<PAGE>   1
                     U.S. Securities and Exchange Commission
                             Washington, D.C. 20549
                                    FORM 10-K

(Mark One)

[x]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                  For the fiscal year ended June 30, 1998
[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934 [No Fee Required]

         For the transition period from ________________ to ____________________


                         Commission file number 1-10310

                                  SETECH, INC.
             (Exact name of Registrant as specified in its charter)

Delaware                                                  11-2809189
--------------------------------------------------------------------------------
(State or other jurisdiction of                           (I.R.S. Employer 
incorporation or organization)                            Identification No.)

903 Industrial Drive, Murfreesboro, Tennessee             37129
--------------------------------------------------------------------------------
(Address of principal executive offices)                  (Zip Code)         

Issuer's telephone number:(615) 890-1700                         
                          --------------

Securities registered under Section 12(b) of the Exchange Act: None

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

                  Title of Class
         Common Stock, $.01 par value

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes       No  X
                                      ----     ----

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ X ]

         As of September 21, 1998 there were 5,679,207 shares of common stock
outstanding and the aggregate value of the shares of common stock held by
non-affiliated shareholders (based upon available over the counter pricing on
October 12, 1998) was $2,826,821.

                       DOCUMENTS INCORPORATED BY REFERENCE

         If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-K into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933 ("Securities Act"). The list documents should
be clearly described for identification purposes. None







                                  Page 1 of 42
<PAGE>   2

                              CAUTIONARY STATEMENTS

         This annual report on Form 10-K contains statements relating to the
future of SETECH, Inc (the "Company") (including certain projections and
business trends) that are "forward looking statements" as defined by Section 27A
of the Securities Act of 1933, as amended, Section 21E of the Securities
Exchange Act of 1934, as amended, and the Private Securities Litigation Reform
Act of 1995, as amended. These forward looking statements include statements
regarding the intent, belief or current expectations of the Company and its
management and involve risks and uncertainties that may cause the Company's
actual results to differ materially from the results discussed in the forward
looking statements. When used in this Form 10-K with respect to the Company, the
words "estimate", "project", "intend", "anticipate", "expect", "foresee",
"believe", "potential", and similar expressions are intended to identify forward
looking statements. Readers are cautioned not to place undue reliance on these
forward looking statements, which speak only as of the date hereof. The risks
and uncertainties relating to the forward looking statements include, but are
not limited to, changes in political, economic and/or labor conditions; changes
in the regulatory environment; the Company's ability to integrate its
acquisitions; competitive production and pricing pressures; as well as other
risks and uncertainties.




                                  Page 2 of 42
<PAGE>   3


                                     PART I
ITEM 1. BUSINESS.

GENERAL

         SETECH, INC., is a Delaware corporation (the "Company") formed in 1987.
The Company is engaged in the businesses of providing "integrated
supply"/inventory management services, general line industrial distribution
services, as well as job shop machining, engineering products and services, to a
variety of industries including automotive, aviation, and medical through it's
primary operations as well as it's four subsidiary corporations:

Southeastern Technology, Inc. ("Southeastern")
Lewis Supply Company, Inc. ("Lewis")
S.E.T.C. de Mexico
CETECH de Mexico

         In August 1996, the Company changed its name from "Aviation Education
Systems, Inc." to "SETECH, INC." to better reflect its diversified business
operations.

         The Company acquired Titan Services, Inc. ("Titan") and Southeastern in
September 1993 upon the acquisition of their parent corporation, SEtech,
Incorporated. The Company caused SEtech, Incorporated to be merged into the
Company, resulting in Titan and Southeastern becoming direct and separate
subsidiaries of the Company.

         On January 30, 1997, the Company sold all of the stock of two of its
wholly owned subsidiaries, Barton ATC, Inc. ("BARTON") and Barton ATC
International, Inc. ("BARTON Intn'l") (sometimes referred to collectively in the
Company's public filings as the "Government Services Group") to Serco Group,
Inc., a wholly-owned subsidiary of Serco Group plc, a British publicly traded
company. (For a more detailed description of the Company's sale of its
Government Services Group, please see the Company's Form 10-QSB for the
quarterly period ended December 31, 1996, filed with the Commission February 14,
1997).

         The Company acquired Lewis Supply Company, Inc. ("Lewis") as a wholly
owned subsidiary in June of 1997. On February 5, 1998, the Company caused its
wholly owned subsidiary, Titan, to merge with and into the Company. In addition,
the Company created two Mexican subsidiaries in October 1997 for the operation
of Lewis sites in Mexico. These actions were taken as part of the Company's
continuing efforts to focus its operations on integrated supply. All operations
formerly conducted under the Titan name have continued under the SETECH name,
while Lewis has continued to operate under its own name.

         Southeastern is a Tennessee corporation and Lewis is incorporated under
Delaware law.

SETECH

SETECH'S OPERATIONS

         SETECH ("SETECH" is used in reference to the direct integrated supply
operations of the Company, versus the consolidated operations referenced as "The
Company".) provides "integrated supply" services to the manufacturing industry.
"Integrated supply" is the forming of long term relationships with manufacturing
customers to provide all of their maintenance, repair, and operating ("MRO")
supplies. Presently, SETECH delivers its services primarily to the automotive
industry through facilities located in Tennessee, Michigan, and Indiana. SETECH
provides procurement, engineering and maintenance/repair services for machined
spare parts, original equipment manufacturer ("OEM") spare parts and inventory
management services. Major manufacturers to supplement and enhance in-house
capabilities and control costs are increasingly utilizing these types of
services. The providing of MRO products to the customer at cost, the
reimbursement of direct site operating expenses and the charging of inventory
management and cost savings fees generates revenues for this operation. Cost of
sales consists of the direct product costs and direct expenses at the customer's
site.





                                  Page 3 of 42
<PAGE>   4

COMPETITION

         SETECH operates in an industry known as "integrated supply." SETECH has
encountered competing firms, and integrated suppliers operate in a highly
competitive market. Additionally, SETECH may in the future encounter presently
unforeseen competition.

MAJOR CUSTOMERS

         SETECH operates under five contracts as a source supplier of purchasing
and inventory control functions for General Motors and related subsidiary
operations at plants located in Tennessee, Michigan, and Indiana. SETECH has
received several major awards from General Motors in recognition of its high
level of performance for this manufacturer. Additional agreements with this
manufacturer were added in April and May 1998, which, if substantially
implemented, should increase revenues in fiscal year 1999. Contracts with this
manufacturer account for virtually all of SETECH's revenues and approximately
24% of the Company's revenues.

PRINCIPAL SUPPLIERS

         SETECH acquires machining services and parts from a wide variety of
machine shops. OEM spare parts are purchased from the original manufacturer.
SETECH purchases approximately 2% of its parts from its subsidiary Southeastern.

LEWIS SUPPLY SUBSIDIARY

LEWIS' OPERATIONS

         Lewis provides integrated supply support to 9 key customers through
direct management of the maintenance, repair, and operating supply function and
tool crib management at over 15 sites. This activity generates approximately
half of Lewis' revenues, and approximately 31% of the Company's revenues. The
revenues and cost of sales for these operations are accounted for in a manner
similar to SETECH's operations. The Company created two wholly-owned Mexican
subsidiaries, S.E.T.C. de Mexico and CETECH de Mexico, in October 1997, to
manage the Mexican integrated supply operations for one of Lewis' customers.

         In addition, Lewis is a general line industrial distributor. Lewis
delivers its distribution services through the operation of five distribution
warehouses in Tennessee, Mississippi, Arkansas, and Missouri. These operations
deliver industrial supply products to over 1,000 customers via company owned
trucks and common carrier. These operations provide the other half of Lewis'
revenues. Revenues and cost of sales are accounted for similar to traditional
distribution basis.

         Effective September 1, 1998, Mr. Michael S. Burnham resigned as
President of Lewis. Responsibilities have been reassigned on an interim basis,
pending a search for his replacement.

COMPETITION

         The industrial distribution industry is highly competitive and features
numerous distribution channels, including national, regional and local
distributors; direct mail suppliers; large warehouse chains; hardware stores;
and manufacturers' own sales forces. Many of Lewis' competitors in industrial
distribution are small enterprises who sell to customers in a limited geographic
area, but Lewis also competes against several large distributors that have
significantly greater resources than Lewis. As customers increasingly seek
low-cost alternatives to traditional methods of purchasing and sources of
supply, they are, among other things, reducing the number of their industrial
suppliers. Industrial suppliers are consolidating to achieve economies of scale
and increase efficiencies; this consolidation trend could cause the industry to
become more competitive. In addition, new competitors may emerge. Certain of
Lewis' competitors sell identical products for prices lower than those offered
by Lewis. Moreover, Lewis also competes on the basis of responsiveness to the
needs of customers for quality service, product diversity, and availability.
There can be no assurance that Lewis will be able to compete successfully under
such conditions.






                                  Page 4 of 42
<PAGE>   5

         In the component of their operations known as "integrated supply",
Lewis has encountered competing integrated supply firms, and continues to
operate in a highly competitive market. Lewis may in the future encounter
presently unforeseen integrated supply competition.

MAJOR CUSTOMERS

         Lewis had three customers which accounted for 11%, 9% and 7%,
respectively, of Lewis' sales during its year ended June 30, 1998, and 7%, 6%,
and 4% of the Company's revenues, respectively. Because the Lewis acquisition
was contemporaneous with the close of the Company's fiscal year ending June 30,
1997, none of Lewis' revenues are reflected on the Company's Statements of
Operations included in this Form 10-K for that year (See Note 2 of the June 30,
1998 financial statements included in this Form 10-K for unaudited pro forma
information combining the consolidated results of the Company and Lewis as if
the Acquisition had occurred on July 1, 1995.)

PRINCIPAL SUPPLIERS

         Historically, the availability of suppliers has not been of concern to
Lewis' management. Lewis has over 4,000 suppliers nationwide.

SOUTHEASTERN TECHNOLOGY SUBSIDIARY

SOUTHEASTERN'S OPERATIONS

         Southeastern is a job shop machining and engineering organization,
serving a variety of industries including aerospace, automotive and medical.
Southeastern continues the manufacturing and sale of medical and surgical
devices for major medical manufacturers, to their specifications. Management
believes, based upon recent growth in this area, that the medical field will
continue to become a more significant source of machine work in the future.
Revenues and the cost of sales in this operation are accounted for similar to a
job-cost manufacturing environment.

COMPETITION

         Southeastern operates in a highly competitive environment and confronts
competition from both generalized and specialized job shop machining and
engineering businesses. Southeastern is equipped with sophisticated computer
aided design and manufacturing equipment. Southeastern engineers utilize
state-of-the-art equipment and systems which are designed to enable them to meet
stringent customer requirements and generate innovative solutions to
consistently emerging manufacturing impediments resulting from cost containment
programs.

MAJOR CUSTOMERS

         Five customers account for 80% of Southeastern's revenues, little of
which is based on long-term contracts. Southeastern's business is concentrated
evenly across the aerospace, automotive and medical industries. None of the
customers of Southeastern account for 10% or more of the Company's revenues.

SUPPLIERS

         Historically, the availability of raw materials has not been of concern
to Southeastern whose management foresees no significant acquisition of
materials impediment to production or production scheduling. Principal suppliers
to Southeastern include various metal suppliers and machine die manufacturers.




                                  Page 5 of 42
<PAGE>   6


EMPLOYEES OF COMPANY AND SUBSIDIARIES

         As of June 30, 1998, the Company and its four subsidiaries had 251
full-time employees, including 5 executive personnel and 8 part-time employees.
The employees are apportioned among the businesses as follows: SETECH (59
full-time, including 3 executives, 4 part-time); Lewis (142 full-time, including
1 executive, 1 part time); Southeastern (50 full-time, including 1 executive, 3
part-time).

ITEM 2. PROPERTIES.

         Among the Company and its subsidiaries, only Lewis owns any real
property.

         Lewis purchased the property at 477 South Main Street in Memphis,
Tennessee in November of 1986. Currently, $15,420 remains outstanding on Lewis'
mortgage. This Memphis location serves as the headquarters of Lewis' operations.
In addition, Lewis leases buildings, equipment, and vehicles under
non-cancelable operating leases.

         SETECH conducts its operations from three rented facilities, one each
located: (1) in Murfreesboro, Tennessee; (2) near its automotive manufacturing
customer in Tennessee, with a lease expiring March, 2001; and (3) adjacent to
its automotive manufacturing customer in Michigan. In addition, integrated
supply customers provide space for SETECH and Lewis operations within their
manufacturing facilities.

         Southeastern conducts its operations from a facility located at 905
Industrial Drive Murfreesboro, Tennessee that is leased under a non-cancelable
operating lease expiring July 31, 2008.

ITEM 3. LEGAL PROCEEDINGS.

         There are no current material legal proceedings.

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

         No matters were submitted to a vote of the security holders, in the
quarter ending June 30, 1998.











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                                  Page 6 of 42
<PAGE>   7


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         (a) Marketing Information - There is only a limited and sporadic
trading market for the Company's common stock, currently trading over the
counter, which has historically been thinly traded with limited market maker
participation.

         The following table, prepared from information supplied by the National
Quotation Bureau, sets forth the range of high and low bid prices for the
Company's common stock for the fiscal periods indicated (which reflects
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions):

<TABLE>
<CAPTION>
                                              COMMON STOCK
                                           ------------------
                                           High           Low
                                           ----           ---
                    <S>                    <C>            <C>
                    1997 (Fiscal)
                    First Quarter           N/A            N/A
                    Second Quarter         1 3/4          1 5/8
                    Third Quarter          1 11/16        1 1/2
                    Fourth Quarter         1 9/16         1 1/32

                    1998 (Fiscal)
                    First Quarter          2              1 1/4
                    Second Quarter         2              1 5/8
                    Third Quarter          1 3/4          1 3/4
                    Fourth Quarter         2 1/2          1 3/4
</TABLE>

         (b)      Holders - There were approximately 180 holders of record of
                  the Company's common stock as of October 12, 1998, inclusive
                  of those brokerage firms and/or clearing houses holding the
                  Company's securities for their clientele (with each such
                  brokerage house and/or clearing house being considered as one
                  holder).

         (c)      Dividends - The Company has not paid or declared any dividends
                  upon its common stock since its inception and, by reason of
                  its present financial status and its contemplated financial
                  requirements, does not contemplate or anticipate paying any
                  dividends upon its common stock in the foreseeable future.

         (d)      See Item 13: Certain Relationships and Related Transactions
                  for related party sales of stock in the last three fiscal
                  years.







                      [THIS SPACE INTENTIONALLY LEFT BLANK]







                                  Page 7 of 42
<PAGE>   8


ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              FY 1998       FY 1997       FY 1996       FY 1995       FY 1994
                                                              -------       -------       -------       -------       -------

<S>                                                           <C>           <C>           <C>           <C>           <C>    
Revenues                                                      $88,920       $35,168       $34,468       $14,492       $ 9,098
Net income from continuing operations                         $    55       $   514       $ 1,403       $   273       $    82

Basic income from continuing operations
                     Per share                                $  0.01       $  0.10       $  0.27       $  0.05       $  0.02

Diluted income from continuing operations
                     Per share                                $  0.01       $  0.09       $  0.24       $  0.05       $  0.02
Dividends paid per share                                      $    --       $    --       $    --       $    --       $    --
Weighted average number of
     Shares outstanding                                         5,506         5,261         5,159         5,414         4,656

Working Capital                                               $25,975       $19,832       $ 4,124       $ 2,439       $ 1,559
Total assets                                                  $47,836       $37,272       $22,143       $14,703       $13,408
Long-term debt obligations                                    $27,168       $20,512       $ 1,332       $   665       $   517
Stockholders' equity                                          $ 7,758       $ 7,668       $ 6,599       $ 5,538       $ 5,266
</TABLE>


Footnotes:

1)        Effective as of June 30, 1996, the Company effectuated a twenty-to-one
          reverse stock split, which reduced the number of shares of the
          Company's single class of common stock. As a result of the
          twenty-to-one reverse stock split, the price per share of the
          Company's common stock increased by a multiple of 20. The periods
          prior to this date have been adjusted to retroactively reflect this
          action.

2)        On January 30, 1997, the Company sold all of the stock of two of its
          wholly owned subsidiaries, Barton ATC, Inc. ("BARTON") and Barton ATC
          International, Inc. ("BARTON Intn'l") (sometimes referred to
          collectively in the Company's public filings as the "Government
          Services Group") to Serco Group, Inc., a wholly-owned subsidiary of
          Serco Group plc, a British publicly traded company. The results of
          operations prior to this date have been adjusted to eliminate amounts
          attributable to these entities, and accounted for as a separate line
          item called "Discontinued Operations" in the Company's Statements of
          Operations.

3)        Effective June 26, 1997, the Company acquired all of the outstanding
          stock of Lewis Supply Company, Inc. in a purchase transaction ("the
          Acquisition"). The Acquisition was consummated by the exchange of
          255,102 shares of the Company's common stock, a commitment to issue an
          additional 30,612 shares, $5,952,500 cash and notes payable totaling
          $750,000 for 100% of the outstanding shares of Lewis' stock. The
          acquisition had no effect on the revenue and net income accounts
          presented for fiscal year l997, but the acquired assets are reflected
          in the balance sheet for that year.

4)        The increase in revenues in fiscal year 1998 is provided by the
          acquisition of Lewis Supply on June 26, 1997. See Note 2 of the June
          30, 1998 financial statements included in this Form 10-K for unaudited
          pro forma information combining the consolidated results of the
          Company and Lewis as if the Acquisition had occurred on July 1, 1995.






                                  Page 8 of 42
<PAGE>   9


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

PLAN OF OPERATION

         With the acquisition of Lewis (the "Acquisition") and the disposition
of its Government Services Group, and restructuring the Company under the SETECH
name, the Company is increasing its focus on integrated supply. While the
Company believes that it will realize certain long-term synergies through the
combination of the integrated supply capacities of SETECH and Lewis, there can
be no assurance that such synergies will be realized. In fiscal 1998 these two 
companies were operated as separate entities.

         In recent months, the Company has expanded its integrated supply
business with its existing automotive manufacturing customer. The Company will
also seek to market its integrated supply services to other manufacturing
businesses. Company management constantly considers the most advantageous
utilization of its financial, personnel and tangible resources, including
appropriate acquisitions and dispositions.

FISCAL YEAR ENDING JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDING JUNE 30, 1997

         Revenues for fiscal year 1998 were $88.9 million, versus $35.2 million
in fiscal 1997, an increase of $53.7 million, or 153%. The increase in revenues
resulted from the addition of Lewis, which was acquired on June 26, 1997, and
provided no revenues in the 1997 fiscal year. Revenues of operations other than
Lewis decreased $746,000, driven by an increase of $2.3 million dollars in
revenue from Southeastern and a decrease of $3.0 million in product revenues for
SETECH. The decline in product revenues by SETECH has minimal impact on overall
results due to all product sales being at cost. (See Item 1: Business).

         In May 1998, a contract was signed with an existing SETECH customer to
establish eight additional sites, with potential annual revenues of up to $30
million. In June 1998, an additional six sites were agreed upon, but not
contracted for, with potential additional revenues of up to $125 million on an
annual basis, when fully implemented. Partial implementation of these sites will
occur in fiscal 1999, but no guarantee of future revenues is certain. This
increase in operations will require a substantial increase in working capital
(see Liquidity and Capital Resources section of this item). Please refer to the
"Cautionary Statements" presented on page 2 of this annual report on Form 10-K,
regarding the risks and uncertainties related to these forward looking
statements.

         Gross profit for fiscal 1998 was $6.3 million (7.1% of sales), versus
$3.7 million (10.4% of sales) for fiscal 1997. Of the $2.6 million increase in
gross profit, approximately $1.7 million was provided by the operations of
Lewis. Of the remaining amount, increased SETECH fees provided approximately
$896,000, with the remainder from the increased sales of Southeastern, albeit at
a lower gross profit as a percentage of revenues. Gross profit as a percentage
of sales declined due to gross margin as a percentage of sales for Lewis being
lower than the preacquisition percentages. This was impacted in the fourth 
quarter by adjustments identified as part of the year-end close, which reduced 
margins in the operation of Lewis' integrated supply sites. As the nature of the
consolidated business shifts from traditional distribution and machine shop
operations to more industrial supply, the gross profit as a percentage of
revenues will continue to decline as profit from product sales, which are sold
at cost, is replaced with profit from fees.

         General and administrative expenses for fiscal 1998 were $4.2 million
(4.7% of revenues), versus $2.1 million (5.9% of revenues) in fiscal 1997. Of
the $2.1 million increase, approximately $1.2 million resulted from the addition
of Lewis' operations. Operations of Southeastern resulted in a reduction in
general and administrative expenses of approximately $76,000. The remaining $1.0
million increase resulted from increased expenses in the marketing and site
implementations areas, including salaries, and travel. The funds were expended
in the acquisition of new integrated supply contracts that were signed late in
the fiscal year and provided no revenues.

         Interest expense for fiscal 1998 was $2.1 million, versus $769,000 in
fiscal 1997. Of the $1.3 million increase, $733,000 was attributable to Lewis,
$18,000 to Southeastern, and the remainder to SETECH. The increase in SETECH is
attributable to increased borrowing for inventories and receivables. The
increase in interest expense was partially offset by a $670,000 increase in
interest income, substantially driven by interest charges to customers of Lewis.

         Income tax provision in fiscal 1998 was $116,000, versus $428,000 in
fiscal 1997. The effective rate for fiscal 1998 was 67.8% as compared to 45.5%
in fiscal 1997. The difference in the rate is due to the impact of goodwill 
amortization and travel and entertainment expenses which are not deductible for 
taxes (Please see Notes 2 and 8 of the June 30, 1998 financial statements for 
further explanation).



                                  Page 9 of 42
<PAGE>   10


FISCAL YEAR ENDING JUNE 30,1997 COMPARED TO FISCAL YEAR ENDING JUNE 30, 1996

         This discussion does not reflect amounts attributable to the Government
Services Division, sold by the Company on January 31, 1997, and accounted for as
a separate line item called "Discontinued Operations" in the Company's
Statements of Operations included in the June 30, 1997 financial statements. Nor
does it include amounts attributable to Lewis, acquired by the Company June 26,
1997. (Please see Note 2 of the June 30, 1998 financial statements included in
this Form 10-K for unaudited pro forma information combining the consolidated
results of the Company and Lewis as if the Acquisition had occurred on July 1,
1995.)

         Revenues for fiscal 1997 were $35.2 million, versus $34.5 million for
fiscal 1996, an increase of $700,000 or 2.0%. (Please see Note 1 of the June 30,
1998 financial statements included with Form 10-K relating to "Reclassification
of Financial Statement Presentation," where it indicates that amounts received
from customers for the cost of inventory acquired and sold under inventory
procurement and management contracts, which were previously recorded as a
reduction in cost of revenues, have been reclassified as revenues.) This
increase represents a $961,000 increase in Southeastern revenues and a $261,000
decline in SETECH revenues. The decline in product revenues by SETECH has
minimal impact on overall results due to all product sales being at cost. (See
Item I: Business).

         Gross profit for fiscal 1997 was $3.7 million (10.4% of sales), versus
$3.0 million (8.6% of sales) for fiscal 1996. Approximately $208,000 of the
increased margin was derived from Southeastern, and the remainder from SETECH.

         General and administrative expenses for fiscal 1997 were $2.1 million
(5.9% of revenues), versus $1.8 million (5.2% of revenues) in fiscal 1996. Of
the $291,000 increase, approximately $55,000 resulted from the increase in
Southeastern's revenues, with the remainder in SETECH. The increase at SETECH
was incurred in the initial increases in marketing costs for the expansion of
the integrated supply operations.

         Interest expense for fiscal 1997 was $769,000, versus $558,000 in
fiscal 1996. Of the $211,000 increase, $79,000 was attributable to Southeastern,
and the remaining to SETECH. The increase at SETECH is attributable to higher
interest rates and increased borrowings for inventories and receivables.

         Income tax expense in fiscal 1997 was $428,000, versus a benefit of
$693,000 in fiscal 1996. Please see Note 8 of the June 30, 1998 financial
statements included in this Form 10-K for detailed analysis and explanation.

SEASONALITY AND QUARTERLY INFORMATION

         Historically, neither SETECH nor the two domestic subsidiaries are
impacted by any significant seasonality issues in earnings, profits, or
statement of financial position.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's primary source of liquidity in the recent past has been
borrowings under its revolving credit facility. Net cash used by operating
activities was $6.3 million in fiscal 1998 due to the significant growth in
inventories for the integrated supply operations, as compared to net cash used
in operating activities of $35,000 in fiscal 1997. Net cash used in investing
activities in fiscal 1998 was $919,000, as compared to $4.3 million used in the
prior fiscal year, primarily due to the acquisition of Lewis. Net cash from
financing activities, primarily the revolving credit facility, was $6.4 million
in fiscal 1998, as compared to $4.7 million in the prior fiscal year. This
increase was primarily driven by utilization of the facility for financing of
inventories for integrated supply operations. At June 30, 1998, the Company's
current assets exceeded its current liabilities by approximately $25.9 million.

         The Company maintains a secured revolving line of credit with a banking
institution in the maximum amount of the lesser of $35 million or the total of
eligible accounts receivable and inventory as defined in the revolving line of
credit agreement. (Please see Exhibit 4.1 and Note 6 of the June 30, 1998
financial statements included in this Form 10-K for a description of the terms
and maturities of this loan.)




                                 Page 10 of 42
<PAGE>   11


         See Item 13, "Certain Relationships and Related Transactions," of this
Annual Report on Form 10-K for a description of the sale (and use of proceeds
thereof) of certain securities of the Company during the fiscal years ended June
30, 1997.

         The potential expansion of operations with a current customer, noted
above, have created a requirement for significant investment in inventories, up
to $150 million, to support that customer. Discussions are currently underway
for the expansion of the revolving credit line and potential acquisition of
subordinated debt. Management believes, but can give no assurance, that these
infusions of debt and equity capital will result in sufficient capital to
support the Company's existing and future operations, but the Company will be
required to seek external financing sources to support this expansion of its
existing lines of business. There can be no assurance that the Company would be
able to obtain such financing on reasonable or attractive terms, if at all.

YEAR 2000 ISSUE

         The Company operates two primary information systems, one for Lewis and
one for both SETECH and Southeastern Technology. The Lewis system is currently
compliant with year 2000 issues, and the SETECH/Southeastern system is being
updated with a new release of its application software that is compliant with
year 2000. The costs of this update are not material and the activities should
be completed by December 31, 1998. The key customers of the Company are
performing their own year 2000 reviews and, to the knowledge of Company
management, are committed to timely completion of those efforts. Vendors from
which the Company purchases products are diverse and varied, providing numerous
alternatives. Key vendors of the Company are performing their own year 2000
reviews and, to the knowledge of Company management, are committed to timely
completion of those efforts.

IMPACTS OF INFLATION

         Due to the nature of the operations of the Company, management believes
the impacts of inflation are not material.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pursuant to Securities and Exchange Commission release 34-38223 (January 31,
1997), the disclosure requirement contemplated by Item 305 of Regulation S-K in
response to this item is not currently mandated for the Company.



                      [THIS SPACE INTENTIONALLY LEFT BLANK]





                                 Page 11 of 42
<PAGE>   12


ITEM 8. FINANCIAL STATEMENTS.

CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                          JUNE 30,
                                                                                  ------------------------
                                                                                    1998            1997
                                                                                  --------        --------
<S>                                                                               <C>             <C>  
                                  ASSETS
CURRENT ASSETS:
    Cash and cash equivalents                                                     $    796        $  1,634
    Accounts receivable, less allowance for doubtful accounts of $157
       and $111, respectively                                                       10,856           8,450
    Inventories                                                                     26,079          17,305
    Deferred tax asset                                                                 440             520
    Prepaid expenses and other current assets                                          204             505
                                                                                  --------        --------
          Total current assets                                                      38,375          28,414
                                                                                  --------        --------
PROPERTY AND EQUIPMENT, NET                                                          2,584           1,747
NONCURRENT DEFERRED TAX ASSET                                                            -              31
COST IN EXCESS OF NET ASSETS ACQUIRED, NET OF ACCUMULATED AMORTIZATION OF
    $842 AND $560, RESPECTIVELY                                                      6,792           6,954
OTHER ASSETS                                                                            85             126
                                                                                  --------        --------
          Total assets                                                            $ 47,836        $ 37,272
                                                                                  ========        ========

                   LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    Current portion of long-term debt                                             $    413        $    412
    Current portion of capital lease obligations                                       208              95
    Accounts payable                                                                 9,851           5,974
    Accrued expenses                                                                 1,928           2,015
    Income taxes payable                                                                 -              86
                                                                                  --------        --------
          Total current liabilities                                                 12,400           8,582
                                                                                  --------        --------
LONG-TERM DEBT, NET OF CURRENT PORTION                                              26,609          20,100
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION                                      559             412
                                                                                  --------        --------
                                                                                    27,168          20,512
                                                                                  --------        --------
COMMITMENTS AND CONTINGENCIES                                                            -               -
PUTTABLE STOCK                                                                         530             510
                                                                                  --------        --------
STOCKHOLDERS' EQUITY:
    Common stock, $.01 par value, 10,000 shares authorized,
       5,679 and 5,669 shares issued, respectively                                      57              57
    Additional paid-in capital                                                      11,932          11,917
    Accumulated deficit                                                             (4,043)         (4,098)
    Treasury stock                                                                    (208)           (208)
                                                                                  --------        --------
                                                                                     7,738           7,668
                                                                                  --------        --------
          Total liabilities and stockholders' equity                              $ 47,836        $ 37,272
                                                                                  ========        ========
</TABLE>


                The accompanying notes to consolidated financial
            statements are an integral part of these balance sheets.





                                 Page 12 of 42
<PAGE>   13


CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                       FOR THE YEARS ENDED JUNE 30,
                                                                     1998          1997          1996
                                                                   --------      --------      --------
<S>                                                                <C>           <C>           <C>     
REVENUES                                                           $ 88,920      $ 35,168      $ 34,468
COST OF REVENUES                                                     82,574        31,501        31,510
                                                                   --------      --------      --------
          Gross profit                                                6,346         3,667         2,958
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                          4,155         2,056         1,765
                                                                   --------      --------      --------
          Operating income                                            2,191         1,611         1,193
                                                                   --------      --------      --------
OTHER INCOME (EXPENSE):
    Other income                                                         33           100            75 
    Interest expense                                                 (2,053)         (769)         (558)
                                                                   --------      --------      --------
                                                                     (2,020)         (669)         (483)
                                                                   --------      --------      --------
          Income from continuing operations before income taxes         171           942           710

INCOME TAX BENEFIT (PROVISION)                                         (116)         (428)          693
                                                                   --------      --------      --------
          Income from continuing operations                              55           514         1,403
                                                                   --------      --------      --------
DISCONTINUED OPERATIONS:
    Operating income (loss), net of applicable tax provision
       of $ -0-, $133, and $113, respectively                             -           112            (4)
    Loss on disposal, net of applicable tax provision
       of $ - 0 - , $311, and $ - 0 -,  respectively                      -          (112)            -
                                                                   --------      --------      --------
          Loss from discontinued operations                               -             -            (4)
                                                                   --------      --------      --------
NET INCOME                                                         $     55      $    514      $  1,399
                                                                   ========      ========      ========
NET INCOME PER SHARE:
    Basic -
       Income from continuing operations                           $   0.01      $   0.10      $   0.27
       Loss from discontinued operations                               0.00          0.00          0.00
                                                                   --------      --------      --------
          Net income per share                                     $   0.01      $   0.10      $   0.27
                                                                   ========      ========      ========
    Diluted -
       Loss from continuing operations                             $   0.01      $   0.09      $   0.24
       Income from discontinued operations                             0.00          0.00          0.00
                                                                   --------      --------      --------
          Net income per share                                     $   0.01      $   0.09      $   0.24
                                                                   ========      ========      ========
Weighted average shares - basic                                       5,506         5,261         5,159
                                                                   ========      ========      ========
Weighted average shares - diluted                                     5,506         6,153         6,106
                                                                   ========      ========      ========
</TABLE>


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





                                 Page 13 of 42
<PAGE>   14


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)

<TABLE>
<CAPTION>
                                          TREASURY STOCK           COMMON STOCK   ADDITIONAL
                                        -------------------      ---------------    PAID-IN   ACCUMULATED
                                        SHARES       AMOUNT      SHARES   AMOUNT    CAPITAL     DEFICIT       TOTAL
                                        ------      -------      ------   ------    -------     -------      -------
<S>                                     <C>         <C>          <C>      <C>       <C>       <C>            <C>
BALANCE (DEFICIT), at June 30, 1995          -      $     -       5,414     $54     $11,496     $(6,011)     $ 5,539
    Purchase of treasury stock           1,018       (1,264)          -       -           -           -       (1,264)
    Sales of treasury stock               (732)         909           -       -          16           -          925
    Net income                               -            -           -       -           -       1,399        1,399
                                         -----      -------       -----     ---     -------     -------      -------
BALANCE (DEFICIT), at June 30, 1996        286      $  (355)      5,414     $54     $11,512     $(4,612)     $ 6,599


    Sales of treasury stock               (122)         147           -       -          24           -          171
    Issuance of stock for Lewis,
         net of amounts redeemable
         under put option                    -            -         255       3         381           -          384
    Net income                               -            -           -       -           -         514          514
                                         -----      -------       -----     ---     -------     -------      -------
BALANCE (DEFICIT), at June 30, 1997        164      $  (208)      5,669     $57     $11,917     $(4,098)     $ 7,668


    Issuance of stock for Lewis,
         net of amounts redeemable
         under put option                    -            -          10       -          15           -           15
    Net income                               -            -           -       -           -          55           55 
                                         -----      -------       -----     ---     -------     -------      -------
BALANCE (DEFICIT), at June 30, 1998        164      $  (208)      5,679     $57     $11,932     $(4,043)     $ 7,738
                                         =====      =======       =====     ===     =======     =======      =======
</TABLE>





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





                                 Page 14 of 42
<PAGE>   15


CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        FOR THE YEARS ENDED JUNE 30,
                                                                      1998          1997         1996
                                                                   ---------      --------      -------
<S>                                                                <C>            <C>           <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:
    Income from continuing operations                              $      55       $   514      $ 1,403
    Adjustments to reconcile income from continuing operations
       to net cash used in continuing operations:
          Depreciation and amortization                                  656           315          344
          Bad debt                                                        46             -           (6)
          Deferred income taxes                                          111           385         (567)
          Gain on disposal of equipment                                  (12)            -           (4)
          Changes in operating assets and liabilities:
              Accounts receivable                                     (2,452)        1,262       (3,076)
              Inventories                                             (8,774)       (1,592)      (3,047)
              Prepaid expenses and other assets                          342           (90)         (25)
              Accounts payable                                         3,877          (989)       2,150
              Accrued expenses                                           (52)          121           71
              Income taxes payable                                       (86)           39         (129)
                                                                   ---------      --------      -------
                 Net cash used in continuing operations               (6,289)          (35)      (2,886)
                                                                   ---------      --------      -------
    Discontinued operations:
          Income (loss) from discontinued operations                       -           112           (4)
          Loss on disposal of discontinued operations                      -          (112)           -
          Changes in net assets of discontinued operations                 -           (91)           4
                                                                   ---------      --------      -------
                 Net cash used in discontinued operations                  -           (91)           -
                                                                   ---------      --------      -------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from sale of equipment                                       12             -            4
    Proceeds from sale of business                                         -         2,150            -
    Consideration paid for Lewis                                           -        (6,306)           -
    Purchase of equipment                                               (931)         (122)         (54)
                                                                   ---------      --------      -------
                 Net cash used in investing activities                  (919)       (4,278)         (50)
                                                                   ---------      --------      -------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from (payments on) short-term debt                        -        (7,794)       3,165
    Proceeds from long-term debt                                      90,385        13,012        1,000
    Payments on long-term debt                                       (83,875)       (1,254)        (470)
    Payments on capital lease obligations                               (140)          (88)           -
    Proceeds from sale of treasury stock, less related
       receivable                                                          -           171          264
    Collection of stock subscriptions receivable                           -           662            -
    Purchase of treasury stock                                             -             -       (1,264)
                                                                   ---------      --------      -------
                 Net cash provided by financing activities             6,370         4,709        2,695
                                                                   ---------      --------      -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    (838)          305         (241)
                                                                                                    
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                         1,634         1,329        1,570
                                                                   ---------      --------      -------
CASH AND CASH EQUIVALENTS, END OF PERIOD                           $     796      $  1,634      $ 1,329
                                                                   =========      ========      =======
</TABLE>


                                   (continued)




                                 Page 15 of 42
<PAGE>   16


CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (CONTINUED)

<TABLE>
<CAPTION>
                                                                        FOR THE YEARS ENDED JUNE 30,
                                                                      1998          1997         1996
                                                                   ---------      --------      -------
<S>                                                                <C>            <C>           <C>    
SUPPLEMENTARY INFORMATION:
    Cash paid from continuing operations during the year for:
       Interest                                                    $   2,326      $    747      $   573
                                                                   =========      ========      =======
       Income taxes                                                $     467      $     48      $    38
                                                                   =========      ========      =======

    Non-cash transactions:
       Notes payable issued to former shareholders of Lewis
          in connection with acquisition                           $       -      $    750      $     -
                                                                   =========      ========      =======
       Stock issued for acquisition of Lewis                       $       -      $    883      $     -
                                                                   =========      ========      =======
       Additional shares of stock to be issued for acquisition
          of Lewis                                                 $     (35)     $    107      $     -
                                                                   =========      ========      =======
       Long-term capital leases entered into                       $     400      $    363      $   252
                                                                   =========      ========      =======
</TABLE>











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






                                 Page 16 of 42
<PAGE>   17


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT NUMBERS OF SHARES AND PER SHARE DATA)


1.   THE COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

     ORGANIZATION

     SETECH, Inc. (the "Company", formerly named Aviation Education Systems,
     Inc.) is a provider of integrated supply services specializing in the
     procurement and management of tooling, supply and proprietary spare parts
     inventories for the automotive and other manufacturing industries, as well
     as a provider of sophisticated machining services primarily for aviation
     and medical instrument manufacturing concerns.

     Prior to January of 1997, the Company was also a provider of air traffic
     control, weather observing and forecasting services under contracts with
     the FAA and other federal, state and local governments and agencies through
     its former subsidiaries Barton ATC, Inc. and Barton ATC International, Inc.
     In January of 1997, the Company sold its stock in these subsidiaries (see
     Note 15).

     PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of SETECH, Inc.
     and its wholly-owned subsidiaries Lewis Supply Company, Inc. ("Lewis"),
     S.E.T.C. de Mexico, CETECH de Mexico, and Southeastern Technology, Inc.
     References to the Company in these notes include SETECH, Inc. and its
     subsidiaries on a consolidated basis. All significant intercompany balances
     and transactions have been eliminated in consolidation.

     CASH EQUIVALENTS

     The Company considers all highly liquid debt instruments with an original
     maturity of three months or less to be cash equivalents.

     INVENTORIES

     Inventories are generally stated at the lower of cost or market. Cost is
     determined principally using the first-in, first-out (FIFO) method.

     PROPERTY AND EQUIPMENT

     Property and equipment are recorded at cost and depreciated on a
     straight-line basis over the estimated useful lives of the assets as
     follows: vehicles and machinery and equipment - 3 to 7 years; furniture and
     fixtures - 5 to 7 years; leasehold improvements - 7 to 15 years; building -
     40 years. Expenditures for maintenance and repairs are generally charged to
     expense as incurred, whereas expenditures for improvements and replacements
     are capitalized.

     The cost and accumulated depreciation of assets sold or otherwise disposed
     of are removed from the accounts and the resulting gain or loss is
     reflected in the consolidated statements of operations.

     Property and equipment obtained through purchase acquisitions are stated at
     the estimated fair value determined on the respective dates of
     acquisitions.

     INTANGIBLE ASSETS

     The excess of the aggregate purchase price over the fair value of assets of
     businesses acquired (goodwill) are being amortized on a straight-line basis
     over a period of 15 to 40 years.







                                 Page 17 of 42
<PAGE>   18
     Subsequent to an acquisition, the Company continually evaluates whether
     later events and circumstances have occurred that indicate the remaining
     estimated useful lives of its intangible assets may warrant revision or
     that the remaining balance of such assets may not be recoverable. When
     factors indicate that such assets should be evaluated for possible
     impairment, the Company uses an estimate of the acquired operation's
     undiscounted cash flows over the remaining life of the asset in measuring
     whether the asset is recoverable.

     REVENUE AND EXPENSE RECOGNITION

     The Company maintains contracts with its customers to procure and manage
     tooling, supply and proprietary spare parts inventories under various
     terms. The Company's contracts are generally from three to five years in
     length with renewal provisions for subsequent periods. Management expects
     to renew the Company's existing contracts for periods consistent with the
     remaining renewal options allowed by the contracts or other reasonable
     extensions.

     Revenues from procurement and inventory management services are recognized
     as the related inventory items are delivered and as fees and incentives are
     earned.

     CREDIT RISK AND CONCENTRATION OF ACTIVITIES

     The Company grants credit terms in the normal course of business to its
     customers. Credit limits, ongoing credit evaluation and account monitoring
     procedures are utilized to minimize the risk of loss. Collateral is
     generally not required.

     A significant number of the Company's customers are in the aviation,
     automobile and medical instrument industries. Approximately 24%, 73% and
     73% of the Company's total revenues, for the 1998, 1997 and 1996 fiscal
     years, respectively, were to a customer in the automobile industry. Trade
     accounts receivable at June 30, 1998 include approximately $2,400 due from
     the same customer.

     INCOME TAXES

     The Company accounts for income taxes under Statement of Financial
     Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
     Under the asset and liability method of SFAS 109, deferred tax assets and
     liabilities are recognized for the future tax consequences attributable to
     differences between the financial statement carrying amounts of existing
     assets and liabilities and their respective tax bases. Deferred tax assets
     and liabilities are measured using enacted tax rates expected to apply to
     taxable income in the fiscal years in which those temporary differences are
     expected to be recovered or settled. Under SFAS 109, the effect on deferred
     tax assets and liabilities of a change in tax rates is recognized in income
     in the period that includes the enactment date.

     STOCK-BASED COMPENSATION

     Statement of Financial Accounting Standards No. 123, "Accounting for
     Stock-Based Compensation" ("SFAS 123"), encourages, but does not require,
     companies to record compensation cost for stock-based employee compensation
     plans at fair value. The Company has chosen to continue to account for
     employee stock-based compensation using the intrinsic value method as
     prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
     Stock Issued to Employees" ("APB Opinion No. 25"), and related
     Interpretations. Under APB Opinion No. 25, no compensation cost related to
     employee stock options has been recognized because all options are granted
     with exercise prices equal to or greater than the estimated fair market
     value at the date of grant. See Note 10 for further discussion.







                                 Page 18 of 42
<PAGE>   19
     NET INCOME PER SHARE

     Statement of Financial Accounting Standards No. 128, "Earnings per Share"
     ("SFAS 128"), establishes standards for computing and presenting earnings
     per share. The Company adopted the provisions of SFAS 128 in the second
     quarter of fiscal 1998 and restated net income per share for all
     periods presented, such adoption did not have a material effect on the
     Company's financial statements, taken as a whole. Basic income per share is
     computed by dividing net income by the weighted average number of common
     shares outstanding during the year. Diluted income per share reflects the
     dilutive effect of stock options outstanding during the period and common
     shares contingently issuable upon conversion of convertible debt securities
     in periods in which such exercise would cause dilution and the effect on
     net income of converting the debt securities.

     RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION

     Amounts received from customers for the cost of inventory acquired and sold
     under inventory procurement and management contracts, which were previously
     recorded as a reduction in cost of revenues, have been reclassified as
     revenues in the accompanying consolidated statements of operations for
     fiscal year 1996. This reclassification conforms the Company's presentation
     to industry practice.

     USE OF 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 as well as the reported amounts of revenues and
     expenses during the reporting period. Actual results may differ from those
     estimates.

     NEW ACCOUNTING PRONOUNCEMENTS

     In February 1997, the Financial Accounting Standards Board (the "FASB")
     issued Statement of Financial Accounting Standards No. 129, "Disclosure of
     Information about Capital Structure" ("SFAS 129"). SFAS 129 establishes
     standards for disclosing information about an entity's capital structure.
     The Company adopted SFAS 129 in the second quarter of fiscal 1998. Such
     adoption did not have a material impact on the Company's financial
     position, results of operations or cash flows.

     In June 1997, the FASB issued Statement of Financial Accounting Standards
     No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
     establishes standards of reporting for comprehensive income and its
     components in a full set of financial statements. SFAS 130 is effective for
     fiscal years beginning after December 15, 1997. Management does not expect
     the adoption to have a material impact on the Company's results of
     operations, financial condition or cash flows.

     In June 1997, the FASB issued statement of Financial Accounting Standards
     No. 131, "Disclosures about Segments of an Enterprise and Related
     Information" ("SFAS 131"). SFAS 131 requires public companies to report
     financial and descriptive information about its reportable operating
     segments in annual financial statements and in interim financial reports
     issued to shareholders. The Company will be required to adopt the
     provisions of this statement in the fourth quarter of fiscal year 1999.
     Management is evaluating this standard and determining if the Company will
     be required to revise its current methods of reporting financial data.

     In April 1998, the Accounting Standards Executive Committee of the American
     Institute of Certified Public Accountants issued Statement of Position
     98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5"). SOP
     98-5 requires the costs of start-up activities and organizational costs, as
     defined, to be expensed as incurred. SOP 98-5 is effective for fiscal years
     beginning after December 15, 1998. Management does not expect the adoption
     to have a material impact on the Company's results of operations, financial
     condition or cash flows.





                                 Page 19 of 42
<PAGE>   20


2.   ACQUISITION

     Effective June 26, 1997, the Company acquired Lewis in a purchase
     transaction. The acquisition was consummated by the exchange of 255,102
     shares of the Company's common stock, a commitment to issue an additional
     30,612 shares of the Company's common stock, $5,953 cash and notes payable
     totaling $750 for 100% of the outstanding shares of Lewis's common stock.
     The principal shareholder and three employees of Lewis also entered into an
     employment agreement and an agreement not to compete with the Company (see
     Note 12).

     10,204 of the 30,612 additional shares of the Company's common stock were
     issued in fiscal 1998 and the remaining additional shares will be issued in
     increments of 10,204 shares per year on June 1 of 1999 and 2000,
     respectively. These shares have been valued as of the date of the
     acquisition and recorded in the accompanying consolidated balance sheets as
     an accrued expense. The total purchase price, including costs associated
     with the acquisition, was $8,056 which has been allocated to the assets
     acquired and liabilities assumed based on their estimated fair values as
     follows:


<TABLE>
<S>                                                       <C>       
                 Current assets                           $   11,779
                 Property and equipment                          844
                 Goodwill                                      5,443
                 Other assets                                    120
                 Deferred tax assets, net                        324
                 Current liabilities                          (4,046)
                 Long-term debt                               (6,408)
                                                          ----------
                                                          $    8,056
                                                          ==========
</TABLE>

     The following unaudited pro forma information combines the consolidated
     results of the Company and Lewis as if the acquisition had occurred on July
     1, 1995, after giving effect to amortization of goodwill and interest
     expense on borrowings to finance the acquisition. The pro forma information
     is not necessarily indicative of the results of operations which would have
     been realized during such periods. While the Company believes that it will
     realize certain long-term synergies through the integration of certain
     operating functions, there can be no assurances that such synergies can be
     realized, and no amounts have been reflected in the pro forma adjustments
     to reflect such anticipated synergies.

<TABLE>
<CAPTION>
                                                                       FISCAL YEAR ENDED
                                                                 JUNE 30, 1997  JUNE 30, 1996
                                                                 -------------  -------------
                                                                         (Unaudited)
<S>                                                                <C>            <C>       
       Revenues from continuing operations                         $   76,254     $   72,605
                                                                   ==========     ==========
       Net income from continuing operations                       $      432     $    1,414
                                                                   ==========     ==========
       Net income from continuing operations per share:

            Basic                                                  $     0.08     $     0.26
                                                                   ==========     ==========
            Diluted                                                $     0.06     $     0.21
                                                                   ==========     ==========
</TABLE>






                                 Page 20 of 42
<PAGE>   21


3.   INVENTORIES

     Inventories as of June 30, 1998 and 1997 consist of the following:

<TABLE>
<CAPTION>
                                                                    1998         1997
                                                                  -------      -------
<S>                                                               <C>          <C>    
               Parts purchased under procurement contracts        $24,540      $15,587
               Specialty machining contracts in process             1,308        1,505
               Raw materials                                          231          213
                                                                  -------      -------
                                                                  $26,079      $17,305
                                                                  =======      =======
</TABLE>






                                 Page 21 of 42
<PAGE>   22


4.   PROPERTY AND EQUIPMENT

     Property and equipment, at cost, as of June 30, 1998 and 1997 consist of
     the following:

<TABLE>
<CAPTION>
                                                                    1998         1997
                                                                  -------      -------
<S>                                                               <C>          <C>    
               Land                                               $    29      $    29
               Building                                               271          271
               Machinery and equipment                              4,300        2,720
               Furniture and fixtures                                 243          596
               Vehicles                                                81           40
               Leasehold improvements                                 150          150
                                                                  -------      -------
                                                                    5,074        3,806
               Less accumulated depreciation and amortization      (2,490)      (2,059)
                                                                  -------      -------
                                                                  $ 2,584      $ 1,747
                                                                  =======      =======
</TABLE>


     Depreciation expense totaled $545, $170 and $198 in fiscal 1998, 1997 and
     1996, respectively. Substantially all property and equipment is pledged as
     collateral on the Company's revolving line of credit (See Note 6).

5.   ACCRUED EXPENSES

     Accrued expenses as of June 30, 1998 and 1997 consist of the following:

<TABLE>
<CAPTION>
                                                                    1998         1997
                                                                  -------      -------
<S>                                                               <C>          <C>    
               Employees' compensation and benefits               $ 1,626      $   906
               Other accrued expenses                                 302          950
               Customer deposits                                        -          159
                                                                  -------      -------
                                                                  $ 1,928      $ 2,015
                                                                  =======      =======
</TABLE>




                                 Page 22 of 42
<PAGE>   23


6.   LONG-TERM DEBT

     Long-term debt as of June 30, 1998 and 1997, consists of the following
     balances:

<TABLE>
<CAPTION>
                                                                                         1998          1997
                                                                                       --------      --------
<S>                                                                                    <C>           <C>
               Revolving line of credit to bank, interest due monthly at
                   LIBOR plus  2.5% (8.5% at June 30, 1998). Matures
                   June 26, 2000.                                                      $ 24,775      $ 17,806
                                                                                                      
               Notes payable to former stockholders of Lewis, due in
                   annual installments of $250 principal plus interest
                   at 7.5%. Matures June 1, 2000.                                           500           750

               Convertible subordinated debentures, due in annual installments of
                   principal of $750 beginning July 1, 1999. Interest payable
                   annually at 8.5%. Matures July 1, 2000. Convertible to common
                   stock in the event of default at a rate of one common share for
                   each $3.00 of principal and interest outstanding.                      1,500         1,500

               Convertible subordinated debentures, due in annual installments of
                   principal and interest of $161 at 8.0%. Matures from June 30,
                   1999 to March 1, 2001. Convertible to common stock in the event
                   of default at varying rates of one common share for each $1.00 to
                   $1.06 of principal and interest outstanding.                             229           363

               Other notes payable                                                           18            93
                                                                                       --------      --------
                                                                                         27,022        20,512
                                                                                                       
                                      Less current portion                                 (413)         (412)
                                                                                       --------      --------
                                                                                       $ 26,609      $ 20,100
                                                                                       ========      ========
</TABLE>

     The Company's debentures are payable to two of its stockholders and are
     subordinated to all other indebtedness. Outstanding principal and accrued
     interest is convertible to the Company's common stock only in the event of
     default. The notes payable to former Lewis stockholders are subordinated to
     the revolving line of credit facility.

     Maximum borrowings available under the revolving line of credit are limited
     to the lesser of $35,000 or the total of eligible accounts receivable and
     inventory as defined in the revolving line of credit agreement (the
     "Agreement"). Additional borrowings available under the line at June 30,
     1998 were approximately $1,139. In addition to customary provisions related
     to events of default, the Agreement provides that an event of default will
     occur upon the termination of any "eligible supply contract" (as defined in
     the Agreement) or upon a change in control of the Company (as defined in
     the Agreement). The revolving line of credit is secured by substantially
     all assets of the Company and contains covenants regarding certain
     financial statement amounts, ratios and activities of the Company and its
     subsidiaries. At June 30, 1998, the Company was in compliance with such
     covenants.







                                 Page 23 of 42
<PAGE>   24


     Annual maturities of long-term debt are summarized as follows:

<TABLE>
<CAPTION>
                    YEAR ENDING
                     JUNE 30,
                     --------

<S>                                           <C>     
                       1999                   $    413
                       2000                     25,822
                       2001                        787
                                              --------
                                              $ 27,022
                                              ========
</TABLE>

7.   CAPITAL LEASE OBLIGATIONS

     The Company leases certain manufacturing equipment under capital leases.
     Related cost and accumulated depreciation of assets under capital leases at
     June 30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                    1998               1997
                                                   -------             -----
<S>                                                <C>                 <C>  
               Machinery and equipment             $ 1,015             $ 615
               Accumulated depreciation               (200)              (81)
                                                   -------             -----
                                                   $   815             $ 534
                                                   =======             =====
</TABLE>


     The future minimum lease payments required under the capital leases at June
     30, 1998 are summarized as follows:

<TABLE>
<S>                                                                       <C>  
               1999                                                        $ 269
               2000                                                          215
               2001                                                          193
               2002                                                          172
               2003                                                           56
                                                                           -----
               Total minimum lease obligations                               905
               Less: interest                                               (138)
                                                                           -----
               Present value of total minimum lease obligations            $ 767
                                                                           =====
</TABLE>

8.   INCOME TAXES

     Income tax benefit (provision) on income from continuing operations
     consisted of the following for the fiscal years ended June 30, 1998, 1997,
     and 1996:

<TABLE>
<CAPTION>
                                                        1998         1997             1996
                                                       -----         -----          ------- 
<S>                                                     <C>          <C>            <C>     
               Current tax benefit (provision)         $  (4)        $ (43)         $    65 
               Deferred tax provision                   (112)         (392)            (441)
               Reduction in valuation allowance            -             7            1,069 
                                                       -----         -----          ------- 
                                                       $(116)        $(428)         $   693 
                                                       =====         =====          ======= 
</TABLE>







                                 Page 24 of 42
<PAGE>   25


     A reconciliation of the U.S. Federal statutory rate to the effective rate
     for income tax benefit (provision) on income from continuing operations is
     as follows:

<TABLE>
<CAPTION>
                                                     1998          1997             1996
                                                    -----         -----          ------- 
<S>                                                  <C>          <C>            <C>    
               U.S. Federal statutory rate          $ (58)        $(320)         $  (200)
               State taxes on income                   (7)          (38)             (18)
               Expenses not deductible                (51)          (57)             (90)
               Other                                    -           (20)             (68)
               Change in valuation allowance            -             7            1,069 
                                                    -----         -----          ------- 
                                                    $(116)        $(428)         $   693 
                                                    =====         =====          ======= 
</TABLE>

     Significant components of the Company's deferred tax liabilities and
     assets, using a tax rate of 38%, as of June 30, 1998 and 1997 are as
     follows:

<TABLE>
<CAPTION>
                                                               1998             1997
                                                               ----             ----
<S>                                                            <C>              <C> 
               Current assets:                                                  
                   Reserves on assets                          $332             $314
                   Liabilities not yet deductible               146              188
                   Other                                        (38)              18
                                                               ----             ----
                               Net current asset                440              520
                                                               ----             ----
               Noncurrent assets (liabilities):                                 
                   Net operating loss deductions                  -               67
                   Other                                          -              (36)
                                                               ----             ----
                      Noncurrent asset                            -               31
                      Less valuation allowance                    -                -
                                                               ----             ----
                               Net noncurrent asset               -               31
                                                               ----             ----
               Total net deferred tax asset                    $440             $551
                                                               ====             ====
</TABLE>

     SFAS 109 requires the Company to record a valuation allowance when it is
     "more likely than not that some portion or all of the deferred tax assets
     will not be realized." It further states that "forming a conclusion that a
     valuation allowance is not needed is difficult when there is negative
     evidence such as cumulative losses in recent years." In fiscal 1996, the
     Company significantly reduced a previously recorded valuation allowance
     based upon expected realization of tax benefits. The ultimate realization
     of deferred income tax assets depends on the Company's ability to generate
     sufficient taxable income in the future. If the Company is unable to
     generate sufficient taxable income in the future through operating results
     or tax planning opportunities, increases in the valuation allowance will be
     required through a charge to expense (decreasing stockholders' equity).


9.   PUTTABLE STOCK AND SHAREHOLDER AGREEMENT

     Each of the Company's shares of common stock issued and to be issued in
     connection with the acquisition of Lewis, is subject to a shareholder
     agreement. Under the terms of the agreement, the shareholder has the option
     to require the Company to repurchase the shares at a price of $2.00 per
     share if the Company has not effected a public offering of the Company's
     common stock on a major stock exchange prior to April 30, 2000, or in the
     event of a change in control of the Company (as defined in the agreement).
     The agreement also requires the shareholder to grant the Company a right of
     first refusal in certain circumstances (as defined in the agreement) on any
     proposed sale of the Company's common stock by the shareholder. The
     agreement expires on June 30, 2000, and was not effected by the resignation
     of the individual effective September 1, 1998 (See Note 12).







                                 Page 25 of 42
<PAGE>   26

10.  STOCKHOLDERS' EQUITY

     COMMON STOCK

     During fiscal 1997, the Company decreased the number of authorized shares
     of common stock from 400,000,000 to 10,000,000.

     On February 28, 1996, the Company repurchased 1,018,410 shares of the
     Company's common stock held by a former executive for $1,264. In fiscal
     1996, the Company reissued 732,500 of these treasury shares to certain
     officers, affiliates and existing shareholders for $925. During fiscal
     1997, a director and certain officers acquired 122,215 shares for $171.

     STOCK OPTIONS

     In August 1994, the Company approved stock option plans for officers, key
     executives and directors, which provide for both non-qualified and
     qualified incentive stock option grants for which options may be granted to
     "key employees" as designated by the Board of Directors. These options will
     vest over a period of four years and expire either three months after
     termination of employment or ten years after date of grant. The Company
     reserved up to 250,000 shares of its common stock for future issuance under
     these plans. At June 30, 1998, the Company had options for 76,556 shares
     outstanding under the plan with exercise prices ranging from of $1.40 to
     $2.00 per share. At June 30, 1997 the Company had options for 29,556 shares
     outstanding under the plan with an exercise price of $1.40. No options were
     outstanding under the plan at June 30, 1996. No options were vested as of
     June 30, 1998.

     In addition to the above plans, the Company issued options for 45,000
     shares to an employee and former shareholder of Lewis during fiscal 1997.
     The options became exercisable upon issuance, have an exercise price of
     $3.50 per share and expire one month after termination of the individual's
     employment with the Company. This individual resigned effective September
     1, 1998, which resulted in the expiration of his options on October 1,
     1998.

     Effective July 1, 1997, the Company established a stock option plan for
     nonemployee directors in an effort to build proprietary interest among the
     Company's nonemployee directors and thereby secure for the Company's
     shareholders the benefits associated with common stock ownership by those
     who will oversee the Company's future growth and success. These options
     will vest over a period of six months and will expire ten years after date
     of grant. The Company reserved up to 200,000 shares of its common stock for
     future issuance under this plan. At June 30, 1998, the Company had options
     for 17,600 shares outstanding under the plan with an exercise price of
     $1.44 per share. Each nonemployee director who has received an initial
     grant of an option shall automatically be granted an option to purchase an
     additional 4,400 shares of Common Stock annually as long as they remain
     directors.

     The Company accounts for options issued to employees under APB Opinion No.
     25. All options are granted with exercise prices equal to or greater than
     management's estimate of the fair value of the Company's common stock on
     the date of grant. As a result, no compensation cost has been recognized.

     Had compensation cost for the Company's employee stock option plans been
     determined based on the fair value at the grant date for awards in 1998 and
     1997 consistent with the provisions of SFAS No. 123, the Company's net
     income and earnings per share would have been reduced to the following pro
     forma amounts for fiscal 1998 and 1997:






                                 Page 26 of 42
<PAGE>   27



<TABLE>
<CAPTION>
                                                                               1998                1997
                                                                            -----------         -----------
<S>                                                                         <C>                 <C>        
               Net income:                   As reported                    $        55         $       514
                                                                            ===========         ===========
                                             Pro forma                      $        49         $       491
                                                                            ===========         ===========
               Net income per share:
                                                                            ===========         ===========
                    Basic                    As reported                    $      0.01         $      0.10
                                                                            ===========         ===========
                                             Pro forma                      $      0.01         $      0.09
                                                                            ===========         ===========
                    Diluted                  As reported                    $      0.01         $      0.09
                                                                            ===========         ===========
                                             Pro forma                      $      0.01         $      0.09
                                                                            ===========         ===========
</TABLE>


     The resulting pro forma compensation cost may not be representative of that
     to be expected in future years.

     The fair value of each option on its date of grant has been established for
     pro forma purposes using the Black-Scholes option pricing model using the
     following weighted average assumptions:


<TABLE>
<CAPTION>
                                                                       1998                1997
                                                                       ----                ----

<S>                                                                    <C>                 <C>  
                         Expected dividend yield                       0.00%               0.00%
                         Expected stock price volatility               0.00%               0.00%
                         Risk free interest rate                       6.00%               6.05%
                         Expected life of option                     6 years             5 years
</TABLE>


11.  NET INCOME PER SHARE

     The following table presents information necessary to calculate diluted net
     income per share for the fiscal years ended June 30, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                   1998              1997              1996
                                                                  ------            ------            ------
<S>                                                               <C>               <C>               <C>   
               Income from continuing operations                  $   55            $  514            $1,403

               Plus interest on convertible
                  debentures, net of associated tax
                  provision                                            -                62                47
                                                                  ------            ------            ------
               Adjusted income from continuing
                  operations                                      $   55            $  576            $1,450
                                                                  ======            ======            ======

               Weighted average shares outstanding                 5,506             5,261             5,159

               Plus additional shares issuable upon
                  conversion of convertible debentures                 -               892               947
                                                                  ------            ------            ------
               Adjusted weighted average shares
                  outstanding                                      5,506             6,153             6,106
                                                                  ======            ======            ======
</TABLE>
                                                                     






                                 Page 27 of 42
<PAGE>   28

12.  COMMITMENTS AND CONTINGENCIES

     LEASES

     The Company rents certain facilities, primarily office and warehousing
     facilities, under various operating leases which expire beginning March
     1998 through December 31, 2001. Also certain equipment and vehicles are
     operated under such leases. Rent expense totaled $443, $312 and $260 in
     fiscal 1998, 1997 and 1996, respectively.

     Minimum future lease payments are estimated as follows:

<TABLE>
<CAPTION>
                        YEAR ENDING JUNE 30,
                        --------------------

<S>                                                                 <C>   
                                1999                                 $ 244
                                2000                                   195
                                2001                                   174
                                                                     -----
                                                                     $ 613
                                                                     =====
</TABLE>




                                 Page 28 of 42
<PAGE>   29


     EMPLOYMENT AND NONCOMPETE AGREEMENTS

     Subsequent to its acquisition of Lewis, the Company entered into an
     employment agreement with a former shareholder of Lewis. The agreement
     contained certain severance benefits including one year of salary
     continuation if the employee is terminated without cause or resigns as a
     result of a change in control of the Company prior to the expiration of the
     agreement. The agreement, for a term of three years, included an agreement
     not to compete with the Company. Effective September 1, 1998, this employee
     resigned and as part of this resignation, the agreement not to compete with
     the Company was revised. While the individual can seek employment in
     competitive firms after December 31, 1998, they may not solicit business
     from the customers of Lewis, nor may they solicit employment of any Lewis
     employees.

     The Company also entered into employment agreements with three employees of
     Lewis. The agreements contain certain severance benefits including one year
     of salary continuation if the employees are terminated without cause prior
     to the expiration of the agreements. The agreements are for terms of two
     years and include an agreement not to compete with the Company for a period
     of one year after termination of employment with the Company.

     In May, the Company also entered into an annual employment agreement with 
     one employee of SETECH. The agreement deals with various compensation and 
     benefits issues, and includes an agreement not to compete with the Company
     for a period of two years after termination of employment with the Company.

     LITIGATION

     The Company is a defendant in certain legal matters in the ordinary course
     of business. Management believes that the resolution of such matters will
     not have a material effect on the Company's financial condition or results
     of operations.

13.  WAGE DEFERRAL PLAN

     The Company sponsors a 401(k) wage deferral plan (the SETECH, Inc. 401k
     Plan and the "Plan"). All employees of the Company age 21 and older are
     eligible to participate beginning either on April 1 or October 1 subsequent
     to hire date. During fiscal 1998, employees could contribute up to the
     lesser of $9 or 15% of their salaries, subject to IRS limitations. All
     participant contributions to the Plan are fully vested at the time of
     contribution. Discretionary employer contributions vest ratably over five
     years of service to the Company. During fiscal 1998, 1997 and 1996, the
     Company made discretionary employer contributions to the Plan totaling $76,
     $33 and $22, respectively.

14.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following estimated fair values of financial instruments is made in
     accordance with the requirements of Statement of Financial Accounting
     Standards No. 107, "Disclosures About Fair Value of Financial Instruments".
     The estimated fair value amounts have been determined by the Company using
     available market information and appropriate valuation methodologies.

     CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

     The carrying amounts of these items are a reasonable estimate of their fair
     value due to their short-term nature.

     LONG-TERM DEBT

     The carrying amount of long-term debt approximates fair value as the
     interest rates are predominantly variable which fluctuate with market
     conditions.






                                 Page 29 of 42
<PAGE>   30


15.  DISCONTINUED OPERATIONS

     On January 31, 1997, the Company sold the net assets of Barton ATC, Inc.
     and Barton ATC International, Inc., which represented its governmental
     services industry segment in prior years, to Serco, Inc. for $2,150.
     Accordingly, these operations are accounted for as discontinued operations,
     and their assets, liabilities and results of operations are segregated in
     the accompanying consolidated statements of operations, balance sheets and
     statements of cash flows. Revenues associated with the discontinued
     operations were $6,727 and $8,333 for the fiscal years ended June 30, 1997
     and 1996, respectively.

     The net loss on the disposal includes additional tax provision which
     resulted from the excess of the Company's book value of its investment in
     the discontinued operations over the value of those operations for income
     tax purposes. Income from discontinued operations for fiscal 1997 and 1996
     includes amortization of goodwill which is not deductible for income tax
     purposes.

16.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following table of supplementary financial information presents
     selected unaudited quarterly results of the Company's operations over the
     last eight quarters:

<TABLE>
<CAPTION>
                                                 Fiscal 1997                                      Fiscal 1998
------------------------------------------------------------------------------------------------------------------------------
                                  First      Second        Third       Fourth      First     Second        Third       Fourth
                                 Quarter     Quarter      Quarter     Quarter     Quarter    Quarter      Quarter      Quarter
------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>         <C>          <C>         <C>        <C>         <C>          <C>         <C>     
Sales                            $ 9,774     $ 8,864      $ 9,177     $ 7,353    $ 20,364    $ 22,351     $ 22,841    $ 24,364
Gross profit                         913       1,129        1,112         513       2,069       1,885        2,165         227
Selling, general,
     and administrative              543         610          729         174       1,152       1,100        1,307         596 
Operating income                     370         519          383         339         917         785          858        (369)
Income from continuing
      operations                     111         211          123          69         227         134          150        (456)
Net income                           168         259          166         (79)        227         134          150        (456)
Basic earnings per share             0.03        0.05         0.03       (0.01)       0.04        0.02         0.03       (0.10)
Diluted earnings per Share           0.03        0.04         0.03       (0.01)       0.04        0.02         0.03       (0.10)
</TABLE>






                                 Page 30 of 42
<PAGE>   31


REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS

To Setech, Inc.:

We have audited the accompanying consolidated balance sheets of SETECH, INC. (a
Delaware corporation formerly named Aviation Education Systems, Inc.) and
Subsidiaries as of June 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Setech, Inc. and
Subsidiaries as of June 30, 1998 and 1997 and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic financial 
statements taken as a whole. The Schedule II -- Valuation and Qualifying 
Accounts listed in the index of financial statements is presented for purposes 
of complying with the Securities and Exchange Commission's rules and is not 
part of the basic financial statements. This schedule has been subjected to the 
auditing procedures applied in the audit of the basic financial statements and, 
in our opinion, based on our audits and the reports of the other auditors, 
fairly states in all material respects the financial data required to be set 
forth therein in relation to the basic financial statements taken as a whole.

                                              /s/ Arthur Andersen LLP
Nashville, Tennessee
October  9, 1998 (except with 
respect to Note 6, as to which 
the date is October 21, 1998)
--------------------------------------------------------------------------------

The Board of Directors
SETECH, INC.
Murfreesboro, Tennessee

We have audited the accompanying consolidated balance sheet of SETECH, INC. (a
Delaware Corporation and formerly Aviation Education Systems, Inc.) and
Subsidiaries as of June 30, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SETECH, INC. and
subsidiaries as of June 30, 1996 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.


                                        /s/ Dempsey Vantrease & Follis PLLC
Murfreesboro, Tennessee
August 19, 1996






                                 Page 31 of 42
<PAGE>   32


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE.

         On June 27, 1997, the Company filed a Form 8-K relating to its change
in certifying accountant from Dempsey Wilson & Company, PC to Arthur Andersen
LLP. Accordingly, the disclosure called for by this Item has been previously
reported as that term is defined in Rule 12b-2 under the Exchange Act.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The Company's directors and executive officers are as follows:

Name, Age and Position                     Biographical Data
----------------------                     -----------------

Mr. Thomas N. Eisenman (48)
President and CEO
Director

         Mr. Eisenman was elected President and CEO of the Company in February
         1996. He is also the Chief Executive Officer of Southeastern and SETECH
         (since June 1995) and Lewis (since June 1997). He is a Director of the
         Company and all of its subsidiaries. He serves as a member of the
         Executive Committee of the Company's Board of Directors. Mr. Eisenman
         founded and served as President of Southeastern. He has also held the
         position of President of Titan Services, Inc. and served on the Board
         of Directors of SETECH, Inc. prior to the Company's acquisition in 1993
         of SEtech. He worked with Kennametal, Inc. in the area of Technical
         Representation, Technical Sales, and Manufacturing Management. He also
         served as a manufacturing engineer for Teledyne Firth Sterling. Mr.
         Eisenman holds a Bachelor of Arts degree in Natural Sciences from
         Slippery Rock University.

Richard Eddinger (47)
Vice President and CFO

         Mr. Eddinger is Vice President and Chief Financial Officer. He was
         hired to supplement the management team in May of 1998. Previously he
         served as Vice President of Finance, Chief Financial Officer and
         Treasurer of the Ellett Brothers Inc. for seven years. During this
         period he was involved in taking Ellett Brothers public and the
         management of the finance, accounting and information systems.
         Previously, he was Vice President of Information Resources, with Omni
         Hotel Management Corporation where he headed its efforts in the
         installation of telemarketing and electronic distribution systems. His
         experience also includes several years with Marriott Corporation and
         Arthur Andersen & Co. Mr. Eddinger holds a BSS in business from High
         Point University and a M.B.A. from the University of North Carolina at
         Chapel Hill. 

Cindy L. Rollins (34) 
Secretary, Treasurer, Director 
Vice President

         Ms. Rollins is Vice President, Secretary, Treasurer and a Director of
         the Company and of each of its three subsidiaries. Ms. Rollins became
         Secretary and Treasurer of the Company in July 1992. She became Chief
         Financial Officer of the Company on September 1, 1993; however, with
         the expected continued growth of the Company, a decision was made to
         separate the position of Chief Financial Officer and Treasurer. Ms.
         Rollins relinquished the Chief Financial Officer's position upon the
         arrival of Mr. Eddinger. Ms. Rollins was employed, in June 1986, by
         BARTON, where she had various finance and accounting positions. Ms.
         Rollins has served continuously as a member of the Board of Directors
         of the Company since August 13, 1992. She is a member of the Executive
         Committee of the Company's Board of Directors. Ms. Rollins holds a BBA
         in Accounting from Middle Tennessee State University.






                                 Page 32 of 42
<PAGE>   33


Mr. William J Ballard (56)
Director

         Mr. Ballard was elected as a member of the Board of Directors of the
         Company on April 25, 1996 by a vote of the Board to fill the vacancy
         created by the resignation of Robert W. Lynch, Jr. Mr. Ballard is the
         Chairman and Chief Executive Officer (since March 1993) of Children's
         Comprehensive Services, Inc., a public company engaged in the business
         of juvenile education and treatment. Previously, he served as President
         of Paladin Capital and President of Major Safe Company, Inc. Mr.
         Ballard holds a B.S. from Middle Tennessee State University and a
         M.B.A. from the University of Chicago.

Mr. Hans R. Buser (50)
Director

         Mr. Buser is a lawyer and certified accountant with degrees in Law
         (1972) from the University of Basel, Switzerland; and in Accounting
         (1982) from the Audit School of Basel, Switzerland. Mr. Buser has held
         positions in the Swiss financial community and in the government of
         Switzerland. He is presently serving as a Vice President in the Audit
         Division of ATAG Ernst & Young of Basel, Switzerland. Mr. Buser
         currently serves as a member of the Environmental Committee of the City
         of Wallbach, Switzerland.

Mr. Peter Joss (55)
Director

         Mr. Joss holds a Bachelor of Business Administration and a Masters
         Degree in Economics from the St-Gall School of Economics, Switzerland.
         From 1969 to 1971 Mr. Joss worked at the Institute of Tourism and
         Transport at the St-Gall School of Economics and from 1971 to 1973 was
         responsible for transport and tourism matters in the cantonal
         government of St-Gall. Mr. Joss held, from 1973 until 1980, a post with
         the Federal Transit Authority, in Bern, where he was responsible for
         public finance of the Swiss railroad system. Following that assignment,
         from 1980 until 1988, he served as the Vice President, Finance, of the
         Swiss Federal Transit Authority. Since 1988, Mr. Joss has served as the
         Chief Executive Officer of Mittelthurgaubahn, a Swiss railroad, and as
         the Chairman of the Board of Directors of both Reiseburo Mittelthurgau
         and Hotel Thurgauerhof, Weinfelden. He is currently a member of the
         Board of Directors of several Swiss and French companies.

Mr. Martin Oester (41)
Director

         Mr. Oester is an economist with degrees in Economics from the
         University of Neuchatel and in Education from the Teachers Training
         College in Spiez, Switzerland. Mr. Oester has taught, both at the
         secondary and post secondary levels; served the Swiss Railway Union as
         an advisor in economic affairs and transportation policy and, since
         1989, has been Investment Manager for, and Vice President of,
         Pensionskasse der ASCOOP, a Swiss pension fund. Pensionskasse der
         ASCOOP is the largest single holder of the Company's capital stock.

         Anthony Morriello serves as President of Southeastern. Richard Hulbert
         is the President of Titan.

         Section 16(a) Beneficial Ownership Reporting Compliance

         See "Item 12, Security Ownership of Certain Benefical Owners and
Management," for a list of directors, officers, and 10% of the Company's common
stock. During the fiscal year, it was discovered that stock options acquired by
Mr. Eisenman, and Ms. Rollins as compensation on July 1, 1996 had not been
reported. Mr. Eisenman, and Ms. Rollins reported the acquisition of these
options on Form 5.






                                 Page 33 of 42
<PAGE>   34


ITEM 11. EXECUTIVE  COMPENSATION.

         The following table sets forth the cash compensation paid for services
rendered in all capacities to the Company during its fiscal year ended June 30,
1998, to each executive officer of the Company whose cash compensation exceeded
$100,000 in such fiscal year.

<TABLE>
<CAPTION>
                                                                    ANNUAL COMPENSATION
                                                                            (IN $)

NAME AND CAPACITY IN                                               RESTRICTED    SECURITIES
WHICH REMUNERATION WAS                                                STOCK      UNDERLYING       LTIP           ALL OTHER
RECEIVED                      YEAR        SALARY        BONUS        AWARDS       OPTIONS       PAYOUTS         COMPENSATION
----------------------        ----        ------        -----        ------       -------       -------         ------------
<S>                           <C>         <C>           <C>          <C>        <C>             <C>             <C> 

Thomas N. Eisenman            1998        131,853       23,000         -       13,965 Shares       -               $2,603
   President and CEO          1997        123,461       36,190         -        7,171 Shares       -
                              1996         94,846       27,900         -            -0-            -

Richard Hulbert               1998        115,943       23,000         -        9,170 Shares       -               $5,413
   Director, IS               1997        112,635       23,866         -        6,277 Shares       -
                              1996        107,311       25,600         -            -0-            -
</TABLE>

                      Option/SAR Grants in Last Fiscal Year



<TABLE>
<CAPTION> 
                                                                                                        POTENTIAL
                                                                                                       REALIZABLE    
                                                                                                    VALUE AT ASSUMED 
                                                                                                     ANNUAL RATES OF 
                                                 % OF TOTAL                                            STOCK PRICE   
                                 NUMBER OF        OPTIONS                                            APPRECIATION FOR
                                SECURITIES       GRANTED TO       EXERCISE OR                           OPTION TERM  
                                UNDERLYING       EMPLOYEES        BASE PRICE                        ------------------
             NAME             OPTIONS GRANTED  IN FISCAL YEAR      ($/SHARE)     EXPIRATION DATE      5%         10%
             ----             ---------------  --------------      ---------     ---------------      --         ---
<S>                              <C>                 <C>             <C>               <C>          <C>          <C>
    Thomas N. Eisenman           13,965              30%             $1.44        July 1, 2007           Note 1
       President and CEO

    Richard R. Hulbert            9,170              20%             $1.44        July 1, 2007
       Director. Info. Systems
</TABLE>


Note 1: There is only a limited and sporadic trading market for the Company's 
        common stock, currently trading over the counter, with historically
        thinly traded with limited market maker participation. Therefore,
        calculation of potential realizable value would not present meaningful
        information and may be misleading.

         Mr. Eddinger has an employment agreement with the Company which expires
May 17, 1999. Mr. Burnham had an employment agreement that was set to expire
June 30, 2000, however as of September 1, 1998 he resigned from his position.
The agreement related to this resignation is contained in Exhibit 10.3.

COMPENSATION OF DIRECTORS

         Each member of the Board of Directors of the Company who are not
employees of the Company or any of its subsidiaries receives a quarterly
director's fee of $400. Each director who is not an employee of the Company is
eligible to participate in the Company's Non-Employee Director Stock Option
Plan, which provides for each Non-Employee Director to receive an option to
purchase 4,400 shares of Common Stock annually, at the then fair market value of
the Common Stock.

         The Board of Directors is authorized to have up to seven members; the
board currently consists of six Directors. The directors are annually elected
for a one year term by the stockholders. The Board of Directors is authorized to
fill any interim vacancy. The Board of Directors had a total of four meeting
during the fiscal year 






                                 Page 34 of 42
<PAGE>   35

ending June 30, 1998. No director attended fewer than 75% of the total of such
meeting and the meeting of the committees upon which they served during the
period for which they were a director.

         Messrs. Ballard, Buser, Joss and Oester comprise the four members of
the Compensation Committee of the Board of Directors of the Company. This
Committee sets the salaries and other compensation of all officers and directors
of the Company. This committee met twice during the fiscal year ending June 30,
1998.

         The Company's executive compensation program is designed to attract,
motivate and fairly reward people with the capabilities required for the Company
to achieve its objectives. It is the Company's belief that a program which
fulfills the financial and emotional needs of its executives is an important
means of retaining them. The Compensation Committee seeks to align executives'
performance objectives with the interests of shareholders, and to structure
compensation plans to reach a balance between achievement of short-term business
plans and long-term strategic goals. Compensation for executive officers,
therefore, is designed to be directly linked to the Company's performance. This
is accomplished through annual bonus programs, substantially dependent upon the
Company's financial performance, combined with stock options which provide
additional value to certain executives as the value of the Common Stock grows.
Each of these components has an integral role in the total executive
compensation program.

         Compensation for each of the Company's associates, including the
executive officers, is based on the associate's responsibilities and performance
over a period of time. The Company's executive compensation program has four
principal components: base salary, annual variable incentive compensation, stock
options, and other compensation. The Committee believes these components combine
to provide a fair and competitive package, while helping the Company to achieve
its objectives, both short and long-term.

         Base Salary: The salary of each executive is regularly reviewed against
comparable positions in other companies in the Company's industry. Each
executive's base salary is then determined based on that information as well as
the individual's performance over time. The Company believes that a position is
ultimately only worth a certain amount in base salary and that additional
compensation should be determined by incentives.

         Annual Variable Incentive Compensation: The Company believes that, for
executives with the most influence on profitability, a meaningful portion of
compensation should be based on a direct link between pay and the Company's
results for the year. The Company has a bonus program that rewards its
executives and key managers based both on the Company's financial performance
during each year and the personal performance of the associate. The Compensation
Committee, following recommendations by Mr. Eisenman, determines the annual
bonus for all associates.

         Stock Options and Restricted Stock: The Company's long-term incentive
compensation for executive officers is designed to focus management's attention
on the Company's future. Such long-term compensation is provided through grants
of restricted stock and stock options. The number of stock options granted is
based upon the executive's salary, performance and responsibilities. The
Compensation Committee, following recommendations by Mr. Eisenman, determines
all grants of Stock Options and Restricted Stock.

         Other Compensation: Each executive officer also receives additional
compensation through standard benefit plans available to all associates
including, but not limited to, matching contributions pursuant to a 401(k) plan,
paid vacation, and group health, life, and disability insurance. The
Compensation Committee believes each of these benefits is an integral part of
the overall compensation program that helps to ensure that executive officers of
the Company receive competitive compensation.

PERFORMANCE GRAPH

         There is only a limited and sporadic trading market for the Company's
common stock, currently trading over the counter, which has historically been
thinly traded with limited market maker participation. While certain pricing is
available from information supplied by the National Quotation Bureau, historical
data is limited. There is not available any reasonable composite index of
trading and pricing of the Common stock. Any presentation of a performance graph
would be arbitrary, would not present meaningful information, and may be
misleading.







                                 Page 35 of 42
<PAGE>   36

         See Item 13 (below), "Certain Relationships and Related Transactions,"
of this Annual Report on Form 10-K for a description of the purchases of Company
common stock by Mr. Eisenman, Mr. Hulbert and certain members of the Board of
Directors during the fiscal years ended June 30, 1997 and 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

                             PRINCIPAL STOCKHOLDERS

         The table below sets forth information regarding the beneficial
ownership of the Common Stock, as of September 22, 1998 date hereof, by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director and executive officer of
the Company and (iii) all directors and executive officers of the Company as a
group. Unless otherwise indicated, each of the stockholders listed below has
sole voting and investment power with respect to the shares beneficially owned.

<TABLE>
<CAPTION>
                                                                        AMOUNT AND
                                NAME AND ADDRESS                    NATURE OF BENEFICIAL
     CLASS                    OF BENEFICIAL OWNER                         OWNER                PERCENT OF CLASS
     -----                    -------------------                         -----                ----------------

<S>                           <C>                                   <C>                        <C> 
     Common                    William J Ballard                          79,400(1)                    1.4%
                                805 South Church
                         Murfreesboro, Tennessee 37130

     Common                      Hans R. Buser                           139,400(1)(2)                 2.5%
                                Aeschengraben 9
                                 Postfach 2149
                          CH-40002, Basel, Switzerland

     Common                    Thomas N. Eisenman                        324,453                       5.7%
                              905 Industrial Drive
                         Murfreesboro, Tennessee 37129

     Common                    Richard R. Hulbert                        320,265                       5.6%
                              905 Industrial Drive
                            Murfreesboro, TN 37129

     Common                        Peter Joss                             79,400(1)                    1.4%
                               Schutzenstrasse 15
                        CH-8570, Weinfelden, Switzerland

     Common                      Martin Oester                             6,900(1)                   0.12%
                              Beundenfeldstrasse 5
                      Postfach 694, 3000 Bern, Switzerland

     Common                     Cindy L. Rollins                             438                      0.01%
                              905 Industrial Drive
                         Murfreesboro, Tennessee 37130

     Common                 Pensionskasse der ASCOOP                   2,600,045(3)                   45.8%
                              Beundenfeldstrasse 5
                    Postfach 694, 3000 Bern 25, Switzerland
</TABLE>






                                 Page 36 of 42
<PAGE>   37



<TABLE>
<S>                           <C>                                   <C>                        <C> 
     Common                  Spida-Ausgleichskassen                    1,259,205(4)                   22.2%
                                 Bergstrasse 21
                            8044 Zurich, Switzerland

     Common                All officers and directors                    950,256                      16.7%
                           as a group (6 persons)(5)
</TABLE>



         (1)      Includes 4,400 shares subject to options, which are currently
                  exercisable.

         (2)      Includes 10,000 shares owned by Mr. Buser's spouse.

         (3)      Does not include amounts owned by Mssrs. Oester, Joss and
                  Buser, each of whom has an ffiliation with Pensionskasse der
                  ASCOOP.

         (4)      Does not include amounts owned by Mr. Buser, who is an
                  affiliate of Spida Ausgleichskassen.

         (5)      Excludes shares owned by Pensionskasse der ASCOOP, the
                  employer of Mr. Oester, a Director of the Company, and with
                  whom Mr. Joss and Mr. Buser have an affiliation; and excludes
                  shares owned by Spida-Ausgleichskassen with whom Mr. Buser, a
                  Director, has an affiliation.

         See Item 13 (below), "Certain Relationships and Related Transactions,"
         of this Annual Report on Form 10-K for a description of the sale (and
         use of proceeds thereof) of certain securities of the Company during
         the fiscal years ended June 30, 1997 and 1998 to certain members of its
         Board of Directors.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In August 1996 (after effectuation of the reverse stock split) Director
William J Ballard purchased 75,000 shares of Company common stock at a price of
$1.40 per share (an aggregate purchase price of $105,000). The Company has
approved an award of 30,000 shares (after effectuation of the reverse stock
split) preliminarily granted to Mr. Eisenman by the Company in the 1996 fiscal
year as additional compensation. As of October 12, 1998, these shares had not
been issued.

         On November 16, 1996, the Company sold 47,215 shares of its Common
Stock, $.01 par value to the following Company employees: Kerry Simmons, Anthony
Morriello and Travis Pierson. The total price of $66,101 was paid in cash. The
sales were made pursuant to Rules 505 and 506 of Regulation D, based on the fact
that the aggregate offering price did not exceed $5,000,000 (Rule 505) and the
fact that there were fewer than 35 investors, each of whom the issuer reasonably
believed immediately prior to sale had such knowledge and experience in
financial and business matters that he was capable of evaluating the merits and
risks of the prospective investment.

         Effective June 26, 1997, the Company acquired all of the outstanding
stock of Lewis Supply Company, Inc. in a purchase transaction ("the
Acquisition"). The Acquisition was consummated by the exchange of 255,102 shares
of the Company's common stock, a commitment to issue an additional 30,612
shares, $5,952,500 cash and notes payable totaling $750,000 for 100% of the
outstanding shares of Lewis' stock. Michael S. Burnham, Jr., Corporate Leader of
Lewis and one of its largest shareholders, was a party to the Acquisition
agreement and various other agreements related thereto. (See below) Mr. Burnham
and various members of his family (see below) who were shareholders of Lewis
received consideration in the Acquisition proportional to their ownership
interests in Lewis.

         Specifically, Mr. Burnham and his family received stock in the
following amounts:

         Michael S. Burnham, Jr., 99,298 shares of SETECH, Inc. $.01 Par Value
         Common Stock;







                                 Page 37 of 42
<PAGE>   38

         Michael S. Burnham, Jr. C/F Gregory Burnham UTMA TN, for 16,954 shares
         of SETECH, Inc. $.01 Par Value Common Stock;

         Michael S. Burnham, Jr. C/F Spencer Burnham UTMA TN, for 16,954 shares
         of SETECH, Inc. $.01 Par Value Common Stock;

         Elizabeth A. Harris (Mr. Burnham's spouse), 64,227 shares of SETECH,
         Inc. $.01 Par Value Common Stock;

         Elizabeth A. Harris, Trustee UA dated 4/23/90 FBO Gregory Burnham and
         Spencer Burnham (Mr. Burnham's sons), Elizabeth Harris Trust I, for
         19,223 shares of SETECH, Inc. $.01 Par Value Common Stock;

         Elizabeth A. Harris, Trustee UA dated 4/23/90 FBO Gregory Burnham and
         Spencer Burnham, Elizabeth Harris Trust II, for 19,223 shares of
         SETECH, Inc. $.01 Par Value Common Stock;

         Elizabeth A. Harris, Trustee UA dated 4/23/90 FBO Gregory Burnham and
         Spencer Burnham, Elizabeth Harris Trust III, for 19,223 shares of
         SETECH, Inc. $.01 Par Value Common Stock;

         Mr. Burnham and his family received Promissory Notes in the following
         amounts:

         Promissory Note, dated June 26, 1997, from SETECH, Inc. to Michael S.
         Burnham, Jr. in the principal amount of $227,304, plus interest at the
         rate of 7% per annum, payable in three annual installments of $75,768;

         Promissory Note, dated June 26, 1997, from SETECH, Inc. to Elizabeth A.
         Harris, in the principal amount of $147,021 plus interest at the rate
         of 7% per annum, payable in three annual installments of $49,007;

         Promissory Note, dated June 26, 1997, from SETECH, Inc. to Elizabeth A.
         Harris, Trustee U/A dated 4/23/90 FBO Gregory Burnham and Spencer
         Burnham (Elizabeth Harris Trust I) in the principal amount of $44,007,
         plus interest at the rate of 7% per annum, payable in three annual
         installments of $14,669;

         Promissory Note, dated June 26, 1997, from SETECH, Inc. to Elizabeth A.
         Harris, Trustee U/A dated 4/23/90 FBO Gregory Burnham and Spencer
         Burnham (Elizabeth Harris Trust II) in the principal amount of $44,007,
         plus interest at the rate of 7% per annum, payable in three annual
         installments of $14,669;

         Promissory Note, dated June 26, 1997, from SETECH, Inc. to Elizabeth A.
         Harris, Trustee U/A dated 4/23/90 FBO Gregory Burnham and Spencer
         Burnham (Elizabeth Harris Trust III) in the principal amount of
         $44,007, plus interest at the rate of 7% per annum, payable in three
         annual installments of $14,669;

         Promissory Note, dated June 26, 1997, from SETECH, Inc. to Michael J.
         Burnham, Jr., Custodian for Spencer Burnham under TN UTMA in the
         principal amount of $38,811, plus interest at the rate of 7% per annum,
         payable in three annual installments of $12,937;

         Promissory Note, dated June 26, 1997, from SETECH, Inc. to Michael J.
         Burnham, Jr., Custodian for Gregory Burnham under TN UTMA in the
         principal amount of $38,811, plus interest at the rate of 7% per annum,
         payable in three annual installments of $12,937;

         Promissory Note, dated June 26, 1997, from SETECH, Inc. to Barbara
         Harris in the principal amount of $87,714, plus interest at the rate of
         7% per annum, payable in three annual installments of $29,238;

         Promissory Note, dated June 26, 1997, from SETECH, Inc. to Barbara
         Harris, Trustee U/A dated 4/23/90 FBO Joanna Gorodetzki and Alexander
         Gorodetzki (Barbara Harris Trust I) in the principal amount of $26,106,
         plus interest at the rate of 7% per annum, payable in three annual
         installments of $8,702;







                                 Page 38 of 42
<PAGE>   39

         Promissory Note, dated June 26, 1997, from SETECH, Inc. to Barbara
         Harris, Trustee U/A dated 4/23/90 FBO Joanna Gorodetzki and Alexander
         Gorodetzki (Barbara Harris Trust II) in the principal amount of
         $26,106, plus interest at the rate of 7% per annum, payable in three
         annual installments of $8,702;

         Promissory Note, dated June 26, 1997, from SETECH, Inc. to Barbara
         Harris, Trustee U/A dated 4/23/90 FBO Joanna Gorodetzki and Alexander
         Gorodetzki (Barbara Harris Trust III) in the principal amount of
         $26,106, plus interest at the rate of 7% per annum, payable in three
         annual installments of $8,702;

         Mr. Burnham and his family received cash in the following amounts:

         Michael Burnham - $1,022,379; Elizabeth Harris - $661,263; Elizabeth
Harris Trust I -$197,927; Elizabeth Harris Trust II - $197,927; Elizabeth Harris
Trust III - $197,927; Gregory Burnham - $174,565; Spencer Burnham - $174,565;
Nancy Katz - $274,024; John Katz - $274,024; David Katz - $385,158; Jared Katz -
$385,158; Sara Katz $385,158; Barbara Harris -$651,658; Barbara Harris Trust I -
$193,944; Barbara Harris Trust II - $193,944; Barbara Harris Trust III -
$193,944; Joanna Gorodetzki - $129,191; Alex Gorodetzki - $129,191.

         Additionally, Mr. Burnham entered into a three-year (beginning June 30,
1997) employment agreement with the Company under which he is entitled to
receive a base salary of $128,000 per year and by which he is entitled to an
option to purchase 45,000 shares of the Company's stock at $3.50 per share. Mr.
Burnham resigned effective September 1, 1998, which resulted in the expiration
of his options on October 1, 1998.

         Also, Mr. Burnham, the Company and Mr. Eisenman are parties to a
Shareholders' Agreement under which Mr. Burnham has the option under certain
circumstances (defined in the agreement) to require the Company to repurchase
his shares at a price of $2.00 per share. Additionally, Mr. Burnham has granted
the Company a right of first refusal under certain circumstances (defined in the
agreement) on any proposed sale of stock by Mr. Burnham. (Please see Note 10 to
the June 30, 1998 financial statements included in this Form 10-K for a detailed
description of the terms of this agreement.)

         In connection with the Acquisition, the Company issued $1,500,000 in
convertible subordinated debentures (convertible in the event of default at a
rate of one common share for each $3 of principal and interest outstanding) to
two of its major stockholders, Pensionskasse der ASCOOP and Spida
Ausgleichskassen. The debentures are to be repaid in annual installments of
principal of $750,000 plus interest at 8.5%. These debentures mature July 1,
2000.







                                 Page 39 of 42
<PAGE>   40


PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Form 10-K:

         1.  Financial Statements: See Item 8 of this report on Form 10-K.

                  Reports of Independent Public Accountants.
                  Consolidated Balance Sheets as of June 30, 1998 and June 30,
                      1997.
                  Consolidated Statements of Operations for the fiscal years
                      ended June 30, 1998, 1997 and 1996. 
                  Consolidated Statements of Changes in Stockholders' Equity 
                      for the fiscal years ended June 30, 1998, 1997 and 1996.
                  Consolidated Statements of Cash Flows for the fiscal years
                      ended June 30, 1998 and 1997.
                  Notes to Consolidated Financial Statements.


         2.  Financial Statement Schedules:

                  Schedule II - Valuation and Qualifying Accounts - Page 42

         All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions, or are inapplicable, or the required information
is disclosed elsewhere, and therefore, has been omitted.

         3. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
on page 45 are filed as part of this report.


(b) There were no reports filed on Form 8-K for the quarter ended June 30, 1998.







                                 Page 40 of 42
<PAGE>   41




                                   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.

(Registrant)                                SETECH, INC.


By:  (Signature and Title)                 /s/ Thomas N. Eisenman
                                      ------------------------------------------
                                      Thomas N. Eisenman, President and CEO
                                      Principal Executive Officer
Date:    October 30, 1998

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

By:  (Signature and Title)                 /s/ Thomas N. Eisenman
                                      ------------------------------------------
                                      Thomas N. Eisenman, President, CEO and
                                      Director
Date:    October 30, 1998



By:  (Signature and Title)                 /s/ Richard M. Eddinger
                                      ------------------------------------------
                                      Richard M. Eddinger, Vice President and
                                      Chief Financial Officer
Date:    October 30, 1998



By:  (Signature and Title)                 /s/ Cindy L. Rollins
                                      ------------------------------------------
                                      Cindy L. Rollins, Secretary, Vice 
                                      President, Director and Chief Accounting 
                                      Officer
Date:    October 30, 1998



By:  (Signature and Title)                 /s/ William J. Ballard
                                      ------------------------------------------
                                      William J Ballard, Director
Date:    October 30, 1998



By:  (Signature and Title)                 /s/ Hans R. Buser
                                      ------------------------------------------
                                      Hans R. Buser, Director
Date:    October 30, 1998



By:  (Signature and Title)                 /s/ Peter M. Joss
                                      ------------------------------------------
                                      Peter M. Joss, Director
Date:    October 30, 1998



By:  (Signature and Title)                 /s/ Martin A. Oester
                                      ------------------------------------------
                                      Martin A. Oester, Director
Date:    October 30, 1998







                                 Page 41 of 42
<PAGE>   42


                                  SETECH, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                 FOR THE YEARS ENDED JUNE 30, 1998, 1997 & 1996

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                 Balance at      Charged to      Charged to                     Balance at
                                                 Beginning         Cost/           Other                            End
                      Description                of Period        Expenses        Accounts       Deductions      of Period
                      -----------                ---------        --------        --------       ----------      ---------
<S>                                               <C>             <C>             <C>             <C>              <C>   
Fiscal
1998      Allowance for Doubtful Accounts          $  111          $   127(C)      $   16(B)       $   97(A)        $  157
                                                   ======          =======         ======          ======           ======

          Allowance for Obsolete Inventory         $  719          $     -         $    -          $    -           $  719
                                                   ======          =======         ======          ======           ======

Fiscal
1997      Allowance for Doubtful Accounts          $    -          $    93(C)      $   18(B)       $    -           $  111
                                                   ======          =======         ======          ======           ======

          Allowance for Obsolete Inventory         $    -          $   719(C)      $    -          $    -           $  719
                                                   ======          =======         ======          ======           ======

Fiscal
1996      Allowance for Doubtful Accounts          $    -          $     -         $    -          $    -           $    -
                                                   ======          =======         ======          ======           ======
          Allowance for Obsolete Inventory         $    -          $     -         $    -          $    -           $    -
                                                   ======          =======         ======          ======           ======
</TABLE>
----------
The information above is provided in support of the financial statements as
further described in Note 2 to the financial statements.

(A)      Represents actual write-off of uncollectible accounts.

(B)      Recoveries.

(C)      Reflected as cost of sales.







                                 Page 42 of 42
<PAGE>   43



                                INDEX TO EXHIBITS

EXHIBIT NUMBER                         DESCRIPTION
--------------                         -----------

   EX-3.(i)      Articles of Incorporation, SETECH, INC.

   EX-3.(ii)     Amended and Restated By-Laws, SETECH, INC. (incorporated by
                 reference to Exhibit 3.(ii) of the Company's Form 10-KSB for
                 the fiscal year ended June 30, 1996, filed with the Commission
                 September 27, 1996)

   EX-4.1        Loan and Security Agreement by and among First Union Commercial
                 Corporation, SETECH, Inc., Lewis Supply Company, Inc.,
                 Southeastern Technology, Inc., and Titan Services, Inc. dated
                 June 26, 1997 (incorporated by reference to Exhibit 4.1 of Form
                 8-K filed with the Commission July 10, 1997)

   EX-4.2        Guaranty Agreement dated June 26, 1997, whereby SETECH, Inc.
                 guarantees subsidiary indebtedness obligations to First Union
                 Commercial Corporation (incorporated by reference to Exhibit
                 4.2 of Form 8-K filed with the Commission July 10, 1997)

   EX-4.3        Revolver Note dated June 26, 1997 payable by Lewis Supply
                 Company, Inc. to First Union Commercial Corporation
                 (incorporated by reference to Exhibit 4.3 of Form 8-K filed
                 with the Commission July 10, 1997)1

   EX-4.4        Revolver Note dated June 26, 1997 payable by Titan Services,
                 Inc. to First Union Commercial Corporation (incorporated by
                 reference to Exhibit 4.4 of Form 8-K filed with the Commission
                 July 10, 1997)

   EX-4.5        Revolver Note dated June 26, 1997 payable by Southeastern
                 Technology, Inc. to First Union Commercial Corporation
                 (incorporated by reference to Exhibit 4.5 of Form 8-K filed
                 with the Commission July 10, 1997)

   EX-4.6        First, Second, and Third Amendments to Loan and Security
                 Agreement by and among First Union Commercial Corporation,
                 SETECH, Inc., Lewis Supply Company, Inc., Southeastern
                 Technology, Inc., and Titan Services, Inc. dated June 26, 1997

   EX-4.7        Shareholders' Agreement by and among SETECH, Inc., Michael S.
                 Burnham, Jr., and Thomas N. Eisenman, dated June 26, 1997
                 (incorporated by reference to Exhibit 10.4 of the Company's
                 Form 10-KSB for the fiscal year ended June 30, 1997, filed with
                 the Commission September 26, 1997)

   EX-10.1       SETECH, Inc. Non-Employee Directors Stock Option Plan
                 (Incorporated by Reference to Form 10-QSBA for the quarter
                 ending September 30, 1997, filed with the commission on
                 February 19,1998, Commission file number 001-10310)

   EX-10.2       Employment Agreement of Richard M. Eddinger
 
   EX-10.3       Resignation Agreement of Michael Burnham

   EX-21         Subsidiaries of the Registrant

   EX-27         Financial Data Schedule (EDGAR version only)


<PAGE>   44


                  SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
                 REPORTS FILED PURSUANT TO SECTION 15(D) OF THE
                      EXCHANGE ACT BY NON-REPORTING ISSUERS

         No annual report with respect to the registrant's last fiscal year nor
any proxy material with respect to any annual or other meeting of
security-holders has been sent to security-holders.