# SECURITIES AND EXCHANGE COMMISSION
                                                         Washington, DC 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 June 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 or Organization)        
  
          (I.R.S. Employer Identification No.)

# 156 W. 56th Street, Suite 2005, New York, NY          
          
          10019
          
(Address of Principal Executive Offices)          
          
          
 
(Zip Code)

# (212) 245-5801

---

# (Registrant's Telephone Number
                                                         Including Area Code)

# RACOM SYSTEMS, INC.
                                       156 W. 56th Street, Suite 2005, New York, New York 10019
                                                   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 outstnding of each of the Registrant's classes of common stock, as of August 10, 2001:

Class          
           
          
          
          
          Number of Shares Outstanding

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

`INDEX

Part I            Financial Information                                                      Page
------            ---------------------                                                      ----

                    Item 1.         Consolidated Balance Sheet as of                           4
                                    June 30, 2001

                                    Consolidated Statements of                                 6
                                    Operations for the three months ended
                                    June 30, 2001 and June 30,2000

                                    Consolidated Statements of Cash                            7
                                    Flows for the three months ended June 30,
                                    2001 and June 30, 2000

                                    Notes to Consolidated Financial Statements                 8

                    Item 2.         Management's Discussion and Analysis of                    18
                                    Financial Condition and Results of Operations

Part II           Other Information and Signatures                                             22

----------------------------------------------`

i

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.

1

# PART I

# FINANCIAL INFORMATION

Item 1.  Financial Statements.

`NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                            CONOLIDATED BALANCE SHEET
                                   (Unaudited)
                                                                   U.S. dollars
                                                                  June 30, 2001
                                                               -----------------
ASSETS

Cash and cash equivalents                                      $      1,026,447
Restricted cash                                                       3,725,524
Interest-bearing deposits with banks                                  7,346,209
Securities available for sale                                         3,244,691
Loans held for sale                                                   6,634,966
Loans held for investment, net                                        6,271,900
Residual interests in securitizations                                15,022,829
Premises and equipment, net                                           3,877,920
Accrued interest receivable                                             258,865
Goodwill                                                                854,234
Other assets                                                          1,151,775
                                                               -----------------
         Total assets                                          $     49,415,360
                                                               =================

LIABILITIES AND SHAREHOLDERS' DEFICIT

Short-term borrowings                                          $     19,172,753
Current portion of long-term debt                                    13,765,684
Accrued expenses and other liabilities                                1,380,799
Long-term debt                                                       16,706,593
Severance and retirement benefits                                        38,113
Negative goodwill, net                                                6,199,296
                                                               -----------------
         Total liabilities                                           57,263,238
                                                               -----------------

Minority interest                                                     2,091,737

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                                                 (16,311,796)
Accumulated other comprehensive income                                  859,701
                                                               -----------------
         Total shareholders' deficit                                 (9,939,615)
                                                               -----------------
         Total liabilities and shareholders' deficit           $     49,415,360
                                                               =================

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

2

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

                                                          Three Months Ended     Three Months Ended
                                                             June 30, 2001          June 30, 2000
                                                         ------------------------------------------
Interest income:
      Loans                                                $       394,401           $  1,299,876
      Deposits with banks                                          307,141                237,574
                                                         ------------------------------------------
           Total interest income                                   701,542              1,537,450

Interest expense:
      Short-term borrowings                                        519,934                918,653
      Long-term debt                                             1,013,623                317,655
                                                         ------------------------------------------
           Total interest expense                                1,533,557              1,236,308
                                                         ------------------------------------------

Net interest income (expense)                                     (832,015)               301,142
Reversal of provision (provision) for loan losses                  196,932                (16,349)
                                                         ------------------------------------------
Net interest income (expense) after provision for loan
      losses                                                      (635,083)               284,793
                                                         ------------------------------------------

Gain on sale of loans                                                4,840                      -

Net loss on disposal of securities available for sale               (8,588)               (77,449)

Other income and expenses:
      Salaries and employee benefits                              (517,375)              (516,384)
      General and administrative                                  (792,551)              (436,968)
      Provision for severance and retirement benefits              (33,228)                     -
      Amortization of negative goodwill                            610,441                672,666
      Amortization of goodwill                                     (44,779)                     -
                                                                                                -
      Loss on valuation of residual interests                     (468,668)                     -
                                                                                                -
      Other, net                                                   (95,892)                77,287
                                                                                                -
                                                         -----------------------------------------
Income (expense) before income taxes                            (1,980,883)                 3,945
                                                         -----------------------------------------
Provision for income taxes                                               -                      -
Minority interest                                                  138,934                  2,602
                                                         -----------------------------------------
Net loss                                                   $    (1,841,949)          $      6,547
                                                         =========================================
Basic and diluted net income (loss) per share
 of common stock                                           $         (0.16)          $      (0.00)
                                                         =========================================
Average number of shares outstanding                            11,508,684             11,508,684


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

3

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

                                                                      Three Months Ended      Three Months Ended
                                                                        June 30, 2001           June 30, 2000
                                                                      --------------------    -------------------
Cash flows from operating activities:
    Net income (loss)                                                  $   (1,841,949)         $      6,547
    Adjustments to reconcile net loss to net cash used in
    Operating activities:
       Minority interest                                                     (138,934)               (2,602)
       Depreciation and amortization                                          176,758                     -
       Amortization of negative goodwill                                     (610,441)             (672,666)
      Amortization of goodwill                                                 44,779                     -
       Provision (reversal of provision) for loan losses                     (196,932)               16,350
       Loss on valuation of retained interest                                 468,668                     -
       Loss on disposal of premises and equipment, net                          2,015                     -
      Gain on disposal of loans held for sale                                  (4,986)                    -
      Net loss on disposal of securities available for sale                     8,588                76,443
       Provision for severance and retirement benefits                         18,857               (16,873)
       Increase (decrease) in accrued expenses and other liabilities         (121,854)             (629,287)
       Decrease (increase) in accrued interest receivable and other           660,743              (732,196)
       assets
                                                                       --------------------    ---------------
Net cash used in operating activities                                      (1,534,688)           (1,954,284)

Cash flows from investing activities:
    Proceeds from sale of loans held for sale                               4,594,357                     -
   Collections from loans held for sale                                             -                     -
   Increase in loans held for sale                                         (6,784,461)                    -
   Collections from loans held for investment                                       -                     -
    Decrease (increase) in loans held for investment, net                     906,890             7,279,951
    Decrease (increase) in interest bearing deposits with banks            (2,093,110)              801,760
   Proceeds from sale of securities available for sale                              -                75,406
   Purchase of securities available for sale                               (1,403,140)              (26,259)
   Purchase of interest in subsidiary                                      (2,786,248)                    -
    Proceeds from sale of securities held to maturity                           1,492                     -
    Acquisition of premises and equipment                                    (390,730)           (3,278,599)
    Others                                                                    (30,576)               25,766
                                                                       --------------------    ---------------
Net cash provided by (used in) investing activities                        (7,985,526)            4,878,025

Cash flows from financing activities:
    Increase in short-term borrowings, net                                  4,853,172             1,659,762
    Consolidated financing activity                                            76,573                     -
    Proceeds from issuance of long-term debt                                        -               447,948
    Payment on long term-debt                                              (1,839,787)           (5,150,077)
                                                                       --------------------    ---------------
Net cash provided by (used in) financing activities                         3,089,958            (3,042,367)

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

Effect of exchange rate changes on cash                                       157,718                   272
                                                                       --------------------    ---------------

Net increase (decrease) in cash and cash equivalents                       (5,740,384)             (118,354)
Cash and cash equivalents at beginning of year                              6,766,831               360,797
                                                                       --------------------    ---------------
Cash and cash equivalents at end of year                               $    1,026,447          $    242,443
                                                                       ====================    ===============

Supplemental cash flow information:
    Cash paid for interest                                             $     1,112,987         $  1,603,078
    Cash paid for income taxes                                                       -                    -

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

4

# NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                             June 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

>5

| | 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. As a result, the Company
(56.9%) and NewState Capital (19.7%), collectively, own 76.6% of STC as of March
31, 2001.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 1, 2000 and April 24, 2001, Newstate Capital purchased 19.87% and
29.26% of WACs common shares from certain shareholders of WAC. As a result
of the 49.13% acquisition of ownership interest in WAC, Newstate Capital
controls WAC and consolidates WACs financial positions 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 June 30, 2001, and for the periods ended
June 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

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 W1,300.70 to
US$1 for assets and liabilities and a weighted average exchange rate of
W1,305.95 to US$1 and W1,114.90 to US$1 for the quarters ended June 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

## 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

## 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 Securitization

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

| | 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 2.00%to 2.71%. 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.

10

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 June 30, 2001 are as follows:

`Allowance for          Balance at
                                           Principal           loan losses           June 30, 2001
                                    --------------------   -----------------  ----------------------
     Mortgage loans                 $          6,778,467   $         2,175,076   $         4,603,391
     Consumer loans                            1,865,173             1,824,829                40,344
     Commercial loans                          2,523,952               895,787             1,628,165
                                    --------------------   -------------------   -------------------
                                    $         11,167,592   $         4,895,692   $         6,271,900
                                    ====================   ===================   ===================`

12

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 $15,022,829 at June 30, 2001. The
restricted cash reserves are included in restricted cash on the consolidated
balance sheet and were $553,232 at June 30, 2001. The following assumptions were
used in measuring the fair value of residual interests in securitizations at
June, 2001. The assumptions listed represent weighted averages of assumptions
used for each securitization.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`Residual interests
                                                                 ---------------------
    Prepayment speed (monthly constant prepayment rate)             2.85% - 3.93%
    Weighted average life in years                                        3
    Discount rate                                                       12.00%
    Loss rate                                                       2.00% - 2.71%`

| | 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 June 30, 2001.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`Amount
                                                                             --------------
    Fair value of residual interests at June 30, 2001                        $  15,022,829
    Effect on fair value of the following hypothetical
     changes in key assumptions:

    Discount rate increased by 2%                                                (841,015)
    Discount rate increased by 4%                                              (1,611,776)
    Monthly prepayment rate at 110% of base assumption                           (366,955)
    Monthly prepayment rate at 120% of base assumption                           (454,449)
    Loss rate at 110% of base assumption                                          (21,075)
    Loss rate at 120% of base assumption                                          (42,149)`

| | 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
2. 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

6.  Premises and Equipment, net

Premises and equipment at
June 30, 2001 are comprised of the following:

`Acquisition          Accumulated            Net book
                                                       cost             depreciation              value
                                              --------------------   -------------------   -------------------
     Land                                     $          1,957,288   $                 -   $         1,957,288
     Building                                              815,537                25,358               790,179
     Furniture and equipment                             1,699,549               569,096             1,130,453
                                              --------------------   -------------------   -------------------
                                              $          4,472,374   $           594,454   $         3,877,920
                                              ====================   ===================   ===================`

Depreciation
expense for the three months ended June 30, 2001 amounted to $176,758.

7.  Short-term Borrowings

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

`Annual interest
                                                    rates (%)                   Amount
                                                ----------------------  ------------------------
    General term borrowings                                8.95            $            999,462
    Bank                                                  11.50            $          2,643,192
    Notes with short-term finance companies           9.29 - 14.00                   15,530,099
                                                                        ------------------------
                                                                           $         19,172,753
                                                                        ========================`

| | 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 June 30, 2001, are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

`Amount
                                                -----------------
 Maximum borrowings                             $  20,325,978
 Average borrowings outstanding                 $  17,436,128
 Weighted average interest rate per annum               11.96%`

8.  Long-term Debt

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

`Amount
                                                            -------------------
    Debentures                                               $     27,062,351
    Bank loans                                                      3,813,331
                                                             ------------------
                                                                   30,875,682
    Less: discounts                                                  (403,405)
                                                             ------------------
                                                                   30,472,277
    Current portion of long-term debt                              13,765,684
                                                             ------------------
                                                             $     16,706,593
                                                             ==================`

14

Debentures outstanding at
June 30, 2001 are comprised of the following:

`Annual interest
                                   Maturity date               rates (%)                  Amount
                              -------------------------   --------------------     ---------------------
Non-collaterized              January 31, 2002                   10.7                       11,532,252
Non-collaterized              July 31, 2002                      11.0                       11,532,252
Non-collaterized              February 21, 2003                  15.0                        3,844,084
Convertible                   February 27, 2031                  12.2                          153,763
                                                                                      ------------------
                                                                                            27,062,351
Less: discounts                                                                               (403,405)
                                                                                      ------------------
                                                                                      $     26,658,946
                                                                                      ==================`

| | 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 June 30, 2001
are comprised of the following:

`Annual interest
                                           Maturity date             rates (%)                Amount
                                       ----------------------     ----------------     ---------------------
    Hanareum Merchant                  January 14, 2002                14.5                $   2,152,687
      Bank
    Ssangyong Fire and
      Marine Insurance                 March 25, 2003                  10.25                   1,660,644
                                                                                           --------------
                                                                                           $   3,813,331
                                                                                           ==============`

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

15

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

`Debentures
                                  (par value)               Bank loans                 Total
                            -----------------------    ----------------------    -------------------
 2002                        $          11,532,252     $           2,337,203    $         13,869,455
 2003                                   15,376,336                 1,476,128              16,852,464
 2031                                      153,763                         -                 153,763
                             ----------------------    ----------------------   ---------------------
                             $          27,062,351     $           3,813,331    $         30,875,682
                             ======================    ======================   =====================`

16

Item 2.     Management's Discussion and Analysis of Plan of Operation.

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 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.

During the three months
ended June 30, 2001 the Company securitized through special purpose entities
(SPE) mortgage loans in the principal amount of $6.8 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 three months ended
June 30, 2001 (First Quarter 2001) the Company produced mortgage
loans in the amount of $6.74 million whereas the Company did not produce any
mortgage loans for the three months ended June 30, 2000 (First Quarter
2000).

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

Interest income

Interest income decreased
by $835 or approximately 54% from $1,537 thousand for the First Quarter 2000 to
$701 thousand for the First Quarter 2001.

Interest income on loans
decreased by approximately $906 thousand from $1,300 thousand in the First
Quarter 2000 to $394 thousand in the First Quarter 2001 mainly due to decrease
in average mortgage loan balance from $25,368 thousand for the First Quarter
2000 to $10,443 thousand for the First Quarter 2001. The decrease in interest
income on loans was due to decrease in average outstanding loan balance from the
First Quarter 2000 to the First 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.

17

Interest income on bank
deposits increased by $157 thousand from $237 thousand in the First Quarter 2000
to $307 thousand in the First Quarter 2001 due to a higher average cash and bank
deposits slightly offset by lower interest rates in the First Quarter 2001 than
in the First Quarter 2000.

Interest Expense

Interest expense increased
by $298 thousand or approximately 19% from $1,236 thousand in the First Quarter
2000 to $1,534 thousand in the First Quarter 2001 due to increase in average
interest rate on loans payable of 0.78% and a higher average loan payable
balance. The average loan payable balance increased from $42,327 thousand for
the First Quarter 2000 to $49,367 thousand in the First Quarter 2001.

Net Interest Loss

The Company incurred net
interest loss of $832 thousand for the First Quarter 2001 compared to a net
interest income of $301,142 in the First Quarter 2000. This was due to increased
competition that caused mortgage loan interest rates to decline below the
Companys average borrowing cost.

Reversal of Provision for Loan Losses

Reversal of provision for
loan losses amounted to $197 thousand for the First Quarter 2001 mainly due to
receipt of loan payments on mortgage loans with allowance for loan losses during
the First Quarter 2001.

Gain on Sales of Loans

The Company sold mortgage
loans with a total value of $6.8 million to special purpose entities (SPE)
during the First Quarter 2001. $6.8 million of NewState Capitals loans
were securitized in May 2001. The SPE then issued senior certificates totaling
$4.6 million. In connection with these transactions NewState Capital recognized
gains on sale of loans amounting to $5 thousand. The Company retained the
residual interests in securitizations with a fair value of $2.2 million.

Total Operating Expenses

Total operating expenses
were $1.34 million in the First Quarter 2001, up from $0.95 million in the First
Quarter 2000. The increase during the First Quarter 2001 was primarily
attributed to increases in salaries, employee benefits, and general and
administrative expenses.

Salaries and Related Expenses

Salaries and related
expenses increased by approximately 7% from $516 thousand for the First Quarter
2000 to $551 thousand for the First Quarter 2001 mainly due to salary increases.

In addition, sales
commissions of $59 thousand and $30 thousand were paid to sales agents based on
their results of new loan originations during the First Quarter 2001 and 2000,
respectively, and are included in general and administrative expenses in the
statements of operations.

18

General and Administration

General and administration
expense increased from $434 thousand for the First Quarter 2000 to $793 thousand
for the First Quarter 2001. The increase of $359 thousand mainly consists of
increase in professional and legal fees of approximately $40 thousand,
advertising expenses of $105 thousand and depreciation expenses of $125 thousand
for the First 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
First Quarter 2001 was $610 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 First Quarter 2001 was $45 thousand.

Net Loss on Disposal of Securities Available for Sale

The Company realized a gain
of $13,467 on disposition of securities available for sale of certain listed
shares for the First Quarter 2001.

The Company realized a loss
of $22,055 on disposition of securities available for sale of certain listed
shares for the First Quarter 2001.

Loss on Valuation of Residual Interests

The Company recorded losses
on valuation of residual interests of $468,668 in the First Quarter 2001 related
to retained interest valuation on the four MBS issuances (one during the year
ended March 31, 2000, two during the year ended March 31, 2001 and one in the
First Quarter 2001). The valuation loss is mainly attributable to an increase in
the constant prepayment rate used for the valuation of residual interests as of
June 30, 2001.

Other expenses, net

The Companys other
expenses, net was $96 thousand mainly due to loss on disposal of premises and
equipment amounting to $43 thousand.

Net Income

The Company recorded a net
loss of $1,842 thousand for the First Quarter 2001 compared to a net income of
$6,547 thousand for the First Quarter 2000. The decrease in net loss was
primarily attributable to a decrease in net interest income, an increase in
salaries and general and administration expense, valuation loss on residual
interests.

19

## LIQUIDITY AND
CAPITAL RESOURCES

At June 30, 2001, the
Company had unrestricted cash and cash equivalents and interest-bearing deposits
totaling $8.4 million compared to $3.6 million at June 30, 2000. For the First
Quarter 2001, cash used in operating activities of $1,535 thousand was primarily
due to (i) the net loss of $1,842 thousand, (ii) minority interest income of
$139 thousand, (iii) depreciation and amortization of $177 thousand, (iv)
amortization of negative goodwill of $610 thousand, (v) reversal provision for
loan losses of $197 thousand, (vi) loss on valuation of subordinated
certificates of $469 thousand, (vii) decrease in accrued interest receivable and
other assets of $661thousand, (viii) decrease in accrued expenses and other
liabilities of $122 thousand, and (ix) other adjustments to reconcile net loss
to net cash used in operations of $68 thousand.

Cash used in investing
activities of $7,985 thousand was primarily due to (i) proceeds from sales of
loans of $4,594 thousand, (ii) collection of loans held for investment of $907
thousand, (iii) increase in loans held for investment of $6,784 thousand, (iv)
increase in bank deposits of $2,093 thousand, (v) purchase of securities
available-for-sale of $4,189 thousand, (vi) acquisition of premises and
equipment of $391 thousand, and (vii) other cash used in investing activities of
$29 thousand.

For the First Quarter 2001,
cash provided by financing activities of $3,090 thousand was primarily due to
(i) payments on short-term borrowings, net of $4,853 thousand, (ii) payments on
long-term debt of $1,840 thousand, (iii) proceed from issuance of common stock
by a subsidiary of the Company of $77 thousand.

The Company has borrowings
of $32.9 million that comes due during Fiscal 2001 that will need to be rolled
over or refinanced. The Company also has negative operating cash flow, which
will require additional funds to continue its operations. 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 shareholders 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.

20

`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.`

21

# 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.


                                            By: ERNEST B. KIM
                                                ----------------------------
                                                Ernest B. Kim, Chief Executive
                                                Officer and President`