | ----------------- |  | - | ------ | - | ------- | 
|     |  | July 31, 2002     |  | $ | 82,679 |  
|    
|    
|    
|    
|     |  | July 31, 2003     |  |   | 47,185 |  
|    
|    
|    
|    
|     |  | July 31, 2004     |  |   | 15,001 |  
|     |  |                   |  |   |        |   |         | 
|     |  |                   |  |   |        | $ | 144,865 | 
|     |  |                   |  |   |        |   |         | 
|    
|    
|    
|    
|DTI: |  |                   |  |   |        |   |         | 
|    
|    
|    
|    
|     |  | Capitalized lease |  | $ | 24,227 |  
|     |  |                   |  |   |        |   |         | 
|     |  | Due to directors  |  | $ | 69,527 |  
|     |  |                   |  |   |        |   |         | 

F- 7



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|   |  |                                                                       
|-- |  | ----------------------------------------------------------------------
|7. |  | Income taxes:                                                         
|  
|  
|  
|  
|   |  | Provision for income taxes (benefit) for the six months ended July 31:

|          |                         |  |      |       |      |  |   |       | 
|--------- | ----------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|          |                         |  | 2001 |       | 2000
|          |                         |  |      |       |     
|Domestic: |                         |  |      |       |      |  |   |      
|         
|         
|         
|         
|          | Current                 |  | $    | 3,279 |      |  | $ | 2,639 | 
|         
|         
|         
|         
|          | Deferred                |  |      |       |      |  |   |       | 
|          |                         |  |      |       |      |  |   |      
|          | Total (benefit) expense |  | $    | 3,279 |      |  | $ | 2,639 | 
|          |                         |  |      |       |      |  |   |      

| |  |                                                                                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | A reconciliation of the income tax provision at the federal statutory rate
to the income tax provision at the effective tax rate is as follows:

|                                                            |                                  |   |         |       |      |   |         |       | 
|----------------------------------------------------------- | -------------------------------- | - | ------- | ----- | ---- | - | ------- | ----- | 
|                                                            |                                  |   | 2001    |       | 2000
|                                                            |                                  |   |         |       |     
|Income tax computed at the domestic
federal statutory rates |                                  | $ | 28,594  |       |      | $ | 22,026  |      
|                                                           
|                                                           
|                                                           
|                                                           
|State tax (net of federal benefit)                          |                                  |   | 3,279   |       |      |   | 2,639   |      
|                                                           
|                                                           
|                                                           
|                                                           
|Reduction in valuation allowance                            |                                  |   | (28,594 | )     |      |   | (22,026 | )    
|                                                            |                                  |   |         |       |      |   |         |      
|                                                            | Net income tax expense (benefit) |   | $       | 3,279 |      |   | $       | 2,639 | 
|                                                            |                                  |   |         |       |      |   |         |      

| |  |                                                                                
| |  | -------------------------------------------------------------------------------
| |  | The components
of deferred tax assets and liabilities consist of the following:

|                                |                          |   |         |         | 
|------------------------------- | ------------------------ | - | ------- | ------- | 
|Deferred tax asset:             |                          |   |         |        
|Net operating loss carryforward |                          | $ | 475,000 |        
|                                |                          |   |         |        
|                                | Total deferred tax asset |   |         | 475,000 | 
|                               
|                               
|                               
|                               
|                                | Valuation allowance      |   |         | 139,874 | 
|                                |                          |   |         |        
|                                |                          | $ | 335,126 |        
|                                |                          |   |         |        

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  | The Company has a net operating loss carry forward of approximately
$1,600,000 for federal and state purposes which will expire in 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|  
|  
|  
|  
|8. |  | Employment and consulting agreements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|  
|  
|  
|  
|   |  | Employment agreements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|  
|  
|  
|  
|   |  | On May 1, 1996, the Company entered into employment agreements with its
President and Vice President. The term of the agreements covers a five year
period expiring April 30, 2006. Compensation is set at a base of $125,000
and $110,000 for the President and Vice President, respectively, with each
getting a bonus of 5% of the increase in Seto Holdings, Inc./East Coast
Sales consolidated net income over the net income from the previous years.
Each employee also received 1,000,000 stock options at $.25, 1,000,000
stock options at $.10 and 500,000 stock options at $.50. The Vice President
also received 50,000 stock options at $.50 in February 2000. The options
were not part of the 1997 Non-statutory Stock Option Plan effectuated March
25, 1997. As of July 31, 2001, none of these options had been exercised.

F- 8



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8. |  | Employment and consulting agreements (continued):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|  
|  
|  
|  
|   |  | Employment agreements (continued):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|  
|  
|  
|  
|   |  | On July 15, 1998, the Company entered into an employment agreement with the
acting secretary of the Company. The term of the agreement covers a five
year period expiring April 30, 2006. Compensation is set at a base of
$60,000 with a bonus of 2% of any increase in Seto Holdings, Inc./East
Coast Sales consolidated net income over the net income from the previous
years. The employee also received 550,000 stock options exercisable at $.50
per share, none of which have been exercised as of April 30, 2001. These
options were not part of the 1997 non-statutory stock option Plan
effectuated March 25, 1997.
|  
|  
|  
|  
|  
|9. |  | Computation of earnings per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                                     |  |            |            |              |  |      |            |      |  |  |            |  |  |  |            | 
|---------------------------------------------------- |  | ---------- | ---------- | ------------ |  | ---- | ---------- | ---- |  |  | ---------- |  |  |  | ---------- | 
|                                                     |  | Six Months |            | Three months
|                                                     |  | ended      |            | ended       
|                                                     |  | July 31,   |            | July 31,    
|                                                     |  |            |            |             
|                                                     |  | 2001       |            | 2000         |  | 2001 |            | 2000
|                                                     |  |            |            |              |  |      |            |     
|Weighted
average number of commonshares outstanding  |  |            | 14,315,254 |              |  |      | 19,090,069 |      |  |  | 14,271,000 |  |  |  | 19,467,165 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Assumed conversion of
stock options                  |  |            | 5,525,000  |              |  |      | 6,063,000  |      |  |  | 5,525,000  |  |  |  | 6,126,000  | 
|                                                     |  |            |            |              |  |      |            |      |  |  |            |  |  |  |            | 
|Weighted average
number of common shares
outstanding |  |            | 19,840,254 |              |  |      | 25,153,069 |      |  |  | 19,796,000 |  |  |  | 25,593,165 | 
|                                                     |  |            |            |              |  |      |            |      |  |  |            |  |  |  |            | 

|    |  |                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10. |  | Principal products and segmentation of sales:                                                                                                                                                                                                                                                                                                                                      
|   
|   
|   
|   
|   
|    |  | The Companys principal products are industrial ceramics, diamond cutting
tools and cellular phone batteries. The tools include dicing blades which
are components of precision electronic saws, scribes which are used to cut
silicon wafers, porcelain and ceramic molds and dressers which are used for
the shading and forming of grinding wheels in the machine tool industry.
|   
|   
|   
|   
|   
|    |  | Financial information relating to the principal industry segments and
classes of products:                                                                                                                                                                                                                                                                                         

|                    |               |                        |           |          |           |          |           |        |           | 
|------------------- | ------------- | ---------------------- | --------- | -------- | --------- | -------- | --------- | ------ | --------- | 
|                    |               |                        |           | July 31, |           | July 31,
|                    |               |                        |           | 2001     |           | 2000    
|                    |               |                        |           |          |           |         
|Sales to customers: |               |                        |           |          |           |          |           |       
|                   
|                   
|                   
|                   
|                    | Industry A:   |                        |           |          |           |          |           |        |          
|                   
|                   
|                   
|                   
|                    |               | Ceramics               |           | $        | 809,262   |          |           | $      | 661,663   | 
|                   
|                   
|                   
|                   
|                    | Industry B:   |                        |           |          |           |          |           |        |          
|                   
|                   
|                   
|                   
|                    |               | Diamond tools          |           |          | 419,303   |          |           |        | 419,699   | 
|                   
|                   
|                   
|                   
|                    | Industry C:   |                        |           |          |           |          |           |        |          
|                   
|                   
|                   
|                   
|                    |               | Rechargeable batteries |           |          | 1,166,950 |          |           |        | 1,173,683 | 
|                   
|                   
|                   
|                   
|                    | Miscellaneous |                        |           | 245,847  |           |          |           | 65,980 |          
|                    |               |                        |           |          |           |          |           |       
|                    |               | $                      | 2,641,362 |          |           | $        | 2,321,025 |       
|                    |               |                        |           |          |           |          |           |       

F- 9



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|    |  |                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------
|10. |  | Principal products and segmentation of sales (continued):                                             
|   
|   
|   
|   
|   
|    |  | Financial information relating to the principal industry segments and
classes of products (continued):

|                          |               |   |           |           |          |   |           |           |  
|------------------------- | ------------- | - | --------- | --------- | -------- | - | --------- | --------- | -
|                          |               |   | July 31,  |           | July 31,
|                          |               |   | 2001      |           | 2000    
|                          |               |   |           |           |         
|Operating profit or loss: |               |   |           |           |          |   |           |          
|                         
|                         
|                         
|                         
|                          | Industry A    |   | $         | 282,277   |          |   | $         | 102,021   |  
|                         
|                         
|                         
|                         
|                          | Industry B    |   |           | (133,600  | )        |   |           | (133,444  | )
|                         
|                         
|                         
|                         
|                          | Industry C    |   |           | 127,460   |          |   |           | 191,398   |  
|                         
|                         
|                         
|                         
|                          | Miscellaneous |   |           | 71,050    |          |   |           | 40,200    |  
|                          |               |   |           |           |          |   |           |          
|                          |               | $ | 347,187   |           |          | $ | 200,175   |          
|                          |               |   |           |           |          |   |           |          
|Identifiable assets:      |               |   |           |           |          |   |           |          
|                         
|                         
|                         
|                         
|                          | Industry A    |   | $         | 672,363   |          |   | $         | 541,835   |  
|                         
|                         
|                         
|                         
|                          | Industry B    |   |           | 1,492,916 |          |   |           | 1,798,725 |  
|                         
|                         
|                         
|                         
|                          | Industry C    |   |           | 881,964   |          |   |           | 765,430   |  
|                          |               |   |           |           |          |   |           |          
|                          |               | $ | 3,047,243 |           |          | $ | 3,105,990 |          
|                          |               |   |           |           |          |   |           |          

|                     |               |   |           |           |          |   |           |           | 
|-------------------- | ------------- | - | --------- | --------- | -------- | - | --------- | --------- | 
|                     |               |   | July 31,  |           | July 31,
|                     |               |   | 2001      |           | 2000    
|                     |               |   |           |           |         
|Sales to customers:  |               |   |           |           |          |   |           |          
|                    
|                    
|                    
|                    
|                     | United States |   | $         | 1,253,387 |          |   | $         | 1,183,723 | 
|                    
|                    
|                    
|                    
|                     | Far East      |   |           | 1,019,272 |          |   |           | 858,779   | 
|                    
|                    
|                    
|                    
|                     | Canada        |   |           | 368,703   |          |   |           | 278,523   | 
|                     |               |   |           |           |          |   |           |          
|                     |               | $ | 2,641,362 |           |          | $ | 2,321,025 |          
|                     |               |   |           |           |          |   |           |          
|Operating profit:    |               |   |           |           |          |   |           |          
|                    
|                    
|                    
|                    
|                     | United States |   | $         | 131,931   |          |   | $         | 80,070    | 
|                    
|                    
|                    
|                    
|                     | Far East      |   |           | 142,347   |          |   |           | 70,061    | 
|                    
|                    
|                    
|                    
|                     | Canada        |   |           | 72,909    |          |   |           | 50,044    | 
|                     |               |   |           |           |          |   |           |          
|                     |               | $ | 347,187   |           |          | $ | 200,175   |          
|                     |               |   |           |           |          |   |           |          
|Identifiable assets: |               |   |           |           |          |   |           |          
|                    
|                    
|                    
|                    
|                     | United States |   | $         | 944,645   |          |   | $         | 993,917   | 
|                    
|                    
|                    
|                    
|                     | Far East      |   |           | 1,554,094 |          |   |           | 1,584,055 | 
|                    
|                    
|                    
|                    
|                     | Canada        |   |           | 548,504   |          |   |           | 528,018   | 
|                     |               |   |           |           |          |   |           |          
|                     |               | $ | 3,047,243 |           |          | $ | 3,105,990 |          
|                     |               |   |           |           |          |   |           |          

F- 10



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|    |  |                                    
|--- |  | -----------------------------------
|11. |  | Supplemental cash flow information:

|                                                                      |                                                   |   |        |  |      |   |        |         | 
|--------------------------------------------------------------------- | ------------------------------------------------- | - | ------ |  | ---- | - | ------ | ------- | 
|                                                                      |                                                   |   | 2001   |  | 2000
|                                                                      |                                                   |   |        |  |     
|Interest paid during the period                                       |                                                   | $ | 44,767 |  |      | $ | 15,864 |        
|                                                                      |                                                   |   |        |  |      |   |        |        
|Income taxes paid during the period                                   |                                                   | $ | 0      |  |      | $ | 0      |        
|                                                                      |                                                   |   |        |  |      |   |        |        
|                                                                     
|Supplemental
schedule of noncash investing and financing activities: |                                                   |   |        |  |      |   |        |        
|                                                                     
|                                                                      | Issuance of common shares for consulting
contract |   |        |  |      |   | $      | 220,600 | 
|                                                                      |                                                   |   |        |  |      |   |        |        

|    |  |                                                                                                                                                                                                                                                                                                                                                      
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|12. |  | Discontinued operations:                                                                                                                                                                                                                                                                                                                             
|   
|   
|   
|   
|    |  | On February 1, 2001, the Company adopted a formal plan to sell Fuji
Fabrication, SDN, BHD. The anticipated disposal date is approximately July
31, 2001. The assets of Fuji Fabrication to be sold consist primarily of
inventories and equipment.                                                                                                   
|   
|   
|   
|   
|   
|    |  | Operating results of Fuji Fabrication for the six months ended July 31,
2001 are shown separately in the accompanying consolidated statement of
income. The consolidated statement of income for July 31, 2000 has been
restated and operating results of Fuji Fabrication are also shown
separately.                                                
|   
|   
|   
|   
|   
|    |  | Net sales of Fuji Fabrication for 2001 and 2,000 were $163,256 and
$443,186, respectively. These amounts are not included in net sales in the
accompanying consolidated statement of income.                                                                                                                                                         
|   
|   
|   
|   
|   
|    |  | In January 2001, the Company disposed of its subsidiary FIMAS SDN BHD and
took back the 5,000,000 shares of its common stock issued in the
acquisition. The net sales of Fimas SDN BHD for the six months ended July
31, 2000 amounted to $10,325,638. This amount is not included in net sales
in the accompanying consolidated statement of income.

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MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Overview and General Developments

1.     General



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because of the earlier disassociation of Fimas Sdn Bhd (Fimas) at the
end of fiscal year 2001 (ending January 31, 2001), the results for the three
months and six months ended July 31, 2000 have been restated and utilized in
this report for comparison purposes. Also, the closing of Fuji Fabrication
Sdn Bhd (Fuji), as of the start of fiscal year 2002, the current fiscal
year, resulted in their operations reflected in the Financial Statements as
discontinued operations. Both Fimas and Fuji were located in Malaysia.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | The asset sale of Fujis equipment, supplies and material is still in
process requiring a cash payment of $150,000 at the time of asset shipment
and $140,000 over the following three (3) months. Management anticipates
that the transaction will be totally completed during this fiscal year and
that after the Company works down Fujis receivables and payables, cash
reserves will be increased by approximately $50,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Even with the conclusion of the operations of Fuji and Fimas, the
Company continues to have a substantial presence in the Far East, Malaysia
in particular, and, generally, revenue derived globally. During the current
second quarter, 38.6% of its revenue was derived from the Far East and 13.9%
came from Canada. Thus, global as well as domestic economic conditions are
of great interest to Management. Although there was some reduction in net
sales in the second quarter of this fiscal year as compared to the first
quarter, net income more than doubled from $99,270 to $234,615. Following
its strategic corporate restructuring, as a minimum, management believes
that this profit trend will continue and probably improve. A substantial
portion of this improvement will be derived from its industrial ceramics
product line and the new emphasis on SETO Technology Sdn Bhds contract
manufacturing services for multiple third parties in the U.S., especially on
medical and automotive products. The latter contributed net sales of
$229,427 during the

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| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | current quarter as compared to less than $20,000 in the
previous quarter and $63,786 in net income or 27.8% of its sales.                                                                                                                                                 
|
| | Management believes that its product lines, now stabilized and better
focussed and efficient, will realize a net income in excess of $600,000
during the fiscal year 2002 which will be the Companys highest annual
result, and remain in a range of 10% to 15% of sales.

2.     Financial Condition



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management believes its financial condition is healthy and will remain
very much so for the remainder of this 2002 fiscal year. As of July 31,
2001, its cash position improved 3.7% over the previous quarter to $763,184.
The nominal decreases from the previous quarter in total current assets and
total assets, 1.1% and 2.3% respectively, are normal results of the impact
of the residual expenses from the wrap-up of the earlier Fimas
disassociation and the still on-going efforts related to the Fuji
discontinuation, mostly a 14.3% decrease in accounts receivable. On the
other side of the ledger and in a positive vein, total current liabilities
dropped 3.9%, long term debt (manageable equipment and shareholder loans)
dropped 14.3% and total shareholders equity increased by 8.9% to
$2,500,502.

SECOND QUARTER 2001 COMPARED TO 2000



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Disregarding discontinued operations, in the fiscal quarter ended July
31, 2001, net sales increased 2.5% to $1,238,522 from $1,208,738 and net
income increased over nine (9) times to $234,615 from $22,407 compared to
the previous fiscal quarter ended July 31, 2000. Management points to the
19.5% increase in gross profit from quarter to quarter as the major reason
for this improvement. Reflecting the different aspects of the product lines
in which the Company is engaged (contract manufacturing services,
distribution, manufacturing), from subsidiary to subsidiary gross profit
margin varied from 29.4% to 66.3% and averages, for the Company as a whole,
at 47.9%, a satisfactory level that management feels can continue for the
remainder of the year.
|
| | Management believes that global economic conditions will only slightly
impact financial results for the remainder of the fiscal year. Management
is confident that                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | net sales and net profit will continue to grow and points
to the bookings as the quarter ended which was in excess of $1,500,000 and
to be satisfied over the next four (4) months as a promising sign.

SIX MONTHS ENDED JULY 31, 2001 COMPARED TO SIX MONTHS ENDED JULY 31, 2000



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the six months ended July 31, 2001 compared to the six months ended
July 31, 2000, net sales increased 13.8% to $2,641,362 over sales of
$2,321,025 for the previous years comparable period. Net income for the
six months ended July 31, 2001 was $333,885 a 13.1% increase over net income
of $295,278 for the previous years comparable period. Contributing to the
latter increase was a drop in the selling, general and administrative
expenses ratio of 10.4% as a function of sales.

LIQUIDITY AND CAPITAL RESOURCES



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At July 31, 2001, the Company had current assets of $2,511,715
inclusive of $763,184 of unrestricted cash, and current liabilities of
$1,949,213 yielding a current ratio of 1.29:1, a 3.2% increase over the
ratio of April 30, 2001. The current ratio is in the upper range of its
historical experience so that Management believes that this measure of a
companys ability to meet current obligations reflects positively on the
Companys financial condition. This is particularly true when one takes
into consideration the residual expenses associated with the disassociation
(Fimas) and the discontinuance (Fuji).
|
| | As described in the Overview and General Developments section, Fujis
asset sale should generate net cash monthly over a period of less than 3
months hence. Although a distinct benefit, Management does not feel that
this cash inflow is essential to meeting its needs and that standard cash
flow will suffice for the remainder of the fiscal year.                                                                                                                                                                                                                                                                         
|
| | There are no plans for large scale, high-priced equipment purchases as
of now. The Company does have a need for dicing saws, both for replacement
purposes as well as growth needs. These $35,000 pieces of equipment are
utilized in the very profitable cutting portion of the industrial ceramics
product line. One saw was purchased last quarter and another will be
purchased during the next quarter. Dicing saws are generally readily
financed on a lease loan basis.                                                                                                                                                    

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys line of credit of $1 million is with a friendly and
cooperative financial institution. It is fully extended and utilized at
this point in time. Although no assurances can be given, the Company is
satisfactorily servicing the loan and expects no problems in continuing to
do so.                                                                                                                                                                           
|
| | On the other hand, although no such prospects are presently known,
funds for any strategic acquisitions, which the Company has decided to
restrict to the U.S. will have to emanate from new financing sources.
Although discussions are in process for such transactions and additional
sources would have to be explored, there is no assurance that such funds
will become available and if so, that it will be sufficient and on
acceptable terms to satisfy requirements.
|
| | A small percentage of the Companys profits may not be distributable to
the Companys other subsidiaries or as dividends. Under Malaysian law, a
Malaysian corporation is required to maintain a statutory reserve of five
percent (5%) of profit after taxation in accordance with the Foreign
Investment Law until such reserve equals ten percent (10%) of legal capital.
Such reserve is non-distributable                                                                

Effects of Foreign Currency Fluctuations



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys foreign operations are subject to risks related to
fluctuations in foreign currency exchange rates. During the second quarter of
fiscal year 2002, the foreign currency exchange loss was $190; and during the
first six months of fiscal year 2000 the foreign currency exchange gain was
$2378, and thus neither materially impacted operational results.                                                                                                                              
|
| | Management believes that for fiscal year 2002, two factors will continue
to keep its foreign currency exchange losses or gains, if any, extremely low:
Malaysian and Chinese exchange rates are fixed relative to the U.S. Dollar and,
outside of these prime Company operating areas, the Company deals in U.S.
Dollars almost exclusively. As a by-product, a number of economists believe
that such predictable policies such as pegging exchange rates yields a key
element of financial stability.
|
| | While future fluctuations in currency rates could impact results of
operations or financial conditions, as now constituted, foreign operations are
expected to continue to provide strong revenue and earnings growth.                                                                                                                                                                                                                                                                                 

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Disclosures About Market Risk



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is exposed to market risks primarily from changes in interest
rates and foreign currency exchange rates. To manage exposure to these
fluctuations, the Company may occasionally enter into various hedging
transactions. The Company does not use derivatives for trading purposes, or to
generate income or to engage in speculative activity, and the Company never
uses leveraged derivatives. The Company does not use derivatives to hedge the
value of its net investments in these foreign operations.
|
| | The Companys exposure to foreign exchange rates fluctuations results from
wholly-owned subsidiary operations in Malaysia and Hong Kong and from the
Companys share of the earnings of these operations, which are denominated in
other currencies.                                                                                                                                                                                                                                                                     
|
| | Also, the Company faces the possibility of adverse market conditions from
technological changes, shifting product emphasis among competitors and the
entry of new competitors into the market.                                                                                                                                                                                                                                                                                                                           

Impact of Inflation



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Although, it is difficult to predict the impact of inflation on costs and
revenues of the Company in connection with the Companys products, the Company
does not anticipate that inflation will materially impact its cost of operation
or the profitability of its products during fiscal year 2002.

Forward Looking Statements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This Managements Discussion and Analysis or Plan of Operation contains
statements which are not historical facts and are forward-looking statements
which reflect managements expectations, estimates and assumptions. Such
statements are based on information available at the time this Form 10-QSB was
prepared and involve risks and uncertainties that could cause future results,
performance and achievements of the

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Company to differ significantly from projected results. Factors that could cause actual future results to differ
materially include, among others, the risks of doing business in Malaysia, Hong
Kong, Southeast Asia in general, and other parts of the globe including,
without limitation, economic and political conditions; foreign currency
translation risks; tariffs and other foreign trade policies and dependence on
inexpensive labor in such countries; partial dependence on the semiconductor,
ceramic, electronic, telecommunication manufacturing industries, and
manufacturing industries in general; availability of raw materials; intense
competition and technological obsolescence. The Company assumes no obligation
to update such forward-looking statements, if any, at any time.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                                              
|----------------------------------------------
|SETO HOLDINGS, INC.(Registrant)               
|                                              
|By /s/ Eugene J. PianEugene J. Pian, President
|                                              
|Date: September 14, 2001                      

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. Pian
Director
|                                         
|Date: September 14, 2001                 
|                                         
|/s/ Craig A. PianCraig A. Pian
Director  
|                                         
|Date: September 14, 2001                 
|                                         
|/s/ Francine PianFrancine Pian
Director  
|                                         
|Date: September 14, 2001