##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

(Mark One)



|[X]  |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 
|---- |  | ----------------------------------------------------------------------------------------
|    
|     |  | For the quarter ended October 31, 2003                                                  
|    
|[  ] |  | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|    
|     |  | For the transition period from
________________ to ________________                     

Commission file number  0-28698

SETO HOLDINGS, INC,
(Exact name of small business issuer as specified in its charter)

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

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

Registrants telephone
number, including area code  (914) 923-5000

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X]
   No [   ]

|                                   |  |                                           
|---------------------------------- |  | ------------------------------------------
|Class
Common stock $.001 par Value |  | Outstanding at October 31, 2003
13,191,670





---

TABLE OF CONTENTS



|                                      |                                                                                                                     |                                                         |  |  |  |  |  | 
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION       
|                                      | ITEM 1. FINANCIAL STATEMENTS                                                                                       
|                                      |                                                                                                                     | CONSOLIDATED CONDENSED STATEMENT OF INCOME             
|                                      |                                                                                                                     | CONSOLIDATED CONDENSED BALANCE SHEET  OCTOBER 31, 2003
|                                      |                                                                                                                     | CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS         
|                                      |                                                                                                                     | NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS   
|                                      | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                      
|                                      | ITEM 3. CONTROLS AND PROCEDURES                                                                                    
|                                      | ITEM 4. SIGNATURES AND CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND THE CHIEF FINANCIAL OFFICER OF THE COMPANY
|                                      | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                                           
|SIGNATURES                           
|Exhibit 31.1 302 Certification of CEO
|Exhibit 31.2 302 Certification of CFO
|Exhibit 32.1 906 Certification of CEO
|Exhibit 32.2 906 Certification of CFO



---



##### Table of Contents



SETO HOLDINGS, INC.
INDEX TO FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2003

INDEX

|         |                       |         |  |                                                                                                                     |  |        
|-------- | --------------------- | ------- |  | ------------------------------------------------------------------------------------------------------------------- |  | -------
|Part I.  | Financial
Information |         | 
|        
|         |                       | Item 1. |  | Consolidated Condensed Financial Statements                                                                         |  |        
|        
|         |                       |         |  | Consolidated Condensed Statement of Income for the nine and three
months ended October 31, 2003 and 2002 (restated) |  | 1      
|        
|         |                       |         |  | Consolidated Condensed Balance Sheet as of October 31, 2003                                                         |  | 2      
|        
|         |                       |         |  | Consolidated Condensed Statement of Cash Flows for the nine months
ended October 31, 2003 and 2002 (restated)       |  | 3      
|        
|         |                       |         |  | Notes to Financial Statements                                                                                       |  | 4  10 
|        
|         |                       | Item 2. |  | Managements Discussion and Analysis of Financial Condition                                                         |  | 11  22
|        
|         |                       | Item 3. |  | Qualitative and quantitative disclosures about market risk                                                          |  | 22     
|        
|         |                       | Item 4. |  | Controls and procedures                                                                                             |  | 23  24
|        
|Part II. | Other
Information     |         | 
|        
|         |                       | Item 6. |  | Exhibits                                                                                                            |  | 25  30





---



##### Table of Contents






PART I  FINANCIAL
INFORMATION




ITEM 1. FINANCIAL STATEMENTS




SETO HOLDINGS, INC. AND
SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF INCOME
NINE AND THREE MONTHS ENDED OCTOBER 31, 2003 AND 2002
(UNAUDITED)

|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |           |   |         |        |  
|------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------- | ------------------ | --------- | - | ----------------- | ---------- | ------------------ | - | --------- | ---------- | -------- | - | ------- | ---------- | --------- | - | ------- | ------ | -
|                                                              |                                                 |                                          |                    |           |   | Nine Months Ended |            | Three Months Ended
|                                                              |                                                 |                                          |                    |           |   | October 31        |            | October 31        
|                                                              |                                                 |                                          |                    |           |   |                   |            |                   
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   | 2002      |            |          |   |         |            | 2002     
|                                                              |                                                 |                                          |                    |           |   | 2003              |            | Restated           |   | 2003      |            | Restated
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |         
|Net revenues                                                  |                                                 | $                                        | 2,888,063          |           |   | $                 | 5,816,794  |                    |   | $         | 927,455    |          |   | $       | 2,434,711  |          
|                                                              | Cost of sales                                   |                                          |                    | 1,100,458 |   |                   |            | 2,689,793          |   |           |            | 357,667  |   |         |            | 1,219,769 |  
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|Gross margin                                                  |                                                 |                                          | 1,787,605          |           |   |                   | 3,127,001  |                    |   |           | 569,788    |          |   |         | 1,214,942  |          
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|Operating expenses:                                           |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|                                                              | Selling, general and administrative expenses    |                                          |                    | 1,621,284 |   |                   |            | 1,613,894          |   |           |            | 549,287  |   |         |            | 638,418   |  
|                                                              | Amortization of acquisition-related intangibles |                                          |                    | 45,000    |   |                   |            |                    |   |           |            | 15,000   |   |         |            |           |  
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|                                                              |                                                 |                                          | Operating expenses |           |   | 1,666,284         |            |                    |   | 1,613,894 |            |          |   | 564,287 |            |           |   | 638,418 |       
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|Operating income                                              |                                                 |                                          | 121,321            |           |   |                   | 1,513,107  |                    |   |           | 5,501      |          |   |         | 576,524    |          
|                                                              | Interest and other, net                         |                                          |                    | (336,139  | ) |                   |            | (69,676            | ) |           |            | (375,769 | ) |         |            | (2,480    | )
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|Income (loss) before income taxes (benefit)                   |                                                 |                                          | (214,818           | )         |   |                   | 1,443,431  |                    |   |           | (370,268   | )        |   |         | 574,044    |          
|                                                              | Income taxes (benefit)                          |                                          |                    | 45,037    |   |                   |            | (15,820            | ) |           |            | 17,526   |   |         |            | 45,504    |  
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|Income (loss) from continuing operations                      |                                                 |                                          | (259,855           | )         |   |                   | 1,459,251  |                    |   |           | (387,794   | )        |   |         | 528,540    |          
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|Discontinued operations:                                      |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|                                                              | Income (loss) from operations of subsidiaries   |                                          |                    | (1,608    | ) |                   |            | (123,005           | ) |           |            | 0        |   |         |            | (51,441   | )
|                                                              | Loss on disposal of subsidiaries                |                                          |                    | (36,127   | ) |                   |            | (906,942           | ) |           |            | (36,396  | ) |         |            | (878,096  | )
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|                                                              |                                                 |                                          | (37,735            | )         |   |                   | (1,029,947 | )                  |   |           | (36,396    | )        |   |         | (929,537   | )        
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|Net income (loss)                                             |                                                 | $                                        | (297,590           | )         |   | $                 | 429,304    |                    |   | $         | (424,190   | )        |   | $       | (400,997   | )        
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|Earning per share information:                                |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|                                                              |                                                 | Income (loss) from continuing operations |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |           |   |        
|                                                              |                                                 |                                          |                    | Basic     |   |                   | ($0.02     | )                  |   | $         | 0.10       |          |   |         | ($0.03     | )         |   | $       | 0.04   |  
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|                                                              |                                                 |                                          |                    | Diluted   |   |                   | ($0.02     | )                  |   | $         | 0.10       |          |   |         | ($0.03     | )         |   | $       | 0.03   |  
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|                                                              |                                                 | Discontinued operations:                 |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |           |   |        
|                                                              |                                                 |                                          |                    | Basic     |   |                   | ($0.00     | )                  |   |           | ($0.07     | )        |   |         | ($0.00     | )         |   |         | ($0.06 | )
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|                                                              |                                                 |                                          |                    | Diluted   |   |                   | ($0.00     | )                  |   |           | ($0.07     | )        |   |         | ($0.00     | )         |   |         | ($0.06 | )
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|Weighted average common shares outstanding                    |                                                 |                                          | 14,083,925         |           |   |                   | 14,484,700 |                    |   |           | 13,642,604 |          |   |         | 14,484,700 |          
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          
|Weighted average common shares outstanding,
assuming dilution |                                                 |                                          | 14,083,925         |           |   |                   | 14,484,700 |                    |   |           | 13,642,604 |          |   |         | 15,226,079 |          
|                                                              |                                                 |                                          |                    |           |   |                   |            |                    |   |           |            |          |   |         |            |          

1



---



##### Table of Contents






SETO HOLDINGS, INC. AND
SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEET  OCTOBER 31, 2003
(UNAUDITED)

|                                                   |                                                                                       |                            |                                            |                                      |           |           |  | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------------------------------------ | --------- | --------- |  | 
|                                                   |                                                                                       |                            |                                            | ASSETS                               |           |           |  | 
|CURRENT ASSETS                                     |                                                                                       |                            |                                            |                                     
|                                                   | Cash and cash equivalents                                                             |                            | $                                          | 179,472                              |          
|                                                   | Accounts receivable                                                                   |                            |                                            | 394,274                              |          
|                                                   | Inventory                                                                             |                            |                                            | 919,546                              |          
|                                                   | Prepaid expenses and other current assets                                             |                            |                                            | 32,058                               |          
|                                                   | Deferred tax asset, current portion                                                   |                            |                                            | 49,000                               |          
|                                                   |                                                                                       |                            |                                            |                                     
|                                                   |                                                                                       | TOTAL CURRENT ASSETS       |                                            |                                      | 1,574,350 |          
|                                                   |                                                                                       |                            |                                            |                                     
|PROPERTY, PLANT AND EQUIPMENT, NET OF DEPRECIATION |                                                                                       |                            | 649,303                                    |                                     
|                                                   |                                                                                       |                            |                                            |                                     
|OTHER ASSETS                                       |                                                                                       |                            |                                            |                                     
|                                                   | Deferred product development costs                                                    |                            |                                            | 193,895                              |          
|                                                   | Goodwill                                                                              |                            |                                            | 85,453                               |          
|                                                   | Other intangible asset                                                                |                            |                                            | 245,000                              |          
|                                                   | Security deposits and other assets                                                    |                            |                                            | 11,039                               |          
|                                                   | Deferred tax asset, net of current portion                                            |                            |                                            | 335,622                              |          
|                                                   |                                                                                       |                            |                                            |                                     
|                                                   |                                                                                       | TOTAL OTHER ASSETS         |                                            |                                      | 871,009   |          
|                                                   |                                                                                       |                            |                                            |                                     
|                                                   |                                                                                       |                            | TOTAL ASSETS                               |                                      | $         | 3,094,662 | 
|                                                   |                                                                                       |                            |                                            |                                     
|                                                   |                                                                                       |                            |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |           |           |  | 
|CURRENT LIABILITIES                                |                                                                                       |                            |                                            |                                     
|                                                   | Note payable, line of credit                                                          |                            | $                                          | 169,363                              |          
|                                                   | Accounts payable                                                                      |                            |                                            | 92,587                               |          
|                                                   | Accrued expenses                                                                      |                            |                                            | 192,961                              |          
|                                                   |                                                                                       |                            |                                            |                                     
|                                                   |                                                                                       | TOTAL CURRENT LIABILITIES  |                                            |                                      | 454,911   |          
|                                                   |                                                                                       |                            |                                            |                                     
|OTHER LIABILITIES                                  |                                                                                       |                            |                                            |                                     
|                                                   | Deferred lease liability                                                              |                            |                                            | 30,000                               |          
|                                                   |                                                                                       |                            |                                            |                                     
|                                                   |                                                                                       | TOTAL OTHER LIABILITIES    |                                            |                                      | 30,000    |          
|                                                   |                                                                                       |                            |                                            |                                     
|STOCKHOLDERS EQUITY                               |                                                                                       |                            |                                            |                                     
|                                                   | Common stock par value $.001; 100,000,000 shares authorized; 13,534,100 shares issued |                            |                                            | 13,534                               |          
|                                                   | Additional paid in capital                                                            |                            |                                            | 4,424,875                            |          
|                                                   | Accumulated other comprehensive income                                                |                            |                                            | (150,522                             | )        
|                                                   | Retained earnings (deficit)                                                           |                            |                                            | (1,595,502                           | )        
|                                                   |                                                                                       |                            |                                            |                                     
|                                                   |                                                                                       |                            | 2,692,385                                  |                                     
|                                                   | Less common shares held in treasury, 342,430 shares at cost                           |                            |                                            | (82,634                              | )        
|                                                   |                                                                                       |                            |                                            |                                     
|                                                   |                                                                                       | TOTAL STOCKHOLDERS EQUITY |                                            |                                      | 2,609,751 |          
|                                                   |                                                                                       |                            |                                            |                                     
|                                                   |                                                                                       |                            | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                      | $         | 3,094,662 | 
|                                                   |                                                                                       |                            |                                            |                                     

2



---



##### Table of Contents






SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 2003 AND 2002
(UNAUDITED)

|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |           |        |         |           |  
|-------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------ | ------------------------------------------------------------------------------ | ----------------------------------------- | ------ | ------- | -------- | --------- | ------ | ------- | --------- | -
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |           |        | 2002   
|                                                   |                                                                                          |              |                                                                                |                                           |        | 2003    |          | Restated 
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          
|OPERATING ACTIVITIES                               |                                                                                          |              |                                                                                |                                           |        |         |          |          
|                                                   | Income (loss) from continuing operations                                                 |              | $                                                                              | (259,855                                  | )      |         | $        | 1,459,251 |       
|                                                   | Adjustments to reconcile net income (loss) to net cash provided
by operating activities: |              |                                                                                |                                           |        |         |          |           |       
|                                                   |                                                                                          |              | Depreciation                                                                   |                                           |        | 104,055 |          |           |        | 78,867  |          
|                                                   |                                                                                          |              | Amortization and impairment of intangibles and other acquisition-related costs |                                           |        | 45,000  |          |           |        |         |          
|                                                   |                                                                                          |              | Gain on sale of equipment                                                      |                                           |        | (31,749 | )        |           |        |         |          
|                                                   |                                                                                          |              | Provision for deferred income taxes                                            |                                           |        | 35,304  |          |           |        | (70,000 | )        
|                                                   |                                                                                          |              | Write off of note receivable                                                   |                                           |        | 364,193 |          |           |        |         |          
|                                                   | Changes in assets and liabilities:                                                       |              |                                                                                |                                           |        |         |          |           |       
|                                                   |                                                                                          |              |                                                                                | Accounts receivable                       |        |         | 491,701  |           |        |         | (390,561  | )
|                                                   |                                                                                          |              |                                                                                | Inventories                               |        |         | (19,134  | )         |        |         | (23,389   | )
|                                                   |                                                                                          |              |                                                                                | Prepaid expenses and other current assets |        |         | (1,634   | )         |        |         | (135,861  | )
|                                                   |                                                                                          |              |                                                                                | Deferred product development costs        |        |         | (15,017  | )         |        |         |           |  
|                                                   |                                                                                          |              |                                                                                | Other assets                              |        |         | (5,039   | )         |        |         | (2,302    | )
|                                                   |                                                                                          |              |                                                                                | Accounts payable, and accrued expenses    |        |         | (185,612 | )         |        |         | 283,519   |  
|                                                   |                                                                                          |              |                                                                                | Deferred lease liability                  |        |         | 1,500    |           |        |         | 4,500     |  
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          
|                                                   | NET CASH PROVIDED BY CONTINUING OPERATIONS                                               |              |                                                                                | 523,713                                   |        |         |          | 1,204,024 |       
|                                                   | NET CASH USED IN DISCONTINUED OPERATIONS                                                 |              |                                                                                | (9,678                                    | )      |         |          | (125,330  | )     
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          
|                                                   |                                                                                          |              |                                                                                | NET CASH PROVIDED BY OPERATING ACTIVITIES |        |         | 514,035  |           |        |         | 1,078,694 |  
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          
|INVESTING ACTIVITIES                               |                                                                                          |              |                                                                                |                                           |        |         |          |          
|                                                   | Proceeds from sale of equipment                                                          |              |                                                                                | 45,960                                    |        |         |          |           |       
|                                                   | Purchase of property and equipment                                                       |              |                                                                                | (133,599                                  | )      |         |          | (107,299  | )     
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          
|                                                   |                                                                                          |              |                                                                                | NET CASH USED IN INVESTING ACTIVITIES     |        |         | (87,639  | )         |        |         | (107,299  | )
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          
|FINANCING ACTIVITIES                               |                                                                                          |              |                                                                                |                                           |        |         |          |          
|                                                   | Decrease in short-term debt, net                                                         |              |                                                                                | (375,662                                  | )      |         |          | (406,971  | )     
|                                                   | Repayments of and retirement of long-term debt                                           |              |                                                                                | (61,924                                   | )      |         |          | (79,072   | )     
|                                                   | Repurchase and retirement of common stock                                                |              |                                                                                | (317,752                                  | )      |         |          | (50,241   | )     
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          
|                                                   |                                                                                          |              |                                                                                | NET CASH USED IN FINANCING ACTIVITIES     |        |         | (755,338 | )         |        |         | (536,284  | )
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          
|NET INCREASE (DECREASE) IN CASH                    |                                                                                          |              | (328,942                                                                       | )                                         |        |         | 435,111  |          
|CASH, BEGINNING OF YEAR                            |                                                                                          |              | 508,414                                                                        |                                           |        |         | 182,417  |          
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          
|CASH, END OF YEAR                                  |                                                                                          | $            | 179,472                                                                        |                                           |        | $       | 617,528  |          
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |                                                                                          |              |                                                                                |                                           |        |         |          |          
|                                                   | CASH PAID DURING THE YEAR FOR:                                                           |              |                                                                                |                                           |        |         |          |           |       
|                                                   |                                                                                          | Interest     |                                                                                | $                                         | 10,817 |         |          | $         | 92,192 |        
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          
|                                                   |                                                                                          | Income taxes |                                                                                | $                                         | 16,972 |         |          | $         | 5,515  |        
|                                                   |                                                                                          |              |                                                                                |                                           |        |         |          |          

The Company acquired trade show equipment in the amount of $32,500 in a non-cash transaction with G Com.Net

3



---



##### Table of Contents






SETO HOLDINGS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



|1. |  | PREPARATION OF INTERIM FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The 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, 2003. 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, 2003 Annual Report on Form 10-KSB.
Certain amounts presented for the nine months ended October 31, 2002
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. |  | RECENT ACCOUNTING PRONOUCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | In May 2003, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards (SFAS) No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities
and Equity. This statement establishes standards for how to classify
and measure certain financial instruments with characteristics of both
liabilities and equity. It requires certain financial instruments
that are within the scope to be classified as a liability (or net
asset in some circumstances), which previously were classified as
equity. This statement is effective for financial statements entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
The adoption of this statement is not expected to have a material
impact on the Companys financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|3. |  | NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

4



---



##### Table of Contents





|4. |  | INVENTORY                                 
|-- |  | ------------------------------------------
|  
|   |  | Inventory at October 31, 2003 consists of:

|                |  |   |         | 
|--------------- |  | - | ------- | 
|Finished goods  |  | $ | 523,038 | 
|Work in Process |  |   | 45,520  | 
|Raw Materials   |  |   | 329,243 | 
|Supplies        |  |   | 21,745  | 
|                |  |   |         | 
|                |  | $ | 919,546 | 
|                |  |   |         | 



|5. |  | GOODWILL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The 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.
|  
|6. |  | IDENTIFIED INTANGIBLE ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | On 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 $45,000 and $0 for the nine months ended October 31, 2003 and 2002,
respectively.                                                                                                                                                                                                                                              
|  
|7. |  | NOTES PAYABLE AND LONG-TERM DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | The Company has an available line-of-credit with a financial
institution in the amount $1,700,000. The line-of-credit carries an
annual rate of 2.9% plus the 30-day commercial paper rate with an
expiration date of December 31, 2003. As of October 31, 2003, the
Company had utilized $169,363 of the line-of-credit. The personal
guarantee of the Companys president and the assets of the Company
secure the line-of-credit.                                                                                                                                                                          
|  
|8. |  | INTEREST AND OTHER, NET                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Interest and Other, net included:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                        |  |                   |          |                    |  |      |         |          |  |   |          |      |  |   |         |  
|--------------------------------------- |  | ----------------- | -------- | ------------------ |  | ---- | ------- | -------- |  | - | -------- | ---- |  | - | ------- | -
|                                        |  | Nine Months Ended |          | Three Months Ended
|                                        |  | October 31        |          | October 31        
|                                        |  |                   |          |                   
|                                        |  |                   |          |                    |  | 2002 |         |          |  |   |          | 2002
|                                        |  | 2003              |          | Restated           |  | 2003 |         | Restated
|                                        |  |                   |          |                    |  |      |         |         
|Interest income                         |  | $                 | 11,958   |                    |  | $    | 23,663  |          |  |   | ($7,920  | )    |  | $ | 9,238   |  
|Gain on sale of asset                   |  |                   | 31,749   |                    |  |      |         |          |  |   |          |      |  |   |         |  
|Interest expense                        |  |                   | (14,595  | )                  |  |      | (92,192 | )        |  |   | (3,204   | )    |  |   | (11,330 | )
|Loss on write off of note receivable    |  |                   | (364,193 | )                  |  |      |         |          |  |   | (364,193 | )    |  |   |         |  
|Foreign currency exchange income (loss) |  |                   | (1,058   | )                  |  |      | (1,147  | )        |  |   | (452     | )    |  |   | (388    | )
|                                        |  |                   |          |                    |  |      |         |          |  |   |          |      |  |   |         |  
|Total                                   |  | $                 | (336,139 | )                  |  | $    | (69,676 | )        |  | $ | (375,769 | )    |  | $ | (2,480  | )
|                                        |  |                   |          |                    |  |      |         |          |  |   |          |      |  |   |         |  

5



---



##### Table of Contents





|9. |  | 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 the second five years and $72,000 for each of the final
five years. The Company is also obligated for insurance and the
increase in real estate taxes over the base year as stipulated in the
lease. This lease requires the following future minimum rental
payments:

|                 |  |   |         | 
|---------------- |  | - | ------- | 
|October 31, 2004 |  | $ | 66,000  | 
|October 31, 2005 |  |   | 66,000  | 
|October 31, 2006 |  |   | 66,000  | 
|October 31, 2007 |  |   | 69,000  | 
|October 31, 2008 |  |   | 72,000  | 
|Thereafter       |  |   | 324,000 | 
|                 |  |   |         | 
|                 |  | $ | 663,000 | 
|                 |  |   |         | 

Rent expense charged to operations was
$50,500 and $49,500 in Q3 2004
and Q3 2003, respectively.

10.     EARNINGS PER SHARE

The following reconciles the number of common shares outstanding at
October 31 of 2003 and 2002 to the weighted average number of
common shares outstanding for the purposes of calculating basic and dilutive
earnings per share:

|                                                             |  |                   |            |                    |  |      |            |          |  |  |            |      |  |  |            | 
|------------------------------------------------------------ |  | ----------------- | ---------- | ------------------ |  | ---- | ---------- | -------- |  |  | ---------- | ---- |  |  | ---------- | 
|                                                             |  | Nine Months Ended |            | Three Months Ended
|                                                             |  | October 31        |            | October 31        
|                                                             |  |                   |            |                   
|                                                             |  |                   |            |                    |  | 2002 |            |          |  |  |            | 2002
|                                                             |  | 2003              |            | Restated           |  | 2003 |            | Restated
|                                                             |  |                   |            |                    |  |      |            |         
|Weighted average common shares outstanding                   |  |                   | 14,083,925 |                    |  |      | 14,484,700 |          |  |  | 13,642,604 |      |  |  | 14,484,700 | 
|Effect of using diluted securities:                          |  |                   |            |                    |  |      |            |          |  |  |            |      |  |  |            | 
|Weighted average common equivalent shares
from
stock options |  |                   |            |                    |  |      |            |          |  |  |            |      |  |  | 741,379    | 
|                                                             |  |                   |            |                    |  |      |            |          |  |  |            |      |  |  |            | 
|Diluted number of common shares outstanding                  |  |                   | 14,083,925 |                    |  |      | 14,484,700 |          |  |  | 13,642,604 |      |  |  | 15,226,079 | 
|                                                             |  |                   |            |                    |  |      |            |          |  |  |            |      |  |  |            | 

At October 31, 2003 there were approximately 6,000,000 million shares
of common stock potentially issuable with respect to stock options,
which could dilute basic earnings per share in the future.

11.     STOCK REPURCHASE PROGRAM

During the first nine months of fiscal 2004, the Company repurchased
1,293,030 shares of common stock under the Companys authorized
repurchase program at a cost of $317,752 and cancelled 1,024,300 shares. On June 27, 2003 the Company with unanimous consent of its
board of directors, increased its stock repurchase program from one
million shares to two and a half million shares. As of October 31,
2003 a total of 957,670 shares remained available for repurchase under
the program.

6



---



##### Table of Contents



12.     DISPOSITION OF SUBSIDIARY

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 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 is
stated at 10% (annually) and was payable in 12 monthly installments.
On July 1, 2003 the company 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 the Company wrote off the
remaining note balance of $364,193 and expensed it to Interest and
other, net (see Note 8).

Fuji Fabrication had no sales for the nine months ended October 31,
2003 and 2002. General and administrative expenses for the nine
months ended October 31, 2003 and 2002 totaled $1,608 and $6,384,
respectively. In addition, at October 31, 2002, Fuji Fabrication
recognized $129,708 in miscellaneous income related to forgiveness of
debt. The company ceased Fujis operations on October 31, 2003.

13.     PRINCIPAL PRODUCTS AND SEGMENTATION OF SALES

The Company has adopted FASB Statement No. 131, Disclosures about
Segments of a Business Enterprise and Related Information. The
Company is managed 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, there is none to be recorded. The accounting policies
for segment reporting are the same as for the Company as a whole.
Financial information relating to the principal industry segments and
classes of products are as follows:

|                                    |  |                   |           |                    |  |      |           |          |  |   |         |      |  |   |           | 
|----------------------------------- |  | ----------------- | --------- | ------------------ |  | ---- | --------- | -------- |  | - | ------- | ---- |  | - | --------- | 
|                                    |  | Nine Months Ended |           | Three Months Ended
|                                    |  | October 31        |           | October 31        
|                                    |  |                   |           |                   
|                                    |  |                   |           |                    |  | 2002 |           |          |  |   |         | 2002
|                                    |  | 2003              |           | Restated           |  | 2003 |           | Restated
|                                    |  |                   |           |                    |  |      |           |         
|Sales to customers:                 |  |                   |           |                    |  |      |           |          |  |   |         |      |  |   |           | 
|Industry A  Ceramics               |  | $                 | 2,199,280 |                    |  | $    | 4,551,500 |          |  | $ | 693,115 |      |  | $ | 1,976,373 | 
|Industry B  Diamond tools          |  |                   | 354,946   |                    |  |      | 677,573   |          |  | $ | 92,373  |      |  |   | 244,208   | 
|Industry C  Contract manufacturing |  |                   | 333,837   |                    |  |      | 587,721   |          |  | $ | 141,967 |      |  |   | 214,130   | 
|                                    |  |                   |           |                    |  |      |           |          |  |   |         |      |  |   |           | 
|                                    |  | $                 | 2,888,063 |                    |  | $    | 5,816,794 |          |  | $ | 927,455 |      |  | $ | 2,434,711 | 
|                                    |  |                   |           |                    |  |      |           |          |  |   |         |      |  |   |           | 

|                                    |  |                   |          |                    |  |      |           |          |  |   |          |      |  |   |          |  
|----------------------------------- |  | ----------------- | -------- | ------------------ |  | ---- | --------- | -------- |  | - | -------- | ---- |  | - | -------- | -
|                                    |  | Nine Months Ended |          | Three Months Ended
|                                    |  | October 31        |          | October 31        
|                                    |  |                   |          |                   
|                                    |  |                   |          |                    |  | 2002 |           |          |  |   |          | 2002
|                                    |  | 2003              |          | Restated           |  | 2003 |           | Restated
|                                    |  |                   |          |                    |  |      |           |         
|Operating income or (loss):         |  |                   |          |                    |  |      |           |          |  |   |          |      |  |   |          |  
|Industry A  Ceramics               |  | $                 | 426,536  |                    |  | $    | 1,621,012 |          |  | $ | 141,655  |      |  | $ | 643,351  |  
|Industry B  Diamond tools          |  |                   | (276,127 | )                  |  |      | (211,953  | )        |  |   | (112,670 | )    |  |   | (103,980 | )
|Industry C  Contract manufacturing |  |                   | (29,088  | )                  |  |      | 104,048   |          |  |   | (23,484  | )    |  |   | 37,153   |  
|                                    |  |                   |          |                    |  |      |           |          |  |   |          |      |  |   |          |  
|                                    |  | $                 | 121,321  |                    |  | $    | 1,513,107 |          |  | $ | 5,501    |      |  | $ | 576,524  |  
|                                    |  |                   |          |                    |  |      |           |          |  |   |          |      |  |   |          |  

7



---



##### Table of Contents



|                    |  |                   |           |                    |  |      |           |          |  |   |         |      |  |   |           | 
|------------------- |  | ----------------- | --------- | ------------------ |  | ---- | --------- | -------- |  | - | ------- | ---- |  | - | --------- | 
|                    |  | Nine Months Ended |           | Three Months Ended
|                    |  | October 31        |           | October 31        
|                    |  |                   |           |                   
|                    |  |                   |           |                    |  | 2002 |           |          |  |   |         | 2002
|                    |  | 2003              |           | Restated           |  | 2003 |           | Restated
|                    |  |                   |           |                    |  |      |           |         
|Sales to customers: |  |                   |           |                    |  |      |           |          |  |   |         |      |  |   |           | 
|United States       |  | $                 | 2,043,465 |                    |  | $    | 2,616,755 |          |  | $ | 838,033 |      |  | $ | 275,860   | 
|Far East            |  |                   | 93,993    |                    |  |      | 133,960   |          |  |   | 26,023  |      |  |   | 71,924    | 
|Canada              |  |                   | 750,605   |                    |  |      | 3,066,079 |          |  |   | 63,399  |      |  |   | 2,086,927 | 
|                    |  |                   |           |                    |  |      |           |          |  |   |         |      |  |   |           | 
|                    |  | $                 | 2,888,063 |                    |  | $    | 5,816,794 |          |  | $ | 927,455 |      |  | $ | 2,434,711 | 
|                    |  |                   |           |                    |  |      |           |          |  |   |         |      |  |   |           | 

Net property, plant and equipment by country were as follows:

|              |  |      |         |          |  |      |         | 
|------------- |  | ---- | ------- | -------- |  | ---- | ------- | 
|              |  |      |         |          |  | 2002
|              |  | 2003 |         | Restated
|              |  |      |         |         
|United States |  | $    | 217,359 |          |  | $    | 322,640 | 
|Far East      |  |      | 431,944 |          |  |      | 308,654 | 
|              |  |      |         |          |  |      |         | 
|              |  | $    | 649,303 |          |  | $    | 631,294 | 
|              |  |      |         |          |  |      |         | 



|    |  | Three customers each accounted for more than 10% of total sales and
together accounted for approximately 63% and 78% of total sales for
the nine and three months ended October 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|14. |  | RESTATEMENT OF PRIOR YEAR RESULTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | The accompanying consolidated financial statements for Q3 2003 have
been restated from those originally reported to reflect a reduction in
the Companys deferred tax asset and accumulated amortization. In Q4,
fiscal 2003, the Department of HomeLand Securitys deadline for
airport security devices being installed in U.S. airports expired in
early December. Due to this deadline, the Companys management
projected less revenue and profits for the fourth quarter of fiscal
2003 and made a decision to revalue its deferred tax asset at October
31, 2002. The Company recorded a deferred tax benefit of $206,456 in
Q3 fiscal 2003, because management expected to use less of their
available net operating loss carryforward. During the fourth quarter of
fiscal 2003, East Coast Sales revenue and profits had exceeded
managements expectations and actually used more of the Companys
available net operating loss carryforward and therefore they decided
to adjust it accordingly. In addition, the Company erroneously booked
goodwill amortization expense of $2,518 for the nine months ended
October 31, 2003.
The Company had adopted SFAS No. 142 effective January 31, 2002 and
accordingly, had 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.
|   
|    |  | As a result, income from continuing operations for Q3 2003 decreased
$249,442. Earnings per share was reduced from $.12 per share to $.10
per share for the nine months ended October 31, 2002 and for the three
months ended October 31, 2002, earnings per share was reduced from
$.05 per share to $.04 a share. The restatements had no effect on
cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

8



---



##### Table of Contents





| |  | The following illustrates the effect of the above mentioned
restatements:
| |  | -------------------------------------------------------------------------

|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |          |       |  
|------------------------------------------------------------- | --------------------------------------------- | ------- | ---------- | ---------------------------------- | ----- | ----------------------------------- | ---------- | -------- | ----- | ------------- | ---------- | -------- | ----- | - | ---------- | -------- | ----- | -
|                                                              |                                               |         |            | Nine Months Ended October 31, 2002 |       | Three Months Ended October 31, 2002
|                                                              |                                               |         |            |                                    |       |                                    
|                                                              |                                               |         |            | As Originally                      |       |                                     |            |          |       | As Originally |            |          |       |  
|                                                              |                                               |         |            | Reported                           |       | As Restated                         |            | Reported |       | As Restated  
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |              
|Net revenues                                                  |                                               | $       | 5,816,794  |                                    |       | $                                   | 5,816,794  |          |       | $             | 2,434,711  |          |       | $ | 2,434,711  |         
|Cost of sales                                                 |                                               |         | 2,689,793  |                                    |       |                                     | 2,689,793  |          |       |               | 1,219,769  |          |       |   | 1,219,769  |         
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|Gross margin                                                  |                                               |         | 3,127,001  |                                    |       |                                     | 3,127,001  |          |       |               | 1,214,942  |          |       |   | 1,214,942  |         
|Operating expenses                                            |                                               |         | 1,616,412  |                                    |       |                                     | 1,613,894  |          |       |               | 640,936    |          |       |   | 638,418    |         
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|Operating income                                              |                                               |         | 1,510,589  |                                    |       |                                     | 1,513,107  |          |       |               | 574,006    |          |       |   | 576,524    |         
|Interest and other, net                                       |                                               |         | (69,676    | )                                  |       |                                     | (69,676    | )        |       |               | (2,480     | )        |       |   | (2,480     | )       
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|Income before income taxes (benefit)                          |                                               |         | 1,440,913  |                                    |       |                                     | 1,443,431  |          |       |               | 571,526    |          |       |   | 574,044    |         
|Income taxes (benefit)                                        |                                               |         | (267,780   | )                                  |       |                                     | (15,820    | )        |       |               | (206,456   | )        |       |   | 45,504     |         
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|Income from continuing operations                             |                                               |         | 1,708,693  |                                    |       |                                     | 1,459,251  |          |       |               | 777,982    |          |       |   | 528,540    |         
|Discontinued operations:                                      |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|                                                              | Income (loss) from operations of subsidiaries |         |            | (123,005                           | )     |                                     |            | (123,005 | )     |               |            | (51,441  | )     |   |            | (51,441  | )    
|                                                              | Gain (loss) on disposal of subsidiaries       |         |            | (906,942                           | )     |                                     |            | (906,942 | )     |               |            | (878,096 | )     |   |            | (878,096 | )    
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|                                                              |                                               |         | (1,029,947 | )                                  |       |                                     | (1,029,947 | )        |       |               | (929,537   | )        |       |   | (929,537   | )       
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|Net income (loss)                                             |                                               | $       | 678,746    |                                    |       | $                                   | 429,304    |          |       | $             | (151,555   | )        |       | $ | (400,997   | )       
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|Earning per share information:                                |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |  
|                                                              | Income from continuing operations             |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|                                                              |                                               | Basic   |            | $                                  | 0.12  |                                     |            | $        | 0.10  |               |            | $        | 0.05  |   |            | $        | 0.04  |  
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|                                                              |                                               | Diluted |            | $                                  | 0.12  |                                     |            | $        | 0.10  |               |            | $        | 0.05  |   |            | $        | 0.04  |  
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|                                                              | Discontinued operations:                      |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |          |      
|                                                              |                                               | Basic   |            | $                                  | (0.07 | )                                   |            | $        | (0.07 | )             |            | $        | (0.06 | ) |            | $        | (0.07 | )
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|                                                              |                                               | Diluted |            | $                                  | (0.07 | )                                   |            | $        | (0.07 | )             |            | $        | (0.06 | ) |            | $        | (0.07 | )
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|Weighted average common shares outstanding                    |                                               |         | 14,484,700 |                                    |       |                                     | 14,484,700 |          |       |               | 14,484,700 |          |       |   | 14,271,000 |         
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         
|Weighted average common shares outstanding,
assuming dilution |                                               |         | 14,484,700 |                                    |       |                                     | 14,484,700 |          |       |               | 15,226,079 |          |       |   | 14,271,000 |         
|                                                              |                                               |         |            |                                    |       |                                     |            |          |       |               |            |          |       |   |            |         

9



---



##### Table of Contents





| |  | Restated Statement of cash flows:
| |  | ---------------------------------

|                                |                                    |                                                                                   |                                           |                                            |           |                 |           |             |           |          |           |  
|------------------------------- | ---------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------ | --------- | --------------- | --------- | ----------- | --------- | -------- | --------- | -
|                                |                                    |                                                                                   |                                           |                                            |           | October 31,2002
|                                |                                    |                                                                                   |                                           |                                            |           |                
|                                |                                    |                                                                                   |                                           |                                            |           | As Originally   |           |             |           |         
|                                |                                    |                                                                                   |                                           |                                            |           | Reported        |           | As Restated
|                                |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|OPERATING ACTIVITIES            |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|                                |                                    | Income from continuing operations                                                 |                                           | $                                          | 1,708,693 |                 |           | $           | 1,459,251 |         
|                                |                                    | Adjustments to reconcile net income to net cash provided
by operating activities: |                                           |                                            |           |                 |           |             |           |         
|                                |                                    |                                                                                   |                                           | Depreciation and amortization              |           |                 | 81,385    |             |           |          | 78,867    |  
|                                |                                    |                                                                                   |                                           | Provision for deferred income taxes        |           |                 | (321,960  | )           |           |          | (70,000   | )
|                                | Changes in assets and liabilities: |                                                                                   |                                           |                                            |           |                 |           |             |          
|                                |                                    |                                                                                   | Accounts receivable                       |                                            |           | (390,561        | )         |             |           | (390,561 | )        
|                                |                                    |                                                                                   | Inventories                               |                                            |           | (23,389         | )         |             |           | (23,389  | )        
|                                |                                    |                                                                                   | Prepaid expenses and other current assets |                                            |           | (135,861        | )         |             |           | (135,861 | )        
|                                |                                    |                                                                                   | Other assets                              |                                            |           | (2,302          | )         |             |           | (2,302   | )        
|                                |                                    |                                                                                   | Accounts payable, and accrued expenses    |                                            |           | 283,519         |           |             |           | 283,519  |          
|                                |                                    |                                                                                   | Deferred lease liability                  |                                            |           | 4,500           |           |             |           | 4,500    |          
|                                |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|                                |                                    |                                                                                   |                                           | NET CASH PROVIDED BY CONTINUING OPERATIONS |           |                 | 1,204,024 |             |           |          | 1,204,024 |  
|                                |                                    |                                                                                   |                                           | NET CASH USED IN DISCONTINUED OPERATIONS   |           |                 | (125,330  | )           |           |          | (125,330  | )
|                                |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|                                |                                    |                                                                                   |                                           | NET CASH PROVIDED BY OPERATING ACTIVITIES  |           |                 | 1,078,694 |             |           |          | 1,078,694 |  
|                                |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|INVESTING ACTIVITIES            |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|                                |                                    | Purchase of property and equipment                                                |                                           |                                            | (107,299  | )               |           |             | (107,299  | )       
|                                |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|                                |                                    |                                                                                   | NET CASH USED IN INVESTING ACTIVITIES     |                                            |           | (107,299        | )         |             |           | (107,299 | )        
|                                |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|FINANCING ACTIVITIES            |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|                                |                                    | Increase (decrease) in short-term debt, net                                       |                                           |                                            | (406,971  | )               |           |             | (406,971  | )       
|                                |                                    | Repayments of and retirement of long-term debt                                    |                                           |                                            | (79,072   | )               |           |             | (79,072   | )       
|                                |                                    | Repurchase and retirement of common stock                                         |                                           |                                            | (50,241   | )               |           |             | (50,241   | )       
|                                |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|                                |                                    |                                                                                   | NET CASH USED IN FINANCING ACTIVITIES     |                                            |           | (536,284        | )         |             |           | (536,284 | )        
|                                |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|NET INCREASE (DECREASE) IN CASH |                                    |                                                                                   | 435,111                                   |                                            |           |                 | 435,111   |            
|CASH, BEGINNING OF PERIOD       |                                    |                                                                                   | 182,417                                   |                                            |           |                 | 182,417   |            
|                                |                                    |                                                                                   |                                           |                                            |           |                 |           |            
|CASH, END OF PERIOD             |                                    | $                                                                                 | 617,528                                   |                                            |           | $               | 617,528   |            
|                                |                                    |                                                                                   |                                           |                                            |           |                 |           |            

10



---



##### Table of Contents






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

The Strategy, Critical Accounting Estimates and Outlook sections all
contain a number of forward-looking statements, all of which are based on our
current expectations. Our actual results may differ materially. These
statements do not reflect the potential impact of any mergers, acquisitions,
divestitures or other business combinations that had not closed as of December
12, 2003.

Recent Developments

We have restated our condensed consolidated financial statements for Q3 of
fiscal 2003 from those originally reported to reflect a reduction in the
Companys deferred tax asset and accumulated amortization. In Q4, fiscal 2003,
the Department of HomeLand Securitys deadline for airport security devices
being installed in U.S. airports expired in early December. Due to this
deadline and conversations with our customers, we had projected reduced sales
and profits for the fourth quarter of fiscal 2003 and we made a decision to
revalue our deferred tax asset at October 31, 2002. We recognized a deferred
tax benefit of $206,456 in Q3 fiscal 2003, because we expected to use less of
our net operating loss carryforward. During the 4th quarter of fiscal 2003,
our East Coast Sales operating segments revenue and profits had exceeded our
expectations and actually used more of the our net operating loss carryforward
and therefore we decided to adjust it accordingly. In addition, we erroneously
booked goodwill amortization expense of $2,518 for the nine months ended
October 31, 2002. The Company has adopted SFAS No. 142 effective January 31,
2002 and accordingly, we ceased amortizing amounts related to goodwill starting
January 31, 2002. The balance of goodwill is related to our East Coast Sales
Company segment (See Note 14). As a result, our income from continuing
operations for Q3 2003 decreased $249,442 and our earnings per share was
reduced from $.12 per share to $.10 per share for the nine months ended October
31, 2002 and for the three months ended October 31, 2002, our earnings per
share was reduced from $.05 per share to $.04 a share.

In addition, during the third quarter of fiscal 2004 we wrote off our note
receivable from G Com Net, who defaulted on the note on October 1, 2003. This
note was related to our former operating segment Fuji Fabrication that we
discontinued in 2001 (fiscal 2002). At that time we had sold equipment and
inventory to G Com Net in exchange for the note receivable which was first due
on September 30, 2002. In September 2002, we renegotiated the note which
included the sale of additional inventory, and we extended the notes due date
to September 30, 2003. In July 2003, the note was reduced by $32,500 due to G
Com Net returning a piece of equipment to us and that we could currently use
for our upcoming and future trade shows.

Throughout the following Managements Discussion and Analysis of Financial
Condition and Results of Operations, all amounts referencing prior periods and
prior period comparisons reflect the balances and amounts on a restated basis.

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 customers already
have established products, it is inherently difficult for us to compete against
them. In addition, certain market segments in which we compete, such as dicing
blade products, have experienced an overall economic decline, increasing the
degree of competition within this market segment. When we believe it is
appropriate, we will take various steps, including discontinuing older products
and reducing prices, in order to increase acceptance of our products and to be
competitive within each relevant market segment.

We plan to continue to cultivate new businesses and work with the security
and chip making industries to expand our product lines.

11



---



##### Table of Contents



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. 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 have
been 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 still not showing 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 selling medical training products, auto 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 2004. As of October 31, 2003 we have
advanced a total of $256,671 to the developer who is producing the tooling and
molds to be used in the manufacturing process of the helmet and other safety
devices. During the 3rd quarter we capitalized $62,776 of these costs and
began depreciating them over their estimated useful lives. We expect to
depreciate the remaining costs when we begin producing the helmets in the
fourth quarter of this fiscal year.

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 2003 (January 31, 2003). Our impairment review
process is based on a discounted future cash flow approach that uses our
estimates of revenue for the reporting unit, driven by assumed market growth
rates and assumed segment share, and estimated costs as well as appropriate
discount rates. These estimates are consistent with the plans and estimates
that we use to manage the underlying business. In the future, we may incur
charges for impairment of goodwill if the ceramic fabrication business
experiences an economic downturn, new technology becomes available, we lose
market acceptance, we fail to deliver new products, or if we fail to achieve
our assumed revenue growth rates or assumed gross margin.

Inventory Our policy for valuation of inventory, including the
determination of obsolete or excess inventory requires us to estimate the
future demand for our products within specific time horizons, generally one
year or less. If our demand forecast for specific products is greater than
actual demand and we fail to reduce manufacturing output accordingly, we could
be required to record additional inventory reserves, which would have a
negative impact on our gross margin.

12



---



##### Table of Contents



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.

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 October 31, 2003, taxes were not provided on approximately $74,548 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
October 31, 2003, we believe that our recorded deferred tax assets will
ultimately be recovered. However, should there be a change in our ability to
recover our deferred tax assets; our tax provision would increase in the period
in which we determine that the recovery is not probable.

In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We recognize
potential liabilities for anticipated tax audit issues in the U.S. and other
tax jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If payment of these amounts ultimately proves to
be unnecessary, the reversal of the liabilities would result in tax benefits
being recognized in the period when we determine the liabilities are no longer
necessary. If our estimate of tax liabilities proves to be less than the
ultimate assessment, a further charge to expense would result.

Results of Operations  Third Quarter of Fiscal 2004 Compared to Third Quarter
Fiscal 2003

The following table sets forth certain consolidated statements of income
data as a percentage of net revenue for the quarter ended October 31, 2003 and
2002:

|                 |                                                                |  |                    |       |          |  |               |       |  
|---------------- | -------------------------------------------------------------- |  | ------------------ | ----- | -------- |  | ------------- | ----- | -
|                 |                                                                |  | Three Months Ended
|                 |                                                                |  |                   
|                 |                                                                |  |                    |       |          |  | Oct. 31, 2002
|                 |                                                                |  | Oct. 31, 2003      |       | Restated
|                 |                                                                |  |                    |       |         
|Net revenues     |                                                                |  | 100.00             | %     |          |  | 100.00        | %    
|Cost of sales    |                                                                |  | 38.56              | %     |          |  | 50.01         | %    
|                 |                                                                |  |                    |       |          |  |               |      
|Gross margin     |                                                                |  | 61.44              | %     |          |  | 49.99         | %    
|                 | Selling, general and administrative expenses                   |  |                    | 59.23 | %        |  |               | 26.22 | %
|                 | Amortization of goodwill                                       |  |                    | 0.00  | %        |  |               | 0.00  | %
|                 | Amortization and impairment of acquisition-related
intangibles |  |                    | 1.62  | %        |  |               | 0.00  | %
|                 |                                                                |  |                    |       |          |  |               |      
|Operating income |                                                                |  | 0.59               | %     |          |  | 23.77         | %    
|                 |                                                                |  |                    |       |          |  |               |      

Our net revenue for Q3 2004 of $927,455 was down approximately 62%
compared to Q3 2003, primarily due to the decrease in demand for our ceramic
products used by the airline security manufacturing industry. Net revenue for
our diamond tool segment was down 62% compared with Q3 2003 which is primarily
due to the weak global semiconductor market. Our contract manufacturing
revenues were down 34% compared with Q3 2003, primarily due to a technical
change that a major customer is making to their personal safety device that
SETO Technology manufactures for them. We expect to begin producing this new
product in the latter part of Q4 this fiscal year.

13



---



##### Table of Contents



Our gross margin percentage in Q3 2004 of 61% was up compared to 50% in Q3
2003. The gross margin for our diamond tool segment was higher compared to Q3
2003 primarily due to lower raw material costs; and our gross margins for our
contract manufacturing segment was down, which was primarily due to the lack of
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 third quarter of 2004 and 2003 were as follows:

|                 |  |         |         |          |  |         |           | 
|---------------- |  | ------- | ------- | -------- |  | ------- | --------- | 
|                 |  |         |         |          |  | Q3 2003
|                 |  | Q3 2004 |         | Restated
|                 |  |         |         |         
|Revenue          |  | $       | 693,115 |          |  | $       | 1,976,373 | 
|                 |  |         |         |          |  |         |           | 
|Operating income |  | $       | 141,655 |          |  | $       | 643,351   | 
|                 |  |         |         |          |  |         |           | 

The East Coast Sales Company operating segment is our ceramics division,
which experienced a decrease in sales due to the decreased demand from the
airline security manufacturing industry. Net revenues for this segment
decreased $1,283,258 or 65% in Q3 2004 compared to Q3 2003. The decrease in
revenue was due to lower sales of custom cut ceramics that are used in airport
security devices.

Net operating income for the East Coast Sales Company operating segment
decreased by $501,696 or 78% compared to Q3 2003 primarily due to the decrease
in demand from the industries mentioned above.

Diamond Tools  Semicon Tools/DTI Technology

The revenue and operating income for the diamond tool operating segment
for the third quarter of 2004 and 2003 were as follows:

|               |  |         |          |          |  |         |          |  
|-------------- |  | ------- | -------- | -------- |  | ------- | -------- | -
|               |  |         |          |          |  | Q3 2003
|               |  | Q3 2004 |          | Restated
|               |  |         |          |         
|Revenue        |  | $       | 92,373   |          |  | $       | 244,208  |  
|               |  |         |          |          |  |         |          |  
|Operating loss |  | $       | (112,670 | )        |  | $       | (103,980 | )
|               |  |         |          |          |  |         |          |  

Net revenue in Q3 2004 was down $151,835 or 62%, compared to Q3 2003. The
net operating loss for Q3 2004 increased $8,690 or 8%, compared to Q3 2003.
The increase in the net operating loss from fiscal Q3 2003 to Q3 2004 was
primarily due to lower sales volume.

Contract Manufacturing  SETO Technology

The revenue and operating income for the contract manufacturing operating
segment for the third quarter of 2004 and 2003 were as follows:

|                        |  |         |         |          |  |         |         | 
|----------------------- |  | ------- | ------- | -------- |  | ------- | ------- | 
|                        |  |         |         |          |  | Q3 2003
|                        |  | Q3 2004 |         | Restated
|                        |  |         |         |         
|Revenue                 |  | $       | 141,967 |          |  | $       | 214,130 | 
|                        |  |         |         |          |  |         |         | 
|Operating income (loss) |  | $       | (23,484 | )        |  | $       | 37,153  | 
|                        |  |         |         |          |  |         |         | 

Net revenue for Q3 2004 was down $72,163 or 34%, compared to Q3 2003,
primarily due to a major customer who is currently redesigning a product that
SETO Technology produces. The lack of sales volume also contributed to the
operating loss of $23,484 we experienced in Q3 2004. Sales will continue to
lag behind fiscal 2003 until the fourth quarter when we expect to begin
production of our customers newly designed product.

14



---



##### Table of Contents



Operating
Expenses

Operating expenses for the third quarter of 2004 and 2003 were as follows:

|                                                               |  |         |         |          |  |         |         | 
|-------------------------------------------------------------- |  | ------- | ------- | -------- |  | ------- | ------- | 
|                                                               |  |         |         |          |  | Q3 2003
|                                                               |  | Q3 2004 |         | Restated
|                                                               |  |         |         |         
|Selling, general and administrative expenses                   |  | $       | 549,287 |          |  | $       | 638,418 | 
|Amortization and impairment of acquisition-related intangibles |  | $       | 15,000  |          |  | $       | 0       | 

Selling,
general and administrative expenses decreased $89,131, or 14%
compared to Q3 2003. This decrease was primarily due to lower administrative
expenses such as payroll and travel.

Amortization and impairment of acquisition-related intangibles increased
$15,000 in Q3 2004 compared to Q3 2003, which was due to the amortization of
the customer lists we purchased in the fourth quarter of fiscal 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.

Interest
and Other, Net

Interest and other, net and taxes for the third quarter of 2004 and 2003
were as follows:

|                                     |  |         |          |          |  |         |         |  
|------------------------------------ |  | ------- | -------- | -------- |  | ------- | ------- | -
|                                     |  |         |          |          |  | Q3 2003
|                                     |  | Q3 2004 |          | Restated
|                                     |  |         |          |         
|Interest income                      |  | $       | (7,920   | )        |  | $       | 9,238   |  
|Gain (loss) on sale of assets        |  | $       | 0        |          |  |         |         |  
|Interest expense                     |  | $       | (3,204   | )        |  | $       | (11,330 | )
|Loss on write off of note receivable |  | $       | (364,193 | )        |  |         |         |  
|Foreign currency exchange loss       |  |         | ($452    | )        |  | $       | (388    | )
|Provision for income taxes (benefit) |  | $       | (17,526  | )        |  | $       | (45,504 | )

In Q3 2004, interest income decreased primarily due to the interest income
we wrote off due to the accrual we made for June and July on our note
receivable from G-Com Net which was subsequently went into default on October
1, 2003. (See Discontinued Operations below)

Interest expense decreased $8,126, or 72%, to $3,204 in Q3 2004 compared
to $11,330 in Q3 2003. This decrease was primarily due to us paying down our
line-of-credit during the second quarter of fiscal 2004. See Financial
Condition section for a more detailed discussion of our financing activities.

Foreign currency exchange loss was relatively flat compared to Q3 2003.
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 2% in Q3 2004 compared to an effective
income rate of 2% for Q3 2003. Our low effective tax rate is a result of our
net operating loss carryforward which we expect to realize the full benefit of
our net operating loss carryover by fiscal 2006.

15



---



##### Table of Contents



Results of Operations  First nine months of Fiscal 2004 Compared to First nine
months of Fiscal 2003

The following table sets forth certain consolidated statements of income data
as a percentage of net revenue for the nine months ended October 31, 2003 and
2002:

|                                                               |  |                   |        |          |  |               |        |  
|-------------------------------------------------------------- |  | ----------------- | ------ | -------- |  | ------------- | ------ | -
|                                                               |  | Nine Months Ended
|                                                               |  |                  
|                                                               |  |                   |        |          |  | Oct. 31, 2002
|                                                               |  | Oct. 31, 2003     |        | Restated
|                                                               |  |                   |        |         
|Net revenues                                                   |  |                   | 100.00 | %        |  |               | 100.00 | %
|Cost of sales                                                  |  |                   | 38.10  | %        |  |               | 46.24  | %
|                                                               |  |                   |        |          |  |               |        |  
|Gross margin                                                   |  |                   | 61.90  | %        |  |               | 53.76  | %
|Selling, general and administrative expenses                   |  |                   | 56.14  | %        |  |               | 27.75  | %
|Amortization of goodwill                                       |  |                   | 0.00   | %        |  |               | 0.00   | %
|Amortization and impairment of acquisition-related intangibles |  |                   | 1.56   | %        |  |               | 0.00   | %
|                                                               |  |                   |        |          |  |               |        |  
|Operating income                                               |  |                   | 4.20   | %        |  |               | 26.01  | %
|                                                               |  |                   |        |          |  |               |        |  

Our net revenue for the first nine months of fiscal 2004 of $2,888,063 was
down approximately 50% compared to the first nine months of fiscal 2003,
primarily due to the decrease in demand for our ceramic products used by the
airline security manufacturing industry. Net revenue for our diamond tool
segment was down 48% compared with the first nine months of fiscal 2003 which
is primarily due to the weak global semiconductor market. Our contract
manufacturing revenues were down 43% compared with the first nine months of
fiscal 2003, primarily due to a technical change that a major customer is
making to their personal safety device that SETO Technology manufactures for
them. We expect to begin producing this new product in Q4 of this fiscal year.

Our gross margin percentage for the first nine months of fiscal 2004 of
62% was up compared to 54% in first nine months of fiscal 2003. The gross
margin for our diamond tool segment was higher compared to the first nine
months of fiscal 2003 primarily due to lower raw material costs; and our gross
margins for our contract manufacturing segment was down, which was primarily
due to the lack of 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 nine months of 2004 and 2003 were as follows:

|                        |  |          |           |          |  |          |           | 
|----------------------- |  | -------- | --------- | -------- |  | -------- | --------- | 
|                        |  |          |           |          |  | YTD 2003
|                        |  | YTD 2004 |           | Restated
|                        |  |          |           |         
|Revenue                 |  | $        | 2,199,280 |          |  | $        | 4,551,500 | 
|                        |  |          |           |          |  |          |           | 
|Operating income (loss) |  | $        | 426,536   |          |  | $        | 1,621,012 | 
|                        |  |          |           |          |  |          |           | 

The East Coast Sales Company operating segment is our ceramics division,
which experienced a decrease in sales due to the decreased demand from the
airline security manufacturing industry. Net revenues for this segment
decreased $2,352,220 or 52% in the first nine months of fiscal 2004 compared to
the first nine months of fiscal 2003. The decrease in revenue was due to lower
sales of custom cut ceramics that are used in airport security devices.

Net operating income for the East Coast Sales Company operating segment
decreased by $1,194,476 or 74% compared to the first nine months of fiscal 2003
primarily due to the decrease in demand from the industries mentioned above.

16



---



##### Table of Contents



Diamond Tools  Semicon Tools/DTI Technology

The revenue and operating income for the diamond tool operating segment
for the first nine months of 2004 and 2003 were as follows:

|                        |  |          |          |          |  |          |          |  
|----------------------- |  | -------- | -------- | -------- |  | -------- | -------- | -
|                        |  |          |          |          |  | YTD 2003
|                        |  | YTD 2004 |          | Restated
|                        |  |          |          |         
|Revenue                 |  | $        | 354,946  |          |  | $        | 677,573  |  
|                        |  |          |          |          |  |          |          |  
|Operating income (loss) |  | $        | (276,127 | )        |  | $        | (211,953 | )
|                        |  |          |          |          |  |          |          |  

Net revenue for the first nine months of fiscal 2004 was down $322,627 or
48%, compared to the first nine months of fiscal 2003. The net operating loss
for the first nine months of fiscal 2004 increased $64,174 or 30%, compared to
the first nine months of fiscal 2003. The increase in the net operating loss
from the first nine months of fiscal 2003 to the first nine months of fiscal
2004 was primarily due to much lower sales volume and we wrote off $75,000 in
slow moving or obsolete inventory in second quarter.

Contract Manufacturing  SETO Technology

The revenue and operating income for the contract manufacturing operating
segment first nine months of 2004 and 2003 were as follows:

|                        |  |          |         |          |  |          |         | 
|----------------------- |  | -------- | ------- | -------- |  | -------- | ------- | 
|                        |  |          |         |          |  | YTD 2003
|                        |  | YTD 2004 |         | Restated
|                        |  |          |         |         
|Revenue                 |  | $        | 333,837 |          |  | $        | 587,721 | 
|                        |  |          |         |          |  |          |         | 
|Operating income (loss) |  | $        | (29,088 | )        |  | $        | 104,048 | 
|                        |  |          |         |          |  |          |         | 

Net revenue for the first nine months of fiscal 2004 was down $253,884 or
43%, compared to the first nine months of fiscal 2003, primarily due to a major
customer who is currently redesigning a product that SETO Technology produces.
The lack of sales volume also contributed to an operating loss of $29,088 we
experienced in the first nine months of fiscal 2004. Sales will continue to
lag behind fiscal 2003 until the fourth quarter when we expect to begin
production of our customers newly designed product.

Operating
Expenses

Operating expenses for the first nine months of fiscal 2004 and 2003 were
as follows:

|                                                               |  |          |           |          |  |          |           | 
|-------------------------------------------------------------- |  | -------- | --------- | -------- |  | -------- | --------- | 
|                                                               |  |          |           |          |  | YTD 2003
|                                                               |  | YTD 2004 |           | Restated
|                                                               |  |          |           |         
|Selling, general and administrative expenses                   |  | $        | 1,621,284 |          |  | $        | 1,613,894 | 
|                                                               |  |          |           |          |  |          |           | 
|Amortization and impairment of acquisition-related intangibles |  | $        | 45,000    |          |  |          |           | 
|                                                               |  |          |           |          |  |          |           | 

Selling,
general and administrative expenses increased $7,390, or .5%
compared to the first nine months of fiscal 2003. This increase was primarily
due to slightly higher administrative expenses such as insurance and utilities.

Amortization and impairment of acquisition-related intangibles increased
$45,000 in the first nine months of fiscal 2004 compared to the first nine
months of fiscal 2003, which was due to the amortization of the customer lists
we purchased in fourth quarter of fiscal 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.

17



---



##### Table of Contents



Interest
and Other, Net

Interest and other, net and taxes for the first nine months of 2004 and
2003 were as follows:

|                                     |  |          |          |          |  |          |         |  
|------------------------------------ |  | -------- | -------- | -------- |  | -------- | ------- | -
|                                     |  |          |          |          |  | YTD 2003
|                                     |  | YTD 2004 |          | Restated
|                                     |  |          |          |         
|Interest income                      |  | $        | 11,958   |          |  | $        | 23,663  |  
|Gain (loss) on sale of assets        |  | $        | 31,749   |          |  |          |         |  
|Interest expense                     |  | $        | (14,595  | )        |  | $        | (92,192 | )
|Loss on write off of note receivable |  | $        | (364,193 | )        |  |          |         |  
|Foreign currency exchange loss       |  | $        | (1,058   | )        |  | $        | (1,147  | )
|Provision for income taxes (benefit) |  | $        | (45,037  | )        |  | $        | (15,820 | )

In the first nine months of fiscal 2004, interest income decreased
primarily due to the interest income we wrote off due to the accrual we made
for June and July on our note receivable from G-Com Net which was subsequently
went into default on October 1, 2003. (See Discontinued Operations below)

In the first quarter of fiscal 2004 we sold equipment in Malaysia for a
gain of $31,749. The equipment consisted of an automobile and a dicing saw
that our diamond tool segment DTI Technology sold.

Interest expense decreased $77,597, or 84%, to $14,595 during the first
nine months of fiscal 2004 compared to $92,192 in the first nine months of
fiscal 2003. This decrease was primarily due to us paying down our
line-of-credit during the second quarter of fiscal 2004 and the repayment of
two equipment loans. See Financial Condition section for a more detailed
discussion of our financing activities.

Foreign currency exchange loss was relatively flat compared to the first
nine months of fiscal 2003. 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 1.6% in Q3 2004 compared to an effective
income benefit of .3% for the first nine months ended fiscal 2003. The
increase in the effective tax rate in the first nine months of fiscal 2004 is
primarily due to the decrease in net operating loss carryforward which was
primarily due from the income from our U.S. operating segment East Coast Sales
Company in fiscal 2003. Our effective tax benefit is a result of our net
operating loss carryforward which we expect to realize the full benefit of our
net operating loss carryover by fiscal 2006.

Discontinued
Operations

As discussed below, in fiscal 2003, we have exited the business of
manufacturing consumer electronic products and rechargeable and other batteries
for consumer products. On February 1, 2001, we adopted a formal plan to sell
Fuji Fabrication, Sdn. Bhd. On October 1, 2001; we sold the assets, which
consisted primarily of inventory and equipment of Fuji Fabrication to G Com Net
for $290,547. We assumed a 10% note for the full amount of the selling price
which was due on September 30, 2002. On October 1, 2002 at the request of G
Com Net, we increased the principal amount of the note to $396,693 due to sales
of additional inventory and previously accrued interest and extended its
maturity so the note was payable in full on September 30, 2003. On October 1,
2003, G Com Net defaulted on this note and we wrote off the remaining balance
of the note ($364,193) which was reduced by equipment that was returned to us
with a value of $32,500. Also, G Com Net returned inventory to us which we
feel is now worthless and we are not carrying on our balance sheet nor did we
offset the notes balance by any inventory amount. The future storage costs,
if any, related to the inventory returned will be charged to current
operations. In addition, we wrote off the remaining assets of Fuji
Fabrication, which consisted of accounts receivable, prepaid expenses and net
plant and equipment for $36,127 which is included in Loss from disposal of
subsidiaries on our consolidated condensed statement of income (loss).

On October 31, 2002, we adopted a formal plan to discontinue the
operations of Hong Kong Batteries Industries, Ltd. (Hong Kong Batteries). Hong
Kong Batteries was a trading company that bought industrial batteries from
manufacturers in mainland China and resold them to companies in Hong Kong, Asia
and Europe. When China was approved for World Trade Organization Status (WTO)
at the end of 2001, without our knowledge most of Hong Kong Batteries
suppliers hired English speaking sales and marketing managers and began to
directly approach all the end user customers of Hong Kong Batteries. During
the first and second quarters of fiscal 2003, Hong Kong Batteries was still
receiving orders from its customers. Then during the third quarter it did not
receive any orders and was informed by its customers that the Chinese
suppliers offered substantial discounts if they bought their products directly

18



---



##### Table of Contents



from the Chinese manufacturers. After many discussions and meetings with the
management of Hong Kong Batteries, we could not overcome the problem and
decided to cease operations as soon as possible due to the lack of revenue and
the high overhead cost we would have incurred if we continued
operating. The discontinuance of Hong Kong Batteries Industries, Ltd resulted in us
writing off $688,183 in goodwill and incurring an additional $225,759 in
disposal costs, which consisted mainly of the write off of cash advances to
Hong Kong Batteries and travel expenses.

In conjunction with the discontinuance of the operations of Fuji
Fabrication and Hong Kong Batteries, we have accrued $34,000 for additional
estimated disposition costs. As of October 31, 2003 we have incurred $34,269
in expenses relating to the disposition of Fuji Fabrication and Hong Kong
Batteries.

The components of income (loss) from discontinued operations of
subsidiaries are as follows:

Fuji Fabrication

|                                             |  |                   |        |                    |  |      |         |                 |  |   |   |  |  |   |         | 
|-------------------------------------------- |  | ----------------- | ------ | ------------------ |  | ---- | ------- | --------------- |  | - | - |  |  | - | ------- | 
|                                             |  | Nine Months Ended |        | Three Months Ended
|                                             |  | October 31        |        | October 31        
|                                             |  |                   |        |                   
|                                             |  | 2003              |        | 2002 (Restated)    |  | 2003 |         | 2002 (Restated)
|                                             |  |                   |        |                    |  |      |         |                
|Net sales                                    |  |                   |        |                    |  |      |         |                 |  |   |   |  |  |   |         | 
|Cost of sales                                |  |                   |        |                    |  |      |         |                 |  |   |   |  |  |   |         | 
|                                             |  |                   |        |                    |  |      |         |                 |  |   |   |  |  |   |         | 
|Gross income (loss)                          |  |                   |       |                    |  |      |        |                 |  |   |  |  |  |   |        | 
|                                             |  |                   |        |                    |  |      |         |                 |  |   |   |  |  |   |         | 
|Selling, general and administrative expenses |  |                   | (1,608 | )                  |  |      | 6,384   |                 |  |   |   |  |  |   | 1,829   | 
|                                             |  |                   |        |                    |  |      |         |                 |  |   |   |  |  |   |         | 
|Other income (expense)                       |  |                   |        |                    |  |      | 129,703 |                 |  |   |   |  |  |   | 129,703 | 
|                                             |  |                   |        |                    |  |      |         |                 |  |   |   |  |  |   |         | 
|Net income (loss)                            |  | $                 | 1,608  |                    |  | $    | 123,319 |                 |  | $ |  |  |  | $ | 127,874 | 
|                                             |  |                   |        |                    |  |      |         |                 |  |   |   |  |  |   |         | 

19



---



##### Table of Contents



Hong Kong Batteries

|                                             |  |                   |          |                    |  |   |          |  
|-------------------------------------------- |  | ----------------- | -------- | ------------------ |  | - | -------- | -
|                                             |  | Nine Months Ended |          | Three Months Ended
|                                             |  | October 31        |          | October 31        
|                                             |  | 2002              |          | 2002              
|                                             |  |                   |          |                   
|Net sales                                    |  | $                 | 445,641  |                    |  |   |          |  
|Cost of sales                                |  |                   | 368,534  |                    |  |   |          |  
|                                             |  |                   |          |                    |  |   |          |  
|Gross income (loss)                          |  |                   | 77,107   |                    |  |   |          |  
|                                             |  |                   |          |                    |  |   |          |  
|Selling, general and administrative expenses |  |                   | 217,927  |                    |  | $ | 101,271  |  
|                                             |  |                   |          |                    |  |   |          |  
|Other income (expense)                       |  |                   | (114,817 | )                  |  |   | (87,357  | )
|                                             |  |                   |          |                    |  |   |          |  
|Net income (loss) before income taxes        |  |                   | (255,637 | )                  |  |   | (188,628 | )
|Income tax (benefit)                         |  |                   | (9,313   | )                  |  |   | (9,313   | )
|                                             |  |                   |          |                    |  |   |          |  
|Net income (loss)                            |  | $                 | (246,324 | )                  |  | $ | (179,315 | )
|                                             |  |                   |          |                    |  |   |          |  

Financial Condition

Our
financial condition remains strong. At October 31, 2003, cash totaled
$179,472, down from $508,414 at January 31, 2003. We used cash to pay off
existing equipment loans totaling $61,924, and $317,752 were used for our stock
repurchase program. At October 31, 2003, total short-term and long-term debt
was $487,911, a decrease of $618,698 compared to January 31, 2003. At October
31, 2003, total debt was $487,911 which represented 19% of stockholders
equity.

For the first nine months of fiscal 2004, cash provided by operating
activities was $514,035, compared to $1,078,694 for the first nine months of
fiscal 2003. Cash was provided by net income adjusted for non-cash related
items. Working capital uses of cash included an increase in inventories,
prepaid expenses, deferred product development costs and other assets and a
decrease in accounts payable and accrued expenses. For the first nine months
of fiscal 2004, net cash used in discontinued operations was $9,678 compared to
cash used in discontinued operations of $125,330 in first nine months of fiscal
2003. This increase was primarily due to the net loss that our discontinued
subsidiary Hong Kong Batteries Industries, Ltd posted during the third quarter
of fiscal 2003. For the first nine months of fiscal 2004, our three largest
customers accounted for approximately 63% of net revenue, with one of these
customers accounting for approximately 34% of net revenue. At October 31,
2003, these three largest customers accounted for approximately 64% of net
accounts receivable.

We used $87,639 in net cash for investing activities during the first nine
months of fiscal 2004, compared to $107,299 during the first nine months of
fiscal 2003. The decrease in cash used for investing activities as compared to
fiscal 2003 was due to the sale of equipment during Q1 2004. Capital
expenditures during the first nine months of fiscal 2004 increased $26,300
compared to fiscal 2003 primarily due to us purchasing a new dicing saw for
East Coast Sales. We anticipate capital expenditures of $200,000 for fiscal
2004.

We used $755,338 in net cash for financing activities during the first
nine months of fiscal 2004, which increased from $536,284 for the same period
in fiscal 2003. The major financing uses of cash for the first nine months of
fiscal 2004 and 2003 were the repayment of debt and repurchase of our common
stock. In fiscal 2004, we purchased 1,293,030 shares of our common stock for
$317,752. Financing sources of cash of $324,338 during the first nine months
of fiscal 2004 were primarily from amounts we drew down on our revolving
line-of-credit. In addition we paid back at total of $700,000 on the line of
credit during the first nine months of fiscal 2004. We have another potential
source of liquidity from authorized borrowings in the form of a line-of-credit
with a U.S. financial institution for $1.7 million. At October 31, 2003, we had
$1,530,637 available for use from this line of credit.

20



---



##### Table of Contents



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.

Outlook

In general, as we look ahead to the last quarter of fiscal 2004, the
outlook still remains uncertain, and we anticipate a year that will be largely
driven by the airline security, military, jet engine and semiconductor
industries as well as the global economy. Although it is difficult to predict
product demand for the rest of fiscal 2004, we expect a 40% to 50% decrease in
revenue from our ceramic segment, East Coast Sales Company. During the fourth
quarter of fiscal 2004 we may be able to better forecast ceramic sales more
accurately due to the Department of HomeLand Security issuing new orders for
security devices. No new orders materialized during the third quarter and
volume was what we anticipated, but we are expecting sales to increase slightly
in the fourth quarter compared to the first nine months of fiscal 2004. The
outlook for the diamond tools industry continues to be weak. We have cut costs
in order to compete with other manufacturers and we have improved the quality
and capability of our diamond cutting products but it has become increasingly
difficult to compete with manufacturers in China. The diamond tool industry
is very dependent on the semiconductor industry, which over last three years
has experienced economic decline and is still not showing signs of growth, but
our other product lines such as scribes for LEDs and cutting services has been
increasing slowly, as these items are also semiconductor related. We are still
interviewing and looking to hire new representatives to sell in new countries
that we are not currently servicing. The outlook for the contract
manufacturing segment remains strong, however, a major customer is currently
redesigning its product that we manufacture and this had an adverse effect on
our net revenue and operating profit for the first nine months of fiscal 2004.
We expect to start producing the redesigned product by the fourth quarter of
this year. In addition, we have a contract with a third party to develop and
manufacture a safety helmet that we expect to bring to market in late fiscal
2004. 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 fiscal 2004 is approximately 55% plus or
minus a few points, which is a slight increase from the fiscal 2003 gross
margin of 51%. 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 2002 we improved our cutting blade facility and
updated our ceramics fabrication facility. We expect that capital spending
will increase to $200,000 (down from 250,000) for fiscal 2004 from $ 124,785 in
fiscal 2003. The increase is primarily due to the expected tooling 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 2004 is expected to be approximately $142,500,
compared to $141,488 in fiscal 2003. Most of this increase would be included
in cost of sales.

We expect amortization of other intangible assets to be approximately
$60,000 in fiscal 2004, as compared to $10,000 in fiscal 2003. As of October
31, 2003 amortization expense totaled $45,000.

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 for this group, 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.

21



---



##### Table of Contents



We expect our tax rate to be minimal for fiscal 2004. This estimate is
lower than the rate in fiscal 2003, primarily due the anticipated decrease in
net revenues 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.

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. For the first nine months of fiscal 2004 we
reported a foreign currency exchange loss of $1,058, compared to a loss of
$1,147 for the first nine months of fiscal 2003, 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.

22



---



##### Table of Contents






ITEM 3. 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 Signatures 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.

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 of 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 Report 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.

23



---



##### Table of Contents



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 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 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.

24



---



##### Table of Contents






ITEM 4. 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).

25



---



##### Table of Contents






ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | a) |  | Exhibits.                                                       
| | -- |  | ----------------------------------------------------------------
|
| |    |  | The following exhibits are filed in connection with this Report:

|     |  |                                                                              |  |  |  | 
|---- |  | ---------------------------------------------------------------------------- |  |  |  | 
|No.  |  | Description                                                                  |  |  |  | 
|     |  |                                                                              |  |  |  | 
|31.1 |  | CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|    
|31.2 |  | CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|    
|32.1 |  | CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|    
|32.2 |  | CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



| | b) |  | Reports on 8-K. None.
| | -- |  | ---------------------

26



---



##### Table of Contents






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.
Registrant                                                                                
|
| |  |  |  | By: /s/ Eugene J. PianEugene J. Pian, President
President and Chief Executive Officer
Date:  December 12, 2003

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
President and Chief Executive Officer
Date:  December 12, 2003             
|
|
| |  |  |  | /s/ Craig A. PianCraig A. Pian
Executive Vice President and
Chief Financial Officer
Date:  December 12, 2003

27