##### Table of Contents



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




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED CONDENSED BALANCE SHEET  JULY 31, 2004CONSOLIDATED CONDENSED STATEMENT OF INCOMECONSOLIDATED CONDENSED STATEMENT OF CASH FLOWSNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESITEM 5. SIGNATURES AND CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND THE CHIEF FINANCIAL OFFICER OF THE COMPANYITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESEX-31.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.EX-31.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.EX-32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.EX-32.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    Table of Contents  
 PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS SETO HOLDINGS, INC. AND SUBSIDIARIES
 
  ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    191,787Accounts receivable
    
    
    652,142Inventory
    
    
    858,623Prepaid expenses and other current assets
    
    
    37,012Deferred tax asset, current portion
    
    
    87,500TOTAL CURRENT ASSETS
    
    
    1,827,064PROPERTY, PLANT AND EQUIPMENT, NET OF DEPRECIATION
    
    
    690,550OTHER ASSETSGoodwill
    
    
    85,453Other intangible asset, net
    
    
    200,000Ownership interests in investee companies
    
    
    325,000Security deposits and other assets
    
    
    15,584Deferred tax asset, net of current portion
    
    
    229,217TOTAL OTHER ASSETS
    
    
    855,254TOTAL ASSETS
    
    $
    3,372,868LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent portion of long-term debt
    
    $
    9,682Note payable, line of credit
    
    
    769,970Accounts payable and accrued expenses
    
    
    327,562TOTAL CURRENT LIABILITIES
    
    
    1,107,214OTHER LIABILITIESDeferred lease liability
    
    
    30,272Long-term debt
    
    
    30,685TOTAL OTHER LIABILITIES
    
    
    60,957STOCKHOLDERS EQUITYCommon stock par value $.001; 100,000,000 shares authorized; 12,708,801 shares issued
    
    
    12,709Additional paid in capital
    
    
    4,231,158Accumulated other comprehensive income
    
    
    (150,522
    )Retained earnings (deficit)
    
    
    (1,847,572
    )2,245,773Less common shares held in treasury, 234,922 shares at cost
    
    
    (41,076
    )TOTAL STOCKHOLDERS EQUITY
    
    
    2,204,697TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    3,372,868
 See notes to consolidated condensed financial statements.




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SETO HOLDINGS, INC. AND
SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF INCOME
SIX AND THREE MONTHS ENDED JULY 31, 2004 AND 2003
(UNAUDITED) Six Months Ended
    
    Three Months EndedJuly 31
    
    July 312004
    
    2003
    
    2004
    
    2003Net revenues
    
    $
    2,444,213
    
    
    $
    1,960,608
    
    
    $
    1,279,909
    
    
    $
    939,423Cost of sales
    
    
    1,098,931
    
    
    
    742,791
    
    
    
    602,347
    
    
    
    329,095Gross margin
    
    
    1,345,282
    
    
    
    1,217,817
    
    
    
    677,562
    
    
    
    610,328Operating expenses:Selling, general and administrative expenses
    
    
    1,316,404
    
    
    
    1,071,997
    
    
    
    716,126
    
    
    
    569,142Amortization of acquisition-related intangibles
    
    
    30,000
    
    
    
    30,000
    
    
    
    15,000
    
    
    
    15,000Operating expenses
    
    
    1,346,404
    
    
    
    1,101,997
    
    
    
    731,126
    
    
    
    584,142Operating income (loss)
    
    
    (1,122
    )
    
    
    115,820
    
    
    
    (53,564
    )
    
    
    26,186Interest and other, net
    
    
    (14,877
    )
    
    
    39,630
    
    
    
    (8,979
    )
    
    
    3,000Income (loss) before income taxes
    
    
    (15,999
    )
    
    
    155,450
    
    
    
    (62,543
    )
    
    
    29,186Income taxes
    
    
    72,405
    
    
    
    27,511
    
    
    
    57,061
    
    
    
    4,950Income (loss) from continuing operations
    
    
    (88,404
    )
    
    
    127,939
    
    
    
    (119,604
    )
    
    
    24,236Discontinued operations:Loss from operations of subsidiaries
    
    
    0
    
    
    
    (1,608
    )
    
    
    0
    
    
    
    (269
    )0
    
    
    
    (1,608
    )
    
    
    0
    
    
    
    (269
    )Net income (loss)
    
    ($
    88,404
    )
    
    $
    126,331
    
    
    ($
    119,604
    )
    
    $
    23,967Earnings per share information:Income (loss) from continuing operationsBasic
    
    ($
    0.01
    )
    
    $
    0.01
    
    
    ($
    0.01
    )
    
    $
    0.00Diluted
    
    ($
    0.01
    )
    
    $
    0.01
    
    
    ($
    0.01
    )
    
    $
    0.00Discontinued operations:Basic
    
    $
    0.00
    
    
    ($
    0.00
    )
    
    $
    0.00
    
    
    ($
    0.00
    )Diluted
    
    $
    0.00
    
    
    ($
    0.00
    )
    
    $
    0.00
    
    
    ($
    0.00
    )Weighted average common shares outstanding
    
    
    12,615,060
    
    
    
    14,308,246
    
    
    
    12,474,077
    
    
    
    14,259,998Weighted average common shares outstanding,
assuming dilution
    
    
    12,615,060
    
    
    
    14,308,246
    
    
    
    12,474,077
    
    
    
    14,259,998
 See notes to consolidated condensed financial statements.




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SETO HOLDINGS, INC. AND SUBSIDIARIES 
 
 2004
    
    2003OPERATING ACTIVITIESIncome from continuing operations
    
    ($
    88,404
    )
    
    $
    127,939Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    101,413
    
    
    
    53,219Amortization and impairment of intangibles and other acquisition-related costs
    
    
    30,000
    
    
    
    30,000Gain on sale of equipment
    
    
    
    
    
    
    (31,749
    )Provision for deferred income taxes
    
    
    67,905
    
    
    
    20,356Changes in assets and liabilities:Accounts receivable
    
    
    (92,888
    )
    
    
    320,645Inventories
    
    
    7,393
    
    
    
    12,996Prepaid expenses and other current assets
    
    
    (29,175
    )
    
    
    (11,748
    )Deferred product development costs
    
    
    
    
    
    
    (77,793
    )Other assets
    
    
    (9,584
    )
    
    
    (5,039
    )Accounts payable and accrued expenses
    
    
    86,471
    
    
    
    (132,136
    )Deferred lease liability
    
    
    272
    
    
    
    3,000NET CASH PROVIDED BY CONTINUING OPERATIONS
    
    
    73,403
    
    
    
    309,690NET CASH PROVIDED BY DISCONTINUED OPERATIONS
    
    
    
    
    
    
    4,535NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    73,403
    
    
    
    314,225INVESTING ACTIVITIESProceeds from sale of equipment
    
    
    
    
    
    
    45,960Purchase of investments in investee companies
    
    
    (325,000
    )Purchase of property and equipment
    
    
    (33,532
    )
    
    
    (83,973
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (358,532
    )
    
    
    (38,013
    )FINANCING ACTIVITIESIncrease (decrease) in short-term debt, net
    
    
    373,050
    
    
    
    (377,425
    )Repayments and retirement of long-term debt
    
    
    (4,750
    )
    
    
    (61,924
    )Repurchase and retirement of common stock
    
    
    (38,134
    )
    
    
    (181,023
    )NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    330,166
    
    
    
    (620,372
    )NET INCREASE (DECREASE) IN CASH
    
    
    45,037
    
    
    
    (344,160
    )CASH, BEGINNING OF PERIOD
    
    
    146,750
    
    
    
    508,414CASH, END OF PERIOD
    
    $
    191,787
    
    
    $
    164,254
 See notes to consolidated condensed financial statements.




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




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3.
    
    INVENTORYInventory at July 31, 2004 consists of: Finished goods
    
    $
    506,588Work in Process
    
    
    38,638Raw Materials
    
    
    300,518Supplies
    
    
    12,879$
    858,623
  4.
    
    GOODWILLThe Company adopted SFAS No. 142 effective January 31, 2002 and
accordingly, as of January 31, 2002, has ceased amortizing amounts related to goodwill. The balance of goodwill is related to the
Companys East Coast Sales Company segment. In accordance with SFAS
No. 142, the Company has evaluated the fair value of its East Coast
Sales segment and determined that none of the goodwill recorded was
impaired. The fair value was determined using a reasonable estimate
of future cash flows of the segment and a risk adjusted discount rate
to compute a net present value of future cash flows.5.
    
    IDENTIFIED INTANGIBLE ASSETSOn December 1, 2002, the Company acquired the customer lists from a
Malaysian Company for $300,000, to be amortized over a period of 5
years. The Companys identified intangible assets are subject to
amortization. Amortization of identified intangible assets amounted
to $30,000 for the six months ended July 31, 2004 and 2003.6.
    
    INVESTMENTSInvestee companies that are not consolidated, but which the
Company exercises significant influence, are accounted for under the
equity method of accounting. Whether or not the Company exercises
significant influence with respect to an Investee depends on an
evaluation of several factors, including among others, representation
on the Investee companys board of directors and ownership level,
which is generally 20% to 50% interest in the voting securities of
the Investee company. Under the equity method of accounting, an
Investee companys accounts are not reflected within the Companys
consolidated balance sheets and statements of operation; however, the
Companys share of the earnings or losses of the Investee company is
reflected in the caption Equity loss-share of Investee company
losses in the consolidated statement of operations. The Companys
carrying value in an equity method Investee company is reflected in
the caption Ownership interests in investee companies in the
Companys consolidated balance sheets.When the Companys carrying value in an equity method Investee
company is reduced to zero, no further losses are recorded in the
Companys consolidated financial statements unless the Company
guaranteed obligations of the Investee company or has committed
additional funding. When the Investee company subsequently reports
income, the Company will not record its share of such income until it
equals the amount of its share of losses not previously recognized.




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On June 25, 2004, the Company formed a joint venture with Prestan
Products LLC (Prestan) for the design of new products, distribution
and for the upgrade and repair of existing safety products. As of July
31, 2004, the Company invested a total of $150,000 which amounted to
a ten percent interest in Prestan. The Company is committed to
invest an additional $350,000 during fiscal 2005 for an additional
23% interest in Prestan. Because the company has significant
influence over Prestan, the investment is being accounted for under
the equity method of accounting.Prestan is a Delaware limited liability company, who utilizes U.S.
generally accepted accounting principles and has a year-end of
December 31st. At July 31, 2004, Prestan had no activity with the
exception of the capital contributions made by its members.Investee companies not accounted for under the consolidation or the
equity method of accounting are accounted for under the cost method
of accounting. Under this method, the Companys share of earnings or
losses of such Investee companies are not included in the consolidated
balance sheet or statement of income (loss). However, impairment
charges are recognized in the consolidated statement of income
(loss). If circumstances suggest that the value of the Investee
company has subsequently recovered, such recovery is not recorded.When a cost method Investee company initially qualifies for use of
the equity method, the Companys carrying value is adjusted for the
Companys share of the past results of the Investees operations.
Therefore, prior losses could significantly decrease the Companys
carrying value in that Investee company at that time.In May 2004, the Company invested $175,000 for a 4% interest in
Slamdance Media Group, LLC (Slamdance). The Company is committed
to invest an additional $325,000 by January 15, 2005 which will increase its interest to 12.5%.Slamdance is comprised of distribution and talent-management units,
and has an agreement for a home-entertainment output deal with
Ventura Entertainment to sell new entertainment products under the
Slamdance label.Slamdance is a U.S. limited liability company who utilizes U.S.
generally accepted accounting principles and has a year-end of
December 31st. At July 31, 2004, Slamdances quarterly financial
statements were not available. Because the company does not have
significant influence over Slamdance, the investment is being
accounted for under the cost method of accounting.  7.
    
    NOTES PAYABLE AND LONG-TERM DEBTThe Company has an available line-of-credit with a financial
institution in the amount $1,200,000. The line-of-credit carries an
annual rate of 2.9% plus the 30-day commercial paper rate with an
expiration date of October 31, 2004. As of July 31, 2004, the
Company had utilized $769,970 of the line-of-credit. The line of credit is secured by the personal guarantee
of the Companys president and the Companys assets.




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8.
    
    INTEREST AND OTHER, NETInterest and Other, net included: Six Months Ended
    
    Three Months EndedJuly 31
    
    July 312004
    
    2003
    
    2004
    
    2003Interest income
    
    $
    5
    
    
    $
    19,878
    
    
    $
    2
    
    
    $
    9,955Gain (loss) on sale of asset
    
    
    (324
    )
    
    
    31,749
    
    
    
    (324
    )Interest expense
    
    
    (13,848
    )
    
    
    (11,391
    )
    
    
    (8,278
    )
    
    
    (6,598
    )Foreign currency exchange loss
    
    
    (710
    )
    
    
    (606
    )
    
    
    (379
    )
    
    
    (357
    )Total
    
    ($
    14,877
    )
    
    $
    39,630
    
    
    ($
    8,979
    )
    
    $
    3,000
  9.
    
    COMMITMENTS AND CONTINGENCIESThe Company is obligated under a lease agreement with an entity owned
by an officer of the Company, which expires on April 30, 2013.
Annual rent expense is as follows: $60,000 for each of the first
five years, $66,000 for each of the second five years and $72,000 for
each of the final five years. The Company is also obligated for
insurance and the increase in real estate taxes over the base year as
stipulated in the lease. This lease requires the following future
minimum rental payments: July 31, 2005
    
    $
    66,000July 31, 2006
    
    
    66,000July 31, 2007
    
    
    67,500July 31, 2008
    
    
    72,000July 31, 2009
    
    
    72,000Thereafter
    
    
    270,000$
    613,500
  Rent expense charged to operations was $33,000 and $33,000 at July
31, 2004 and 2003, respectively.During the second quarter, as a result of a joint venture with Prestan
Products LLC, the Company entered into an agreement to lease
office and warehouse space in Ohio under a long-term, non-cancelable
operating lease. The lease expires on June 23, 2009, and provides
for a renewal option for an additional five years. Annual rent
expense is as follows: $54,544 for each of the first three years and
$58,620 for each of the final two years. The Company is subleasing
50% of the space to Prestan Products. This lease requires the following
future minimum rental payments: July 31, 2005
    
    $
    54,544July 31, 2006
    
    
    54,544July 31, 2007
    
    
    54,883July 31, 2008
    
    
    58,620July 31, 2009
    
    
    53,735$
    276,326
  Rent expense charged to operations amounted to $4,681 at July 31,
2004.




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The Company is committed to investing an additional $675,000 in the
Joint venture and investment mentioned in Note 6.  10.
    
    EARNINGS PER SHAREThe following table reconciles the number of common shares
outstanding at July 31, 2004 and 2003 to the weighted average number
of common shares outstanding for the purposes of calculating basic
and diluted earnings per share: Six Months Ended
    
    Three Months EndedJuly 31
    
    July 312004
    
    2003
    
    2004
    
    2003Weighted average common shares
outstanding
    
    
    12,615,060
    
    
    
    14,308,246
    
    
    
    12,474,077
    
    
    
    14,259,998Effect of using diluted securities:Weighted average common equivalent
shares from
stock optionsDiluted number of common shares
outstanding
    
    
    12,615,060
    
    
    
    14,308,246
    
    
    
    12,474,077
    
    
    
    14,259,998
  At July 31, 2004 there were approximately six million shares of
common stock potentially issuable with respect to stock options,
which could dilute basic earnings per share in the future.  11.
    
    STOCK REPURCHASE PROGRAMDuring the first six months of fiscal 2005, the Company repurchased
219,200 shares of common stock under the Companys authorized
repurchase program at a cost of $38,134. In addition, on March 25,
2004, the Company cancelled 475,000 shares of treasury stock. On
June 27, 2003 the Company with unanimous consent of its board of
directors, increased its stock repurchase program from one million
shares to two and a half million shares. As of July 31, 2004 a total
of 531,500 shares remained available for repurchase under the
program.12.
    
    DISPOSITION OF SUBSIDIARYOn February 1, 2001, the Company adopted a formal plan to sell Fuji
Fabrication, SDN, BHD (Fuji). On October 1, 2001, the assets of
Fuji Fabrication, which consisted primarily of inventory and
equipment, were sold for $290,547 with the Company assuming a note
for the full amount of the selling price. On October 1, 2002 the
Company recast the note for $396,693, which included the sales of
additional inventory and previously accrued interest. Interest on
the note was stated at 10% (annually) and was payable in 12 monthly
installments. On July 1, 2003 the company received equipment valued
at $32,500 which was offset against the note receivable at July 31,
2003. The note was payable in full on September 30, 2003. On
October 1, 2003, the payee, G Com Net, defaulted on the note and the
Company wrote off the remaining note balance of $364,193.Fuji Fabrication had no sales for the six months ended July 31, 2003.
General and administrative expenses for the six months ended July
31, 2003 totaled $1,608. The company ceased Fujis operations on
October 31, 2003.




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##### Table of Contents



13.
    
    PRINCIPAL PRODUCTS AND SEGMENTATION OF SALESThe Company has adopted FASB Statement No. 131, Disclosures about
Segments of a Business Enterprise and Related Information. The
Company is engaged in three principal operating segments, which are
(1) custom cut and fabricated ceramic parts for the aircraft,
aerospace, defense, detection/protection industries, (2) the
manufacturing of disposable precision diamond cutting tools for the
semiconductor and electronics industries, and (3) contract
manufacturing of personal safety devices. These operating segments
were determined based on the nature of the products and services
offered. Operating segments are defined as components of an
enterprise about which separate financial information is available
and is evaluated regularly by the chief operating decision-maker
(CEO) to decide how to allocate resources and to assess performance.Operating segments do not record inter-segment revenue, and
accordingly, none is recorded. The accounting policies for segment
reporting are the same as for the Company as a whole. Financial
information relating to the principal industry segments and classes
of products are as follows: Six Months Ended
    
    Three Months EndedJuly 31
    
    July 312004
    
    2003
    
    2004
    
    2003Sales to customers:Industry A - Ceramics
    
    $
    1,792,687
    
    
    $
    1,506,165
    
    
    $
    949,877
    
    
    $
    767,635Industry B - Diamond tools
    
    
    460,775
    
    
    
    262,573
    
    
    $
    248,727
    
    
    
    50,816Industry C - Contract manufacturing
    
    
    190,751
    
    
    
    191,870
    
    
    $
    81,305
    
    
    
    120,972$
    2,444,213
    
    
    $
    1,960,608
    
    
    $
    1,279,909
    
    
    $
    939,423
 Six Months Ended
    
    Three Months EndedJuly 31
    
    July 312004
    
    2003
    
    2004
    
    2003Operating income or (loss):Industry A - Ceramics
    
    $
    437,972
    
    
    $
    284,881
    
    
    $
    254,094
    
    
    $
    160,034Industry B - Diamond tools
    
    
    (239,400
    )
    
    
    (163,457
    )
    
    ($
    128,732
    )
    
    
    (135,464
    )Industry C - Contract manufacturing
    
    
    (199,694
    )
    
    
    (5,604
    )
    
    ($
    178,926
    )
    
    
    1,616($
    1,122
    )
    
    $
    115,820
    
    
    ($
    53,564
    )
    
    $
    26,186
 Six Months Ended
    
    Three Months EndedJuly 31
    
    July 312004
    
    2003
    
    2004
    
    2003Sales to customers:United States
    
    $
    1,271,471
    
    
    $
    1,205,432
    
    
    $
    641,852
    
    
    $
    523,567Far East
    
    
    286,960
    
    
    
    67,970
    
    
    
    161,520
    
    
    $
    31,500Canada
    
    
    885,782
    
    
    
    687,206
    
    
    
    476,537
    
    
    $
    384,356$
    2,444,213
    
    
    $
    1,960,608
    
    
    $
    1,279,909
    
    
    $
    939,423




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##### Table of Contents



Net property, plant and equipment by country were as follows: July 31, 2004
    
    July 31, 2003United States
    
    $
    283,354
    
    
    $
    234,929Malaysia
    
    
    407,196
    
    
    
    401,373Total property, plant and equipment, net
    
    $
    690,550
    
    
    $
    636,302
  Three customers each accounted for more than 10% of total sales and
together accounted for approximately 63% of total sales for the six
months ended July 31, 2004.




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS This document includes statements that may constitute forward-looking
statements made pursuant to the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company would like to caution
readers regarding certain forward-looking statements in this document and in
all of its communications to stockholders and others, press releases,
securities filings, and all other documents and communications. Statements
that are based on managements projections, estimates and assumptions are
forward-looking statements. The words believe, expect, anticipate,
intend, will, should, may and similar expressions generally identify
forward-looking statements. While the Company believes in the veracity of all
statements made herein, forward-looking statements are necessarily based upon a
number of estimates and assumptions that, while considered reasonable by the
Company, are inherently subject to significant business, economic and
competitive uncertainties and contingencies and known and unknown risks. Many
of the uncertainties and contingencies can effect events and the Companys
actual results and could cause its actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company. The Companys future operating results are subject to risks and
uncertainties and are dependent on many factors including, without limitation,
the risks identified in this report. Please see the Risk Factors in
Financial Condition. Except as otherwise required by the applicable
securities laws, the Company disclaims any intention or obligation publicly to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The Strategy, Critical Accounting Estimates and Outlook sections all
contain a number of forward-looking statements, all of which are based on our
current expectations. Our actual results may differ materially. These
statements do not reflect the potential impact of any mergers, acquisitions,
divestitures or other business combinations that had not closed as of September
7, 2004. Recent Developments On March 15, 2004, the Company filed a report on Form 8-K containing a
press release announcing an odd-lot purchase program for stockholders of less
than 100 shares of the Companys common stock, whereby stockholders will have
the opportunity to sell their shares to the Company for a price of $0.20 per
share with no brokerage fees. According to the Company, in the event that the
odd-lot program reduces the number of the Companys registered stockholders to
less than 300, the Company may deregister its common stock and suspend its
reporting obligation under the Securities Exchange Act of 1934, which would
result among other things, in the Company common stock being delisted from the
Bulletin Board and only being quoted on the Pink Sheets®, which is a
centralized quotation service that collects and publishes market maker
quotations in real time. The odd-lot program expired on June 15, 2004. In June 2004, the Company invested $175,000 for a 4% interest in Slamdance
Media Group, LLC (Slamdance). Slamdance is engaged in the distribution of
movies and entertainment products. Slamdance is comprised of distribution and
talent-management units, and has an agreement for a home-entertainment output
deal with Ventura Entertainment to sell new entertainment products under the
Slamdance label. On June 25, 2004 the Company formed a joint venture with Prestan Products
LLC (Prestan) for the design of new products, distribution and the upgrade
and repair of existing safety products. Prestan expects to begin operations in
August 2004. The engineering, design and distribution of products will be from
our full service hub in Ohio with the manufacturing being performed by our SETO
Technology operating segment in Malaysia. Strategy Our goal is to be a niche company, with the ability to provide products
and services to a variety of larger corporations who need contract
manufacturing and/or made-to-order products. Our primary areas of focus are
the fabrication of ceramic parts for the airline security business and jet
engine manufacturing, the manufacture and distribution of cutting blades for
silicon wafers and contract manufacturing of safety, rescue and CPR training
devices.




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##### Table of Contents



All of our businesses operate in competitive environments characterized by
the introduction of new products with lower prices. As part of our overall
strategy, we use our relatively small size and ability to provide niche
services for larger companies in order to compete vigorously in each relevant
market segment. Our competition comes from established businesses as well as
new entrants to the marketplace. The trend in the United States (U.S.) toward
HomeLand Security will offer us new opportunities, but will result in more
competition. Competition tends to increase pricing pressure on our products,
which may mean that we must offer our products at lower prices than we had
anticipated, resulting in lower profits. Because some of our competitors
already have established products, it is inherently difficult for us to compete
against them. In addition, certain market segments in which we compete, such
as dicing blade products, have experienced an overall economic decline,
increasing the degree of competition within this market segment. When we
believe it is appropriate, we will take various steps, including discontinuing
older products and reducing prices, in order to increase acceptance of our
products and to be competitive within each relevant market segment. We plan to continue to cultivate new businesses and work with the security
and chip making industries to expand our product lines. East
Coast Sales Company East Coast Sales Company (ECS) operating
segment specializes in the distribution and value-added fabrication of
technical ceramic products for the airline security industry and jet engine
manufacturers, and distributes clean room supplies and tools. Our strategy for
ceramic fabrication is to increase our production efficiency by utilizing our
foreign subsidiarys labor force and updating our machinery. After September
11th, East Coast Sales experienced an increase in demand for its ceramic
products used in the manufacture of airport safety and detection devices. Our
three major customers are developing new products which will require our
ceramic products. In addition to airport security devices, our ceramic
products are used in military defense equipment such as missiles, and by
manufacturers of jet engines for both commercial and military use. In order to
increase the acceptance and deployment of our ceramic products, we are focused
on providing our customers with the highest quality products and services. Semicon Tools and DTI Technology Semicon Tools and DTI Technology
operating segments strategy is to produce quality diamond cutting tools for
the semiconductor industry. These cutting tools have diamond particles
captured in a nickel metal or resin matrix, each with micron size diamond
particles to form very small precision cutting edges made to close tolerances.
The diamond blades are used as the dicing/cutting saw blades of precision
computer controlled electronic cutting devices that are needed in the
electronic and semiconductor industries to cut and separate integrated circuits
and discrete devices from processed wafers. Complimenting our dicing blade
line, we manufacture other supplementary products including diamond scribing
tools for specialty coated glass as mirrors and sapphire substrates for LED
chips. We also manufacture natural and synthetic diamond tips known as
Thermodes and Synthrodes and are used in the tape automated bonding process.
We are currently consulting with an outside source in Taiwan to improve our
manufacturing process and diamond tool technology. The diamond tool segment is
very dependent on the semiconductor industry which over the last three years
has experienced economic decline and started to show signs of growth. The
diamond blades manufactured by DTI Technology are a vital part of East Coast
Sales ceramic fabrication process. SETO
Technology  SETO Technologys strategy is to provide
contract-manufacturing services for personal electronic safety devices and to
produce medical, automotive and mining safety devices. This segment is
currently developing and/or selling medical training products, personal safety
devices and safety helmets. Currently this segments main product is a CPR
training device used by the medical industry. We have five different models
under contract on an exclusive and nondisclosure basis. SETO Technology has
also contracted with a third party to develop and manufacture a safety helmet
that we expect to bring to market in fiscal 2005. The safety helmets are close
to meeting our specifications and are being tested by Underwriters
Laboratories. We modified the helmets LED lights and internal circuit
boards, which was completed in early July. We expect to make our first sale by
the end of the third quarter of fiscal 2005, pending the approval from
Underwriters Laboratories, market acceptance and no further modifications. Our
new joint venture with Prestan Products LLC will provide engineering services
for new safety products, aid in reconfiguring current product designs and the
distribution of our safety products from Ohio. In addition, during the second
quarter we hired a new national sales manager who will be responsible for the
marketing of our safety products.




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##### Table of Contents



Critical Accounting Estimates The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results reported in our financial
statements. Some of these accounting policies require us to make difficult and
subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Our most critical accounting estimates
include the assessment of recoverability of goodwill, which impacts write-offs
of goodwill; valuation of inventory which impacts gross margin; assessment of
recoverability of long-lived assets which primarily impacts gross margin when
we impair assets or accelerate their depreciation; and recognition and
measurement of current and deferred income tax assets and liabilities which
impacts our tax provision. Below we discuss these policies further, as well as
the estimates and judgments involved. We also have other policies that we
consider to be key accounting policies, such as our policy for revenue
recognition; however, this policy does not meet the definition of critical
accounting estimates because it generally requires us to make estimates or
judgments that are difficult or subjective. Goodwill According to our accounting policy we perform an annual
impairment review in the fourth quarter of each year, or more frequently if
indicators of potential impairment exist. Our most recent review was in the
fourth quarter of fiscal 2004 (January 31, 2004). Our impairment review
process is based on a discounted future cash flow approach that uses our
estimates of revenue for the reporting unit, driven by assumed market growth
rates and assumed segment share, and estimated costs as well as appropriate
discount rates. These estimates are consistent with the plans and estimates
that we use to manage the underlying business. In the future, we may incur
charges for impairment of goodwill if the ceramic fabrication business
experiences an economic downturn, new technology becomes available, we lose
market acceptance, we fail to deliver new products, or if we fail to achieve
our assumed revenue growth rates or assumed gross margin. Inventory Our policy for valuation of inventory, including the
determination of obsolete or excess inventory requires us to estimate the
future demand for our products within specific time horizons, generally one
year or less. If our demand forecast for specific products is greater than
actual demand and we fail to reduce manufacturing output accordingly, we could
be required to record additional inventory reserves, which would have a
negative impact on our gross margin. Non-Marketable Equity Securities At July 31, 2004, the carrying value of
our portfolio of investments in non-marketable equity securities totaled
$325,000. During the second quarter of fiscal 2005, we made equity investments
in Prestan Products LLC and Slamdance Media Group LLC in order to stimulate
growth in our SETO Technology Division and to diversify into a new industry.
The proceeds from our investments in non-marketable securities of private companies
contribute a portion of the funds required for these companies to grow. Our investment in Prestan Products LLC is an early-stage
company that is still defining its strategic direction whose products and
engineering services may directly support out safety products. We also invest
for strategic reasons, and each investment is evaluated for potential financial
returns. We invest in companies that can succeed and have an impact on their
market segment. However, these types of investments involve a great deal of
risk, and there can be no assurance that any specific company, whether at an
early stage or mature stage, or somewhere in between, will grow or will be
successful, and consequently, we could lose all or part of our investment.
When the strategic objectives of an investment have been achieved, or if the
investment or business diverges from our objectives, we may decide to dispose
of the investment. However, our investments in non-marketable equity
securities are not liquid, and there can be no assurance that we will be able
to dispose of these investments on favorable terms or at all. We have an investment in the voting stock of Prestan Products LLC, a US
designer, developer and marketer of personal safety devices, with a carrying
value of $150,000 at July 31, 2004. This investment is intended to provide
SETO with an opportunity to design, develop, market and distribute our personal
safety products. We are committed to invest an additional $350,000 in Prestan
Products LLC by the end of fiscal 2005. We have an investment in the voting stock of Slamdance Media Group LLC, a
US distributor of entertainment products, with a carrying value of $175,000 at
July 31, 2004. This investment is intended to provide SETO with additional
investment income. We are committed to invest an additional $325,000 in
Slamdance Media LLC by January 15, 2005.




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##### Table of Contents



Our ability to recover our strategic investments in non-marketable equity
securities and to earn a return on these investments is primarily dependent on
how successfully these companies execute their business plans and
how well their products and services are accepted, as well as their ability to
obtain financing for continued operations, to grow and to take advantage of
liquidity events. In the current equity market environment, the companies
ability to obtain additional funding as well as to take advantage of liquidity
events, such as mergers and private sales remain constrained. We review all of our investments quarterly for impairment, however, for
non-marketable equity securities, the impairment analysis requires significant
judgment to identify events or circumstances that would likely have a
significant adverse effect on the fair value of the investment. The indicators
we use to identify those events or circumstances include (a) the investees
revenue and earnings trends relative to predefined milestones and overall
business prospects, (b) the general market conditions in the investees
industry, and (c) the investees liquidity, debt ratios and the rate at which
the investee is using its cash. Investments identified as having an indicator of impairment are subject to
further analysis to determine if the investment is other than temporarily
impaired, in which case we write the investment down to its impaired value.
When an investee is not considered viable from a financial point of view, we
write down the entire investment since we consider the estimated fair market
value to be nominal. If an investee obtains additional funding at a valuation
lower than our carrying amount or requires a new round of equity funding to
stay in operation and the funding does not appear imminent, we presume that the
investment is other than temporarily impaired, unless specific facts and
circumstances indicate otherwise. Investments in non-marketable securities are inherently risky and our
investments can fail. Their success (or lack thereof) is dependent upon
product development, market acceptance, operational efficiency and other key
business success factors. In addition, depending on their future prospects,
they may not be able to raise additional financings when needed or they may
receive lower valuations, with less favorable investment terms than previous
financings, and the investments would likely be impaired. Long-Lived Assets We assess the impairment of long-lived assets when
events or changes in circumstances indicate that the carrying value of the
assets or the asset grouping is not recoverable. Factors that we consider in
deciding when to perform impairment review include significant
under-performance of a business or product line in relation to expectations,
significant negative industry or economic trends, and significant changes in
our use of the assets. Recoverability of assets that will continue to be used
in our operations is measured by comparing the carrying amount of the assets
grouping to the related total future net cash flows. If an assets grouping
carrying value is not recoverable through those cash flows, the asset grouping
is considered to be impaired. The impairment is measured by the difference
between the assets carrying amount and their fair value, based on the best
information available, including market prices or discounted cash flow
analysis. Revenue recognition The Company recognizes net revenue when the earnings
process is complete, as evidenced by an agreement with the customer, transfer
of title and acceptance, if applicable, as well as fixed pricing and probable
collectibility. When the Company sells its products to distributors, the
distributors have substantial independent operations under sales arrangements
whose terms do not allow for rights of return or price protection on unsold
products held by them. In these instances, the Company recognizes revenue when
it ships the product directly to the distributors. Shipping and handling costs
billed to customers are included in net revenue and the related shipping costs
are included in cost of sales. Income Taxes In determining income for financial statement purposes, we
must make certain estimates and judgments. These estimates and judgments occur
in the calculation of certain tax liabilities and in the determination of the
recoverability of certain tax assets, which arise from temporary differences
between the tax and financial statement recognition of revenue and expense.




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##### Table of Contents



We must assess the likelihood that we will be able to recover our deferred
tax assets. If recovery is not likely, we must increase our provision for
taxes by recording a reserve in the form of a valuation allowance for the
deferred tax assets that we estimate will not ultimately be recoverable. As of
July 31, 2004, we believe that our recorded deferred tax assets will ultimately
be recovered. However, should there be a change in our ability to recover our
deferred tax assets, our tax provision would increase in the period in which we
determine that the recovery is not probable. In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We recognize
potential liabilities for anticipated tax audit issues in the U.S. and other
tax jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If payment of these amounts ultimately proves to
be unnecessary, the reversal of the liabilities would result in tax benefits
being recognized in the period when we determine the liabilities are no longer
necessary. If our estimate of tax liabilities proves to be less than the
ultimate assessment, a further charge to expense would result. Results of Operations Second Quarter of Fiscal 2005 Compared to Second Quarter 2004 The following table sets forth certain consolidated statements of income
data as a percentage of net revenue for the periods indicated: Three Months EndedJuly 31, 2004
    
    July 31, 2003Net revenues
    
    
    100.00
    %
    
    
    100.00
    %Cost of sales
    
    
    47.06
    %
    
    
    35.04
    %Gross margin
    
    
    52.94
    %
    
    
    64.96
    %Selling, general and administrative expenses
    
    
    55.95
    %
    
    
    60.59
    %Amortization & impairment of acquisition-related intangibles
    
    
    1.17
    %
    
    
    1.60
    %Operating income (loss)
    
    
    (4.18
    %)
    
    
    2.77
    %
 Our net revenue for Q2 2005 of $1,279,909 was up approximately 36%
compared to Q2 2004, primarily due to the increase in demand for our diamond
cutting tools and ceramic products used by the airline security manufacturing
industry. Net revenue for our diamond tool segment increased 389% compared
with Q2 2004 which is primarily due to higher sales volume and lower unit
prices. Our contract manufacturing revenues were down 33% compared with Q2
2004, primarily due to the delays we are experiencing with the introduction of
our new safety helmet. Our gross margin percentage in Q2 2005 of 53% was 12% lower compared to Q2
2004. The gross margin for our diamond tool segment of 47% was higher compared
to 37% during Q2 2004, which was primarily due to the write off of $75,000 in
obsolete inventory in Q2 2004; our gross margin for our ceramics division
decreased to 52% compared to 57% in Q2 2004, which was primarily due higher
material and labor costs; and our gross margin for our contract manufacturing
segment decreased, which was primarily due to the decrease in sales volume.
See Outlook for a discussion of gross margin expectations.




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##### Table of Contents



Ceramics
- East Coast Sales Company The revenue and operating income for the East Coast Sales Company
operating segment for the second quarter of fiscal 2005 and fiscal 2004 were as follows: July 31, 2004
    
    July 31, 2003Revenue
    
    $
    949,877
    
    
    $
    767,635Operating income
    
    $
    254,094
    
    
    $
    160,034
 The East Coast Sales Company operating segment is our ceramics division,
which experienced an increase in sales due to the increased demand from the jet
engine manufacturing industry and the airline security manufacturing industry.
Net revenues for this segment increased $182,242 or 24% in Q2 2005 compared to
Q2 2004. The increase in revenue was due to higher sales of custom cut
ceramics that are used in the manufacturing of jet engines and airport
security devices. Net operating income for the East Coast Sales Company operating segment
increased by $94,060 or 59% compared to Q2 2004 primarily due to the increase
in demand from the industries mentioned above and the allocation of certain
overhead costs to DTI and SETO Technology. Diamond
Tools  Semicon Tools/DTI Technology The revenue and operating income for the diamond tool operating segment
for the second quarter of fiscal 2005 and fiscal 2004 were as follows: July 31, 2004
    
    July 31, 2003Revenue
    
    $
    248,727
    
    
    $
    50,816Operating loss
    
    ($
    128,732
    )
    
    ($
    135,464
    )
 Net revenue for Q2 2005 was up compared to Q2 2004. The net operating
loss for Q2 2005 decreased $6,732 or 5%, compared to Q2 2004. The decrease in
the net operating loss from fiscal Q2 2004 to Q2 2005 was primarily due to
Semicon Tools allocating a significant percentage of the Companys overhead
expenses. These overhead expenses include officers and administrative
salaries, rent, professional fees, public relations expense, insurance expense,
regulatory fees, stock administrative costs and travel expense all of which
have increased from Q2 2004. Contract
Manufacturing  SETO Technology The revenue and operating income for the contract manufacturing operating
segment for the second quarter of fiscal 2005 and fiscal 2004 were as follows: July 31, 2004
    
    July 31, 2003Revenue
    
    $
    81,305
    
    
    $
    120,972Operating income (loss)
    
    ($
    178,926
    )
    
    $
    1,616
 Net revenue for Q2 2005 was down $39,667 or 33%, compared to Q2 2004,
primarily due a decrease in sales from a major customer and the delays we are
experiencing with our new safety helmet. Operating loss for the second quarter
fiscal 2005 increased $180,542 which was primarily due to increased marketing,
consulting and travel expenses we incurred regarding our safety helmet and the
allocation of certain overhead expenses from Semicon Tools and East Coast
Sales.




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##### Table of Contents



Operating Expenses Operating expenses for the second quarter of fiscal 2005 and fiscal 2004 were as
follows: July 31, 2004
    
    July 31, 2003Selling, general and administrative expenses
    
    $
    716,126
    
    
    $
    569,142Amortization & impairment of acquisition-related intangibles
    
    $
    15,000
    
    
    $
    15,000
 Selling, general and administrative expenses increased $146,984 or 26%
compared to Q2 2004. This increase was primarily due to higher salaries and
wages, consulting expense, insurance expense, depreciation expense, travel

expense and professional fees relating to the introduction of our new safety
helmet. Amortization and impairment of acquisition-related intangibles was $15,000
in Q2 2005 and Q2 2004. This expense is related to our purchase of customer
lists in 2002. If market conditions change and it is deemed that the customer
lists do not have any future benefit and become impaired, we may write off the
entire amount, which would have a negative effect on our operating income. Interest and Other, Net Interest and other, net and taxes for the second quarter of fiscal 2005 and fiscal 2004
were as follows: July 31, 2004
    
    July 31, 2003Interest income
    
    $
    2
    
    
    $
    9,955Gain (loss) on sale of assets
    
    ($
    324
    )Interest expense
    
    ($
    8,278
    )
    
    ($
    6,598
    )Foreign currency exchange loss
    
    ($
    379
    )
    
    ($
    357
    )Provision for income taxes
    
    $
    57,061
    
    
    $
    4,950
 In Q2 2005, interest income decreased primarily due to the absence of the
payments we received on our note receivable from G-Com Net in the second
quarter of fiscal 2004. Interest expense increased $1,680 or 25%, to $8,278 in Q2 2005 compared to
$6,598 in Q2 2004. This increase was primarily due to us drawing down on our

line of credit during the second quarter of fiscal 2005. See Financial
Condition section for a more detailed discussion of our financing activities. Foreign currency exchange loss was relatively flat compared to Q2 2004.
We experience currency translation gains or losses when we purchase items from
foreign countries (other than Malaysia) whose currencies are not pegged to the
U.S. Dollar. Historically, these gains and losses have been insignificant and
therefore we do not expect any significant losses in the future. Our effective income tax rate on our US income was 32% in Q2 2005 compared
to an effective income tax rate of 17% for Q2 2004. The increase in the
effective tax rate in Q2 2005 is primarily due to the net income from our U.S.
operating segment, East Coast Sales Company. This net income will absorb a
portion of our federal net operating loss carryforward. Deferred tax expense
amounted to $54,874 in the second quarter of fiscal 2005. We expect to realize the
full benefit of our net operating loss carryover by fiscal 2010. Discontinued Operations On February 1, 2001, the Company adopted a formal plan to sell Fuji
Fabrication, SDN, BHD. On October 1, 2001, the assets of Fuji Fabrication,
which consisted primarily of inventory and equipment, were sold for $290,547
and we assumed a note for the full amount of the selling price. On October 1,
2002 we recast the note for $396,693, which included the sales of additional
inventory and previously accrued interest. Interest on the note is stated at
10% (annually) and was payable in 12 monthly installments. On July 1, 2003 we
received $32,500 in equipment which was offset against the note receivable at
July 31, 2003. The note was




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##### Table of Contents



payable in full on September 30, 2003. On October 1, 2003, the payee, G Com
Net, defaulted on the note and we ultimately wrote off the remaining note
balance of $364,193. Fuji Fabrication had no sales for the three months ended July 31, 2003.
General and administrative expenses for the three months ended July 31, 2003
totaled $269. The company ceased Fujis operations on October 31, 2003. First Half of Fiscal 2005 Compared to First Half of Fiscal 2004 The following table sets forth certain consolidated statements of income data
as a percentage of net revenue for the periods indicated: Six Months EndedJuly 31, 2004
    
    July 31, 2003Net revenues
    
    
    100.00
    %
    
    
    100.00
    %Cost of sales
    
    
    44.96
    %
    
    
    37.89
    %Gross margin
    
    
    55.04
    %
    
    
    62.11
    %Selling, general and administrative expenses
    
    
    53.86
    %
    
    
    54.68
    %Amortization & impairment of acquisition-related intangibles
    
    
    1.23
    %
    
    
    1.53
    %Operating income (loss)
    
    
    (0.05
    %)
    
    
    5.90
    %
 Our net revenue for the first half of fiscal 2005 of $2,444,213 was up
approximately 25% compared to the first half of fiscal 2004, primarily due to
the increase in demand for our diamond cutting tools and ceramic products used
by the airline security manufacturing industry. Net revenue for our diamond
tool segment increased 75% compared with first half of fiscal 2004 which is
primarily due to higher sales volume and lower unit prices. Our contract
manufacturing revenues were down 1% compared with the first half of fiscal
2004, primarily due to the delays that were are experiencing with the
introduction of our new safety helmet. Our gross margin percentage for the first half of fiscal 2005 of 55% was
7% lower compared to 2004. The gross margin for our diamond tool segment of
48% was slightly lower compared to 51% during the first half of fiscal 2004,
which was primarily due to increase material cost and lower margins; our gross
margin for our ceramics division decreased to 55% compared to 56% in the first
half of fiscal 2004, which was primarily due to slightly higher labor costs; and
our gross margin for our contract manufacturing segment decreased, which was
primarily due to the allocation of certain overhead expenses. See Outlook
for a discussion of gross margin expectations. Ceramics
- East Coast Sales Company The revenue and operating income for the East Coast Sales Company
operating segment for the first half of 2005 and 2004 were as follows: July 31, 2004
    
    July 31, 2003Revenue
    
    $
    1,792,687
    
    
    $
    1,506,165Operating income
    
    $
    437,972
    
    
    $
    284,881
 The East Coast Sales Company operating segment is our ceramics division,
which experienced an increase in sales due to the increased demand from the jet
engine manufacturing industry and the airline security manufacturing industry.
Net revenues for this segment increased $286,522 or 19% in the first half of
fiscal 2005 compared to 2004. The increase in revenue was due to higher sales
of custom cut ceramics that are used in the manufacturing of jet engines
and airport security devices.




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##### Table of Contents



Net operating income for the East Coast Sales Company operating segment
increased by $153,091 or 54% compared to the first half of fiscal 2004
primarily due to the increase in demand from the industries mentioned above
and the allocation of certain overhead costs to DTI and SETO Technology. Diamond
Tools  Semicon Tools/DTI Technology The revenue and operating income for the diamond tool operating segment
for the first half of 2005 and 2004 were as follows: July 31, 2004
    
    July 31, 2003Revenue
    
    $
    460,775
    
    
    $
    262,573Operating loss
    
    ($
    239,400
    )
    
    ($
    163,457
    )
 Net revenue for the first six months of fiscal 2005 was up compared to
2004. The net operating loss for the first six months of fiscal 2005 increased
$75,943 or 46%, compared to 2004. The increase in the net operating loss from
the first six months of fiscal 2004 to 2005 was primarily due to lower margins
and increased selling expenses. Contract
Manufacturing  SETO Technology The revenue and operating income for the contract manufacturing operating
segment for the first half of 2005 and 2004 were as follows: July 31, 2004
    
    July 31, 2003Revenue
    
    $
    190,751
    
    
    $
    191,870Operating income (loss)
    
    ($
    199,694
    )
    
    ($
    5,604
    )
 Net revenue for the first half of fiscal 2005 was down slightly compared
to 2004. We are still experiencing delays with our new safety helmet and are
waiting for approval from Underwriters Laboratories. Operating loss for the
first half of fiscal 2005 increased $194,090 which was primarily due to
increased marketing, consulting and travel expenses we incurred regarding our
safety helmet and the allocation of certain overhead expenses from Semicon
Tools and East Coast Sales. Operating Expenses Operating expenses for the first half of fiscal 2005 and 2004 were as
follows: July 31, 2004
    
    July 31, 2003Selling, general and administrative expenses
    
    $
    1,316,404
    
    
    $
    1,071,997Amortization & impairment of acquisition-related intangibles
    
    $
    30,000
    
    
    $
    30,000
 Selling, general and administrative expenses increased $244,407 or 23%
compared to the first half of fiscal 2004. This increase was primarily due to
higher salaries and wages, consulting expense, insurance expense, depreciation
expense, travel expense and professional fees relating to the introduction of
our new safety helmet. Amortization and impairment of acquisition-related intangibles was $30,000
in the first half of fiscal 2005 and 2004. This expense is related to our
purchase of customer lists in 2002. If market conditions change and it is
deemed that the customer lists do not have any future benefit and become
impaired, we may write off the entire amount, which would have a negative
effect on our operating income.




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Interest and Other, Net Interest and other, net and taxes for the first half of fiscal 2005 and
2004 were as follows: July 31, 2004
    
    July 31, 2003Interest income
    
    $
    5
    
    
    $
    19,878Gain (loss) on sale of assets
    
    ($
    324
    )
    
    
    31,749Interest expense
    
    ($
    13,848
    )
    
    ($
    11,391
    )Foreign currency exchange loss
    
    ($
    710
    )
    
    ($
    606
    )Provision for income taxes
    
    $
    72,405
    
    
    $
    27,511
 In the first half of fiscal 2005, interest income decreased primarily due
to the absence of the payments we received on our note receivable from G-Com
Net in the first half of fiscal 2004. Interest expense increased $2,457 or 22%, to $13,848 in first six months
of 2005 compared to $11,391 in 2004. This increase was primarily due to us
drawing down on our line-of-credit during the first six months of fiscal 2005.
See Financial Condition section for a more detailed discussion of our
financing activities. Foreign currency exchange loss was relatively flat compared to the first
six months of fiscal 2004. We experience currency translation gains or losses
when we purchase items from foreign countries (other than Malaysia) whose
currencies are not pegged to the U.S. Dollar. Historically, these gains and
losses have been insignificant and therefore we do not expect any significant
losses in the future. Our effective income tax rate on our US income was 33% in the first six
months of fiscal 2005 compared to an effective income tax rate of 18% for 2004.
The increase in the effective tax rate in first six months of fiscal 2005 is
primarily due to the net income from our U.S. operating segment East Coast
Sales Company. This net income will absorb a portion of our federal net
operating loss carryforward. Deferred tax expense amounted to $67,905 during
the first six months of fiscal 2005. We expect to realize the full benefit of
our net operating loss carryover by fiscal 2010. Discontinued Operations On February 1, 2001, the Company adopted a formal plan to sell Fuji
Fabrication, SDN, BHD. On October 1, 2001, the assets of Fuji Fabrication,
which consisted primarily of inventory and equipment, were sold for $290,547
and we assumed a note for the full amount of the selling price. On October 1,
2002 we recast the note for $396,693, which included the sales of additional
inventory and previously accrued interest. Interest on the note is stated at
10% (annually) and was payable in 12 monthly installments. On July 1, 2003 we
received $32,500 in equipment which was offset against the note receivable at
July 31, 2003. The note was payable in full on September 30, 2003. On October
1, 2003, the payee, G Com Net, defaulted on the note and we ultimately wrote
off the remaining note balance of $364,193. Fuji Fabrication had no sales for the six months ended July 31, 2003.
General and administrative expenses for the six months ended July 31, 2003
totaled $1,608. The company ceased Fujis operations on October 31, 2003. Financial Condition Our financial condition remains strong. At July 31, 2004, cash totaled
$191,787, up from $45,037 at January 31, 2004. At July 31, 2004, total
short-term and long-term debt was $1,168,171, an increase of $454,771 compared
to January 31, 2004. These increases are attributable primarily to us drawing
down $373,050 on our line of credit, which was used to fund our investments in
Prestan Products LLC and Slamdance Media Group LLC. At July 31, 2004, total
debt represented 53% of stockholders equity.




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For the first six months of fiscal 2005, cash provided by operating
activities was $73,403, compared to $314,225 in 2004. This decline was mainly
due to the increase in our accounts receivable balance from January 31, 2004 to
July 31, 2004 compared to a decrease in accounts receivable from January 31,
2003 to July 31, 2003. Cash was provided by net
income adjusted for non-cash related items. Working capital uses of cash
included an increase in accounts receivable, prepaid expenses and other assets.
For the first six months of fiscal 2005, our three largest customers accounted
for approximately 63% of net revenue, with one of these customers accounting
for approximately 34% of net revenue. At July 31, 2004, these three largest
customers accounted for approximately 56% of net accounts receivable. We used $358,532 in net cash for investing activities during the first six
months of fiscal 2005, compared to $38,013 during 2004. The increase in cash
used for investing activities as compared to the first six months of fiscal
2004 was due to the investments made in Prestan Products LLC and Slamdance
Media Group LLC. Capital expenditures for the first six months of fiscal 2005
decreased $50,441 compared to fiscal 2004. We anticipate capital expenditures
of $200,000 for fiscal 2005. Cash provided by financing activities amounted to $330,166 in the first
six months of fiscal 2005, compared to cash used by financing activities of
$620,372 in 2004. The major financing source of cash was the $373,050 we
drew down on our line of credit to finance the two investments we made in June.
The major financing uses of cash for the first six months of fiscal 2005 and
2004 were the repayment of long-term debt and repurchase of our common stock.
In first six months of fiscal 2005, we purchased 219,200 shares of our common
stock for $38,134. We have a potential source of liquidity from authorized
borrowings in the form of a line of credit with a U.S. financial institution
for $1.2 million. At July 31, 2004, we had $430,030 available for use from
this line of credit. We believe that we have the financial resources needed to meet our
anticipated business requirements for the next 12 months, which includes capital
expenditures for the expansion or upgrading of our manufacturing capacity and
working capital requirements. Risk Factors Our activities may require additional financing, which may not be
available on acceptable terms, if at all. As our business expands, we expect to increase our expenses for sales,
marketing and product development efforts. Although there can be no assurance,
we believe that we have sufficient capital resources from operations and our
line of credit to finance our operational requirements through January 31,
2005. If we incur operating losses, or if unforeseen events occur that would
require additional funding, we may need to raise additional capital or incur
debt to fund our operations. We would expect to seek such capital through
sales of additional equity or debt securities and/or loans from banks, but
there can be no assurance that such funds will be available to us on acceptable
terms, if at all. Failure to obtain such financing or obtaining it on terms not
favorable to us could have a material adverse affect on future operating
prospects and continued growth, as well as diluting investors in an offering. Approximately 63% of our sales for the six months ended July 31, 2004 were
generated from three (3) customers and, accordingly, the loss of any one such
customer could adversely affect our sales. As of July 31, 2004, three customers accounted for 63% of our sales. We
are seeking to broaden our customer base by introducing new products and
introducing a new cutting blade; however, no assurance can be given that our
efforts will be successful or that these three customers will not continue to
account for a large concentration of our sales. The loss of one or more of
these three customers, or any other customer that accounts for a significant
portion of our sales, could materially adversely affect our business, operating
results, and financial condition. We depend heavily on our executive officers and would have difficulty
replacing them. Our future success depends to a significant degree on the skills,
experience and efforts of our executive officers. We currently have employment
agreements with our executive officers, but the loss of these personnel could
materially adversely affect our business and our ability to achieve
profitability.




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




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We are required to file annual and quarterly reports with the SEC,
pursuant to the Securities Exchange Act of 1934, as amended, and the rules
promulgated there under. To the extent we do not file such reports timely, our
securities may not longer be permitted to be traded on the OTC Bulletin Board,
and would then be listed on the pink sheets. Such action would have an
adverse affect on our ability to raise additional funds in the future since
many potential investors will not invest in companies whose securities are
traded on the pink sheets. Outlook In general, as we look ahead to the second half of fiscal 2005, the
outlook continues to be uncertain, and we anticipate a year that will be
largely driven by the airline security, military, jet engine, semiconductor
industries, the need for personal safety devices as well as the global economy.
Although it is difficult to predict product demand for the rest of fiscal
2005, we expect a 10% to 15% decrease in revenue from our ceramic segment, East
Cost Sales Company. The outlook for the diamond tools industry is showing some
strength, and with the acceptance of our new three new cutting blades, sales
could increase 5%-15% during the next half of fiscal 2005. The diamond tool
industry is very dependent on the semiconductor industry, which over the last
three years has experienced economic decline and is now starting to show signs
of growth. The outlook for the contract manufacturing segment for the rest of
fiscal 2005 should be stronger than fiscal 2004. With the introduction of our
new personal safety devices, our joint venture with Prestan Products LLC, and
the hiring of a new national sales manager, sales for our contract
manufacturing segment could grow 20%-30% in the second half of fiscal 2005. In
this environment, revenue growth for our new safety helmet is largely dependent
on the commercial acceptance of our current designs and successfully marketing
the designs to the safety and rescue industries, which we can not assure. Our
investment in Slamdance Media Group LLC will allow us to diversify into another
industry. Investment income is largely dependent on the commercial success of
Slamdances entertainment products, which we cannot assure. Our financial results are substantially dependent on sales of ceramics and
related products by the East Coast Sales Company operating segment. Revenue is
partly a function of the mix of products we offer, all of which are difficult
to forecast. Because of the changing conditions throughout the world our
revenue is subject to the impact of economic conditions in various geographic
regions. Our gross margin expectation for the rest of fiscal 2005 is approximately
57% plus or minus a few points, which is a slight increase from the fiscal 2004
gross margin of 56%. Our gross margin varies depending on unit sales volumes
and product mixes. Our policy for valuation of inventory, including the
determination of obsolete inventory, requires us to estimate the future demand
for our products within six months or less. The estimates of future demand
that we use in the valuation of inventory are also used for near-term factory
planning. If our demand forecast is greater than actual demand and we fail to
reduce manufacturing output accordingly, we would likely be required to record
additional inventory reserves, which would have a negative impact on our gross
margin. Various other factors including unit sales volumes and new
technologies will also continue to affect cost of sales and the variability of
gross margin percentages. We do not expect net gains from equity securities for fiscal 2005. It is
not possible to know at the present time whether specific investments are
likely to be impaired or the extent or timing of individual impairments. At
July 31, 2004, we held non-marketable equity securities with a carrying value
of $325,000. The investments could fail. Their success (or lack thereof) is
dependent upon product development, market acceptance, operational efficiency
and other key business success factors. In addition, depending on their future
prospects, they may not be able to raise additional financings when needed or
they may receive lower valuations, with less favorable investment terms than in
previous financings, and the investments would likely become impaired.
However, we are not able to determine at the present time which specific
investments are likely to be impaired in the future, or the extent or timing of
individual impairments In fiscals 2003 and 2004 we improved our cutting blade facility and
updated our ceramics fabrication facility. We expect that capital spending
will be $200,000 for fiscal 2005 which is up from $156,319 in fiscal 2004. The
decrease is primarily due to the expected equipment needed to produce our new
safety helmet. If market demand does not grow or our new products are not
accepted, revenues and gross margins may also be adversely affected.




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Depreciation for fiscal 2005 is expected to be approximately $200,000,
compared to $196,501 in fiscal 2004. We expect amortization of other intangible assets to be approximately
$60,000 in fiscal 2005, as compared to $60,000 in fiscal 2004. As of July 31,
2004 amortization expense totaled $30,000. We review our acquisition-related intangible assets for impairment
whenever indicators of potential impairment exist. We also review goodwill for
impairment in the fourth quarter of each year, or earlier if indicators of
potential impairment exist. If we fail to deliver products, if our new
products fail to gain market acceptance, or if market conditions in the ceramic
business decline, our revenue and cost forecasts may not be achieved and we may
incur charges for impairment of goodwill. We expect our effective tax rate to be approximately 30% for fiscal 2005.
This estimate is higher than the rate in fiscal 2004, primarily due to the
anticipated increase in net income from our East Coast Sales Company operating
segment and the use of our available net operating loss carryover for federal
income tax purposes. The expected rate is based on current tax law and is
subject to change. Our future results of operations and the other forward-looking statements
contained in this Outlook section and in our Strategy and Critical
Accounting Estimates sections involve a number of risks and uncertainties, in
particular the statements regarding our strategies, our expectations regarding
new products, future economic conditions, revenues, gross margin and costs,
capital spending and depreciation and amortization. In addition to the factors
discussed above, among the other factors that could cause actual results to
differ materially are the following: business and economic conditions and
trends in the airline security business, jet engine manufacturers, microchip
industry, and safety industries in various geographic regions; possible
disruption in commercial activities related to terrorist activity and armed
conflict, such as change in logistics and security arrangements, and reduced
end-user purchases relative to expectations; the impact of events outside the
United States, such as the business impact of fluctuating currency rates,
unrest or political instability in a locale; changes in customer order
patterns; competitive factors and acceptance of new products in specific market
segments; pricing pressures; excess or obsolete inventory and variations in
inventory valuation and the spread of SARS illness could adversely affect our
business and our customer order patterns. We believe that we have the products, facilities, personnel and financial
resources for continued business success, but future revenues, costs, margins
and profits are all influenced by a number of factors, including those
discussed above, all of which are inherently difficult to forecast. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, including changes in currency
exchange rates and interest rates. We do not try to mitigate these risks by
utilizing derivative financial instruments or other risky strategies. A substantial majority of our revenue, expense, and capital purchasing
activities are transacted in U. S. dollars. However, we do enter into these
transactions in other currencies, primarily the Malaysian Ringgit. The
Malaysian Ringgit is pegged to the U.S. Dollar and is translated to U.S.
dollars for consolidated purposes. In first six months of fiscal 2005 we
reported a foreign currency exchange loss of $710, compared to a loss of $606
in 2004, neither of which materially impacted the financial statements. Inflation has not had a material effect on our revenues and income from
continuing operations in the past four years. Inflation is not expected to
have a material future effect.




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES Quarterly Controls Evaluation and Related CEO and CFO Certifications Within the 90 days prior to the date of this Quarterly report on Form
10-QSB, the company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures (Disclosure Controls), and its
internal controls and procedures for financial reporting (Internal Controls).
The controls evaluation was done under the supervision and with the
participation of management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO). Immediately following the Signature Page of this Quarterly Report are
certifications of the CEO and the CFO, which are required in accord with Rule
13a-14 of the Securities Exchange Act of 1934 (the Exchange Act). This
Controls and Procedures section includes the information concerning the
controls evaluation referred to in the certifications and it should be read in
conjunction with the certifications for a more complete understanding of the
topics.




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##### Table of Contents



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




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




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




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




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SIGNATURES Pursuant to the requirements of the Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereto
duly authorized. SETO Holdings, Inc.RegistrantBy: /s/ Eugene J. PianEugene J. Pian, PresidentPresident and Chief Executive OfficerDate: September 13, 2004
 In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated. /s/ Eugene J. PianEugene J. PianPresident and Chief Executive OfficerDate: September 13, 2004/s/ Craig A. PianCraig A. PianExecutive Vice President andChief Financial OfficerDate: September 13, 2004