THE FOLLOWING ITEMS WERE THE
                                                    SUBJECT OF A FORM 12b-25 AND
                                                    ARE INCLUDED HEREIN: ITEMS 6
                                                    AND 7 AND PORTIONS OF ITEMS
                                                    1 AND 13


                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                             -----------------------
                                   FORM 10-KSB/A

                                AMENDMENT NO. 1

(Mark One)

[_X_]    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934.

For the fiscal year ended:          March 31, 2000

                                       OR

_____    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934.

For the transition period from _____ to _____

                         Commission file number 0-21907

                             NEWSTATE HOLDINGS, INC.
--------------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

                  Delaware                              84-1182875
------------------------------------------         ---------------------------
(State or Other Jurisdiction of                     (I.R.S. Employer
Incorporation or Organization)                     Identification No.)

156 West 56th Street, Suite 2005
         New York, New York                                10019
------------------------------------------         --------------------------
(Address of Principal Executive Offices)           (Zip Code)


                                 (212) 245-5801
--------------------------------------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)


         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

         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.
[_X_] Yes [___] 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, 2000 was $13,200,834.

         The aggregate  market value of the common stock of the registrant  held
by non-affiliates  as of June 27, 2000 was  approximately  $3,684,118  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, 2000 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 [_X_]

                       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.

         This form  10-KSB/A  amends the Report on 10-KSB of NewState  Holdings,
Inc. dated June 29, 2000, previously filed with the Commission.


<PAGE>

<TABLE>
<CAPTION>

                                TABLE OF CONTENTS

                                                                                 Page
PART I                                                                          -------

<S>                                                                             <C>
Item 1. Description of Business                                                 4
Item 2. Description of Properties                                               14
Item 3. Legal Proceedings                                                       14
Item 4. Submission of Matters to a Vote of Security Holders                     15

PART II


Item 5. Market for Common Equity and Related Stockholder Matters                15
Item 6. Management's Discussion and Analysis or Plan of Operation               17
Item 7. Financial Statements                                                    17
Item 8. Change In and Disagreements With Accountants on Accounting
         and Financial Disclosure                                               17

PART III


Item 9. Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act                      18
Item 10. Executive Compensation                                                 20
Item 11. Security Ownership of Certain Beneficial Owners and Management         21
Item 12. Certain Relationships and Related Transactions                         23
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K        23

SIGNATURES


</TABLE>


                    Statement Regarding Forward-Looking Statements

                    Statements   contained  in  this  document   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  certain  risks and
uncertainties  that  could  cause  actual  results  to  differ  materially  from
anticipated results.  These risks and uncertainties include, but are not limited
to,  regulatory  constraints,  changes  in laws  or  regulations  governing  the
Company's products, services and international trade, the ability of the Company
to market successfully its products and services 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 and the  specific  global  markets  in which the  Company
competes,  the  availability of financing from internal and external sources 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 could also cause actual  results to
vary  materially  from  the  future  results  covered  in  such  forward-looking
statements.   The  Company   assumes  no   obligation   for  updating  any  such
forward-looking statements at any time.

         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
Korea. We were originally incorporated under the name Racom Systems, Inc. in the
State of Delaware on June 3, 1991 and in  September  1999 we changed our name to
NewState Holdings, Inc. The Company has 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 is to expand  NewState  Capital's
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 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  74.2 billion
Korean Won (US$67 million) in residential  mortgage assets as of March 31, 2000.
We expect our mortgage loan  portfolio to expand to be about 200 billion  Korean
Won (US$180  million) by the end of our 2000  fiscal year (March 31,  2001).  We
anticipate  that NewState  Capital will build an additional  five branch offices
besides  the  corporate  headquarters  in Seoul,  Korea and the other six branch
offices,  and plan to have one regional office in each major  metropolitan  area
throughout  Korea  within  fiscal year 2000.  We expect that the total number of
branch offices in Korea will be 15 and 150  additional  full time employees will
be hired in the same time period. This aggressive  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. 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 (the "Acquisition Agreement"), 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.

                  As a result of the Acquisition Agreement, (i) NewState Capital
became a 99.6% owned  subsidiary of NSK, our wholly-owned  subsidiary,  and (ii)
NewState  NY  became  the  owner  of  approximately  80%  of our  common  stock.
Immediately  following the reverse acquisition,  we revised our business plan to
focus on the residential mortgage lending business of NewState Capital.

                  OUR MORTGAGE BUSINESS


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


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


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


                  -    servicing    -   ongoing    billing,    collection    and
foreclosure/collateral management.


                  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.

                  Mortgage Products

                  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:

                           -        employment and income;

                           -        credit history;

                           -        property value and characteristics; and

                           -        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.

                  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
2000.  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  74.2 billion
Korean Won (US$70 million) in residential  mortgage assets as of March 31, 2000.
We expect our mortgage loan  portfolio to expand to be about 200 billion  Korean
Won (US$180  million) by the end of our 2000 fiscal year (March 31,  2001).  The
following  table sets forth the geographic  distribution by province of NewState
Capital's loan originations as of March 31, 2000.

<TABLE>
<CAPTION>


                           DISTRIBUTION BY PROVINCE OF

                      NEWSTATE CAPITAL'S LOAN ORIGINATIONS

                                 March 31, 2000

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


          Region              Number of   % of          Total Principal    TPB in US Dollars     % of TPB
                               Assets       Assets      Balance ("TPB")
                                                        in Korean Won
<S>                            <C>         <C>         <C>                   <C>                     <C>
-----------------------------------------------------------------------------------------------------------
                  Seoul           352      11.26       W14,305,748,186       $12,911,325             19.28
-----------------------------------------------------------------------------------------------------------
                  Pusan           237       7.58         5,420,483,134         4,892,133              7.31
-----------------------------------------------------------------------------------------------------------
                  Taegu           917      29.33        21,547,261,539        19,446,987             29.04
-----------------------------------------------------------------------------------------------------------
                In-Chon           135       4.32         3,068,049,173         2,768,997              4.13
-----------------------------------------------------------------------------------------------------------
            Kyung-Gi Do           505      16.15        11,547,209,833        10,421,670             15.56
-----------------------------------------------------------------------------------------------------------
       Kyungsang Nam Do           339      10.84         6,872,265,001         6,202,405              9.26
-----------------------------------------------------------------------------------------------------------
      Kyungsang Book Do           155       4.96         2,914,641,323         2,630,543              3.93
-----------------------------------------------------------------------------------------------------------
           Junla Nam Do            56       1.79           927,483,756           837,079              1.25
-----------------------------------------------------------------------------------------------------------
          Junla Book Do            69       2.21         1,225,861,873         1,106,374              1.65
-----------------------------------------------------------------------------------------------------------
            Kang-Won Do           246       7.87         4,469,856,441         4,034,166              6.02
-----------------------------------------------------------------------------------------------------------
    Choong-Chung Nam Do           104       3.33         1,554,933,963         1,403,370              2.10
-----------------------------------------------------------------------------------------------------------
                 Others            11       0.35           346,673,109           312,882              0.47
-----------------------------------------------------------------------------------------------------------
      Total :                   3,126     100.00       W74,200,467,331       $66,967,931            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.

                  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 development in Korea
of a  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 then 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 the amount not exceeding twenty times of 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 21, 2000,  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 10.17 - 12.61
percent.  With this issuance of  mortgage-backed  securities,  NewState  Capital
became  the  first  issuer of  mortgage-backed  securities  in Korea.  A general
summary of the principal  terms of the MBS  prospectus  and the mechanics of the
securitization itself is discussed below.

         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   increased
participation  by the commercial  banks in the housing loan business is expected
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 bases. In addition,  commercial banks typically have a broad network of
branch offices that are easily located near a prospective borrowers home.

                  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 October 18, 1999, we adopted a fiscal year  consistent with
the fiscal year of NewState Capital, our recently acquired Korean subsidiary. As
a result of this change, our fiscal year now ends on March 31 of each year. This
is  different  from the fiscal  year  reflected  in our prior  filings  with the
Securities and Exchange Commission.

                  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,  as the  independent  accountants  that will  audit our  consolidated
financial statements for the fiscal year ended March 31, 2000.

                  NewState Capital Co., Ltd. (Korea)

                  On December 20,  1999,  Youngnam  Finance Co.,  Ltd., a Korean
specialty-finance  company,  merged into NewState  Capital under the laws of the
Republic of Korea.

                  On March 21, 2000,  NewState  Capital  issued  mortgage-backed
securities ("MBS") 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 as the trustee and back-up  servicer.  NewState  Capital issued
four  tranches  of senior  MBS and one  tranche  of  subordinated  MBS which was
retained by NewState Capital.  The senior tranches of the MBS have a maturity of
1-10 years and an interest rate of 10.17 - 12.61 percent.  With this issuance of
MBS,  NewState  Capital  took the honor of becoming  the first  issuer of MBS in
Korea.

                  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:

                  - new laws or  regulations,  or  different  interpretation  of
existing laws and regulations;

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

                  -  our  ability  to  comply  with  applicable   administrative
requirements; and

                  - 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:

                           - it must maintain a minimum  paid-capital and equity
                           capital in the amount of twenty (20)  billion  Korean
                           Won (US$17.9  million)  (NewState  Capital  currently
                           maintains   twenty  four  (24)  billion   Korean  Won
                           (US$21.4 million) of paid-in capital under Korean
                           GAAP accounting);

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

                           - 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:

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

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

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

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

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

                           - 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.

                                    EMPLOYEES

                  At  March  31,  2000,  we  employed  a total  of 34 full  time
employees and 50 commission-based  sales managers. Of these full-time employees,
32 are based in Korea  and 2 are 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 lease our principal  executive offices located in
Seoul,  Korea  and New York  City.  NewState  Capital  has  entered  into  lease
arrangements  with  Dongsuh  Securities  Co.  for the Seoul  office  and we have
entered into lease  arrangements  with Ombu  Securities  Corporation for the New
York office.  The lease with Dongsuh  Securities Co. is for approximately  1,368
square meters of commercial  space located at 826-24,  Yoksam-Dong,  Kangnam-Gu,
Seoul, Korea.

                  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,  Taeguseo,  Changwon,  Jinju,  Pusan 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
Sanyong  Insurance Co. for the purchase of an office building  located in Seoul,
Korea for 3.4 billion Korean Won (US$3 million).  NewState Capital will maintain
its principal  executive  offices in 3,204 square meters of commercial  space at
this new  location.  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 plan to move into the new
office space on July 7, 2000.

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 1999 fiscal year ending on March 31, 2000.
Previous  submissions  to a vote of  security  holders in the last three  fiscal
quarters of our 1999 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."

                  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


1998              1Q (1/1 - 3/31)           $149.7656                  $84.375
                  2Q (4/1 - 6/30)           $118.125                   $78.0469
                  3Q (7/1 - 9/30)           $84.375                    $35.8594
                  4Q (10/1 - 12/31)         $59.0625                   $12.6562


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



                  HOLDERS

                  As of March 31,  2000,  there were 48 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, 2000,  1999 and 1998
as a result of its shareholder equity being less than paid-in capital in each of
those three fiscal years.

                  In  the  event  that  NewState  Capital's  shareholder  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.  In the
event that NewState  Capital is permitted by Korean law to pay dividends and all
required corporate approvals are obtained, then dividends would be paid to us in
Korean Won after  payment  by  NewState  Capital  of  certain  of its  corporate
expenses and then converted by us into U.S. Dollars. It is the Company's present
policy, however, to not pay cash dividends on its common stock.

                  The ability of NewState  Capital to declare and pay  dividends
to its shareholders is further  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

                  On January 31, 2000,  the Company  issued 10,000 shares of its
common stock,  $0.01 par value per share,  at a price of $1.50 per share, to one
(1) Korean  individual,  pursuant to an exemption  from  registration  under the
Securities Act provided by Section 4(2) thereunder and Regulation S. Proceeds of
the  offering,  totalling  $10,000  were  used for the  payment  of  outstanding
liabilities and for general overhead expenses.  Sales of unregistered  shares in
the last  three  fiscal  quarters  of our 1999  fiscal  year have  already  been
reported in our quarterly filings.

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

                       MANAGEMENT DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


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.

The fiscal year ended March 31,  2000  ("Fiscal  1999") was the first year since
its acquisition that the Company was able to resume normal business  activities.
The  Company  restructured  its  systems of  operations  and  processes  with an
emphasis on  efficiently  originating,  underwriting  and  servicing  investment
quality  residential  mortgage  loans.  On March 20,  2000,  the Company  issued
through  a  special  purpose  entity  (SPE)  mortgage-backed  securities  in the
principal amount of $38.8 million and became the first issuer of mortgage-backed
securities in Korea.  The Company  services the MBS, taking  responsibility  for
collecting on delinquent  loans and recovering on defaulted  loans.  The Company
intends to enter the public mortgage-backed  securitization market on a periodic
basis.

For  Fiscal  1999 the  Company  produced  mortgage  loans in the amount of $22.6
million.  During  Fiscal 1999,  the mortgage loan  portfolio  decreased to $26.1
million,  compared to $98 million in Fiscal 1998.  This decrease in the mortgage
loan  portfolio  was a result of sale of loans  for  issuing  MBS,  prepayments,
partial prepayments and scheduled  amortization of $94.5 million. The prepayment
rate in the servicing  portfolio was 31%. 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 1999 Compared with Fiscal 1998

As a result of the  effects of the  International  Monetary  Fund debt crisis in
Korea,  NewState  Capital and Youngnam  Finance Co.,  since its  acquisition  by
NewState  Capital,  suspended  new loan  production  from December 1997 to April
1999.  With the  acquisition  of  capital  stock  from  NewState  Capital  Corp.
(NewState  Capital  NY) by the Company in December  1999,  NewState  Capital has
revamped its loan origination  procedures,  increased staffing and enhanced loan
origination and servicing software.

The total  volume of loans  produced by the Company in Fiscal 1999 was  $22.6
million, up from $0.28 million in Fiscal 1998.

Total loan production by branch is summarized below:


(Dollar amounts in millions)            Fiscal 1999        Fiscal 1998
------------------------------- -------------------- -------------------
Seoul                                        $15.88               $0.28

Daegu                                         $4.61                 Nil

Pusan                                         $0.35                 Nil

Gwangju                                       $0.43                 Nil

Changwon                                      $0.57                 Nil

Jinju                                         $0.31                 Nil

Seo-Daegu                                     $0.44                 Nil
------------------------------  -------------------- -------------------
TOTAL                                        $22.59               $0.28
==============================  ==================== ===================

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 1998,  only the Seoul and Youngnam
(Daegu) offices existed.

During Fiscal 1999, the Company  received 1,092 new loan  applications  of which
508  were  approved  and  closed.   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 $13.2 million,  or  approximately  21.4%, in Fiscal
1999 from $16.8  million in Fiscal  1998.  The  decrease in  interest  income in
Fiscal 1999,  compared to Fiscal 1998,  was  primarily  due to the lower average
interest rates applied to the loans  originated.  The fall in interest rates was
due to the recovery of the Korean  financial  industry from the IMF Crisis.  The
lower interest income was also due to a decrease of  approximately  61.9 million
in mortgage  loans,  compared to the amount  outstanding  as of March 31,  1999,
reflecting  prepayments  and the transfer of mortgage loans to a special purpose
entity for MBS issuance.

Interest  income on bank deposits  decreased to $2.2 million in Fiscal 1999 from
$3.3  million in Fiscal 1998 due to a decline in cash and bank  deposits to $2.5
million  from  $32.0  million.  Funds from cash and bank  deposits  were used to
retire  long-term debt and short-term  borrowings.  This resulted in decrease in
long-term  debt from $70.5  million as of March 31 ,1999 to $13.4  million as of
March 31, 2000 and in short-term  borrowings from $54.5 million to $30.1 million
for the same period.

Interest Expenses

Interest  expenses  decreased to $10.8 million in Fiscal 1999 from $15.6 million
in Fiscal 1998 due to decrease in outstanding  borrowings.  The Company utilized
funds from early loan  repayments  to reduce total  borrowings to $43 million at
the end of March  31,  2000  from $125  million  at the end of March  31,  1999.
Interest  expenses  decreased  also due to the  Company's  success  in  lowering
average cost of borrowings,  expressed in annual rate, from 13.72% to 11.91% and
this decrease was offset by borrowings assumed with the acquisition of Youngnam.

Net Interest Income

Net interest income  increased to $2.4 million in Fiscal 1999,  compared to $1.2
million in Fiscal  1998.  The  increase  in net  interest  income was due to (i)
additional  interest  income  provided by the  acquisition  of Youngnam and (ii)
lower  interest  expenses  resulted from  decrease in  borrowings  and borrowing
costs, and was offset by (i) lower interest rates on outstanding  loans and (ii)
lower loans outstanding resulted from prepayments.

Provision For Loan Losses

Provision  for loan losses  increased  to $8.9  million in Fiscal 1999 from $1.1
million in Fiscal 1998. This increase is due to additional provision to impaired
corporate  loans,  including an additional $1 million for general  reserve.  The
additional provisions are based on different credit classification and valuation
standard than the one used in Fiscal 1998.

Gain on Sales of Loans

The Company sold mortgage loans amounting to $45.76 million to a special purpose
entity (SPE) in March 2000.  The SPE then issued  senior  certificates  totaling
$36.8 million.  In connection with this  transaction  $0.2 million was accounted
for as gain on sale of loans.  The Company  retained  the  residual  interest in
securitization amounting to $7.13 million.

Total Operating Expenses

Total  operating  expenses  were $7.3 million in the Fiscal  1999,  up from $3.0
million in the Fiscal 1998.  The increase  during Fiscal Year 1999 was primarily
attributed  to  increase  in  salaries,   employee  benefits,  and  general  and
administrative   expenses  due  to  increased  staffing  and  office  expansions
associated with the resumption of normal operations during the Fiscal 1999.

Salaries and Employee Benefits

The Company has increased  staffing  during  Fiscal 1999 in connection  with the
resumption of normal  operations.  Salaries and employee benefits increased 274%
in Fiscal 1999 to $4.0  million  from  $788,550  in the  Fiscal  1998 due to the
acquisition  of Youngnam and an increase of personnel  from 28 to 94,  excluding
personnel on commission basis.

Salaries and related  expenses are  summarized  below for Fiscal 1999 and Fiscal
1998:

(Dollar amounts in thousands)        Fiscal 1999      Fiscal 1998
------------------------------ ------------------ -----------------
Salaries                                  $2,621              $462
Employee Benefits                           $403              $216
Commissions                                 $275                $0
Severance                                   $724               $96
------------------------------ ------------------ -----------------
Total                                     $4,023              $774
============================== ================== =================

Total  salaries,  including  bonuses,  increased  during Fiscal 1999  reflecting
continued expansion of the branch network and the staffing required for a larger
servicing portfolio.  The number of employees and agents increased from 28 as of
March 31, 1999 to 197 as of March 31, 2000.  Commissions during Fiscal 1999 were
paid to sales agents based on the results of new loan production.

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 service.

General and Administration

General and  administration  expense for Fiscal 1999  increased  to $3.5 million
from $1.6 million for Fiscal 1998.  This was primarily due to: (i) the continued
expansion  of  the  branch  network;  (ii)  a  larger  servicing  portfolio  and
expenditure on loan servicing systems; and (iii) higher advertising expenditures
to promote name recognition.

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 is being  amortized at rate of $2.8 million,  at
the current Won:US Dollar exchange rate, each quarter over a 5 year period.

Loss on Sales of Available-for-Sale Securities

The Company  realized a net loss of $3.1 million on  disposition  of  securities
available for sale, of which $1.6 million were in connection with disposition of
720,000 shares of common stock of Chung An Finance Co. As of March 31, 2000, the
Company has a portfolio of available-for-sale  securities totaling approximately
$2.5 million.

Other Income/Expense, net

Other  expenses  recorded  $547,575  in the  Fiscal  1999  whereas  an income of
$148,808 was recordecd in the Fiscal 1998. Other expenses  consist  primarily of
refunds to borrowers for a portion of the increase in interest rates made by the
previous management during IMF crisis in Korea.

Net Income

The Company  recorded a net loss of $13.8  million or $1.28 per share for Fiscal
1999  compared  to a net loss of $2.087  million or $0.22 per share  (based on a
proforma weighted average shares  outstanding of 9,332,482) for Fiscal 1998. The
increase in net loss was  primarily  due to an increase  in  provision  for loan
losses,  loss on disposal of securities  available for sale and higher operating
expenses associated with increased staffing and branch expansion.

LIQUIDITY AND CAPITAL RESOURCES

At  March  31  ,  2000,   the  Company  had  cash  and  cash   equivalents   and
interest-bearing  deposits  totaling  $4.5 million  compared to $32.5 million at
March 31,  1999.  For the  twelve  months  ended  March 31,  2000,  cash used in
operating  activities  of $6.0 million was  primarily due to (i) the net loss of
$13.8 million (ii)  amortization  of negative  goodwill of $2.8  million,  (iii)
provision  for  loan  losses  of $8.8  million,  (iv) net  loss on  disposal  of
securities   available-for-sale  of  $3.0  million,  (v)  cumulative  effect  of
accounting  change of $0.6 million,  and (vi)  decrease in accrued  expenses and
other liabilities of $1.3 million.

Cash provided by investing activities was $70.2 million was primarily due to (i)
proceeds  from sales of loans of $36.8  million  (ii) net  decrease  in loans of
$23.3 million, (iii) decrease in bank deposits of $2.8 million and (iv) sales of
securities  available-for-sale  of $8.8 million and (v) investment of securities
available-for-sale of $3.0 million.

For  Fiscal  1999,  cash  used in  financing  activities  of $91.4  million  was
primarily due to (i) decrease in short-term  borrowings of $33.7  million,  (ii)
payment of long-term  debt of $64.7 million and (iii)  proceeds from issuance of
long-term  debt of $1.7  million and proceeds  from  issuance of common stock of
$5.2  million.  The Company  will  require  additional  capital to continue  its
operations.  The  Company  intends  to  secure  additional  capital  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 to the holders
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 1999,  the Company  received 1,092 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  182 times from  Fiscal  1998 to Fiscal  1999.  This
increase  was  primarily  due to the fact that the Company  resumed its mortgage
origination  in Fiscal 1999.  The  prepayment  rate in the  servicing  portfolio
increased  from Fiscal 1999 to Fiscal 2000.  This was due primarily to increased
refinances as a result of the low of interests.

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  the
Quarterly  Financial  Review issued by Housing & Commercial Bank, as of December
31, 1999, total outstanding balance of mortgage loans in Korea was approximately
US$55  billion,  indicating  5.4%  increase  from  prior  year.  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  70% of the
Company's new originations. The Company is also 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  International  Monetary  Funds  crisis.  The  Company  has striven to
diversity  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 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 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.  The Company assumes no obligation for
updating any such forward-looking statements at any time.


ITEM 7:  FINANCIAL STATEMENTS

                  The financial  statements required pursuant to this Item 7 are
included in this Form 10-KSB/A 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 two most recent fiscal years 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.

                                    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,  2000,  the
names,  ages and  positions  of our  executive  officers  and  directors.  Their
respective backgrounds are described below.

NAME                      AGE       CAPACITIES
----                      ---       ----------


Ernest B. Kim             46        Chairman, President and Chief
                                    Executive Officer of NewState
                                    Holdings, Inc. and NewState Capital
                                    Co., Ltd.

Jin Ki Kim                43        Vice President, Secretary and
                                    Director of NewState Holdings, Inc.
                                    and Director of NewState Capital Co.,
                                    Ltd.

Alexander T. Shang        42        Treasurer and Chief Financial
                                    Officer of NewState Holdings, Inc.

Sun W. Young              51        Independent Director of NewState
                                    Holdings, Inc.

A. Sungil Noh             40        Independent Director of NewState
                                    Holdings, Inc.

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



NAME OF
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 Ki 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.

Alexander T. Shang         From July 1999 until present,  Mr. Shang has
                           been the  Treasurer  and Chief  Financial  Officer of
                           NewState Holdings, Inc. From July 1997 to present, he
                           was  Vice   President  of  GEM  Advisors,   Inc.,  an
                           investment   firm  and  a  member  of  the   National
                           Association of Securities Dealers. From 1994 to 1996,
                           he was Vice President in the Fixed Income  Department
                           and the  Capital  Market  Group-Emerging  Markets  at
                           Furman Selz,  Inc. From 1993 to 1996, Mr. Shang was a
                           Vice  President at Financial  Security  Assurance,  a
                           triple-A mono-line insurance company  specializing in
                           providing  credit  enhancement  in  asset-backed  and
                           municipal bond transactions. Mr. Shang graduated from
                           Columbia  University with a B.A. in Economics in 1979
                           and a B.S. in  Computer  Science in 1981.  Mr.  Shang
                           also  received a M.S. in  Management in 1984 from the
                           Sloan  School  of  Management  at  the  Massachusetts
                           Institute of Technology.

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,   Ernest  &  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..


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 1999
and  1998.  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       YEAR     SALARY     BONUS      OTHER ANNUAL      RESTRICTED     SECURITIES      LTIP            ALL OTHER
   PRINCIPLE                                     COMPENSATION    STOCK AWARD(S)   UNDERLYING      PAYOUTS       COMPENSATION
   POSITION                                                                       OPTIONS/SARs
---------------- -------- ---------- --------- ----------------- ---------------- --------------- ----------- ------------------
---------------- -------- ---------- --------- ----------------- ---------------- --------------- ----------- ------------------
<S>               <C>     <C>           <C>           <C>               <C>             <C>           <C>             <C>
Ernest B. Kim,    1999    $532,881      0             0                 0               0             0               0
CEO and
President
                  1998     $42,000      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.

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

<PAGE>

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.

NAME                                AMOUNT AND NATURE OF               PERCENT
AND ADDRESS                         BENEFICIAL OWNERSHIP               OF CLASS
-----------                         --------------------               --------

NewState Capital Corp.                      8,000,000                    69.51%
c/o NewState Holdings, Inc.                 Direct (1)
156 W. 56th Street, Suite 2005
New York, NY 10019

Ernest B. Kim                               8,000,000                    69.51%
NewState Holdings, Inc.                     Indirect (2)
156 W. Street, Suite 2005
New York, New York  10019

Misoo Kim                                   8,000,000                    69.51%
c/o NewState Holdings, Inc.                 Indirect (3)
156 W. 56th Street, Suite 2005
New York, New York 10019

The Kim Voting Trust                        8,000,000                    69.51%
c/o NewState Holdings, Inc.                 Indirect (4)
156 W. 56th Street, Suite 2005
New York, New York 10019

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

(1) NewState Capital Corp. is a privately-held family corporation. Ernest B. Kim
is the record owner of 20.9% of the outstanding shares of NewState Capital Corp.
Mr. Kim's wife is the record owner of 16.7% of the outstanding shares, and 62.4%
of the  outstanding  shares  are held in a voting  trust for the  benefit of Mr.
Kim's children. Mr. Kim's wife is the trustee of the trust.

(2)  NewState  Capital  Corp.  is the  record  owner  of these  shares  and is a
privately-held  family corporation.  Mr. Kim is the record owner of 20.9% of the
outstanding  shares of NewState Capital Corp. Mr. Kim's wife is the record owner
of 16.7% of the outstanding shares, and 62.4% of the outstanding shares are held
in a voting trust for the benefit of Mr. Kim's  children.  Mr. Kim's wife is the
trustee of the trust.

(3)  NewState  Capital  Corp.  is the  record  owner  of these  shares  and is a
privately-held family corporation.  Mrs. Kim is the record owner of 16.7% of the
outstanding  shares of NewState  Capital Corp.  Mrs. Kim's husband is the record
owner of 20.9% of the outstanding  shares,  and 62.4% of the outstanding  shares
are held in a voting trust for the benefit of Mrs. Kim's  children.  Mrs. Kim is
the trustee of the trust.

(4)  NewState  Capital  Corp.  is the  record  owner  of these  shares  and is a
privately-held  family corporation.  Mr. Kim is the record owner of 20.9% of the
outstanding  shares of NewState Capital Corp. Mr. Kim's wife is the record owner
of 16.7% of the outstanding shares, and 62.4% of the outstanding shares are held
in this voting  trust for the benefit of Mr. Kim's  children.  Mr. Kim's wife is
the trustee of the trust and has the exclusive  power to: (i) vote, or to direct
the voting of, the  securities,  and (ii) dispose,  or to direct the disposition
of, the securities. The voting trust will terminate on July 12, 2009.

         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:

                                    NATURE AND AMOUNT OF
BENEFICIAL OWNER                    BENEFICIAL OWNERSHIP        PERCENT OF CLASS
----------------                    --------------------        ----------------

Ernest B. Kim                               8,000,000                 69.51%
Indirect (1)

All executive officers
and directors as a group                    8,000,000                 69.51%
Indirect (1)

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

(1)  NewState  Capital  Corp.  is the  record  owner  of these  shares  and is a
privately-held  family corporation.  Mr. Kim is the record owner of 20.9% of the
outstanding  shares of NewState Capital Corp. Mr. Kim's wife is the record owner
of 16.7% of the outstanding shares, and 62.4% of the outstanding shares are held
in a voting trust for the benefit of Mr. Kim's  children.  Mr. Kim's wife is the
trustee of the 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.

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

                  EXHIBITS

         2        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)

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

         3.2      Fourth Amended and Restated By-Laws (filed herewith)

         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 filed
                  herewith)

         10.3     Lease  Agreement,  dated May 21, 1998, by and between  Dongsuh
                  Securities  Co. and Dongsuh  Finance Co.,  Ltd.  (now known as
                  NewState Capital Co., Ltd.) (English version filed herewith)

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

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

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

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

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

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

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

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

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

         10.13    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
                  filed herewith)

         10.14    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  filed
                  herewith)

         10.15    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 filed
                  herewith)

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

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

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

         21       List of Subsidiaries (filed herewith)

         23       Consent of Samil Accounting Corporation (filed herewith)

         27       Financial Data Schedule (filed herewith)

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

(1)    Incorporated  by reference to the  Company's  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 the Company's 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

                  * Form 8-K Filed July 21,  1999 - - We  announced  that we had
                  acquired  approximately  99.6% of the issued  and  outstanding
                  capital  stock  of  NewState   Capital  Co.,  Ltd.,  a  Korean
                  corporation,  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
                  Capital Corp, a New York corporation.

                  * Form  8-K/A  filed on  October  1, 1999 - - We  amended  our
                  Report on Form 8-K filed on July 21, 1999 by providing certain
                  financial  statements and pro forma  financial  information of
                  NewState  Capital  Co.,  Ltd.,  our recently  acquired  Korean
                  subsidiary in a reverse  acquisition.  We also  announced that
                  effective  September  15, 1999 we changed our name to NewState
                  Holdings,  Inc.  and  that  at  the  opening  of  business  on
                  September  17,  1999 our new OTC  Bulletin  Board  symbol  was
                  "NSTH".

                  * Form 8-K filed on October 20, 1999 - - We announced  that we
                  had adopted a fiscal year  consistent  with the fiscal year of
                  NewState  Capital  Co.,  Ltd.,  our recently  acquired  Korean
                  subsidiary  in a  reverse  acquisition.  As a  result  of this
                  change, our fiscal year will end on March 31 of each year.

                  * Form 8-K filed on March 28,  2000 - - We  announced  that we
                  had dismissed our independent  auditors,  Arthur Andersen LLP,
                  effective  March 23, 2000, and on that date we appointed Young
                  Wha Corporation ("Young Wha"), the Ernst & Young International
                  member firm in Korea, as our independent auditors.


<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>

                      INDEX TO FINANCIAL STATEMENTS OF 1998

                                                                      Page
                                                                      ----

Independent Auditors' Report                                          F-23

Financial Statements:

     Consolidated Balance Sheet as of March 31, 1999                  F-24

     Consolidated Statement of Operations for the Periods
      December 9, 1998 to March 31, 1999 and from
      April 1, 1998 to December 8, 1998                               F-25

     Consolidated Statement of Cash Flows for the Periods
      December 9, 1998 to March 31, 1999 and from
      April 1, 1998 to December 8, 1998                               F-26

     Statement of Shareholders' Equity for the Periods
      December 9, 1998 to March 31, 1999 and from
      April 1, 1998 to December 8, 1998                               F-27


     Notes to Consolidated Financial Statements                       F-28


                                      F-22

<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
     NewState Capital Co., Ltd., a subsidiary of Newstate Capital Corp. U.S.A.

In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statements  of  operations,  shareholders'  equity  and cash flows
present fairly,  in all material  respects,  the financial  position of Newstate
Capital Co., Ltd. and its  subsidiary  as of March 31, 1999,  and the results of
their  operations  and their cash flows for the periods from December 9, 1998 to
March 31, 1999 (Post-acquisition  period), and from April 1, 1998 to December 8,
1998 (Pre-acquisition period) in conformity with accounting principles generally
accepted in the United States of America.  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 of these  statements in  accordance  with  auditing  standards  generally
accepted in the United  States of America which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audit  provides a reasonable  basis for the opinion  expressed
above.

As  discussed  in Note 1 to the  consolidated  financial  statements,  effective
December  9, 1998,  Newstate  Capital  Corp.  U.S.A.  acquired  99.5% of all the
outstanding  stock of the Company in a business  combination  accounted for as a
purchase. As a result of the acquisition, the consolidated financial information
for the period after the acquisition is presented on a different cost basis than
that for the period before the acquisition and, therefore, is not comparable.

As described in Note 1, the Company operates under adverse  economic  conditions
in Korea and the Asia Pacific region.



                                          /s/      SAMIL ACCOUNTING CORPORATION

July 30, 1999



Samil  Accounting  Corporation  is the  Korean  member  firm  of  the  worldwide
PricewaterhouseCoopers organization.

                                      F-23

<PAGE>


                                     NEWSTATE CAPITAL CO., LTD. AND SUBSIDIARY
                                            CONSOLIDATED BALANCE SHEET
                                                  March 31, 1999

<TABLE>
<CAPTION>

                                                            In Thousands of                 U.S. Dollars
                                                              Korean Won                    (Unaudited)
                                                         ----------------------        -----------------------
<S>                                                      <C>                           <C>
ASSETS

Cash and cash equivalents                                W      32,006,329             US$      26,134,016
Interest-bearing deposits with banks                             7,889,816                       6,442,244
Securities available for sale (Note 3)                          13,317,615                      10,874,186
Securities held to maturity (Note 3)                                64,153                          52,383
Loans (Note 4)                                                 118,463,288                      96,728,413
Accrued interest receivable                                      2,972,203                       2,426,882
Other assets                                                     2,163,596                       1,766,633
                                                         ------------------            --------------------
         Total assets                                    W     176,877,000             US$     144,424,757
                                                         ==================            ====================

liabilities and shareholders' equity

Short-term borrowings (Note 5)                           W      66,799,727             US$      54,543,747
Accrued expenses and other liabilities                           1,933,356                       1,578,636
Long-term debt (Note 6)                                         86,343,288                      70,504,032
Accrued employee benefit (Note 7)                                  689,000                         562,587
Negative goodwill (Notes 2 and 12)                              15,676,107                      12,799,957
                                                         ------------------            --------------------
         Total liabilities                                     171,444,478                     139,988,959
                                                         ------------------            --------------------

Minority interest                                                   42,379                          34,603

Commitments and contingencies (Note 9)

Shareholders' equity:
Common stock: W 5,000 par value;
      16,000,000 shares authorized;  4,978,000 shares
      issued and outstanding (Note 10)                           4,890,001                       3,992,816
Retained earnings                                                  464,995                         379,681
Accumulated other comprehensive                                     35,147                          28,698
                                                         ------------------            --------------------
         Total shareholders' equity                              5,390,143                       4,401,195
                                                         ------------------            --------------------
         Total liabilities and shareholders' equity      W     176,877,000             US$     144,424,757
                                                         ==================            ====================

</TABLE>

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

                                      F-24

<PAGE>


                                     NEWSTATE CAPITAL CO., LTD. AND SUBSIDIARY
                                       CONSOLIDATED STATEMENT OF OPERATIONS
                                Periods from December 9, 1998 to March 31, 1999,
                                    and from April 1, 1998 to December 8, 1998


<TABLE>
<CAPTION>

                                             Period from December 9, 1998 to                  Period from April 1, 1998 to
                                                      March 31, 1999                                December 8, 1998
                                       ---------------------------------------------   --------------------------------------------
                                         In Thousands of          U.S. Dollars           In Thousands of         U.S. Dollars
                                           Korean Won              (Unaudited)             Korean Won             (Unaudited)
                                       --------------------   ----------------------   --------------------  ----------------------
<S>                                    <C>                    <C>                      <C>                   <C>
Interest income:
      Loans                            W        3,878,500     US$       3,166,898      W      12,624,511     US$       10,373,468
      Deposits with banks                       1,960,517               1,600,814              2,070,331                1,701,176
                                       -------------------    --------------------     ------------------    ---------------------
           Total interest income                5,839,017               4,767,712             14,694,842               12,074,644
                                       -------------------    --------------------     ------------------    ---------------------

Interest expenses:
      Short-term borrowings                     2,186,995               1,785,739              6,681,407                5,490,063
      Long-term debt                            2,246,847               1,834,610              7,931,642                6,517,372
                                       -------------------    --------------------     ------------------    ---------------------
           Total interest expense               4,433,842               3,620,349             14,613,049               12,007,435
                                       -------------------    --------------------     ------------------    ---------------------

Net interest income                             1,405,175               1,147,363                 81,793                   67,209
Provision for loan losses                        --                      --                   (1,300,771)              (1,068,834)
                                       -------------------    --------------------     ------------------    ---------------------
Net interest income (loss after
      provision for loan losses                 1,405,175               1,147,363             (1,218,978)              (1,001,625)

Other income and expense:
      Salaries and employee benefits
                                                 (513,324)               (419,143)              (449,568)                (369,407)
      General and administration               (1,297,658)             (1,059,572)              (665,216)                (546,603)
      Employee benefit                           (213,000)               (173,920)              (476,000)                (391,126)
      Amortization of negative
      goodwill                                    706,812                 577,130               --                       --
      Other income, net                           375,775                 306,830               (192,313)                (158,022)
                                       -------------------    --------------------     ------------------    ---------------------
                                                 (941,395)               (768,675)            (1,783,097)              (1,465,158)
                                       -------------------    --------------------     ------------------    ---------------------

Income (loss) before income taxes
      and minority interest                       463,780                 378,688             (3,002,075)              (2,466,783)
Provision for income taxes (Note 11)
                                                 --                      --                     --                       --
Minority interest                                   1,215                     993
                                       -------------------    --------------------     ------------------    ---------------------
Net income (loss)                      W          464,995     US$         379,681      W      (3,002,075)    US$       (2,466,783)
                                       -------------------    --------------------     ------------------    ---------------------
Net income (loss) per common share,
      basic and diluted                W               93     US$            0.08      W            (751)    US$            (0.62)
                                       -------------------    --------------------     ------------------    ---------------------
Average number of shares outstanding
                                                4,978,000               4,978,000              4,000,000                4,000,000
                                       -------------------    --------------------     ------------------    ---------------------

</TABLE>

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

                                      F-25
<PAGE>

                                     NEWSTATE CAPITAL CO., LTD. AND SUBSIDIARY
                                       CONSOLIDATED STATEMENT OF CASH FLOWS
                                Periods from December 9, 1998 to March 31, 1999,
                                    and from April 1, 1998 to December 8, 1998


<TABLE>
<CAPTION>

                                                 Period from December 9, 1998 to                  Period from April 1, 1998 to
                                                          March 31, 1999                                December 8, 1998
                                           ---------------------------------------------  ------------------------------------------
                                             In Thousands of          U.S. Dollars          In Thousands of          U.S. Dollars
                                               Korean Won             (Unaudited)             Korean Won              (Unaudited)
                                           --------------------  -----------------------  --------------------   -------------------
<S>                                        <C>                   <C>                      <C>                    <C>
Cash flows from operating activities:
    Net income (loss)                      W         464,995     US$          379,681     W       (3,002,075)    US$    (2,466,783)
    Adjustment to reconcile net income
    (loss) to net cash provided by
    (used in) operating activities:
    Minorities interest                               (1,215)                    (993)              --                    --
    Depreciation and amortization                    403,701                  329,633                906,716               745,042
    Amortization of negative goodwill               (715,440)                (584,176)              --                    --
    Provision for loan losses                       --                       --                    1,300,771             1,068,834
    Increase in accrued employee                     213,000                  173,920                476,000               391,126
    benefit
    Decrease in accrued expenses and
    other liabilities                               (281,542)                (229,887)              (545,247)             (448,026)
    Increase in accrued income and
    other assets                                     (70,756                  (57,773)               286,033               235,031
                                           ------------------    ---------------------    -------------------    ------------------
Net cash provided by (used in)
    operating Activities                              12,743                   10,405               (577,802)             (474,776)
                                           ------------------    ---------------------    -------------------    ------------------

Cash flows from investing activities:
    Decrease in loans, net                        12,497,882               10,204,852             32,703,842            26,872,508
    Decrease (increase) in interest
    bearing deposits with banks, net              19,424,464               15,860,590             (5,899,275)           (4,847,391)
    Purchase of available-for-sale
    securities                                      (354,500)                (289,459)               (93,378)              (76,728)
    Payment for purchase of
    subsidiary, net of cash acquired             (12,974,134)             (10,593,724)              --                    --
    Other                                            (22,410)                 (18,298)              --                    --
                                           ------------------    ---------------------    -------------------    ------------------
Net cash provided by investing                    18,571,302               15,163,961             26,711,189            21,948,389
    activities
                                           ------------------    ---------------------    -------------------    ------------------

Cash flows from financing activities:
    Increase (decrease) in short-term
    borrowings, net                               20,500,000               16,738,793             (3,400,000)           (2,793,755)
    Payments on long-term debt                   (18,272,359)             (14,919,866)           (22,572,500)          (18,547,658)
    Issuance of common stock                       4,890,000                3,992,815                     --                    --
                                           ------------------    ---------------------    -------------------    ------------------
Net cash provided by (used in)
    financing activities                           7,117,641                5,811,742            (25,972,500)          (21,341,413)
                                           ------------------    ---------------------    -------------------    ------------------
Net increase in cash and cash                     25,701,686               20,986,108                160,887               132,200
    equivalents

Cash and cash equivalents at beginning
    of period                                      6,304,643                5,147,908              6,143,756             5,048,279
                                           ------------------    ---------------------    -------------------    ------------------
Cash and cash equivalents at end of        W      32,006,329     US$       26,134,016     W        6,304,643     US$     5,180,479
    period
                                           ------------------    ---------------------    -------------------    ------------------

Supplemental schedule of non-cash
investing and financing activities:
The Parent  acquired  99.5% of NEWSTATE
capital stock (see note 1) and NEWSTATE
acquired all of YOUNGNAM  capital stock
(see note 12). In  conjunction  with the
acquisitions, liabilities were assumed as
follows:

    Fair value of assets acquired          W     188,123,541     US$      153,607,855     W         --           US$      --
    Cash paid for the capital stock               19,000,001               15,514,003               --                    --
                                           ------------------    ---------------------    -------------------    ------------------
    Liabilities assumed                          169,123,540              138,093,852               --                    --
                                           ------------------    ---------------------    -------------------    ------------------
Supplemental cashflow information:
    Cash paid for interest                         1,488,393                1,215,312              2,976,785             2,446,002
                                           ------------------    ---------------------    -------------------    ------------------
    Cash paid for income taxes                      --                       --                     --                    --
                                           ------------------    ---------------------    -------------------    ------------------

</TABLE>

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

                                      F-26

<PAGE>


                                        NEWSTATE CAPITAL CO., LTD.
                                    STATEMENT OF SHAREHOLDERS' EQUITY
                              Periods from December 9, 1998 to March 31, 1999,
                                 and from April 1, 1998 to December 8, 1998
                                            -----------------

<TABLE>
<CAPTION>

                                                                        In thousands of Korean Won
                                               ---------------------------------------------------------
                                         Capital stock                      Accumulated other
                               --------------------------  Retained earning  comprehensive                   In U.S. Dollars
                                  Shares          Amount      (deficit)        Income          Total           (Unaudited)
                               ------------  ------------- -------------- --------------- ---------------  --------------------
<S>                              <C>         <C>           <C>              <C>            <C>              <C>
Balance April 1, 1998            4,000,000   W  20,000,000 W (17,947,338)   W (321,524)    W 1,731,138       US$   1,413,520

Net loss                                             -        (3,002,075)       -           (3,002,075)           (2,466,783)
Net change in unrealized
  appreciation on
  available-for-sale securities                      -             -           228,146         228,146               186,287
                               ------------  ------------- -------------- --------------- ---------------  --------------------
Comprehensive income                                                                        (2,773,929)           (2,280,496)

Balance December 8, 1998         4,000,000      20,000,000   (20,949,413)      (93,378)     (1,042,791)             (866,976)
Acquisition of the Company by
  the Parent                                   (19,999,999)   20,949,413        93,378       1,042,792               866,977
Shares issued to Parent            978,000       4,890,000                                   4,890,000             3,992,816
Net income                                         -             464,995         -             464,995               379,680
Net change in unrealized
  appreciation on
  available-for-sale securities     -             -                -            35,147          35,147                28,698
                                                                          --------------- ---------------  --------------------
Comprehensive income                                                                           500,142               408,378

                               ------------  ------------- -------------- --------------- ---------------  --------------------
Balance March 31, 1999           4,978,000   W   4,890,001 W     464,995    W   35,147     W 5,390,143       US$   4,401,195
                               ============  ============= ============== =============== ===============  ====================
</TABLE>

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

                                      F-27

<PAGE>

                   NEWSTATE CAPITAL CORP., LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1999

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

1.   Basis of Presentation:
     ----------------------

     NEWSTATE  CAPITAL CO.,  LTD.  ("NEWSTATE"),  a  99.6%-owned  subsidiary  of
     Newstate  Capital  Corp.  U.S.A.  (the  "Parent"),  is a financing  company
     incorporated  on February  18, 1994 under the laws of the Republic of Korea
     to engage in factoring  commercial  notes and accounts  receivable,  and to
     provide  short-term and long-term  financing to customers.  The name of the
     company was changed from Dongsuh Finance Co., Ltd. to NEWSTATE CAPITAL CO.,
     LTD. on December 9, 1998 when the Parent acquired  3,980,000 (99.5%) shares
     of NEWSTATE's common stock from Dongsuh Horizon Securities Co., Ltd. for $1
     in cash.  Youngnam Housing Finance Co., Ltd.  ("YOUNGNAM"),  a wholly-owned
     subsidiary  of NEWSTATE,  is a business  that  provides  financing  for the
     purchase of homes to middle-income individuals.

     The accompanying  consolidated financial statements include the accounts of
     NEWSTATE  and  YOUNGNAM  (collectively,  the  "Company").  All  significant
     inter-company   accounts  and   transactions   have  been   eliminated   in
     consolidation.

     As a result of the effects of the  International  Monetary Fund debt crisis
     in Korea,  NEWSTATE  and  YOUNGNAM,  since  its  acquisition  by  NEWSTATE,
     suspended  new loan  originations  from the period  December  1997 to April
     1999.  Consequently,  the accompanying  financial statements do not reflect
     the Company's normal business activities in a stable economic environment.

     The Company  operates a branch in Seoul and two  branches in the  Kyungsang
Province of the Republic of Korea.

     The official accounting records of the Company are maintained in Korean Won
     in  accordance  with the relevant laws and  regulations  of the Republic of
     Korea.  The U.S.  Dollar  amounts  are  provided  herein  as  supplementary
     information  solely for the convenience of the reader.  All Won amounts are
     expressed in U.S.  Dollars at the rate of W1,224.7:  US$1,  the  prevailing
     rate on March 31,  1999.  This  presentation  should not be  construed as a
     representation  that the Won amounts shown could be converted in or settled
     in U.S. Dollars at this or any other rate.

     The  Company's  primary  source  of  revenue  is from  providing  loans  to
     customers,  who are predominantly  small and  middle-market  businesses and
     middle-income  individuals. A substantial portion of the Company's revenues
     is from housing loans.

     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 refinance of borrowings (see note 5),
     collections  on or sale of loans,  sale of securities,  or through  capital
     contributions.

                                      F-28

<PAGE>

2.   Summary of Significant Accounting Policies:
     -------------------------------------------

     The  significant  accounting  policies  followed  by  the  Company  in  the
     preparation  of the  accompanying  consolidated  financial  statements  are
     summarized below:

     Use of Estimates in the Preparation of Financial Statements

     The  preparation  of  financial  statements  requires  management  to  make
     estimates and assumptions that affect amounts reported therein.  Due to the
     inherent uncertainty involved in making estimates,  actual results reported
     may differ from those estimates.

     Risks and Uncertainties

     The  operations of the Company have been  affected,  and may continue to be
     affected for the foreseeable future by the unstable economic  conditions in
     the Republic of Korea and the Asia Pacific  region.  Specific  factors that
     have impacted the Company include increased  unemployment in Korea, limited
     availability of credit,  significant numbers of corporate  bankruptcies and
     the general deterioration of the economies of countries in the Asia Pacific
     region.  Given the current economic  conditions,  it is at least reasonably
     possible  that  a  continuation  of  the  economic  crisis  or  a  lack  of
     significant  improvement  in the  Korean  economy  may  require a  material
     adjustment  in the  short-term  for  the  recoverability  of the  Company's
     assets.

     Recognition of Interest Income

     Interest income on loans and investments is recognized on an accrual basis.
     Discounts or premiums  associated  with the acquisition of NEWSTATE and the
     acquisition of YOUNGNAM (see note 12) are recognized on an effective  yield
     method.  Acquisition  discounts  from  impaired  or past  due  loans  where
     collection is not anticipated are recognized as cash, if any, is received.

     Cash Equivalents

     Cash and cash  equivalents  comprise  cash and time  deposits in banks with
     original maturities of three months or less.

     Securities Held to Maturity

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

     Securities Available for Sale

     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.

     Realized  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.

     Premiums  and  discounts  are  recognized  in  interest  income  using  the
     effective interest method over the period to maturity.

                                      F-29

<PAGE>

     Loans, Allowance and Discontinuance of Interest Income Recognition

     Loans receivable that management has the intent and ability to hold for the
     foreseeable  future or until  maturity  are  reported at their  outstanding
     principal  balance,  net of  allowance  for  loan  losses,  and  since  the
     acquisition  of NEWSTATE,  net of discounts  associated  with the adjusting
     loans to estimated market values.

     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.

     The  allowance  for loan  losses is  increased  by charges  to expense  and
     decreased by charge-offs,  if applicable.  Management's periodic evaluation
     of the adequacy of the allowance is based on the  Company's  past loan loss
     experience,  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.

     Losses on consumer and residential mortgage loans are generally provisioned
     through a charge to the  allowance  for loan  losses  based upon  specified
     stages of delinquency and estimated losses on such loans.

     Since the  acquisition  of  NEWSTATE  by the Parent in which all loans were
     marked to market, the Company has established no provisions for loan losses
     (see  note 1 with  respect  to the  lack of loan  originations  during  the
     periods).

     The Company  considers all non-accrual  commercial 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.  Generally,  the Company  estimates cash flows for a
     period of 3 to 5 years,  regardless of whether the original or restructured
     term of an impaired  loan exceeds such  periods.  Charge-offs  are recorded
     only after all practical  efforts to collect the loan have been  exhausted.
     Under  Korean  law,  a loan to an  individual  remains  legally  binding in
     perpetuity.

     Foreclosed Real Estate

     Real estate properties  acquired  through,  or in lieu of, loan foreclosure
     are to be sold and are  initially  recorded at fair value less cost to sell
     at the date of foreclosure. After foreclosure,  valuations are periodically
     performed  by  management  and the real  estate is  carried at the lower of
     carrying amount or fair value, less cost to sell.

     Premises and Equipment

     Company  premises,  furniture  and  equipment  are  carried  at cost,  less
     accumulated  depreciation  computed  principally  by the  declining-balance
     method over the estimated useful lives of the assets.

     Accrued Employee Benefits

     Employees and directors  with more than one year of service are entitled to
     receive a lump-sum  payment  upon  termination  of their  service  with the
     Company,  either  voluntary  or  involuntary,  based  on  their  length  of
     employment and rate of pay at the time of termination.  Severance  benefits
     are accrued based  primarily on the  employees'  compensation  and years of
     service.

     In accordance  with the National  Pension Act, a certain portion of accrued
     employee  benefits is remitted to the  National  Pension  Fund and deducted
     from  accrued  employee  benefits.  The  contributed  amount is refunded to
     employees from the National Pension Fund upon their retirement.

                                      F-30
<PAGE>
     Negative Goodwill

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

     Debt Issuance Costs

     Debt issuance costs are deferred and amortized over the life of the related
     debt instrument on the effective interest method.

     Income Taxes

     Deferred  income taxes are  recognized for the future tax  consequences  of
     differences  between  the tax bases of  assets  and  liabilities  and their
     financial  reporting amounts at each year-end based on enacted tax laws and
     statutory tax rates  applicable to the periods in which the differences are
     expected to affect  taxable  income.  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 Income (Loss) Per Share

     Earnings (loss) per share is computed using the weighted  average number of
     common  shares  outstanding  during the year.  Basic and  diluted  earnings
     (loss) per share amount are the same.

     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 and the change in unrealized  gains and losses
     on available for sale  securities.  The Company has presented these item in
     the statement of shareholders' equity.

     Push Down Accounting

     In  accordance  with  Securities  & Exchange  Commission  Staff  Accounting
     Bulletin No. 54 ("SAB No. 54"),  the Company has "pushed down" the Parent's
     purchase  price in  revaluing  the assets and  liabilities  of the Company.
     According  to the  provisions  of SAB No. 54,  purchase  transactions  that
     result in an entity becoming substantially wholly-owned require a new basis
     of accounting  for the purchased  assets and  liabilities.  For the periods
     subsequent to December 9, 1998, the  consolidated  financial  statements of
     the Company reflect the accounting  basis used by the Parent  subsequent to
     the acquisition of the Company.

     As a result of the purchase,  the following  purchase price adjustments are
     recorded as of December 9, 1998 (amounts in thousands of Won):

<TABLE>
<CAPTION>

                                                                Increase (Decrease)
                                                  ------------------------------------------------
<S>                                               <C>                     <C>
Interest-bearing deposits with bank               W           7,679       US$             6,270
Securities held to maturity                                   4,156                       3,393
Loans                                                    (2,840,145)                 (2,319,054)
Accrued interest receivable                                (103,065)                    (84,155)
Long-term debt                                              113,862                      92,971
Premises and equipment                                     (199,634)                   (163,006)

</TABLE>


     In connection with the acquisition of NEWSTATE,  Dongsuh Horizon Securities
     Co., Ltd.  forgave  W13,076,230  thousand of short term loan receivable due
     from NEWSTATE.  The negative goodwill resulting from the purchase,  and the
     resulting push down of the Parent's basis, amounted to W8,675,257 thousand.

                                      F-31

<PAGE>

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

     Securities at March 31, 1999 are as follows (in thousands of Won):

<TABLE>
<CAPTION>


                                                       Gross unrealized       Gross unrealized
                                  Amortized cost            gains                 losses                Fair value
                                -------------------    ------------------     ------------------     ------------------
<S>                             <C>                    <C>                    <C>                    <C>
Available for sale:
    Equity securities           W          970,621     W          35,147      W              --      W       1,005,768
    Interest in pools of
    debt securities             W       12,311,847     W          35,147      W              --      W          65,366
                                -------------------    ------------------     ------------------     ------------------
                                W       13,282,468     W          35,147      W              --      W      13,317,615
                                -------------------    ------------------     ------------------     ------------------
Held to maturity:
    Bond                        W           64,153     W           1,213      W              --      W          65,366
                                -------------------    ------------------     ------------------     ------------------

</TABLE>


     The  Company's  investment  in the  interests in pools of debt  securities,
     which the Company  acquired from the subsidiary on March 12, 1999 (see note
     12),  functions  similarly  to mutual fund or debt fund where the  holders'
     interests  represent  their  share of the net  assets  of the pools of debt
     securities.

     The scheduled  maturities of securities  held to maturity at March 31, 1999
are as follows:

                                               In thousands of Won
                                          Cost                  Fair value
                                          ----                  ----------
Due in one year or less            W              --       W               --
Due from one to five years                    60,505                   62,058
Due from five to ten years                     3,648                    3,308
                                   ------------------      -------------------
                                   W          64,153       W           65,366
                                   ------------------      -------------------

                                      F-32
<PAGE>

4.   Loans:
     ------

     As a result of  acquisition  transactions  described in notes 1 and 12, the
     Company's loan balances were adjusted to fair value as of those acquisition
     dates.  Accordingly,  the loan  balances  at March 31,  1999  comprise  the
     following components by loan types (in thousands of Won):

<TABLE>
<CAPTION>


                                            Principal         Unamortized interest       Credit discount     Balance at March 31,
                                                               premium (discount)                                    1999
                                       --------------------   ----------------------   --------------------  ----------------------
<S>                                    <C>                    <C>                      <C>                   <C>
Commercial                             W       23,594,429     W           130,334      W     (14,513,299)    W          9,211,464
Residential real estate                       108,580,975              (2,247,948)              (629,640)             105,702,487
Consumer                                        6,479,325                (235,176)            (2,694,812)               3,549,337
                                       -------------------    --------------------     ------------------    ---------------------
                                       W      138,653,829     W        (2,352,790)     W     (17,837,751)    W        118,463,288
                                       -------------------    --------------------     ------------------    ---------------------

</TABLE>


     The  effective  interest  rates used for purposes of  calculating  interest
     premium or  discount  were based on the loan rates at which the same loans,
     after  adjusting  for amounts not expected to be  collected,  would be made
     under conditions prevailing at the time.

     At March 31, 1999, residential real estate loans of W54,396,799 (par value)
     thousand are pledged as  collateral  for certain  short-term  and long-term
     borrowings (see Notes 5 and 6).

     An analysis of the change in the allowance for loan losses is as follows:

                                                    Thousands of Won
                                                  ----------------------
Balance at March 31, 1998                         W        17,760,105
Provision for loan losses                                   1,300,771
Adjustment for push down                                  (19,060,876)
                                                  --------------------
                                                  W                --
                                                  --------------------


     Until the  acquisition  of  NEWSTATE,  W14,416,740  thousand of  impairment
     losses were recorded in relation to impaired  loans.  Impaired loans at the
     end of  the  year  totaled  W18,181,919  thousand  in  principal  balances.
     Interest  income  recognized  on  impaired  commercial  loans  amounted  to
     W253,262 thousand on cash basis during the fiscal year.

                                      F-33
<PAGE>

     Scheduled  maturities  of  loans  receivable  at  March  31,  1999  (net of
applicable discounts) are as follows:

                                                    Thousands of Won
                                                  ----------------------
Due in one year or less                           W        29,045,689
Due from one to five years                                 41,355,076
Due from five to ten years                                 22,533,246
Due after ten years                                        25,529,277
                                                  --------------------
                                                  W       118,463,288
                                                  --------------------


5.   Short-term Borrowings:
     ----------------------

     Short-term borrowings at March 31, 1999 comprise the following:

                                Annual Interest Rates
                                         (%)                 Thousands of Won
                                ----------------------- ----------------------
Overdraft                            8.95                  W        1,999,727
General term borrowings             12.69                          10,800,000
Notes with short-term
Finance companies
                                    12.40                          54,000,000
                                                        ----------------------
                                                           W       66,799,727
                                                        ----------------------


     Certain bank  deposits and financing  assets are pledged as collateral  for
     the above borrowings (see Note 4). 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.

     Maximum  and average  borrowings  and  weighted  average  interest  rate on
     short-term borrowings for the year ended March 31, 1999, follows:

                                                    Thousands of Won
                                                  ----------------------
Maximum borrowings                                W        66,799,727
Average borrowings outstanding                             47,623,839
Weighted average interest rate                                 13.72%


6.   Long-term Debt:
     ---------------

     Long-term debt at March 31, 1999 comprises the following:

                                                         Thousands of Won
                                    Reference
                                -------------------    ----------------------
Debentures                             (A)             W        52,346,288
Bank loans                             (B)                      34,000,000
                                                       --------------------
                                                       W        86,346,288
                                                       --------------------


     (A) Debentures outstanding at March 31, 1999 comprise the following:

                                    Annual Interest
                                       Rates (%)            Thousands of Won
                                   ------------------    -----------------------
Debentures collateralized by
bank letter of credit                    11.0            W         24,000,000
Non-collateralized debentures          15.5-17.0                   11,000,000
Unlisted private debentures            10.0-10.5                   17,500,000
                                                         ---------------------
                                                                   52,500,000
                                                                     (153,712)
                                                         ---------------------
Less: discounts                                          W         52,346,288
                                                         ---------------------


                                      F-34

<PAGE>


     (B) Bank loans at March 31, 1999 comprise the following:

                                   Annual Interest
                                      Rates (%)            Thousands of Won
                                  ------------------    -----------------------
Korea First Bank                     10.35-12.25        W         24,000,000
Hanaareum Merchant Bank                 16.0                       4,000,000
Kukmin Bank                             10.5                       6,000,000
                                                        ---------------------
                                                        W         34,000,000
                                                        ---------------------


     Certain bank  deposits and financing  assets are pledged as collateral  for
the above debt (see Note 4).

     The maturities of long-term debt  outstanding at March 31, 1999,  excluding
     discounts on debentures, are as follows:

                              Thousands of Won
              Debentures                   Bank
              (par value)                  Loans                   Total
              -----------            ------------------    ---------------------
1999  W           13,896,369    W       30,000,000         W         43,896,369
2000              31,514,701             2,400,000                   33,914,701
2001               6,935,218             1,600,000                    8,535,218
      -----------------------   -----------------------
                                                           ---------------------
      W           52,346,288    W       34,000,000         W         86,346,288
      -----------------------   -----------------------    ---------------------


7.   Accrued Employee Benefit:
     -------------------------

     The following information relates to the Company's benefit obligation under
its severance benefit plan.

     Change in benefit obligation:

                                                As of                As of
                                             December 8,           March 31,
                                                1998                  1999
                                            -----------------  -----------------
Benefit obligation at beginning of period   W      167,000     W       638,000
Service cost                                       457,000             205,000
Interest cost                                       14,000               6,000
                                            ---------------    ----------------
Benefit obligation at end of period                638,000             849,000
Unrecognized prior service cost                   (162,000)           (160,000)
                                            ---------------    ----------------
Accrued benefit cost                        W      476,000     W       689,000
                                            ---------------    ----------------
  Components of net periodic benefit cost:
Service cost                                W      457,000     W       205,000
Interest cost                                       14,000               6,000
Amortization of prior service cost                   5,000               2,000
                                            ---------------    ----------------
                                            W      476,000     W       213,000
                                            ---------------    ----------------

     The discount and rate of increase for future compensation used to determine
     the actuarial value above were 12% and 4%, respectively.

                                      F-35
<PAGE>


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

     The estimated  fair values of the Company's  financial  instruments  are as
follows:

                                                      Thousands of Won
                                        ---------------------------------------
                                              Book                Fair
                                              Value              Value
                                        ------------------    ------------------
Financial assets:
 Cash and cash equivalent               W      31,990,862     W    31,990,862
 Interest-bearing deposits with banks           7,903,478           8,079,671
 Securities available for sale                 13,317,615          13,317,615
 Securities held to maturity                       64,153              65,366
 Loans                                        118,463,288         118,187,136
 Accrued interest receivable                    2,974,008           2,974,008
Financial liabilities:
 Short-term borrowings                         66,799,727          66,799,727
 Long-term debt                                86,346,288          87,719,641


     The  following  methods  and  assumptions  were  used  by  the  Company  in
     estimating fair values of financial instruments as disclosed herein:

     - Cash and short-term instruments

     Carrying amounts (which represent cost) of cash and short-term  instruments
approximate their fair value.

     - Available for sale and held to maturity securities.

     Fair values for securities are based on quoted market prices.

     - Loans receivable

     Fair values for loans are  estimated  using  discounted  cash flow 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.

     - Accrued interest receivable

     The carrying amounts of accrued interest receivable  approximate their fair
values.

     - Short-term borrowings

     Carrying   amounts  (which   represent   cost)  of  short-term   borrowings
approximate their fair value.

     - Long-term debt

     Fair values of  long-term  debt is  estimated  using  discounted  cash flow
     analysis based on the Company's then current  incremental  borrowing  rates
     for similar types of borrowing arrangements.

                                      F-36
<PAGE>

9.   Commitments and Contingencies:
     ------------------------------

     At March 31, 1999, the Company has entered into bank  overdraft  agreements
     for borrowings of up to W2,000 million with Daegu Bank.

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

     The Company  issued  978,000  shares of common stock for cash at W5,000 per
share on December 9, 1998.

11.  Income taxes:
     -------------

     The  statutory  income  tax  rate,   including   resident  tax  surcharges,
     applicable  to the Company is  approximately  30.8% in 1999.  However,  the
     actual  income tax expense  reported by Company  differs  from the expected
     income tax computed at the statutory income tax rate as follows:

<TABLE>
<CAPTION>


                                               Period from April 1, 1998 to                   Period from December 9, 1998
                                                     December 8, 1998                               to March 31, 1999
                                       ---------------------------------------------   --------------------------------------------
                                            Tax Rate                Thousand                Tax Rate               Thousand
                                               (%)                   of Won                    (%)                  of Won
                                       --------------------   ----------------------   --------------------  ----------------------
<S>                                             <C>           <C>                             <C>            <C>
Income tax expense computed at
      statutory rate                            30.8          W           143,218             (30.8)         W           (924,639)
Disallowed interest and expenses                10.4                       48,573              0.2                         78,856
Net amortization/accretion of
      goodwill                                  19.1                       89,024               --                       --
Change in deferred tax valuation
      allowance                                (60.3)                    (280,815)            (30.6)                      845,783
                                       -------------------    --------------------     ------------------    ---------------------
Income tax expense as reported                   --           W          --                     --           W           --
                                       -------------------    --------------------     ------------------    ---------------------

</TABLE>


     At March 31, 1999, the Company had tax basis net operating loss  carryovers
     of W3,160,338  thousand  available to offset future taxable  income.  These
     carryovers expire through March 31, 2004.

     At March 31, 1999,  the Company has fully reserved  valuation  allowance on
     net  deferred  income  tax assets  arising  from loss  carry  forwards  and
     temporary differences between amounts reported for financial accounting and
     income tax purposes  because it is uncertain that the Company will generate
     enough  taxable  income  in the  future  to fully  utilize  the loss  carry
     forwards and temporary differences.

                                      F-37

<PAGE>


     The  significant  components  of deferred  tax assets are  reflected in the
following:

                                                     Thousand of Won
                                                  ----------------------
Deferred tax assets:
  Loss carry forward                              W           973,384
  Loan                                                      1,775,401
  Accrued employee benefit                                    210,978
  Debt forgiveness                                          4,027,479
  Purchased discounts                                         356,335
                                                  --------------------
                                                            7,343,577

Deferred tax liabilities:
  Accrued interest income                                      10,116
  Purchased premium                                         1,476,739
                                                  --------------------
                                                            1,486,855

Net deferred tax assets before valuation
     allowance                                              5,856,722
                                                  --------------------
Valuation allowance on net deferred tax
     assets                                                (5,856,722)
                                                  ====================
Net deferred tax assets                           W         --
                                                  --------------------

12.      Acquisition of Youngnam Housing Finance Co., Ltd.:
         -------------------------------------------------

         On March 12, 1999,  NEWSTATE  acquired all of the outstanding  stock of
         YOUNGNAM  for   approximately   W19,000,000   thousand  in  cash.   The
         acquisition was recorded under the purchase  method of accounting.  The
         acquisition  resulted in negative goodwill of approximately  W7,707,661
         thousand  which is being  amortized  over 5 years  using  straight-line
         method.

         The  following  pro  forma  results  reflect  the  assumption  that the
         transaction  was  effective at the  beginning  of the  post-acquisition
         period (in thousands, except per share amounts):

                                                       (Unaudited)
                                   Period from April 1,            Period from
                                    1998 to December 8,         December 9, 1998
                                           1998                To March 31, 1999
                                   ----------------------     ------------------

Sales                              W      23,575,984             W    8,796,731
Net income(loss)                          (1,874,448)                   840,870
Net income(loss)                                (468)                       169
  per share (in Korean Won)

                                      F-38

<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: July 14, 2000

                  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.

Signature                           Title                     Date
---------                           -----                     ----

ERNEST B. KIM
________________________________    Chairman of the Board,    July 14, 2000
Ernest B. Kim                       President and CEO

ALEXANDER T. SHANG
________________________________    Treasurer and Chief       July 14, 2000
Alexander T. Shang                  Financial Officer

JIN K. KIM
________________________________    Vice President, Secretary July 14, 2000
Jin K. Kim                          and Director

SUN W. YOUNG
________________________________    Director                  July 14, 2000
Sun W. Young

A. SUNGIL NOH
________________________________    Director                  July 14, 2000
A. Sungil Noh