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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) x
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarter ended April 30, 2004o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from
  to
 Commission file number 0-28698 SETO HOLDINGS, INC.  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   Registrants telephone
number, including area code (914) 923-5000 Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x      No o Class
    
    Outstanding at April 30, 2004Common stock $.001 par Value
    
    12,600,878




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED CONDENSED BALANCE SHEET  APRIL 30, 2004CONSOLIDATED CONDENSED STATEMENTS OF INCOMECONSOLIDATED CONDENSED STATEMENT OF CASH FLOWSNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESITEM 5. SIGNATURES AND CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND THE CHIEF FINANCIAL OFFICER OF THE COMPANYITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESEX-31.1 Certification of CEOEX-31.2 Certification of CFOEX-32.1 Certification of CEOEX-32.2 Certification of CFO    Table of Contents  
 PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS SETO HOLDINGS, INC. AND SUBSIDIARIES 
  ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    464,935Accounts receivable
    
    
    591,088Inventory
    
    
    838,473Prepaid expenses and other current assets
    
    
    39,452Deferred tax asset, current portion
    
    
    64,000TOTAL CURRENT ASSETS
    
    
    1,997,948PROPERTY, PLANT AND EQUIPMENT, NET OF DEPRECIATION
    
    
    729,498OTHER ASSETSGoodwill
    
    
    85,453Other intangible asset, net
    
    
    215,000Security deposits and other assets
    
    
    6,000Deferred tax asset, net of current portion
    
    
    307,591TOTAL OTHER ASSETS
    
    
    614,044TOTAL ASSETS
    
    $
    3,341,490LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent portion of long-term debt
    
    $
    9,682Note payable, line of credit
    
    
    713,352Accounts payable and accrued expenses
    
    
    209,974TOTAL CURRENT LIABILITIES
    
    
    933,008OTHER LIABILITIESDeferred lease liability
    
    
    30,000Long-term debt
    
    
    33,083TOTAL OTHER LIABILITIES
    
    
    63,083STOCKHOLDERS EQUITYCommon stock, par value $.001; 100,000,000 shares authorized; 12,709,100 shares issued
    
    
    12,709Additional paid in capital
    
    
    4,231,158Accumulated other comprehensive income
    
    
    (150,522
    )Retained earnings (deficit)
    
    
    (1,727,968
    )2,365,377Less common shares held in treasury, 108,222 shares at cost
    
    
    (19,978
    )TOTAL STOCKHOLDERS EQUITY
    
    
    2,345,399TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    3,341,490
 See notes to consolidated condensed financial statements.




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SETO HOLDINGS, INC. AND SUBSIDIARIES 
 
 2004
    
    2003Net revenues
    
    $
    1,164,304
    
    
    $
    1,021,185Cost of sales
    
    
    493,895
    
    
    
    413,696Gross margin
    
    
    670,409
    
    
    
    607,489Selling, general and administrative expenses
    
    
    602,967
    
    
    
    502,855Amortization and impairment of acquisition-related intangibles
    
    
    15,000
    
    
    
    15,000Operating expenses
    
    
    617,967
    
    
    
    517,855Operating income
    
    
    52,442
    
    
    
    89,634Interest and other, net
    
    
    (5,898
    )
    
    
    36,630Income before income taxes
    
    
    46,544
    
    
    
    126,264Income taxes
    
    
    15,344
    
    
    
    22,561Income from continuing operations
    
    
    31,200
    
    
    
    103,703Discontinued operations:Loss from operations of subsidiaries
    
    
    
    
    
    
    (1,339
    )Net income
    
    $
    31,200
    
    
    $
    102,364Earning per share information:Income from continuing operationsBasic
    
    $
    0.00
    
    
    $
    0.01Diluted
    
    $
    0.00
    
    
    $
    0.01Discontinued operations:Basic
    
    $
    0.00
    
    
    $
    (0.00
    )Diluted
    
    $
    0.00
    
    
    $
    (0.00
    )Weighted average common shares outstanding
    
    
    12,957,128
    
    
    
    14,521,147Weighted average common shares outstanding, assuming dilution
    
    
    12,957,128
    
    
    
    14,655,762
 See notes to consolidated condensed financial statements.




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SETO HOLDINGS, INC. AND SUBSIDIARIES 
 
 2004
    
    2003OPERATING ACTIVITIESIncome from continuing operations
    
    $
    31,200
    
    
    $
    103,703Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    50,133
    
    
    
    26,131Amortization and impairment of intangibles and other acquisition-related costs
    
    
    15,000
    
    
    
    15,000Gain on sale of equipment
    
    
    
    
    
    
    (31,749
    )Provision for deferred income taxes
    
    
    13,031
    
    
    
    20,356Changes in assets and liabilities:Accounts receivable
    
    
    (31,834
    )
    
    
    308,862Inventories
    
    
    27,543
    
    
    
    32,669Prepaid expenses and other current assets
    
    
    (31,615
    )
    
    
    (19,777
    )Deferred product development costs
    
    
    
    
    
    
    (52,989
    )Other assets
    
    
    
    
    
    
    (5,039
    )Accounts payable and accrued expenses

    
    
    (31,117
    )
    
    
    (85,588
    )Deferred lease liability
    
    
    
    
    
    
    1,500NET CASH PROVIDED BY CONTINUING OPERATIONS
    
    
    42,341
    
    
    
    313,079NET CASH PROVIDED BY DISCONTINUED OPERATIONS
    
    
    
    
    
    
    4,805NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    42,341
    
    
    
    317,884INVESTING ACTIVITIESProceeds from sale of equipment
    
    
    
    
    
    
    45,960Purchase of property and equipment
    
    
    (21,200
    )
    
    
    (76,070
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (21,200
    )
    
    
    (30,110
    )FINANCING ACTIVITIESIncrease (decrease) in short-term debt, net
    
    
    316,432
    
    
    
    (478,636
    )Repayments of and retirement of long-term debt
    
    
    (2,352
    )
    
    
    (11,212
    )Repurchase and retirement of common stock
    
    
    (17,036
    )
    
    
    (5,415
    )NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    297,044
    
    
    
    (495,263
    )NET INCREASE (DECREASE) IN CASH
    
    
    318,185
    
    
    
    (207,489
    )CASH, BEGINNING OF PERIOD
    
    
    146,750
    
    
    
    508,414CASH, END OF PERIOD
    
    $

    464,935
    
    
    $
    300,925
 See notes to consolidated condensed financial statements.




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SETO HOLDINGS, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
  1.
    
    PREPARATION OF INTERIM FINANCIAL STATEMENTSThe consolidated financial statements have been prepared by SETO
Holdings, Inc. (the Company) in conformity with accounting
principles generally accepted in the United States and are consistent
in all material respects with those applied in the Companys Annual
Report on Form 10-KSB for the year ended January 31, 2004. In the
opinion of management, the Companys interim financial statements
include all adjustments (consisting of normal recurring accruals and
adjustments necessary for adoption of new accounting standards)
necessary to present fairly the results of the interim periods shown.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
Securities and Exchange Commission rules. Management believes that
the disclosures made are adequate to make the information presented
not misleading. The results for the interim periods are not
necessarily indicative of results for the full year. The unaudited
financial statements contained herein should be read in conjunction
with the consolidated financial statements and notes thereto included
in the Companys January 31, 2004 Annual Report on Form 10-KSB.
Certain amounts presented for the three months ended April 30, 2003
have been reclassified to conform to the current presentation.The consolidated financial statements include the accounts of the
Company and its subsidiaries, which are wholly owned. All
significant intercompany transactions are eliminated in the
consolidation process.2.
    
    NATURE OF OPERATIONS, RISKS AND UNCERTAINTIESThe Company currently has a minuscule share of the dicing blade and
ceramics market. There can be no assurance that the Company will be
able to increase its market share or that the market demand will
increase. Furthermore, the Company faces the possibility of adverse
market conditions from technological changes, shifting product
emphasis among competitors and the entry of new competitors in the
market.Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. The Company places its cash and
cash equivalents with high quality financial institutions.Currency Risk. The Company transacts business in currencies other
than the U.S. dollar, primarily the Malaysian Ringgit. The Malaysian
Ringgit is pegged to the U.S. dollar therefore the Company has not
established any transaction or balance sheet risk management
programs. For foreign subsidiaries whose functional currency is the
local foreign currency, balance sheet accounts are translated at
exchange rates in effect at the end of the year and income statement
accounts are translated at average exchange rates for the year.
Acquisition related translation gains or losses are included as a
separate component of shareholders equity. Exchange differences
arising from foreign currency translation are included in the profit
and loss account.




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3.
    
    INVENTORYInventory at April 30, 2004 consists of: Finished goods
    
    $
    488,125Work in Process
    
    
    41,950Raw Materials
    
    
    302,747Supplies
    
    
    5,651$
    838,473
  4.
    
    GOODWILLThe Company adopted SFAS No. 142 effective January 31, 2002 and
accordingly, has ceased amortizing amounts related to goodwill
starting January 31, 2002. The balance of goodwill is related to the
Companys East Coast Sales Company segment. In accordance with SFAS
No. 142, the Company has evaluated the fair value of its East Coast
Sales segment and determined that none of the goodwill recorded was
impaired. The fair value was determined using a reasonable estimate
of future cash flows of the segment and a risk adjusted discount rate
to compute a net present value of future cash flows.5.
    
    IDENTIFIED INTANGIBLE ASSETSOn December 1, 2002, the Company acquired the customer lists from a
Malaysian Company for $300,000, to be amortized over a period of 5
years. The Companys identified intangible assets are subject to
amortization. Amortization of identified intangible assets amounted
to $15,000 for the three months ended April 30, 2004 and 2003.6.
    
    NOTES PAYABLE AND LONG-TERM DEBTThe Company has an available line-of-credit with a financial
institution in the amount $1,200,000. The line-of-credit carries an
annual rate of 2.9% plus the 30-day commercial paper rate with an
expiration date of October 31, 2004. As of April 30, 2004, the
Company had utilized $713,352 of the line-of-credit. The personal
guarantee of the Companys president and the assets of the Company
secure the line-of-credit.7.
    
    INTEREST AND OTHER, NETInterest and Other, net included: April 30, 2004
    
    April 30, 2003Interest income
    
    $
    3
    
    
    $
    9,923Gain on sale of assets
    
    
    0
    
    
    
    31,749Interest expense
    
    
    (5,570
    )
    
    
    (4,793
    )Foreign currency exchange loss
    
    
    (331
    )
    
    
    (249
    )Total
    
    ($
    5,898
    )
    
    $
    36,630




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8.
    
    COMMITMENTS AND CONTINGENCIESThe Company is obligated under a lease agreement with an entity owned
by an officer of the Company, which expires on April 30, 2013.
Annual rent expense is as follows; $60,000 for each of the first
five years, $66,000 for each of the second five years and $72,000 for
each of the final five years. The Company is also obligated for
insurance and the increase in real estate taxes over the base year as
stipulated in the lease. This lease requires the following future
minimum rental payments: April 30, 2005
    
    $
    66,000April 30, 2006
    
    
    66,000April 30, 2007
    
    
    66,000April 30, 2008
    
    
    72,000April 30, 2009
    
    
    72,000Thereafter
    
    
    288,000$
    630,000
  Rent expense charged to operations was $16,500 and $16,500 in Q1 2005
and Q1 2004, respectively.9.
    
    EARNINGS PER SHAREThe following table reconciles the number of common shares
outstanding at April 30, 2004 and 2003 to the weighted average number
of common shares outstanding for the purposes of calculating basic
and diluted earnings per share: April 30,2004
    
    2003Weighted average common shares outstanding
    
    
    12,957,128
    
    
    
    14,521,147Effect of using diluted securities:Weighted average common equivalent shares from
stock options
    
    
    
    
    
    
    134,615Diluted number of common shares outstanding
    
    
    12,957,128
    
    
    
    14,655,762
  At April 30, 2004 there were approximately six million shares of
common stock potentially issuable with respect to stock options,
which could dilute basic earnings per share in the future.10.
    
    STOCK REPURCHASE PROGRAMDuring the first three months of fiscal 2005, the Company repurchased
92,500 shares of common stock under the Companys authorized
repurchase program at a cost of $17,036. In addition, on March 25,
2004, the Company cancelled 475,000 shares of treasury stock. On
June 27, 2003 the Company with unanimous consent of its board of
directors, increased its stock repurchase program from one million
shares to two and a half million shares. As of April 30, 2004 a
total of 658,200 shares remained available for repurchase under the
program.




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11.
    
    DISPOSITION OF SUBSIDIARYOn February 1, 2001, the Company adopted a formal plan to sell Fuji
Fabrication, SDN, BHD (Fuji). On October 1, 2001, the assets of
Fuji Fabrication, which consisted primarily of inventory and
equipment, were sold for $290,547 with the Company assuming a note
for the full amount of the selling price. On October 1, 2002 the
Company recast the note for $396,693, which included the sales of
additional inventory and previously accrued interest. Interest on
the note was stated at 10% (annually) and was payable in 12 monthly
installments. On July 1, 2003 the company received equipment valued
at $32,500 which was offset against the note receivable at July 31,
2003. The note was payable in full on September 30, 2003. On
October 1, 2003, the payee, G Com Net, defaulted on the note and the
Company wrote off the remaining note balance of $364,193.Fuji Fabrication had no sales for the nine months ended October 31,
2003. General and administrative expenses for the nine months ended
October 31, 2003 totaled $1,608. The company ceased Fujis
operations on October 31, 2003.12.
    
    PRINCIPAL PRODUCTS AND SEGMENTATION OF SALESThe Company has adopted FASB Statement No. 131, Disclosures about
Segments of a Business Enterprise and Related Information. The
Company is engaged in three principal operating segments, which are
(1) custom cut and fabricated ceramic parts for the aircraft,
aerospace, defense, detection/protection industries, (2) the
manufacturing of disposable precision diamond cutting tools for the
semiconductor and electronics industries, and (3) contract
manufacturing of personal safety devices. These operating segments
were determined based on the nature of the products and services
offered. Operating segments are defined as components of an
enterprise about which separate financial information is available
and is evaluated regularly by the chief operating decision-maker
(CEO) to decide how to allocate resources and to assess performance.Operating segments do not record inter-segment revenue, and
accordingly, none is recorded. The accounting policies for segment
reporting are the same as for the Company as a whole. Financial
information relating to the principal industry segments and classes
of products are as follows: April 30, 2004
    
    April 30, 2003Sales to customers:Industry A - Ceramics
    
    $
    842,810
    
    
    $
    738,530Industry B - Diamond tools
    
    
    212,048
    
    
    
    211,757Industry D - Contract manufacturing
    
    
    109,446
    
    
    
    70,898Total sales
    
    $
    1,164,304
    
    
    $
    1,021,185Operating income or loss:Industry A - Ceramics
    
    $
    183,878
    
    
    $
    124,847Industry B - Diamond tools
    
    
    (110,668
    )
    
    
    (27,993
    )Industry D - Contract manufacturing
    
    
    (20,768
    )
    
    
    (7,220
    )Total operating income
    
    $
    52,442
    
    
    $
    89,634
 April 30, 2004
    
    April 30, 2003Sales to customers:United States
    
    $
    629,619
    
    
    $
    681,865Far East
    
    
    125,440
    
    
    
    36,470Canada
    
    
    409,245
    
    
    
    302,850Total sales
    
    $
    1,164,304
    
    
    $
    1,021,185




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Net property, plant and equipment by country were as follows: April 30, 2004
    
    April 30, 2003United States
    
    $
    293,058
    
    
    $
    199,082Malaysia
    
    
    436,440
    
    
    
    423,904Total property, plant and equipment, net
    
    $
    729,498
    
    
    $
    622,986
  Three customers each accounted for more than 10% of total sales and
together accounted for approximately 62% of total sales for the three
months ended April 30, 2004.




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document includes statements that may constitute forward-looking
statements made pursuant to the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company would like to caution
readers regarding certain forward-looking statements in this document and in
all of its communications to stockholders and others, press releases,
securities filings, and all other documents and communications. Statements
that are based on managements projections, estimates and assumptions are
forward-looking statements. The words believe, expect, anticipate,
intend, will, should, may and similar expressions generally identify
forward-looking statements. While the Company believes in the veracity of all
statements made herein, forward-looking statements are necessarily based upon a
number of estimates and assumptions that, while considered reasonable by the
Company, are inherently subject to significant business, economic and
competitive uncertainties and contingencies and known and unknown risks. Many
of the uncertainties and contingencies can effect events and the Companys
actual results and could cause its actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company. The Companys future operating results are subject to risks and
uncertainties and are dependent on many factors including, without limitation,
the risks identified in this report. Please see the Risk Factors in
Financial Condition. Except as otherwise required by the applicable
securities laws, the Company disclaims any intention or obligation publicly to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The Strategy, Critical Accounting Estimates and Outlook sections all
contain a number of forward-looking statements, all of which are based on our
current expectations. Our actual results may differ materially. These
statements do not reflect the potential impact of any mergers, acquisitions,
divestitures or other business combinations that had not closed as of June 4,
2004. Recent Developments On March 15, 2004, the Company filed a report on Form 8-K containing a
press release announcing an odd-lot purchase program for stockholders of less
than 100 shares of the Companys common stock, whereby stockholders will have
the opportunity to sell their shares to the Company for a price of $0.20 per
share with no brokerage fees. According to the Company, in the event that the
odd-lot program reduces the number of the Companys registered stockholders to
less than 300, the Company may deregister its common stock and suspend its
reporting obligation under the Securities Exchange Act of 1934, which would
result among other things, in the Company common stock being delisted from the
Bulletin Board and only being quoted on the Pink Sheets®, which is a
centralized quotation service that collects and publishes market maker
quotations in real time. The odd-lot program expires on June 15, 2004. Strategy Our goal is to be a niche company, with the ability to provide products
and services to a variety of larger corporations who need contract
manufacturing and/or made-to-order products. Our primary areas of focus are
the fabrication of ceramic parts for the airline security business and jet
engine manufacturing along with cutting blades for silicon wafers. All of our businesses operate in competitive environments characterized by
the introduction of new products with lower prices. As part of our overall
strategy, we use our relatively small size and ability to provide niche
services for larger companies in order to compete vigorously in each relevant
market segment. Our competition comes from established businesses as well as
new entrants to the marketplace. The trend in the United States (U.S.) toward
HomeLand Security will offer us new opportunities, but will result in more
competition. Competition tends to increase pricing pressure on our products,
which may mean that we must offer our products at lower prices than we had
anticipated, resulting in lower profits. Because some of our competitors
already have established products, it is inherently difficult for us to compete
against them. In addition, certain market segments in which we compete, such
as dicing blade products, have experienced an overall economic decline,
increasing the degree of competition within this market segment. When we
believe it is appropriate, we will take various steps, including discontinuing
older products and reducing prices, in order to increase acceptance of our
products and to be competitive within each relevant market segment.




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We plan to continue to cultivate new businesses and work with the security
and chip making industries to expand our product lines. East Coast Sales Company East Coast Sales Company (ECS) operating
segment specializes in the distribution and value-added fabrication of
technical ceramic products for the airline security industry and jet engine
manufacturers, and distributes clean room supplies and tools. Our strategy for
ceramic fabrication is to increase our production efficiency by utilizing our
foreign subsidiarys labor force and updating our machinery. After September
11th, East Coast Sales experienced an increase in demand for its ceramic
products used in the manufacture of airport safety and detection devices. Our
three major customers are developing new products which will require our
ceramic products. In addition to airport security devices, our ceramic
products are used in military defense equipment such as missiles, and by
manufacturers of jet engines for both commercial and military use. In order to
increase the acceptance and deployment of our ceramic products, we are focused
on providing our customers with the highest quality products and services. Semicon Tools and DTI Technology Semicon Tools and DTI Technology
operating segments strategy is to produce quality diamond cutting tools for
the semiconductor industry. We plan to improve the quality and capability of
our diamond cutting products that we currently have on the market. We are
currently consulting with an outside source in Taiwan to improve our
manufacturing process and diamond tool technology. The diamond tool segment is
very dependent on the semiconductor industry which over the last three years
has experienced economic decline and is starting to show signs of growth. The
diamond blades manufactured by DTI Technology are a vital part of East Coast
Sales ceramic fabrication process. SETO Technology SETO Technologys strategy is to provide
contract-manufacturing services for personal electronic safety devices and to
produce medical, automotive and mining safety devices. This segment is
currently developing and/or selling medical training products, personal safety
devices and safety helmets. Currently this segments main product is a CPR
training device used by the medical industry. We have five different models
under contract on an exclusive and nondisclosure basis. SETO Technology has
also contracted with a third party to develop and manufacture a safety helmet
that we expect to bring to market in fiscal 2005. The safety helmets are close
to meeting our specifications. We are currently modifying the helmets LED
lights and internal circuit boards, which we expect to complete by June 2004.
We expect to make our first sale by the end of the quarter ended July 31, 2004,
depending on market acceptance and no further modifications. Critical Accounting Estimates The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results reported in our financial
statements. Some of these accounting policies require us to make difficult and
subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Our most critical accounting estimates
include the assessment of recoverability of goodwill, which impacts write-offs
of goodwill; valuation of inventory, which impacts gross margin; assessment of
recoverability of long-lived assets, which primarily impacts gross margin when
we impair assets or accelerate their depreciation; and recognition and
measurement of current and deferred income tax assets and liabilities, which
impacts our tax provision. Below we discuss these policies further, as well as
the estimates and judgments involved. We also have other policies that we
consider to be key accounting policies, such as our policy for revenue
recognition; however, this policy does not meet the definition of critical
accounting estimates because they generally require us to make estimates or
judgments that are difficult or subjective. Goodwill According to our accounting policy we perform an annual
impairment review in the fourth quarter of each year, or more frequently if
indicators of potential impairment exist. Our most recent review was in the
fourth quarter of fiscal 2004 (January 31, 2004). Our impairment review
process is based on a discounted future cash flow approach that uses our
estimates of revenue for the reporting unit, driven by assumed market growth
rates and assumed segment share, and estimated costs as well as appropriate
discount rates. These estimates are consistent with the plans and estimates
that we use to manage the underlying business. In the future, we may incur
charges for impairment of goodwill if the ceramic fabrication business
experiences an economic downturn, new technology becomes available, we lose
market acceptance, we fail to deliver new products, or if we fail to achieve
our assumed revenue growth rates or assumed gross margin.




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Inventory Our policy for valuation of inventory, including the
determination of obsolete or excess inventory requires us to estimate the
future demand for our products within specific time horizons, generally one
year or less. If our demand forecast for specific products is greater than
actual demand and we fail to reduce manufacturing output accordingly, we could
be required to record additional inventory reserves, which would have a
negative impact on our gross margin. Long-Lived Assets We assess the impairment of long-lived assets when
events or changes in circumstances indicate that the carrying value of the
assets or the asset grouping is not recoverable. Factors that we consider in
deciding when to perform impairment review include significant
under-performance of a business or product line in relation to expectations,
significant negative industry or economic trends, and significant changes in
our use of the assets. Recoverability of assets that will continue to be used
in our operations is measured by comparing the carrying amount of the assets
grouping to the related total future net cash flows. If an assets grouping
carrying value is not recoverable through those cash flows, the asset grouping
is considered to be impaired. The impairment is measured by the difference
between the assets carrying amount and their fair value, based on the best
information available, including market prices or discounted cash flow
analysis. Revenue recognition- The Company recognizes net revenue when the earnings
process is complete, as evidenced by an agreement with the customer, transfer
of title and acceptance, if applicable, as well as fixed pricing and probable
collectibility. When the Company sells its products to distributors, the
distributors have substantial independent operations under sales arrangements
whose terms do not allow for rights of return or price protection on unsold
products held by them. In these instances, the Company recognizes revenue when
it ships the product directly to the distributors. Shipping and handling costs
billed to customers are included in net revenue and the related shipping costs
are included in cost of sales. Income Taxes In determining income for financial statement purposes, we
must make certain estimates and judgments. These estimates and judgments occur
in the calculation of certain tax liabilities and in the determination of the
recoverability of certain tax assets, which arise from temporary differences
between the tax and financial statement recognition of revenue and expense. As
of April 30, 2004, taxes were not provided on approximately $5,997 of
undistributed earnings of foreign subsidiaries, as we invest or expect to
invest the undistributed earnings indefinitely. If in the future these
earnings are repatriated to the United States, or if we determine such earnings
will be remitted in the foreseeable future, additional tax provisions would be
required. We must assess the likelihood that we will be able to recover our deferred
tax assets. If recovery is not likely, we must increase our provision for
taxes by recording a reserve, in the form of a valuation allowance, for the
deferred tax assets that we estimate will not ultimately be recoverable. As of
April 30, 2004, we believe that our recorded deferred tax assets will
ultimately be recovered. However, should there be a change in our ability to
recover our deferred tax assets; our tax provision would increase in the period
in which we determine that the recovery is not probable. In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We recognize
potential liabilities for anticipated tax audit issues in the U.S. and other
tax jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If payment of these amounts ultimately proves to
be unnecessary, the reversal of the liabilities would result in tax benefits
being recognized in the period when we determine the liabilities are no longer
necessary. If our estimate of tax liabilities proves to be less than the
ultimate assessment, a further charge to expense would result.




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Results of Operations Three months ended April 30, 2004 versus the three months ended April 30,
2003 The following table sets forth certain consolidated statements of income
data as a percentage of net revenue for the periods indicated: Three Months EndedApril 30, 2004
    
    April 30, 2003Net revenues
    
    
    100.00
    %
    
    
    100.00
    %Cost of sales
    
    
    42.42
    %
    
    
    40.51
    %Gross margin
    
    
    57.58
    %
    
    
    59.49
    %Selling, general and administrative expenses
    
    
    51.79
    %
    
    
    49.24
    %Amortization & impairment of acquisition-related intangibles
    
    
    1.29
    %
    
    
    1.47
    %Operating income
    
    
    4.50
    %
    
    
    8.78
    %
 Our net revenue for Q1 2005 of $1,164,304 was up approximately 14%
compared to Q1 2004, primarily due to the increase in demand for our ceramic
products used by the airline security manufacturing industry. Net revenue for
our diamond tool segment was relatively flat compared with Q1 2004 which is
primarily due to the weak global semiconductor market. Our contract
manufacturing revenues were up 54% compared with Q1 2004, primarily due to a
technical change that a customer made to its medical training devices in fiscal
2004 that we are now producing for them. Our gross margin percentage in fiscal 2005 of 58% was 2% lower compared to
Q1 2004. The gross margin for our diamond tool segment of 47% was
substantially lower compared to 62% during Q1 2004, which was primarily due to
higher material costs; our gross margin for our ceramics division increased to
58% compared to 52% in Q1 2004, which was primarily due lower labor costs; and
our gross margin for our contract manufacturing segment increased, which was
primarily due to the increase in sales volume. See Outlook for a discussion
of gross margin expectations. Ceramics - East Coast Sales Company The revenue and operating income for the East Coast Sales Company
operating segment for the first quarter of 2005 and 2004 were as follows: April 30, 2004
    
    April 30, 2003Revenue
    
    $
    842,810
    
    
    $
    738,530Operating income
    
    $
    183,878
    
    
    $
    124,847
 The East Coast Sales Company operating segment is our ceramics division,
which experienced an increase in sales due to the increased demand from the jet
engine manufacturing industry and the airline security manufacturing industry.
Net revenues for this segment increased $104,280 or 14% in Q1 2005 compared to
Q1 2004. The increase in revenue was due to higher sales of custom cut
ceramics that are both used in the manufacturing of jet engines and airport
security devices. Net operating income for the East Coast Sales Company operating segment
increased by $59,031 or 47% compared to Q1 2004 primarily due to the increased
in demand from the industries mentioned above.




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##### Table of Contents



Diamond Tools  Semicon Tools/DTI Technology The revenue and operating income for the diamond tool operating segment
for the first quarter of 2005 and 2004 were as follows: April 30, 2004
    
    April 30, 2003Revenue
    
    $
    212,048
    
    
    $
    211,757Operating loss
    
    ($
    110,668
    )
    
    ($
    27,993
    )
 Net revenue for Q1 2005 was flat compared to Q1 2004. The net operating
loss for Q1 2005 increased $82,675 or 295%, compared to Q1 2004. The increase
in the net operating loss from fiscal Q1 2004 to Q1 2005 was primarily due to
Semicon Tools absorbing a significant percentage of the Companys overhead
expenses. These overhead expenses include officers and administrative
salaries, rent, professional fees, public relations expense, insurance expense,
regulatory fees, stock administrative costs and travel expense all of which
have all increased from Q1 2004. It has been our policy to not allocate these
expenses to our foreign subsidiaries. Contract Manufacturing  SETO Technology The revenue and operating income for the contract manufacturing operating
segment for the first quarter of 2005 and 2004 were as follows: April 30, 2004
    
    April 30, 2003Revenue
    
    $
    109,446
    
    
    $
    70,898Operating loss
    
    ($
    20,768
    )
    
    ($
    7,220
    )
 Net revenue for Q1 2005 was up $38,548 or 54%, compared to Q1 2004,
primarily due an increase in sales from a major customer who in fiscal 2004
redesigned a product that SETO Technology produces. The increase in sales
volume did not have a corresponding effect on operating income. SETO
Technology experienced an operating loss of $20,768 compared to a loss of
$7,220 in Q1 2004. This was mainly due to an increase in wages, depreciation
and travel cost. Sales will continue to be ahead of fiscal 2004 due to the
increase in production of our customers new product design. Operating Expenses Operating expenses for the first quarter of 2005 and 2004 were as follows: April 30, 2004
    
    April 30, 2003Selling, general and administrative expenses
    
    $
    602,967
    
    
    $
    502,855Amortization & impairment of acquisition-related intangibles
    
    $
    15,000
    
    
    $
    15,000
 Selling, general and administrative expenses increased $100,112 or 20%
compared to Q1 2004. This increase was primarily due to higher wage expense,
insurance expense, depreciation expense, travel expense and professional fees. Amortization and impairment of acquisition-related intangibles was $15,000
in Q1 2005 and Q1 2004. This expense is related to our purchase of customer
lists in 2002. If market conditions change and it is deemed that the customer
lists do not have any future benefit and become impaired, we may write off the
entire amount, which would have a negative effect on our operating income.




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Interest and Other, Net Interest and other, net and taxes for the first quarter of 2005 and 2004
were as follows: April 30, 2004
    
    April 30, 2003Interest income
    
    $
    3
    
    
    $
    9,923Gain (loss) on sale of assets
    
    
    
    
    
    $
    31,749Interest expense
    
    ($
    5,570
    )
    
    ($
    4,793
    )Foreign currency exchange loss
    
    ($
    331
    )
    
    ($
    249
    )Provision for income taxes
    
    $
    15,344
    
    
    $
    22,561
 In Q1 2005, interest income decreased primarily due to the absence of the
payments we received on our note receivable from G-Com Net in the first quarter
of fiscal 2004. In Q1 2004 we sold some equipment in Malaysia for a gain of $31,749. The
equipment consisted of an automobile and a dicing saw that our diamond tool
segment sold during the quarter. Interest expense increased $777, or 16%, to $5,570 in Q1 2005 compared to
$4,793 in Q1 2004. This increase was primarily due to us drawing down on our
line-of-credit during the first quarter of fiscal 2005. See Financial
Condition section for a more detailed discussion of our financing activities. Foreign currency exchange loss was relatively flat compared to Q1 2004.
We experience currency translation gains or losses when we purchase items from
foreign countries (other than Malaysia) whose currencies are not pegged to the
U.S. Dollar. Historically, these gains and losses have been insignificant and
therefore we do not expect any significant losses in the future. Our effective income tax rate was 33% in Q1 2005 compared to an effective
income tax rate of 18% for Q1 2004. The increase in the effective rate in Q1
2005 is primarily due to the net income from our U.S. operating segment East
Coast Sales Company. This net income will absorb a portion of our federal net
operating loss carryforward. Deferred tax expense amounted to $13,031 in first
quarter of fiscal 2005. We expect to realize the full benefit of our net
operating loss carryover by fiscal 2010. Discontinued Operations On February 1, 2001, the Company adopted a formal plan to sell Fuji
Fabrication, SDN, BHD. On October 1, 2001, the assets of Fuji Fabrication,
which consisted primarily of inventory and equipment, were sold for $290,547
and we assumed a note for the full amount of the selling price. On October 1,
2002 we recast the note for $396,693, which included the sales of additional
inventory and previously accrued interest. Interest on the note is stated at
10% (annually) and was payable in 12 monthly installments. On July 1, 2003 we
received $32,500 in equipment which was offset against the note receivable at
July 31, 2003. The note was payable in full on September 30, 2003. On October
1, 2003, the payee, G Com Net, defaulted on the note and we ultimately wrote
off the remaining note balance of $364,193. Fuji Fabrication had no sales for the three months ended April 30, 2003.
General and administrative expenses for the three months ended April 30, 2003
totaled $1,339. The company ceased Fujis operations on October 31, 2003. Financial Condition Our financial condition remains strong. At April 30, 2004, cash totaled
$464,935, up from $146,750 at January 31, 2004. At April 30, 2004, total
short-term and long-term debt was $996,091, an increase of $282,963 compared to
January 31, 2004. These increases are attributable primarily to us drawing
down $316,432 on our line of credit, most of which is included in our cash
balance at April 30, 2004. At April 30, 2004, total debt represented 42% of
stockholders equity.




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##### Table of Contents



For Q1 2005, cash provided by operating activities was $42,341, compared
to $317,884 in Q1 2004. This decline was mainly due to the decrease in our
accounts receivable balance from January 31, 2004 to April 30, 2004. Cash was
provided by net income adjusted for non-cash related items. Working capital
uses of cash included an increase in accounts receivable, prepaid expenses, and
a decrease in accounts payable and accrued expenses. For Q1 2005, our three
largest customers accounted for approximately 62% of net revenue, with one of
these customers accounting for approximately 33% of net revenue. At April 30,
2004, these three largest customers accounted for approximately 49% of net
accounts receivable. We used $21,200 in net cash for investing activities during Q1 2005,
compared to $30,110 during Q1 2004. The decrease in cash used for investing
activities as compared to Q1 2004 was due to the purchase of equipment during
Q1 2004. Capital expenditures in Q1 2005 decreased $54,870 compared to fiscal
2004. We anticipate capital expenditures of $200,000 for fiscal 2005. Cash provided by financing activities amounted to $297,044 in Q1 2005,
compared to cash used by financing activities of ($495,263) in Q1 2004. The
major financing source of cash was the $316,432 we drew down on our line of
credit. We plan to use this money to finance the purchase of materials for the
production of our new safety helmet which we plan to bring to market by the
third quarter of this fiscal year. The major financing uses of cash for Q1
2005 and Q1 2004 were the repayment of debt and repurchase of our common stock.
In Q1 2005, we purchased 92,500 shares of our common stock for $17,036. We
still have a potential source of liquidity from authorized borrowings in the
form of a line-of-credit with a U.S. financial institution for $1.2 million.
At April 30, 2004, we had $486,648 available for use from this line of credit. We believe that we have the financial resources needed to meet our
anticipated business requirements for the next 12 months, including capital
expenditures for the expansion or upgrading of our manufacturing capacity and
working capital requirements. Risk Factors Our activities may require additional financing, which may not be
available on acceptable terms, if at all. As our business expands, we expect to increase our expenses for sales,
marketing and product development efforts. Although there can be no assurance,
we believe that we have sufficient capital resources from operations and our
line of credit to finance our operational requirements through January 31,
2005. If we incur operating losses, or if unforeseen events occur that would
require additional funding, we may need to raise additional capital or incur
debt to fund our operations. We would expect to seek such capital through
sales of additional equity or debt securities and/or loans from banks, but
there can be no assurance that such funds will be available to us on acceptable
terms, if at all. Failure to obtain such financing or obtaining it on term not
favorable to us could have a material adverse affect on future operating
prospects and continued growth, as well as diluting investors in an offering. Approximately 62% of our sales for the three months ended April 30, 2004
were generated from three (3) customers and, accordingly, the loss of any one
such customer could adversely affect our sales. As of April 30, 2004, three customers accounted for 62% of our sales. We
are seeking to broaden our customer base by introducing new products and
introducing a new cutting blade; however, no assurance can be given that our
efforts will be successful or that these three customers will not continue to
account for a large concentration of our sales. The loss of one or more of
these three customers, or any other customer that accounts for a significant
portion of our sales, could materially adversely affect our business, operating
results, and financial condition. We depend heavily on our executive officers and would have difficultly
replacing them. Our future success depends to a significant degree on the skills,
experience and efforts of executive officers. We currently have employment
agreements with our executive officers, but the loss of these personnel could
materially adversely affect our business and our ability to achieve
profitability.




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##### Table of Contents



We are controlled by a small number of stockholders, some of which are key
members of our executive management, and such control could prevent the taking
of certain actions that may be beneficial to other stockholders. A significant portion of our voting securities are owned by various
members of the Pian family. Although each member of the Pian family may vote
their respective shares independently, due to their substantial ownership of
our voting securities, together they control the outcome of substantially all
matters which may be submitted to a vote of our stockholders, including but not
limited to the selection of certain members to our Board of Directors and the
adoption of measures that could delay or prevent a change in control or impede
a merger, takeover or other business combination we may potentially be involved
in. Additionally, Eugene Pian is our Chief Executive Officer and Craig Pian is
our Chief Financial Officer, thereby also giving them substantial control over
matters considered by the officers and directors of the Company without
approval of the stockholders. Our common stock is subject to penny stock regulation, which may limit the
liquidity of our common stock and the ability of our stockholders to sell
shares. Our common stock is subject to regulations of the SEC relating to the
market for penny stocks. These regulations generally require that a disclosure
schedule explaining the penny stock market and the risks associated with the
penny stock market be delivered to purchasers of penny stocks and imposes
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors. Moreover,
broker-dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our
common stock to sell shares to third parties or to otherwise dispose of them.
Accordingly, there can be no assurance that an active trading market in the
Companys shares will be developed or sustained. Our common stock is thinly traded, and the public market may provide
little or no liquidity for holders of our common stock. There is currently a limited volume of trading in our common stock and on
many days there is no trading activity in our common stock. Holders of our
common stock may find it difficult to find buyers for their shares at prices
quoted in the market, or at all. Our stock price may be volatile, which could result in substantial losses
for investors. Volatility in the market could cause our stockholders to incur substantial
losses. An active public market for our common stock may not develop and the
market price of our common stock may become highly volatile. The market price
of our common stock may fluctuate significantly in response to the following
factors, some of which are beyond our control:  
    
    Changes in market valuations of similar companies;
    
    Announcements by us of new or improved products,
significant contracts, acquisitions, strategic relationships,
joint ventures or capital commitments;
    
    Regulatory developments;
    
    Additions or departures of key personnel;
    
    Deviations in our results of operations from the estimates of security analysts; and
    
    Future issuances of our common stock or other securities. If we are not current in our periodic filings with the SEC, we could lose
our eligibility to trade our securities on the OTC Bulletin Board, which
would have an effect on our ability to raise additional funds.




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##### Table of Contents



We are required to file annual and quarterly reports with the SEC,
pursuant to the Securities Exchange Act of 1934, as amended, and the rules
promulgated there under. To the extent we do not file such reports timely, our
securities may not longer be permitted to be traded on the OTC Bulletin Board,
and would then be listed on the pink sheets. Such action would have an
adverse affect on our ability to raise additional funds in the future since
many potential investors will not invest in companies whose securities are
traded on the pink sheets. Outlook In general, as we look ahead to the rest of fiscal 2005, the outlook
continues to be uncertain, and we anticipate a year that will be largely driven
by the airline security, military, jet engine, semiconductor industries, the
need for personal safety devices as well as the global economy. Although it is
difficult to predict product demand for the rest of fiscal 2005, we expect a 5%
to 10% increase in revenue from our ceramic segment, East Cost Sales Company.
The outlook for the diamond tools industry is showing some strength, and with
the introduction of our new cutting blades, sales could increase 10%-12% during
the next three quarters of fiscal 2005. The diamond tool industry is very
dependent on the semiconductor industry, which over the last three years has
experienced economic decline and is now starting to show signs of growth. The
outlook for the contract manufacturing segment for the rest of fiscal 2005
should be stronger than fiscal 2004. With the introduction of our new personal
safety devices sales for our contract manufacturing segment could grow 30%-50%
in fiscal 2005. In this environment, revenue growth for our new safety helmet
is largely dependent on the commercial acceptance of our current designs and
successfully marketing the designs to the safety and rescue industries, which
we can not assure. Our financial results are substantially dependent on sales of ceramics and
related products by the East Coast Sales Company operating segment. Revenue is
partly a function of the mix of products we offer, all of which are difficult
to forecast. Because of the changing conditions throughout the world our
revenue is subject to the impact of economic conditions in various geographic
regions. Our gross margin expectation for the rest of fiscal 2005 is approximately
57% plus or minus a few points, which is a slight increase from the fiscal 2004
gross margin of 56%. Our gross margin varies depending on unit sales volumes
and product mixes. Our policy for valuation of inventory, including the
determination of obsolete inventory, requires us to estimate the future demand
for our products within six months or less. The estimates of future demand
that we use in the valuation of inventory are also used for near-term factory
planning. If our demand forecast is greater than actual demand and we fail to
reduce manufacturing output accordingly, we would likely be required to record
additional inventory reserves, which would have a negative impact on our gross
margin. Various other factors including unit sales volumes and new
technologies will also continue to affect cost of sales and the variability of
gross margin percentages. In fiscals 2003 and 2004 we improved our cutting blade facility and
updated our ceramics fabrication facility. We expect that capital spending
will be $200,000 for fiscal 2005 which is up from $156,319 in fiscal 2004. The
increase is primarily due to the expected equipment needed to produce our new
safety helmet. If market demand does not grow or our new products are not
accepted, revenues and gross margins may also be adversely affected. Depreciation for fiscal 2005 is expected to be approximately $200,000,
compared to $196,501 in fiscal 2004. We expect amortization of other intangible assets to be approximately
$60,000 in fiscal 2005, as compared to $60,000 in fiscal 2004. As of April 30,
2004 amortization expense totaled $15,000. We review our acquisition-related intangible assets for impairment
whenever indicators of potential impairment exist. We also review goodwill for
impairment in the fourth quarter of each year, or earlier if indicators of
potential impairment exist. If we fail to deliver products, if our new
products fail to gain market acceptance, or if market conditions in the ceramic
business decline, our revenue and cost forecasts may not be achieved and we may
incur charges for impairment of goodwill.




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##### Table of Contents



We expect our effective tax rate to be approximately 30% for fiscal 2005. This
estimate is higher than the rate in fiscal 2004, primarily due to the
anticipated increase in net income from our East Coast Sales Company operating
segment and the use of our available net operating loss carryover for federal
income tax purposes. The expected rate is based on current tax law and is
subject to change. Our future results of operations and the other forward-looking statements
contained in this Outlook section and in our Strategy and Critical
Accounting Estimates sections involve a number of risks and uncertainties, in
particular the statements regarding our strategies, our expectations regarding
new products, future economic conditions, revenues, gross margin and costs,
capital spending and depreciation and amortization. In addition to the factors
discussed above, among the other factors that could cause actual results to
differ materially are the following: business and economic conditions and
trends in the airline security business, jet engine manufacturers, microchip
industry, and safety industries in various geographic regions; possible
disruption in commercial activities related to terrorist activity and armed
conflict, such as change in logistics and security arrangements, and reduced
end-user purchases relative to expectations; the impact of events outside the
United States, such as the business impact of fluctuating currency rates,
unrest or political instability in a locale; changes in customer order
patterns; competitive factors and acceptance of new products in specific market
segments; pricing pressures; excess or obsolete inventory and variations in
inventory valuation and the spread of SARS illness could adversely affect our
business and our customer order patterns. We believe that we have the products, facilities, personnel and financial
resources for continued business success, but future revenues, costs, margins
and profits are all influenced by a number of factors, including those
discussed above, all of which are inherently difficult to forecast. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, including changes in currency
exchange rates and interest rates. We do not try to mitigate these risks by
utilizing derivative financial instruments or other risky strategies. A substantial majority of our revenue, expense, and capital purchasing
activities are transacted in U. S. dollars. However, we do enter into these
transactions in other currencies, primarily the Malaysian Ringgit. The
Malaysian Ringgit is pegged to the U.S. Dollar and is translated to U.S.
dollars for consolidated purposes. In Q1 2005 we reported a foreign currency
exchange loss of $3331, compared to a loss of $249 in Q1 2004, neither of which
materially impacted the financial statements. Inflation has not had a material effect on our revenues and income from
continuing operations in the past four years. Inflation is not expected to
have a material future effect. 
 ITEM 4. CONTROLS AND PROCEDURES Quarterly Controls Evaluation and Related CEO and CFO Certifications Within the 90 days prior to the date of this Quarterly report on Form
10-QSB, the company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures (Disclosure Controls), and its
internal controls and procedures for financial reporting (Internal Controls).
The controls evaluation was done under the supervision and with the
participation of management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO). Immediately following the Signature Page of this Quarterly Report are
certifications of the CEO and the CFO, which are required in accord with Rule
13a-14 of the Securities Exchange Act of 1934 (the Exchange Act). This
Controls and Procedures section includes the information concerning the
controls evaluation referred to in the certifications and it should be read in
conjunction with the certifications for a more complete understanding of the
topics.




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##### Table of Contents



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




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statements and the risk of such misstatements would not be detected within a
timely period by employees in the normal course of performing their assigned
functions. We also sought to deal with other Controls matters in the controls
evaluation, and in each case if a problem was identified, we considered what
revision, improvement and/or correction to make in accordance with our ongoing
procedures. From the date of the Controls evaluation to the date of this Quarterly
Report, there have been no significant changes in Internal Controls or in other
factors that could significantly affect Internal Controls, including corrective
actions with regard to significant deficiencies and material weaknesses. Conclusions Based upon the Controls evaluation, our CEO and CFO have concluded that,
subject to the limitations noted above, our Disclosure Controls are effective
to ensure that material information relating to SETO Holdings, Inc. and its
consolidated subsidiaries is made known to management, including the CEO and
CFO, particularly during the period when our periodic reports are being
prepared, and that our Internal Controls are effective to provide reasonable
assurance that our financial statements are fairly presented in conformity with
generally accepted accounting principles.




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




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  a)
    
    Exhibits.The following exhibits are filed in connection with this Report: No.
    
    Description31.1
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  b)
    
    Reports on 8-K:On March 15, 2004, we filed a report on Form 8-K containing a press
release announcing an odd-lot purchase program for stockholders of less
than 100 shares of our common stock, whereby stockholders will have the
opportunity to sell their shares to the Company for a price of $0.20 per
share with no brokerage fees.




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SIGNATURES Pursuant to the requirements of the Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereto
duly authorized. SETO Holdings, Inc.RegistrantBy: /s/ Eugene J. PianEugene J. Pian, PresidentPresident and Chief Executive OfficerDate: June 11, 2004
 In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated. /s/ Eugene J. PianEugene J. PianPresident and Chief Executive OfficerDate: June 11, 2004/s/ Craig A. PianCraig A. PianExecutive Vice President andChief Financial OfficerDate: June 11, 2004