# SECURITIES
AND EXCHANGE COMMISSION

# WASHINGTON,
D.C. 20549

---

# FORM 10-QSB

# (Mark One)

| | [ X ]  Quarterly Report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended September 30, 2001 | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------ | 

| | or | 
| | -- | 

| | [   ]  Transition Report
 pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 | 
| | ------------------------------------------------------------------------------------------------ | 

| | For the
 transition period from _____ to _____ | 
| | ---------------------------------------------- | 

| | Commission
File Number  0-21907 | 
| | ------------------------------- | 

| | NEWSTATE HOLDINGS, INC. | 
| | ----------------------- | 

| | (Exact name of small business
issuer as specified in its charter) | 
| | ----------------------------------------------------------------- | 

|Delaware |  | 84-1182875
|-------- |  | ----------

|(State or Other Jurisdiction of Incorporation) |  | (I.R.S. Employer Identification Number)
|---------------------------------------------- |  | ---------------------------------------

|156 W. 56th Street, Suite 2005, New York, NY |  | 10019
|-------------------------------------------- |  | -----

|(Address of Principal Executive Offices) |  | (Zip Code)
|---------------------------------------- |  | ----------

| | (212) 245-5801 | 
| | -------------- | 

| | Registrant's telphone number, including area code | 
| | ------------------------------------------------- | 

---

| | RACOM SYSTEMS, INC. | 
| | ------------------- | 

| | P.O. Box 3224,
 Boulder, Colorado 80307-3224 | 
| | -------------------------------------------- | 

| | Former Fiscal Year  -  December 31 | 
| | ---------------------------------- | 

---

| | (Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report) | 
| | ---------------------------------------------------------------------------------- | 

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

|Yes:   X |  | No:  ___
|-------- |  | --------

Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of
September 28, 2001:

|Class |  | Number of Shares Outstanding
|----- |  | ----------------------------

|Common Stock, .01 par value |  | 11,508,684
|--------------------------- |  | ----------

# INDEX

|Part I. | Financial Information |  | Page
|------- | --------------------- |  | ----

| | Item 1. | Condensed Consolidated Balance Sheet as of
          September 30, 2001 | 4
| | ------- | ----------------------------------------------------------------------- | -

| |  | Condensed Consolidated Statements of Operations
          for the three month periods ended
          September 30, 2001 and September 30, 2000,
          and the Six month periods ended
          September 30, 2001 and September 30, 2000 | 5
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -

| |  | Condensed Consolidated Statements of Cash Flows 
          
for the six months ended September 30, 2001
          
and September 30, 2000 | 6
| |  | ----------------------------------------------------------------------------------------------------------------------------------------- | -

| |  | Notes to Condensed Consolidated Financial Statements | 7
| |  | ---------------------------------------------------- | -

| | Item 2. | Management's Discussion and Analysis of
     Financial Condition and Results of Operations | 17
| | ------- | ------------------------------------------------------------------------------------------ | --

|Part II. |  | Other Information and Signatures | 23
|-------- |  | -------------------------------- | --

Statements contained in
this Report which are not historical in nature are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can be identified by the use of forward-looking
terminology such as believes, expects, may,
should, or anticipates or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.

Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
could cause the actual results, performance, or achievements of the Company to
differ materially from anticipated results, performance or achievements
expressed or implied by such forward looking statements. These risks and
uncertainties include, but are not limited to, regulatory constraints, changes
in laws or regulations governing the Companys products and international
trade, the ability of the Company to market successfully its products in an
increasingly competitive worldwide market, changes in the Companys
operating strategy, failure to consummate or successfully integrate product
developments, the general economy of the United States, Korea and the specific
global markets in which the Company competes, the availability of financing from
internal and external sources to fund the Companys growth strategy, the
effect of adverse changes in loan demand, real estate values, borrowing costs
and current interest rates in Korea, and other factors as may be identified from
time to time in the Companys filings with the Securities and Exchange
Commission or in the Companys press releases. No assurance can be given
that the future results covered by the forward-looking statements will be
achieved. Other factors not identified above could also cause actual results to
vary materially from the future results covered in such forward-looking
statements. The Company assumes no obligation to publicly correct or
update these forward looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward looking
statements or if the Company later becomes aware that they are not likely to be
achieved.

|PART I |  | Financial Information | 
|------ |  | --------------------- | 

|Item 1. |  | Financial Statements | 
|------- |  | -------------------- | 

`NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                                                      CONSOLIDATED BALANCE SHEET
                                                              (Unaudited)


                                                            U. S. dollars
                                                          September 30, 2001
                                                        -----------------------
ASSETS

Cash and cash equivalents                             $            1,106,692
Restricted cash                                                    3,625,230
Interest-bearing deposits with banks                               6,000,470
Securities available for sale                                      3,282,745
Loans held for sale                                               11,583,881
Loans held for investment, net                                     5,285,910
Residual interests in securitizations                             18,571,498
Premises and equipment, net                                        4,066,760
Accrued interest receivable                                          341,089
Goodwill                                                             911,570
Other assets                                                       8,321,223
                                                      -------------------------
         Total assets                                 $           63,097,068
                                                      =========================

LIABILITIES AND SHAREHOLDERS' DEFICIT

Short-term borrowings                                 $           33,006,646
Current portion of long-term debt                                 24,262,239
Accrued expenses and other liabilities                             1,632,311
Long-term debt                                                     8,076,349
Severance and retirement benefits                                     38,495
Negative goodwill, net                                             5,549,400
                                                      -------------------------
         Total liabilities                                        72,565,440
                                                      -------------------------

Minority interest                                                  1,676,907

Commitments and contingencies                                              -

Shareholders' deficit:
Common stock: $.01 par value;
         40,000,000 shares authorized;                             5,512,480
         11,508,684 shares issued and outstanding
Accumulated deficit                                              (17,372,981)
Accumulated other comprehensive income                               715,222
                                                      -------------------------
         Total shareholders' deficit                             (11,145,279)
                                                      -------------------------
         Total liabilities and shareholders' deficit  $           63,097,068
                                                      =========================`

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

`NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                                                 CONSOLIDATED STATEMENT OF OPERATIONS
                                                              (Unaudited)

                                                             Three Months Ended                Six Months Ended
                                                               September 30,                     September 30,
                                                        ------------------------------   -----------------------------
                                                            2001            2000             2001             2000
                                                        --------------   -------------   --------------   ------------
Interest income:
      Loans                                             $      609,078   $   1,028,342   $    1,003,479   $  2,329,555
      Deposits with banks                                       65,445         589,635          372,586        827,597
                                                        --------------   -------------   --------------   ------------
           Total interest income                               674,523       1,617,977        1,376,065      3,157,152

Interest expense:
      Short-term borrowings                                    803,857         765,745        1,323,791      1,685,357
      Long-term debt                                         1,039,009         807,370        2,052,632      1,125,551
                                                        --------------   -------------   --------------   ------------
           Total interest expense                            1,842,866       1,573,115        3,376,423      2,810,908
                                                        --------------   -------------   --------------   ------------

Net interest income (expense)                               (1,168,343)         44,862       (2,000,358)       346,244
Reversal of provision (provision) for loan losses              103,643         529,391          300,575        513,219
                                                        --------------   -------------   --------------   ------------
Net interest income (expense) after provision for
      loan losses                                           (1,064,700)        574,253       (1,699,783)       859,463

Gain on sale of loans                                          413,037               -          417,877              -

Net loss on disposal of securities available for sale          (98,370)              -         (106,958)             -

Other income and expenses:
      Salaries and employee benefits                          (647,808)       (468,253)      (1,165,183)      (985,189)
      General and administrative                            (1,401,143)       (998,902)      (2,193,694)    (1,436,523)
      Provision for severance and retirement benefits         (112,687)       (140,230)        (145,915)      (140,280)
      Amortization of negative goodwill                        616,261         666,953        1,226,702      1,334,433
      Amortization of goodwill                                 (57,222)              -         (102,001)             -
      Gain (loss) on valuation of residual interests         1,182,827               -          714,159              -
      Other, net                                               (62,291)        222,332         (158,183)       222,250
                                                        --------------   -------------   --------------   ------------
Income (expense) before income taxes                        (1,232,096)       (143,847)      (3,212,979)      (145,846)
                                                        --------------   -------------   --------------   ------------
Provision for income taxes                                           -               -                -              -
Minority interest                                              170,911           5,147          309,845          7,752
                                                        --------------   -------------   --------------   ------------
Net loss                                                $   (1,061,185)  $    (138,700)  $   (2,903,134)  $   (138,094)
                                                        ==============   =============   ==============   ============
Basic and diluted net income (loss) per share of
      common stock                                      $        (0.09)  $      (0.01)   $        (0.25)  $      (0.01)
                                                        ==============   =============   ===============  =============
Average number of shares outstanding                        11,508,684      11,508,684       11,508,684     11,508,684
                                                        ==============   =============   ==============   =============`

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

`NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                              (Unaudited)


                                                                       Six Months Ended        Six Months Ended
                                                                      September 30, 2001      September 30, 2000
                                                                      ------------------      -------------------
Cash flows from operating activities:
    Net income (loss)                                                      $ (2,093,134)           $   (138,094)
    Adjustments to reconcile net loss to net cash used in
    Operating activities:
       Minority interest                                                       (309,845)                 (7,753)
       Depreciation and amortization                                            449,257                  91,942
       Amortization of negative goodwill                                     (1,226,702)             (1,334,433)
       Amortization of goodwill                                                 102,001                       -
       Provision (reversal of provision) for loan losses                       (300,575)               (357,471)
       Loss (gain) on valuation of retained interest                           (714,159)               (520,642)
       Loss on disposal of premises and equipment, net                            2,024                       -
       Gain on disposal of loans held for sale                                 (425,254)                134,723
       Net loss on disposal of securities available for sale                    106,958                  76,443
       Provision for severance and retirement benefits                           19,575                  70,803
       Increase (decrease) in accrued expenses and other liabilities            375,763              (1,895,649)
       Decrease (increase) in accrued interest receivable and other assets   (6,890,829)               (317,189)
                                                                           ------------             --------------
Net cash used in operating activities                                       (11,714,920)             (4,273,763)

Cash flows from investing activities:
    Proceeds from sale of loans held for sale                                18,385,747                       -
   Increase in loans held for sale                                          (28,430,104)                      -
    Decrease (increase) in loans held for investment, net                     2,718,046               8,391,538
    Decrease (increase) in interest bearing deposits with banks                (718,119)            (11,625,761)
   Proceeds from sale of securities available for sale                        1,173,835                 587,947
   Purchase of securities available for sale                                 (4,945,565)             (1,649,718)
   Purchase of interest in subsidiary                                        (1,928,734)                      -
    Proceeds from sale of securities held to maturity                             1,492                       -
    Acquisition of premises and equipment                                      (909,352)             (3,548,155)
    Others                                                                       (2,668)                 25,786
                                                                           ------------             --------------
Net cash provided by (used in) investing activities                         (14,665,422)             (7,818,363)

Cash flows from financing activities:
    Increase (decrease) in short-term borrowings, net                        18,931,165              (9,728,024)
    Consolidated financing activity                                              76,928                 170,000
    Proceeds from issuance of long-term debt                                  3,690,650              28,606,336
    Payment on long term-debt                                                (2,700,985)             (6,944,691)
                                                                           ------------             --------------
Net cash provided by (used in) financing activities                          19,997,758              12,103,621

Increase in cash and cash equivalents due to addition of a                      532,154                       -
    subsidiary

Effect of exchange rate changes on cash                                         180,291                     634
                                                                            -----------             --------------

Net increase (decrease) in cash and cash equivalents                         (5,660,139)                 12,129
Cash and cash equivalents at beginning of year                                6,766,831                 360,546
                                                                            -----------             --------------
Cash and cash equivalents at end of year                                    $ 1,106,692             $   372,675
                                                                            ===========             ==============

Supplemental cash flow information:
    Cash paid for interest                                                  $ 2,908,434             $ 1,603,078
    Cash paid for income taxes                                                        -                       -`

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



# NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                          September 30, 2001

|1. | Organization and Business
|-- | -------------------------

| | The accompanying  financial statements report the consolidated accounts of NewState Holdings,  Inc. (formerly Racom Systems, Inc.,
     the "Company") and its 99.6% owned subsidiary,  NewState Capital Co., Ltd. (a Korean corporation,  "NewState Capital"),  its 76.6%
     owned and newly established  subsidiary Smart Technology Co., Ltd. (a Korean  corporation,  "STC") and its 49.1% owned World Asset
     Co., Ltd. (a Korean asset  management  company,  "WAC").  The Company's  primary  business is the origination of mortgage loans to
     individual  borrowers  in Korea and the  servicing of loans  securitized  and sold to public  investors in Korea.  The Company was
     incorporated  on June 3, 1991 pursuant to the laws of the State of Delaware and presently has its principal  executive  offices in
     Seoul,  Korea and New York, New York,  United States of America.  As described  below,  the Company has treated the acquisition of
     NewState Capital as a reverse acquisition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 20, 1999, the Company acquired 99.6% (4,958,000 shares) of the issued and
outstanding capital stock of NewState Capital, which was formerly a subsidiary
of NewState Capital Corp., a New York corporation (NewState NY), in
exchange for issuing 8,000,000 shares of the Companys common stock,
representing approximately 80% of the Companys total issued and
outstanding shares of common stock, to NewState NY. The Company also assumed a
US$5,000,000 liability of NewState NY to a bank. As a result of the acquisition,
(i) NewState Capital became a subsidiary of NSK Holdings, Inc (a Delaware
corporation, NSK) which was dissolved as described below, (ii) several new
investors acquired 667,000 shares of the Company for US$1,000,000 (US$1.50 per
share), and (iii) NewState NY owned 80% of the common stock in the Company.
Subsequently, NewState NY was dissolved on October 10, 2000 and it distributed
all of its property and assets, including its 80% stock ownership in the
Company, to the shareholders of NewState NY.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounted for the NewState Capital acquisition as a purchase under a
reverse acquisition procedure whereby NewState Capitals operations and
retained earnings are reported as continuous.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Racom
Systems, Inc. (a Colorado corporation) and NSK, both wholly-owned subsidiaries
of the Company, were dissolved on November 30, 2000 and December 31, 2000,
respectively, and distributed their property and assets to the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
September 20, 2000, NewState Capital established STC. Subsequently, a new
investor purchased 1,600,000 new shares of STC, sold the shares to the Company
and other new investors purchased new shares of STC. On August 14, 2001,
Newstate Capital sold a 0.65% ownership interest in STC. As a result, the
Company (51.29%) and NewState Capital (19.05%), collectively, own 71.34% of STC
as of September 30, 2001.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 1, 2000, April 24 and August 10, 2001, Newstate Capital purchased
19.87%, 29.26% and 6.21% of WACs common shares from certain shareholders
of WAC. As a result of the 55.34% acquisition of ownership interest in WAC,
Newstate Capital controls WAC and consolidates WACs financial position and
results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 8, 1998, NewState NY acquired 3,980,000 (99.5%) shares of Dongsuh
Finance Co., Ltd.s common stock from Dongsuh Horizon (Dongsuh
Horizon) Securities Co., Ltd. for US$1 in cash and changed its name to
NewState Capital. The acquisition was accounted for as a purchase. In connection
with the acquisition of NewState Capital, Dongsuh Horizon, forgave $10,780,074
of short-term loans receivable due from NewState Capital. The acquisition
resulted in negative goodwill of $7,151,902, which is being amortized over 5
years using the straight-line method.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 12, 1999, NewState Capital acquired all of the outstanding stock of
Youngnam Housing Finance Co., Ltd. for $16,521,739 in cash. The acquisition was
recorded under the purchase accounting method. The acquisition resulted in
negative goodwill of $6,702,314, which is being amortized over 5 years using the
straight-line method.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Unaudited Financial Statements
|-- | ------------------------------

| | The
consolidated financial statements as of September 30, 2001, and for the periods
ended September 30, 2001 and 2000, included herein are unaudited; however, such
information reflects all adjustments consisting of normal recurring adjustments,
which are, in the opinion of management, necessary for a fair presentation of
the information for such periods. In addition, the results of operations for the
interim periods are not necessarily indicative of the results for the entire
fiscal year. The accompanying financial statements are in condensed form and
should be read in conjunction with the Companys annual report filed on
Form 10-KSB.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accompanying consolidated financial statements have been prepared assuming that
Newstate Holdings, Inc. will continue as a going concern. The Company has
incurred recurring operating losses and has a working capital deficiency. These
conditions raise substantial doubt about the Companys ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Summary of Significant
Accounting Policies
|-- | ------------------------------------------

| | Basis of Financial Statements
| | -----------------------------

| | The
consolidated financial statements include the accounts of NewState Holdings,
Inc. and all wholly-owned and majority-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation. The official
accounting records of NewState Capital are maintained in Korean won in
accordance with the relevant laws and regulations of the Republic of Korea and
are adjusted herein to conform to accounting principles generally accepted in
the United States of America. The financial statements of NewState Capital are
translated into U.S. Dollars at the quarter-end exchange rate of W1,309.10 to
US$1 for assets and liabilities and a weighted average exchange rate of
W1,299.92 to US$1 and W1,115.37 to US$1 for the quarters ended September 30,
2001 and 2000, respectively,for income and expenses.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Use of Estimates
 in the Preparation of Financial Statements
| | ------------------------------------------------------------

| | The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect amounts reported in the consolidated
financial statements and the accompanying notes. The more significant estimates
are loan loss reserves and fair value of residual interests in securitization.
Actual results reported may differ from these estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash Equivalents
| | ----------------

| | Cash
equivalents consist of interest bearing bank deposits and other investments that
are readily convertible into cash and have original maturities of three months
or less.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loans Held for Investment
| | -------------------------

| | Loans are stated at
 unpaid principal balances, less allowance for loan losses.
| | -------------------------------------------------------------------------------

| | Mortgage Loans
Held for Sale
| | ----------------------------

| | Mortgage
loans originated or reclassified from loans held for investment with the intent
for sale in the secondary market are carried at the lower of cost, net of a
valuation allowance, or estimated market value in the aggregate. Market value is
determined using current market rates for loans of similar quality and type. Net
unrealized losses, if any, would be recognized in a valuation allowance by
charges to income. Each of the mortgage loans are primarily secured by single
family residential real estate located throughout the Republic of Korea.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recognition of
Interest Income
| | ------------------------------

| | Interest
income on loans held for investment and held for sale is recognized on an
accrual basis. The accrual of interest is discontinued if, in managements
opinion, full payment of principal or interest is in doubt, or when principal or
interest is past due over 90 days or more, and collateral, if any, is
insufficient to cover principal and interest. Non-accrual loans are those on
which the accrual of interest is discontinued. When the interest accrual is
discontinued, all uncollected accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received. Discounts
or premiums associated with the acquisition of NewState Capital and Youngnam
Housing Finance Co., Ltd. are recognized on an effective yield method,
considering early repayment of loans and impaired or past due loans.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Allowance for
Loan Losses
| | -------------------------

| | The
allowance for loan losses on loans held for investment is calculated, in part,
based on historical loss experience. In addition, management takes into
consideration other factors such as known and inherent risks in the portfolio,
adverse situations that may affect the borrowers ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company considers all non-accrual commercial and consumer loans as impaired
loans. Loan allowances on commercial loans deemed to be impaired are determined
based upon an estimate of future cash flows discounted at the related
loans effective rate. Write-offs are recorded only after all practical
efforts to collect the loan have been exhausted.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Present Value
Discounts
| | -----------------------

| | If
the present value of a loan is different from its book value due to a
rescheduling of terms as agreed by the related parties (as in the case of court
receivership, court mediation or workout), the present value of the loans is
offset against the allowance for loan losses, if available, or charged to
current expenses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
difference between book value and present value is recorded as present value
discounts in the balance sheet and amortized to current earnings over the
related period using the effective method. The amortization is recorded as
interest income on loans.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sale of Loans
| | -------------

| | Gains
or losses resulting from securitization of mortgage loans are recognized at the
date of settlement and are based on the difference between the selling price for
securitization and carrying value of the related loans sold. Such gains and
losses may be increased or decreased by the amount of any servicing-related
premiums received. Nonrefundable fees and direct costs associated with the
origination of the mortgage loans are deferred and recognized when the loans are
sold.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loan
securitizations are accounted for as a sale when control of these loans is
surrendered, to the extent that consideration other than beneficial interests in
the loans transferred is received in the exchange. Liabilities and derivatives
incurred or obtained by the transfer of loans are required to be measured at
fair value, if practicable. In addition, servicing assets and other retained
interests in the loans are measured by allocating the previous carrying value
between the loans sold and the interest retained, if any, based on their
relative fair market values at the date of transfer.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Residual Interests in
Securities
| | --------------------------------

| | Residual
interests in securitizations (Residuals) are recorded as a result of
the sale of loans through securitizations. The loan securitizations are
generally structured as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | First,
the Company sells a portfolio of mortgage loans to a special purpose entity
(SPE) which has been established for the limited purpose of buying
and reselling mortgage loans. The SPE then issues interest-bearing asset-backed
securities (the Certificates) in an amount to be determined based on
discounted cash flows from the mortgage loans using a risk-appropriate discount
rate. One or more investors purchase these Certificates for cash. The cash
proceeds are used to pay the Company the cash portion of the purchase price for
the mortgage loans. The SPE also issues a certificate representing the residual
interest in the payments on the securitized loans. In addition, the Company may
provide a credit enhancement for the benefit of the investors in the form of
additional collateral (over-collateralization account or OC Account)
held by an Owners Trust (the Trust). The OC Account is required by
the servicing agreement to be maintained at certain levels. At the closing of
each securitization, the Company removes from its consolidated balance sheet the
mortgage loans held for sale and adds to its consolidated balance sheet (i) the
cash received, (ii) the estimated fair value of the interest in the mortgage
loans retained from the securitizations (Residuals), which consist of (a) the OC
Account and (b) the net interest receivable (NIR) and (iii) the
estimated fair value of the servicing asset. The NIR represents the discounted
estimated cash flows to be received by the Company in the future. The excess of
the cash received and the assets retained by the Company over the carrying value
of the loans sold, less transaction costs, equals the net gain on sale of
mortgage loans recorded by the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company allocates its basis in the mortgage loans between the portion of the
mortgage loans sold through the Certificates and the portion retained (the
Residuals and servicing assets) based on the relative fair values of those
portions on the date of sale. The Company is not aware of an active market for
the purchase or sale of Residuals and, accordingly, the Company determines the
estimated fair value of the Residuals by discounting the expected cash flows
using a discount rate commensurate with the risks involved. The Company has
utilized an effective discount rate of 12% on the estimated cash flows released
from the OC Account to value the Residuals through securitization.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company receives periodic servicing fees for the servicing and collection of the
mortgage loans as master servicer of the securitized loans. In addition, the
Company is entitled to the cash flows from the Residuals that represent
collections on the mortgage loans in excess of the amounts required to pay the
Certificate principal and interest, the servicing fees and certain other fees
such as trustee and custodial fees.  At the end of each collection period,
the aggregate cash collections from the mortgage loans are allocated first to
the base servicing fees and certain other fees such as trustee and custodial
fees for the period, then to the Certificate holders for interest at the
pass-through rate on the Certificates plus principal as defined in the servicing
agreements. If the amount of cash required for the above allocations exceeds the
amount collected during the collection period, the shortfall is drawn from the
OC Account. If the cash collected during the period exceeds the amount necessary
for the above allocation, and there is no shortfall in the related OC Account,
the excess may be reinvested in certain prescribed financial products. If the OC
Account balance is not at the required credit enhancement level, the excess cash
collected is retained in the OC Account until the specified level is achieved.
The cash and collateral in the OC Account is restricted from use by the Company.
Cash held in the OC Account may be used to make accelerated principal paydowns
on the Certificates to create additional excess collateral in the OC Account
which is held by the Trust on behalf of the Company as the Residual holder. The
specified credit enhancement levels are defined in the servicing agreement as
the OC Account balance expressed generally as a percentage of the current
collateral principal balance.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company uses a lifetime default rate estimate ranging from 1.45% to 2.15%. All
of the mortgage loans are fixed rate. These estimates are based on historical
loss data for comparable loans and the specific characteristics of the loans
originated by the Company. The Company estimates prepayments by evaluating
historical prepayment performance of comparable mortgage loans and the impact of
trends in the industry.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys Residuals are subordinate to the Certificates until the
Certificate holders are fully paid.
| | ---------------------------------------------------------------------------------------------------------

| | Premises and
Equipment
| | ----------------------

| | The
Companys building, furniture and equipment are carried at cost less
accumulated depreciation. Expenditures for normal repairs and maintenance are
charged to current operations as incurred. Expenditures which extend the life of
assets are capitalized. Depreciation is provided using the straight-line method
for building and declining-balance method for furniture and equipment over the
estimated useful lives of the assets, which is 40 years for the building and
range from four to ten years for furniture and equipment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Goodwill
| | --------

| | Goodwill,
which represents the excess of purchase price of net assets acquired over fair
value, is amortized on the straight-line basis over 5 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | Negative Goodwill
| | -----------------

| | Negative
goodwill, which represents the excess of fair value over purchase price of net
assets acquired, is amortized on the straight-line basis over 5 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net Earnings (Loss)
Per Share
| | -----------------------------

| | Earnings
(loss) per share of common stock is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | Loans
|-- | -----

| | Loans held for investment
at September 30, 2001 are as follows:
| | ---------------------------------------------------------------

`Allowance for          Balance at
                            Principal           loan losses          June 30, 2001
                     --------------------   -----------------  ----------------------
Mortgage loans       $          5,699,321   $         2,114,173   $         3,585,148
Consumer loans                  1,786,191             1,759,962                26,229
Commercial loans                2,564,572               890,039             1,674,533
                     --------------------   -------------------   -------------------
                     $         10,050,084   $         4,764,174   $         5,285,910
                     ====================   ===================   ===================`

|5. | Securitization Activities
|-- | -------------------------

| | Residual
interests in securitizations and restricted cash reserves serve as credit
enhancements for securitization transactions. Residual interests in mortgage
loan securitization transactions were $18,571,498 at September 30, 2001. The
restricted cash reserves are included in restricted cash on the consolidated
balance sheet and were $1,547,660 at September 30, 2001. The following
assumptions were used in measuring the fair value of residual interests in
securitizations at September 30, 2001. The assumptions listed represent weighted
averages of assumptions used for each securitization.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`Residual interests
                                                             ------------------
    Prepayment speed (monthly constant prepayment rate)         2.62% - 4.78%
    Weighted average life in years                                    3
    Discount rate                                                   12.00%
    Loss rate                                                   1.45% - 2.15%`

| | The
sensitivity analyses of the valuations of retained interests in securitizations
and restricted cash reserves are summarized below. The sensitivity analyses show
the hypothetical effect on the fair value of those assets of two unfavorable
variations from the expected levels for each key assumption, independently from
any change in another key assumption. The following are the results of those
sensitivity analyses on the valuation at September 30, 2001.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`Amount
                                                               -----------------

Fair value of residual interests at September 30, 2001          $    18,571,498
Effect on fair value of the following hypothetical
 changes in key assumptions:

Discount rate increased by 2%                                       (1,014,136)
Discount rate increased by 4%                                       (1,939,361)
Monthly prepayment rate at 110% of base assumption                     (53,351)
Monthly prepayment rate at 120% of base assumption                    (109,678)
Loss rate at 110% of base assumption                                   (21,110)
Loss rate at 120% of base assumption                                   (41,934)`

| | The
objective of these hypothetical analyses is to measure the sensitivity of the
fair value of the retained interests to changes in assumptions. The methodology
used to calculate the fair value in the analyses is a discounted cash flow
analysis, the same methodology used to estimate fair value as described in Note
3. These estimates do not factor in the impact of simultaneous changes in other
key assumptions. The above scenarios do not reflect managements
expectation regarding the future direction of these rates, and they depict only
certain possibilities out of a large set of possible scenarios.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | Premises and Equipment,
net
|-- | ---------------------------

| | Premises and equipment
at September 30, 2001 are comprised of the following:
| | ----------------------------------------------------------------------------

`Acquisition          Accumulated            Net book
                                  cost             depreciation              value
                         --------------------   -------------------   -------------------
Land                     $          1,944,729   $                 -   $         1,944,729
Building                              810,304                30,134               780,170
Furniture and equipment             2,932,742               590,881             1,341,861
                         --------------------   -------------------   -------------------
                         $          5,687,775   $           621,015   $         4,066,760
                         ====================   ===================   ===================`

| | Depreciation expense for the
six months and three months ended September 30, 2001 amounted to $449,257 and
$176,758, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------

|7. | Other assets
|-- | ------------

| | Other assets at September 30, 2001
are comprised of the following:
| | ------------------------------------------------------------------

`Amount
                                                                                     ----------------------
     Receivable from sale of loans held for sale                                     $            6,874,952
     Other assets                                                                                 1,446,271
                                                                                     ----------------------
                                                                                     $            8,321,223
                                                                                     ======================`

|8. | Short-term Borrowings
|-- | ---------------------

| | Short-term borrowings at September 30, 2001 are
comprised of the following:
| | ---------------------------------------------------------------------------

`Annual interest
                                                       rates (%)                  Amount
                                                 -----------------------   ----------------------
General term borrowings                             8.20 - 13.50           $        1,833,321
Bank                                                    11.50                      10,472,080
Notes with short-term finance companies             9.25 - 14.00                   20,701,245
                                                                           -----------------------
                                                                           $       33,006,646
                                                                           =======================`

| | Certain
bank deposits, loans held for investment and residual interests in
securitization are pledged as collateral for the above borrowings. Historically,
short-term borrowings have been revolving in nature and refinanced by new
borrowings as they become due. Management believes that the Company will
continue to borrow in the near term short-term funds for operations through new
and renewals of existing borrowing arrangements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Maximum and average borrowings and
the weighted average interest rate on short-term borrowings for the three months
period ended September 30, 2001 are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

`Amount
                                              -------------------------
Maximum borrowings                            $        33,006,646
Average borrowings outstanding                         22,080,785
Weighted average interest rate per annum                   11.87%`

|9. | Long-term Debt
|-- | --------------

| | Long-term debt at September 30, 2001
is comprised of the following:
| | -------------------------------------------------------------------

`Amount
                                                       ---------------------
    Debentures                                         $        26,888,702
    Bank loans                                                   5,774,960
                                                       ---------------------
                                                                32,663,662
    Less: discounts                                               (325,074)
                                                       ---------------------
                                                                32,338,588
    Current portion of long-term debt                           24,262,239
                                                       ---------------------
                                                       $         8,076,349
                                                       =====================`

| | Debenures outstanding at September 30, 2001
are comprised of the following:
| | ---------------------------------------------------------------------------

`Annual interest
                              Maturity date           rates (%)                  Amount
                         ---------------------   --------------------     ---------------------
    Non-collaterized     January 31, 2002               10.7              $        11,458,254
    Non-collaterized     July 31, 2002                  11.0                       11,458,254
    Non-collaterized     February 21, 2003              15.0                        3,819,417
    Convertible          February 27, 2031              12.2                          152,777
                                                                          ---------------------
                                                                                   26,888,702
    Less: discounts                                                                  (325,074)
                                                                          ---------------------
                                                                          $        26,563,628
                                                                          =====================`

| | The
Companys convertible debentures are non collateralized and can be
converted to common shares of STC for $0.37 per share from February 27, 2002 to
February 26, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Bank loans at September 30, 2001 are
comprised of the following:
| | ----------------------------------------------------------------

`Annual interest
                                Maturity date             rates (%)                Amount
                            ----------------------     ----------------     ---------------------
    Hanareum Merchant       January 14, 2002                14.5            $          1,222,214
      Bank
    Ssangyong Fire and
      Marine Insurance        March 25, 2003                10.25                      1,649,988
    Kyungki Committee
      Bank                      July 6, 2003                13.5                       2,902,758
                                                                            ---------------------
                                                                            $          5,774,960
                                                                            =====================`

| | The Company's building and land, certain bank deposits
and loans held for investment are pledged as collateral for the debentures
and bank loans.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| | The maturities of long-term debt
outstanding at September 30, 2001, excluding discounts on debentures, are as follows:
| | ----------------------------------------------------------------------------------------------------------------------

`Debentures
                  (par value)               Bank loans                 Total
            -----------------------    ----------------------    -------------------
 2002        $          22,916,508     $           1,222,214    $         24,138,772
 2003                    3,819,417                 4,552,746               8,372,163
 2031                      152,777                         -                 152,777
             ----------------------    ----------------------   ---------------------
             $          26,888,702     $           5,774,960    $         32,663,662
             ======================    ======================   =====================`

|Item  2. | MANAGEMENT'S DISCUSSION
AND ANALYSIS
|-------- | ------------------------------------

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

THE FOLLOWING ANALYSIS OF
THE OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY SHOULD BE READ IN
CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING
NOTES THERETO, OF THE COMPANY CONTAINED ELSEWHERE IN THIS FORM 10-QSB.

GENERAL

The Companys business
strategy, undertaken by its operating subsidiary NewState Capital Co., Ltd.
(NewState Capital), is primarily focused on three areas: residential
mortgage loan production, loan servicing and the capital markets in Korea. Loan
production and loan servicing comprise the Companys mortgage banking
business and is core to the Companys whole operation. The operations of
the capital markets segment include issuing and selling mortgage-backed
securities (MBS) and making bulk purchases and sales of whole loans.
Currently, issuing and selling MBS is only considered a source of funding
primarily for the Companys mortgage banking business. However, the Company
plans to expand this segment as a revenue generating operation in the near
future.

The Companys current
business plan is to expand its mortgage origination efforts throughout Korea,
develop and offer innovative new mortgage products to Korean middle-income
families and individuals, and to securitize and sell its mortgage loan portfolio
as MBS to investors in Korea.

The Companys results
of operations are influenced primarily by the level of demand for mortgage
loans, which is affected by such external factors as the level and direction of
interest rates and the strength of the overall economy, as well as the economy
in the Companys lending markets. Home mortgage loans in Korea, including
those originated by the Company, typically have variable interest rates. There
is no standard lending rate by which mortgage interest rates are determined;
however, mortgage lenders, including the Company, typically adjust their
interest rates monthly to reflect the lenders on-going cost of funding.

During the six months ended
September 30, 2001, the Company securitized through special purpose entities
(SPE) mortgage loans in the principal amount of $22.5 million. The
Company services loans in the MBS pools, taking responsibility for collection of
delinquent loans and recovering on defaulted loans. The Company intends to sell
its mortgage loans to the public mortgage-backed securitization market on a
periodic basis.

For the six months ended
September 30, 2001, the Company produced mortgage loans in the amount of $28.0
million compared to $2.7 million for the six months ended September 30, 2000.

RESULTS OF OPERATIONS FOR THE THREE MONTHS
 ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000

Interest Income

Interest income decreased
by $943 thousand or approximately 58.3% from $1,618 thousand for the Second
Quarter 2000 to $675 thousand for the Second Quarter 2001.

Interest income on loans
decreased by approximately $419 thousand from $1,028 thousand in the Second
Quarter 2000 to $609 thousand in the Second Quarter 2001 mainly due to a
decrease in the average mortgage loan balance from $27,933 thousand for the
Second Quarter 2000 to $6,592 thousand for the Second Quarter 2001. The decrease
in interest income on loans was due to decrease in average outstanding loan
balance from the Second Quarter 2000 to the Second Quarter 2001. The decrease in
the average mortgage loan balance reflects prepayments and the transfer of
mortgage loans to special purpose entities for MBS issuance.

Interest income on bank
deposits decreased to $65 thousand in the Second Quarter 2001 from $590 thousand
in the Second Quarter 2000 due to a lower average cash balance in the Second
Quarter 2001 than in the Second Quarter 2000. Funds from cash and bank deposits
were used to retire short-term borrowings and to originate mortgage loans.

## Interest
Expense

Interest expense increased
by $270 thousand or approximately 17.1% from $1,573 thousand in the Second
Quarter 2000 to $1,842 thousand in the Second Quarter 2001 due to a higher
average loan payable balance and increase in average interest rate on loans
payable of 0.1%. The average loan payable balance increased from $51,148
thousand for the Second Quarter 2000 to $58,899 thousand in the Second Quarter
2001. The Company obtained additional borrowings amounting to W15.9 million, in
the Second Quarter 2001.

## Net Interest
Loss

The Company incurred a net
interest loss of $1,168 thousand in the Second Quarter 2001, compared to a net
interest income of $45 thousand in the Second Quarter 2000. This was primarily
due to a substantial excess of average aggregate interest bearing liabilities
($51,148 thousand) compared to interest earnings assets ($6,952 thousand) and
increased competition that caused loan rates to decline below the Companys
average borrowing cost.

## Reversal of
Provision for Loan Losses

Reversal of provision for
loan losses amounted to $104 thousand for the Second Quarter 2001 mainly due to
receipt of loan payments on mortgage loans with allowance for loan losses during
the Second Quarter 2001.

## Gain on Sales of Loans

The Company sold mortgage
loans with a total value of $15.7 million to special purpose entities (SPE)
during the Second Quarter 2001. The loans were securitized in September 2001. In
connection with these transactions NewState Capital recognized gains on sale of
loans amounting to $413 thousand. The Company retained the residual interests in
securitizations with a fair value of $2.6 million.

## Total Operating Expenses

Total operating expenses
were $2.2 million in the Second Quarter 2001, up from $1.6 million in the Second
Quarter 2000. The increase during the Second Quarter 2001 was primarily
attributed to increases in salaries, employee benefits, and general and
administrative expenses in line with the Companys effort to expand its
business.

## Salaries and
Related Expenses

Salaries and related
expenses increased by approximately 25.0% from $608 thousand for the Second
Quarter 2000 to $760 thousand for the Second Quarter 2001 mainly due to salary
increases and increase in number of employees.

In addition, sales
commissions of $163 thousand and $21 thousand were paid to sales agents based on
their results of new loan originations during the Second Quarter 2001 and 2000,
respectively, and are included in general and administrative expenses in the
statements of operations.

## General and Administration

General and administration
expense increased from $999 thousand for the Second Quarter 2000 to $1,401
thousand for the Second Quarter 2001. The increase of $402 thousand mainly
consists of an increase in professional and legal fees of approximately $53
thousand, advertising expenses of $67 thousand, entertainment expenses of $31
thousand and depreciation expense of $17 thousand for the Second Quarter 2001.

## Amortization of Negative Goodwill

Negative goodwill totaling
approximately $14.8 million resulted from the acquisition of NewState Capital by
NewState NY in December 1998 and Youngnam by NewState Capital in March 1999 and
is being amortized over a 5 year period. The amount of amortization for the
Second Quarter 2001 was $616 thousand.

## Amortization of Goodwill

Goodwill  totaling $899 thousand  resulted from the acquisition of World Asset Co., Ltd. by NewState Capital in April 2001 and is being
amortized over a 5 year period. The amount of amortization for the Second Quarter 2001 was $57 thousand.

## Net Gains and Losses on Disposal
of Securities Available-for-Sale

The Company realized a gain
of $10,416 on disposition of securities available-for-sale of certain listed
shares for the Second Quarter 2001.

The Company realized a loss
of $108,786 on disposition of securities available-for-sale of certain listed
shares for the Second Quarter 2001.

## Gain on
Valuation of Residual Interests

The Company recorded a gain
on valuation of residual interests of $1,183 thousand in the Second Quarter 2001
related to retained interest valuation on the six MBS issuances (one during the
year ended March 31, 2000, two during the year ended March 31, 2001, one in the
First Quarter 2001 and two in the Second Quarter 2001). The valuation gain is
mainly attributable to decreased interest payments due to senior mortgage-backed
security holders payable by SPEs because of early principal repayments on
certain senior certificates during the Second Quarter 2001.

## Other
expenses, net

The Companys other
gains of $59 thousand consist mainly of prepayment fees received from borrowers
mortgage low amounting to $56 thousand.

The Companys other
expenses of $121 thousand consist mainly of refunds of $100 thousand to
borrowers of interest payments received due to incorrect interest rates used by
Newstate Capital.

## Net Income

The Company recorded a net
loss of $1,061 thousand for the Second Quarter 2001 compared to a net loss of
$139 thousand for the Second Quarter 2000. The increase in net loss was
primarily attributable to a decrease in net interest income and an increase in
salaries and general and administration expenses.

## RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2000

## Interest Income

Interest income decreased
by $1,781 thousand or approximately 56.4% from $3,157 thousand for the six
months ended September 30, 2000 (the First Half 2000) to $1,376
thousand for the six months ended September 30, 2001 (the First Half
2001).

Interest income on loans
decreased by approximately $1,326 thousand from $2,330 thousand in First Half
2000 to $1,003 thousand in the First Half 2001 mainly due to a decrease in the
average mortgage loan balance from $29,226 thousand for the First Half 2000 to
$7,105 thousand for the First Half 2001. The decrease in interest income on
loans was due to a decrease in average outstanding loan balance from the Interim
2000 to the Interim 2001. The decrease in the average mortgage loan balance
reflects prepayments and the transfer of mortgage loans to special purpose
entities for MBS issuance.

Interest income on bank
deposits decreased to $373 thousand in the First Half 2001 from $828 thousand in
the First Half 2000 due to a lower average cash balance in the First Half 2001
than in the First Half 2000. Funds from cash and bank deposits were used to
retire short-term borrowings and to originate mortgage loans.

## Interest
Expense

Interest expense increased
by $565 thousand or approximately 20.12% from $2,811 thousand in the First Half
2000 to $3,376 thousand in the First Half 2001 due to a higher average loan
payable balance and increase in average interest rate on loans payable of 0.33%.
The average loan payable balance increased from $46,479 thousand for the First
Half 2000 to $54,272 thousand in the First Half 2001. The Company pursued
additional borrowings, the total amount of $18.9 million, in the First Half
2001.

## Net Interest
Loss

The Company incurred a net
interest loss of $2,000 thousand in the First Half 2001, compared to a net
interest income of $346 thousand in the First Half 2000. This was due primarily
to a substantial excess of average aggregate interest bearing liabilities
($54,272 thousand) compared to interest bearing assets ($7,105 thousand) and
increased competition that caused loan rates to decline below the Companys
average borrowing cost.

## Reversal of
Provision for Loan Losses

Reversal of provision for
loan losses amounted to $300,575 in the First Half 2001 while the provision for
loan losses amounted to $513,219 in the First Half 2000. The reversal of
provision for loan losses is mainly due to receipt of loan payments on mortgage
loans with allowance for loan losses.

## Gain on Sales
of Loans

The Company sold mortgage loans
with an aggregate principal value of $22.5 million to special purpose entities
(SPE) during the First Half 2001. The loans were securitized in May 2001 and
September 2001. In connection with these transactions NewState Capital
recognized gains on sale of loans amounting to $418 thousand. The Company
retained the residual interests in securitizations amounting to $4.8 million.

## Total
Operating Expenses

Total operating expenses
were $3.5 million in the First Half 2001, up from $2.56 million in the First
Half 2000. The increase during the First Half 2001 was primarily attributed to
increases in salaries, employee benefits, and general and administrative
expenses in line with the Companys effort to expand its business.

## Salaries and
Related Expenses

Salaries and related
expenses increased 18.27% in the First Half 2001 to $1,165,183 from $985,189 in
the First Half 2000 due to both increases in the average number of employees and
increases in annual salaries. The Company appointed a new director and raised
the average annual salaries for its employees. Average full time equivalents
(FTEs) were 56 in the First Half 2001 compared to 42 in the First Half
2000.

In addition, sales
commissions of $222 thousand and $51 thousand were paid to sales agents based on
their results of new loan originations during the First Half 2001 and 2000,
respectively, and are included in general and administrative expenses in the
statements of operations.

## General and
Administration

General and administration
expense for the First Half 2001 increased to $2,194 thousand from $1,437 for the
First Half 2000. This was primarily due to an increase in professional and legal
fees of approximately $190 thousand and in advertising of $59 thousand and
depreciation expenses of $60 thousand from the First Half 2000 to the First Half
2001.

## Amortization
of Negative Goodwill

Negative goodwill totaling
approximately $14.8 million resulted from the acquisition of NewState Capital by
NewState NY in December 1998 and Youngnam by NewState Capital in March 1999 and
is being amortized over a 5 year period. The amount of amortization for the
First Half 2001 was $1,227 thousand.

## Amortization
of Goodwill

Negative goodwill totaling
$899 thousand resulted from the acquisition of World Asset Co., Ltd by NewState
Capital in April 2001 and is being amortized over a 5 year period. The amount of
amortization for the First Half 2001 was $102 thousand.

## Net Loss on
Disposal of Securities Available for Sale

The Company realized a gain
of $24 thousand on disposition of securities available-for-sale on sale of
certain equity shares.

The Company realized a loss
of $131 thousand on disposition of securities available-for-sale during the
First Half 2001.

## Gain on
Valuation of Residual Interests

The Company recorded a gain
on valuation of residual interests of $714 thousand in the First Half 2001
related to retained interests on MBS issuances (one in Fiscal 1999 and two in
Fiscal 2000 and two in the First Half 2001). The gain is mainly attributable to
decreased interest payments due to senior mortgage backed security holders
payable by SPEs because of early principal repayments on certain senior
certificates during the First Half 2001.

## Other gain, net

The Companys other
gains of $115 thousand consist mainly of prepayment fees received from mortgage
loan borrowers amounting to $107 thousand.

The Companys other
expenses of $273 thousand consist mainly of refunds of $169 thousand to
borrowers of interest payments received due to incorrect interest rates used by
Newstate Capital.

The Companys other
expenses, net was $158 in the First Half 2001 compared to $165 in the First Half
2000.

## Net Income

The Company recorded a net
loss of $2,903 thousand or $0.25 per share for the First Half 2001 compared to a
net loss of $138 thousand or $0.01 per share for the First Half 2000. The
increase in net loss was primarily attributable to a decrease in net interest
income and increase in salaries, general and administration expenses.

## LIQUIDITY AND
CAPITAL RESOURCES

At September 30, 2001, the
Company had unrestricted cash and cash equivalents and interest-bearing deposits
totaling $7.1 million compared to $15.2 million at September 30, 2000. For the
six months ended September 30, 2001, cash used in operating activities of $11.7
million was primarily due to (i) the net loss of $2,903 thousand, (ii) minority
interest in loss of $310 thousand, (iii) depreciation and amortization of $449
thousand, (iv) amortization of negative goodwill of $1,227 thousand, (v)
reversal provision for loan losses of $301 thousand, (vi) gain on valuation of
subordinated certificates of $714 thousand, (vii) gain on disposal of loans held
for sale of $425 thousand, (viii) increase in accrued expenses and other
liabilities of $376 thousand, and (ix) increase in accrued interest receivable
and other assets of $6,891 thousand.

Cash used in investing
activities of $14.7 million was primarily due to (i) proceeds from sales of
loans held for sale of $18,386 thousand, (ii) decrease in loans held for
investment of $2,718 thousand, (iii) increase in loans held for sale of $28,430
thousand, (iv) decrease in interest bearing deposits with bank $718 thousand,
(v) proceed from sale of available for sale securities $1,174 thousand, (vi)
purchase of securities available for sale of $4,946 thousand, (vii) purchase of
interest in subsidiary of $1,929 thousand, and (viii) acquisition of premises
and equipment of $909 thousand.

Cash provided by financing
activities of $20.0 million was primarily due to (i) a increase in short-term
borrowings, net of $18,931 thousand, (ii) proceeds from issuance of long-term
debt of $3,691 thousand, and (iii) payments on long-term borrowings of $2,701
thousand.

The Company has borrowings
of $57.3 million that come due during the next twelve months that will need to
be rolled over or refinanced. The Company also has a serious negative operating
cash flow condition primarily due to its substantial debts, and will require
additional funds to continue its operations. These conditions raise substantial
doubt about the Companys ability to continue as a going concern. The
Company intends to secure additional funds by issuing corporate bonds, pledging
assets for bank borrowings, and issuing mortgage-back securities. The Company
may also issue additional equity or convertible debt securities, if required,
which may result in additional dilution in ownership of the stockholders of the
Companys common stock. There can be no assurance that additional financing
will be available on terms and conditions acceptable to the Company, if
available at all.

|PART II. | Other Information
|-------- | -----------------

|Item 1. | Legal Proceedings
|------- | -----------------

| | None.
| | -----

|Item 2. | Changes in Securities and Use of Proceeds
|------- | -----------------------------------------

| | None.
| | -----

|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

| | None.
| | -----

|Item 4. | Submission of Matters to a Vote of
Security Holders
|------- | ---------------------------------------------------

| | None.
| | -----

|Item 5. | Other Information
|------- | -----------------

| | None.
| | -----

|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------

| | (a) | Exhibits
| | --- | --------

| |  | None.
| |  | -----

| | (b) | Reports on Form 8-K
| | --- | -------------------

| |  | None.
| |  | -----

## SIGNATURES

Pursuant to the  requirements of the Securities  Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.

| |  | NEWSTATE HOLDINGS, INC.
| |  | -----------------------

| |  | ERNEST B. KIM
| |  | -------------

| |  | By:_________________________________
| |  | ------------------------------------

| |  | Ernest B. Kim, Chairman, President
       and Chief Executive Officer
| |  | ---------------------------------------------------------------------