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EDGAR FILINGS

Year 2001 / May 07

FREESTAR TECHNOLOGIES (FSTI.OB)

Item 2 - Management's Discussion & Analysis or Plan of Operation

Freestar Technologies, is a diversified firm consisting of three divisions, all vertically integrated to serve the growing demand for the machinery, media, apparel, automotive parts, micro-turbine and telecommunications markets.

The strategic business plan is broadly diversified with a business mix of high earning hard assets in non-cyclical markets and high margin products and services in high growth cyclical markets. Positioning itself in these negatively- correlated markets is designed to smooth out the Company's performance in all stages of the business cycle.

The Company's first division is its Sports/promotional Apparel Division, known as Freedom Surf, built around the acquisition of Southern California Logo in January, 2000. SewCal is a producer of promotional apparel for the film and sports industry in Southern California. It has trade marked a sports apparel line, invested heavily in its production capacity, and currently is positioned and negotiating to take on a major national apparel line under license. Its current customer list is a Who's-Who in the entertainment (e.g. Disney) and sports world (e.g. L.A. Lakers). Its growth strategy is to expand the SewCalLogo customer base on a national level and to grow through related acquisitions.

The Company's second division is not operational as of the end of the first quarter of 2001.

The third division will be known as Freestar Techonology Systems and results from the grant of a license from Turbonique, Inc. and focuses on developing advanced micro- turbine technology to meet the demand for improved efficiency and performance in the automotive transportation, power and pump markets. This division also was not operational at the end of the first quarter of 2001.

History of the Company

The Company was organized on August 2, 1997 under the laws of the State of Delaware as Interstate Capital Corporation. The Company at that time had no operations and was considered a development stage company. On November 17, 1999, the Company caused a Nevada corporation to be formed under the name of Freedom Surf, Inc. which then merged with Interstate Capital Corporation for the purpose of changing the corporate domicile to Nevada.

Previously, on April 5, 1999, Interstate Capital Corporation had completed a public offering that was exempt from Federal registration under Regulation D, Rule 504 of the Securities & Exchange Act of 1933, as amended. The Company sold 5,000,000 shares of common stock at a price of $.001 per share raising a total of $5,000.00.

Effective January 4, 2000, the Company, then known as Freedom Surf, acquired all of the issued and outstanding shares of stock in Southern California Logo, Inc. ["SewCal"]. The contract was executed on May 12, 2000 but was deemed effective for purposes of reporting income and expense as of January 4, 2000.

Sewcal was acquired through a structured acquisition under the terms of which the former owners of Sewcal, Rick & Judy Songer, received a total of 900,000 shares of stock. They, in turn, transferred a total of 13,150 shares to some long time employees. Judy Songer retained a total of 236,850 shares of common stock in Freestar and Rick Songer owns a total of 650,000 shares. Additionally, the Company then known as Freedom Surf was to pay a total of $800,000 in cash to the Songers. $500,000 of that amount was paid in August, 2000 and the balance is still owed.

Significant Events During the Year 2000 and Subsequent Events During First Quarter of 2001

On December 10, 1999, Freedom Surf reported that it had purchased equipment (the "Equipment") to manufacture neoprene wet suits which was stored in Costa Rica. Freedom Surf valued the Equipment at $5,180,000. Freedom Surf did not obtain a report from a licensed independent appraiser. However, Raece Richardson, then President of Freedom Surf, arranged for an appraisal of this Equipment by a local appraiser of boats who valued the Equipment at $5,180,000.00. Freedom Surf then issued 969,000 shares of its common stock to the seller of the Equipment, STS de Costa Rica, S.A. ["STS"], and also issued a promissory note in the amount of $335,000 to the same company.

On October 19, 2000, Freedom Surf reported that it had sold the Equipment to Ronbridge Investments Limited, a Hong Kong company ("Ronbridge") for $4,750,000, accepting a down payment of $750,000 in cash which was received on August 31, 2000 and a promissory note for the balance of $4,000,000. At the time of the sale, the only shareholder and President of Ronbridge was Raece Richardson's father. At the time, Raece Richardson was a principal shareholder of Freedom Surf. At the time the transaction was completed on the sale of the Equipment, Ronbridge did not have sufficient resources to pay the amount due on the balance of $4,750,000. Also, neither Freedom Surf nor Ronbridge had the capacity to pay the promissory note to the original owner of the Equipment who was still owed $335,000.

Based on advice from outside consultants, the equipment transaction was structured so that Pacific Standard Financial Group, Inc. ["Pacific"] acquired the Equipment from STS and resold it to the Freedom Surf.

Pacific is believed to have purchased the Equipment from STS for the same consideration that the Company agreed to pay Pacific except that the promissory note issued by Pacific to the STS was in the original principal amount of $300,000. Pacific transferred the 969,000 shares to STS and also executed a promissory note to STS for $300,000, as noted.

After this transaction, Freedom Surf never took possession of the Equipment and it remained in storage under the control of STS. As a part of the agreement, Freedom Surf was required to pay storage fees but never paid them. Also, Freedom Surf never paid Pacific the $335,000 which was owed and Pacific, in turn, never paid STS the $300,000 which was owed to them. On November 16, 2000, Freedom Surf received a notice ("Notice") from STS declaring a default. The Notice stated that STS was terminating the agreement. STS returned the 969,000 shares of common stock and has not given any indication that it would bring suit for the monies owed to it. They have accepted the Equipment in lieu of payment.

Finally, Freedom Surf informed Ronbridge that it was not in a position to refund Ronbridge the $750,000 which it received as a down payment on the sale of the Equipment.

On December 8, 2000, Freedom Surf reported on Form 8-K to the Securities & Exchange Commission that the above described situation had occurred.

On January 23, 2001, a group of shareholders who had formed a committee known as the Committee for Corporate Governance, Larinda Nilsen, Chairman, filed a Preliminary Proxy Statement [PRE 14a] with the Securities & Exchange Commission stating that they intended to call a special meeting of the shareholders for the purpose of removing the remaining members of the Board and electing new Board members.

Prior to the filing of this Preliminary Proxy Statement, certain members of the Board of Directors had already resigned. On December 1, 2000, John W. Cruickshank resigned as a member of the Board of Directors of the Company. Shortly thereafter, Holly Richardson, another member of the Board resigned leaving two members of the Board, Rick Songer and David McKenzie.

The remaining Board members, Rick Songer & David McKenzie met in a special meeting of the Board of Directors on February 2, 2001 to consider the matters raised by the Preliminary Proxy Statement which had been filed by Larinda Nilsen. Both Rick Songer and David McKenzie tendered their resignation as members of the Board of Directors, those resignations to become effective on February 5, 2001 at 12:00 P.M. Pacific Standard Time. Prior to their resignations becoming effective, pursuant to Article II, Section 2 of the By Laws of the corporation, the resigning Board elected new members to replace the present Board until the next annual meeting of the shareholders, those persons to become Board members effective on February 5, 2001 at 12:00 P.M. Pacific Standard Time.

Article II, Section 2 of the By Laws of the corporation provides as follows:

"SECTION 2. When any vacancy occurs among the Directors by death, resignation, disqualification or other cause, the stockholders, at any regular or special meeting, or at any adjourned meeting thereof, or the remaining Directors, by the affirmative vote of a majority thereof, shall elect a successor to hold office for the unexpired portion of the term of the Director whose place shall have become vacant and until his successor shall have been elected and shall qualify."

The new members of the Board of Directors who were elected to serve until the next Annual Meeting of the Shareholders were: Charles Cortland Hooper, Arthur F. Wigand and James L. Flippen.

On February 14, 2001, the Secretary of State of the State of Nevada accepted an Amendment to the Articles of Incorporation of the Registrant changing its name from Freedom Surf, Inc. to Freestar Technologies.

Additionally, the Board of Directors implemented a reverse stock split of one (1) share of common stock for each four (4) shares owned. This reverse split returned shareholders to the same number of shares which they had prior to the October, 2000 forward split discussed above. The reverse split became effective on February 22, 2001. The reverse split had been authorized by the Board of Directors at a special meeting held on February 5, 2001 pursuant to Section 78.207 of the Nevada Revised Statutes which provides in pertinent part as follows:

"1. Unless otherwise provided in the articles of incorporation, a corporation organized and existing under the laws of this state that desires to change the number of shares of the same class and series and correspondingly increasing or decreasing the number of shares issued and outstanding shares of the same class and series held by each shareholder of record as of the effective date and time of the change, may, . . ,do so by a resolution adopted by the board of directors, without obtaining the approval of the shareholders."

Results of Operations

The results of operations of the Company for the period ended March 31, 2001 compared to the period ended March 31, 2000 are discussed below.

Revenues

Presently, Freestar receives income from the manufacturing operation at Sewcal. For the three month period ended March 31, 2001 gross income totaled $747,427. This contrasted with gross income of $475,508 for the same period last year.

Operating Expenses

Sales, General and Administrative:

Selling, general and administrative costs for the period ended March 31, 2001 totaled $199,261 whereas for the same period ended March 31, 2000, those expenses totaled $105,985.

Interest Expense:

Interest expense for the period ended March 31, 2001 was a credit of $(18,546) after credit for interest earned on deposits of $300,000 which Freestar maintains as additional collateral for its credit line. Interest expense for the same period ended March 31, 2000 also ended in a credit of $(17,958).

Net Profit

Our net operating income before taxes for the period ended March 31, 2001 was $462,885 as compared to a net operating income before taxes of $348,658 for the same period ended March 31, 2000. This translates to a net operating income per share of $0.045 per share, basic and diluted, for the period ended March 31, 2001 and $0.045, basic and diluted for the period ended March 31, 2000. It should be noted, however, that the Company had a net loss on operations for the year ended December 31, 2000 of $(179,947) as a result of other operations not related to its sewing operations at SoCal Logo. Also, the business of SoCal is highly seasonal with high gross sales during the early months of the year and lower gross sales toward the end of the year. For that reason, the quarterly results are not necessarily reflective of the results which the Company may have when annualized.

Liquidity and Capital Resources

To date, we have funded our capital requirements for our current from cash flows from our operations and from equity lines of credit which the Company has available. Our cash position as of March 31, 2001 was $339,456 as compared to $1,787 for the same period ended March 31, 2000. The increase in cash came mainly from the $300,000 deposit of cash maintained as additional collateral for the Company's credit line and from increased cash flow during the first quarter of 2001. Cash flow provided by operating activities increased by $38,457 during the period from December 31, 2000 to March 31, 2001 increasing the balance of cash from $300,999 as of December 31, 2000 to $339,456 as of March 31, 2001. During the quarter, the Company received no funds from either investing or financing activities.

Our Capital Requirements

During the next two years, we plan to finance our long-term operations and capital requirements with the profits and funds generated from the revenues from operations and equity lines which we intend to obtain during that period.