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                           SECURITIES AND EXCHANGE COMMISSION
                                  WASHINGTON, DC 20549
                                       ___________

                                       FORM 10-KSB

(Mark One)
<S>  <C>  
[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934.

For the fiscal year ended July 31, 1997
                          ------------- 
                                           OR

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ______________________ to _____________________
 

                             Commission File Number 0-22964

                              SEL-DRUM INTERNATIONAL, INC.
                              ----------------------------
                     (Name of Small Business Issuer in Its Charter)

             Colorado                                            84-1236134
             --------                                            ----------
 (State or Other Jurisdiction of                   (I.R.S. Employer Identification No.)
  Incorporation or Organization)

 501 Amherst Street, Buffalo, New York                           14207-2913
 -------------------------------------                           ----------
(Address of Principal Executive Offices)                         (Zip Code)

                                     1-800-263-9356
                                     --------------
                     Issuer's Telephone Number, Including Area Code

     Securities registered under Section 12(b) of the Exchange Act:

            Title of Each Class          Name of Each Exchange on Which Registered
            -------------------          -----------------------------------------
                   None                                 None

     Securities registered pursuant to Section 12(g) of the Exchange Act:

                               Common Stock, no par value
                               --------------------------
                                   Title of Each Class

   Check whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such  reports),  and (2) has been subject to such filing
requirements for the past 90 days.   Yes [X]  No [ ]

   Check if there is no  disclosure  of  delinquent  filers in  response  to Item 405 of
Regulation S-B contained  herein,  and no disclosure  will be contained,  to the best of
registrant's  knowledge,  in definitive proxy or information statements  incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]

   The Issuer's revenues for the year ended July 31, 1997 were $16,619,967.

   As of October 22, 1997 there were 7,642,500  outstanding  shares of Common Stock,  no
par value.  The  aggregate  market value of the voting stock of the  registrant  held by
non-affiliates on October 22, 1997 based on the average bid and asked price on such date
was $105,067.

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ITEM 1.   DESCRIPTION OF BUSINESS
---------------------------------

General
-------

     Sel-Drum  International,   Inc.,  ("Sel-Drum"  or  the  "Company")  is  the
successor  corporation to Dakota Equities Ltd., a publicly-held "blind pool." On
February 1, 1995,  the Company  acquired all the  outstanding  common  shares of
Sel-Drum  Imaging  Corporation,  the  parent  corporation  of a  privately  held
Canadian  Corporation  which was founded in 1978. The Company's primary business
is the  distribution of high mortality copier  replacement  parts,  toners,  and
photoreceptors ("Drums"), including, to a limited extent, the remanufacturing of
Drums. On August 1, 1995, the Company added remanufactured facsimile and printer
cartridges to its product  offering  through its operations in Kelowna,  British
Columbia (the "Kelowna Facility").  The Company markets in the United States and
Canada  through a direct network of sales agents and  telemarketers.  Outside of
North  America,  the Company is represented  by several  distributors  and their
sales account for less than 5% of the total  revenues.  The Company  amalgamated
Micron Imaging  Corporation (now the Kelowna Facility) and Sel-Drum  Corporation
on November 1, 1996.

     On March 7, 1997, the Company and certain principal shareholders terminated
discussions  with JRCS  Corp.  regarding  the sale of  substantially  all of the
outstanding capital stock of the Company.

     On October 29, 1997,  the Company  announced  that it had hired  Raymond C.
Sparks  as its new  Chief  Executive  Officer  and  President,  replacing  Brian
Turnbull who has agreed to remain with the Company as a full-time consultant.

     Sel-Drum is a leading  independent  distributor  of high  mortality  copier
replacement parts and supplies. As one of the largest independent high mortality
copier parts distribution  companies in North America,  Sel-Drum provides a link
between parts  manufacturers,  sellers and buyers.  Sel-Drum is also  developing
strong  relationships  with  suppliers who seek advanced  inventory  management,
order processing and forecasting.

     Through its Sel-Drum Imaging  Corporation  subsidiary,  the Company has two
wholly owned  subsidiaries,  Sel-Drum  Corporation  (U.S.A.),  Inc. and Sel-Drum
Corporation.  Unless  otherwise  indicated,  all references to "Sel-Drum" or the
"Company"   include  the  Company,   Sel-Drum  Imaging   Corporation,   Sel-Drum
Corporation  and  Sel-Drum  Corporation  (U.S.A.),  Inc. It should be noted that
approximately  50% of the  Kelowna  Facility's  remanufactured  product  is sold
directly to the other operating divisions.  Sel-Drum Corporation (U.S.A.),  Inc.
and Sel-Drum  Corporation  employ a number of sales agents and telemarketers who
contact directly the copier machine dealers throughout North America.  There are
approximately  12,000 such dealers  marketing various brands of copier products.
The  Company  estimates  that the  potential  market  place  for high  mortality
replacements  parts,  drums and toner, not controlled by the Original  Equipment
Manufacturers ("O.E.M."s) to be approximately $675 million in North America.


  


<PAGE>



Company Strategy
----------------

     Through  flexibility in sourcing as well as customer  service,  the Company
continually strives to be a reliable,  innovative and cost-effective provider of
high mortality copier and facsimile component products to the approximately $675
million per year market in North  America.  The Company  believes there are also
significant   opportunities  in  the  European  and  Asia-Pacific  regions.  The
Company's strategy to accomplish these objectives includes the following:

          o    Provide high quality products and superior customer service.  The
               Company  maintains a detailed  and  extensive  quality  assurance
               program.  The Company also requires that both its  affiliated and
               unaffiliated  suppliers  conform to Company  customer quality and
               standards.  The  Company  intends to  continue  its  strategy  of
               demanding high quality from its vendors.

         o     Improve remanufacturing flexibility. Management believes that the
               Company  is the  only  copier  parts  distributor  with  internal
               manufacturing and remanufacturing  support.  Although to date the
               Company's  manufacturing  facility in Kelowna,  British  Columbia
               (the "Kelowna  Facility")  has been  under-utilized,  the Company
               intends to increase the  utilization  of its Kelowna  Facility to
               remanufacture printer and facsimile cartridges.  The Company also
               intends  to  reemphasize  the  Kelowna  Facility's   distribution
               capabilities  to service its existing  customers in Western North
               America.  To achieve this strategy,  the Company  intends to make
               capital  expenditures  in its Kelowna  Facility of  approximately
               $200,000.

          o    Increase  sales  outside  of North  America.  As a result  of the
               recent  hiring of a new Chief  Executive  Officer/President,  the
               Company's  founder,  Brian  Turnbull,  will focus his  efforts on
               expanding the Company's international sales. The Company believes
               that  Mr.  Turnbull's   significant  experience  and  network  of
               customers  will serve to enhance the  Company's  sales outside of
               North America, although no assurances can be given that this will
               occur.

         o     Establish integrated data system.  An integrated data system will
               permit the  Company's  employees to access  information  on stock
               availability,  pricing  and order  status,  and to perform  order
               entry on a real time basis from anywhere in the world. The system
               will facilitate immediate drop shipment from Burlington,  Ontario
               or  Kelowna,  British  Columbia  to  customers  throughout  North
               America and overnight  fulfillment of European  customer  orders.
               The  anticipated  system will provide direct  customer  access to
               Sel- Drum's central inventory management and retrieval system. In
               addition,  the  Sel-Drum  order entry system will be available on
               the  Internet  and  should  enable   customers  to  review  parts
               availability,  place orders and check order status.  To date, the
               system has not been  implemented  and no assurances  can be given


                                      - 2 -


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               that such a system will be implemented or if implemented  whether
               such system will be  successful.  The Company  estimates the cost
               associated  with  the  establishment  of  such a  system  will be
               approximately $200,000.

         o     Seek qualified acquisition candidates.  The copier, facsimile and
               printer  component  parts  industry is extremely  fragmented  and
               undergoing  consolidation.  Although the Company is not presently
               engaged  in  discussion,  part  of  its  strategy  is to  acquire
               existing smaller  companies within its industry segment with whom
               the  Company  believes  economies  of scale can be  obtained.  No
               assurances can be given that the Company will be able to identify
               suitable   acquisition   candidates;   or,  if   identified   and
               successfully completed,  whether such acquisition candidates will
               provide the economies of scale the Company is seeking.

         o     Obtain  Nasdaq  Stock Market  listing.   The Company's management
               intends to refocus its effort on obtaining  listing on the Nasdaq
               Small Cap Market system. The Company's management recognizes that
               it is  substantially  more  difficult for investors to dispose of
               securities or to obtain  accurate  quotations as to securities in
               the OTC Bulletin  Board Service.  As a longer term strategy,  the
               Company  intends to apply to list the  Company's  Common Stock on
               the Nasdaq Small Cap Stock Market.  To date, the Company does not
               meet the  necessary  minimum bid price per share or public  float
               criteria  required by Nasdaq for listing on the Small Cap Market.
               In the event the Company is unsuccessful obtaining listing on the
               Nasdaq  Small  Cap Stock  Market,  it may seek  listing  on other
               regional  exchanges  or  national  exchanges.  There  can  be  no
               assurance that any  application  for listing on any exchange will
               be  approved  or that a  market  for  the  Common  Stock  will be
               obtained.

     As a result of the Company's strategy to promote superior customer service,
increase  sales outside of North America,  establish an integrated  data system,
seek qualified acquisition  candidates,  and obtain Nasdaq Stock Market listing,
the Company believes it is well positioned to increase sales and  profitability.
The Company's  strategy is subject to certain  conditions outside of its control
and  no  assurances  can be  given  that  the  Company  will  be  successful  in
implementing   any  or  all  of  its  corporate   objectives.   See  "Investment
Considerations."

Copier, Facsimile, and Printer Parts Distribution
-------------------------------------------------

     Management  believes  Sel-Drum  is  one of the  largest  independent  North
American  distributors of high mortality copier parts,  drums, toner and related
supplies,  serving  both  the  commercial,   institutional  and  general  copier
after-markets. Product lines distributed by Sel- Drum include a variety of other
supplies.  Sel-Drum purchases these new parts from suppliers for its own account
and resells such parts to its  customers,  which include  commercial  customers,
governmental agencies and other distributors.


                                      - 3 -



<PAGE>



     The Company  distributes  high mortality copier parts from customer service
centers located throughout North America,  and to a limited extent in Europe and
the Asia-Pacific region.  Although the Company intends to refocus its efforts on
developing  markets  outside of North  America,  to date sales  outside of North
America  account for less than 5% of total  sales.  Field sales  representatives
located in each of these regions call upon current and potential  customers on a
regular basis to solicit orders and provide product and operational information.
Each service center is staffed to receive and process  telephone,  facsimile and
mail orders.  A majority of the parts  distributed by the Company are located in
its Buffalo,  New York warehouse  complex,  with the remaining parts distributed
from the Company's Burlington, Ontario and Kelowna, British Columbia facilities.

     Management  believes that this diversity  distinguishes  Sel-Drum from most
other distributors  which carry a narrower range of products.  Over 2,500 unique
part numbers are sold to approximately 4,500 customers.

     Through Densigraphix of Montreal,  Quebec, the Company markets its products
in the province of Quebec. Densigraphix is a significant distributor of toner to
the reprographics  industry. The Company markets some of the Densigraphix toners
outside of Quebec, Canada. In August 1995, the Company introduced remanufactured
cartridges  for the facsimile  and printer  market.  Many of these  products are
marketed by the copier dealers already marketing the Company's  products.  It is
estimated that 75 million  cartridges  will be sold to the North American market
by all North  American  distributors  in 1998, and  approximately  25 million of
these will be re-charged units.

     Through MKG  Cartridge  Systems Inc.,  Mississauga,  Ontario,  Canada,  the
Company markets  remanufactured  cartridge  products to the industry's  dealers,
vendors and resellers in North America. It is anticipated that this product line
will represent more than 11% of the Company revenues in this coming fiscal year.

Sales and Marketing
-------------------

     The  Company  markets  and  inventories  a line  of  2,500  high  mortality
replacements  parts,  Drums,  toner,  and  remanufactured  facsimile and printer
cartridges. The Company recently added coin-ops for copier and vending machines,
keycounters, key pads and other related accessories. Sel-Drum emphasizes breadth
of product  offering,  competitive  pricing,  attention to customer  service and
value-added     functions     through    advanced    systems    and    inventory
management/logistics  applications.  Sel-Drum's  parts  distribution  operations
serve the different  requirements of both the commercial  copier and the general
copier after-market sectors.

     Sel-Drum's  commercial and institutional  copier parts  distribution  sales
operations conduct direct sales and marketing efforts through a team of regional
sales  managers  and  field  sales   representatives  who  meet  regularly  with
Sel-Drum's  major  customers.  Their  function  is not only to sell and  provide
technical  support  for  existing  products  but  also to work  with  Sel-Drum's
customers and with suppliers in order to identify new market opportunities.


                                      - 4 -



<PAGE>

     The  commercial  and  institutional  parts   distribution  sales  operation
conducts much of its parts purchasing  activities  through annual or longer term
purchase  orders  with  a strong  emphasis  upon  customer  service.  Management
believes  that  Sel-Drum's  and its  focus  on  service  provide  a  competitive
advantage in serving its customers.

     Sel-Drum's general copier parts  distribution  operations sell through both
employee and third-party sales  representatives  to meet customer  requirements.
The general  copier  parts  distribution  staff works  closely with the regional
sales  staff  and the  inventory  provisioning  group to ensure  that  inventory
availability and customer service levels are maintained.  Frequent  meetings are
conducted  with  suppliers  to  provide  new  product  introductions  as well as
marketing and sales training.

     Sel-Drum  warrants its products to its Customers which does not represent a
material cost to the Company.

Seasonality of Business
-----------------------

     Although  there is no  significant  fluctuation  in the  flow of  business,
revenues are generally  lower during the Company's  fourth fiscal  quarter.  The
Company  believes  this occurs due to school  closings  and  governments  summer
recess because those  institutional  customers are significant  users of copying
machines producing high volumes of copies and the recurring need for replacement
parts.

Competition
-----------

     Sel-Drum's  primary  competitors for sales of copier parts and supplies are
other  independent  distributors  and  the  OEMs.   While Sel-Drum  historically
competed in the parts distribution sector on the basis of price and availability
of parts,  management  believes  that a primary basis for competition today, and
a key  differentiating  factor in  the  future,  will be the  ability  to  offer
value-added  services  to  accommodate customers, such as broad-based  inventory
management services and sophisticated systems capability.

Employees
---------

     At July 31, 1997,  Sel-Drum  employed  approximately 71 full time employees
located  in  the  United  States  and  Canada.  The  Company  has  no  employees
represented  by unions.  The Company  believes  that its  relationship  with its
employees is satisfactory.

New Chief Executive Officer
---------------------------

     The Company  recently  announced that it had hired Raymond C. Sparks as its
new CEO and  President.  Mr.  Sparks  replaces  Brian  Turnbull,  the  Company's
founder,  who will remain with the  Company as a full-time  consultant  and will
devote much of his efforts toward  transitioning his prior  responsibilities  as
well as developing sales outside of North America. From 1993 to 1997, Mr. Sparks


                                   - 5 -

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was the President,  Chairman of the Board and Chief Executive Officer of Village
Green Bookstores, Inc., a publicly-held specialty retailer. Mr. Sparks has eight
years of public  accounting  experience  in South  Africa with Ernst & Young and
later,  with Webb & Company.  Since  1979,  Mr.  Sparks has been  engaged in the
retail  industry,  primarily  in  supermarket  and  specialty  stores,  in  both
operational  and financial  capacities.  Mr.  Sparks was Financial  Director for
Burlington Industries in Cape Town until 1983. From 1983 to 1987, Mr. Sparks was
Divisional  Financial  Manager for Checkers  Supermarkets Ltd. in Cape Town. Mr.
Sparks moved to the United States in 1987, and became Chief Financial Officer of
Checkers Restaurants,  Brooklyn,  New York. In 1989, he was named Vice President
of Finance at Tie Rack (U.S.) Inc. Mr. Sparks was the Chief  Operating and Chief
Financial  Officer  of Burke & Burke  (New  York) in 1991.  Mr.  Sparks was Vice
President of Conston  Corporation,  an apparel  retailer located in Philadelphia
before he joined Village Green in June 1993.  Mr. Sparks holds the  professional
qualification of Chartered Accountant  (C.A.(S.A.)),  and was awarded a Bachelor
of Commerce  (with honors)  degree in Financial  Accounting by the University of
Cape Town, South Africa.

Forward-Looking Information
---------------------------

     This document  contains,  and other  materials  filed or to be filed by the
Company with the Commission which are incorporated by reference  herein, as well
as information  included in oral statements or other written  statements made or
to be made by the Company, contain or will contain or include, disclosures which
are  forward-looking  statements  within  the  meaning  of  Section  27A  of the
Securities Act of 1934, as amended (the "Act"),  and Section 21E of the Exchange
Act. Such  forward-looking  statements  address,  among other things,  strategic
initiatives  (including  plans for enhancing the Company's  business through new
acquisitions,  information technology systems,  sales strategies,  market growth
plans,  margin  enhancement  initiatives,  capital  expenditures,  and financing
sources).  Such  forward-looking  information is based upon management's current
plans or expectations and is subject to a number of uncertainties and risks that
could significantly affect current plans,  anticipated actions and the Company's
future financial  condition and results.  These uncertainties and risks include,
but are not  limited to,  those  relating to  successfully  managing  program to
acquire and integrate new  companies,  including  technical  services  risks and
uncertainties  relating to conducting  operations in a competitive  environment;
delays,  technological  changes,  management  transitions and employment issues;
debt service  requirements  (including  sensitivity  to  fluctuation in interest
rates and foreign currency); and general economic conditions.  As a consequence,
current plans,  anticipated  actions and future financial  condition and results
may differ from those expressed in any forward-looking  statements made by or on
behalf of the Company.

Investment Considerations
-------------------------

     The  following  factors  are  important  and  relevant   considerations  in
evaluating  the  business  of the  Company  and a  potential  investment  in the
Company's securities.

     PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK. Some portion of the Company's
common  stock  currently  trades on the NASD's OTC Bulletin  Board.  The Company
intends  to apply to list the  Common  stock on the  Nasdaq  Small Cap Market or
regional or national exchange, if denied listing on such market. There can be no


                                   - 6 -

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assurance that a market for the Common Stock will develop or be sustained.  As a
result,  purchasers of the Company's  securities may have  difficulty in selling
such securities should they desire to do so.

     COMMON STOCK ELIGIBLE FOR RESALE.  Of the 7,642,500  shares of Common Stock
presently  outstanding,  over 7,400,000  shares are "restricted  securities" and
under  certain  circumstances  may be sold in  compliance  with Rule 144 adopted
under the Securities  Act. Future sales of such shares are likely to depress the
market price of the Company's  Common Stock,  which would have an adverse effect
on the value of the Company's securities.

     ABILITY TO RESPOND TO RAPID  CHANGE.  The  Company's  future  success  will
depend  significantly on its ability to enhance its current products and develop
or  acquire  and  market  new  products  which  keep  pace  with   technological
developments and evolving industry standards as well as to respond to changes in
customer  needs.  The failure of the  Company's  management to adapt to changing
technological  and  business  conditions,  as  well  as the  growth  of its  own
business,  results of operations  and prospects,  would have a material  adverse
effect on the Company's business.

     MANAGEMENT TRANSITION; DEPENDENCE UPON KEY PERSONNEL. The Company's success
will  depend in large  measure  on the  efforts of key  senior  management.  The
Company recently  announced that it had hired Raymond C. Sparks as its new Chief
Executive  Officer  and  President,   replacing  the  Company's  founder,  Brian
Turnbull.  Mr.  Turnbull has agreed to remain as a consultant to the Company and
will  devote a  substantial  amount  of time  working  on the  Company's  export
business and transitioning his prior  responsibilities  over to Mr. Sparks.  The
loss of the  services  of Mr.  Turnbull  or Mr.  Sparks or the loss of other key
personnel could have a material adverse effect on the Company.

     MANAGEMENT  OF GROWTH.  The Company has  recently  experienced  a period of
growth and if such growth continues into the future, a significant strain may be
placed on the Company's  management and other  resources.  The Company's  future
performance  will  depend  in part  on its  ability  to  manage  changes  in its
operations  and will  require  the  Company to hire  additional  management  and
technical  personnel,  particularly in the marketing and customer support areas.
In addition,  the Company's  ability to manage  changes in its  operations  will
require it to continue to improve its operational  and financial  control system
and to  attract,  train,  motivate,  manage  and retain  key  employees.  If the
Company's  management were to become unable to manage growth  effectively,  that
would have a  material  adverse  effect on the  Company's  financial  condition,
prospects and operating results.

     POTENTIAL  UNSPECIFIED  ACQUISITIONS.  The Company is currently considering
acquiring  other  smaller  businesses  within  its  industry  segment  from whom
economies  of scale can be  achieved.  In the event the  Company  determines  to
acquire such  businesses  or assets,  investors may not have an  opportunity  to
review  the  financial  statements  of  such  businesses  or  to  vote  on  such
acquisitions. To date, the Company has not identified any acquisition candidates
and no assurances can be given that any such  acquisitions will occur or if they
occur whether such  acquisitions will provide the economies of scale the Company
desires from such candidates.


                                      - 7 -



<PAGE>


     COMPETITION.   The  high   mortality   copier  parts   business  is  highly
competitive.  The Company  believes  that  competition  in the industry is based
principally  upon experience,  quality,  prices and the ability to meet customer
delivery  requirements.  Prior competition in the industry affects the Company's
ability to increase prices on certain products and, in some cases,  subjects the
Company  to  pressure  from its  customers  to  reduce  prices.  While  recently
committing its efforts to improve its  remanufacturing and assembly processes to
permit the  Company to reduce  costs  through  operating  efficiencies,  thereby
improving  profitability,  there can be no  assurances  that these  efforts will
serve to  improve  productivity  and  profitability.  Additionally,  some of the
Company's  competitors  have greater  financial  resources  than the Company and
there can be no assurance  that the Company will be able to compete  effectively
with these competitors.

     CONTROL BY MANAGEMENT.  Management holds approximately 86.60% of the Common
Stock of the Company.  As a result,  management  is in a position to control the
management and policies of the Company,  including, but not limited to, electing
or removing the Company's Board of Directors,  changing the core business of the
Company,  causing or restricting the sale of the Company, causing the Company to
engage in transactions  with affiliated  companies and controlling the Company's
dividend policy.

     RELIANCE ON QUALITY  CONTROL OF  UNAFFILIATED  MANUFACTURERS.  Although the
Company  believes  that it  maintains  good  control  with  respect  to  product
specifications  and  quality,  there  can  be  no  assurance  that  unaffiliated
manufacturers  become  unable  or  unwilling  to  continue  to  manufacture  the
Company's  distributed  products that are consistent with the Company's  quality
and  performance  standards.  In  this  regard,  the  Company  has  occasionally
received, and may in the future receive,  shipments of product from unaffiliated
manufacturers of products that fail to conform to the Company's  quality control
standards or are not timely  delivered.  Although  shipments  from  unaffiliated
manufacturers of products that failed to conform to the Company's standards have
not materially affected the Company's  operation,  there cannot be any assurance
that such  failure  in the  future  would not  materially  adversely  affect the
Company's results of operations or its reputation in the marketplace.

ITEM 2.   DESCRIPTION OF PROPERTY
---------------------------------

     As of July 31, 1997, the Company was utilizing  approximately 45,300 square
feet of warehouse and manufacturing space and approximately 6,700 square feet of
office, administrative,  training and sales space. The Company believes that its
properties are adequate for its needs. Information with respect to the principal
facilities used by Sel-Drum is set forth below:









                                   - 8 -



<PAGE>



ADDRESS                           PRIMARY USE                    
                                                            
501 Amherst Street           (1)  Registered Headquarters   
Buffalo, N.Y. U.S.A.              and U.S.A. Distribution   
                                                            
1370 Artisans Court          (2)  Executive and             
Burlington, On. Canada            Administration Facilities 
                                  Canadian Distribution     
                                                            
1910 Dayton Street           (3)  Manufacturing Facility    
Kelowna, B.C., Canada                                       
                                                            
1944 Dayton Street           (4)  Distribution Center       
Kelowna, B.C., Canada                                       
                                                            
1890 Dayton Street           (5)  Distribution Center       
Kelowna, B.C., Canada       

(1) The Company established its U.S.A. distribution facilities in 1982, which it
has agreed to lease through March 1998 at an annual rental of $38,000.00

(2) Established in 1978 as the executive and  administrative  offices,  together
with the distribution  center for product within Canada.  The Company has agreed
to lease the property through February 2002 at an annual rental of $85,000.00.

(3) The Kelowna  Facility  occupies  three  properties,  one owned by a director
Robert  Asseltine and the others by third parties.  The lease with Mr. Asseltine
is month to month and has an annual rent of approximately $47,500.


ITEM 3.   LEGAL PROCEEDINGS
---------------------------

     As of July 31, 1997, there are no known material legal proceedings  against
the Company or any of its officers and directors.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------------------------------------------------------------

     No matters  were  submitted  to a vote of the  security  holder  during the
fourth fiscal quarter of 1997.









                                   - 9 -



<PAGE>

                                     PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------------------------------------------------------------------

     The Common Stock of the Company  began  trading on the OTC  Bulletin  Board
June 20th,  1995  under the symbol  "SDUM".  The OTC  Bulletin  Board is an NASD
sponsored  and  operated  inter-dealer  automated  quotation  system  for equity
securities  not included in the Nasdaq  system.  The OTC Bulletin Board has only
recently  been   introduced  as  an  alternative  to  "pink  sheet"  trading  of
over-the-counter securities.  Consequently, the liquidity and stock price of the
Company's securities in the secondary market may be adversely affected. There is
no assurance that a regular trading market will develop for any of the Company's
securities or that, if developed,  any such market will be sustained.  Moreover,
there can be no assurance that the Company's securities will be listed on Nasdaq
or any national  securities  exchange  following the  consummation of a Business
Combination.  The range of high and low bid quotations for the Company's  Common
Stock for the most  recently  completed  Fiscal Year were obtained from the NASD
and are provided below.  The volume of trading in the Company's Common Stock has
been limited and the bid prices  reported may not be  indicative of the value of
the Common Stock or the existence of an active trading market.

                               COMMON STOCK PRICE

  First Quarter       Second Quarter       Third Quarter       Fourth Quarter
----------------     ---------------      ---------------     ---------------
 High      Low        High     Low         High      Low       High      Low
 ----      ---        ----     ---         ----      ---       ----      ---
$.6865    $.6865     $1.00    $.6865      $.25      $.125     $.5625    $.125

On  October  22,  1997  there were  approximately  357  holders of record of the
Company's common stock. The number of shares issued was 7,642,500.

     The Company has not paid a dividend  with  respect to its Common  Stock nor
does the Company anticipate paying dividends in the foreseeable future.

ITEM 6.   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
          OF OPERATIONS.
          --------------

     The  Company  markets  and  inventories  a line  of  2,500  high  mortality
replacement  parts,  Drums,  toner,   facsimile  and  printer  cartridges.   The
replacement  parts  are  principally  manufactured  in Japan and  Germany,  many
exclusively to the Company's  specifications.  Facsimile and printer  cartridges
are manufactured for the Company for distribution to the copier dealer market in
North  America,   by  MKG  Mississauga,   Ontario,   Canada.  The  Company  also
remanufactures facsimile and printer cartridges at its Kelowna Facility.






                                     - 10 -


<PAGE>



RESULTS OF OPERATIONS
---------------------

     The Company's  results of operations are affected by numerous  factors such
as general  economic  conditions,  competition and inventory  costs. The largest
component  of the  Company's  cost of sales is  inventory  cost,  which may vary
slightly from period to period based upon timing of purchases  which  indirectly
affect the Company's inventory costs.

     The following table sets forth for each of the periods  presented,  certain
income statement data for the Company expressed as a percentage of net sales.

                                               Years Ended
                                               -----------
Statement of Operations Data         1997          1996          1995
----------------------------         ----          ----          ----
Net Sales                            100.0%         100.0%      100.0%
As a Percentage of Net Sales:
Cost of Goods Sold                    66.0%         65.8%         68.0%
Gross Profit                          34.0%         34.2%         32.0%
Selling, General and                  23.8%         24.7%         23.9%
Administrative Expenses
Provision for Bad Debt                  .5%           .3%           .3%
Income from Operations                 9.7%          9.2%          7.8%
Other Income (Expense)                 (.7%)         (.9%)        (1.3%)
Income Before Taxes                    9.0%          8.3%          6.5%
Net Income                             5.8%          5.2%          4.3%
                            

Year Ended 1997 Compared to Year Ended 1996
-------------------------------------------

     The Company's  distribution  centers in  Burlington,  Ontario  (Canada) and
Buffalo,  New York (USA),  continued to show strong  profit  margins  during the
fiscal year ended July 31,  1997 with each  facility  recording  32.2% and 36.6%
gross margins respectively.  The Company's Kelowna Facility, however, recorded a
loss in  absolute  dollars  of  approximately  $285,000  as a result of  limited
remanufacturing  production  of Drums.  During  Fiscal 1998,  in addition to the
remanufacture  of Drums,  the Company intends to utilize the Kelowna  Facility's
capacity to alleviate its current reliance upon third-party  remanufacturers  of
cartridges.  Additionally,  the Company intends to utilize  expected  additional
capacity for  distribution  of copier and facsimile  component  parts in Western
North America.  The Company anticipates fiscal 1998 capital expenditures related
to the  redeployment  of assets at the Kelowna  Facility to total  approximately
$200,000.

     Net sales for the year ended July 31,  1997 were $16.6  million as compared
with $14.8 million for the year ended July 31, 1996,  an increase of 12.2%.  The
increase in net sales is  principally  the result of steady  improvement  in the
copier and copier component  markets and an intensified  marketing effort within
the Company and its distribution channels.


                                   - 11 -



<PAGE>



     Gross profit margin for the year ended July 31, 1997 was 34.0%, as compared
to 34.2% for Fiscal 1996. As disclosed  above,  gross profit margins  reflect an
increase in profit margins in the Company's two distribution  centers located in
Burlington,  Ontario  and  Buffalo,  New  York,  and a loss  from the  Company's
manufacturing facility in Kelowna, British Columbia.

     Selling,  general, and administrative  expenses for the year ended July 31,
1997 increased 8.3% from the prior  comparable  period.  This increase  resulted
primarily  from  professional  and other  fees  associated  with the  terminated
negotiations  with JRCS described  earlier herein and legal and accounting costs
associated  with the  Company's  longer term  strategy to obtain  listing on the
Nasdaq Stock Market.

     As a result of the foregoing,  net income  improved by 25% from Fiscal 1996
to Fiscal 1997.

Year Ended 1996 Compared to Year Ended 1995
-------------------------------------------

     Net sales for the year ended July 31, 1996 were $14.8 million,  an increase
of $.6 million from the prior year's  revenues.  Gross profit for Fiscal 1996 of
$5.1 million (34.2%) compared  favorably to Fiscal 1995 of $4.5 million (31.7%),
an absolute dollar increase of 11.7%.  Margins continued to improve quarter over
quarter with a 2.5% improvement for Fiscal 1996 over previous Fiscal 1995.

     Selling and general and  administrative  expenses increased by $.26 million
in Fiscal 1996 from Fiscal  1995.  The  increases  in  expenses  were  primarily
additional sales  commissions and  telemarketers  added in the fourth quarter of
Fiscal 1996.

     The Company  changed its policy for the  handling of currency  transactions
between Sel- Drum Corporation and Sel-Drum Corporation (U.S.A.),  Inc. as stated
in the Form 10-KSB for Fiscal 1995. As a result,  the Company  enjoyed a $15,000
foreign exchange gain, and increased its interest income to $27,260. This income
off-set  interest  expense of $175,193 to a net  interest  expense of  $147,933,
compared to a net interest expense of $150,612 for the prior fiscal year. Income
before  taxes of $1.23  million  represented  an  increase of 35% from the prior
fiscal year.

     Taxes  incurred  in the  fiscal  year  ended  July 31,  1996 were  $458,663
resulting in net income of $770,187  and  earnings per share of $0.10  comparing
favorably  with fiscal year ended July 31, 1995 of  $613,900  and  earnings  per
share of $0.08.

Liquidity and Capital Resources
-------------------------------

     The  Company's  principal  capital  requirements  are to fund  its  working
capital needs and material inventory requirements and to fund the improvement of
facilities,  machinery and equipment.  Historically  the Company has used income
generated by operations as well as bank financing to fund these capital needs.


                                   - 12 -



<PAGE>



     Net cash provided by operating  activities  primarily represents net income
plus  changes in working  capital  positions.  Net cash  provided  by  operating
activities  for the  year  ended  July  31,  1997 was  $820,000.  The  Company's
arrangements with its North American  customers  typically provide that payments
are due within 30 days  following the date of the  Company's  shipment of goods,
while  arrangements with overseas  customers are generally on a letter of credit
basis.  Due to the  continuing  expansion  of the  Company's  sales,  management
believes that the Company's working capital requirements will increase.

     Net cash used for investing activities  represents purchases of property in
connection  with the start up of a facsimile  and printer  cartridge  production
operation at the Company's Kelowna, British Columbia facility.

     The Company  currently  has a revolving  demand loan  arrangement  with the
National Bank of Canada in the amount of  $2,683,240  (U.S.).  These  borrowings
generally  assist the Company with funding of accounts  receivable and inventory
purchases.  As of October  15,  1997  outstanding  borrowings  of  approximately
$400,000 (U.S.) net of current cash existed under this arrangement.

     Cash  flow  from  operations  coupled  with  cash  flow  generated  by bank
financing  has  provided  the Company  with the cash  necessary to meet its cash
requirements.  For the foreseeable  future, the Company anticipates cash outlays
in connection with the utilization of the Kelowna  Facility for  remanufacturing
printer  and  facsimile  cartridges  to be  $200,000.  The Company may expend an
additional  $200,000 in connection with hardware and software  upgrades relative
to the establishment of an integrated data system.  The Company's current credit
facility  requires  it to obtain the  written  consent of the  National  Bank of
Canada prior to making capital  expenditures during any fiscal year in excess of
$200,000. In connection with the foregoing anticipated capital expenditures, the
Company anticipates seeking such consent.

ITEM 7.   FINANCIAL STATEMENTS 
------------------------------

                                    CONTENTS
                                    --------

AUDITED CONSOLIDATED FINANCIAL STATEMENTS            PAGE
---------------------------------------------------------

     Independent Auditors' Report                    F-1

     Consolidated Balance Sheet                      F-2, F-3

     Consolidated Statements of Income               F-4

     Consolidated Statements of Changes
     in Shareholders' Equity                         F-5

     Consolidated Statements of Cash Flows           F-6

     Notes to Audited Consolidated
     Financial Statements                            F-7 - F-14


                                     - 13 -

<PAGE>





                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------




Shareholders and Board of Directors
Sel-Drum International, Inc. and Subsidiaries

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Sel-Drum
International,  Inc.  and  Subsidiaries  as of July 31,  1997,  and the  related
consolidated  statements  of income,  changes in  shareholders'  equity and cash
flows  for each of the two  years in the  period  ended  July  31,  1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  consolidated   financial  position  of  Sel-Drum
International,  Inc. and  Subsidiaries as of July 31, 1997, and the consolidated
results of their  operations and their  consolidated  cash flows for each of the
two years in the period  ended  July 31,  1997,  in  conformity  with  generally
accepted accounting principles.


                                     MENGEL, METZGER, BARR & CO. LLP


Rochester, New York
September 19, 1997












                                       F-1



<PAGE>

                  SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                  ---------------------------------------------
                           CONSOLIDATED BALANCE SHEET
                           --------------------------
                                  JULY 31, 1997
                                  -------------

                                     ASSETS
                                     ------
<TABLE>
<CAPTION>

<S>                                                               <C>                
CURRENT ASSETS
--------------
   Cash and cash equivalents                                      $         1,084,954
   Accounts receivable, net of allowance for doubtful            
    accounts of $72,504                                                     2,199,625
   Inventories                                                              3,143,472
   Refundable income taxes                                                     38,293
   Deferred income tax benefit                                                 25,000
   Other current assets                                                        81,485
                                                                 ---------------------
                                                                 
                                       TOTAL CURRENT ASSETS                 6,572,829
PROPERTY                                                         
--------                                                         
   Equipment                                                                1,357,641
   Vehicles                                                                    24,835
   Furniture and fixtures                                                      48,465
   Leasehold improvements                                                     414,114
                                                                 ---------------------
                                                                 
                                                                            1,845,055
   Less accumulated depreciation and amortization                             919,898
                                                                 ---------------------
                                                                 
                                                                              925,157
                                                                 
OTHER ASSETS                                                     
------------                                                     
   Organization costs, net of accumulated amortization of $5,479                9,096
   Purchased and developed technology, net of accumulated        
    amortization of $31,184                                                    55,840
   Deposits                                                                    17,496
   Loans receivable from related parties                                      115,421
                                                                 ---------------------
                                                                 
                                                                              197,853
                                                                 ---------------------
                                                                 
                                                                  $         7,695,839
                                                                 =====================
                                                                 
                                                                 
                                                                 
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>











                                     F-2

<PAGE>



                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------


CURRENT LIABILITIES
-------------------
   Current portion of long-term debt                             $       59,524
   Notes payable to bank                                              1,393,185
   Accounts payable                                                     628,999
   Other current liabilities                                            258,427
                                                                ----------------
                                                                
                                  TOTAL CURRENT LIABILITIES           2,340,135
                                                                
OTHER LIABILITIES                                               
-----------------                                               
   Deferred income taxes                                                 31,909
   Long-term debt                                                       109,072
                                                                ----------------
                                                                
                                                                        140,981
                                                                
SHAREHOLDERS' EQUITY                                            
--------------------                                            
   Preferred stock:                                             
    Class C                                                           1,280,048
    Class D                                                           3,520,132
                                                                ----------------
                                                                
                                                                      4,800,180
                                                                
   Common stock                                                         771,356
   Additional paid-in capital                                            11,915
   Cumulative foreign currency translation adjustment                  (113,311)
   Accumulated deficit                                                 (255,417)
                                                                ----------------
                                                                
                                                                      5,214,723
                                                                ----------------
                                                                
                                                                 $    7,695,839
                                                                ================
                                                             




















                                     F-3



<PAGE>

                 SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                 ---------------------------------------------

                       CONSOLIDATED STATEMENTS OF INCOME
                       ---------------------------------
<TABLE>
<CAPTION>

                                                          Year Ended July 31,
                                                  -----------------------------------

                                                       1997                 1996
                                                  --------------       --------------
<S>                                                <C>                  <C>         
Net sales                                          $ 16,619,967         $ 14,811,891

Cost of goods sold                                   10,968,448            9,746,252
                                                  --------------       --------------

                                     GROSS PROFIT     5,651,519            5,065,639

Selling, administrative and general expenses          3,954,952            3,651,045

Provision for doubtful accounts                          75,089               47,960
                                                  --------------       --------------

                           INCOME FROM OPERATIONS     1,621,478            1,366,634

Other income (expense):
   Interest income                                       22,851               27,260
   Interest expense                                    (129,361)            (175,193)
   Loss on disposal of property                         (24,551)              (4,869)
   Foreign currency transaction gain                      9,495               15,018
                                                  --------------       --------------

                                                      (121,566)             (137,784)
                                                  --------------       --------------

                       INCOME BEFORE INCOME TAXES     1,499,912            1,228,850

Income taxes (benefit):
   Current                                              531,155              463,210
   Deferred                                               6,903               (4,547)
                                                  --------------       --------------

                                                        538,058              458,663
                                                  --------------       --------------

                                       NET INCOME  $    961,854         $    770,187
                                                  ==============       ==============

Earnings per common share                          $        .13         $       .10
                                                  ==============       ==============


The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>








                                     F-4



<PAGE>

                             SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                             ---------------------------------------------

                      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                      ----------------------------------------------------------
<TABLE>
<CAPTION>

                                                                       Cumulative
                                                                        Foreign
                                                        Additional     Currency                          Total
                           Preferred       Common        Paid-in       Translation    Accumulated     Shareholders'
                            Stock          Stock         Capital       Adjustment       Deficit         Equity
                         -----------    -----------    -----------    -----------     -----------     -----------
<S>                      <C>            <C>            <C>            <C>             <C>             <C>        
Balance at
 August 1, 1995          $ 4,800,180    $   740,356    $    11,915    $  (110,532)    $(1,987,458)    $ 3,454,461

Net income for
 the year                       --             --             --             --           770,187         770,187

Adjustment for
 foreign
 currency
 translation                    --             --             --              465            --               465

Issuance of 10,500              --
 shares of common
 stock                          --           21,000           --             --              --            21,000
                         -----------    -----------    -----------    -----------     -----------     -----------


      BALANCE AT
      JULY 31, 1996        4,800,180        761,356         11,915       (110,067)     (1,217,271)      4,246,113

Net income for
 the year                       --             --             --             --           961,854         961,854

Adjustment for
 foreign currency
 translation                    --             --             --           (3,244)           --            (3,244)

Issuance of 10,000
 shares of common
 stock in exchange
 for services
 rendered                       --           10,000           --             --              --            10,000
                         -----------    -----------    -----------    -----------     -----------     -----------
     BALANCE AT
     JULY 31, 1997       $ 4,800,180    $   771,356    $    11,915    $  (113,311)    $  (255,417)    $ 5,214,723
                         ===========    ===========    ===========    ===========     ===========     ===========

















The accompanying notes are an integral part of the consolidated financial statements.

</TABLE>






                                                                    F-5


<PAGE>

                                  SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                                  ---------------------------------------------

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                      -------------------------------------
<TABLE>
<CAPTION>

                                                                                  Year Ended July 31,
                                                                        ---------------------------------------

                                                                                 1997                 1996
                                                                        ------------------   ------------------
<S>                                                                       <C>                  <C>           
CASH FLOWS - OPERATING ACTIVITIES
    Net income                                                            $      961,854       $      770,187
    Adjustments to reconcile net income to net cash provided from
    operating activities:
      Provision for doubtful accounts                                             75,089               47,960
      Depreciation and amortization                                              187,032              188,838
      Deferred income tax (benefit)                                                6,903              (4,547)
      Loss on disposal of property                                                24,551                4,869
      Issuance of common stock in exchange for services rendered                  10,000                    -
      Changes in certain assets and liabilities affecting operations:
        Accounts receivable                                                    (505,503)            (102,235)
        Inventories                                                              652,294            (704,282)
        Refundable income taxes                                                 (38,293)                    -
        Other current assets                                                      40,174             (13,940)
        Deposits                                                                 (3,021)                  145
        Accounts payable                                                       (538,462)              132,515
        Income taxes payable                                                    (91,771)               32,319
        Other current liabilities                                                 39,198              104,795
                                                                        ------------------   ------------------
                                                 NET CASH PROVIDED FROM
                                                   OPERATING ACTIVITIES          820,045              456,624

CASH FLOWS - INVESTING ACTIVITIES
    Purchases of property                                                       (90,341)            (113,717)
                                                                        ------------------   ------------------
                                                    NET CASH (USED FOR)
                                                   INVESTING ACTIVITIES         (90,341)            (113,717)

CASH FLOWS - FINANCING ACTIVITIES
    Bank overdraft                                                                     -             (17,058)
    Increase in loans receivable from related parties                            (1,126)              (3,063)
    Short-term (repayments) borrowings, net                                    (680,959)              731,913
    Repayments on long-term debt                                               (140,817)             (59,272)
    Proceeds from issuance of common stock                                             -               21,000
                                                                        ------------------   ------------------
                            NET CASH (USED FOR) PROVIDED FROM FINANCING
                                                             ACTIVITIES        (822,902)              673,520

Effect of exchange rate changes on cash                                          (3,244)              (1,036)
                                                                        ------------------   ------------------
                               NET (DECREASE) INCREASE IN CASH AND CASH
                                                            EQUIVALENTS         (96,442)            1,015,391
Cash and cash equivalents at beginning of year                                 1,181,396              166,005
                                                                        ------------------   ------------------
                                              CASH AND CASH EQUIVALENTS
                                                         AT END OF YEAR   $    1,084,954       $    1,181,396
                                                                        ==================   ==================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
    Cash paid during the period for:
      Interest                                                            $       129,361      $       175,193
                                                                        ==================   ==================

      Income taxes                                                        $       661,648      $       426,046
                                                                        ==================   ==================

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>


                                         F-6



<PAGE>


                 SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                 ---------------------------------------------
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------
                  FOR THE YEARS ENDED JULY 31, 1997 AND 1996
                  ------------------------------------------


NOTE A:   THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------

     Description of business
     -----------------------
     Sel-Drum  International,  Inc. (the  "Company") is a holding  company which
     owns 100% of the common stock of Sel-Drum  Imaging  Corporation (a Canadian
     holding  company).  Sel-Drum  Imaging  Corporation  owns 100% of the common
     stock of Sel-Drum  Corporation  (U.S.A.),  Inc. (a United States  operating
     company) and Sel-Drum Corporation (a Canadian operating company).

     Prior to November 1, 1996,  Micron  Imaging Corp.  was also a  wholly-owned
     subsidiary of Sel-Drum  Imaging  Corporation.  On November 1, 1996,  Micron
     Imaging Corp. and Sel-Drum  Corporation  combined their operations into one
     entity, which continued to do business as Sel-Drum Corporation.

     Sel-Drum Corporation (U.S.A.), Inc. and Sel-Drum Corporation are engaged in
     the wholesale  distribution of parts and supplies used in the  reprographic
     industry. Micron Imaging (a division of Sel-Drum Corporation as of November
     1,  1996) is engaged  in the  commercial  production  and  distribution  of
     arsenic  triselenide  photoconductor  aluminum  drums  used in  duplicating
     machinery and the  remanufacture  of cartridges  used in laser printers and
     facsimile machines. The Companies grant credit to customers who are located
     throughout the United States and Canada,  and arrange for letters of credit
     and sight drafts with international customers.

     Sel-Drum  Corporation  (U.S.A.),  Inc. operates from a warehouse located in
     Buffalo,  New  York.  Sel- Drum  Corporation's  operating  facility,  which
     includes  warehouse  space  and  administrative   offices,  is  located  in
     Burlington,  Ontario, Canada. Micron Imaging has its manufacturing facility
     and administrative offices in Kelowna, British Columbia, Canada.

     Principles of consolidation
     ---------------------------
     The accompanying  consolidated financial statements include the accounts of
     Sel-Drum  International,  Inc. and its wholly-owned  subsidiaries  (through
     Sel-Drum Imaging  Corporation),  Sel-Drum  Corporation  (U.S.A.),  Inc. and
     Sel-Drum  Corporation.  All material intercompany balances and transactions
     have been eliminated in consolidation.

     Cash and cash equivalents
     -------------------------
     The Company's policy is to invest cash in excess of operating  requirements
     in  income  producing  investments.  Cash  equivalents  are  highly  liquid
     investments  purchased  with  original  maturities of three months or less.
     Cash  equivalents  consist of  investments  in term  deposit  accounts at a
     Canadian financial institution.  At July 31, 1997, the Company's investment
     in these term deposit accounts aggregated $438,574.

     Concentration of credit risk  - cash
     ------------------------------------
     The Company  maintains cash balances at financial  institutions  located in
     New York and Canada.  Accounts at the New York  institution  are insured by
     the Federal Deposit Insurance  Corporation up to $100,000.  Accounts at the
     Canadian  institutions  are  insured  by  the  Canadian  Deposit  Insurance
     Corporation up to $43,500 ($60,000 Canadian). Uninsured balances aggregated
     approximately $1,313,000 at July 31, 1997.


                                     F-7


<PAGE>

                  SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                  ---------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                   FOR THE YEARS ENDED JULY 31, 1997 AND 1996
                   ------------------------------------------


NOTE A:   THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
--------------------------------------------------------------------

     Inventories
     -----------
     Inventories  are valued at the lower of cost,  determined  by the first-in,
     first-out (FIFO) method, or market.

     Property
     --------
     Property is stated at cost less accumulated  depreciation and amortization.
     Depreciation   and   amortization   are  computed  using   accelerated  and
     straight-line  methods  over the  estimated  useful  lives  of the  related
     assets, which are as follows:

                    Equipment                        5 - 10 Years
                    Vehicles                         5 Years
                    Furniture and fixtures           5 Years
                    Leasehold improvements           10 Years

     Major renewals and  betterments  are  capitalized,  while  maintenance  and
     repairs are charged to operations as incurred. Upon sale or retirement, the
     related cost and accumulated  depreciation or amortization are removed from
     the accounts and the related gain or loss is reflected in operations.

     Organization costs
     ------------------
     Organization  costs  are being amortized on a straight-line  basis over ten
     years.

     Purchased and developed technology
     ----------------------------------
     Purchased and developed  technology,  consisting of technology  acquired as
     well as  engineering  and other costs  associated  with the  development of
     Micron Imaging's  production process, is being amortized on a straight-line
     basis over its estimated useful life of ten years.

     Foreign currency translation and transactions
     ---------------------------------------------
     Sel-Drum  International,  Inc.  and  Sel-Drum  Corporation  (U.S.A.),  Inc.
     maintain their accounting  records in U.S. dollars,  while Sel-Drum Imaging
     Corporation and Sel-Drum  Corporation  maintain their accounting records in
     Canadian dollars.  The accompanying  consolidated  financial statements are
     presented  in U.S.  dollars.  Accordingly,  all balance  sheet  accounts of
     Sel-Drum Imaging  Corporation and Sel-Drum  Corporation are translated into
     U.S.  dollars at period-end  exchange rates,  and statement of income items
     are  translated  at  weighted   average   exchange  rates.   The  resulting
     translation  adjustments  are made  directly  to a  separate  component  of
     shareholders'  equity. Gains or losses from foreign currency  transactions,
     such as those  resulting  from the  settlement  of foreign  receivables  or
     payables, are included in the statements of income.

     Advertising costs
     -----------------
     The  Company's  policy  is  to  expense   advertising  costs  as  incurred.
     Advertising  costs for  fiscal  1997 and 1996 were  $110,212  and  $97,782,
     respectively.


                                       F-8


<PAGE>
                  SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                  ---------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                   FOR THE YEARS ENDED JULY 31, 1997 AND 1996
                   ------------------------------------------

NOTE A:   THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
--------------------------------------------------------------------

     Income taxes
     ------------
     Deferred income tax assets and liabilities arise from temporary differences
     associated with differences  between the financial  statement and tax basis
     of assets and  liabilities,  as  determined  by the enacted rates which are
     expected  to be in effect  when these  differences  reverse.  Deferred  tax
     assets and liabilities  are classified as current or noncurrent,  depending
     on the  classification  of the assets and liabilities to which they relate.
     Deferred  tax assets and  liabilities  not related to an asset or liability
     are  classified as current or noncurrent  depending on the periods in which
     the temporary  differences are expected to reverse.  The principal types of
     temporary   differences   between  assets  and  liabilities  for  financial
     statement and tax return purposes are detailed in Note F.

     Earnings per common share
     -------------------------
     Earnings  per common  share is based upon the  weighted  average  number of
     common shares considered to be outstanding  during the period. The weighted
     average number of shares  considered to be outstanding  for the years ended
     July 31, 1997 and 1996 were 7,640,000 and 7,628,900, respectively.

     Estimates
     ---------
     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosure  of  contingent  assets  and  liabilities  at  the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during  the  reporting  period.  Actual  results  could  differ  from those
     estimates.

NOTE B:  INVENTORIES
--------------------

     The components of inventories at July 31, 1997 are as follows:

                       Raw materials                     $   236,240     
                                                                     
                       Work-in-process                        17,763 
                                                                     
                       Finished goods                      2,889,469 
                                                        -------------
                                                         $ 3,143,472 
                                                        =============
NOTE C:  LOANS RECEIVABLE FROM RELATED PARTIES
----------------------------------------------

     Non-interest bearing loans receivable from related parties at July 31, 1997
are summarized as follows:

                       Due from 547117 Ontario Limited   $    26,003  
                                                                     
                       Due from 547118 Ontario Limited        89,418 
                                                        -------------
                                                         $   115,421 
                                                        =============
                       
     The  President  of Sel-Drum  Corporation  is the majority  shareholder  (by
     attribution) of the Canadian holding companies,  547117 Ontario Limited and
     547118  Ontario  Limited.  There are  currently no repayment  terms for the
     outstanding loans cited above.
                                     F-9

<PAGE>

                  SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                  ---------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                   FOR THE YEARS ENDED JULY 31, 1997 AND 1996
                   ------------------------------------------


NOTE D:   NOTES PAYABLE TO BANK
-------------------------------

     Sel-Drum  Corporation has several debt  arrangements  with a Canadian bank,
     summarized as follows:

      FACILITY A: $2,683,240 revolving demand loan ($3,700,000 Canadian dollars)
      to assist with  financing of the accounts  receivable  and  inventories of
      Sel-Drum   Corporation  and  Sel-Drum  Corporation   (U.S.A.),   Inc.  The
      arrangement  provides  for interest to be paid monthly at the bank's prime
      rate  plus  .25%  (an  effective  rate  of  5% at  July  31,  1997).  This
      arrangement  may be  drawn  upon  by  Sel-Drum  Corporation  and  Sel-Drum
      Corporation (U.S.A.),  Inc. There were borrowings outstanding against this
      arrangement  at July  31,  1997 of  $1,358,738.  Letters  of  credit  (see
      Facility B below),  which reduce the amount of borrowings  available under
      the terms of the  arrangement,  were  outstanding  at July 31,  1997 in an
      amount approximating $155,310.

      FACILITY B: This  arrangement  provides the Company with letters of credit
      to  purchase  inventories,   up  to  an  amount  approximating  $1,087,800
      ($1,500,000  Canadian  dollars),  subject  to the  outstanding  balance of
      Facility A cited above.

      FACILITY C: $250,000  revolving demand loan to finance the payment of U.S.
      trade accounts payable,  subject to the outstanding  balance of Facility A
      cited above. No amounts were  outstanding  under this  arrangement at July
      31, 1997.

      FACILITY D: $50,000 facility to provide check clearing privileges for U.S.
      dollar  checks,  subject to the  outstanding  balance of  Facility A cited
      above.  No amounts were  outstanding  under this  arrangement  at July 31,
      1997.

      FACILITY E: $253,820  ($350,000  Canadian dollars) facility to provide for
      the purchase of up to $1,269,100  ($1,750,000 Canadian dollars) of forward
      exchange  contracts  in  Japanese  yen.  Borrowings  are  subject  to  the
      outstanding balance of Facility A cited above. No amounts were outstanding
      under this arrangement at July 31, 1997.

      FACILITY F: $47,000  ($65,000  Canadian  dollars)  arrangement  to finance
      leasehold  improvements  at the  facility of Sel-Drum  Corporation,  which
      provides  for  interest  at the prime rate plus 1% (an  effective  rate of
      5.75% at July 31, 1997). Borrowings are subject to the outstanding balance
      of Facility A cited above. There were borrowings  outstanding against this
      arrangement at July 31, 1997 of $34,447.

     Accordingly,  at July 31,  1997 the Company  had  approximately  $1,134,745
     available for borrowing under these arrangements.

     Total amounts  outstanding on all of the above  arrangements as of July 31,
     1997 amounted to $1,393,185.








                                     F-10


<PAGE>

                  SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                  ---------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                   FOR THE YEARS ENDED JULY 31, 1997 AND 1996
                   ------------------------------------------

NOTE D:   NOTES PAYABLE TO BANK, Cont'd
-------------------------------

     The above  arrangements are secured by substantially all assets of Sel-Drum
     Corporation and Sel-Drum Corporation (U.S.A.),  Inc., the limited corporate
     guarantees  of Sel-Drum  International,  Inc. and Sel- Drum Imaging  Corp.,
     each in the amount of $2,538,200 ($3,500,000 Canadian dollars),  assignment
     of a $362,600  ($500,000  Canadian  dollars) life  insurance  policy on the
     President  of Sel-Drum  Corporation,  the  corporate  guarantees  of 547118
     Ontario Limited and 547117 Ontario Limited (both of which are substantially
     owned by the President of Sel-Drum  Corporation) and the limited  corporate
     guarantee  of  Sel-  Drum  Corporation  (U.S.A.),  Inc.  in the  amount  of
     $1,087,800  ($1,500,000 Canadian dollars). In addition,  Facility F is also
     secured by a collateral mortgage of $217,560 ($300,000 Canadian dollars) on
     the operating facilities of Sel-Drum Corporation. Further, the arrangements
     contain  various  covenants  which  provide for,  among other  things,  the
     maintenance of certain ratios and dividend restrictions.

NOTE E:   LONG-TERM DEBT
------------------------

     Long-term debt at July 31, 1997 is summarized as follows:

     Interest free loan payable to Western Economic
     Diversification Fund, due in monthly payments of     $        168,596
     approximately $4,960 through November 1999.   

     Less:  Current portion of long-term debt                       59,524
                                                         ------------------

                                                          $        109,072
                                                         ==================

Maturities for long-term debt are as follows:

          Year ending July 31,
-----------------------------------

               1998                 $      59,524
               1999                        59,524
               2000                        49,548
                                   ---------------

                                    $     168,596
                                   ===============














                                     F-11



<PAGE>

                  SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                  ---------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                   FOR THE YEARS ENDED JULY 31, 1997 AND 1996
                   ------------------------------------------


NOTE F:   INCOME TAXES
----------------------

     The total tax  provision is different  from the amount that would have been
     recorded by applying the U.S.  statutory  federal income tax rate to income
     before taxes. The reconciliation of these differences is as follows:

<TABLE>
<CAPTION>
                                                                              July 31,
                                                                    ---------------------------

                                                                          1997          1996
                                                                    -------------  ------------
<S>                                                                       <C>           <C>  
Statutory U.S. tax rate                                                   34.0%         34.0%
State income taxes, net of federal tax benefit                             2.0           2.0
Utilization of loss carryforwards                                          (.2)          (.2)
Utilization of scientific research and experimental development
   expenditure carryforwards                                               (.5)            -
Difference between non-U.S. and U.S. tax rates                              .7           1.3
Other                                                                      (.1)           .2
                                                                    -------------  ------------

                                                 EFFECTIVE TAX RATE       35.9%         37.3%
                                                                    =============  ============

Deferred taxes  resulting from temporary  differences as of July 31, 1997 are as follows:

                                                                                  Assets/(Liabilities)
                                                                                  --------------------

<S>                                                                                 <C>            
Allowance for doubtful accounts receivable                                          $        25,000

Depreciation                                                                               (79,047)

Scientific research and experimental development expenditure carryforwards                   20,000

Investment tax credit carryforwards                                                          47,138

Tax effect of utilization of investment tax credit carryforwards being required            (20,000)
to be included in taxable income
                                                                                  -------------------

                                                                                    $       (6,909)
                                                                                  ===================

Current                                                                             $        25,000

Long-term                                                                                  (31,909)
                                                                                  -------------------

                                                                                    $       (6,909)
                                                                                  ==================
</TABLE>

At July 31, 1997, Sel-Drum  Corporation had scientific research and experimental
development expenditure  carryforwards  approximating $50,000 which may, subject
to certain  limitations,  offset future taxable income. The scientific  research
and experimental  development  expenditure  carryforwards may be carried forward
indefinitely.  In addition,  Sel-Drum Corporation also had investment tax credit
carryforwards of $47,138 available,  subject to certain  limitations,  to reduce
future income taxes payable. These credits expire at various times through 2004.


                                     F-12


<PAGE>
                  SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                  ---------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                   FOR THE YEARS ENDED JULY 31, 1997 AND 1996
                   ------------------------------------------

NOTE G:  COMMON AND PREFERRED STOCK
-----------------------------------

          The following is certain  information  regarding  common and preferred
          stock as of July 31, 1997:

          Sel-Drum International, Inc.
          ----------------------------

               Preferred Stock
               ---------------
                Par Value                                                 None
                Shares authorized                                   10,000,000
                Shares issued and outstanding                             None

               Common Stock
               ------------
                Par value                                                 None
                Shares authorized                                  100,000,000
                Shares issued and outstanding                        7,642,500


          Sel-Drum Imaging Corporation
          ----------------------------

               Preferred Stock
               ---------------
                Class A (5% non-cumulative):
                 Par value                                                None
                 Stated value                                          $727.30
                 Shares authorized                                       2,000
                 Shares issued and outstanding                            None

                Class B (5% non-cumulative):
                 Par value                                                None
                 Stated Value                                          $727.30
                 Shares authorized                                       5,000
                 Shares issued and outstanding                            None

                Class C (5% non-cumulative):
                 Par value                                                None
                 Stated value                                          $727.30
                 Shares authorized                                      10,000
                 Shares issued and outstanding                           1,760

                Class D (5% non-cumulative):
                 Par value                                                None
                 Stated value                                          $727.30
                 Shares authorized                                      10,000
                 Shares issued and outstanding                           4,840












                                      F-13


<PAGE>


                  SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
                  ---------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                   FOR THE YEARS ENDED JULY 31, 1997 AND 1996
                   ------------------------------------------


NOTE H:   COMMITMENTS AND CONTINGENCIES
---------------------------------------

          Lease commitments
          -----------------
          Sel-Drum  Corporation  leases its  operating  facility  from a related
          party at a base monthly rental  approximating  $7,050 through February
          2002. In addition to the base rental,  the Company is responsible  for
          property taxes, insurance, utilities and repairs and maintenance.

          Sel-Drum  Corporation  (U.S.A.),  Inc.  leases its  warehouse  from an
          unrelated party at a base monthly rental  approximating $2,800 through
          March 1998, then $3,200 through the expiration of the lease in October
          2001. The base monthly rental includes property taxes and utilities.

          Micron Imaging leases one of its facilities for  approximately  $1,500
          per month under a lease  agreement  which expires in May 1998.  Micron
          Imaging  also leases two  additional  facilities  on a  month-to-month
          basis, one from a related party.

          Total  rent  expense  for  the  Company's  operating   facilities  and
          warehouse  was $194,679 and $149,761 for the years ended July 31, 1997
          and 1996, respectively.

          Total minimum future rental payments under all  noncancellable  leases
          are approximately as follows:

                          Year ending July 31,              Amount     
                       ---------------------------       ------------  
                                                                       
                                  1998                    $  146,669   
                                  1999                       134,824   
                                  2000                       126,845   
                                  2001                       122,856   
                                  2002                        51,864   
                                                         ------------  
                                                                       
                                                          $  583,058   
                                                         ============  
                       

          The amounts  included in the minimum future rental  payments above for
          the Company's Canadian  facilities have been converted to U.S. dollars
          using the appropriate period-end exchange rates.

          Employment contracts
          --------------------
          Employment  contracts  exist with the  President,  Vice-President  and
          Director of Finance of Sel-Drum Corporation and the General Manager of
          Micron Imaging.  These  contracts  provide for minimum annual salaries
          plus bonuses.

          Contingencies
          -------------
          At July 31, 1997,  Sel-Drum  Corporation was  contingently  liable for
          approximately $155,310 related to letters of credit (see Note D).


                                     F-14

<PAGE>

ITEM 8.   CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING AND
--------------------------------------------------------------------------------
          FINANCIAL DISCLOSURE.
          ---------------------

   None.
                                    PART III
                                    --------

ITEM 9.   DIRECTORS,   EXECUTIVE   OFFICERS,  PROMOTERS   AND  CONTROL  PERSONS;
--------------------------------------------------------------------------------
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
          --------------------------------------------------

   The  directors,  nominees,  and  executive  officers  of the  Company  are as
follows:

        Name                        Age             Position with Company
        ----                        ---             ---------------------

Robert Asseltine                    66              Chairman, Director

Brian Turnbull                      62              Director, President, Chief
                                                    Executive Officer

Brien Murtagh                       49              Executive Vice President of
                                                    Sales

John Hall                           55              Financial Director

Robert Orr                          53              Director Nominee


   BRIAN  TURNBULL.  The  Company's  founder,  Mr.  Turnbull  has  been  in  the
photocopier industry his entire business career. The Sel-Drum Group of companies
started in 1978 with Mr. Turnbull's  launching  Sel-Drum Corp. Mr. Turnbull will
resign as CEO and President  effective January 1, 1998. Mr. Turnbull will remain
with the  Company  as a  full-time  consultant  and will  focus his  efforts  at
developing the Company's international sales.

   ROBERT  ASSELTINE.  Mr. Asseltine has been with the Company since February 1,
1995. Mr. Asseltine was founder and CEO of Micron Imaging Corp., the photocopier
drum  manufacturer  now owned by the Company which was amalgamated with Sel-Drum
Corporation  in November  1996.  Prior to founding  Micron  Imaging in 1991, Mr.
Asseltine  was the Founder and  President  of the Copytron  Group of  companies,
formerly Western Canada's largest  independent copier dealer,  which was sold to
Savin Canada.

   BRIEN  MURTAGH.  Mr.  Murtagh  has been with  Sel-Drum  for over 15 years and
became Executive Vice President of Sales on February  1,1995.  Prior to assuming
this  position,  he was Vice  President  of Sel-Drum  Corporation  and  Sel-Drum
Corporation (U.S.A.), Inc. Mr.Murtagh has been associated with the reprographics
industry for many years, starting his career with Nashua in the U.K.

   JOHN HALL.  Mr. Hall joined  Sel-Drum  Corporation  in 1985 as the  Financial
Manager.  On February 1, 1995,  he was  appointed as Director of Finance for the
Company.  Previously,  he was employed  for five years by Butler  Metals Co., an

                                   - 14 -

<PAGE>


automotive related company,  in the position of Manager of Accounting.  Prior to
his employment with Butler,  he was employed by T.R.W. in Canada in the capacity
of Chief Accountant. Mr. Hall earned his C.M.A. in 1972.

   ROBERT  ORR.  Mr. Orr is a former  partner in the law firm of Ross & McBride,
the  Company's  Canadian  Corporate  Counsel.  Mr.  Orr's 25  years of  practice
experience  includes  representation  of  small  to  medium  sized  corporations
including corporate restructuring, financing and commercial real estate. Mr. Orr
has  agreed to become a  director  beginning  after the next  annual  meeting of
shareholders.

Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------

   Section 16(a) of the  Securities  Exchange Act of 1934 (the  "Exchange  Act")
requires the  Company's  officers and directors and the holders of more than ten
percent  (10%) of the  Company's  outstanding  Common  Stock to file  reports of
ownership with the Securities and Exchange Commission and to furnish the Company
with  copies  of these  reports.  The  Company  believes  that all such  reports
required  to be filed  during or with  respect to the fiscal year ended July 31,
1997 were made on a timely basis.

ITEM 10.  EXECUTIVE COMPENSATION
--------------------------------

   The following table sets forth the compensation of the executive  officers of
the Company:

                          SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                   Annual Compensation          Long-Term Compensation
                                ------------------------    ------------------------------
                                                                            Securities
Name and                                                      All other     Underlying
Principal Position        Year   Salary ($)     Bonus ($)    Compensation  Options/SARs(#)
------------------------------------------------------------------------------------------
<S>                       <C>    <C>            <C>             <C>            <C>
Brian Turnbull, Director,  
Chief Executive Officer   1997   $210,000 (1)   $52,497          -0-            -0-

                          1996   $210,000 (1)   $47,437          -0-

Brien Murtagh            
Vice President of Sales   1997   $91,250        $52,497          -0-            -0-

                          1996   $72,830        $47,437          -0-            -0-
____________

(1)  Perquisite and other benefits not included  above  are:  (a) an  automobile lease
allowance of $12,000;  (b) a golf club  membership  of $1,500;  and (c) the payment of
life insurance premiums of approximately $17,000 per year.
</TABLE>

Compensation of Directors
-------------------------

   Directors are reimbursed for their reasonable expenses incident to travel and
attendance  at  meetings.  Directors do not receive any other  compensation  for
attendance at meetings.

                                   - 15 -

<PAGE>




ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

   As of  October  22,  1997,  the only  class of voting  securities  issued and
outstanding  was 7,642,500  shares of the Company's  Common Stock,  no par value
(the "Common Stock").

   The following  table sets forth certain  information  as of October 22, 1997,
regarding  (i) each  person  known to the  Company to be a record or  beneficial
owner of more than 5% of the Common  Stock,  (ii) each  director of the Company,
(iii) each executive  officer (See Item 10:  Executive  Compensation),  and (iv)
directors and officers as a group.


                                           Amount and                        
                                            Nature of                        
             Name and Address of           Beneficial              Percent   
              Beneficial Owner            Ownership (1)           Class (1)  
        ------------------------------   -----------------      -------------
                                                                             
        Robert Asseltine                                                     
        501 Amherst Street                                                   
        Buffalo, New York 14207             1,759,680 (2)             23.02% 
                                                                             
        Brian Turnbull                                                       
        501 Amherst Street                                                   
        Buffalo, New York 14207             4,514,000 (3)             59.06% 
                                                                             
        Brien Murtagh                                                        
        501 Amherst Street                                                   
        Buffalo, New York 14208                   345,000              4.51% 
                                                                             
        All Directors and Executive                                          
        Officers as a group (4 persons)         6,618,680             86.60% 
                                                                             
        
__________

1.   As reported by such persons as of October 22, 1997, with  percentage  based
     on 7,642,500 shares issued and outstanding. To date, there are no presently
     exercisable  options or warrants  that would  increase the number of shares
     owned by such person and the number of shares outstanding.
2.   Includes  237,000  shares  owned  of record by  Mr. Asseltine's wife.  Also
     includes 293,680 shares to be issued to Mr. Asseltine pursuant to a private
     transaction. 
3.   Shares owned of record by 547118 Ontario  Limited,  an Ontario  corporation
     controlled by Mr. Turnbull.





                                     - 16 -



<PAGE>



ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

Employment Contracts
--------------------

   RAYMOND C. SPARKS  EMPLOYMENT  AGREEMENT.  Effective  November  1, 1997,  the
Company will enter into an Employment Agreement with Mr. Sparks (the "Employment
Agreement")  to  serve  as the  Chief  Executive  Officer  of the  Company.  The
Agreement provides for a term of three years, subject to termination as provided
in the Agreement,  and provides that as  compensation  under the Agreement,  Mr.
Sparks will be paid $125,000  (U.S.) annual salary and will receive an option to
purchase  250,000  shares of the  Company's  no par value  Common  Stock,  at an
exercise price of forty cents per share. The Employment  Agreement also provides
for a $25,000 relocation allowance, fringe benefits, including health insurance,
on terms which may be agreed to from time to time by the Company and Mr. Sparks.

Shareholder Loans
-----------------

   The Company is owed $115,000 by 547117  Ontario Ltd. and 547118 Ontario Ltd.,
both of  which  are  controlled  by Brian  Turnbull,  Chief  Executive  Officer,
President  and a  Director,  in the  form  of an  interest-free  loan  from  the
Company's  subsidiary,  Sel-Drum  Corporation.  The  loan  was  used to  provide
leasehold  and  structural  improvements  to the Company's  Burlington,  Ontario
facility.

Preferred Stock
---------------

   The Company's Sel-Drum Imaging  Corporation  subsidiary has issued to each of
Messrs.  Turnbull and  Asseltine,  Preferred  Stock which is  redeemable  at the
Company's  option at  $727.30  per  share.  Mr.  Asseltine  owns  1,760  Class C
Preferred  Shares and Mr.  Turnbull owns 4,840 Class D Preferred  Shares.  These
shares were issued to Messrs.  Turnbull  and  Asseltine in  connection  with the
Company's transaction with Dakota Equities Ltd. in February, 1995.

Consulting Agreements
---------------------

   During Fiscal 1997, the Company paid Mr. Asseltine $28,000 in connection with
his efforts to transition  management  and find a suitable  replacement  for Mr.
Turnbull,  who has  agreed to  remain as a  consultant  to the  Company  for the
purposes of expanding the Company's  international  sales.  Beginning January 1,
1998,  the Company and Mr.  Turnbull will  terminate Mr.  Turnbull's  employment
contract.  In his capacity as a consultant,  Mr.  Turnbull  will receive  annual
compensation of $126,000 as well as existing fringe benefits including the lease
of a car by the Company.






                                     - 17 -


<PAGE>



Leases
------

   Mr. Asseltine, through Reaton Leasing Ltd., a corporation he controls, leases
to the Company a 12,800  square foot  facility at 1890 Dayton  Street for one of
the Company's facilities in Kelowna, British Columbia. Lease payments are $4,000
per month.

   The  Company  leases its 21,600  square  foot  Burlington  facility  from Mr.
Turnbull pursuant to a lease terminating in February 2002. Annual lease payments
are approximately $85,000.

ITEM 13.  EXHIBITS, LISTS AND REPORTS ON FORM 8-K
-------------------------------------------------

   (a)    See Index to Exhibits.

   (b)    Reports on Form 8-K.

          No reports on Form 8-K have been filed  during the last quarter of the
          period covered by this report.






























                                     - 18 -



<PAGE>



                                   SIGNATURES

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


                                          SEL-DRUM INTERNATIONAL, INC.


Dated:  October 29, 1997                  By:  /s/ Brian Turnbull
                                             -----------------------------------
                                                Brian Turnbull
                                                President and
                                                Chief Executive Officer

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

     Signature and Title                             Date
     -------------------                             ----


/s/ Robert Asseltine                            October 29, 1997
------------------------------
Robert Asseltine

/s/ John Hall                                   October 29, 1997
------------------------------
John Hall
Financial Director
(Chief Accounting Officer)




















                                     - 19 -



<PAGE>



                               INDEX TO EXHIBITS


  (2)  PLAN  OF  ACQUISITION,   REORGANIZATION,   ARRANGEMENT,   LIQUIDATION  OR
       SUCCESSION

       Not applicable.

  (3)  (a)    ARTICLES OF INCORPORATION

              Articles of Incorporation are incorporated  herein by reference to
              Exhibit 3.1 to the  Registrant's  Form 10-KSB filed for the fiscal
              year ended July 31, 1996.

       (b)    BY-LAWS

              By-laws are incorporated herein by reference to Exhibit 3.2 to the
              Registrant's  Form 10-KSB filed for the fiscal year ended July 31,
              1996.

  (4)  INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS, INCLUDING INDENTURES

       (a)    The documents listed under Item (3) of this Index are incorporated
              herein by reference.

  (9)  VOTING TRUST AGREEMENT

       Not applicable.

  (10) MATERIAL CONTRACTS

       (a)    Employment  Agreement  between  Sel-Drum   Corporation,   Sel-Drum
              Imaging  Corporation  and Brian F. Turnbull dated January 31, 1995
              is  incorporated  herein  by  reference  to  Exhibit  10.2  to the
              Registrant's Form 10-KSB for the fiscal year ended July 31, 1996.

       (b)    Employment Agreement between Sel-Drum Corporation,  Sel-Drum Corp.
              U.S.A. Inc.,  Sel-Drum Imaging Corporation and Brien Murtagh dated
              January 31, 1995 is  incorporated  herein by  reference to Exhibit
              10.3 to the  Registrant's  Form  10-KSB for the fiscal  year ended
              July 31, 1996.

       (c)    Employment Agreement, as amended, between Micron Imaging Corp. and
              Alex  Brian  Green  dated as of  October  3, 1994 is  incorporated
              herein by  reference  to  Exhibit  10.4 to the  Registrant's  Form
              10-KSB for the year ended July 31, 1996.

  (11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS

       Computation can be clearly  determined from the Financial  Statements and
       Notes thereto included herein.


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<PAGE>




  (13) ANNUAL OR QUARTERLY REPORTS, FORM 10-Q AND FORM 10-QSB

       Not applicable.

  (16) LETTER ON CHANGE IN CERTIFYING ACCOUNTANT

       Not applicable.

  (18) LETTER ON CHANGE IN ACCOUNTING PRINCIPLES

       Not applicable.

 *(21) SUBSIDIARIES OF THE REGISTRANT

  (22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE

       Not applicable.

  (23) CONSENT OF EXPERTS AND COUNSEL

       Not applicable.

  (24) POWER OF ATTORNEY

       Not applicable.

 *(27) FINANCIAL DATA SCHEDULE

       The Financial Data Schedule is included herein as Exhibit 27.

  (99) Additional Exhibits

       Not applicable.
________________________

 * Exhibit filed with this Report













 

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