SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549
                                 ---------------
                                   FORM 10-QSB
                                   (Mark One)


          /X/     QUARTERLY REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended December 31, 1999
                         Commission file number 0-21907

                                       or

         /  /     TRANSITION REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the transition period from _____ to ______

                         Commission file number 0-21907


                             NewState Holdings, Inc.
                            ------------------------
        (Exact Name of Small Business Issuer as Specified in Its Charter)

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


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

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


                              RACOM SYSTEMS, INC.
                  16 W. 32nd Street, New York, New York 10001
                        Former Fiscal Year - December 31
                  --------------------------------------------
              (Former Name, Former Address and Former Fiscal Year,
                         if Changed Since Last Report)


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

    Yes:  X                                                       No: ___

       Indicate  the number of shares  outstanding  of each of the  Registrant's
classes of common stock, as of December 31, 1999:

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

Common Stock, .01 par value                                11,498,684


<PAGE>


<TABLE>
<CAPTION>
                                      INDEX
                                      -----

Part I            Financial Information                                                      Page
------            ---------------------                                                      ----
<S>               <C>               <C>                                                       <C>
                    Item 1.         Condensed Consolidated Balance Sheets as of                 4
                                    December 31, 1999 and at March 31, 1999

                                    Condensed Consolidated Statements of                        5
                                    Operations for the three months ended
                                    December 31, 1999 and December 31,1998
                                    and for the nine months ended December 31,
                                    1999 and December 31, 1998

                                    Condensed Consolidated Statements of Cash                   6
                                    Flows for the nine months ended December
                                    31, 1999 and December 31, 1998

                                    Notes to Condensed Financial Statements                     7

                    Item 2.         Management's Discussion and Analysis of                    11
                                    Financial Condition and Results of Operations

Part II           Other Information and Signatures                                             21
-------           --------------------------------                                             --

</TABLE>

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

Such  forward-looking  statements  involve certain risks and uncertainties  that
could cause actual results to differ materially from anticipated results.  These
risks and  uncertainties  include  regulatory  constraints,  changes  in laws or
regulations  governing  the  Company's  products and  international  trade,  the
ability of the Company to market  successfully  its products in an  increasingly
competitive  worldwide  market,  changes in the  Company's  operating  strategy,
failure to consummate  or  successfully  integrate  products  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.


<PAGE>

<TABLE>
<CAPTION>

                                                  NEWSTATE HOLDINGS, INC.
                                              (FORMERLY RACOM SYSTEMS, INC.)
                                                CONSOLIDATED BALANCE SHEET
                                                        (UNAUDITED)

                                                                                                            March 31,
                                                                                  December 31,                 1999
                                                                                      1999                 (Pro-forma)
                                                                               ---------------------   ---------------------
                                  ASSETS
<S>                                                                                   <C>                     <C>
Cash and cash equivalents                                                             $  4,207,241            $  26,118,761
Interest-bearing deposits with banks                                                     3,525,550                6,430,168
Securities available for sale                                                            1,440,696               10,853,802
Securities held to maturity                                                              1,593,633                   52,284
Loans                                                                                   78,754,699               96,547,097
Premises and equipment                                                                     284,503                        -
Accrued interest receivable                                                              2,231,982                2,422,333
Goodwill                                                                                 1,063,093                        -
Other assets                                                                             2,362,558                1,763,322
                                                                                --------------------    --------------------
       Total assets                                                                  $  95,463,955            $ 144,187,767
                                                                                ====================    ====================
                   LIABILITIES AND SHAREHOLDERS' EQUITY

Short-term borrowings                                                                   55,657,412               54,441,505
Accrued expenses and other liabilities                                                   1,015,093                1,897,308
Long-term debt                                                                          21,425,946               70,371,873
Accrued employee benefit                                                                 1,111,287                  561,532
Negative goodwill                                                                       11,553,982               12,775,963
                                                                                --------------------    --------------------
      Total liabilities                                                                 90,763,720              140,048,182

Minority interest                                                                           26,633                   34,539

Shareholders' equity:
     Common  stock ($.01 par value ;  40,000,000  shares  authorized;  9,332,482
     shares  issued and  outstanding  as of March 31,  1999;  11,498,684  shares
     issued and outstanding as of December 31, 1999)                                       114,987                   93,325
     Preferred stock (no par value, 10,000,000 shares authorized in
     1999, no shares issued and outstanding)                                                    -                         -
     Additional paid-in capital                                                          5,552,493                3,892,006
Retained earnings                                                                          448,329                   91,071
Accumulated other comprehensive income (loss)                                           (1,442,207)                  28,645
                                                                                --------------------    --------------------
      Total shareholders' equity                                                         4,673,602                4,105,047
                                                                                --------------------    --------------------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                     $  95,463,955            $ 144,187,767
                                                                                ====================    ====================

</TABLE>
<PAGE>


<TABLE>
<CAPTION>

                                                    NEWSTATE HOLDINGS, INC.
                                                (FORMERLY RACOM SYSTEMS, INC.)
                                             CONSOLIDATED STATEMENT OF OPERATIONS
                                                          (UNAUDITED)

                                                         Three Months Ended                      Nine Months Ended
                                                --------------------------------------- ---------------------------------------
                                                  December 31,        December 31,       December 31,        December 31,
                                                      1999                1998               1999                1998
                                                -----------------    -----------------  -----------------  -----------------
                                                                       (Pro-forma)                            (Pro-forma)
<S>                                                   <C>                <C>                <C>                 <C>
Interest income:
  Loans                                               $2,795,778         $ 3,019,925        $ 9,508,600         $ 10,150,832
  Deposits with banks                                    546,771             743,351          1,981,733            1,747,114
                                                -----------------    -----------------  -----------------  -----------------
      Total interest income                            3,342,549           3,763,276         11,490,333           11,897,946
                                                -----------------    -----------------  -----------------  -----------------
Interest expenses:
  Short-term borrowings                                1,564,334           1,544,671          4,497,351            5,368,836
  Long-term debt                                         986,689           1,831,772          4,429,537            6,408,792
                                                -----------------    -----------------  -----------------  -----------------
      Total interest expenses                          2,551,023           3,376,443          8,926,888           11,777,628
                                                -----------------    -----------------  -----------------  -----------------
Net interest income (expenses)                           791,526             386,833          2,563,445              120,318
Reversal of (addition to)
      provision for loan losses                          981,322          (1,036,967)         1,660,373           (1,133,927)
                                                -----------------    -----------------  -----------------  -----------------
Net interest income (expenses)
      after provision for loan losses                  1,772,848            (650,134)         4,223,818           (1,013,609)

Other income and expenses:
  Salaries                                              (742,441)           (158,902)        (2,354,173)            (385,148)
  General and administrative                            (540,842)           (757,315)        (2,018,602)          (1,077,866)
  Employee benefit                                      (150,902)                  -           (826,083)                   -
  Amortization of negative goodwill                      701,444             115,265          2,080,474              115,265
  Amortization of goodwill                               (58,377)                  -           (104,438)                   -
  Loss on sales of securities                         (1,597,949)                  -         (1,597,949                    -
  Other income (loss), net                               251,731              (3,959)           676,658             (141,369)
                                                -----------------    -----------------  -----------------  -----------------
                                                      (2,137,336)           (804,911)        (4,144,113)          (1,489,118)

Income (loss) before
      provision for income taxes                        (364,488)         (1,455,045)            79,705           (2,502,727)
Provision/credit for income taxes                        426,312                  -             212,273                    -
Minority interest                                          2,069               6,281             10,151                    -
                                                -----------------    -----------------  -----------------  -----------------
Net income (loss)                                         63,893          (1,448,764)           302,129           (2,502,727)
                                                =================    =================  =================  =================
Net income (loss)
      per share of common stock                         $   0.01           $   (0.16)          $   0.03            $   (0.27)
                                                 ================    =================  =================  =================
Average shares outstanding                            11,443,684           9,332,482         10,670,557            9,332,482
                                                 ================    =================   ================   ================

</TABLE>
<PAGE>

<TABLE>
<CAPTION>


                                                  NEWSTATE HOLDINGS, INC.
                                              (FORMERLY RACOM SYSTEMS, INC.)
                                           CONSOLIDATED STATEMENT OF CASH FLOWS
                                                        (UNAUDITED)

                                                                                       For the nine months ended
                                                                                 December 31,              December 31,
                                                                                     1999                      1998
                                                                              --------------------     --------------------
                                                                                                           (Pro-forma)
<S>                                                                                   <C>                    <C>
Cash flows from operating activities:
  Net income (loss)                                                                   $   302,129            $  (2,496,446)
  Adjustment to reconcile net loss to net cash
   used in operating activities:
   Minorities interest                                                                    (10,151)                  (6,281)
   Provision (reversal of provision) for loan loss                                     (1,660,373)               1,133,927
   Depreciation and amortization                                                          153,603                   68,896
   Amortization of negative goodwill                                                   (2,080,474)                (115,265)
   Amortization of goodwill                                                               104,438                        0
   Increase in accrued employee benefit                                                   837,055                        0
   Loss on sales of available-for-sale securities                                       1,597,949                        0
   Decrease in accrued expenses and other liabilities                                  (1,865,568)                (450,547)
   Increase in accrued interest receivables and other assets                           (1,060,270)                (463,178)
                                                                              --------------------     --------------------
Net cash used in operating activities                                                  (3,681,662)              (2,328,894)
                                                                              --------------------     --------------------
Cash flows from investing activities:
   Decrease in loans, net                                                              27,284,302               28,816,810
   Decrease (increase) in interest bearing deposits with banks                          3,279,266                9,891,303
   Proceed from available-for-sale securities                                           6,665,539                  173,482
   Investment in subsidiary                                                            (5,150,500)                       0
   Other                                                                               (2,024,431)              (2,347,311)
                                                                              --------------------     --------------------
Net cash provided by investing activities                                              30,054,176               36,534,284
                                                                              --------------------     --------------------
Cash flows from financing activities:
   Decrease in short-term borrowings, net                                              (2,581,452)             (22,594,256)
   Decrease (increase) in long-term debt                                              (52,269,033)              (4,000,866)
   Proceeds from issuance of common stock                                               5,419,980                3,718,348
                                                                              --------------------     --------------------
Net cash used in financing activities                                                 (49,430,505)             (22,876,774)

Effect of exchange rate changes on cash and cash equivalents                            1,146,471                1,683,127
                                                                              --------------------     --------------------
Net increase (decrease) in cash and cash equivalents                                  (21,911,520)              13,011,743
Cash and cash equivalents at beginning of period                                       26,118,761                4,440,734
                                                                              --------------------     --------------------
Cash and cash equivalents at end of period                                          $   4,207,241            $  17,452,477
                                                                              ====================     ====================

</TABLE>
<PAGE>



                             NEWSTATE HOLDINGS, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  December 1999

NOTE 1:       BASIS OF PRESENTATION

         The accompanying  financial statements report the consolidated accounts
of NewState Holding,  Inc.  (formerly Racom Systems,  Inc.) and its wholly-owned
subsidiaries,  NSK Holdings, Inc. (a Delaware corporation),  Racom Systems, Inc.
(a  Colorado  corporation)  and its 99.6% owned and newly  acquired  subsidiary,
NewState Capital Co., Ltd. (a Korean  corporation).  Pursuant to the acquisition
described in Note 5 below,  the Company has treated the transaction as a reverse
acquisition  and,  accordingly,  has  reported  the pro forma effect in the 1998
financial  statements in order to achieve  comparability  in its  operations and
cash flows. 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.

NOTE 2:       UNAUDITED FINANCIAL STATEMENTS

         The consolidated  financial statements as of December 31, 1999, and for
the periods ended  December 31, 1999 and 1998,  included  herein are  unaudited;
however,  such  information  reflects  all  adjustments   consisting  of  normal
recurring adjustments, which are, in the opinion of management,  necessary for a
fair  presentation  of the  information  for such  periods.  The 1998 pro  forma
presentation  gives effect to the reverse  acquisition in July 1999, in order to
provide  comparability  in the  presentation  of operations  and cash flows.  In
addition,  the results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year. The accompanying financial
statements  are in  condensed  form and should be read in  conjunction  with the
Company's annual report filed on Form 10-KSB.

NOTE 3:       PROVISION FOR LOAN LOSSES

              Since the acquisition of NewState  Capital by the Company in which
all loans were marked to market,  the Company has  established no provisions for
losses.  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  Capital,  net of discounts  associated  with the adjusting loans to
estimated market values.

              Any  collection  from prior  written off loans are recorded in the
income  statements  under  other  income  (this  was  erroneously  stated in the
December  31, 1999  10-QSB as recorded  under  reversal  of  provision  for loan
losses).  From time to time, the  management,  in  consultation  with its Korean
independent  auditor,  record under reversal of provision for loan losses in the
income  statement a portion of  previously  written-off  loans which the Company
believes  are  recoverable   based  on  recent  payment  history  of  individual
borrowers.

              Based  on   management's   experience   with  new  mortgage  loans
originated,  the Company  does not  believe  that it is  necessary  to include a
provision  for loan  losses at this  time.  However,  this  policy may change as
management reviews future loan loss experience.

NOTE 4:       STOCK SPLITS

              On March 1, 1999,  the Company  effected a reverse  stock split of
the Company's  common stock on the basis of one share for each four and one-half
(4 1/2) shares. The authorized number of shares was not split.

              On July 12, 1999,  the Company  effected a reverse  stock split of
the  Company's  common  stock on the basis of one share  for each  fifteen  (15)
shares. The authorized number of shares was not split.

              The  outstanding  and weighted  average number of shares of common
stock and per share data in these  financial  statements  have been  adjusted to
reflect the impact of the stock splits for all period presented.

<PAGE>

NOTE 5:       ACQUISITION

              On  July  20,  1999,  the  Company  acquired  approximately  99.6%
(4,958,000  shares) of the  issued and  outstanding  capital  stock of  NewState
Capital Co., Ltd., a Korean corporation  ("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.  The Company  also  assumed a $5,000,000
liability of NewState NY to a bank. 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.,  a  Delaware  corporation  ("NSK"),   which  is
incorporated  herein by  reference  to the  Company's  Form 8-K  filed  with the
Securities and Exchange Commission  ("Commission") on July 21, 1999. As a result
of the Acquisition  Agreement,  (i) NewState  Capital has become a subsidiary of
NSK,  (ii)  several new  investors  acquired  667,000  shares of the Company for
$1,000,000  ($1.50 per share) pursuant to the terms and conditions of the Common
Stock  Purchase  Agreement  dated July 14, 1999 by and among the Company,  Ocean
Strategic  Holdings  Limited  and  Zebra  Strategic  Holdings  Limited  which is
incorporated  herein by  reference  to the  Company's  Form 8-K  filed  with the
Commission on July 21, 1999,  and (iii) NewState NY owns 80% of the common stock
in the Company.  Accordingly,  following the  consummation  of the  Acquisition,
NewState NY controls the Company.

              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.

              NewState Capital is a finance company incorporated on February 18,
1994 under the laws of the Republic of Korea to engage in  factoring  commercial
notes  and  accounts  receivables,  and  to  provide  short-term  and  long-term
financing,  including  home mortgage  loans,  to  customers.  On March 12, 1999,
NewState Capital acquired all the outstanding  stock of Youngnam Housing Finance
Co.,  Ltd., a Korean company  providing  financings for the purchase of homes to
middle-income  individuals.  The  acquisition  was  recorded  under the purchase
method of accounting.

NOTE 6:       CERTAIN TRANSACTIONS

              In  July  and  August,  1999,  the  Company  completed  a  private
placement  for the  sales of  1,416,660  shares  of the its  common  stock  with
aggregated proceeds amounting to $4,249,980. The Company utilized these funds to
retire a  portion  of  $5,000,000  liability  assumed  with the  acquisition  of
NewState Capital. The entire $5,000,000 liability was repaid on August 19, 1999.

NOTE 7:       LOANS

              The loan  balances at December  31, 1999  comprise  the  following
components by loan types (in thousands of Won):

<TABLE>
<CAPTION>

                                                                   Unamortized
                                                                interest premium
                                                                and discount and                       Balance in
                                                   Principal     credit discount       Balance       U.S. Dollars(a)
                                             -----------------  ----------------   --------------   ---------------
              <S>                               <C>                <C>               <C>               <C>
              Residential real estate           W   84,989,595    W  1,124,480       W 86,114,075       $75,182,534
              Consumer                               3,492,267        (562,689)         2,929,578         2,557,690
              Commercial                            15,447,885     (14,285,906)         1,161,979         1,014,475
                                              ----------------   ----------------   -------------    --------------
                                                W  103,929,747    W 13,724,115       W 90,205,632       $78,754,699

</TABLE>

         (a)  translated at the rate of W1,145.4:  $1.00,  the prevailing Won to
U.S. Dollar exchange rate on December 31, 1999

<PAGE>

NOTE 8:       SHORT TERM BORROWINGS

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

<TABLE>
<CAPTION>


                                                 Annual Interest       Thousands
                                                    Rate (%)              of Won      U.S. Dollars(a)
                                               ---------------------------------     ----------------
               <S>                               <C>                <C>                 <C>
               General term borrowings           12.75-14.50        W  8,000,000        $   6,984,460
               Notes with short-term              9.25-11.00          55,750,000           48,672,953
                      finance companies
                                                               -----------------      ---------------
                                                                    W 63,750,000         $ 55,657,412
                                                               =================      ===============

</TABLE>

         (a)  translated at the rate of W1,145.4:  $1.00,  the prevailing Won to
U.S. Dollar exchange rate on December 31, 1999

NOTE 9:       LONG -TERM DEBT

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

<TABLE>
<CAPTION>

                                                                       Thousands
                                                      Reference           of Won      U.S. Dollars(a)
                                                    ------------------------------   ----------------
                <S>                                      <C>        <C>                  <C>
                Debentures                               (A)        W 21,541,278         $ 18,806,774
                Won currency loans                       (B)           3,000,000            2,619,172
                                                               -----------------     ----------------
                                                                    W 24,541,279         $ 21,425,947
                                                               =================     ================
</TABLE>

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

<TABLE>
<CAPTION>

                                                       Annual          Thousands
                                                      Rates (%)           of Won      U.S. Dollars(a)
                                                    ------------------------------   ----------------
                <S>                                <C>              <C>                 <C>
                Debentures collateralized
                  by bank letter of credit         12.30-12.78      W 18,000,000         $ 15,715,034
                Non-collateralized debentures           10.5           3,500,000            3,055,701
                                                               -----------------     ----------------
                                                                    W 21,500,000         $ 18,770,735
                Profit: premium                                           41,279               36,039
                                                               -----------------     ----------------
                                                                    W 21,541,279         $ 18,806,774
                                                               =================     ================
</TABLE>

(B) Won currency loans outstanding at December 31, 1999 comprise the following:

<TABLE>
<CAPTION>

                                                       Annual          Thousands
                                                      Rates (%)           of Won      U.S. Dollars(a)
                                                    ------------------------------   ----------------
                <S>                                     <C>         <C>                 <C>
                Kukmin Bank                             12.5        W  3,000,000        $   2,619,172
                                                               -----------------      ---------------
                                                                    W  3,000,000        $   2,619,172
                                                               =================      ===============
</TABLE>

         (a)  translated at the rate of W1,145.4:  $1.00,  the prevailing Won to
U.S. Dollar exchange rate on December 31, 1999

<PAGE>


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

ITEM 2        MANAGEMENT'S DISCUSSION AND ANALYSIS

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

Overview

The Company was winding down its  operations  during the second half of 1998 and
until July 1999, when it acquired 99.6% of the capital stock of NewState Capital
Co., Ltd., a Korean corporation ("NewState Capital") from NewState Capital Corp.
(NewState NY), a New York corporation.

NewState Capital was formed in February 1994 under the name Dongsuh Finance Co.,
Ltd ("Dongsuh Finance"). Dongsuh Finance changed its name to NewState Capital on
December  9,  1998  when  Dongsuh  Horizon   Securities   Co.,  Ltd.   ("Dongsuh
Securities")  sold 3,980,000  shares (99.5%) of the outstanding  common stock of
Dongsuh  Finance to NewState NY. In  connection  with the  acquisition,  Dongsuh
Securities  forgave  W13,076,230,000  of short  term  loan  receivable  due from
NewState  Capital.  The negative goodwill  resulting from the purchase,  and the
resulting push down of NewState NY's basis,  amounted to W8,675,257,000 which is
being amortized over 5 years using straight-line method.

On December 9, 1998,  NewState  Capital issued 978,000 shares of common stock to
NewState NY, bringing  NewState NY's ownership of NewState  Capital to 99.6%. On
March 12, 1999,  NewState Capital acquired all the outstanding stock of Youngnam
Housing  Finance  Co.,  Ltd.  ("Youngnam")  for  W19,000,000,000  in  cash.  The
acquisition resulted in negative goodwill of approximately  W7,707,661,000 which
is being  amortized  over 5 years using  straight-line  method.  Effectively  on
December 20, 1999, Youngnam merged into NewState Capital.

From the period  December 1997 to April 1999,  as a result of the  International
Monetary  Fund  debt  crisis  in Korea  ("IMF  Crisis"),  NewState  Capital  and
Youngnam,  after  its  acquisition  by  NewState  Capital,  suspended  new  loan
originations.  With the acquisition of the capital stock of NewState  Capital by
the  Company  in 1999,  NewState  Capital  has  revamped  its  loan  origination
procedures,  increased  staffing and enhanced  loan  origination  and  servicing
software. Consequently, the accompanying financial statements do not reflect the
Company's normal business activities in a stable economic environment.

The  Company's  current  business  plan is to expand  its  mortgage  origination
efforts  throughout  Korea,  develop  innovative new mortgage products to Korean
middle-income families and individuals,  and to securitize and sell its mortgage
loan portfolio as mortgage-backed securities. The Company has opened five branch
offices in 1999,  which are  located in the  cities of Taegu,  Changwon,  Jinju,
Pusan and  Kwang-ju,  and will  continue  to expand its  presence in other major
Korean cities.

Home mortgage loans in Korea,  including those  originated by NewState  Capital,
typically have variable  interest rates and are for terms of 15 years.  There is
no  standard  lending  rate by which  mortgage  interest  rates are  determined;
however,  mortgage lenders,  including NewState Capital,  typically adjust their
interest  rates on a monthly  basis to reflect  the  lender's  on-going  cost of
funding.


COMPARISON OF THE THREE MONTH PERIOD ENDED DECEMBER 31, 1999 TO THE
THREE MONTH PERIOD ENDED DECEMBER 31, 1998

Interest Income

Interest income decreased to $3.3 million, or approximately 13.2%, for the three
months ended December 31, 1999 ("Third  Quarter 1999") from $3.8 million for the
three months ended  December 31, 1998 ("Third  Quarter  1998").  The decrease in
interest  income in the Third Quarter 1999 as compared to Third Quarter 1998 was
due  to  the  reduction  of  average  mortgage  loan  rate  resulting  from  the
stabilization  of the Korean financial  markets after the IMF Crisis,  offset by
the  acquisition of Youngnam which provided $1.05 million in interest  income in
the Third  Quarter  1999.  Excluding  the  effect of the  Youngnam  acquisition,
interest income decreased  approximately $1.55 million, or approximately  40.8%,
in the Third Quarter 1999 as compared to Third  Quarter  1998.  This is due to a
decrease  of  approximately  $13.3  million in mortgage  loans,  compared to the
amount outstanding as of December 31, 1998, as a result of prepayments.

Interest income on bank deposits decreased to $0.55 million in the Third Quarter
1999 from $0.74  million in the Third  Quarter 1998 due to a decline in cash and
bank  deposits  to $7.7  million  from $34  million.  Funds  from  cash and bank
deposits were used to retire  long-term  borrowings,  which decreased from $52.3
million as of December 31 ,1998 to $21.4 million as of December 31, 1999.

Interest Expenses

Total interest expense  decreased to $2.5 million in the Third Quarter 1999 from
$3.4 million in the Third Quarter 1999 due to lower outstanding borrowings.  The
Company  utilized funds from early loan repayments to reduce total borrowings to
$77.1  million at the end of Third Quarter 1999 from $87.6 million at the end of
the Third Quarter 1999.  Interest expenses were also decreased due to a lowering
of the average  cost of  borrowings  from 16.3% to 10.8% annual  interest  rate,
offset by borrowings assumed with the acquisition of Youngnam.

Net Interest Income

Net interest income  increased to $791,526 in the Third Quarter 1999 as compared
to $386,833 in the Third Quarter 1998.  The increase in net interest  income was
due to (i) the Youngnam  acquisition which provided  additional  interest income
and (ii) lower interest  expenses  resulting from lower borrowings and borrowing
costs, and offset by (i) lower interest rate on outstanding loans and (ii) lower
loans outstanding resulting from prepayments.

Reversal of Provision For Loan Losses

Reversal  of  provision  for loan  losses  increased  to $1 million in the Third
Quarter 1999 from an addition to provision  for loan losses of $1.04  million in
Third Quarter 1998. The reversal is based on collection of accrued  interest and
principal  payments  from  previously  written-off  loans,  resulting  in higher
recovery projection on these loans.

Total Operating Expenses

Total operating expenses were $1.4 million in the Third Quarter 1999 compared to
$0.9 million in the Third Quarter 1998.  The increase  during Third Quarter 1999
as compared to Third  Quarter 1998 was  primarily  attributed  to an increase in
salaries,  employee  benefits,  and  general and  administrative  expense due to
increased  staffing and office  expansions  associated  with the  resumption  of
normal operations during the fiscal year 1999.

Salaries and Employee Benefits

The Company has  increased  staffing  during the fiscal year 1999 in  connection
with the resumption of normal  operations.  Salaries increased 460% in the Third
Quarter  1999 to $742,441  from  $158,902 in the Third  Quarter  1998 due to the
acquisition of Youngnam and an increase of personnel from 24 to 100.

Employee  benefits are accrued for employees  and  directors  with more than one
year of service and are based on their annual compensation and years of service.
There were no employee benefits accrued during the Third Quarter 1998 due to the
termination  of most employees  during 1998,  resulting in no employee with more
than one-year of service during Third Quarter 1998.

Amortization of Negative Goodwill

Negative  goodwill  totaling  approximately  $11.5  million  resulting  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  approximately
$700,000, at the current Won:US Dollar exchange rate, each quarter over a 5 year
period.  There was no  amortization  of negative  goodwill in the Third  Quarter
1998.

Amortization of Goodwill

Goodwill totaling  approximately  $1.1 million resulting from the acquisition of
NewState  Capital by the  Company is being  amortized  at rate of  approximately
$58,000 per quarter over 5 years.  There was no  amortization of goodwill in the
Third Quarter 1998.

Loss on Sales of Available-for-Sale Securities

The Company  took a loss of $1.6  million on  disposition  of 720,000  shares of
common  stock of Chung An  Finance  Co.  As of end of Third  Quarter  1999,  the
Company has a portfolio of available-for-sale  securities totaling approximately
$3 million.

Other Income

Other income  increased to $251,731 in the Third Quarter 1999 from an expense of
$3,959 in the Third Quarter 1998.  Other income consists  primarily of fees from
collection of loan losses and financial service commissions.

<PAGE>

Net Income

The  Company  recorded  a net income of $63,893 or $0.01 per share for the Third
Quarter 1999  compared to a net loss of $1.45 million or $0.16 per share for the
Third Quarter 1998. The increase in net income was primarily  attributable to an
increase  in net  interest  income,  reversal  of  provision  for  loan  losses,
amortization  of  negative  goodwill,  and credit for income  taxes in the Third
Quarter 1999. This was offset by higher operating  expenses  associated with the
resumption of normal  business  operations in fiscal year 1999.  The Company has
recorded  a  credit  for  income  taxes  in Third  Quarter  1999 as a result  of
over-reporting  of income  taxes in Second  Quarter  1999.



<PAGE>


COMPARISON OF THE NINE MONTH PERIOD ENDED DECEMBER 31, 1999 TO THE NINE MONTH
PERIOD ENDED DECEMBER 31, 1998

Interest Income

Interest  income  decreased to $11.5 million for the nine months ended  December
31, 1999 ("Interim  1999") from $11.9 million for nine months ended December 31,
1998 ("Interim  1998").  The  acquisition of Youngnam added  approximately  $4.2
million  in  interest  income  to  Interim  1999.  Excluding  the  effect of the
acquisition,  interest income declined by  approximately  46% to $7.2 million in
Interim 1999 as compared to Interim  1998.  The  decrease in interest  income in
Interim  1999 is  primarily  due to a  reduction  in  average  interest  rate on
outstanding mortgage loans and bank deposits resulting from the stabilization of
the Korean financial  markets in 1999 following the IMF Crisis.  Interest income
on bank  deposits  increased  to $2 million in Interim 1999 from $1.7 million in
Interim  1998  as a  result  of the  Youngnam  acquisition.  Excluding  Youngnam
acquisition,  interest income on bank deposits  decreased by approximately  $0.4
million in Interim  1999 as compared  to Interim  1998 due to a decrease in bank
deposits and bank deposit rate.

Interest Expenses

Total  interest  expenses  decreased to $8.9 million for Interim 1999 from $11.8
million in Interim  1998.  Excluding the effect of Youngnam  acquisition,  total
interest  expenses  in  Interim  1999 was $5.8  million,  a decline  of 35% from
Interim 1998. The decrease in interest  expenses was primarily  attributable  to
lower borrowing costs following the IMF Crisis and lower outstanding  borrowings
resulting from the applying loan prepayments to long-term debt retirement.

Net Interest Income

Net interest  income  increased to $2.6 million in Interim 1999 from $120,000 in
Interim  1998.  The increase in net interest  income was due to (i) the Youngnam
acquisition  which provided  additional  interest income and (ii) lower interest
expenses  resulting from lower borrowings and borrowing costs, and offset by (i)
lower  interest  rate on  outstanding  loans and (ii)  lower  loans  outstanding
resulting from prepayments.

Reversal of Provision For Loan Losses

Reversal of provision for loan losses  increased to $1.7 million in Interim 1999
from a provision for loan losses of $1.1 million in Interim  1999.  The reversal
is  based  on  collection  of  accrued  interest  and  principal  payments  from
previously  written-off loans,  resulting in higher recovery projection on these
loans.

Total Operating Expenses

Total  operating  expenses  were $5.2 million in Interim  1999  compared to $1.4
million in Interim  1998.  The  increase in  operating  expenses  was  primarily
attributed to an increase in salaries,  general and  administrative  expense and
employee  benefits.  The  increase  in salaries  and general and  administrative
expenses are due to increased staffing and office expansions associated with the
resumption of normal operations during Interim 1999.

Salaries and Employee Benefits

Salaries  increased  to $2.3  million in Interim  1999  compared  to $385,145 in
Interim  1998 due to the  acquisition  of Youngnam  and an increase of personnel
from 24 to 100.

Employee  benefits  increased  to  $826,083 in Interim  1999  compared to nil in
Interim 1998.  Employee  benefits are accrued for  employees and directors  with
more than one year of service  and are based on their  annual  compensation  and
years of service.  There were no employee  benefits  accrued during Interim 1998
due to the termination of most employees during 1998, resulting no employee with
more than one-year service during Interim 1998.

Amortization of Negative Goodwill

Negative  goodwill  totaling  approximately  $11.5  million  resulting  from the
acquisition  of NewState  Capital in December 1998 and Youngnam in March 1999 is
being amortized at rate of approximately  $700,000, at the current Won:US Dollar
exchange rate,  each quarter over a 5 year period.  There was no amortization of
negative goodwill in Interim 1998.

Amortization of Goodwill

Goodwill totaling  approximately  $1.1 million resulting from the acquisition of
NewState  Capital by the  Company is being  amortized  at rate of  approximately
$58,000  per  quarter  over 5 years.  There was no  amortization  of goodwill in
Interim 1998.

Other Income

Other  income  increased  to $676,658 in Interim 1999 from a loss of $141,369 in
Interim 1998.  Other income consists  primarily of collection of loan losses and
financial service commissions.

Net Income

The Company recorded a net income of $302,129 or $0.03 per share for the Interim
1999  compared to a net loss of $2.5  million or $0.27 per share for the Interim
1998. The increase in net income was primarily  attributable  to (i) an increase
in net  interest  income,  (ii)  reversal of provision  for loan  losses,  (iii)
amortization of negative  goodwill,  and (iv) credit for income taxes.  This was
offset by higher  operating  expenses  associated  with the resumption of normal
business  operations in fiscal year 1999.  The Company has recorded a credit for
income taxes in Interim 1999 as a result of the merger of Youngnam into NewState
Capital,  thus allowing the Company to utilize  Youngnam's  net  operating  loss
carry-forwards.

LIQUIDITY AND CAPITAL RESOURCES

At  December  31,  1999,  the  Company  had  cash  and  cash   equivalents   and
interesting-bearing  deposits totaling $7.7 million compared to $32.5 million at
March 31,  1999.  For the nine months  ended  December  31,  1999,  cash used in
operating  activities of $3.7 million was primarily due to (i) the net income of
$302,129,  (ii)  reversal of provision  for loan losses of $1.7  million,  (iii)
amortization  of negative  goodwill of $2.1  million,  (iv)  increase in accrued
employee benefit of $837,055, (v) loss on sales of available-for-sale securities
of $1.6  million,  (vi) decrease in accrued  expenses of $1.8 million,  and (iv)
increase in accrued income of $1.1 million.

Cash provided by investing  activities  was $30 million was primarily due to (i)
repayment of loans outstanding of $27.3 million,  (ii) decrease in bank deposits
of $3.3  million  and  (iii)  sales  of  securities  of $6.7  million  and  (iv)
investment in the subsidiary  NewState Capital totaling $5.2 million (equivalent
to  the  loan  and  associated   interest  payments  assumed  with  the  reverse
acquisition of NewState Capital).

For  Interim  1999,  cash used in  financing  activities  of $49.4  million  was
primarily  due to (i) decrease in short-term  borrowings  of $2.6 million,  (ii)
repayment of long-term  debt of $52.3  million and (iii)  private  placements of
shares of common stock in the  aggregated  amount of $5.4  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.

YEAR 2000 UPDATE

The Company  conducted tests of its systems and applications on January 1 and 2,
2000. To date, the Company has not experienced  any material  disruptions of its
internal  computer  systems or application  software and has not experienced any
material problems with the computer systems or application software of its third
party vendors. The Company continues to monitor its systems and applications and
those of its third party vendors in order to address them  promptly,  should any
arise.

Although the Company's Year 2000 rollover did not present any material  business
disruption,  there are some remaining Year 2000 related risks,  including  risks
due to the fact Year 2000 is a leap year.  Management  believes that appropriate
actions has been taken to address  these  remaining  Year 2000 issues.  However,
management  cannot be  certain  that Year 2000  issues  will not have a material
adverse impact on the Company, since it is early in the Year 2000.



<PAGE>


PART II.      Other Information

Item 1.       Legal Proceedings
              ----------------------
              None

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

              On November  10, 1999,  the Company  issued  82,500  shares of its
common stock,  $0.01 par value per share,  at a price of $3.00 per share, to Mr.
Kim Kyung Dong, a Korean individual,  pursuant to an exemption from registration
under the Securities  Act provided by Section 4(2)  thereunder and Regulation S.
The  issuance  of these  shares by the Company to Mr. Dong was in full and final
payment for certain capital raising services rendered by Mr. Dong to the Company
in Korea.

Item 3.       Defaults Upon Senior Securities
              --------------------------------------
              None

Item 4.       Submission of Matters to a Vote of Security Holders
              ---------------------------------------------------------------
              None

Item 5.       Other Information
              ----------------------
              None

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

(a)      Exhibits:

         27       Financial Data Schedule

(b)      Reports on Form 8-K

         * Form 8-K Filed July 21,  1999 - - The Company  announced  that it 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 its common  stock,  representing  approximately  80% of its
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 - - The  Company  amended  its
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., a
recently acquired Korean subsidiary in a reverse  acquisition.  The Company also
announced  that  effective  September  15, 1999 the Company  changed its name to
NewState  Holdings,  Inc. and that at the opening of business on  September  17,
1999 the Company's new OTC Bulletin Board symbol was "NSTH".

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

                                   SIGNATURES

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

                                    NEWSTATE HOLDINGS, INC.


                                    By:      ALEXANDER T. SHANG
                                             ----------------------------
                                             Alexander T. Shang, Treasurer and
                                                Chief Financial Officer


Dated:  February 18, 2000