SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB
(Mark One)
/ X /    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         [FEE REQUIRED]
                    For the fiscal year ended March 31, 2001
                                       OR
/  /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         [NO FEE REQUIRED]

          For the transition period from _____________ to _____________

                         Commission file number 0-21907

                             NewState Holdings, Inc.
                             -----------------------

            Delaware                                   84-1182875
            --------                                   ----------
 (State or other jurisdiction of           (I.R.S. Employer Identification No.)
    of Incorporation or organization)

        156 West 56th Street, Suite 2005
               New York, New York                           10019
   ------------------------------------------           -------------
    (Address of principal executive offices)              (Zip Code)



         Issuer's telephone number, including area code: (212) 245-5801
                                                         --------------

         SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

                                      None
                                      ----

         SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:


                     Common Stock, $0.01 par value per share
                  --------------------------------------------
                                (Title of Class)


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

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  / X /

     The registrant's revenues as of March 31, 2001 was $4,340,315.

     The aggregate market value of the common stock of the registrant held by
non-affiliates as of June 27, 2001 was approximately $3,113,849 based on the
average bid and asked prices for such common stock as reported on the
Over-The-Counter Bulletin Board. The number of shares of common stock of the
registrant outstanding as of June 27, 2001 was 11,508,684.

     (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

     Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes /  /  No /  /

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Transitional Small Business Disclosure Format (check one):   Yes /  /  No /  /

                       DOCUMENTS INCORPORATED BY REFERENCE

     No annual report to security holders, proxy or information statement or
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 is
incorporated herein by reference.

<PAGE>

<TABLE>
<CAPTION>
                                TABLE OF CONTENTS

                                                                               Page
PART I
<S>                                                                             <C>

Item 1.  Description of Business...................................................2
Item 2.  Description of Properties ...............................................13
Item 3.  Legal Proceedings........................................................13
Item 4.  Submission of Matters to a Vote of Security Holders......................14


PART II

Item 5.  Market for Common Equity and Related Stockholder Matters ................14
Item 6.  Management's Discussion and Analysis or Plan of Operation................16
Item 7.  Financial Statements.....................................................23
Item 8.  Changes In and Disagreements With Accountants on Accounting
              and Financial Disclosure ...........................................23


PART III

Item 9.    Directors, Executive Officers, Promoters and Control Persons;
               Compliance with Section 16(a) of the Exchange Act  ................24
Item 10.  Executive Compensation .................................................26
Item 11.  Security Ownership of Certain Beneficial Owners and Management..........27
Item 12.  Certain Relationships and Related Transactions .........................29
Item 13.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.........29

SIGNATURES..........................................................................

</TABLE>

<PAGE>
         Statement Regarding Forward-Looking Statements
         ----------------------------------------------

         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.

         All  references  in this Form 10-KSB to "the  Company,"  "we," "us," or
"our" are to NewState  Holdings,  Inc. and its subsidiaries,  unless the context
requires otherwise.

<PAGE>
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

                                BUSINESS OVERVIEW

         NewState  Holdings,  Inc. is the holding company and parent corporation
for its network of financial  services companies in the Republic of South Korea.
We were  originally  incorporated  under the name "Racom  Systems,  Inc." in the
State of Delaware on June 3, 1991 and on September  15, 1999 we changed our name
to "NewState  Holdings,  Inc." We have principal  executive offices in New York,
New York and Seoul,  Korea.  Our principal  business  operations  are located in
Korea.

         Our principal operating subsidiary in Korea, NewState Capital Co., Ltd.
(formerly  known  as  Dongsuh  Finance  Co.,  Ltd.)  ("NewState  Capital"),   is
registered  with the Korean  Financial  Supervisory  Commission  as a "specialty
finance company" under the Credit  Specialized  Financial  Business Act of 1997.
NewState  Capital was acquired by our present  management  in December  1998 and
restructured  to specialize  in the  origination  and  servicing of  residential
mortgage loans to individual borrowers in Korea.

         Our  current  business  plan  continues  to focus on the  expansion  of
NewState   Capital's   mortgage   origination   efforts  throughout  Korea,  the
development of innovative new mortgage products to Korean middle-income families
and individuals,  and the securitization and sale of its mortgage loan portfolio
as  mortgage-backed  securities to public  investors in Korea. We seek to become
the  leading  residential  mortgage  originator  in  Korea by  providing  highly
efficient, responsive and sophisticated loan servicing to Korean homebuyers.

         We currently manage and service  approximately  65.6 billion Korean Won
(US$49  million)  in  residential  mortgage  assets  including  those  that were
securitized  and sold as of March 31, 2001,  compared to 74.2 billion Korean Won
(US$67  million) as of March 31, 2000. We expect our mortgage loan  portfolio to
expand to about 140 billion  Korean Won (US$105  million) by the end of our 2001
fiscal  year (March 31,  2002).  We plan to  establish  five  additional  branch
offices in Seoul,  Korea,  and six additional  branch offices in other cities in
Korea  such that we have one  branch  office  in each of the major  metropolitan
areas  throughout Korea before the end of fiscal year 2001. We expect to have 15
branch  offices in Korea and 150  additional  full time  employees by the end of
fiscal year 2001. This expansion plan is designed to enable NewState  Capital to
build  relationships  with  customers  in order to  maximize  the rate of market
penetration.

                         ACQUISITION OF NEWSTATE CAPITAL

         On July 20, 1999, we 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  privately-held  New York  corporation
("NewState  NY"), in exchange for issuing  8,000,000 shares of our common stock,
representing  approximately  80% of our total issued and  outstanding  shares of
common stock, to NewState NY (the  "Acquisition").  We also assumed a $5,000,000
liability of NewState NY to a bank which we repaid in full in August  1999.  The
terms  and  conditions  of the  Acquisition  are  more  fully  set  forth in the
Agreement  and Plan of  Reorganization,  dated as of July 14, 1999, by and among
the Company,  NewState  NY,  NewState  Capital and a newly  formed  wholly-owned
subsidiary of the Company,  NSK Holdings,  Inc.  ("NSK"),  which is incorporated
herein by reference to our Form 8-K filed with the Commission on July 21, 1999.

         Immediately  following the  Acquisition,  (i) NewState Capital became a
99.6% owned  subsidiary of NSK, our  wholly-owned  subsidiary,  (ii) NewState NY
became the owner of approximately  80% of our common stock, and (iii) we revised
our  business  plan to focus on the  residential  mortgage  lending  business of
NewState  Capital.  As discussed below under the heading "RECENT  DEVELOPMENTS,"
NSK was dissolved in December 2000.

                              OUR MORTGAGE BUSINESS

         The Korean  residential  mortgage  loan  process is divided  into three
primary areas:

         o        mortgage    origination   -   sourcing,    verification    and
                  documentation of mortgage loans;

         o        mortgage  funding -  underwriting,  funding and selling closed
                  loans to mortgage loan purchasers; and

         o        servicing     -    ongoing     billing,     collection     and
                  foreclosure/collateral management.
<PAGE>
         We  believe  that  the   residential   mortgage  market  in  Korea  has
experienced a recession in recent years as a result of the government's  control
over real estate investment on certain  properties.  It is our belief,  however,
that the Korean residential  mortgage market now faces a turning point due an to
extensive  government  deregulation  plan and the  enactment  of new laws by the
Korean government to encourage the growth of the real estate market. The current
residential  mortgage  market  in Korea  can be  categorized  into  two  primary
sectors:  (i) the publicly  funded  housing  loan sector and (ii) the  privately
funded housing loan sector. The National Housing Fund, Housing & Commercial Bank
and Kookmin  Bank are  government-controlled  financial  institutions  primarily
responsible  for offering  public  residential  mortgage  loans to middle or low
income  households.  Life insurance  companies,  commercial  banks and specialty
finance  companies have been responsible for providing  private housing loans to
all other  qualified  individuals.  Information on our competitors in the Korean
residential  mortgage  lending  business  is  discussed  below under the heading
"COMPETITION."

         Mortgage Products
         -----------------

         Through our operating subsidiary in Korea, NewState Capital, we plan to
become a leading  mortgage  originator  and  servicer in the Korean  residential
mortgage  industry.  NewState  Capital offers first  mortgages to homebuyers and
homeowners  seeking to refinance.  NewState  Capital handles all aspects of loan
origination,  including quoting rates,  collecting and verifying  borrower data,
locking the rate, pre-underwriting the loan package, and arranging for appraisal
and  settlement  services for the borrower.  In addition,  NewState  Capital can
provide complete transaction  fulfillment,  including underwriting,  funding and
packaging  loans for sale to the  secondary  markets  in Korea.  Through  one of
NewState  Capital's branch offices or its website,  NewState  Capital  currently
offers a wide array of mortgage  loan  products,  including 30 and 15-year fixed
rate loans, a variety of adjustable rate mortgages,  balloon mortgages and other
loan products.  NewState Capital offers  assistance to prospective  borrowers in
making  their  home  buying  decisions  in each  phase of the  loan  application
process.

         Mortgage Origination and Underwriting
         -------------------------------------

         NewState  Capital  originates,  underwrites,  funds and sells  mortgage
loans to  homebuyers.  Loan  applications  generally  are  prepared  by NewState
Capital's  loan  officers  located  at one of its branch  offices.  Verification
procedures, include, among other things, obtaining: (i) written confirmations of
the  applicant's  income and bank  deposits,  (ii) a formal credit report on the
applicant from an  unaffiliated  credit  reporting  agency,  (iii) a preliminary
title report,  and (iv) a real estate  appraisal.  Appraisals for mortgage loans
are prepared by third party,  unaffiliated appraisers who are pre-approved based
upon their experience, education and reputation.

         Completed loan applications are then transmitted to NewState Capital's
underwriting department. NewState Capital's underwriting department contains
experienced staff who verify the completeness and accuracy of application
information, and determine its compliance with its underwriting criteria and
those of applicable government agencies. NewState Capital's guidelines for
underwriting mortgage loans comply with the underwriting criteria employed by
non-bank mortgage lenders in Korea under the supervision of the Financial
Supervisory Commission. NewState Capital's underwriting personnel function
independently of its loan origination personnel and do not report to any
individual directly involved in the loan origination process. NewState Capital
considers the following general underwriting criteria in determining whether to
approve a loan application:

        o        employment and income;
        o        credit history;
        o        property value and characteristics; and
        o        available assets.

         NewState  Capital is currently in the process of adopting United States
underwriting  and loan  servicing  standards  and is  converting  its  servicing
software to meet these servicing guidelines. In order to meet the growing demand
for residential  mortgages in Korea,  management is instituting  more responsive
customer services and faster and easy-to-use loan processing systems,  including
the recent  introduction  of our online  loan  application  process  through our
website.

<PAGE>
         Mortgage Servicing
         ------------------

         NewState   Capital   devotes   significant   resources   to   providing
personalized,  timely  customer  service and support to minimize  the  potential
uncertainty,  anxiety  and  inconvenience  of the  loan  process.  By  combining
high-tech   communications  with  highly  personalized  attention,  the  Company
believes that NewState  Capital provides a level of customer service superior to
that experienced in the traditional loan application and servicing process.

         The  primary  goal of  loan  portfolio  servicing  is to  collect  loan
payments in full from  borrowers  when due and payable.  Any deviation from this
objective is considered a default.  NewState Capital's  portfolio servicing team
is  directly  responsible  for  managing  and  preventing  these  deviations  or
defaults.  In  order  to  maximize  servicing  efficiency,   NewState  Capital's
portfolio servicing team operates an advanced computer tracking system named the
Delinquency  Information  Management System ("DIMS"),  which it adopted from the
U.S. version of the DIMS. DIMS provides  delinquency  reports which itemizes the
amounts and days past due per borrower.  DIMS  classifies  our loan portfolio by
level of  creditability,  and  organizes  the  information  relating  to payment
reminders,  enforcement letters, and foreclosure documents in an orderly fashion
to maximize collection efforts.  DIMS also manages our foreclosure  information,
including  the  procedure  schedule,   courts  dates,  decisions  and  follow-up
schedules.

         NewState Capital's portfolio servicing team constantly trains its staff
of  highly  sophisticated  mortgage  debt  management  specialists.  During  the
mandatory portfolio servicing training program,  trainees are required to attend
classes on mortgage operations,  servicing  procedure,  real estate and mortgage
law,  housing rental law and other similar courses.  Comprehensive  in-the-field
training  is also  offered  to  strengthen  the  skills of the  servicing  team.
NewState Capital's  portfolio  servicing team is continuously  attending outside
lectures and seminars regarding the real estate market and industry in an effort
to keep abreast of current  economic and legal issues  developing  and affecting
the mortgage industry.

         Marketing Strategy
         ------------------

         We  believe  that it is  critically  important  for  financial  service
providers to establish  themselves as household  names.  With this  objective in
mind, we continuously strive to promote and support NewState Capital's corporate
image as the mortgage  company that reaches out to  individuals  and families in
Korea by placing  the  customer's  needs  first.  We believe  that our  mortgage
products  and  services  will change the way that people live by  improving  the
quality of their  lives.  Establishing  a reputation  for prompt and  responsive
service is another integral  component of our marketing  strategies.  We believe
that that the ability to process loan  applications  quickly provides a distinct
advantage over its competitors.

         An extensive  media campaign is scheduled for the fiscal year 2001. The
primary  media  through which we will promote  NewState  Capital's  products and
services will be television, radio, newspapers, and billboards. Advertising will
be focused on raising customer  awareness and recognition of NewState  Capital's
name and  mission.  The  primary  goal of the  advertising  campaign  will be to
separate NewState Capital from our competitors. In addition, we will send out by
direct  mail to  prospective  customers  such as  construction  companies,  home
buyers,  and  existing  homeowners  to promote its  products  and  services.  In
addition,  our  website  will also be  utilized  as  marketing  tools as well as
channels to reach Internet users.  The home page has an on-line loan application
and on-line banking system.
<PAGE>
         Geographical Distribution of Loans
         ----------------------------------

         We currently manage and service  approximately  65.6 billion Korean Won
(US$49  million)  in  residential  mortgage  assets  including  those  that were
securitized  and sold as of March 31, 2001,  compared to 74.2 billion Korean Won
(US$67  million) as of March 31, 2000. We expect our mortgage loan  portfolio to
expand to be about 140  billion  Korean Won  (US$105  million) by the end of our
2001 fiscal year (March 31, 2002). The following table sets forth the geographic
distribution  by province of residential  mortgage loans managed and serviced by
NewState Capital as of March 31, 2001.

<TABLE>
<CAPTION>
                           DISTRIBUTION BY PROVINCE OF
                 LOANS MANAGED AND SERVICED BY NEWSTATE CAPITAL
                                 March 31, 2001

                                                                     Total Principal
                                    Number                          Balance ("TRB") in
Region                             of Assets    % of Assets            Korean Won              TPS in US Dollars       % of TPB
------                             ----------  --------------   ------------------------    ---------------------    ----------
<S>                                   <C>           <C>                 <C>                          <C>                <C>
Seoul                                    308           13.18            W17,263,945,044              $12,946,340         26.33
Pusan                                    132            5.65              3,093,624,667                2,319,929          4.72
Taegu                                    513           21.95             12,617,035,983                9,461,594         19.24
In-Chon                                  122            5.22              3,276,755,617                2,457,260          5.00
Kyung-Gi Do                              439           18.78             13,792,649,982               10,343,195         21.04
Kyungsang Nam Do                          67            2.87              1,031,762,103                  773,725          1.57
Kyungsang Book Do                        335           14.33              6,531,667,008                4,898,138          9.96
Junla Nam Do                             108            4.62              2,250,049,077                1,687,326          3.43
Kang-won Do                              211            9.03              3,854,588,143                2,890,580          5.88
Choong-Chung Nam Do                       89            3.81              1,457,856,733                1,093,256          2.23
Others                                    13            0.56                391,231,846                  293,387          0.60
                                   ----------  --------------   ------------------------    ---------------------    ----------
Total:                                 2,337           100.0            W65,561,166,203              $49,164,730        100.00

</TABLE>

                            FUNDING OF MORTGAGE LOANS

         NewState  Capital  currently  funds  most  of  the  mortgage  loans  it
originates through short-term  borrowings under  collateralized  loan agreements
with several commercial banks, merchant banks,  investment trust companies,  and
insurance companies, which provide primary credit facilities upon which NewState
Capital  relies.  These  agreements  are generally  terminable at will by either
party and are refinanced by new borrowings as they become due. These  borrowings
are in turn repaid with proceeds received by NewState Capital when such mortgage
loans are sold or repaid by the  borrowers.  Management  believes  that NewState
Capital  will  continue to borrow  funds on a  short-term  basis for  operations
through renewals of existing borrowing arrangements.

         NewState  Capital has relied upon a few significant  lenders to provide
the primary credit facilities for its loan originations. Any failure to renew or
obtain  adequate  funding  under  the  existing  financing  facilities  or other
financing arrangements,  or any substantial reduction in the size of or increase
in the cost of such  facilities,  could  have a material  adverse  effect on our
business,  results of operations and financial condition. To the extent NewState
Capital is not successful in maintaining or replacing existing financing, we may
have to curtail  our  mortgage  loan  originations,  which could have a material
adverse effect on our business, results of operations and financial condition.

<PAGE>
                               LOAN SECURITIZATION

         The  primary  source of capital in Korea for the  residential  mortgage
industry has been through  private and  government  loans,  corporate  bonds and
private placements of equity.  Although the Korean  residential  mortgage market
has grown  significantly  over the last few years,  the  Korean  mortgage-backed
securities  market in the finance industry has remained  virtually  undeveloped.
The  implementation by the government of a long term housing finance system such
as a mortgage backed securities system that is generally used in other countries
has been well overdue.

         In  January  1999,  in an effort to  strengthen  the  national  housing
finance  market  through a long-term  and stable  supply of housing  funds,  the
Korean government passed the  Mortgage-Backed  Securities  Company Act (the "MBS
Act") to establish and operate a mortgage-backed  securitization  company and to
issue  mortgage-backed  securities.  To that end, in September  1999, the Korean
government  established  Korean  Mortgage  Company  (the  "KoMoCo"),   the  only
mortgage-backed   securitization  company  to  have  obtained  authorization  of
securitization   business  from  the  Korean  Financial  Supervisory  Commission
("FSC"),  to  facilitate  the  spirit of the MBS Act.  The  KoMoCo has a paid-in
capital of one hundred point one (100.1) billion Korean Won (US$89,434,889). The
Korean  government  holds forty-five (45) percent of the interest in the KoMoCo,
making it the controlling shareholder.  The remaining interests are held by four
major Korean financial institutions.

         The MBS Act's  scheme of  securitization  requires  originators  of the
mortgage loans to prepare and file  registration  statements with the FSC and to
follow  certain  guidelines  for the  transfer  of  mortgage  loan assets to the
KoMoCo.  The KoMoCo,  which can be characterized as a permanent  special-purpose
vehicle that is organized in such a way that the likelihood of its bankruptcy is
remote, only purchases  residential  mortgage loans from financial  institutions
that seek to raise  cash.  As a special  purpose  vehicle,  the KoMoCo  does not
engage in the  origination  of  mortgage  loans,  but rather  limits its role to
buying only residential mortgage loans. The KoMoCo, and not the selling company,
will the issue mortgage-backed securities to raise cash and those securities are
intended to be payable  from  collections  on the  receivables  purchased by the
KoMoCo.

         The KoMoCo may  guarantee  the payment of  mortgage-backed  securities,
including mortgage-backed securities issued by a private securitization company,
within an amount not exceeding twenty times equity capital of the securitization
company. This mechanism of guaranteeing repayment of mortgage-backed  securities
to investors provides a special added assurance to the investors.

         We intend to take full  advantage of the MBS Act to dispose of NewState
Capital's  portfolio of mortgage loan assets and to maintain better liquidity in
the future.  We have  structured  NewState  Capital's  operations  and processes
specifically  for the  purpose of  efficiently  originating,  underwriting,  and
servicing loans for  securitization  in order to meet the requirements of credit
rating  agencies.  NewState  Capital  generally  intends  to  enter  the  public
mortgage-backed securitization market on a periodic basis.

         On March 20, 2000 ("MBS-1"),  NewState Capital issued through a private
special purpose securitization company ("SPC") mortgage-backed securities in the
principal  amount of 58.9  billion Won (US$53.6  million) in Korea,  with Daewoo
Securities  Co.,  Ltd.  as the lead  manager and  Housing  and  Commercial  Bank
(formerly  Korea  Housing  Bank) as the trustee and back-up  servicer.  NewState
Capital issued four senior  tranches of MBS and one  subordinated  tranche which
was retained by NewState  Capital.  The senior  tranches of the mortgage  backed
securities have a maturity of 1-10 years and an interest rate of 9.19% to 10.63%
as of March 31, 2001 (10.17% - 12.61% as of March 31, 2000).  With this issuance
of  mortgage-backed  securities,  NewState  Capital  became the first  issuer of
mortgage-backed  securities  in Korea.  One of the senior  tranche with one year
maturity was paid of during Fiscal 2000.

         On January 19, 2001 ("MBS-2"),  NewState Capital issued mortgage-backed
securities  (MBS) in the principal  amount of 21.1 billion Won ($16.5  million).
This was the  second  MBS  issuance  by  NewState.  The MBS are  issued  in five
tranches. The two senior tranches are rated AAA by Korean Rating Services,  Inc.
and Korean  Management  Consulting Credit Rating Corp. and the three subordinate
tranches are rated single-A,  triple-B and single-C. NewState Capital issued the
MBS with LG Investment & Securities  Co.,  Ltd. as the lead  manager/underwriter
and legal  counsel for the issuer was Shin & Kim. Due diligence was conducted by
Samil Accounting  Corporation (an international  member firm of Price Waterhouse
Coopers),  and the  trustee  was Housing &  Commercial  Bank of Korea.  NewState
Capital retained all of the three subordinated tranches. The two senior tranches
have a maturity of 4 - 8 years and an  interest  rate of 8.5% - 9.2% as of March
31, 2001.

<PAGE>
         On March 22, 2001 ("MBS-3"),  NewState  Capital issued  mortgage-backed
securities  (MBS) in the principal  amount of 10.5 billion won ($8.07  million).
The MBS is structured  with 3 tranches;  5-year senior  tranche with AAA rating,
7-year  senior  tranche  with BBB rating and 10-year  un-rated  Class M tranche.
NewState Capital issued the MBS with LG Investment & Securities Co., Ltd. as the
lead  manager/underwriter  and legal  counsel for the issuer was Shin & Kim. Due
diligence was conducted by Samil Accounting Corporation (an international member
firm of Price Waterhouse Coopers), and the trustee was Housing & Commercial Bank
of Korea.  Ratings  were  provided by Korea  Investors  Service  Inc. and Korean
Management  Consulting Credit Rating Corp.  NewState Capital retained the 7-year
senior  tranche  and the  10-year  un-rated  tranche.  The senior  tranche has a
maturity of 5 years and an interest rate of 7.7% as of March 31, 2000.

         The following table summarizes  valuation  amounts and assumptions used
by the Company for  valuation  of residual  interests in  securitizations  as of
March 31, 2001:

                       MBS-1          MBS-2          MBS-3
                       -----          -----          -----

Valuation Amount    $6,760,150     $3,757,065     $2,435,570
Discount Rate           12%            12%            12%
Prepayment Rate        3.11%          2.74%          2.51%
Loss Rate              2.37%          1.47%          2.00%

         For an additional discussion regarding loan securitization in Korea see
Item 6, Management's Discussion and Analysis or Plan of Operation.

                                   COMPETITION

         Competition  for residential  mortgage loan  originations is intense in
Korea  in  this  new  era of  governmental  deregulation.  We  face  significant
competition from government funded institutions,  established  commercial banks,
insurance  companies  and  other  private  mortgage  companies.  Many  of  these
competitors  are  substantially  larger than us and have more  capital and other
resources, as well as a lower cost of funds. However,  competition can take many
forms,  including  convenience in obtaining a loan, customer service,  marketing
and  distribution  channels,  terms  provided  and  interest  rates  charged  to
borrowers.  The  following  summarily  discusses the major  competitors  in this
rapidly developing and evolving industry.

         National  Housing Fund and Housing & Commercial Bank
        (formerly  Korea Housing Bank).

         Both of these  financial  institutions  are  controlled  by the  Korean
government and were the first entrants into the  residential  mortgage market in
Korea.  They also hold the most  significant  share of the residential  mortgage
market in Korea.  Both institutions  primarily  provide financial  assistance to
middle  or  lower  income  households.  Consequently,  the  mortgage  loans  are
typically  small  and are to  individual  borrowers  in lower  income  brackets.
Management  believes  that  their  market  share is  decreasing  because  of the
introduction  of private company funding to the market and expect their share to
decline even further if the mortgage  market is  continually  deregulated by the
Korean government.

         Commercial  Banks.

         Management  believes that  participation by the commercial banks in the
housing loan business is expected to steadily increase in the future as a result
of the government's deregulation  initiatives.  Commercial banks currently enjoy
the  competitive  advantage of having  secure and  established  customer  bases.
Because of their strong name  recognition in the business,  commercial banks can
enter new markets  simply by  targeting  their own customer  base.  In addition,
commercial  banks  typically  have a broad  network of branch  offices  that are
easily located near a prospective borrowers home.

<PAGE>

         Citibank, one of the fastest growing foreign commercial banks in Korea,
has one of the most  systematic  mortgage  operations in Korea.  Citibank's  key
advantage  is name  recognition  and brand  awareness.  As a result of its large
capital and customer base, we believe that loan  applicants view Citibank as one
of the safest  financials  institutions  in Korea.  We  believe,  however,  that
Citibank's  marketing  efforts  have  primarily  targeted  middle to high income
borrowers  which  significantly  limits the full potential reach of its mortgage
loan  portfolio.  In addition,  we believe that the  application  process is too
difficult for many individual borrowers to complete.

         Insurance  Companies.

         Insurance  companies have a broad network system and direct sales force
in Korea.  These key factors give customers easy and convenient  access to their
mortgage  lending  services.  The  Company  believes,  however,  that due to the
insurance-related   image  of  insurance  companies  in  Korea,  borrowers  have
generally  preferred other  financial  institutions  for their mortgage  banking
needs.

         Mortgage Companies.

         Residential  mortgage companies  (including NewState Capital) have been
in operation in Korea since 1997. As a result of their recent entrance into this
developing  new  private  lending  market,   no  single  mortgage   company  has
successfully  penetrated the mortgage market.  However,  we expect the number of
private  mortgage  companies  in the  market to grow  rapidly  over the next few
years. Mortgage companies are characterized as having convenient loan processing
systems and are focused on  providing  high  quality  customer  service at every
level.  We believe that their  principal  weaknesses  are relatively low capital
bases and liquidity  problems.  Because of these weaknesses,  mortgage companies
must  charge  higher  interest  rates to their  borrowers,  which  gives  them a
significant disadvantage compared to other competitors in the mortgage industry.

                               RECENT DEVELOPMENTS

         NewState Holdings, Inc. (formerly Racom Systems, Inc.)
         -----------------------------------------------------

         On March 23, 2000, we approved:  (i) the  dismissal of Arthur  Andersen
LLP as the independent  accountants for the Company,  and (ii) the engagement of
Young Wha  Corporation,  the Ernst & Young  International  member  firm in Korea
("Young Wha"), as the independent  accountants  that will audit our consolidated
financial  statements  for the fiscal  year ended March 31,  2000.  We have also
engaged Young Wha to audit our consolidated  financial statements for the fiscal
year ended March 31, 2001.

         On November 21,  2000,  the boards of directors of both the Company and
its wholly-owned  subsidiary,  Racom Systems, Inc., a Colorado corporation ("New
Racom"),  authorized the dissolution of New Racom by unanimous  written consent.
We had formed New Racom as part of the Acquisition of NewState  Capital in order
to transfer all remaining assets and liabilities that existed on the date of the
Acquisition to New Racom.  This  transaction,  however,  was never  consummated.
Articles of  Dissolution  were filed with the Secretary of State of the State of
Colorado on December 19, 2000. New Racom had no assets.

         On  November  29,  2000,  the  boards  of  directors  of both  NewState
Holdings, Inc. and its wholly-owned subsidiary,  NSK, authorized the dissolution
and liquidation of NSK by unanimous written consent. As discussed in more detail
above under the heading  "ACQUISITION OF NEWSTATE CAPITAL," we had formed NSK to
acquire 99.6% of the issued and  outstanding  common stock of NewState  Capital.
The dissolution and liquidation of NSK became effective as of December 31, 2000.
A Certificate of Dissolution  was filed with the Secretary of State of the State
of Delaware on January 18, 2001. As a result of the  dissolution and liquidation
of NSK,  NewState  Holdings,  Inc.  now  directly  owns  99.6% of the issued and
outstanding common stock of NewState Capital.

<PAGE>
         NewState Capital Co., Ltd. (Korea)

         On July 31, 2000,  NewState Capital Co., Ltd. issued corporate bonds in
the principal amount of 30 billion Won (US$27 million). The bonds issued had two
different  maturities,  1.5 years and 2 years,  in the amount of 15 billion  Won
(approximately   US$14  million)  each  and  have  been  incorporated  into  the
underlying   assets  backing  a  1.5  trillion  Won  (US$1.4   billion)   pooled
collateralized  bond  obligation  ("CBO") issue  underwritten by LG Investment &
Securities  Co., Ltd. LG Investment & Securities  Co., Ltd., the lead manager in
issuing the CBO, is one of the largest  securities  firms in Korea with over 7.3
trillion  Won in total assets and over 2,500  employees in 99 domestic  branches
and 5 branches overseas.

         On August 10,  2000,  NewState  Capital  restructured  its  origination
activities to focus on the issuance of Mortgage Backed Securities  ("MBS") which
is the Company's primary financing strategy.  NewState Capital has increased its
loan  origination  capability with the opening of three  additional  branches in
Seoul.  The  Company's  top three  sales  performers  were  appointed  as branch
managers for the new branches. This is just one of Company's  implementations to
expand its mortgage  origination  efforts throughout Korea and develop and offer
innovative new mortgage products.

         On September  28, 2000,  NewState  Capital Co.,  Ltd.,  entered into an
agreement  with  Korea  First  Bank in which  NewState  Capital  will  originate
mortgages  on  behalf  of the  bank.  Korea  First  Bank  is one of the  leading
commercial  banks in Korea with 292 branches and 42  sub-branches  and has total
assets of $22.8 billion as of year end 1999.

         On February 23, 2001,  NewState  Capital issued  corporate bonds in the
principal amount of 5 billion Won (US$4.2 million). The bonds were issued with a
single maturity term of 2 years and have been  incorporated  into the underlying
assets backing a 5.41 billion Won (US$4.51 million) pooled  collateralized  bond
obligation underwritten by Bookook Securities Co., Ltd.

         On May 14, 2001, NewState Capital issued MBS in the principal amount of
10.1 billion Korean Won (US$7.8 million).  This is NewState Capital's fourth MBS
since March 20, 2000. This MBS was structured with three tranches; 5-year senior
tranche  with AAA  rating,  10-year  senior  tranch  with BBB rating and 15-year
un-rated Class M tranche.  NewState  Capital issued the MBS with LG Investment &
Securities Co., Ltd. as the lead  manager/underwriter  and legal counsel for the
issuer  was  Shin &  Kim.  Due  diligence  was  conducted  by  Samil  Accounting
Corporation (an international member firm of Price Waterhouse Coopers),  and the
trustee was Housing & Commercial  Bank of Korea.  Ratings were provided by Korea
Investors  Service Inc. and Korean  Management  Consulting  Credit  Rating Corp.
NewState  Capital  retained the 10-year senior tranche and the 15-year  un-rated
tranche.  The senior  tranche have a maturity of 5 years and an interest rate of
8.5% as of March 31, 2001.
<PAGE>
                       REGULATION OF THE MORTGAGE INDUSTRY

         Our  business  operations  in  Korea  are  subject  to  the  rules  and
restrictions  imposed by Korea's  legal and  economic  system as well as general
economic  and  political  conditions  in Korea.  In the  past,  Korea has had an
unstable economy with rigid economic  controls imposed by the Korean  government
on the mortgage loan industry. More recently, however, Korea has begun to pursue
economic reform and development policies which have improved business conditions
in Korea for  credit-specialized  finance businesses including companies engaged
in the  business  of credit  card  financing,  facilities  leasing,  installment
financing and venture capital.  Korean law categorizes our residential  mortgage
lending  business as a form of installment  financing  business and,  therefore,
subjects our operations to the laws and regulations affecting credit-specialized
finance  businesses.  There can be no assurance that the Korean  government will
continue to pursue such policies, or that such policies will be successful.

         As a result,  our operations in Korea may be adversely  affected by one
or more of the following:

         o        new  laws or  regulations,  or  different  interpretations  of
                  existing laws and regulations;

         o        our ability to timely obtain the necessary  administrative  or
                  regulatory approvals;

         o        our   ability  to  comply   with   applicable   administrative
                  requirements; and

         o        currency devaluations.

         NewState Capital has registered with the Korean  Financial  Supervisory
Commission ("FSC") as a "specialty finance company" under the Credit Specialized
Financial  Business  Act of 1997 (the  "Act").  NewState  Capital  is  therefore
subject to the  supervision  of the FSC and certain  regulations  under the Act,
including the following:

         o        in making mortgage loans, it must follow specified  procedures
                  designed to inform and protect borrowers; and

         o        it can only  acquire  real estate  according  to the  specific
                  provisions set forth under the Act.

         These   regulations  may  limit  our  ability  to  respond  to  certain
development opportunities in Korea. In addition, changes in existing regulations
or policies or adoption  of new  regulations  or policies  could have an adverse
effect on our  operations  in Korea.  We  believe  that  NewState  Capital is in
substantial  compliance  in  all  material  respects  with  the  Act  and  is in
possession of all necessary  licenses to do business in Korea,  except where the
licenses are not material to the our business and operations as a whole.

         In addition, governmental agencies in Korea may:

         o        require  NewState  Capital to obtain  additional  licenses  in
                  order to continue business;

         o        revoke the  acceptance of our  registration  as provided under
                  the Act;

         o        regulate  the  interest  rates  that we will be  permitted  to
                  charge for mortgage loans;

         o        impose or change the tariffs or fees on our operations;

         o        subject  us to  regulation  not  specifically  related  to the
                  residential mortgage industry; or

         o        adopt laws or regulations  relating to the internet and online
                  commerce.

         Any of these actions could have an adverse effect on our operations in
Korea.
<PAGE>
                                    EMPLOYEES

         At March 31, 2001, we employed a total of 50 full time employees and 33
commission-based  sales managers. Of these full-time employees,  49 are based in
Korea and 1 is based in the United  States.  We also trained  approximately  100
sales agents who are paid on a commission basis. We presently plan to expand our
personnel base in such areas as management, marketing,  underwriting,  servicing
and  origination.  We do not foresee any serious  difficulties  in hiring  these
additional  employees.  None  of  our  employees  are  covered  by a  collective
bargaining agreement, and we believe our employee relations are good.

ITEM 2.  DESCRIPTION OF PROPERTY

         We currently  own our  principal  executive  offices  located in Seoul,
Korea and New York City. On April 28, 2000, NewState Capital purchased the Seoul
office from Chung,  Byunghoon.  NewState Capital has agreed to assume a mortgage
in the amount of 2.4 billion  Korean Won (US$2.14  million) for purposes of this
acquisition.  The closing date was May 31, 2000 and we moved into the  newoffice
space on July 7, 2000 The Seoul office is approximately 3204.46 square meters of
commercial space located at 837-26, Yoksam-Dong,  Kangnam-Gu, Seoul, Korea. This
office space is  separated  in second and third floor.  And we have entered into
lease arrangements with Ombu Securities Corporation for the New York office.

         Our lease  with Ombu  Securities  Corporation  in New York City is on a
month-to-month  basis and is for  approximately  600 square  feet of  commercial
space  located at 156 West 56th Street,  Suite 2005,  New York,  New York 10019.
NewState  Capital has also entered into additional  lease  arrangements  for its
branch offices in Taegu, Pusan, Ulsan, and Kwangju. We believe that our existing
facilities are sufficient for our current needs, but additional commercial space
will be required as it continues to open more branch offices throughout Korea.

         NewState  Capital  has  recently  entered  into  an  agreement  with LG
Insurance Co. for the purchase of an office building located in Seoul, Korea for
3.6 billion Korean Won (US$2.8 million).

ITEM 3.  LEGAL PROCEEDINGS

         We are not,  nor are any of our  subsidiaries,  subject to any material
legal proceedings.  The Company or its subsidiaries may from time to time become
a party to various  legal  proceedings  arising in the ordinary  course of their
business.

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

         There were no submissions  of matters to a vote of security  holders in
the fourth  quarter of our 2000 fiscal year ending on March 31,  2001.  Previous
submissions to a vote of security  holders in the last three fiscal  quarters of
our 2000 fiscal year have already been reported in our quarterly filings.

<PAGE>
                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

                               MARKET INFORMATION

         Our common stock was included for  quotation on the OTC Bulletin  Board
under the symbol  "RCOM" on April 15,  1999.  Prior to April 15, 1999 and during
fiscal 1998,  there was essentially no trading in the common stock. On September
15,  1999,  we  changed  our  ticker  symbol to refer to our new name,  NewState
Holdings,  Inc. Our common stock now trades on the OTC Bulletin  Board under the
symbol "NSTH.OB".

                                  MARKET PRICE

         The following  table sets forth the high and low closing bid prices for
common stock  transactions on the OTC Bulletin Board for the periods  indicated.
The  quotations  shown reflect  inter-dealer  prices,  without  retail  mark-up,
mark-down or commissions and may not represent actual transactions.

QUARTER       CALENDAR             HIGH BID PRICE                LOW BID PRICE
-------       --------             --------------                -------------

1999          1Q (1/1 - 3/31)        $37.9687                        $15
              2Q (4/1 - 6/30)        $11.25                           $1.875
              3Q (7/1 - 9/30)         $5.1562                         $2.50
              4Q (10/1 - 12/31)       $4                              $2

2000             (1/1 - 3/31)         $2.50                           $2

2000          1Q (4/1 - 6/30)         $2.125                          $0.75
              2Q (7/1 - 9/30)         $0.7575                         $0.75
              3Q (10/1 - 12/31)       $0.875                          $0.5625

2001          4Q (1/1 - 3/31)         $1.8125                         $0.75

                                     HOLDERS

         As of March 31,  2001,  there  were 55  holders of record of our common
stock and 11,508,684 shares of common stock issued and outstanding.

                                    DIVIDENDS

         We did not declare any cash  dividends  on our common  stock during the
most recent two fiscal years. It is our present policy not to pay cash dividends
on our common stock.  We expect to retain  earnings,  if any, to fund our growth
and  expansion.  Any payment of cash dividends on our common stock in the future
will be dependent upon our financial condition,  results of operations,  current
and  anticipated  cash  requirements  and plans for expansion,  as well as other
factors that we deem relevant, including adherence to Korean company law.

         NewState Capital's ability to dividend and remit funds to us is subject
to government regulation in Korea and board approval. Korean law imposes certain
restrictions  upon  dividends  paid  by  corporations  to  their   shareholders.
According to Korean law, dividends can be paid to owners of common stock only if
shareholder  equity exceeds paid-in capital.  NewState Capital could not pay any
dividends for the fiscal years ending March 31, 2001,  2000 and 1999 as a result
of its  shareholders  equity  being less than  paid-in  capital in each of those
three fiscal years.

         In the event that NewState  Capital's  shareholders  equity exceeds its
paid-in  capital,  NewState  Capital's  by-laws  provide  that  it  may  declare
dividends on its common stock, either on an interim or annual basis. The by-laws
provide  that  shareholders  of record on  September  30 of each fiscal year are
eligible for an interim dividend.  In order for shareholders of NewState Capital
to  receive  an  interim  dividend,  the  NewState  Capital  board  must adopt a
resolution within  forty-five (45) days of September 30.  Shareholders of record
at  fiscal  year end on March 31 of each  year are also  eligible  for an annual
dividend  which is approved at the annual  meeting of  shareholders.  The annual
dividend, if any, is generally paid within one (1) month thereafter. If NewState
Capital is permitted by Korean law to pay dividends  and all required  corporate
approvals are obtained,  then dividends would be paid to NewState Holdings, Inc.
in Korean Won after  payment  by  NewState  Capital of certain of its  corporate
expenses.  It is our present policy,  however,  to not pay cash dividends on our
common stock.

<PAGE>
         The ability of NewState  Capital to declare  and pay  dividends  to its
shareholders is also restricted by the Foreign Exchange  Transaction Laws. Under
the Foreign Exchange  Transaction Laws, if the Korean  government  believes that
certain emergency circumstances exist or are likely to occur, including, but not
limited to, (i) sudden  fluctuations in interest rates or exchange  rates,  (ii)
extreme difficulty in stabilizing the balance of payments or (iii) a substantial
disturbance  in the Korean  financial  and  capital  markets,  it may impose any
necessary and appropriate  restrictions  such as requiring  NewState  Capital to
obtain prior approval from the Minister of Finance and Economy for  repatriation
of dividends in Korea to the United States.

                     RECENT SALES OF UNREGISTERED SECURITIES
         None.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

                       MANAGEMENT DISCUSSION AND ANALYSIS
                              OR PLAN OF OPERATION
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.

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 year ended March 31, 2001 ("Fiscal 2000") the Company issued through
special purpose entities (SPE) two mortgage-backed securities in the principal
amount of $16.5 million and $8.1 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 Fiscal  2000 the  Company  produced  mortgage  loans in the amount of $20.84
million  compared  to $18.41  million in during the year  ended  March 31,  2000
("Fiscal 1999").  During Fiscal 2000, NewState Capital's mortgage loan portfolio
decreased by $13.4 million,  compared to the decrease of $26.1 million in Fiscal
1999.  This decrease in the mortgage loan portfolio  resulted from sale of loans
through   securitization,   prepayments,   partial   prepayments  and  scheduled
amortization.  The  constant  monthly  prepayment  rate  in  NewState  Capital's
servicing portfolio was approximately 2.3%. This high prepayment rate was due to
high rate of refinances of the loans originated with higher interest rates prior
to Fiscal 1999 under previous management.

<PAGE>

RESULTS OF OPERATIONS

Fiscal 2000 Compared with Fiscal 1999

The total  volume of loans  originated  by the  Company  during  Fiscal 2000 was
$20.84 million,  up from $18.41 million during Fiscal 1999.  Fiscal 1999 amounts
have  been  recalculated  using  the  exchange  rate as of  March  31,  2001 for
comparative purposes.

Total loan production by branch is summarized below:

(Dollar amounts in millions)        Fiscal 2000               Fiscal 1999
-------------------------------------------------------------------------
Seoul                                    $15.54                  $12.84
Daegu                                       nil                    3.83
Pusan                                      0.50                    0.29
Gwangju                                    0.44                    0.36
Changwon                                   0.03                    0.47
Jinju                                       nil                    0.26
Ace/Daegu (old Seo-Daegu)                  4.17                    0.36
Ulsan                                       .16                     nil
-------------------------------------------------------------------------
TOTAL                                  $20.84                    $18.41


Factors  that  affect the  relative  volume of  production  among the  Company's
branches are the level of mortgage lending activity in each branch's market, the
length of time the  branch has been  opened,  and the  success of each  branch's
sales and marketing efforts.

During  Fiscal  2000,  the  Company  closed  its  branch  office  in  Daegu  and
consolidated  that branch  operations with Seo-Daegu  branch.  The  consolidated
branch name is  Ace/Dague.  In  addition,  the Company  closed its Jinju  branch
during Fiscal 2000.

During  Fiscal  2000 and 1999,  the  Company  received  1,132 and 1,092 new loan
applications  of  which  577 and 508 were  approved  and  closed,  respectively.
Factors that affected the percentage of applications  received and funded during
a given time period  include the movement and direction of interest  rates,  the
average length of loan commitments  issued, the  creditworthiness of applicants,
the production branch's loan processing efficiency and loan pricing decisions.

Interest Income

Interest income  decreased to $4.3 million,  or  approximately  67.1%, in Fiscal
2000 from $13.2  million in Fiscal  1999.  The  decrease in  interest  income in
Fiscal  2000,  compared  to Fiscal  1999 was  primarily  due to the  decrease in
average  loan  balance.  The lower  interest  income  was due to a  decrease  of
approximately   $13.4  million  in  mortgage  loans,   compared  to  the  amount
outstanding  as of March 31, 2000,  reflecting  prepayments  and the transfer of
mortgage  loans to  special  purpose  entities  for MBS  issuance.  The  average
mortgage  loan balances were $16.8 million and $59.3 million for Fiscal 2000 and
1999, respectively.  The average loan balances for consumer and commercial loans
did not change significantly from Fiscal 1999 to Fiscal 2000.

Interest  income on bank deposits  decreased to $1.2 million in Fiscal 2000 from
$2.2  million  in Fiscal  1999 due to a lower  average  cash  balance  and lower
interest  rates in Fiscal  2000 than in Fiscal  1999.  Funds  from cash and bank
deposits were used to retire  short-term  borrowings  and to originate  mortgage
loans.

Interest Expense

Interest expense  decreased to $5.8 million in Fiscal 2000 from $10.8 million in
Fiscal 1999 due to a lower average  interest rate and lower average loan payable
balance during the year. The Company  utilized funds from early loan  repayments
to reduce  average  borrowings  to $47.9  million  for Fiscal  2000  compared to
average borrowings of $105.0 million for Fiscal 1999.

Net Interest Loss

The  Company  incurred  a net  interest  loss of $1.5  million  in Fiscal  2000,
compared to a net interest  income of $2.4 million in Fiscal 1999.  This was due
to increased  competition  that caused loan rates to decline below the Company's
average  borrowing  cost.  The average rate on loans  originated  was 11.50% and
average  borrowing  cost was 12.04%  during  Fiscal 2000  compared to 12.20% and
10.86% during Fiscal 1999, respectively.

Reversal of Provision for Loan Losses

Reversal of  provision  for loan losses  amounted to $3.2 million in Fiscal 2000
while the provision for loan losses amounted to $8.9 million in Fiscal 1999. The
reversal  of  provision  for loan  losses is mainly  due to  recovery  of a loan
amounting to $2.4 million during Fiscal 2000.

<PAGE>

Gain on Sales of Loans

The  Company  sold  mortgage  loans with a total value of $21 million to special
purpose entities (SPE) during Fiscal 2000.  $13.6 million of NewState  Capital's
loans were  securitized in November 2000 and $7.4 million of NewState  Capital's
loans were securitized in January, 2001. The SPE then issued senior certificates
totaling $15 million.  In connection with these  transactions  NewState  Capital
recognized  gains  on sale of  loans  amounting  to $74  thousand.  The  Company
retained the residual interests in securitizations amounting to $6.1 million.

Total Operating Expenses

Total  operating  expenses  were $4.8  million  in Fiscal  2000,  down from $7.3
million in Fiscal 1999. The decrease during Fiscal 2000 was primarily attributed
to decreases  in salaries,  employee  benefits,  and general and  administrative
expenses.

Salaries and Related Expenses

Salaries  and related  expenses  decreased  44.0% in Fiscal 2000 to $2.1 million
from $3.7 in Fiscal 1999 due to a decrease in the  average  number of  employees
and termination of employees with high salaries in early 2000. The Company hired
approximately  15 new low  salaried  employees  in late 2000.  Average full time
equivalents (FTE's) were 42 in Fiscal 2000 compared to 44 in Fiscal 1999.

Salaries and related expenses are summarized below for Fiscal 2000 and 1999:

(Dollar amounts in thousands)         Fiscal 2000          Fiscal 1999
------------------------------ -----------------------------------------------
Salaries                                 $1,726              $2,621
Employee Benefits                           163                 403
Provision for Severance and
Retirement Benefits                         210                 724
------------------------------ -----------------------------------------------
Total                                    $2,099              $3,748
============================== ===============================================
FTE's                                        42                  44
Average salary per FTE                    $50.0               $85.2


In addition,  sales  commissions of $204 thousand and $275 thousand were paid to
sales agents based on their results of new loan originations  during Fiscal 2000
and 1999, respectively,  and are included in general and administrative expenses
in the statements of operations. Employee benefits are accrued for employees and
directors  with  services of more than one year and the amount of  benefits  are
based on their annual compensation and years of services. Employees are entitled
to request  advance  payments of accrued  employee  benefits while  continuously
being employed by the same employer.

General and Administration

General and  administration  expense for Fiscal 2000  decreased  to $2.7 million
from $3.6  million  for Fiscal  1999.  This was  primarily  due to a decrease in
professional  and legal fees of  approximately  $0.8  million and  decreases  in
telecommunications and lower leasing expense from Fiscal 1999 to Fiscal 2000.

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 at a
rate of $2.8 million per year, at the current Won:US Dollar exchange rate.

Net Loss on Disposal of Securities Available for Sale

The  Company  realized  a gain of $1.0  million  on  disposition  of  securities
available  for  sale,  of  which  $0.9  million  were  in  connection  with  the
disposition of 40,000 shares of common stock of Core Asset Co., Ltd.

The  Company  realized  a loss of $2.3  million  on  disposition  of  securities
available  for  sale,  of  which  $2.1  million  were  in  connection  with  the
disposition  of 971,450  shares of common  stock of  Chungang  Finance Co. As of
March 31,  2000,  the Company has a portfolio of  available-for-sale  securities
totaling approximately $2.1 million.

Gain on Valuation of Residual Interests

The Company recorded gains on valuation of residual interests of $1.1 million in
Fiscal 2000 related to retained  interest  valuation on the three MBS  issuances
(one in Fiscal 1999 and two in Fiscal 2000). The gain is mainly  attributable to
decrease in the discount rate used for the valuation of residual  interests from
14% at March  31,  2000 to 12% as March 31,  2001.  The  Company  used the lower
discount rate as of March 31, 2001 because of the lower prevailing interest rate
environment in Korea in Fiscal 2000 compared to Fiscal 1999.

Other gain, net

The  Company's  other  income,  net was $444  thousand  in Fiscal 2000 while the
Company's other  expenses,  net was $547,575 in Fiscal 1999. The change in other
income,  net  from  Fiscal  1999 to  2001  is  primarily  because  there  was no
impairment  loss  on  securities  held  for  sale in  Fiscal  2000  whereas  the
impairment loss in 1999 was $675,047.

Net Income

The Company  recorded a net loss of $225  thousand or $0.02 per share for Fiscal
2000  compared  to a net loss of $13.8  million  or $1.28 per share  (based on a
proforma weighted average shares outstanding of 10,771,245) for Fiscal 1999. The
decrease in net loss was primarily  due to a provision for loan losses  reversal
of $3.2 million  during  Fiscal 2000  compared to a provision for loan losses of
$8.9 million during Fiscal 1999.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2001, the Company had  unrestricted  cash and cash  equivalents and
interest-bearing  deposits  totaling  $11.4 million  compared to $4.5 million at
March 31,  2000.  For the year  ended  March 31,  2001,  cash used in  operating
activities  of $2.2  million  was  primarily  due to (i)  the  net  loss of $225
thousand (ii) amortization of negative goodwill of $2.8 million,  (iii) reversal
provision  for  loan  losses  of $3.2  million,  (iv) net  loss on  disposal  of
securities  available-for-sale  of  $1.4  million,  (v)  gain  on  valuation  of
subordinated certificates of $1.1 million, (vi) increase in accrued expenses and
other  liabilities  of $0.5  million,  and (vii)  decrease  in accrued  interest
receivable and other assets of $3.1 million.

Cash used in  investing  activities  of $1.4  million was  primarily  due to (i)
proceeds  from sales of loans of $17.2 million (ii) total  collections  of loans
held for sale and held for investment of $14.2 million,  (iii) total increase in
loans held for sale and held for investment of $24.9  million,  (iv) increase in
bank deposits of $2.5 million and (v) sales of securities  available-for-sale of
$1.1 million and (vi) purchase of securities  available-for-sale of $2.4 million
and (vii) acquisition of premises and equipment of $4.2 million.

For Fiscal  2000,  cash  provided  by  financing  activities  of $11 million was
primarily due to (i) a decrease in short-term  borrowings of $12.6 million, (ii)
proceeds  from  issuance of common stock of $0.4  million  (iii)  proceeds  from
issuance of long-term  debt of $29.9 million and (iv) payment on long-term  debt
of $6.6  million.  The Company has  borrowings  of $29.2  million that comes due
during Fiscal 2000 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.

PROSPECTIVE TRENDS

Applications

During Fiscal 2000,  the Company  received 1,132 new loan  applications.  Future
application  levels  and  loan  fundings  are  dependent  on  numerous  factors,
including the level of demand for mortgage  loans,  the level of  competition in
the market,  the  direction  of  interest  rates,  seasonal  factors and general
economic conditions.

Market Factors

Loan production  increased 11.26% from Fiscal 1999 to Fiscal 2000. This increase
was primarily due to the Company's new sales  promotion and sales force training
programs.  The prepayment rate in the servicing  portfolio increased from Fiscal
1999 to Fiscal 2000. This was due primarily to increased refinancing as a result
of the low interest rate.

The Company's  primary  competitors are commercial  banks,  including  Housing &
Commercial Bank, HSBC Bank,  Citibank,  and life insurance  companies.  Over the
past  year,  certain  commercial  banks have  expanded  their  mortgage  banking
operations  through  already-established  branch  networks.  According  to  Mail
Business Newspaper,  a major economic daily news paper in Korea, as of March 31,
2001,  the total  outstanding  balance  of  mortgage  loans held by seven of the
largest Korean banks was approximately $32,846 million.

In view of the continuation of the economic recovery, we believe that the market
size will  continue  to grow  this year as well.  As a  mortgage  provider,  the
Company's best efforts will be made to increase its market share through maximum
utilization of its sales force. In addition,  the Company will step up its sales
efforts in Seoul and the metropolitan area which is expected to generate most of
the Company's new originations.  The Company understands the importance of other
regional  markets as well. Thus, the Company is continuing its efforts to expand
its production  activities  outside of Seoul.  Some regions in which the Company
operates have experienced  slower economic growth and recovery from the negative
impact of the International  Monetary Funds crisis in late 1997. The Company has
striven to diversify its mortgage banking activities  geographically to mitigate
such effects.  The  delinquency  rate,  classified as loans 90 days or more past
due, in the  Company's  servicing  portfolio  decreased to 22.7% as of March 31,
2001 from 24% as of March 31, 2000. The Company  believes that this decrease was
primarily  the  result  of  enhanced  efficiency  and  effectiveness  of the new
servicing system, an improved economy, and changes in portfolio mix and aging.

This  Management  Discussion and Analysis of Financial  Condition and Results of
Operations   include   forward-looking   statements   which  involve  risks  and
uncertainties.  Actual events may differ  materially from those discussed in the
forward-looking  statements as a result of certain factors,  including,  but not
limited to, changes in interest rates,  economic  conditions,  loan growth, loan
loss provisions, customer retention, failure to realize expected cost savings or
revenue  enhancements from  acquisitions.  The Company assumes no obligation for
updating any such forward-looking statements at any time.

This  Management  Discussion and Analysis of Financial  Condition and Results of
Operation   includes   forward-looking   statements   which  involve  risks  and
uncertainties.  Actual events may differ  materially from those discussed in the
forward-looking  statements as a result of certain factors,  including,  but not
limited to, changes in interest rates,  economic  conditions,  loan growth, loan
loss provisions, customer retention, failure to realize expected cost savings or
revenue enhancements from acquisitions. We assume no obligation for updating any
such forward-looking statements at any time.

<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

         The financial  statements required pursuant to this Item 7 are included
in  this  Form  10-KSB  as a  separate  section  following  Item 13  hereof  and
commencing on page F-1 and are hereby  incorporated  by reference into this Item
7.

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

         We dismissed our independent  auditors,  Arthur Andersen LLP, effective
March 23, 2000. On that date we appointed Young Wha  Corporation  ("Young Wha"),
the  Ernst &  Young  International  member  firm in  Korea,  as our  independent
auditors.  These  actions  were  approved by our Board of Directors on March 23,
2000. The dismissal resulted from a mutual agreement between Arthur Andersen LLP
and the Company.

         We  selected  and  approved  Young  Wha after an  extensive  evaluation
process  initiated  by our Board of  Directors.  We had not sought the advice of
Young Wha on specific  audit or  accounting  issues  relating  to our  financial
statements prior to engagement of that firm.

         The report of Arthur  Andersen LLP on our financial  statements for the
years ended  December 31, 1998 and 1997 were modified due to  substantial  doubt
about our ability to continue as a going concern.

         In  connection  with the  audits of our  financial  statements  for the
fiscal years ended December 31, 1998 and 1997 and through March 28, 2000,  there
had been no disagreements  with Arthur Andersen LLP on any matters of accounting
principles or practices,  financial  statement  disclosure or auditing  scope or
procedure,  which if not resolved to the  satisfaction  of Arthur  Andersen LLP,
would  have  caused  them to make  reference  thereto  in  their  report  on the
Company's financial statements for such years.

         Arthur  Andersen LLP has stated in its letter  addressed to the SEC its
concurrence with the foregoing statements in this paragraph.

<PAGE>
                                    PART III

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

         The following table sets forth,  as of March 31, 2001, the names,  ages
and  positions  of  our  executive  officers  and  directors.  Their  respective
backgrounds are described below.

<TABLE>
<CAPTION>

NAME                      AGE          CAPACITIES
----                      ---          ----------
<S>                       <C>          <C>
Ernest B. Kim             47           Chairman, President and Chief Executive Officer of NewState
                                       Holdings, Inc. and NewState Capital Co., Ltd.

Jin Ki Kim                44           Vice President, Secretary and Director of NewState Holdings,
                                       Inc. and Director of NewState Capital Co., Ltd.

Sun W. Young              52           Independent Director of NewState Holdings, Inc.

A. Sungil Noh             41           Independent Director of NewState Holdings, Inc.

Officer/Director                               Employment History
----------------                               ------------------
Ernest B. Kim                                  Mr. Kim is the founder of NewState  Capital Co., Ltd. He
                                               is the primary  decision  maker for the new  management.
                                               From December 1998 to the present,  Mr. Kim has been the
                                               chairman  of the board and the chief  executive  officer
                                               of NewState  Capital,  and from July 1999 to the present
                                               the  chairman of the board and chief  executive  officer
                                               of NewState  Holdings,  Inc. From 1982 to 1990,  Mr. Kim
                                               was the branch  manager for Mony Financial  Services,  a
                                               personal  financial  consulting and planning firm,  and,
                                               from 1991 to 1998, Mr. Kim was the district  manager for
                                               Massachusetts  Mutual  Financial  Services,  a financial
                                               consulting   and  planning   firm.  In  1977,   Mr.  Kim
                                               graduated  from  Young  Nam  University  in TaeGu  City,
                                               Korea and studied  marketing at New York  University  in
                                               1982.

Jin K. Kim                                     From July 1999  until  present,  Mr. Kim has been a Vice
                                               President  and Director of NewState  Holdings,  Inc. Mr.
                                               Kim was also  elected  Secretary  of NewState  Holdings,
                                               Inc.  on May 1,  2000.  From 1996 to 1999,  Mr.  Kim was
                                               manager of mortgage  originations  at NewLife  Financial
                                               Co.,  a  licensed  mortgage  broker.  From 1994 to 1996,
                                               Mr.  Kim  was  a  manager  of   export/import  at  Grace
                                               International,   Inc.,  a  general  merchandise  trading
                                               company.   From  1990  to  1994,  Mr.  Kim  was  a  life
                                               insurance  agent with Mutual Life of New York  Insurance
                                               Co. Mr. Kim  received a B.A. in Graphics  Design in 1983
                                               from Myung-Ji University, Seoul, Korea.

Sun W. Young                                   Mr.  Young has been a Director  of  NewState  since July
                                               1999.  He also  served as  Secretary  of  NewState  from
                                               July 1999 until  January  2000.  Mr. Young  received his
                                               law  degree  from  Hofstra  University  School of Law in
                                               1989 and has been an  attorney  at law  licensed  in the
                                               States of New York and New Jersey  since  that time.  He
                                               also  received  a  Bachelor  of Law  Degree  from  Seoul
                                               National  University in Seoul,  Korea in 1971 and worked
                                               for several corporations, including Korean Airlines.

A. Sungil Noh                                  Mr. Noh has been a Director  of  NewState  since June 9,
                                               2000. Mr. Noh is the principal of the  accounting  firm,
                                               A. Sungil Noh,  CPA, and  practices in the States of New
                                               York,   New   Jersey   and   Massachusetts.   Prior   to
                                               establishing  his firm in August  1997,  he worked  with
                                               two of the world's  largest  accounting  and  consulting
                                               firms,  Ernst & Young L.L.P. and  PricewaterhouseCoopers
                                               L.L.P.,  for  twelve(12)  years as  Practice  Leader  of
                                               Korean   Business   Group  and   Senior   Manager.   His
                                               responsibilities  included  providing tax and consulting
                                               services  to  U.S.,  Korean,   Japanese,   and  European
                                               companies   in  a  variety  of   industries,   including
                                               investment  banking  and broker  dealers.  His  business
                                               and  community  services  include;   financial  and  tax
                                               advisor to the Korean  Chamber of Commerce  and Industry
                                               of U.S.A.,  Inc., internal auditor of the Palisades Park
                                               Chamber   of   Commerce,    internal    accountant    of
                                               Presbyterian  Church of Palisades,  and President of the
                                               Binghamton  University  Korean Alumni  Association.  His
                                               professional  affiliations  comprise  memberships in the
                                               American  Institute of Certified Public  Accountants and
                                               the  New  York  State   Society  of   Certified   Public
                                               Accountants  and a  register  CPA of the  States  of New
                                               York,  New Jersey  and  Commonwealth  of  Massachusetts.
                                               Mr. Noh  graduated  from  Binghamton  University  with a
                                               B.S. in Accounting in 1985.

</TABLE>

ITEM 10. EXECUTIVE COMPENSATION.

         No  compensation  in excess of $100,000  was awarded to,  earned by, or
paid to any  executive  officer of the Company  during the fiscal years 2000 and
1999. The following table and the accompanying notes provide summary information
for each of the last two fiscal years concerning cash and non-cash  compensation
paid or accrued by Ernest B. Kim,  the  Company's  chief  executive  officer and
president for the past two years.

<TABLE>
<CAPTION>

                                                                  LONG TERM COMPENSATION
              ANNUAL COMPENSATION                           AWARDS                      PAYOUTS
              -------------------                           ------                      -------
     Name and                                                      Restricted    Securities
     Principle                                     Other Annual      Stock       Underlying     LTIP        All Other
     Position        Year     Salary     Bonus     Compensation     Award(s)    Options/SARs    Payouts    Compensation
     ---------       ----     ------     -----     ------------     --------    ------------    -------    ------------
<S>                  <C>     <C>           <C>          <C>            <C>            <C>          <C>
Ernest B. Kim,       2000    $302,887      0            0              0              0            0            0
Chairman,
President and
CEO
                     1999    $532,881      0            0              0              0            0            0

</TABLE>

                               BOARD COMPENSATION

         Our inside directors do not currently  receive cash  compensation  from
the Company  for their  service as members of the Board of  Directors,  although
they are reimbursed for certain  expenses in connection with attendance at Board
and  Committee  meetings.  Our  outside  directors  receive  $500  per  month as
compensation  for  service  as  members  of the  Board of  Directors.  There are
currently  two  outside  members of the Board of  Directors.  We do not  provide
additional  compensation for committee  participation or special  assignments of
the Board of Directors.

                              EMPLOYMENT AGREEMENTS

         On  January  3,  2000,  NewState  Capital  entered  into an  employment
agreement  with Kwang Yong Koh, Vice  President and Chief  Operating  Officer of
NewState  Capital.  This agreement  obligates  NewState Capital to pay Mr. Ko an
annual salary of 56 million Korean Won  (US$50,000),  plus a 0.05% commission on
the total amount of new mortgage  originations  per year  received by the branch
offices under Mr. Koh's control and supervision. This agreement is terminable at
will by NewState Capital.

<PAGE>

ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table  sets  forth  information   regarding  beneficial
ownership  of our  common  stock by all  stockholders  who own 5% or more of our
common stock. The ownership reflected in the table is accurate as of the date of
this  prospectus.  Beneficial  ownership  has been  determined  for  purposes of
completing this table in accordance  with Rule 13d-3 of the Securities  Exchange
Act of  1934,  as  amended.  Under  Rule  13d-3 a  person  is  deemed  to be the
beneficial  owner of  securities  if the  person has or shares  voting  power or
investment  power in  respect  of such  securities  or has the right to  acquire
beneficial ownership of the securities within 60 days.

<TABLE>
<CAPTION>
                                                            AMOUNT AND NATURE OF
                  NAME AND ADDRESS                          BENFICIAL OWNERSHIP        PERCENT OF CLASS
------------------------------------------------------   ---------------------------   ------------------
<S>                                                             <C>                           <C>
Ernest B. Kim                                                    1,630,000                    69%
NewState Holdings, Inc.                                            Direct
156 W. Street, Suite 2005                                        6,320,000
New York, NY 10019                                              Indirect (1)

Misoo Kim                                                        1,280,000                    69%
c/o NewState Holdings, Inc.                                        Direct
156 W. 56th Street, Suite 2005                                   6,670,000
New York, NY 10019                                              Indirect (2)

The Andrew J. Kim Irrevocable Trust                              1,680,000                    69%
c/o NewState Holdings, Inc.                                        Direct
156 W. 56th Street, Suite 2005                                   6,270,000
New York, NY 10019                                              Indirect (3)

The Amy J. Kim Irrevocable Trust                                 1,680,000                    69%
c/o NewState Holdings, Inc.                                        Direct
156 W. 56th Street, Suite 2005                                   6,270,000
New York, NY 10019                                              Indirect (4)

The Christine A. Kim Irrevocable Trust                           1,680,000                    69%
c/o NewState Holdings, Inc.                                        Direct
156 W. 56th Street, Suite 2005                                   6,270,000
New York, NY 10019                                              Indirect (5)

</TABLE>

(1)      Mr. Kim is the  Chairman of the Board,  President  and Chief  Executive
         Officer of the  Company.  Mr.  Kim's  spouse,  Misoo Kim, is the direct
         beneficial  owner of 1,280,000  shares of Company  common stock.  Three
         trusts established for the benefit of Mr. Kim's three children are each
         direct  beneficial owners of 1,680,000 shares of Company common stock..
         Misoo Kim is the trustee for each trust.

(2)      Mrs. Kim's spouse, Mr. Ernest B. Kim, is the direct beneficial owner of
         1,630,000 shares of Company common stock.  Three trusts established for
         the benefit of Mrs.  Kim's three  children  are each direct  beneficial
         owners of 1,680,000  shares of Company  common  stock.  Mrs. Kim is the
         trustee for each trust.

(3)      Mr. Kim  established  this trust for the benefit of his son,  Andrew J.
         Kim.  His  spouse,  Misoo Kim,  is the  trustee.  Mr. Kim is the direct
         beneficial  owner of 1,630,000  shares of Company common stock and Mrs.
         Kim is the  direct  beneficial  owner of  1,280,000  shares of  Company
         common stock.  Two trusts  established for the benefit of Mr. Kim's two
         other  children each directly own  1,680,000  shares of Company  common
         stock.

(4)      Mr. Kim established this trust for the benefit of his daughter,  Amy J.
         Kim.  His  spouse,  Misoo Kim,  is the  trustee.  Mr. Kim is the direct
         beneficial  owner of 1,630,000  shares of Company common stock and Mrs.
         Kim is the  direct  beneficial  owner of  1,280,000  shares of  Company
         common stock.  Two trusts  established for the benefit of Mr. Kim's two
         other children each own 1,680,000 shares of Company common stock.

(5)      Mr.  Kim  established  this  trust  for the  benefit  of his  daughter,
         Christine A. Kim. His spouse, Misoo Kim, is the trustee. Mr. Kim is the
         direct beneficial owner of 1,630,000 shares of Company common stock and
         Mrs. Kim is the direct  beneficial owner of 1,280,000 shares of Company
         common stock.  Two trusts  established for the benefit of Mr. Kim's two
         other children each own 1,680,000 shares of Company common stock.

<PAGE>
         The  following  table  lists,  as of the date  hereof,  the  number and
percentage  of our  outstanding  shares  of  common  stock  beneficially  owned,
directly or indirectly,  by each executive  officer and director,  and by all of
our directors and officers as a group:

<TABLE>
<CAPTION>

                                                            AMOUNT AND NATURE OF
                  NAME AND ADDRESS                          BENEFICIAL OWNERSHIP       PERCENT OF CLASS
------------------------------------------------------   ---------------------------   ------------------
<S>                                                              <C>                          <C>
Ernest B. Kim,                                                   1,630,000                    69%
Chairman of the Board, President and Chief Executive               Direct
Officer                                                          6,320,000
c/o NewState Holdings, Inc.                                     Indirect (1)
156 W. 56th Street, Suite 2005
New York, NY 10019

All executive officers and directors as a group                  1,630,000                    69%
                                                                   Direct
                                                                 6,320,000
                                                                Indirect (1)

</TABLE>


(1)      Mr. Kim is the direct  beneficial  owner of 1,630,000 shares of Company
         common  stock.  Mr.  Kim's  wife  is the  direct  beneficial  owner  of
         1,280,000 shares Company common stock, and three (3) irrevocable trusts
         established  for the  benefit  of Mr.  Kim's  three (3)  children  each
         directly own 1,680,000  shares of Company common stock.  Mr. Kim's wife
         is the trustee of each trust.

         We do not know of any  arrangements,  the  operation of which may, at a
subsequent date, result in a change of control of the Company.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         None.

<PAGE>

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


EXHIBITS
--------

2        Agreement  and Plan of Merger dated as of July 14, 1999  between  Racom
         Systems,  Inc., NewState Capital Corp., NewState Capital Co., Ltd., and
         NSK Holdings, Inc. (1)

3.1(a)   Third Amended and Restated  Certificate  of  Incorporation  of NewState
         Holdings, Inc. (2)

3.1(b)   Certificate of Amendment of NewState Holdings, Inc. (filed herewith)

3.2      Fourth Amended and Restated By-Laws (2)

10.1     Agreement  and Plan of Merger dated as of July 20, 1999  between  Racom
         Systems,  Inc., NewState Capital Corp., NewState Capital Co., Ltd., and
         NSK Holdings, Inc. (1)

10.2     Employment Agreement, dated January 3, 2000, between Kwang Yong Koh and
         NewState Capital Co., Ltd. (English version) (2)

10.3     Mortgage-Backed  Securities Agreement,  dated December 17, 1999, by and
         between Daewoo  Securities Co. and NewState Capital Co., Ltd.  (English
         version) (2)

10.4     Stock  Purchase  Agreement,  dated  December  28,  1998 by and  between
         NewState  Capital Co.,  Ltd. and Youngnam  Merchant  Banking Co.,  Ltd.
         (English version filed herewith) (2)

10.5     Credit  Transaction  Agreement,  dated  January 7, 2000 by and  between
         NewState  Capital Co., Ltd. and Hyundai  Marine and Fire Insurance Co.,
         Ltd. (English version) (2)

10.6     Credit  Transaction  Agreement,  dated  January 8, 2000, by and between
         NewState Capital Co., Ltd. and Korea First Bank (English version) (2)

10.7     Agreement  to Amend  Repayment  Terms,  dated  October 7, 1999,  by and
         between NewState Capital Co., Ltd. and Korea Investment Trust Co., Ltd.
         (English version) (2)

10.8     Funding  Agreement,  dated  January 14, 1999,  by and between  NewState
         Capital Co., Ltd. and CHE-IL Merchant Banking Corp.  (English  version)
         (2)

10.9     Credit  Transaction  Agreement,  dated January 18, 2000, by and between
         NewState Capital Co., Ltd. and Youngnam Merchant Banking Corp. (English
         translated version) (2)

10.10    Credit  Transaction  Agreement,  dated July 12,  1999,  by and  between
         NewState Capital Co., Ltd. and Central Merchant Banking Corp.  (English
         version) (2)

10.11    Credit  Transaction  Agreement,  dated November 24, 1999 by and between
         NewState Capital Co., Ltd. and Kookmin Bank, Ltd. (English version) (2)

10.12    Underwriting  Agreement,  dated  February  26,  1997,  by  and  between
         NewState  Capital Co.,  Ltd. and  Yeoungnam  Housing  Finance Co., Ltd.
         (Corporate Bond Series #6) (English version) (2)

10.13    Underwriting  Agreement,  dated May 9, 1997,  by and  between  NewState
         Capital Co., Ltd. and Yeoungnam  Housing  Finance Co., Ltd.  (Corporate
         Bond Series #8) (English version) (2)

10.14    Underwriting  Agreement,  dated May 9, 1997,  by and  between  NewState
         Capital Co., Ltd. and  Yeoungnam  Housing  Finance Co.,  Ltd.  (Private
         Placement Series #22) (English version) (2)

10.15    Credit  Transaction  Agreement,  dated  May 27,  1998,  by and  between
         NewState Capital Co., Ltd. and Teagu Bank, Ltd. (English version) (2)

10.16    Request for Extension of Credit Transaction, dated May 27, 1999, by and
         between  NewState  Capital  Co.,  Ltd.  and Taegu Bank,  Ltd.  (English
         version) (2)

10.17    Amendment  Agreement,  dated January 22, 2000, by and between  NewState
         Capital Co., Ltd. and Taegu Bank, Ltd. (English version) (2)

10.18    Stock  Purchase  Agreement,  dated  December  1, 2000,  by and  between
         NewState  Capital  Co.,  Ltd.  and Suk Cho Kang and other  shareholders
         (filed herewith)

10.19    Modification to Stock Purchase Agreement, dated April 24, 2001, between
         NewState  Capital  Co.,  Ltd.  and Suk Cho Kang and other  shareholders
         (filed herewith)

10.20    Agency  Agreement, dated  December  27, 2000,  by and between  NewState
         Second Mortgage SPC and Korea Housing Bank (filed herewith)

10.21    Asset Management  Agreement,  dated December 17, 2000, between NewState
         Second Mortgage SPC and NewState Capital Co., Ltd. (filed herewith)

10.22    Agency  Agreement dated February 28, 2001 by and between NewState Third
         Mortgage SPC and Korea Housing Bank (filed herewith)

10.23    Asset Management  Agreement,  dated February 28, 2001, between NewState
         Third Mortgage SPC and NewState Capital Co., Ltd. (filed herewith)

10.24    Business  Cooperation  Agreement,  dated  May 2,  2001  by and  between
         NewState Capital Co., Ltd. and Shinhan Bank Ltd. (filed herewith)

10.25    Contract for Sale of Real Estate,  dated March 17, 2000, by and between
         Byung Hoon Chung, as Seller,  and NewState  Capital Co., Ltd., as Buyer
         (filed herewith)

16       Letter,  dated  March 28,  2000 from Arthur  Andersen  LLP,  our former
         principal  accountants,  to  the  Securities  and  Exchange  Commission
         pursuant to Item 304(a)(3) of Regulation S-B (3)

21       List of Subsidiaries (filed herewith)

------------------

(1)      Incorporated  by reference  to the Current  Report on Form 8-K of Racom
         Systems,   Inc.  (Commission  File  No.  000-21907),   filed  with  the
         Securities and Exchange Commission on July 21, 1999.

(2)      Incorporated  by reference to Amendment  No. 1 to the Annual  Report on
         Form  10-KSB/A  of  NewState  Holdings,   Inc.   (Commission  File  No.
         000-21907),  filed with the Securities and Exchange  Commission on July
         14, 2000.

(3)      Incorporated by reference to the Current Report on Form 8-K of NewState
         Holdings,  Inc.  (Commission  File  No.  000-21907),   filed  with  the
         Commission on March 28, 2000.

REPORTS ON FORM 8-K

         None.
<PAGE>
                         INDEX TO FINANCIAL STATEMENTS OF 2000

                                                                      Page
                                                                      ----

Independent Auditors' Report                                          F-2

Financial Statements:

     Consolidated Balance Sheet as of March 31, 2001                  F-3

     Consolidated Statement of Operations for the Year
      Ended March 31, 2001                                            F-4

     Consolidated Statement of Shareholders' Deficit
      for the Year Ended March 31, 2001                               F-5

     Consolidated Statement of Cash Flows for the
      Year Ended March 31, 2001                                       F-6

     Notes to Consolidated Financial Statements                       F-7



                                      F-1

<PAGE>
                                   Young Wha
                          Ernst & Young International


                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
NewState Holdings, Inc.

We  have  audited  the  accompanying  consolidated  balance  sheet  of  NewState
Holdings, Inc. and its subsidiaries (the "Company") as of March 31, 2001 and the
related consolidated  statements of operations,  shareholders'  deficit and cash
flows for the years ended March 31, 2001 and 2000.  These  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of NewState Holdings,
Inc.  and its  subsidiaries  as of March  31,  2001,  and the  results  of their
operations  and cash  flows  for the  years  ended  March  31,  2001 and 2000 in
conformity with accounting principles generally accepted in the United States of
America.

The accompanying  consolidated  financial statements have been prepared assuming
that Newstate  Holdings,  Inc. will continue as a going  concern.  As more fully
described in Note 13, 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.  Management's  plans in
regard to these matters are also described in Note 13. 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.

As  described  in Note 2, the  Company  changed  its  method of  accounting  for
severance and retirement  benefits for NewState  Capital Co., Ltd., a subsidiary
of the Company, effective April 1, 1999.

                                                   /s/ Young Wha Corporation
May 22, 2001
Seoul, Korea
                                      F-2
<PAGE>
<TABLE>
<CAPTION>

                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                 March 31, 2001


                                                                      U.S. dollars
                                                                        (Note 2)
                                                                -------------------------
ASSETS
<S>                                                             <C>
Cash and cash equivalents                                       $           6,766,831
Restricted cash (Note 2)                                                    1,011,093
Interest-bearing deposits with banks                                        4,660,667
Securities available for sale (Note 3)                                      2,111,933
Loans held for sale (Note 15)                                               6,654,068
Loans held for investment, net (Note 4)                                     6,640,393
Residual interests in securitizations (Notes 2 and 5)                      12,952,785
Premises and equipment, net (Note 6)                                        3,480,684
Accrued interest receivable                                                   206,137
Other assets                                                                1,389,324
                                                                -------------------------
         Total assets                                           $          45,873,915
                                                                =========================

LIABILITIES AND SHAREHOLDERS' DEFICIT

Short-term borrowings (Note 7)                                  $          13,948,256
Current portion of long-term debt (Note 8)                                 15,259,902
Accrued expenses and other liabilities                                      1,441,004
Long-term debt (Note 8)                                                    16,264,628
Severance and retirement benefits (Note 2)                                     18,708
Negative goodwill (Notes 1 and 2)                                           6,639,749
                                                                -------------------------
         Total liabilities                                                 53,572,247
                                                                -------------------------

Minority interest                                                             190,620

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                                                       (14,469,847)
Accumulated other comprehensive income (Note 11)                            1,068,415
                                                                -------------------------
         Total shareholders' deficit                                       (7,888,952)
                                                                -------------------------
         Total liabilities and shareholders' deficit            $          45,873,915
                                                                =========================

</TABLE>

              The accompanying notes are an integral part of these consolidated
financial statements.
                                      F-3
<PAGE>

<TABLE>
<CAPTION>

                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                       Years Ended March 31, 2001 and 2000
                 (Amounts stated in U. S. dollars - see Note 2)


                                                                           2001                     2000
                                                                 ------------------------- ------------------------
<S>                                                             <C>                        <C>
Interest income:
      Loans                                                      $           3,098,269     $          11,009,722
      Deposits with banks                                                    1,242,046                 2,191,112
                                                                 ------------------------- ------------------------
           Total interest income                                             4,340,315                13,200,834

Interest expense:
      Short-term borrowings                                                  2,603,853                 6,003,369
      Long-term debt                                                         3,199,717                 4,817,814
                                                                 ------------------------- ------------------------
           Total interest expense                                            5,803,570                10,821,183
                                                                 ------------------------- ------------------------

Net interest income (expense)                                               (1,463,255)                2,379,651
Reversal of provision (provision) for loan losses (Note 4)                   3,173,294                (8,852,048)
                                                                 ------------------------- ------------------------
Net interest income (expense) after provision for loan losses
                                                                             1,710,039                (6,472,397)
                                                                 ------------------------- ------------------------

Gain on sale of loans                                                           73,631                   212,102

Net loss on disposal of securities available for sale                       (1,356,548)               (3,055,412)

Other income and expenses:
      Salaries and employee benefits                                        (1,888,894)               (3,024,224)
      General and administration                                            (2,706,251)               (3,591,892)
      Provision for severance and retirement benefits                         (210,133)                 (724,267)
      Amortization of negative goodwill                                      2,833,319                 2,754,758
      Gain on valuation of residual interests                                1,058,791                         -
      Other, net                                                               444,310                  (547,575)
                                                                 ------------------------- ------------------------
                                                                              (468,858)               (5,133,200)
                                                                 ------------------------- ------------------------
Loss before cumulative effect of accounting change
  and income taxes                                                             (41,736)              (14,448,907)

Cumulative effect of accounting change (Note 2)                                      -                   590,150
Provision for income taxes (Note 12)                                          (214,962)                        -
Minority interest                                                               31,234                    64,354
                                                                 ------------------------- ------------------------
Net loss                                                         $            (225,464)    $         (13,794,403)
                                                                 ========================= ========================
Basic and diluted net loss per share of common stock             $               (0.02)    $               (1.28)
Average number of shares outstanding                                        11,508,684                10,771,245
                                                                 ========================= ========================

</TABLE>

              The accompanying notes are an integral part of these consolidated
financial statements.
                                      F-4
<PAGE>


                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
                       Years Ended March 31, 2001 and 2000
                 (Amounts stated in U. S. dollars - see Note 2)

<TABLE>
<CAPTION>

                                                                      Retained        Accumulated
                                                     Additional       earnings           other
                                       Common          paid-in      (accumulated    comprehensive
                                        stock          capital        (deficit)      income (loss)        Total
                                    ------------- -------------- -----------------  --------------  -------------
<S>                                   <C>         <C>            <C>                <C>             <C>
Balance at April 1, 1999              $    13,325 $            - $        (449,980) $        28,840 $    (407,815)
Issuance of common stock                  101,762      5,397,393                                        5,449,155
Net loss                                                               (13,794,403)                   (13,794,403)
Net change in unrealized loss
   on securities available for sale                                                        (223,602)     (223,602)
Foreign currency translation
   adjustments                                                                             (513,172)     (513,172)
                                      ----------- -------------- -----------------  ---------------   ------------
Comprehensive loss                              -              -       (13,794,403)        (736,774)  (14,531,177)
                                      ----------- -------------- ------------------ ----------------  ------------
Balance at March 31, 2000                 115,087      5,397,393       (14,244,383)        (707,934)   (9,439,837)
Net loss                                                                  (225,464)                      (225,464)
Net change in unrealized loss
   on securities available for sale                                                         172,758       172,758
Foreign currency translation
   adjustments                                                                            1,603,591     1,603,591
                                      ----------- -------------- -----------------  --------------- ----------------
Comprehensive loss                              -              -          (225,464)       1,776,349     1,550,885
                                      ----------- -------------- ------------------ --------------- ----------------
Balance at March 31, 2001             $   115,087 $    5,397,393 $     (14,469,847) $     1,068,415 $  (7,888,952)
                                      =========== ============== =================  =============== ================

</TABLE>

              The accompanying notes are an integral part of these consolidated
financial statements.
                                      F-5
<PAGE>

<TABLE>
<CAPTION>

                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                       Year Ended March 31, 2001 and 2000
                 (Amounts stated in U. S. dollars - see Note 2)

                                                                             2001                    2000
                                                                    -----------------------  ---------------------
<S>                                                                 <C>                      <C>
Cash flows from operating activities:
    Net income (loss)                                               $        (225,464)       $      (13,794,403)
    Adjustments to reconcile net loss to net cash used in
    Operating activities:
       Minority interest                                                      (31,234)                  (64,354)
       Depreciation and amortization                                           216,258                  143,624
       Amortization of negative goodwill                                   (2,833,319)               (2,754,758)
       Provision (reversal of provision) for loan losses                   (3,173,294)                8,852,048
       Gain on valuation of retained interest                              (1,058,791)                        -
       Loss on disposal of premises and equipment, net                          27,936                        -
      Gain on disposal of loans held for sale                                 (73,631)                 (212,102)
      Net loss on disposal of securities available for sale                  1,356,548                3,055,412
       Provision for severance and retirement benefits                           1,992                  724,267
      Cumulative effect of accounting change                                         -                 (590,150)
       Increase (decrease) in accrued expenses and other
        liabilities                                                            475,359               (1,303,672)
       Decrease (increase) in accrued interest receivable and
        other assets                                                         3,130,341                  (11,873)
                                                                    -----------------------  -------------------
Net cash used in operating activities                                      (2,187,299)               (5,955,961)

Cash flows from investing activities:
    Proceeds from sale of loans held for sale                               17,169,740                        -
   Collections from loans held for sale                                      2,088,601                        -
   Increase in loans held for sale                                        (23,714,286)                        -
   Collections from loans held for investment                               12,143,944               36,830,835
    Decrease (increase) in loans held for investment, net                  (1,184,492)               23,318,439
    Decrease (increase) in interest bearing deposits with banks            (2,490,553)                2,769,882
   Proceeds from sale of securities available for sale                       1,144,491                8,814,197
   Purchase of securities available for sale                               (2,424,372)               (3,032,558)
    Proceeds from sale of securities held to maturity                           57,785                        -
    Acquisition of premises and equipment                                  (4,180,115)                        -
    Others                                                                           -                1,554,574
                                                                    -----------------------  -------------------
Net cash provided by (used in) investing activities                        (1,389,257)               70,255,369

Cash flows from financing activities:
    Decrease in short-term borrowings, net                                (12,634,473)              (33,678,770)
    Proceeds from issuance of common stock                                     408,419                5,251,655
    Proceeds from issuance of long-term debt                                29,901,754                1,713,062
    Payment on long term-debt                                              (6,594,802)              (64,734,695)
                                                                    -----------------------  -------------------
Net cash provided by (used in) financing activities                         11,080,898              (91,448,748)

Effect of exchange rate changes on cash                                    (1,100,905)                   18,016
                                                                    -----------------------  -------------------

Net increase (decrease) in cash and cash equivalents                         6,403,437              (27,131,324)
Cash and cash equivalents at beginning of year                                 363,394               27,494,718
                                                                    -----------------------  -------------------
Cash and cash equivalents at end of year                            $        6,766,831       $          363,394
                                                                    =======================  ===================
Supplemental cash flow information:
    Cash paid for interest                                          $        5,748,927       $       10,844,559
    Cash paid for income taxes                                                       -                        -
Non-cash investing and financing activities:
    Residual interest retained in loans securitized                          6,071,996                7,168,060
    Loans transferred from held for investment to held for sale
     on March 31, 2000                                                               -               11,461,433
    Mortgage loans assumed                                                           -                2,166,066
    Unrealized loss on securities available for sale,
     accounted for as comprehensive income                                     150,908                  223,602

</TABLE>

         The  accompanying  notes  are an  integral  part of these  consolidated
financial statements.
                                      F-6
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 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") and its 76.6% owned and newly established
     subsidiary Smart  Technology Co., Ltd (a Korean  corporation,  "STC").  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.

     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.

     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.

     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.
                                      F-7
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

1.   Organization and Business (cont'd)
     ----------------------------------

     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.   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  year-end  exchange  rate of  W1,333.50 to US$1 at March 31,
     2001, for assets and  liabilities and a weighted  average  exchange rate of
     W1,164.85 to US$1 and  W1,167.50 to US$1 for the years ended March 31, 2001
     and 2000, respectively,  for income and expenses. The resulting translation
     adjustments  are  recorded  as  a  component  of  comprehensive  income  in
     shareholders'  equity.  Amounts in Note 15 were approximated  using the May
     22, 2001 rate of W1,296.50 to US$1.

     Accounting Change
     -----------------

     Prior to April 1, 1999,  NewState  Capital  accounted for the severance and
     retirement benefits under SFAS No. 87 "Employers' Accounting for Pensions"
                                      F-8
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

2.   Summary of Significant Accounting Policies (cont'd)
     ---------------------------------------------------

     Accounting Change (cont'd)
     --------------------------

     Effective from April 1, 1999,  NewState  Capital  accounts for its employee
     severance and retirement  benefits  liability in accordance with EITF Issue
     88-1, as the obligation  arising from services performed to and at rates of
     pay in effect at the fiscal year end,  since the severance  and  retirement
     benefits are  different  from the pension  plans  prevailing  in the United
     States of America. The differences are as follows:

     The severance and retirement benefits are lump-sum payment obligations upon
     termination of employment;  the payment amount of the benefit is determined
     based on the  service  years  and  rates of pay at the  termination.  Also,
     employees,  at their option, become entitled to request advance payments of
     accrued severance and retirement benefits while being continuously employed
     by the same employer.  In this case, the service period of those  employees
     begins from the date of the advance payments.

     The cumulative  effect of the accounting change above amounting to $590,150
     was credited to income (there is no tax effect attributable to the change).

     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.

     Restricted Cash
     ---------------

     Bank  deposits  amounting to  approximately  $471,469  have been pledged as
     collateral for certain short-term borrowings and long-term debt as of March
     31,  2001.  In addition,  bank  deposits  amounting  to $539,624  have been
     pledged as collateral for mortgage loans sold through securitizations as of
     March  31,  2001.
                                      F-9
<PAGE>
                NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO
                CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001

2.   Summary of Significant Accounting Policies (cont'd)
     ---------------------------------------------------

     Securities Held to Maturity and Available for Sale
     --------------------------------------------------

     Investments  for which the Company has the  positive  intent and ability to
     hold to maturity are reported at amortized cost.

     Securities available for sale consist of certain equity and debt securities
     which  management  believes  could be sold in response to changes in market
     conditions or other factors. Unrealized holding gains or losses, net of tax
     if applicable, are included as a component of other comprehensive income in
     shareholders' equity until realized.

     Realized gains and losses on the sale of securities  available for sale are
     determined using the specific-identification method.

     Declines   in  the  fair   value   of   individual   held-to-maturity   and
     available-for-sale  securities  below their cost that are  determined to be
     other than temporary result in write-downs of the individual  securities to
     their fair value.  The related  write-downs  are  included as losses in the
     statement of operations.

     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.
                                      F-10
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

2.   Summary of Significant Accounting Policies (cont'd)
     ---------------------------------------------------

     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.  loans 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.
                                      F-11
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

2.   Summary of Significant Accounting Policies (cont'd)
     ---------------------------------------------------

     Present Value Discounts (cont'd)
     --------------------------------

     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 Loan Securitization
     -----------------------------------------

     Residual interests in loan securitizations  ("Residuals") are recorded as a
     result of the sale of loans  through  securitizations,  and are  carried at
     estimated fair value.

     Loan Securitizations
     --------------------

     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.
                                      F-12
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

2.   Summary of Significant Accounting Policies (cont'd)
     ---------------------------------------------------

     Loan Securitizations (cont'd)
     -----------------------------

     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.  (See Valuation of Residuals
     below).

     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's  Residuals are  subordinate  to the  Certificates  until the
     Certificate holders are fully paid.

     Valuation of Residuals
     ----------------------

     The  Company is not aware of an active  market for the  purchase or sale of
     Residuals  and,  accordingly,  it  estimates  the fair  value  of  retained
     interests  based on a  discounted  cash flow  analysis.  The cash flows are
     estimated as the excess of the  principal and interest  payments  collected
     from mortgage loan  borrowers on each pool of the mortgage  loans sold over
     the sum of the principal and interest rate paid to the  certificate  holder
     plus the servicing fee, trust fee, other expenses and an estimate of future
     credit  losses  over  the  life  of the  mortgage  loans.  Cash  flows  are
     discounted  from the date the cash is expected to become  available  to the
     Company (the  "cash-out"  method).  These cash flows are projected over the
     life of the  mortgage  loans using  payment,  default,  and  interest  rate
     assumptions that the Company believes would be used by market  participants
     for  similar  financial  instruments  subject  to  prepayment,  credit  and
     interest rate risk.  The cash flows are  discounted  using an interest rate
     that  management  believes  a  purchaser  unrelated  to the  seller  of the
     financial  instrument would demand. As all estimates used are influenced by
     factors  outside the Company's  control,  there is uncertainty  inherent in
     these  estimates,  making it reasonably  possible that they could change in
     the near term.

     The Company has  utilized  effective  discount rates of 14% and 12% on  the
     estimated cash flows released from the OC Account to value the Residuals at
     March 31,  2001 and  2000,  respectively.  The  Company  has used  lifetime
     default rate  estimates  ranging from 1.47% to 2.37%.  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.

     Servicing rights
     ----------------

     Servicing assets associated with mortgage loan securitization  transactions
     are not material as the  benefits of servicing  are not expected to be more
     or less than  adequate  compensation  to the  Company  for  performing  the
     servicing.

     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 that 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.

     Severance and Retirement Benefits
     ---------------------------------

     In accordance  with the Korean Labor  Standards Law and NewState  Capital's
     regulations,  terminating  employees  with at least one year of service are
     entitled to severance and retirement  benefits based on the rates of pay in
     effect at the time of  termination,  years of  service  and  certain  other
     factors.  NewState  Capital  provides  for  this  liability  at  an  amount
     sufficient  to  state  the  estimated   obligation  arising  from  services
     performed  to and at rates of pay in effect at year  end.  Funding  of this
     liability is not required by Korean law.

     In order to obtain tax benefits,  NewState Capital funded its severance and
     retirement  benefits obligation by depositing with life insurance companies
     the  amount  of  $44,707  as of March 31,  2001,  and  nominating  NewState
     Capital's employees as beneficiaries of these deposits.  Accordingly,  this
     amount has been offset against NewState Capital's  obligation for severance
     and retirement benefits.
                                      F-13
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

2.   Summary of Significant Accounting Policies (cont'd)
     ---------------------------------------------------

     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.

     Income Taxes
     ------------

     The Company uses the liability method in accounting for income taxes, which
     reflects the tax effect of tax loss carryforwards and temporary differences
     between the tax basis of assets and liabilities and their reported  amounts
     in  the  accompanying   financial  statements.   Deferred  tax  assets  and
     liabilities  are measured using the enacted tax rates and laws that will be
     in effect when the differences are expected to reverse.

     A valuation allowance is provided on deferred income tax assets where it is
     more likely than not that such assets will not be realized.

     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.

     Comprehensive Income
     --------------------

     The Company has adopted  Statement of Financial  Accounting  Standards  No.
     ("SFAS")  130,  "Reporting   Comprehensive   Income",   which  defines  and
     establishes the standards for reporting comprehensive income. Comprehensive
     income for the Company includes net income,  the change in unrealized gains
     and  losses  on  available  for  sale   securities  and  foreign   currency
     translation  adjustments.  The  Company  has  presented  these items in the
     statement of changes in shareholders' deficit.
                                      F-14
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

2.   Summary of Significant Accounting Policies (cont'd)
     ---------------------------------------------------

     Recent Accounting Pronouncement
     -------------------------------

     In September 2000, the FASB issued SFAS No. 140,  "Accounting for Transfers
     and Servicing of Financial  Assets and  Extinguishments  of Liabilities - a
     Replacement of FASB Statement No., 125." SFAS No. 140 revises the standards
     for accounting and  securitizations and other transfers of financial assets
     and No. 125's  provisions.  SFAS No. 140 is  effective  for  transfers  and
     servicing of financial assets and extinguishments of liabilities  occurring
     after March 31,  2001.  The  statement  is effective  for  recognition  and
     reclassification   of   collateral   and  for   disclosures   relating   to
     securitization  transactions  and  collateral for fiscal years ending after
     December 15, 2000. The Company  adopted the  disclosure  provisions of SFAS
     140 for the year ended March 31, 2001 and anticipates  that the adoption of
     the accounting  provisions of SFAS No. 140 will not have a material  effect
     on the Company's financial position or results of operations.

3.   Securities
     ----------

     Securities available for sale at March 31, 2001 are as follows:

<TABLE>
<CAPTION>
                                                                     Gross unrealized
                                                   Cost                   losses                Fair value
                                           ----------------------   --------------------   ---------------------
     <S>                                   <C>                      <C>                    <C>
     Equity securities                     $           1,479,515    $            18,501    $          1,461,014
     Secondary interests in
     Collateral Backed
     Obligations                                         650,919                      -                 650,919
                                           ----------------------   --------------------   ---------------------
                                           $           2,130,434    $            18,501    $          2,111,933
                                           ======================   ====================   =====================

</TABLE>

     $575,928 and $74,991 of the  Company's  secondary  interests in  collateral
     backed  obligations  mature  on  February  2,  2003 and  August  23,  2003,
     respectively.

     On December 1, 2000, NewState Capital entered into an agreement to purchase
     49.13% of issued and outstanding  common shares of World Asset Co., Ltd. (a
     Korean asset management company,  "WAC") from certain  shareholders of WAC.
     Pursuant to the agreement,  NewState Capital provided a contract deposit of
     $307,357 to the  shareholders  on December 1, 2000 and purchased  19.87% of
     WAC's common shares from the shareholders for $1,199,850 on January 5, 2001
     and the remaining 29.26% interest was purchased on April 24, 2001 (see Note
     14).
                                      F-15
<PAGE>

                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

3.   Securities (cont'd)
     -------------------

     During the year ended March 31, 2001, the Company sold securities available
     for sale with an aggregate  cost of $2,501,039  for $1,144,491 and realized
     gains and losses of $981,102 and $2,337,650, respectively.

     During the year ended March 31, 2000, the Company sold securities available
     for sale with an aggregate cost of $11,869,609  for $8,814,197 and realized
     gains and losses of $263,851 and $3,319,263, respectively.

4.   Loans
     -----

     Loans held for investment at March 31, 2001 are as follows:

<TABLE>
<CAPTION>

                                                                        Allowance for          Balance at
                                                     Principal           loan losses         March 31, 2001
                                              --------------------   -------------------   -------------------
     <S>                                      <C>                    <C>                   <C>
     Mortgage loans                           $          7,288,426   $         2,278,013   $         5,010,413
     Consumer loans                                      1,918,799             1,821,160                97,639
     Commercial loans                                    2,406,094               873,753             1,532,341
                                              --------------------   -------------------   -------------------
                                              $         11,613,319   $         4,972,926   $         6,640,393
                                              ====================   ===================   ===================

</TABLE>

     Activity in the allowance for loan losses is summarized as follows:

                                                                 Amount
                                                    -------------------------
       Balance at beginning of year                 $            8,134,870
       Reversal of provision for loan losses                    (3,173,294)
       Write-offs                                               (1,305,113)
       Recoveries                                                2,433,449
       Foreign currency translation adjustment                  (1,116,986)
                                                    --------------------------
       Balance at end of year                       $            4,972,926
                                                    ==========================

     Non-accrual loans in loans held for investment  totaled $6,888,061 or 43.4%
     of the total loans held for  investment at March 31, 2001.  The Company has
     not recognized any interest income related to the non-accrual  loans during
     the year ended March 31, 2001.

     Impaired loans (commercial and consumer loans) at the end of the year
     totaled $1,821,160 in principal balances and the average impaired loan
     balances totaled $1,986,842 during the fiscal year. Impaired loans are
     fully reserved. Interest income that would have been recorded for impaired
     loans amounted to approximately $295,685 during the fiscal year.
     Non-accrual residential real estate loans are not treated as impaired loans
     because the Company expects that mortgaged collateral can be foreclosed to
     recover the loan amounts.
                                      F-16
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

4.   Loans (cont'd)
     --------------

     Scheduled  maturities of loans held for investment at March 31, 2001 are as
     follows:

                                                   Amount
                                          --------------------------
Due in one year or less                    $                858,586
Due from one to five years                                4,300,614
Due from five to ten years                                3,916,469
Due after ten years                                       2,537,650
                                           -------------------------
                                           $             11,613,319
                                           =========================

     Mortgage loans held for  investment  amounting to $3,205,429 are pledged as
     collateral for certain short-term borrowings and long-term debt.

     Mortgage  and  consumer  loans  are of small  nature  to a large  number of
     borrowers   throughout   Korea  and  do  not   result  in  a  credit   risk
     concentration.  The largest credit risk  concentration  is comprised of two
     unsecured  commercial  loans on non accrual status to the Jinro Group which
     represents  81.1% and 18.7% of the total net carrying  value of  commercial
     loans and loans held for investment, respectively.

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  $12,952,785 at March 31,
     2001. The restricted  cash reserves are included in restricted  cash on the
     consolidated  balance  sheet  and were  $539,624  at March  31,  2001.  The
     following  assumptions  were used in  measuring  the fair value of residual
     interests in  securitizations  at March 31, 2001.  The  assumptions  listed
     represent weighted averages of assumptions used for each securitization.

                                                            Residual interests
                                                            --------------------
    Prepayment speed (monthly constant prepayment rate)        2.51% - 3.11%
    Weighted average life in years                                   3
    Discount rate                                                  12.00%
    Loss rate                                                  1.47% - 2.37%

     NewState Capital repurchased  $594,837,  all of delinquent accounts,  which
     are included in loans held for investment as of March 31, 2001. The Company
     recognized servicing fees of $169,888 during the year ended March 31, 2001,
     which are included in other income.
                                      F-17
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

5.   Securitization Activities (cont'd)
     ----------------------------------

     The  total  principal  amount  of the  mortgage  loans  outstanding  of the
     securitized  loan  portfolio  amounted to $35,222,235 at March 31, 2001. Of
     this  amount,   $12,952,785   is  recognized   as  residual   interests  in
     securitizations on the Company's balance sheet at March 31, 2001.

     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 March 31, 2001.

                                                                      Amount
                                                                 ---------------
    Fair value of residual interests at March 31, 2001           $  12,952,785
    Effect on fair value of the following hypothetical
     changes in key assumptions:

    Discount rate increased by 2%                                    (831,097)
    Discount rate increased by 4%                                  (1,588,557)
    Monthly prepayment rate at 110% of base assumption                (68,247)
    Monthly prepayment rate at 120% of base assumption               (166,807)
    Loss rate at 110% of base assumption                              (17,326)
    Loss rate at 120% of base assumption                              (34,651)

     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.
                                      F-18
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

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

     Premises and equipment at March 31, 2001 are comprised of the following:

<TABLE>
<CAPTION>

                                                    Acquisition          Accumulated            Net book
                                                       cost             depreciation              value
                                              --------------------   -------------------   -------------------
     <S>                                      <C>                    <C>                   <C>
     Land                                     $          1,909,145   $                 -   $         1,909,145
     Building                                              795,477                19,887               775,590
     Furniture and equipment                             1,212,912               416,963               795,949
                                              --------------------   -------------------   -------------------
                                              $          3,917,534   $           436,850   $         3,480,684
                                              ====================   ===================   ===================

</TABLE>

     Depreciation  expense for the years ended March 31, 2001 and 2000  amounted
     to $215,949 and $143,624, respectively.

7.   Short-term Borrowings
     ---------------------

     Short-term borrowings at March 31, 2001 are comprised of the following:

<TABLE>
<CAPTION>

                                                               Annual interest
                                                                  rates (%)                    Amount
                                                            -----------------------     ----------------------
     <S>                                                           <C>                  <C>
     General term borrowings                                           8.95             $             599,925
     Notes with short-term finance companies                       9.29 - 14.00                   13,348,331`
                                                                                        ----------------------
                                                                                        $          13,948,256
                                                                                        ======================
</TABLE>

     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 year ended March 31, 2001, are as follows:

                                                            Amount
                                                    --------------------
     Maximum borrowings                              $     26,361,455
     Average borrowings outstanding                  $     18,412,974
     Weighted average interest rate per annum                 11.96%
                                      F-19
<PAGE>

                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

8.   Long-term Debt
     --------------

     Long-term debt at March 31, 2001 is comprised of the following:

                                                 Amount
                                             ------------------
    Debentures                               $     28,271,466
    Bank loans                                      3,719,535
                                             ------------------
                                                   31,991,001
    Less: discounts                                  (466,471)
                                             ------------------
                                                   31,524,530
    Current portion of long-term debt              15,259,902
                                             ------------------
                                             $     16,264,628
                                             ==================

     Debentures outstanding at March 31, 2001 are comprised of the following:

<TABLE>
<CAPTION>

                                                                Annual interest
                                       Maturity date               rates (%)                  Amount
                                  -------------------------   --------------------     ---------------------
    <S>                           <C>                                <C>               <C>
    Guaranteed                    May 10, 2001                        9.7              $           374,953
    Non-collaterized              June 29, 2001                      10.5                        1,499,813
    Non-collaterized              January 31, 2002                   10.7                       11,248,594
    Non-collaterized              July 31, 2002                      11.0                       11,248,594
    Non-collaterized              February 21, 2003                  15.0                        3,749,531
    Convertible                   February 27, 2031                  12.2                          149,981
                                                                                       ---------------------
                                                                                                28,271,466
    Less: discounts                                                                               (466,471)
                                                                                       ---------------------
                                                                                       $        27,804,995
                                                                                       =====================

</TABLE>

     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 March 31, 2001 are comprised of the following:

<TABLE>
<CAPTION>

                                                                  Annual interest
                                           Maturity date             rates (%)                Amount
                                       ----------------------     ----------------     ---------------------
    <S>                                <C>                             <C>             <C>
    Hanareum Merchant                  January 14, 2002                14.5            $          2,099,738
      Bank
    Ssangyong Fire and
      Marine Insurance                 March 25, 2003                  10.25                      1,619,787
                                                                                       ---------------------
                                                                                       $          3,719,535
                                                                                       =====================

</TABLE>
                                      F-20
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

8.   Long-term Debt (cont'd)
     -----------------------

     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 March 31, 2001,  excluding
     discounts on debentures, are as follows:

             Debentures
            (par value)               Bank loans                 Total
       ----------------------    ----------------------    -------------------
 2002  $          13,123,360     $           2,279,715    $         15,403,075
 2003             14,998,125                 1,439,820              16,437,945
 2031                149,981                         -                 149,981
       ----------------------    ----------------------   ---------------------
       $          28,271,466     $           3,719,535    $         31,991,001
       ======================    ======================   =====================

9.   Financial Instruments
     ---------------------

     The  Company  estimates  the fair  value  of  financial  instruments  using
     available market information and appropriate  valuation  methods.  However,
     considerable  judgment is necessarily  required to interpret market data to
     develop the estimates of fair value.  Accordingly,  the estimates presented
     herein are not necessarily indicative of the amounts that could be realized
     in a current market exchange.  The use of different  market  assumptions or
     estimation  methods may have a material  impact on the estimated fair value
     amounts.

     The estimated  fair values of the  Company's  financial  instruments  as of
     March 31, 2001 are as follows:

<TABLE>
<CAPTION>

                                                               Book                   Estimated
                                                               value                  fair value
                                                       --------------------      --------------------
  <S>                                                  <C>                       <C>
  Financial assets:
    Cash and cash equivalents                          $         6,766,831       $        6,766,831
    Restricted cash                                              1,011,093                1,011,093
    Interest-bearing deposits with banks                         4,660,667                4,660,667
    Securities available for sale                                2,111,933                2,111,933
    Loans held for investment                                    6,640,393                6,640,393
    Loans held for sale                                          6,654,068                6,654,068
    Residual interests in securitization                        12,952,785               12,952,785
    Accrued interest receivable                                    206,137                  206,137
  Financial liabilities:
    Short-term borrowings                                       13,948,256               13,825,109
    Long-term debt                                              31,524,530               32,335,035

</TABLE>
                                      F-21
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

9.   Financial Instruments (cont'd)
     ------------------------------

     The following methods and assumptions were used in estimating the Company's
     fair value disclosures for financial instruments:

     Cash and cash  equivalents:  The  fair  value of cash and cash  equivalents
     approximates the carrying value reported in the balance sheet.

     Restricted  cash:  The  fair  value of  restricted  cash  approximates  the
     carrying value reported in the balance sheet.

     Interest-bearing  deposits with banks:  The fair value of  interest-bearing
     deposits with banks approximates the carrying value reported in the balance
     sheet.

     Securities  available  for sale:  Fair values for  securities  are based on
     quoted market prices.

     Loans held for  investment  and sale:  Fair values for loans are  estimated
     using  discounted  cash flows analysis using interest rate currently  being
     offered for loans with similar term to borrowers of similar credit quality.
     Fair values for impaired  loans are estimated  using  discounted  cash flow
     analysis or underlying collateral values, where applicable.

     Residual interests in securitization:  The fair value of residual interests
     in  securitization  is determined by  calculating  the net present value of
     estimated  future cash flows using a discount  rate  commensurate  with the
     risks involved.

     Accrued  interest  receivable:  The  carrying  value  of  accrued  interest
     receivable approximates its fair value.

     Short-term  borrowings:  The carrying  value  reported in the balance sheet
     approximates  fair value as the  short-term  borrowings are due upon demand
     and bear interest at a rate that approximates current market interest rates
     for similar type short-term borrowings.

     Long-term  debt:  The  fair  value  of  long-term  debt  is  determined  by
     discounting  the expected cash payments at the current market interest rate
     over the term of long-term debt.
                                      F-22
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

10.  Capital Stock
     -------------

     The following  table  illustrates the computation of basic and diluted loss
     per share:

<TABLE>
<CAPTION>

                                                                           2001                 2000
                                                                 ---------------------   ------------------
     <S>                                                          <C>                    <C>
     Numerator:
       Net loss                                                   $         (225,464)    $     (13,794,403)
     Denominator for basic and diluted loss per
      share:
        Weighted-average common shares
         Outstanding                                                      11,508,684            10,771,245
                                                                 ---------------------   ------------------
     Basic and diluted loss per share                             $            (0.02)    $           (1.28)
                                                                 =====================   ==================

</TABLE>

11. Other Comprehensive Income
    --------------------------

     Other  comprehensive  Income  consists of net unrealized  gains (losses) on
     securities  available-for-sale and foreign currency translation adjustment.
     No taxes have been provided on components  of other  comprehensive  income.
     The components of other comprehensive income are as follows:

<TABLE>
<CAPTION>
                                                                                                  Amount
                                                                                            -------------------
   <S>                                                                                        <C>
   March 31, 1999                                                                             $       28,840
                                                                                            -------------------
      Net unrealized losses                                                                         (194,762)
      Less reclassification adjustment for losses
        realized in net income                                                                       (28,840)
     Foreign currency translation adjustments                                                       (513,172)
                                                                                            -------------------
   Net unrealized losses                                                                            (736,774)
                                                                                            -------------------
   March 31, 2000                                                                                   (707,934)
                                                                                            -------------------
      Net unrealized losses                                                                          (22,004)
      Less reclassification adjustment for losses
        realized in net income                                                                       194,762
      Foreign currency translation adjustments                                                     1,603,591
                                                                                            -------------------
   Net unrealized losses                                                                           1,776,349
                                                                                            -------------------
   March 31, 2001                                                                               $  1,068,415
                                                                                            -------------------

</TABLE>
                                      F-23
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

12.  Income Taxes
     ------------

     For the year ended March 31, 2001, Newstate Holdings, Inc. reported taxable
     income of $710,023.  The components of the provision for income tax expense
     are  comprised  of the  current  U.S.  federal and state tax  provision  on
     Newstate  Holdings,  Inc.  earnings.  For the year  ended  March 31,  2000,
     Newstate Holdings, Inc. reported a taxable loss of $167,268, which was used
     to reduce the current year tax provision.  Other  temporary  differences of
     Newstate  Holdings,  Inc. are immaterial.  Net operating  losses ("NOL") of
     NewState  Capital are not  available to offset the U.S.  income of Newstate
     Holdings, Inc.

     NewState Capital  reported a Korean taxable loss of $2,768,711.  Due to net
     losses of NewState Capital,  net deferred tax assets have been fully offset
     by a valuation  allowance and  accordingly,  no income tax benefit has been
     recorded for the years ended March 31, 2001 and 2000.

     At March 31, 2001 NewState Capital has NOL  carryforwards for Korean income
     tax purposes of $8,491,134 which will expire as follows:

              Year                             Amount
     -----------------------            ----------------------
      2003                              $           1,560,619
      2004                                          2,542,736
      2005                                          1,969,253
      2006                                          2,418,526
                                        ----------------------
      Total                             $           8,419,134
                                        ======================

     NewState  Capital's  temporary  differences and tax loss carryforwards that
     comprised deferred income tax assets and liabilities were as follows:

                                                    Amount
                                            ----------------
     Loss carryforwards                     $      2,615,269
     Impaired loans                                  432,218
     Accrued interest income                         (783,881)
     Other                                             3,174
                                            ----------------
     Deferred income tax assets                    2,266,780
     Valuation allowance                          (2,266,780)
                                            ----------------
     Net deferred income tax assets         $          -
                                            ================
                                      F-24
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

13.  Going Concern Matters
     ---------------------

     The accompanying  consolidated financial statements have been prepared on a
     going concern basis,  which  contemplates the realization of assets and the
     satisfaction  of liabilities in the normal course of business.  As shown in
     the consolidated financial statements during the years ended March 31, 2001
     and 2000, the Company incurred losses of $225,464 and $13,794,403,  and had
     negative  cash  flows  from   operations  of  $2,187,229  and   $5,955,961,
     respectively,  and has debts of $29,208,158 maturing during the fiscal year
     ending March 31, 2002.  These  factors  among others may indicate  that the
     Company  will be unable to  continue as a going  concern  for a  reasonable
     period of time.

     The  financial  statements do not include any  adjustments  relating to the
     recoverability  and  classification  of liabilities that might be necessary
     should the Company be unable to continue as a going concern.  A significant
     portion  of the  Company's  liabilities  are  short-term  or due on demand,
     whereas most of its assets are long-term loans or investments.  In order to
     meet its obligations and sustain its operations,  the Company must generate
     sufficient cash flow through  refinancing of borrowings,  collections on or
     sale of loans,  sale of securities,  or through capital  contributions  and
     must ultimately attain profitability. The Company is also actively pursuing
     additional  debt and equity  financing  through  discussion  with potential
     investors and financial  institutions  and  subsequent to year end obtained
     additional financing of approximately $4,627,844 million (Note 15).

14. The Korean Economy
    ------------------

     Beginning in 1997,  the  Republic of Korea and other  countries in the Asia
     Pacific  region  experienced  a severe  contraction  in  substantially  all
     aspects of their economies.  This situation is commonly  referred to as the
     1997 Asian  financial  crisis.  In response to this  situation,  the Korean
     government and the private sector began implementing  structural reforms to
     historical  business  practices.  Through the middle of 2000, it was widely
     accepted in Korea that the economic situation had stabilized, but not fully
     recovered from the 1997 crisis.

     The  Korean  economy is  currently  experiencing  additional  difficulties,
     particularly  in  the  areas  of  restructuring   private  enterprises  and
     reforming  the  banking  and  financial  services   industry.   The  Korean
     government  continues to apply pressure to Korean  companies to restructure
     into more  efficient  and  profitable  firms.  The  banking  and  financial
     services  industry  is  currently  undergoing  forced   consolidations  and
     significant   uncertainty   exists  with  regard  to  the  availability  of
     short-term  financing  during the coming  year.  The  Company may be either
     directly or indirectly affected by the situation described above.
                                      F-25
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2001

14. The Korean Economy (cont'd)
    ---------------------------

     The  accompanying   financial   statements  reflect   management's  current
     assessment of the impact to date of the economic situation on the financial
     position  of  the  Company.  Actual  results  may  differ  materially  from
     management's current assessment.

15. Subsequent Events
    -----------------

     On April 24, 2001,  NewState  Capital  obtained W4 billion  ($3,085,229) of
     short-term borrowings due on demand from a financial institution.

     On April  24,  2001,  NewState  Capital  paid  $1,256,259  to  purchase  an
     additional  29.26% of WAC's  common  shares  pursuant to a December 1, 2000
     agreement with WAC  shareholders.  As of April 24, 2001,  NewState  Capital
     owns 49.13% of WAC.

     On May 14, 2001, NewState Capital securitized  $6,843,965 of mortgage loans
     held for sale as of March  31,  2001  through  a  special  purpose  entity.
     NewState  Capital  reported  proceeds of $4,859,236 from the sale of senior
     certificates  and retained the remaining  interest of the mortgage loans as
     credit enhancement of the senior certificates.

     On May 21 and 25, 2001,  NewState Capital obtained W2 billion  ($1,542,615)
     of short-term borrowings due on demand from a financial institution.
                                      F-26
<PAGE>
                         INDEX TO FINANCIAL STATEMENTS OF 1999

                                                                      Page
                                                                      ----

Independent Auditors' Report                                          F-2

Financial Statements:

     Consolidated Balance Sheet as of March 31, 2000                  F-3

     Consolidated Statement of Operations for the Year
      Ended March 31, 2000                                            F-4

     Consolidated Statement of Shareholders' Deficit
      for the Year Ended March 31, 2000                               F-5

     Consolidated Statement of Cash Flows for the
      Year Ended March 31, 2000                                       F-6

     Notes to Consolidated Financial Statements                       F-7



                                      F-1

<PAGE>

                                   YOUNG WHA
                          ERNST & YOUNG INTERNATIONAL

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders
NewState Holdings, Inc.


We  have  audited  the  accompanying  consolidated  balance  sheet  of  NewState
Holdings, Inc. and its subsidiaries (the "Company") as of March 31, 2000 and the
related consolidated  statements of operations,  shareholders'  deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of NewState Holdings,
Inc.  and its  subsidiaries  as of March  31,  2000,  and the  results  of their
operations and cash flows for the year then ended in conformity  with accounting
principles generally accepted in the United States of America.

As described in Notes 1 and 11, the Company is subject to liquidity  risk and it
operates under adverse economic conditions in Korea and the Asia Pacific region.

As  described  in Note 2, the  Company  changed  its  method of  accounting  for
severance and retirement  benefits for NewState  Capital Co., Ltd., a subsidiary
of the Company, effective April 1, 1999.


                                             /S/ YOUNG WHA CORPORATION

June 8, 2000
Seoul, Korea

                                      F-2

<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                 March 31, 2000

<TABLE>
<CAPTION>
                                                                                          U. S. dollars
                                                                                             (Note 2)
                                                                                     -------------------------
ASSETS
<S>                                                                                  <C>
Cash and cash equivalents                                                            $      363,394
Restricted cash (Note 2)                                                                  2,134,601
Interest-bearing deposits with banks                                                      2,071,229
Securities available for sale (Note 3)                                                    2,472,296
Securities held to maturity (Note 3)                                                         66,841
Loans held for investment (Note 4)                                                       15,270,126
                                                                                         ----------
Loans held for sale (Note 4)                                                             11,461,433
Residual interest in securitization (Note 2)                                              7,168,060
Premises and equipment, net                                                                  50,917
Accrued interest receivable                                                                 455,318

Other assets (Note 5)                                                                     4,745,431
---------------------
                                                                                     -------------------
         Total assets                                                                $   46,259,646
                                                                                     ===================

LIABILITIES AND SHAREHOLDERS' DEFICIT

Short-term borrowings (Note 6)                                                       $   30,067,236
Accrued expenses and other liabilities                                                    1,193,857
Long-term debt (Note 7)                                                                  13,437,807
Severance and retirement benefits (Note 2)                                                   20,422
Negative goodwill (Note 2)                                                               11,009,721
                                                                                     -------------------
         Total liabilities                                                               55,729,043
                                                                                     -------------------

Minority interest                                                                           (29,560)

Commitments and contingencies                                                                     -

Shareholders' deficit:
Common stock: $.01 par value;
      40,000,000 shares authorized;
      11,508,684 shares issued and outstanding                                            5,512,480
Preferred Stock:  no par value;
      10,000,000 shares authorized;
      none issued and outstanding
Accumulated deficit                                                                     (14,244,383)
Accumulated other comprehensive loss                                                       (707,934)
                                                                                     -------------------
         Total shareholders' deficit                                                     (9,439,837)
                                                                                     -------------------
         Total liabilities and shareholders' deficit                                 $   46,259,646
                                                                                     ===================

</TABLE>

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

                                      F-3
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
                            Year Ended March 31, 2000


<TABLE>
<CAPTION>
                                                                                        U. S. dollars
                                                                                           (Note 2)
                                                                                   -------------------------
<S>                                                                                <C>
Interest income:
      Loans                                                                        $    11,009,722
      Deposits with banks                                                                2,191,112
                                                                                   ------------------
           Total interest income                                                        13,200,834

Interest expense:
      Short-term borrowings                                                              6,003,369
      Long-term debt                                                                     4,817,814
                                                                                   ------------------
           Total interest expense                                                       10,821,183
                                                                                   ------------------

Net interest income                                                                      2,379,651
Provision for loan losses                                                               (8,852,048)
                                                                                   ------------------
Net interest expense after provision for loan losses                                    (6,472,397)
                                                                                   ------------------

Gain on sale of loans                                                                      212,102

Net loss on disposal of securities available for sale                                   (3,055,412)

Other income and expenses:
      Salaries and employee benefits                                                    (3,024,224)
      General and administration                                                        (3,591,892)
      Provision for severance and retirement benefits                                     (724,267)
      Amortization of negative goodwill                                                  2,754,758

      Other, net                                                                          (547,575)
                                                                                   ------------------
                                                                                        (5,133,200)
                                                                                   ------------------
Loss before cumulative effect of accounting change
  And income taxes                                                                     (14,448,907)

Cumulative effect of accounting change                                                     590,150
Provision for income taxes                                                                       -
Minority interest                                                                           64,354
                                                                                   ------------------
Net loss                                                                           $   (13,794,403)
                                                                                   ==================

Basic and diluted net loss per share of common stock                               $         (1.28)
Average number of shares outstanding                                               ------------------
                                                                                        10,771,245
                                                                                   ==================

</TABLE>

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

                                      F-4
<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
                            Year Ended March 31, 2000

<TABLE>
<CAPTION>

                                                          Additional                                  Accumulated other
                              Capital stock               paid-in           Retained earnings         comprehensive
                              Shares         Amount       capital          (accumulated deficit)      income (loss)       Total
                              ------         ------       -------          ---------------------      -------------       -----

<S>                          <C>             <C>          <C>                 <C>                      <C>            <C>
Balance at April 1, 1999      1,332,482      $  13,325    $       --          $    (449,980)           $     28,840    $ (407,815)
Issuance of common stock     10,176,202        101,762     5,397,393                                             --     5,499,155
Net loss                                                                        (13,794,403)                     --   (13,794,403)
Net change in unrealized loss
  on securities available
  for sale                                                                                                 (223,602)     (223,602)
Foreign currency translation
  adjustments                                                                                              (513,172)     (513,172)
Comprehensive loss                                                                                                    (14,531,177)
Balance at March 31, 2000    11,508,684      $ 115,087    $5,397,393          $ (14,244,383)            $  (707,934)   (9,439,837)


</TABLE>

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

                                      F-5
<PAGE>

<TABLE>
<CAPTION>

                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            Year Ended March 31, 2000
                                                                                       U.S. dollars
                                                                                         (Note 2)
                                                                                   ----------------------
<S>                                                                                <C>
Cash flows from operating activities:
    Net loss                                                                       $         (13,794,403)
    Adjustments to reconcile net loss to net cash used in
    Operating activities:
       Minority interest                                  )                                      (64,354)
       Depreciation and amortization                                                             143,624
       Amortization of negative goodwill                  )                                   (2,754,758)

       Provision for loan losses                                                               8,852,048
      Gain on sale of loans                                                                     (212,102)
      Net loss on disposal of securities available for                                         3,055,412
       sale
       Provision for severance and retirement benefits                                           724,267
      Cumulative effect of accounting change              )                                     (590,150)
       Decrease in accrued expenses and other liabilities )                                   (1,303,672)
       Increase in accrued interest receivable and other  )                                      (11,873)
       assets
                                                                                   ----------------------
Net cash used in operating activities                     )                                   (5,955,961)

Cash flows from investing activities:
   Proceeds from sale of loans                                                                36,830,835
    Decrease in loans, net                                                                    23,318,439
    Decrease in interest bearing deposits with banks                                           2,769,882
   Proceeds from sale of securities available for sale                                         8,814,197
   Purchase of securities available for sale              )                                   (3,032,558)

    Others                                                )                                    1,554,574
                                                                                   ----------------------
Net cash provided by investing activities                                                     70,255,369

Cash flows from financing activities:
    Decrease in short-term borrowings, net                )                                  (33,678,770)
    Proceeds from issuance of common stock                                                     5,251,655
   Proceeds from issuance of long-term debt                                                    1,713,062
    Payment on long term-debt                             )                                  (64,734,695
                                                                                   ----------------------
Net cash used in financing activities                     )                                  (91,448,748
Effect of exchange rate changes on cash                                                           18,016
                                                                                  ----------------------

Net decrease in cash and cash equivalents                 )                                  (27,131,324)

Cash and cash equivalents at beginning of year                                                27,494,718
                                                                                   ----------------------
Cash and cash equivalents at end of year                                           $             363,394
                                                                                   ======================

Supplemental cash flow information:
    Cash paid for interest                                                         $          10,844,559
                                                                                   ======================
    Cash paid for income taxes                                                     $                   -
                                                                                   ======================

Non-cash investing and financing activities:
   Residual interest retained in loans securitized                                 $           7,168,060
                                                                                   ======================
   Loans transferred to held for sale                                              $          11,461,433
                                                                                   ======================
   Mortgage loans assumed                                                          $           2,166,066
                                                                                   ======================
   Unrealized loss on securities available for sale,
     Accounted for as comprehensive income                                         $             223,602
                                                                                   ======================

</TABLE>

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

                                      F-6

<PAGE>
                    NEWSTATE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 2000


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

      The accompanying  financial statements report the consolidated accounts of
      NewState Holdings,  Inc. (formerly Racom Systems, Inc., the "Company") and
      its wholly-owned subsidiaries, NSK Holdings, Inc. (a Delaware corporation,
      "NSK"), Racom Systems, Inc. (a Colorado corporation),  and its 99.6% owned
      and newly  acquired  subsidiary,  NewState  Capital  Co.,  Ltd.  (a Korean
      corporation,  "NewState  Capital").  As described  below,  the Company has
      treated  the  transaction  as  a  reverse  acquisition.  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.

      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, (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 filed a Certificate
      of Dissolution  with the New York Department of State on December 29, 1999
      and is currently in the process of winding up its affairs and distributing
      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  acquisition  as a purchase under a reverse
      acquisition  procedure whereby NewState Capital's  operations and retained
      earnings are reported as continuous.  The proforma  results of operations,
      assuming  the   acquisition  had  occurred  on  April  1,  1999,  are  not
      significantly different from the reported result 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  loan  receivable  due from  NewState
      Capital.

      As a result of the purchase, the following purchase price adjustments were
      recorded as of December 9, 1998 in NewState Capital's financial statements
      (Korean won in thousands):
                                                       Increase (decrease)
                                                       --------------------
     Interest-bearing deposits with banks              $            6,331
     Securities held to maturity                                    3,426
     Loans                                                     (2,341,422)
     Accrued interest receivable                                  (84,967)
     Long-term debt                                                93,868
     Premises and equipment                                      (164,579)

     The  negative  goodwill  resulting  from  the  purchase  price  adjustments
     amounted to  $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.

                                      F-7
<PAGE>

     Liquidity Risk

     A significant portion of the Company's liabilities are short-term or due on
     demand,  whereas most of its assets are long-term loans or investments.  In
     order to meet its obligations and sustain its operations,  the Company must
     generate   sufficient   cash  flow  through   refinancing   of  borrowings,
     collections  on or sale of loans,  sale of securities,  or through  capital
     contributions.

2.   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  year-end  exchange  rate of W1,108.0 to US$1 for assets and
     liabilities  and a weighted  average  exchange rate of W1,167.5 to US$1 for
     income and expenses. The resulting translation  adjustments are recorded as
     a component of comprehensive income in shareholders' equity.

     Accounting Change

     Prior to April 1, 1999,  NewState  Capital  accounted for the severance and
     retirement benefits under SFAS No. 87 "Employers' Accounting for Pensions"

     Effective from April 1, 1999,  NewState  Capital  accounts for its employee
     severance and retirement  benefits  liability in accordance with EITF Issue
     88-1, as the obligation  arising from services performed to and at rates of
     pay in effect at the fiscal year end,  since the severance  and  retirement
     benefits are  different  from the pension  plans  prevailing  in the United
     States of America. The differences are as follows:

     The severance and retirement benefits are lump-sum payment obligations upon
     termination of employment;  the payment amount of the benefit is determined
     based on the  service  years  and  rates of pay at the  termination.  Also,
     employees,  at their option, become entitled to request advance payments of
     accrued severance and retirement benefits while being continuously employed
     by the same employer.  In this case, the service period of those  employees
     begins from the date of the advance payments.

     The cumulative  effect of the accounting change above amounting to $590,150
     was credited to income (there is no tax effect attributable to the change).

     The  following  pro forma results  reflect the  assumption  of  retroactive
     application of the new method to NewState Capital:

                                                              Year ended
                                                            March 31, 1999
                                                         -----------------------
     Net loss                                                  $  (2,308,026)
     Earnings per share of common stock                        $       (4.64)

     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 reserve and fair value of residual
     interests in securitization.  Actual results reported may differ from these
     estimates.

                                      F-8
<PAGE>

     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.

     Restricted Cash

     Bank deposits  amounting to  approximately  $1,773,590 have been pledged as
     collateral for certain short-term borrowings and long-term debt as of March
     31,  2000.  In addition,  bank  deposits  amounting  to $361,011  have been
     pledged as collateral for mortgage loans sold through  securitization as of
     March 31, 2000.

     Securities Held to Maturity and Available for Sale

     Investments  for which the Company has the  positive  intent and ability to
     hold to maturity are reported at amortized cost.

     Securities available for sale consist of certain equity and debt securities
     which  management  believes  could be sold in response to changes in market
     conditions or other factors. Unrealized holding gains or losses, net of tax
     if applicable, are included as a component of other comprehensive income in
     shareholders' equity until realized.

     Realized gains and losses on the sale of securities  available for sale are
     determined using the specific-identification method.

     Declines   in  the  fair   value   of   individual   held-to-maturity   and
     available-for-sale  securities  below their cost that are  determined to be
     other than temporary result in write-downs of the individual  securities to
     their fair value.  The related  write-downs  are  included as losses in the
     statement of operations.

     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 one family residential real estate
      located within and 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.

                                      F-9
<PAGE>
      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 Interest 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.

     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
     14% 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

                                      F-10
<PAGE>

     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 of 2% which  results in
     constant  default rate of  approximately  1%. 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.

     Foreclosed Real Estate

     Real estate acquired  through loan  foreclosure is to be sold and initially
     carried  at fair  value,  minus  estimated  costs  to  sell at the  date of
     foreclosure.  Valuations  are  periodically  performed by management and an
     allowance for loss is established by a charge to operations if the carrying
     value of a property exceeds its fair value,  minus estimated costs to sell.
     Foreclosed  real  estate  amounting  to  $4,626  as of March  31,  2000 was
     included in other assets in the accompanying balance sheet.

     Premises and Equipment

     Premises,  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
     declining-balance  method over the  estimated  useful  lives of the assets,
     which range from three to eight years for office  furniture,  equipment and
     leasehold  improvements.  Deprecation  expense for the year ended March 31,
     2000 amounted to $143,624 and  accumulated  depreciation  at March 31, 2000
     amounted to $283,921.

     Severance and Retirement Benefits

     In accordance  with the Korean Labor  Standards Law and NewState  Capital's
     regulations,  terminating  employees  with at least one year of service are
     entitled to severance and retirement  benefits based on the rates of pay in
     effect at the time of  termination,  years of  service  and  certain  other
     factors.  NewState  Capital  provides  for  this  liability  at  an  amount
     sufficient  to  state  the  estimated   obligation  arising  from  services
     performed  to and at rates of pay in effect at year  end.  Funding  of this
     liability is not required by Korean law.

     In accordance with the Korean National  Pension Law,  NewState  Capital has
     prepaid a portion of its severance and  retirement  benefits  obligation to
     the Korean  National  Pension  Corporation  at the rate of three percent of
     payroll expense.  Such  prepayments  amounting to $10,128 at March 31, 2000
     have been offset  against  NewState  Capital's  liability for severance and
     retirement  benefits.  In accordance with a revision of the Korean National
     Pension Law, these  prepayments are no longer  required  effective April 1,
     1999.

     In order to obtain tax benefits,  NewState Capital funded its severance and
     retirement  benefits obligation by depositing with life insurance companies
     the  amount  of  $49,477  as of March 31,  2000,  and  nominating  NewState
     Capital's employees as beneficiaries of these deposits.  Accordingly,  this
     amount has been offset against NewState Capital's  obligation for severance
     and retirement benefits.

     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.

                                      F-11
<PAGE>

     Income Taxes

     The Company uses the liability method in accounting for income taxes, which
     reflects the tax effect of tax loss carryforwards and temporary differences
     between the tax basis of assets and liabilities and their reported  amounts
     in  the  accompanying   financial  statements.   Deferred  tax  assets  and
     liabilities  are measured using the enacted tax rates and laws that will be
     in effect when the differences are expected to reverse.

     A valuation allowance is provided on deferred income tax assets where it is
     more likely than not that such assets will not be realized.

     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.

     Comprehensive Income

     The Company has adopted  Statement of Financial  Accounting  Standards  No.
     130, "Reporting  Comprehensive  Income",  which defines and establishes the
     standards for reporting comprehensive income.  Comprehensive income for the
     Company  includes net income,  the change in unrealized gains and losses on
     available for sale securities and foreign currency translation adjustments.
     The  Company  has  presented  these  items in the  statement  of changes in
     shareholders' equity.

3.   Securities
     ----------

     Securities available for sale at March 31, 2000 are as follows:

                                                   Gross
                                                 unrealized
                                 Cost              losses         Fair value
                          -------------      ----------------   ----------------
Equity securities         $   2,695,898         $   223,602      $   2,472,296
-----------------         -------------         ------------     ---------------

     Certain  securities  available  for sale  amounting  to  $84,856  have been
     pledged as collateral for certain short-term borrowings and long-term debt.

     Securities held to maturity at March 31, 2000 consist of Korean  government
     bonds amounting to $66,841, which have a fair value of $58,593.

     During the  period  ended  March 31,  2000,  the  Company  sold  securities
     available for sale  amounting to  $11,869,609  for  $8,814,197 and realized
     gains and losses of $263,851 and $3,319,263, respectively.

                                      F-12
<PAGE>

     The scheduled  maturities of debt securities  held-to-maturity at March 31,
2000 are as follows:

<TABLE>
<CAPTION>

                                                                        Amount
                                                  ----------------------------------------------------
                                                           Cost                     Fair value
                                                  -----------------------     ------------------------
<S>                                               <C>                         <C>
Due in one year or less                           $              33,949       $                33,896
Due from one to five years                                       15,988                        11,795
Due from five to ten years                                       16,904                        12,902
                                                  ----------------------      ------------------------
                                                  $              66,841       $                58,593
                                                  ======================      ========================

</TABLE>

4.   Loans
     -----

     Loans held for investment at March 31, 2000 are as follows:

<TABLE>
<CAPTION>

                                                                        Allowance for          Balance at
                                                     Principal           loan losses         March 31, 2000
                                               -------------------   -------------------   ----------------
     <S>                                       <C>                   <C>                   <C>
     Loans held for investment                 $        23,404,996   $         8,134,870   $        15,270,126
     ---------------------------------------------------------------------------------------------------------

</TABLE>

     Loans  held  for   investment   consist  of   residential   mortgage  loans
     (approximately  63%) and  commercial  and consumer  loans  (approximately
     37%) at March 31, 2000.


                                      F-13
<PAGE>

     Activity in the allowance for loan losses is summarized as follows:

                                                         Amount
                                                 -----------------------
Balance at beginning of year                      $                   -
Provision for loan losses                                     8,134,870
-------------------------                                     ---------
                                                  ----------------------
Balance at end of year                            $           8,134,870
----------------------                                        ---------
                                                  ======================

     Provision  for loan losses in the  accompanying  consolidated  statement of
     operations  amounting to $8,852,048 includes provision for accrued interest
     on loans amounting to $717,178.

     Non-accrual loans in loans held for investment  totaled $8,376,014 or 35.8%
     of the total loans held for  investment at March 31, 2000.  The Company has
     not recognized any interest income related to the non-accrual  loans during
     the year ended March 31, 2000.

     Impaired  loans  (commercial  and  consumer  loans)  at the end of the year
     totaled  $2,031,893  in principal  balances and the average  impaired  loan
     balances totaled  $6,648,454  during the fiscal year.  Interest income that
     would have been recorded for impaired loans amounted to $464,803 during the
     fiscal year.  Non-accrual  residential real estate loans are not treated as
     impaired loans since mortgaged  collateral can be foreclosed to recover the
     loan amounts to the adequate extent.

     Scheduled  maturities of loans held for investment at March 31, 2000 are as
follows:

                                                       Amount
                                                       ---------
Due in one year or less                              $ 2,908,137
Due from one to five years                             4,657,968
Due from five to ten years                             5,372,226
Due after ten years                                   10,466,665
                                               ------------------
                                                    $ 23,404,996
                                               ==================

     On March 31, 2000, the Company reclassified $11,461,433 of residential real
     estate loans from loans held for  investment  to loans  available for sale,
     which are  recorded at the lower of cost or  estimated  market value in the
     aggregate.
                                      F-14
<PAGE>

     Certain loans held for  investment  and mortgage  loans  available for sale
     amounting to $10,264,660  are pledged as collateral for certain  short-term
     borrowings and long-term debt.

5.   Other assets
     ------------

     Other assets as of March 31, 2000 consist of the following:

                                                             Amount
                                                             ------
     Prepayment for purchase of real estate asset       $   2,643,646
     Guarantee deposits                                     1,297,596
     Others                                                   804,189
                                                        -------------
                                                        $   4,745,431
                                                        =============

6.   Short-term Borrowings
     ---------------------

     Short-term borrowings at March 31, 2000 consist of the following:

                                             Annual interest
                                                rates (%)         Amount
                                           -----------------   -----------------
    General term borrowings                     9.2 - 13.4     $    1,637,633
    Notes with short-term finance companies    12.8 - 13.7         28,429,603
                                                               -----------------
                                                               $   30,067,236
                                                                ================

     Certain bank deposits,  loans held for investment,  mortgage loans held for
     sale and  securities  available for sale 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  renewals of existing  borrowing
     arrangements.

                                      F-15
<PAGE>

     Maximum and average  borrowings and the weighted  average  interest rate on
     short-term borrowings for the year ended March 31, 2000, are as follows:

                                                             Amount
                                                    -------------------------
Maximum borrowings                                       $      68,107,401
Average borrowings outstanding                           $      58,863,738
Weighted average interest rate per annum                            10.81%

7.   Long-term Debt
     --------------

     Long-term debt at March 31, 2000 is comprised of the following:

                                      Reference                  Amount
                                  ------------------     -----------------------
Debentures                               (A)                 $       7,661,633
Bank loans                               (B)                         5,776,174
                                                         ----------------------
                                                             $      13,437,807
                                                         ======================


(A) Debentures outstanding at March 31, 2000 are comprised of the following:

<TABLE>
<CAPTION>

                                                            Annual interest
                                      Maturity date            rates (%)               Amount
                                    -------------------   --------------------  ----------------------
<S>                                   <C>                        <C>               <C>
Collaterized debentures                May 5, 2000               11.0              $      4,512,635
Non-collaterized debentures           June 29, 2001              10.5                     3,158,845
                                                                                --------------------
                                                                                          7,671,480
Less: discounts                                                                             (9,847)
                                                                                --------------------
                                                                                   $      7,661,633
                                                                                ====================

</TABLE>

(B) Bank loans at March 31, 2000 are comprised of the following:

<TABLE>
<CAPTION>
                                                        Annual interest
                                 Maturity date             rates (%)                  Amount
                            ------------------------ ----------------------  -------------------------
<S>                            <C>                           <C>                <C>
Hanareum Merchant Bank
                               January 14, 2002              14.5               $         3,610,108
Ssangyong Fire and Marine
    Insurance                   March 25, 2003               10.25                        2,166,066
                                                                             -----------------------
                                                                                $         5,776,174
                                                                             =======================

</TABLE>
                                      F-16

<PAGE>

     Certain bank  deposits and financial  assets are pledged as collateral  for
     the  collateraized  debentures  and the loan  payable to Hanareum  Merchant
     Bank.

     In March 2000, the Company  entered into an agreement to purchase an office
     building  located  in  Seoul,   Korea  for  $3,068,592.   A  prepayment  of
     $2,643,646,  included  in  other  assets,  was  made in cash  amounting  to
     $477,581 and by assuming the Ssangyong Fire and Marine  Insurance  mortgage
     loan on the property amounting to $2,166,066.

     The maturities of long-term debt  outstanding at March 31, 2000,  excluding
     discounts on debentures, are as follows:

<TABLE>
<CAPTION>

                         Debentures                   Bank
                        (par value)                  loans                     Total
                -----------------------  -------------------------    ----------------------
<S>             <C>                      <C>                          <C>
2000            $            5,856,579   $         1,299,639          $           7,156,218
2001                         1,805,054             2,743,682                      4,548,736
2002                                 -             1,732,853                      1,732,853
                -----------------------  -------------------------    ----------------------
                $            7,661,633   $         5,776,174          $          13,437,807
                =======================  =========================    ======================

</TABLE>

8.   Financial Instruments
     ---------------------

     The  Company  estimates  the fair  value  of  financial  instruments  using
     available market information and appropriate  valuation  methods.  However,
     considerable  judgment is necessarily  required to interpret market data to
     develop the estimates of fair value.  Accordingly,  the estimates presented
     herein are not necessarily indicative of the amounts that could be realized
     in a current market exchange.  The use of different  market  assumptions or
     estimation  methods may have a material  impact on the estimated fair value
     amounts.
                                      F-17

<PAGE>

     The estimated  fair values of the  Company's  financial  instruments  as of
March 31, 2000 are as follows:

<TABLE>
<CAPTION>

                                                                    Korean won in thousands
                                                        ------------------------------------------------
                                                               Book                      Fair
                                                              value                     Value
                                                        -------------------    -------------------------
  <S>                                                        <C>                     <C>
  Financial assets:
    Cash and cash equivalents                                $     363,394           $      363,394
    Restricted cash                                              2,134,601                2,134,601
    Interest-bearing deposits with banks                         2,071,229                2,071,229
    Securities available for sale                                2,472,296                2,472,296
    Securities held to maturity                                     66,841                   58,593
    Loans held for investment                                   15,270,126               15,219,218
  ---------------------------                                   ----------               ----------
    Loans held for sale                                         11,461,433               12,415,864
    Residual interest in securitization                          7,168,060                7,168,060
    Accrued interest receivable                                    455,318                  455,318
  Financial liabilities:
    Short-term borrowings                                       30,067,236               30,067,236
    Long-term debt                                              13,437,807               13,846,573

</TABLE>

     The following methods and assumptions were used in estimating the Company's
     fair value disclosures for financial instruments:

                                      F-18
<PAGE>

     Cash and cash  equivalents:  The  fair  value of cash and cash  equivalents
     approximates the carrying value reported in the balance sheet.

     Restricted  cash:  The  fair  value of  restricted  cash  approximates  the
     carrying value reported in the balance sheet.

     Interest-bearing  deposits with banks:  The fair value of  interest-bearing
     deposits with banks approximates the carrying value reported in the balance
     sheet.

     Securities  available  for sale  and  held to  maturity:  Fair  values  for
     securities are based on quoted market prices.

     Loans held for  investment  and sale:  Fair values for loans are  estimated
     using discounted cash flows analysis using interest currently being offered
     for loans with similar term to borrowers of similar  credit  quality.  Fair
     values for impaired loans are estimated using discounted cash flow analysis
     or underlying collateral values, where applicable.

     Residual interests in securitizations: The fair value of residual interests
     in  securitizations  is determined by calculating  the net present value of
     estimated  future cash flows using a discount  rate  commensurate  with the
     risks involved.

     Accrued  interest  receivable:  The  carrying  value  of  accrued  interest
receivable approximates its fair value.

     Short-term  borrowings:  The carrying  value  reported in the balance sheet
     approximates  fair value as the  short-term  borrowings are due upon demand
     and bear interest at a rate that approximates current market interest rates
     for similar type short-term borrowings.

     Long-term  debt:  The  fair  value  of  long-term  debt  is  determined  by
     discounting  the expected cash payments at the current market interest rate
     over the term of long-term debt.

                                      F-19
<PAGE>

9.   Capital Stock
     -------------

     The following  table  illustrates the computation of basic and diluted loss
per share:

     Numerator:
       Net loss                                            $  (13,794,403)
     Denominator for basic and diluted loss per share:
       Weighted-average common shares outstanding              10,771,245
                                                           --------------
     Basic and diluted loss per share                      $        (1.28)
                                                           ==============

         The  weighted-average  common shares  outstanding are calculated giving
retroactive  effect, to April 1, 1999, of the Racom shares outstanding as of the
July 20, 1999 exchange transaction.


10.  Income Taxes
     ------------

     At March 31, 2000 the Company has Net Operating Loss ("NOL")  carryforwards
     for U.S.  federal  income tax  purposes  and Korean  income tax purposes of
     $300,954  which will expire in the years 2007 through  2019 and  $2,246,694
     which will expire in the years 2004 through 2005, respectively.

     Temporary  differences and tax loss  carryforwards  that comprised deferred
     income tax assets and liabilities were as follows:

     Loss carryforwards                          $            1,822,002
                                                              ---------
     Impaired loans                                             642,995
     Severance and retirement benefits                           82,651
                                                    --------------------
     Deferred income tax assets                               2,547,648
                                                              ---------
     Valuation allowance                                     (2,547,648)
                                                             -----------
                                                    --------------------
     Net deferred income tax assets              $                    -
                                                    ====================

     A full  valuation  allowance  was  provided  since  the  Company  does  not
     anticipate taxable income in the foreseeable future.

                                      F-20
<PAGE>

11. The Korean economy:
    -------------------

     From the fourth quarter of 1997, the effects of adverse economic conditions
     in the Republic of Korea included national  liquidity  crisis,  significant
     depreciation  of the value of the  Korean  won,  higher  domestic  interest
     rates,  reduced  opportunities  for  refinancing of maturing  debts,  and a
     general  reduction in spending  across the  country.  In order to partially
     address  this  situation,  the  Government  of the Republic of Korea sought
     assistance  from  the   International   Monetary  Fund  and  implemented  a
     comprehensive policy package intended to address the structural  weaknesses
     in the Korean economy and financial sector.  While the reform policies were
     intended to alleviate the economic  crisis in Korea and improve the economy
     over time, the effects  included,  among others,  slower economic growth, a
     reduction in  availability  of credit,  volatility  in interest  rates,  an
     increase in the number of bankruptcies of Korean companies and individuals,
     and labor unrest  resulting  from the increase in  unemployment.  While the
     Korean economy has recently shown signs of  improvement,  the effect on the
     Company's  financial  position of future  developments  with respect to the
     Korean economy can not presently be determined.

                                      F-21
<PAGE>


                                   SIGNATURES

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

                                      NEWSTATE HOLDINGS, INC.

                                          ERNEST B. KIM
                                      By: ________________________________
                                          Ernest B. Kim
                                          Chairman of the Board

Dated:  June 29, 2001

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

<TABLE>
<CAPTION>

   SIGNATURE                                  TITLE                           DATE
   ---------                                  -----                           ----
<S>                                 <C>                                   <C>

ERNEST B. KIM                        Chairman of the Board,               June 29, 2001
-------------------------------         President and CEO
Ernest B. Kim

JIN K. KIM                          Vice President, Secretary             June 29, 2001
-------------------------------           and Director
Jin K. Kim

SUN W. YOUNG                                Director                      June 29, 2001
-------------------------------
Sun W. Young

A. SUNGIL NOH                               Director                      June 29, 2001
-------------------------------
A. Sungil Noh

</TABLE>