##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|(X)   |  | Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 
|     
|      |  | For the quarterly period ended  April 30,
2002                                          
|      |  |                                                                                         
|      |  | or                                                                                      
|      |  |                                                                                         
|(   ) |  | Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1939
|     
|      |  | For the transition period from
 to                                                      

Commission File
Number:      33-5820-LA

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

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


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

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

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

|      |  |   
|----- |  | --
|Yes X |  | No

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

|                                          |  |                              
|----------------------------------------- |  | -----------------------------
|Class                                     |  | Outstanding at April 30, 2002
|                                          |  |                              
|Common Stock, par value $.001
  per share |  | 14,659,000                   





---

TABLE OF CONTENTS



|                                                                                      |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|INDEX                                                                                
|CONSOLIDATED BALANCE SHEET  APRIL 30, 2002                                          
|CONSOLIDATED STATEMENT OF INCOME                                                     
|CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME                                       
|CONSOLIDATED STATEMENT OF CASH FLOWS                                                 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                           
|Managements Discussion and Analysis of Financial Condition and Results of Operations
|SIGNATURES                                                                           



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##### Table of Contents






INDEX

|                                                                                                |  |           
|----------------------------------------------------------------------------------------------- |  | ----------
|Part I. Financial Information                                                                   |  |           
|                                                                                               
|Item 1. Consolidated financial statements:                                                      |  |           
|                                                                                               
|Balance sheet as of April 30, 2002                                                              |  | F-2       
|                                                                                               
|Statement
of income for the three months ended            April 30, 2002 and 2001               |  | F-3       
|                                                                                               
|Statement
of comprehensive income for the three months            ended April 30, 2002 and 2001 |  | F-4       
|                                                                                               
|Statement
of cash flows for the three months            ended April 30, 2002 and 2001           |  | F-5       
|                                                                                               
|Notes to consolidated financial statements                                                      |  | F-6 - F-10
|                                                                                               
|Item 2. Managements discussion and analysis of
financial condition                             |  |           
|                                                                                               
|                                                                                               
|Part II. Other information                                                                      |  |           
|                                                                                               
|Signatures                                                                                      |  |           





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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEET 
APRIL 30, 2002(UNAUDITED)

|                                                   |                                                                                       |                                            |                            |                                            |         |           |           | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------ | -------------------------- | ------------------------------------------ | ------- | --------- | --------- | 
|ASSETS                                            
|                                                  
|                                                  
|                                                  
|                                                  
|Current assets:                                    |                                                                                       |                                            |                            |                                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Cash                                                                                  |                                            | $                          | 448,765                                    |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Accounts receivable, less allowance
for doubtful accounts of $13,350                  |                                            |                            | 981,132                                    |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Note receivable                                                                       |                                            |                            | 291,607                                    |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Inventory                                                                             |                                            |                            | 897,023                                    |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Prepaid expenses and other current assets                                             |                                            |                            | 41,954                                     |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Deferred tax asset, current portion                                                   |                                            |                            | 170,000                                    |        
|                                                   |                                                                                       |                                            |                            |                                           
|                                                   |                                                                                       |                                            | Total current assets       |                                            |         | 2,830,481 |          
|                                                   |                                                                                       |                                            |                            |                                           
|Property, plant and equipment, net of depreciation |                                                                                       |                                            | 728,684                    |                                           
|                                                   |                                                                                       |                                            |                            |                                           
|Other assets:                                      |                                                                                       |                                            |                            |                                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                       | Goodwill, net of amortization              |                            |                                            | 763,456 |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                       | Security deposits and other assets         |                            |                                            | 70,897  |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                       | Deferred tax asset, net of current portion |                            |                                            | 330,000 |          
|                                                   |                                                                                       |                                            |                            |                                           
|                                                   |                                                                                       |                                            | 1,164,353                  |                                           
|                                                   |                                                                                       |                                            |                            |                                           
|                                                   |                                                                                       |                                            | Total assets               |                                            | $       | 4,723,518 |          
|                                                   |                                                                                       |                                            |                            |                                           
|LIABILITIES AND SHAREHOLDERS EQUITY              
|                                                  
|                                                  
|                                                  
|                                                  
|Current liabilities:                               |                                                                                       |                                            |                            |                                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Current portion of long-term debt                                                     |                                            | $                          | 27,468                                     |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Notes payable                                                                         |                                            |                            | 833,505                                    |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Accounts payable                                                                      |                                            |                            | 417,810                                    |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Accrued expenses                                                                      |                                            |                            | 104,292                                    |        
|                                                   |                                                                                       |                                            |                            |                                           
|                                                   |                                                                                       |                                            | Total current liabilities  |                                            |         | 1,383,075 |          
|                                                   |                                                                                       |                                            |                            |                                           
|Other liabilities:                                 |                                                                                       |                                            |                            |                                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Deferred lease liability                                                              |                                            |                            | 24,000                                     |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Long-term debt, net of current portion                                                |                                            |                            | 38,762                                     |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net liabilities of discontinued operations, less
assets to be disposed of             |                                            |                            | 89,064                                     |        
|                                                   |                                                                                       |                                            |                            |                                           
|                                                   |                                                                                       |                                            | Total other liabilities    |                                            |         | 151,826   |          
|                                                   |                                                                                       |                                            |                            |                                           
|Commitments and contingencies                      |                                                                                       |                                            |                            |                                           
|                                                  
|                                                  
|                                                  
|                                                  
|Shareholders equity:                              |                                                                                       |                                            |                            |                                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Common stock par value $.001; 100,000,000
shares authorized; 14,783,400 shares issued |                                            |                            | 14,783                                     |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Additional paid in capital                                                            |                                            |                            | 4,515,786                                  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Currency translation adjustment                                                       |                                            |                            | (150,522                                   | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Retained earnings (deficit)                                                           |                                            |                            | (1,165,189                                 | )      
|                                                   |                                                                                       |                                            |                            |                                           
|                                                   |                                                                                       |                                            | 3,214,858                  |                                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Less common shares held in treasury, 124,400
shares at cost                           |                                            |                            | (26,241                                    | )      
|                                                   |                                                                                       |                                            |                            |                                           
|                                                   |                                                                                       |                                            | Total shareholders equity |                                            |         | 3,188,617 |          
|                                                   |                                                                                       |                                            |                            |                                           
|                                                   |                                                                                       |                                            |                            | Total liabilities and shareholders equity |         | $         | 4,723,518 | 
|                                                   |                                                                                       |                                            |                            |                                           

See notes to consolidated financial statements.

F- 2



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF INCOME

THREE MONTHS ENDED APRIL 30, 2002 AND 2001
(UNAUDITED)

|                                             |                                      |         |           |         |      |          |           |         |      | 
|-------------------------------------------- | ------------------------------------ | ------- | --------- | ------- | ---- | -------- | --------- | ------- | ---- | 
|                                             |                                      |         |           |         |      |          |           | 2001   
|                                             |                                      |         |           | 2002    |      | Restated
|                                             |                                      |         |           |         |      |         
|Net sales                                    |                                      | $       | 1,835,839 |         |      | $        | 1,402,840 |        
|                                            
|                                            
|                                            
|                                            
|Cost of sales                                |                                      |         | 907,816   |         |      |          | 787,372   |        
|                                             |                                      |         |           |         |      |          |           |        
|Gross profit                                 |                                      |         | 928,023   |         |      |          | 615,468   |        
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |                                      |         | 556,124   |         |      |          | 468,456   |        
|                                             |                                      |         |           |         |      |          |           |        
|Income from operations                       |                                      |         | 371,899   |         |      |          | 147,012   |        
|                                             |                                      |         |           |         |      |          |           |        
|Other income (expenses):                     |                                      |         |           |         |      |          |           |        
|                                            
|                                            
|                                            
|                                            
|                                             | Interest income                      |         |           | 6,125   |      |          |           | 3,839   |     
|                                            
|                                            
|                                            
|                                            
|                                             | Interest expense                     |         |           | (69,607 | )    |          |           | (28,903 | )   
|                                            
|                                            
|                                            
|                                            
|                                             | Foreign currency exchange            |         |           | (462    | )    |          |           | 2       |     
|                                             |                                      |         |           |         |      |          |           |        
|                                             |                                      |         | (63,944   | )       |      |          | (25,062   | )      
|                                             |                                      |         |           |         |      |          |           |        
|Income before income taxes (benefit)         |                                      |         | 307,955   |         |      |          | 121,950   |        
|                                            
|                                            
|                                            
|                                            
|Income tax (benefit)                         |                                      |         | (67,081   | )       |      |          | 1,300     |        
|                                             |                                      |         |           |         |      |          |           |        
|Income from continuing operations            |                                      |         | 375,036   |         |      |          | 120,650   |        
|                                             |                                      |         |           |         |      |          |           |        
|Discontinued operations:                     |                                      |         |           |         |      |          |           |        
|                                            
|                                            
|                                            
|                                            
|                                             | Loss from operations of subsidiaries |         |           | (3,219  | )    |          |           | (21,380 | )   
|                                            
|                                            
|                                            
|                                            
|                                             | Loss on disposal of subsidiaries     |         |           | (6,606  | )    |          |           |         |     
|                                             |                                      |         |           |         |      |          |           |        
|                                             |                                      |         | (9,825    | )       |      |          | (21,380   | )      
|                                             |                                      |         |           |         |      |          |           |        
|Net income                                   |                                      | $       | 365,211   |         |      | $        | 99,270    |        
|                                             |                                      |         |           |         |      |          |           |        
|Earnings per share information:              |                                      |         |           |         |      |          |           |        
|                                            
|                                            
|                                            
|                                            
|                                             | Income
from continuing operations    |         |           |         |      |          |           |         |     
|                                            
|                                            
|                                            
|                                            
|                                             |                                      | Basic   |           | $       | 0.03 |          |           | $       | 0.01 | 
|                                             |                                      |         |           |         |      |          |           |        
|                                             |                                      | Diluted |           | $       | 0.03 |          |           | $       | 0.01 | 
|                                             |                                      |         |           |         |      |          |           |        
|                                             | Discontinued operations:             |         |           |         |      |          |           |         |     
|                                            
|                                            
|                                            
|                                            
|                                             |                                      | Basic   |           | $       | 0.00 |          |           | $       | 0.00 | 
|                                             |                                      |         |           |         |      |          |           |        
|                                             |                                      | Diluted |           | $       | 0.00 |          |           | $       | 0.00 | 
|                                             |                                      |         |           |         |      |          |           |        

See notes to consolidated financial statements.

F- 3



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

THREE MONTHS ENDED APRIL 30, 2002 AND 2001
(UNAUDITED)

|                                        |                                         |   |         |   |          |   |        |   | 
|--------------------------------------- | --------------------------------------- | - | ------- | - | -------- | - | ------ | - | 
|                                        |                                         |   |         |   |          |   | 2001  
|                                        |                                         |   | 2002    |   | Restated
|                                        |                                         |   |         |   |         
|Net income                              |                                         | $ | 365,211 |   |          | $ | 99,270 |  
|                                       
|                                       
|                                       
|                                       
|Other comprehensive income, net of tax: |                                         |   |         |   |          |   |        |  
|                                       
|                                       
|                                       
|                                       
|                                        | Foreign currency translation adjustment |   |         | 0 |          |   |        | 0 | 
|                                        |                                         |   |         |   |          |   |        |  
|Comprehensive income                    |                                         | $ | 365,211 |   |          | $ | 99,270 |  
|                                        |                                         |   |         |   |          |   |        |  

See notes to consolidated financial statements.

F- 4



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF CASH FLOWS

THREE MONTHS ENDED APRIL 30, 2002 AND 2001
(UNAUDITED)

|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |          |         |         |         |  
|-------------------------------------------------- | ------------------------------ | ------------------------------------------------------------------------------ | -------------------------------------------------- | ------------------------------------------------------ | -------- | ------- | -------- | -------- | ------- | ------- | ------- | -
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |          |         | 2001   
|                                                   |                                |                                                                                |                                                    |                                                        |          | 2002    |          | Restated
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         
|Operating activities:                              |                                |                                                                                |                                                    |                                                        |          |         |          |         
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                | Income from continuing operations                                              |                                                    | $                                                      | 375,036  |         |          | $        | 120,650 |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                | Adjustments to reconcile net income to cash
provided by continuing operations: |                                                    |                                                        |          |         |          |          |         |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                |                                                                                | Depreciation and amortization                      |                                                        |          | 43,158  |          |          |         | 25,977  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                |                                                                                | Provision for deferred income taxes                |                                                        |          | (70,000 | )        |          |         |         |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                |                                                                                | Compensatory stock surrendered                     |                                                        |          |         |          |          |         | (25,200 | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                |                                                                                | Changes in other operating assets and
liabilities: |                                                        |          |         |          |          |         |         |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                |                                                                                |                                                    | Accounts and notes receivable                          |          |         | (43,549  | )        |         |         | (82,056 | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                |                                                                                |                                                    | Inventories                                            |          |         | (37,211  | )        |         |         | (31,530 | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                |                                                                                |                                                    | Prepaid expenses and other current assets              |          |         | 48,271   |          |         |         | 44,220  |  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                |                                                                                |                                                    | Other assets                                           |          |         | (19,660  | )        |         |         | (40,008 | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                |                                                                                |                                                    | Accounts payable, and accrued expenses                 |          |         | (44,301  | )        |         |         | 161,564 |  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                |                                                                                |                                                    | Deferred lease liability                               |          |         | 1,500    |          |         |         | 1,500   |  
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         
|                                                   |                                |                                                                                |                                                    | Net cash provided by continuing operations             |          |         | 253,244  |          |         |         | 175,117 |  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                |                                                                                |                                                    | Net cash provided by (used in) discontinued
operations |          |         | (8,961   | )        |         |         | 29,993  |  
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         
|                                                   |                                |                                                                                |                                                    | Net cash provided by operating activities              |          |         | 244,283  |          |         |         | 205,110 |  
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         
|Investing activities:                              |                                |                                                                                |                                                    |                                                        |          |         |          |         
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                | Purchase of property and equipment                                             |                                                    |                                                        | (50,650  | )       |          |          |         |        
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         
|                                                   |                                |                                                                                |                                                    | Net cash used in investing activities                  |          |         | (50,650  | )        |         |         |         |  
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         
|Financing activities:                              |                                |                                                                                |                                                    |                                                        |          |         |          |         
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                | Proceeds from financing                                                        |                                                    |                                                        | 135,853  |         |          |          | 14,677  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                | Payment of debt                                                                |                                                    |                                                        | (409,578 | )       |          |          | (83,245 | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                | Purchase of treasury stock                                                     |                                                    |                                                        | (14,215  | )       |          |          |         |        
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         
|                                                   |                                |                                                                                |                                                    | Net cash used in financing activities                  |          |         | (287,940 | )        |         |         | (68,568 | )
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         
|Net increase (decrease) in cash                    |                                |                                                                                | (94,307                                            | )                                                      |          |         | 136,542  |         
|                                                  
|                                                  
|                                                  
|                                                  
|Cash, beginning of period                          |                                |                                                                                | 543,072                                            |                                                        |          |         | 599,229  |         
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         
|Cash, end of period                                |                                | $                                                                              | 448,765                                            |                                                        |          | $       | 735,771  |         
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         
|Supplemental disclosures of cash flow information: |                                |                                                                                |                                                    |                                                        |          |         |          |         
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Cash paid during the year for: |                                                                                |                                                    |                                                        |          |         |          |          |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                | Interest                                                                       |                                                    | $                                                      | 69,607   |         |          | $        | 28,903  |        
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         
|                                                   |                                | Income taxes                                                                   |                                                    | $                                                      | 601      |         |          |          |         |        
|                                                   |                                |                                                                                |                                                    |                                                        |          |         |          |         

See notes to consolidated financial statements.

F- 5



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(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, 2002. 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, 2002 Annual Report on Form 10-KSB.                                                                       
|  
|   |  | 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. |  | Accounting change:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | On February 1, 2002, the Company adopted Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived
Assets
(Statement 144). Statement 144 supersedes Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets to be disposed
of, and the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of
business. Statement 144 also amends ARB No. 51, Consolidated Financial
Statements, to eliminate the exception to consolidation for a subsidiary
for which control is likely to be temporary. Adoption of Statement 144 had
no impact of the financial position of the Company or its results of
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Standard No. 145, Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical
Corrections
(Statement 145). Statement 145 rescinds FASB Statement
No. 4 Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, and FASB Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. Statement 145 also rescinds FASB
Statement No. 44 Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. Statement 145
also amends other existing authoritive pronouncements to make various
technical corrections, clarify meanings, or describe their applicability
under changed conditions. Early adoption of Statement 145 is encouraged
and may be as of the beginning of the fiscal year or as of the beginning
of the interim period in which the statement issued. The Company has
elected to early adopt this statement effective February 1, 2002.
Management does not believe adoption of this statement materially impacted
the Companys financial position or results of operations.

F- 6



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



|3. |  | Nature of operation, risks and uncertainties:                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company currently has a minuscule share of the dicing blade, 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 into the market.
|  
|4. |  | Inventory:                                                                                                                                                                                                                                                                                                                                                                                                           

|                                          |                 |   |         |         | 
|----------------------------------------- | --------------- | - | ------- | ------- | 
|Inventories at April 30, 2002 consist of: |                 |   |         |        
|                                         
|                                         
|                                         
|                                         
|                                          | Finished goods  |   | $       | 519,156 | 
|                                         
|                                         
|                                         
|                                         
|                                          | Work-in-process |   |         | 76,058  | 
|                                         
|                                         
|                                         
|                                         
|                                          | Raw materials   |   |         | 295,829 | 
|                                         
|                                         
|                                         
|                                         
|                                          | Supplies        |   |         | 5,980   | 
|                                          |                 |   |         |        
|                                          |                 | $ | 897,023 |        
|                                          |                 |   |         |        



|5. |  | Intangible assets and goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On January 1, 2002, the Company fully adopted Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible
Assets(Statement 142), Statement 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, Intangible Assets. Statement 142 establishes new
accounting for goodwill and other intangible assets recorded in business
combinations. Under the new rules, goodwill and intangible assets arising
from acquisitions after June 30, 2001, are no longer amortized but are
subject to annual impairment tests in accordance with the statement. Other
intangible assets will continue to be amortized over their useful lives.
|  
|   |  | In January 1990, the Company acquired East Coast Sales Company for
$309,000. The purchase price exceeded the fair value of the assets by
$134,281, which was assigned to goodwill and is being amortized on the
straight-line basis over forty years. As of April 30, 2002 accumulated
amortization of goodwill amounted to $49,667.                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | In November 1999, the Company acquired Hong Kong Batteries Industries, Ltd
for $727,000. The purchase price exceeded the fair value of the assets by
$747,300, which was assigned to goodwill and is being amortized on the
straight-line basis over twenty years. As of April 30, 2002 accumulated
amortization of goodwill amounted to $68,458.                                                                                                                                                                                                                                                                                                                                                                                      

F- 7



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



|6. |  | Commitments and contingencies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company is obligated under a lease agreement with an entity owned by an
officer of the Company which expires on April 30, 2013. Annual rent
expense is as follows: $60,000 for each of the first five years, $66,000
for each of the second five years and $72,000 for each of the final five
years. The Company is also obligated for insurance and the increase in
real estate taxes over the base year as stipulated in the lease. This
lease requires the following future minimum rental payments:

|               |  |   |         | 
|-------------- |  | - | ------- | 
|April 30, 2003 |  | $ | 64,500  | 
|              
|              
|              
|              
|April 30, 2004 |  |   | 66,000  | 
|              
|              
|              
|              
|April 30, 2005 |  |   | 66,000  | 
|              
|              
|              
|              
|April 30, 2006 |  |   | 66,000  | 
|              
|              
|              
|              
|April 30, 2007 |  |   | 66,000  | 
|              
|              
|              
|              
|Thereafter     |  |   | 421,500 | 
|               |  |   |         | 
|               |  | $ | 750,000 | 
|               |  |   |         | 



|   |  | Rent expense charged to operations was $23,891 and $16,921 in 2002 and 2001
respectively.                                                                                                                                       
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company also leases three vehicles under operating leases with terms
expiring through 2003. Total lease expense was $12,321 and $12,321 for the
three months ended April 30, 2002 and 2001 respectively.                    
|  
|7. |  | Earnings per share:                                                                                                                                                                                                             
|  
|   |  | The following reconciles the number of common shares outstanding at April
30 of 2002 and 2001 to the weighted average number of common shares
outstanding for the purposes of calculating basic and dilutive earnings
per share:

|                                                             |  |           |            |      |  |  |            | 
|------------------------------------------------------------ |  | --------- | ---------- | ---- |  |  | ---------- | 
|                                                             |  | April 30,
|                                                             |  |          
|                                                             |  | 2002      |            | 2001
|                                                             |  |           |            |     
|Weighted average number of
common shares outstanding         |  |           | 14,659,000 |      |  |  | 14,361,000 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Effect of using diluted securities:                          |  |           |            |      |  |  |            | 
|                                                            
|                                                            
|                                                            
|                                                            
|Weighted average common equivalent
shares from stock options |  |           | (2,944,575 | )    |  |  | 1,501,176  | 
|                                                             |  |           |            |      |  |  |            | 
|Diluted number of common shares
outstanding                  |  |           | 11,714,425 |      |  |  | 15,862,176 | 
|                                                             |  |           |            |      |  |  |            | 



|   |  | At April 30, 2002 there were approximately 6,025,000 million shares of
common stock potentially issuable with respect to stock options, which
could dilute basic earnings per share in the future.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|8. |  | Disposition of subsidiary:                                                                                                                                                                        
|  
|   |  | On February 1, 2001, the Company adopted a formal plan to sell Fuji
Fabrication, SDN, BHD. The assets of Fuji Fabrication to be sold consist
primarily of inventory and equipment.                
|  
|   |  | The sale of Fuji Fabrication on October 1, 2001 resulted in a selling price
of $290,547, which includes a note receivable with a balance of $291,607
including accrued interest.                  

F- 8



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



|8. |  | Disposition of subsidiary (continued):                                                                                                                                             
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Net sales of Fuji Fabrication for 2002 and 2001 were $0 and $33,259
respectively. These amounts are not included in net sales in the
accompanying consolidated statement of income.

|                                             |  |           |        |      |  |   |         |  
|-------------------------------------------- |  | --------- | ------ | ---- |  | - | ------- | -
|                                             |  | April 30,
|                                             |  |          
|                                             |  | 2002      |        | 2001
|                                             |  |           |        |     
|Net sales                                    |  | $         | 0      |      |  | $ | 33,259  |  
|                                            
|                                            
|                                            
|                                            
|Cost of sales                                |  |           | 0      |      |  |   | 50,789  |  
|                                             |  |           |        |      |  |   |         |  
|Gross profit                                 |  |           | 0      |      |  |   | (17,530 | )
|                                             |  |           |        |      |  |   |         |  
|Selling, general and administrative
expenses |  |           | 3,219  |      |  |   | 6,284   |  
|                                            
|                                            
|                                            
|                                            
|Other income                                 |  |           |        |      |  |   | (2,434  | )
|                                             |  |           |        |      |  |   |         |  
|                                             |  |           | 3,219  |      |  |   | 3,850   |  
|                                             |  |           |        |      |  |   |         |  
|Net income (loss)                            |  | $         | (3,219 | )    |  | $ | (21,380 | )
|                                             |  |           |        |      |  |   |         |  



|9. |  | Principal products and segmentation of sales:                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Companys principal products are industrial ceramics, diamond cutting
tools, cellular phone batteries and industrial batteries. The tools
include dicing blades which are components of precision electronic saws,
scribes which are used to cut silicon wafers, porcelain and ceramic molds
and dressers which are used for the shading and forming of grinding wheels
in the machine tool industry.
|  
|   |  | Financial information relating to the principal industry segments and
classes of products:                                                                                                                                                                                                                                                                                                               

|                          |                                     |   |           |           |      |   |           |           |  
|------------------------- | ----------------------------------- | - | --------- | --------- | ---- | - | --------- | --------- | -
|                          |                                     |   | April 30,
|                          |                                     |   |          
|                          |                                     |   | 2002      |           | 2001
|                          |                                     |   |           |           |     
|Sales to customers:       |                                     |   |           |           |      |   |           |          
|                         
|                         
|                         
|                         
|                          | Industry A  Ceramics               |   | $         | 1,005,339 |      |   | $         | 430,637   |  
|                         
|                         
|                         
|                         
|                          | Industry B  Diamond tools          |   |           | 262,884   |      |   |           | 217,342   |  
|                         
|                         
|                         
|                         
|                          | Industry C  Industrial batteries   |   |           | 382,274   |      |   |           | 738,441   |  
|                         
|                         
|                         
|                         
|                          | Industry D  Contract manufacturing |   |           | 185,342   |      |   |           | 16,420    |  
|                          |                                     |   |           |           |      |   |           |          
|                          |                                     | $ | 1,835,839 |           |      | $ | 1,402,840 |          
|                          |                                     |   |           |           |      |   |           |          
|Operating profit or loss: |                                     |   |           |           |      |   |           |          
|                         
|                         
|                         
|                         
|                          | Industry A  Ceramics               |   | $         | 369,972   |      |   | $         | 148,942   |  
|                         
|                         
|                         
|                         
|                          | Industry B  Diamond tool           |   |           | (45,550   | )    |   |           | (82,363   | )
|                         
|                         
|                         
|                         
|                          | Industry C  Industrial batteries   |   |           | 8,256     |      |   |           | 72,802    |  
|                         
|                         
|                         
|                         
|                          | Industry D  Contract manufacturing |   |           | 39,221    |      |   |           | 7,631     |  
|                          |                                     |   |           |           |      |   |           |          
|                          |                                     | $ | 371,899   |           |      | $ | 147,012   |          
|                          |                                     |   |           |           |      |   |           |          
|Identifiable assets:      |                                     |   |           |           |      |   |           |          
|                         
|                         
|                         
|                         
|                          | Industry A  Ceramics               |   | $         | 917,450   |      |   | $         | 583,701   |  
|                         
|                         
|                         
|                         
|                          | Industry B  Diamond tools          |   |           | 2,329,894 |      |   |           | 1,489,337 |  
|                         
|                         
|                         
|                         
|                          | Industry C  Industrial batteries   |   |           | 614,796   |      |   |           | 992,583   |  
|                         
|                         
|                         
|                         
|                          | Industry D  Contract manufacturing |   |           | 182,536   |      |   |           | 45,364    |  
|                         
|                         
|                         
|                         
|                          | Corporate                           |   |           | 678,842   |      |   |           | 1,356,111 |  
|                          |                                     |   |           |           |      |   |           |          
|                          |                                     | $ | 4,723,518 |           |      | $ | 4,467,096 |          
|                          |                                     |   |           |           |      |   |           |          



| |  | Two customers each accounted for more than 10% of total sales and together
accounted for approximately 53% of total sales for the three months ended
April 30, 2002.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

F- 9



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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



|9. |  | Principal products and segmentation of sales (continued):
|-- |  | ---------------------------------------------------------
|  
|   |  | Foreign and domestic operations and export sales:        

|                     |               |   |           |           |      |   |           |           | 
|-------------------- | ------------- | - | --------- | --------- | ---- | - | --------- | --------- | 
|                     |               |   | April 30,
|                     |               |   |          
|                     |               |   | 2002      |           | 2001
|                     |               |   |           |           |     
|Sales to customers:  |               |   |           |           |      |   |           |          
|                    
|                    
|                    
|                    
|                     | United States |   | $         | 1,009,711 |      |   | $         | 438,469   | 
|                    
|                    
|                    
|                    
|                     | Far East      |   |           | 440,665   |      |   |           | 718,831   | 
|                    
|                    
|                    
|                    
|                     | Canada        |   |           | 385,463   |      |   |           | 245,540   | 
|                     |               |   |           |           |      |   |           |          
|                     |               | $ | 1,835,839 |           |      | $ | 1,402,840 |          
|                     |               |   |           |           |      |   |           |          
|                    
|                    
|                    
|                    
|Operating profit:    |               |   |           |           |      |   |           |          
|                    
|                    
|                    
|                    
|                     | United States |   | $         | 92,975    |      |   | $         | 14,701    | 
|                    
|                    
|                    
|                    
|                     | Far East      |   |           | 96,694    |      |   |           | 129,371   | 
|                    
|                    
|                    
|                    
|                     | Canada        |   |           | 182,230   |      |   |           | 2,940     | 
|                     |               |   |           |           |      |   |           |          
|                     |               | $ | 371,899   |           |      | $ | 147,012   |          
|                     |               |   |           |           |      |   |           |          
|Identifiable assets: |               |   |           |           |      |   |           |          
|                    
|                    
|                    
|                    
|                     | United States |   | $         | 2,125,583 |      |   | $         | 2,351,818 | 
|                    
|                    
|                    
|                    
|                     | Far East      |   |           | 1,794,935 |      |   |           | 1,563,467 | 
|                    
|                    
|                    
|                    
|                     | Canada        |   |           | 803,000   |      |   |           | 551,811   | 
|                     |               |   |           |           |      |   |           |          
|                     |               | $ | 4,723,518 |           |      | $ | 4,467,096 |          
|                     |               |   |           |           |      |   |           |          

F- 10



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##### Table of Contents






Managements Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations  First Quarter of 2003 Compared to First Quarter of 2002 Restated



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our net revenues for Q1 2003 (fiscal year ending January 31, 2003) increased
368% compared to Q1 2002 and we experienced our best financial results for a
quarter as comparably structured. The increase in net revenues came from
SETOs Ceramic division, East Coast Sales Company, primarily due to a
significant increase in sales of our custom ceramic products for the
detection and protection industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Cost of sales for Q1 2003 increased 15% compared to Q1 2002 while our gross
margin percentage increased to 50% for Q1 2003 compared to 43% in Q1 2002,
primarily due to the increase in the higher-margin custom ceramic business.
See Outlook for a discussion of our gross margin expectations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Q1 2002 has been restated using the Treasury Stock method to calculate
earnings per share, which is required by Statement of Financial Accounting
Standards (SFAS) No. 128. Under SFAS No. 128, the exercise of options and
warrants shall be assumed at the beginning of the period, or time of issuance
if later and common shares shall be assumed issued. The proceeds from
exercise shall be assumed to be used to purchase common stock at the average
market price during the period. The difference between the number of shares
assumed issued and the number of shares purchased shall be included in the
denominator of the diluted earnings per share computation. The diluted
number of common shares outstanding at April 30, 2001was originally
19,886,000 shares and has been restated at 15,862,176 shares. The difference
in diluted shares outstanding had no effect on the earning per share amount
at April 30, 2001.
|
| | Ceramics Net revenues for the Ceramic segment increased by $574,702 or 134%
in Q1 2003 compared to Q1 2002. This increase in net revenues was primarily
due to significantly higher sales of our custom ceramic products that are
used in detection and protection systems. Net operating profit increased by
$221,030, or 148% for Q1 2003 compared to Q1 2002, primarily due to the
increase in the higher-margin custom ceramic business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Diamond Tools Net revenues for the Diamond Tool segment increased by
$45,420 or 21% in Q1 2003 compared to Q1 2002, primarily due to higher
margins and cost cutting measures initiated in 2002. Net operating loss
decreased by $36,813, or 45% for Q1 2003 compared to Q1 2002, primarily due
to the higher product margins and a reduction in payroll.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Industrial Batteries Net revenues for the Industrial Batteries segment
decreased $356,167 or 48% for Q1 2003 compared to Q1 2002, primarily due to
lower gross margins and increased competition from China. Net operating
profit decreased by $64,546 or 89% for Q1 2003 compared to Q1 2002, primarily
due a decrease in sales and increased competition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Contract Manufacturing Net revenues for the Contract Manufacturing Segment
increased $168,922 or 1029% for Q1 2002 compared to Q1 2001, primarily due to
significantly higher sales and market acceptance of our products. Net
operating profit increased $31,590 or 414% for Q1 2002 compared to Q2 2002,
primarily due to the increase in sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Selling, General and Administrative Expenses, Other and Taxes. General and
administrative expenses increased $87,668 or 19% in Q1 2003 compared to Q1
2002, primarily due higher payroll costs, commissions and professional fees.
Selling, general and administrative expenses were 30% of net revenues in Q1
2002 and 33% of net revenues in Q1 2001, including charges for amortization
of acquisition-related intangibles and costs and, in Q1 2001 amortization of
goodwill.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Amortization of acquisition-related intangibles and costs increased to
$10,180 in Q1 2003. Amortization of goodwill and acquisition-related
intangibles and costs were $5,642 in Q1 2002. The increase primarily
resulted from the implementation of Statement of Financial Accounting
Standards (SFAS) No. 142, as of the beginning of fiscal 2003. Under SFAS
142, goodwill is no longer amortized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Our effective income tax rate was 43% for Q1 2003 compared to 1% for Q1
2002. The lower tax rate in Q1 2003 is due to our higher net income from our
United States subsidiaries and is offset by our net operating loss
carryforward. The adjusted rate for Q1 2003 reflects the current expected
income for fiscal 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                





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##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition

Liquidity and Capital Resources



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our financial condition remains strong. At April 30, 2002, cash totaled
$448,765, down $94,307 at January 31, 2002. Total short-term and long-term
debt of $1,534,901 was 48% and 65% of shareholders equity as of the end of
the first quarter of 2003 and 2002 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | For the first quarter of 2002, cash provided by operating activities was $
244,283. Inventory levels increased from January 31, 2002, as we had to
increase our ceramics inventory due to increased demand. Accounts receivable
also increased, primarily due the increase in sales volume that occurred
during the first quarter. Our six largest customers accounted for
approximately 47% of net revenues for the first quarter of 2003. At April
30, 2002, these four largest customers accounted for approximately 44% of net
accounts receivable. Our deferred tax asset increased $70,000 during the
first quarter 2002, due to our estimated profitability in the United States
for fiscal 2003. The main non-operating source of cash during the quarter
was $135,853 that we drew down on our line of credit.
|
| | We fund our working capital requirements on a short-term basis primarily
through a line-of-credit with a major financial institution with maturity on
October 31, 2002. Maximum borrowing capacity under the line-of-credit is
$1,200,000. At April 30, 2002 we utilized $833,505 of the credit total line
and had $366,495 available for use.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Major uses of cash during the quarter included capital spending of $50,650
for plant and equipment, and $409,578 was used to pay down our short and
long-term debt. In addition, during Q1 2003 we purchased seventy five
thousand shares of our stock for $14,215, which was placed in our treasury.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Our current ratio for Q1 2003 was 2.05 compared to 1.23 for Q1 2002,
primarily due to our increase in sales and our cost cutting measures that
were put in place in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | We believe that we have the financial resources needed to meet our business
requirements for the next twelve months, including capital expenditures,
working capital requirements and potential future acquisitions or strategic
investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Outlook



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following outlook section contains a number of forward-looking
statements, all of which are based on current expectations. 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 the end of the first quarter of fiscal 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results we report in our financial
statements. Some of our 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: valuation of inventory, which impacts cost of sales and
gross margin; our deferred tax asset, which impacts income tax expense
(benefit); and the assessment of recoverability of goodwill and other
intangible assets, which impacts write-offs of goodwill and intangibles.
Below, we discuss these policies further, as well as the estimates and
judgments that are as difficult or subjective, such as our policies for
revenue recognition.
|
| | Uncertainty in global economic conditions continues to make it difficult to
predict product demand, but we expect that the current trends will continue
through 2003. For the second quarter 2003, we expect revenue to be between
$1,875,000 and $2,100,000, compared to first quarter revenue of $1,835,839.
Our financial results are substantially dependent on sales of ceramic
products and diamond tools, all of which are difficult to forecast. Revenue
is also subject to the impact of economic conditions in various geographic
regions.                                                                                                                                                                                                                                                                                              
|
| | We can expect gross margins percentage in the second quarter of 2003 to be
approximately 52%, plus or minus a couple of points, compared to 50% in the
first quarter. For the full year of fiscal 2003, our gross margin percentage
is expected to be 55%, plus or minus a few points. Our expectation for
fiscal 2003 reflects our early                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         





---



##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of Operations



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | progress this year in improving profitability,
and is consistent with our view that the current trends will continue through
2003. Our gross margin varies, depending on sales volume and product
pricing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Our policy for valuation of inventory, including the determination of
obsolete inventory, requires us to estimate the future demand of our products
within specific time horizons, generally four months or less. The estimates
of future demand that we use in the valuation of inventory are the basis for
our published revenue forecast. If our demand forecast for specific products
is greater than actual demand and we do not reduce manufacturing output
accordingly, we could be required to record additional inventory reserves,
which would have a negative impact on our gross margin.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | We currently expect capital spending will be approximately $125,000 in fiscal
2003. If demand for our products does not continue to grow, revenues and
gross margins could be adversely affected. Depreciation is expected to be
$40,000 for the second quarter and $140,000 for fiscal 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | We have completed the adoption of the SFAS Nos. 141 and 142 on accounting for
business combinations and goodwill as of the beginning of fiscal 2003.
Accordingly, we will no longer amortize goodwill from future acquisitions,
but will continue to amortize acquisition-related intangibles and costs.
Consequently, we expect amortization of acquisition-related intangibles and
costs to be approximately $9,340 in the second quarter and $37,365 for fiscal
2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | In conjunction with the implementation of the new accounting rules for
goodwill, as of the beginning of fiscal 2003, we completed a goodwill
impairment review for Hong Kong Batteries SDN BHD and East Coast Sales
Company, the reporting units that have substantially all of our recorded
goodwill, and found no impairment. According to our accounting policy under
the new rules, we will perform a similar review annually, or earlier if
indicators of potential impairment exist. Our impairment review is based on a
discounted cash flow approach that uses our estimates of revenues and costs
for these groups as well as appropriate discount rates. If our revenue and
cost forecasts are not achieved, we may incur charges for impairment of
goodwill.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Our future results of operations and the other forward-looking statements
contained in this outlook discussion involve a number of risks and
uncertaintiesin particular the statements regarding our goals, plans to
cultivate new business, future economic conditions and the tax rate. 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 detection and protection systems field
and diamond tool industries in various geographic regions; factors associated
with doing business outside the United States, including currency controls
and fluctuations, and tariff, import and other related restrictions and
regulations; possible disruption in commercial activities related to
terrorist activity or armed conflict in the United States and other
locations, such as changes in logistics and security arrangements, and
reduced end-user purchases relative to expectations; civil or military unrest
or political instability in a locale; changes in customer order patterns;
competitive factors such as manufacturing technologies and pricing pressures;
excess or obsolete inventory and variations in inventory valuation; the
ability to sustain and grow ceramic, diamond tools and custom manufacturing,
and successfully integrate and operate any acquired business; and litigations
involving intellectual property, stockholder and other issues.
|
| | We believe that we have the product offerings, facilities, personnel, and
competitive 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Market Risk



| |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are exposed to market risks from changes in interest rates and foreign
currency exchange rates. To manage exposures to these fluctuations, we may
occasionally enter into various hedging transactions. We do not use
derivatives for trading purposes, or do we generate income or engage in
speculative activity and we have never used leveraged derivatives to hedge
the value of its net investments in our foreign subsidiaries.
|
| | Currency During Q1 2003, our loss from foreign currency exchange losses
totaled $462 compare to a gain of $2 in Q1 2002, neither materially impacted
our operational results. We feel that we can manage our foreign currency
translation gains and losses due to the fact that both Malaysias and Chinas
currency rates are fixed                                                                                                    





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##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of Operations



| |                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | relative to the U.S. dollar. While future
fluctuations in currency rates could have a negative impact on our future
operations, the current conditions are expected to continue to provide strong
revenue and earnings growth.                                                                                                                  
|
| | Inflation We have not had a significant impact from general inflation over
the past five years due to our cash flow and the global economy. Although it
is difficult to predict the impact of inflation, we do not anticipate that
inflation will materially impact our margins, operating costs and our results
of operations for fiscal 2003.





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##### Table of Contents






SIGNATURES

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

|                                              
|----------------------------------------------
|SETO HOLDINGS, INC.(Registrant)               
|                                              
|By /s/ Eugene J. PianEugene J. Pian, President
|                                              
|Date:  June 14, 2002                          

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.

|                                         
|-----------------------------------------
|/s/ Eugene J. PianEugene J. Pian
Director
|                                         
|Date:  June 14, 2002                     
|                                         
|/s/ Craig A. PianCraig A. Pian
Director  
|                                         
|Date:  June 14, 2002                     
|                                         
|/s/ Francine PianFrancine Pian
Director  
|                                         
|Date:  June 14, 2002