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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended March 31, 2001

OR

For the transition period from ____________ to ____________.

Commission File Number 000-28909

GREYSTONE DIGITAL TECHNOLOGY, INC.

(858) 874-7000
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
None.

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)

      Indicate by check mark whether the registrant: (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 by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [   ]

      As of July 6, 2001, the aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant was approximately $3,641,271, based on the closing price of the Company’s Common Stock on the Nasdaq OTC Bulletin Board on July 6, 2001 of $0.16 per share.

      As of July 6, 2001, 29,749,034 shares of registrant’s Common Stock, $0.001 par value, and 3,183.5 shares of registrant’s Preferred Stock, $0.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year are incorporated by reference into Part III of this report.

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PART I

Forward-Looking Statements

      This document contains “forward-looking statements,” which may include the following:

	•		our business strategy;
	•		the timing of and plans for the introduction of new products and enhancements;
	•		plans for hiring additional personnel;
	•		anticipated growth in the market for our products;
	•		completion of acquisitions or the entering into strategic alliances; and
	•		the adequacy of our existing resources together with anticipated sources of additional capital to fund our operations for at least the next 12 months.

      Other statements about our plans, objectives, expectations and intentions contained in this document that are not historical facts may also be forward-looking statements. When used in this prospectus, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of reasons, including those discussed under “Factors That May Affect Future Performance” and elsewhere in this document. We assume no obligation to update any forward-looking statements.

Item 1. Business

Overview

      GreyStone is a software development and systems integration company. Specifically, we develop real-time, interactive, and networked three-dimensional (3-D) visual and aural software, simulated “virtual” environments, and “Info-Space” applications that we market to customers in government and commercial markets. We also provide our customers with supporting engineering services in order to add value to the software applications that we sell to our customers.

      We commenced business in San Diego, California in 1989 in order to provide the United States military and its contractors with software and engineering services for applications in highly advanced military hardware (fighting aircraft, missiles, ships, and vehicles) and training simulators. Our defense customers have included the U.S. Navy, Army and Air Force, Lockheed Martin, Logicon, Hughes Aircraft, and the Defense Advanced Research Projects Agency (DARPA), and others. These customers use GreyStone’s products and services in aerial, mechanized, and naval combat, electronic warfare, mission planning and support, training, battlefield command, control, communications, computers, and intelligence (“C4I”), and unmanned aerial vehicles (“UAVs”).

      In 1994, we initiated a long-term program to develop multi-player (collaborative) real-time, interactive, and networked 3-D entertainment content (“Titles”) to run on high-end 3-D multimedia home-based personal computers (“PCs”) and new PC-based open architecture arcade amusement machines (“OA3Ms”). During 1998 we developed our first PC-based entertainment Title, XS-G^TM, to sell to the OA3M entertainment market.

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      In December 1999 we transitioned from operating as a privately-held company to a publicly-traded company with the completion of a merger with a company with no previous operations which was traded on the Over-the-Counter Bulletin Board. GreyStone Technology, Inc.’s operations continue today as a wholly-owned subsidiary of GreyStone Digital Technology, Inc. (formerly Express Capital Concepts, Inc.). All references to “GreyStone’s” operations in this report are those of the wholly-owned subsidiary, under which all of GreyStone Digital Technology, Inc.’s operations are currently conducted.

      Since 1994 we have followed a strategy where we invested resources and devoted many arduous employee hours to translate the Company’s technology and experience working in the defense business to the commercial entertainment business. However, a series of events during this past fiscal year has forced a reevaluation of this strategy and the decision to suspend our entertainment operations and focus our resources on our core revenue business areas, information science and technology for defense and government. In eliminating our involvement in non-core business areas, and instituting a number of internal changes designed to reduce our operating costs, we believe the Company can grow its core business and achieve positive cash flow from its operations.

      We have several goals in this effort. The first is to focus our business on what we do best—information technology software and engineering services; and the second is to maximize our ability to achieve our goal of profitability. We will consider a merger or acquisition if it compliments this strategy or can increase shareholder value.

      According, we have begun to implement a profound transformation in our operations that will continue over the next two fiscal years. We believe that this transformation should result in a reliable course for profitable operations. We have begun to implement a number of initiatives which we believe will allow us to grow our core business in information science and technology and still apply our technology to certain commercial markets.

      During the next business year our Government Business Group will continue providing engineering services relating to the sale of its product, RAGE, and its engineering services contracts. Marketing targets remain focused on Battlefield Visualization applications, and customized C4I/ISR applications. During the past fiscal year we have won subcontractor positions on several new programs and will be aggressively pursuing new business under these contract vehicles.

Our Current Markets, Products, and Services

      We have developed and marketed software products that are targeted at the defense preparation market. We develop software products that are used in combat and training simulations and provide support services that contain costs and increase the effectiveness of defense operations and defense preparation. We are planning expansion in these areas and may consider a merger or acquisition to support this strategy.

GOVERNMENT BUSINESS

      We founded GreyStone in 1989 to provide the U.S. military and contractors with software and engineering services for applications in highly advanced military hardware and training simulators. We provide customers real-time, 2-D and 3-D, distributed and networked virtual environments for collaborative mission planning, rehearsal, mission reconstruction, testing, training, prototype development and operational assessments. Our virtual environments employ real-time simulation, intelligent agent and advanced visualization technologies that create a battle-space in which a commander and soldier alike can assess, command, and shape the dynamics of the battle as well as experiment with various contingencies to

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test skill and enhance judgment. Virtual environments are used to provide knowledge of the battle-space previously not available without deploying live troops and millions of dollars of equipment.

      From the beginning, we have built our government business on key technologies (real-time simulation, intelligent agents and advanced visualization) used to create virtual environments and the experience of qualified individuals who understand the requirements and utility of virtual environments for training and combat operations. GreyStone has modeling and simulation professionals, advanced systems integrators, mission-planning specialists, intelligent agent experts, software developers with defense industry experience, and experienced former military personnel who continue to provide the government customer with an alternative to deploying troops and systems to the field.

      GreyStone has a legacy of software development and engineering services for high-performance military systems that are immersive, interactive, and which function in real-time. GreyStone has been able to adapt its military software products for application across several mission areas: planning, advanced simulations, aerial combat, battlefield command and control, and, most recently, in the arenas of intelligence, surveillance and reconnaissance systems. GreyStone’s defense products are applied to some of the world’s most advanced military hardware and training simulators for aerial combat, combat simulation, electronic warfare, mission planning and support, battlefield C4I, and unmanned aerial vehicles (UAVs).

               RAGE™ —the Product

      Military personnel use GreyStone’s Real-time Advanced Graphics Environment, RAGE™ to reproduce realistic combat scenarios for command centers to visualize and distribute information in real-time regarding forces, systems situations and conditions.

      GreyStone’s RAGE software product has been used in over 70 joint military exercises and advanced technology demonstrations worldwide. RAGE provides customers real-time, 2/3D, distributed and networked virtual environments for collaborative decision-making, situation awareness, mission planning/rehearsal/ reconstruction, testing, training, prototype development and operational assessments.

      Since RAGE is the primary software running the real-time enhanced virtual world simulation during an exercise, each site requires a RAGE license sale. With each exercise, GreyStone is paid for other engineering services it performs, such as modifications to RAGE, custom databases, and the creation of unique interfaces required of each application, in addition to providing both field and home-office services during the exercise. The system has been useful for UAV concept of employment and operational utility demonstrations in over 60 large-scale live Joint and Army exercises and force modernization Advanced Warfighting Experiments.

               Engineering Services and Products

      GreyStone provides, on a contract basis, advanced engineering and software development services to the military and its contractors including services during the last twelve months to:

	•		Lockheed Martin — Projects include F-22 Internal Research and Development
	•		Joint Strike Fighter Program Office — Joint Strike Fighter C4I Support Plan
	•		U.S. Navy SPAWAR Systems Center Code 44 — San Diego — Joint Medical Operations — Telemedicine, and Joint Semi-Automated Forces, DD-21 concept modeling and analysis

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	•		General Atomics — Aeronautical Systems Inc. — San Diego — Advanced visualization for Predator UAV ground-based trainer
	•		U.S. Navy NAWC Weapons Division — China Lake — Advanced visualization and simulation for unmanned vehicle flight simulation, flight test support
	•		U.S. Navy NWDC Simulation Center —Newport — Virtual UAV simulations, advanced sensor simulation for large-scale exercises
	•		U.S. Navy NAVAIR— Patuxent River — Advanced Electronic Attack Analysis of Alternatives to replace the EA-6B tactical jamming aircraft for OSD
	•		U.S. Air Force — Wright-Patterson AFB — Small Business Innovation Research into the use of Intelligent Agent technology for predicting aircraft system failures, providing preventive maintenance
	•		U.S.M.C. Warfighting Laboratory — Quantico — Advanced visualization and virtual UAV simulations for Limited Operation Experiments
	•		General Atomics — Predator UAV ground trainer visualization
	•		U.S. Navy Space and Naval Warfare Systems Command — San Diego — Early Operational Assessments for Navy C4I systems, experiment support
	•		U.S. Joint Forces Command — Norfolk — Virtual UAV simulation, advanced visualization technologies, exercise and experiment support

      These Services have been contracted for through the following:

	•		U.S. Navy SPAWAR Systems Center Code 44 BATTLEFIELD VISUALIZATION AND ADVANCED SIMULATION TECHNOLOGY: GreyStone has been awarded individual delivery orders for a total value of approximately $3,500,000 to date (last two years).
	•		INFORMATION WARFARE IDIQ: The Veridian Engineering, Inc. team, including GreyStone as a subcontractor, was awarded a three-year delivery order contract with a ceiling of $38.1 million to provide engineering services in support of developmental efforts for information warfare systems located at the Naval Air Warfare Center Weapons Division, Point Mugu, California.

      New awards in the last twelve months include:

	•		U.S. ARMY AVIATION and MISSILE COMMAND OMNIBUS 2000: GreyStone, as part of a large team lead by the Computer Sciences Corporation, has been selected to participate in the $2.5 billion U.S. Army Aviation and Missile Command OMNIBUS 2000 Support Services program. The OMNIBUS 2000 program will replace about 60 separate support services contracts formerly awarded by the government. The U.S. Army Aviation and Missile Command develops, acquires, fields and sustains aviation and missile systems, which supports the readiness of the Army’s technologically superior systems on the battlefield.
	•		U.S. ARMY SIMULATION TRAINING and INSTRUMENTATION COMMAND (STRICOM) TEAM OMNIBUS CONTRACT (STOC). STOC is an 8 year Indefinite Delivery/Indefinite Quantity Contract (ID/IQC) structured to allow STRICOM to acquire the full spectrum of Simulation, Training, Modeling, Test and Instrumentation products and services to support

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			Warfighter needs throughout the Army and DoD. The ID/IQC was structured to contain Lots for each STRICOM business domain: Live, Virtual, Constructive, and Test-Instrumentation. Within STRICOM, the Program Management offices are organized around the business domains: PM-TRADE (Live); PM-CATT (Virtual); PM-WARSIM (Constructive); and PM-ITTS (Test-Instrumentation). GreyStone participated as a subcontractor with three different companies, Motorola, CSC/Nichols, and Aegis for winning positions with both large and small companies in all four business domains. This contractual vehicle permits the issuance of task orders for modeling and simulation efforts at any phase within the acquisition life cycle of STRICOM systems.
	•		U.S. Navy SPAWAR Systems Center Code 42 C4I SOFTWARE APPLICATIONS and DATABASES. As part of the SAIC team. The contract requires system engineering tasks all software and associated documentation for new, upgraded, and existing C4I applications. These C4I applications include tactical decision aids, planning tools, analyst aids, user interaction techniques, visualization tools, correlation and fusion techniques, data and information interpretation approaches and interfaces. GreyStone is the subcontractor for modeling, simulation and visualization on this winning team.

                Defense Backlog

      GreyStone’s backlog at March 31, 2001 was approximately $850,000. GreyStone’s backlog at March 31, 2000 was approximately $405,000. All of the backlog is expected to be completed within the company’s fiscal year 2002, ending March 31, 2002. All U.S. Government contracts are subject to termination at the convenience of the Government, whereupon the company would only be paid for work completed up to the termination date.

                Government Business Strategy

      We have focused our core software products and services on Command, Control, Communications, Computers and Intelligence (C4I) and modeling and simulation. In addition to software license sales, GreyStone provides, on a contract basis, advanced engineering and software development services to the military and its contractors. Our strategy the past year has been to:

      (1) Pursue large and growing opportunity in simulation, modeling and training: We have focused software products and services in the government-defined growth areas of simulation, advanced visualization and artificial intelligence and taken advantage of the government’s mandate for commercial-off-the-shelf (COTS) solutions applications. We have been on the winning teams for seven such contracts in the past year, giving us eleven contract vehicles through which to pursue simulation-based engineering services.

      (2) Penetrate New Markets Via Strategic Relationships: We have pursued an aggressive teaming strategy with large and small businesses to gain access to new customers. We chose incumbent contractors whose technology complimented ours or for whom our virtual environments offered them a competitive advantage in renewing their contracts. We also accepted teaming agreements with new firms in the interest of participating in larger multiple contracts for a variety programs that we might not normally access. We engaged in teaming and ongoing relationships with, CSC Nichols, Motorola, SAIC, and three small businesses, all of which have a loyal customer base for which our technology adds new solutions.

      (3) Gain Access to New Technologies: Much of GreyStone’s current capabilities and technology base has been achieved through targeting contracts from government research laboratories and organizations in order to gain access to emerging technologies. This important segment of the government market often funds high-risk technology initiatives and supports GreyStone’s strategy of applying its technology across all of our business areas and products. This has been true particularly in promoting GreyStone’s role in optimizing commercial image generator technology. As the government customer

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seeks lower cost computer workstations to host virtual environments, they are funding continued development of the software products on these new, more affordable hardware systems.

      GreyStone has been able to offer our government customers real-time, distributed, networked virtual environments on PCs because the technology base at GreyStone was already operating on PCs to satisfy GreyStone’s commercial customers in the software games business. This common technology base creates a synergy in the company that helps us pull innovative and cost-effective methods for sharing and displaying data used in the commercial industry for our government customers.

      COMMERCIAL BUSINESS
      Mercracer 3000 Program

      During the past fiscal year we introduced the Mercury motion-based entertainment system (MercRacer 3000™) using the Canyon Fighter™ game, a derivative of our XS-G™ game as a first featured game content. In addition, we continued development of a new game designed specifically to take advantage of the exciting experience that the Mercury system provided. In December 2000, we executed an agreement with Virtual Distribution, Inc. (VDI) to purchase and exclusively distribute GreyStone’s MercRacer 3000. Under the agreement, VDI was to purchase and GreyStone was to deliver 20 MercRacer 3000 platforms by February 2001, a total of 150 systems by June 2001, and VDI was to continue placing orders for delivery of a minimum of 350 systems through June 2002. After a series of delays in VDI’s performance, in March 2001 we learned that VDI’s parent corporation had disbanded VDI completely. As a result of VDI’s demise, the lender of our line of credit called the loan, thereby disabling our ability to complete the production run of MercRacer units.

      As a result of the above events and our inability to immediately secure additional funding to maintain our entertainment business operations, we were forced to terminate the MercRacer program. As of the date of this report, we have stopped the development and production of all entertainment products and content.

      Virtual Info-Space

      During this past year we began to develop new products and services that could exploit the growth and potential of the Internet and wireless communication technology. These products and services were to be marketed primarily to the e-based business market, which we defined as those companies that seek to apply the reach and efficiency of the Internet to enhance their competitive market position and operational effectiveness. The products and services were intended to help businesses to acquire, manage, and distribute information in a more valuable and useful way.

      On January 23, 2001, GreyStone signed a services agreement to provide applications of Virtual Info-Space to OptMark Inc., a newly organized private company based in Corona, CA. Under the agreement, OptMark agreed to pay GreyStone $1.3 million over a nine to twelve month period for development of software applications that OptMark intended to market to provide customers with enhanced interactive content for wireless media platforms. The agreement also provided for GreyStone to receive continuing royalty payments from OptMark and for GreyStone to make a $100,000 equity investment in OptMark, which would represent a 50% ownership of OptMark. In March 2001 OptMark had been unable to raise the money to pay GreyStone to develop the software and the two parties agreed to abandon the agreement. GreyStone had paid $30,000 of the $100,000 equity investment by the time the relationship ended. The $30,000 was written off in the period ended March 31, 2001.

      As of the date of this report, we have suspended the development of all Virtual Info-Space products and services. Although development has been suspended, we still plan to one day pursue this area and may consider a merger or acquisition to support our efforts.

      GreyStone's commercial business, including the MercRacer program and the Virtual Info-Space project have been treated as discontinued operations in the financial statements which accompany this report.

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Strategic Business Acquisitions or Mergers

      We may acquire or merge with businesses and engage the best professional talents to achieve our objectives at a faster pace when these actions are likely to lower our risk and improve our profitability. To advance our strategy we will consider business combinations with businesses that can benefit from our ability to apply advanced digital technology to solve problems and communicate better. Certain businesses that integrate communication systems and simulation systems, or have established e-commerce reach, or address an established community of common interest, or have an established communications network may advance our strategic plan.

      On January 14, 2000 GreyStone executed a letter of intent for the acquisition of a company that designs, builds, and sells forensic surveillance, mobile intelligence, and communications platforms. GreyStone chose not to pursue a business combination. The proposal for forensic vehicles and command and control systems for a national security agency in South America is still pending and the two companies have executed a teaming agreement regarding the opportunity.

      In support of the relationship between GreyStone and the target company, GreyStone loaned the target company president $500,000 in November 1999 and $100,000 in February 2000. The loans were collateralized by all of the borrower’s stock in the target company. The loans have been extended by GreyStone three times, and most recently matured on November 18, 2000. Total principal and unpaid interest accrued through March 31, 2001 is $670,097. GreyStone has requested repayment of the loans and has received $27,500 this calendar year. A reserve was taken in the period ended December 31, 2000 for the loans.

      In June 2000 GreyStone purchased inventory from the target company, with a cost basis of $330,000, and purchased an account receivable for $135,000. GreyStone has been unable to resell the inventory to-date and was unable to collect on the account receivable. A reserve for the entire amount of these purchases was taken in the period ended March 31, 2001.

Research and Development

      Our success will depend to a substantial degree upon our ability to develop and introduce in a timely fashion new products and enhancements to our existing products that meet changing customer requirements and emerging industry standards. We have made and plan to continue to make substantial investments in research and development. In the year ended March 31, 2001, our research and development expenses related to continuing operations were $634,312. This compares to $568,063 in 2000 and $232,663 in 1999.

      We have focused our development efforts on the development of RAGE, our visualization and simulation software, and the UAV Toolkit software for the Government sector, the XS-G game and the Mercury motion-based entertainment system for the Commercial sector, and the GreySim tools which support both business sectors.

      Our research and development efforts have been coordinated by the Strategic Technology Unit, whose responsibility was to develop and demonstrate advanced technologies for use in GreyStone’s products. These research and development projects included the exploration of basic technology alternatives, maturation of critical technology components, and the execution of cooperative technology ventures. As of the date of this report the majority of activities in the Strategic Technology Unit have been suspended.

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      Research and development expenses primarily consist of salaries and related costs of employees engaged in ongoing research, design and development activities and subcontracting costs. As of March 31, 2001, we had 24 employees engaged in research and development for continuing operations.

Competition

      GreyStone experiences substantial competition in its defense and entertainment markets and believes its principal competitive advantages to be its reputation and experience in its selected market areas, creativity in applying existing and GreyStone proprietary technology to new applications that meet customer requirements, technical assistance to its customers, and price.

      GreyStone believes that it has a competitive advantage with its government software product, RAGE, which has been identified by the government in several sole source award announcements as a requirement for award performance. While GreyStone believes that this competitive advantage may continue, for an unknown period of time, there is no guarantee that the government will continue to identify GreyStone’s software as a continuing requirement for such awards.

      GreyStone competes against established corporations in the government market that have substantially greater financial and other resources than GreyStone. In the past, GreyStone has worked closely with several companies as a sub-contractor. No assurances can be given that GreyStone will be successful in maintaining or enhancing these relationships in the future. GreyStone considers the principal competitors for its government products and services to include Science Applications International Corporation (SAIC), Cubic Corporation, Logicon, TRW and others. There can be no assurance that GreyStone will be able to compete with these and other companies for future government contracts or that such contracts, upon successful award, will be on terms favorable to GreyStone.

      The markets for interactive 3-D software products are still emerging, and we expect the number of competitors to increase. Companies having greater financial resources may be able to make greater investments in research and development, engage in more extensive marketing campaigns, carry large inventories, adopt more aggressive pricing policies and make more attractive offers to customers. We believe that large entertainment and computer companies are increasing their focus on the interactive 3-D software entertainment market, which will stimulate further competition.

      GreyStone’s competitors range from small companies with limited resources to large companies with greater financial, technical and marketing resources. GreyStone’s future success in its government markets will depend upon, among other things, its ability to withstand competition from larger companies, to obtain and retain competent personnel to successfully accomplish its obligations under its various contracts and agreements and to productively extend its technological expertise to new applications. All of these factors are subject to uncertainty.

Patents and Proprietary Rights

      GreyStone applies for patents, or other appropriate proprietary or statutory protection, when it develops valuable new or improved technology. As of March 31, 2001, GreyStone has one design patent as well as certain trademarks and copyrights. The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. There can be no assurance that its patent will afford effective protection against competitors with similar technology; nor can there be any assurance that patents issued to GreyStone will not be infringed upon or designed around by others or that others will not obtain patents that GreyStone would need to license or design around. If the courts uphold existing or future patents containing broad claims, the holders of such patents might be in a position to require companies to obtain licenses. There can be no assurance those licenses that might be required for GreyStone’s products would be available on reasonable terms, if at all.

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      In addition to patent and copyright law, GreyStone relies on trade secrets and proprietary know-how, which it seeks to protect in part by confidentiality agreements with its strategic partners, employees, consultants, vendors and licensees. GreyStone’s agreements prohibit unauthorized disclosure or reverse engineering of GreyStone’s systems. However, GreyStone expects that third parties may attempt to reverse engineer its technology. There can be no assurance that GreyStone’s confidentiality agreements will not be breached or that GreyStone would have adequate remedies for any breach. The law concerning reverse engineering by a person or entity that has not signed a license agreement is currently uncertain. As a result, GreyStone may not have an adequate remedy if a competitor disassembles or reverse engineers products based on GreyStone’s proprietary technology even if trade secret or copyright law protects GreyStone’s technology.

      GreyStone relies in part on copyright laws to prevent unauthorized duplication or distribution of its software, written materials and audiovisual works. Existing copyright laws afford only limited protection, particularly in certain jurisdictions outside the United States where GreyStone may seek to license its technology.

      As used in this document, RAGE is a trademark of GreyStone. In June 1998 GreyStone applied for registration of XS-G as a trademark. Notice of allowance was issued in August 1999.

Employees

      GreyStone had 52 full-time employees as of March 31, 2001. 24 of these employees are in research and product development related activities, one in manufacturing and eight in GreyStone’s business sectors, marketing and sales, and finance and administration. 19 additional employees were assigned to operations which have since been discontinued. As of July 6, 2001, GreyStone had 33 full- time employees. GreyStone is not a party to any collective bargaining agreement, and GreyStone believes its relations with employees to be adequate.

Factors Which May Affect Future Performance

      Risks Related to GreyStone’s Operations

GreyStone’s revenues are principally generated from sales and services to the U.S. Government and its contractors.

      To date, substantially all of GreyStone’s revenues have come from sales and services to U.S. government agencies and contractors. GreyStone’s contracts are subject to funding limitations for the convenience of the government. Cancellations or delays of government projects or activities will have a significant impact on GreyStone’s results of operations and financial condition. Because GreyStone tends to work on only a few projects at any time, cancellations or delays can affect GreyStone more adversely than larger companies.

      It is possible that the U.S. government may spend less money on military-related technology in the future or that GreyStone in any event will not be successful in attracting new government business in the future. While the total amount of expenditures should remain in the billions of dollars and GreyStone believes that an increasing proportion of these expenditures will be budgeted to software and related technologies, there can be no assurance that the purchases by the U.S. government or its contractors will remain at or above current levels. Any inability by GreyStone to offset declines in government business with sales to the commercial market or other governments would affect GreyStone materially and adversely.

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GreyStone’s government contracts can be terminated at any time.

      All government contracts and, in general, subcontracts under them may be terminated at any time at the convenience of the United States Government. Government contracts also may be canceled if the necessary funds are not appropriated by Congress. Since Congress normally appropriates funds only one fiscal year at a time, longer term government contracts are usually only partly funded at any time. If any of GreyStone’s government contracts or subcontracts were to be terminated or canceled, GreyStone generally would only be entitled to receive payment for work completed and allowable termination or cancellation costs. Termination or cancellation of GreyStone’s contracts or subcontracts could have a material adverse effect on GreyStone.

GreyStone needs capital now and will need additional capital in the future, which may not be available on acceptable terms.

      To finance its business plan and negative cash flow GreyStone has continually needed to obtain debt and equity financing on a private basis. Cash deficiencies in the past and at the time of this report have required GreyStone to defer payment of its obligations and impeded its operations and development. Although GreyStone has been able in the past to fund operations by selling shares and borrowing, there is no assurance that it can continue to do so.

      Historically, the company has funded its operations primarily through private sales of common and preferred stock, and borrowings. The stock sales have been made pursuant to private placements and exemptions from registration under the Securities Act of 1933. The Company raised approximately $6,000,000, $5,000,000, and 3,577,000 during its business years ended March 31, 2001, 2000 and 1999, respectively. The funds raised in the recent business year was primarily from the sale of convertible preferred stock ($4,500,000), borrowings from a one-year line of credit ($845,000), and short term borrowings from the company’s principal stockholder, officers, and other private lenders.

      On March 31, 2001, GreyStone’s total current assets were $699,973 and total current liabilities were $3,793,599, which resulted in a working capital deficiency of $3,093,626.

      No assurance can be given that additional equity capital or borrowings will be available to GreyStone on favorable terms, if at all. Nor is there any assurance that GreyStone’s results from operations will improve, or that its financial condition will improve.

      GreyStone presently anticipates that its expenditures will continue to exceed its revenues from its operations if there is not a significant improvement in its revenues. If GreyStone’s revenues do not increase substantially, and if there are any significant delays in raising additional capital, then GreyStone may face the risk of not having enough cash or other resources to continue to operate its current business plan. Without increased revenues, or the ability to raise additional capital, GreyStone could be compelled to curtail or even cease operations. If this were to happen, GreyStone shareholders could lose all or part of their investment.

GreyStone’s quarterly results are likely to fluctuate significantly and may be below the expectations of analysts and investors.

      GreyStone’s quarterly revenues, operating results and cash flows vary. Factors which cause this fluctuation include:

	•		the uncertainty in timing of the payments on government contracts;
	•		the reduction in size, delay in starting-time, interruption, or termination of one or more significant projects or contracts during a quarter;

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	•		the delays in the research, development and introduction of new products; and
	•		general economic conditions which may affect the ability of GreyStone to sell its products to the government and government contractors.

      The timing of payments on government contracts depends on government project schedules. When a project does not start on time or proceeds slowly GreyStone’s financial condition and results of operations can be harmed. Because a majority of GreyStone’s operating expenses, including salaries, depreciation and rent, are largely fixed before a quarter begins, GreyStone has only a limited ability to protect itself from these delays. GreyStone believes that quarterly revenues and operating results are likely to vary significantly in the future and that period-to-period comparisons of its revenues and operating results are not necessarily meaningful and should not be relied upon as indications of future performance.

GreyStone will not be able to accurately predict the success of its future operations and you should not rely on GreyStone’s forward-looking statements.

      Forward-looking statements have been made in the “Company Business” section and elsewhere in this document. Forward-looking statements are all those which are not about historical fact, and include, but are not limited to, information concerning:

	•		business strategy, future operations and results of operations;
	•		the ability of GreyStone to continue its operations
	•		the ability of GreyStone’s shareholders to sell their shares in the over-the-counter market;
	•		the ability of GreyStone to raise additional capital; and
	•		other statements which include “believes,” “expects,” “anticipates”, “intends,” “estimates” or similar expressions.

      While these statements are based on GreyStone’s current expectations, they are subject to important risks and uncertainties and should not be relied on as predictions of what will happen. Factors that may cause actual results to differ from the statements which have been made include, but are not limited to, the other risk factors discussed in this document. Forward-looking statements should not be seen as representations that they will be realized, and GreyStone is assuming no obligation to update them if they should become aware that the statements may not be realized.

GreyStone depends on key engineering, technical and other personnel skilled in government contracting and may have difficulty retaining and attracting these skilled employees in the future.

      GreyStone’s recent cash inadequacies and suspension of the Commercial, Virtual Info-Space, and Strategic Technology groups have had, and may continue to have a negative effect in its ability to implement the business plan. GreyStone’s future success depends to a significant extent on the continued service of its senior management and other key employees. The loss of any of these individuals could have a material adverse effect on GreyStone’s business and results of operations. GreyStone also believes that its future success will depend, in large part, on its ability to attract and retain highly skilled employees in a variety of disciplines. Competition for such employees within the computer industry is intense, and there can be no assurance that GreyStone will be successful in attracting and retaining such personnel.

We may engage in future mergers or acquisitions that dilute or stockholders’ equity and cause us to incur debt or assume contingent liabilities.

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      We may pursue acquisitions that could provide new technologies or products. Future acquisitions may involve the use of significant amounts of cash, potentially dilutive issuances of equity or equity-linked securities, the incurrence of debt, or amortization expenses related to goodwill and other intangible assets.

      In addition, acquisitions involve numerous risks, including:

	•		difficulties in the assimilation of the operations, technologies, products and personnel of the acquired company;
	•		the diversion of management’s attention from other business concerns;
	•		risks of entering markets in which we have no or limited prior experience; and
	•		the potential loss of key employees of the acquired company.

We do not plan to pay cash dividend on our common stock.

      We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain future earnings, if any, to finance the growth and expansion of our business and for general corporate purposes.

Risks related to the digital technology market

GreyStone’s market is characterized by rapid technological change and its products and services could become obsolete or fail to gain market acceptance.

      GreyStone’s success will depend on its ability to develop and introduce products which keep pace with the technological advances in a number of different disciplines, and to respond to rapidly changing customer preferences and tastes. GreyStone must also introduce new and innovative entertainment products frequently to attract and maintain consumer interest. There is no guarantee that GreyStone can give assurance that it will be successful in developing or marketing products that incorporate technological advances, or that adequately address changing customer preferences on a timely basis, if at all. Furthermore, even if GreyStone is able to successfully develop and market products that incorporate technological advances, there is no guarantee that these products will gain customer acceptance.

GreyStone may experience delays in product introduction or defects in software code which could adversely affect its business and results of operations.

      GreyStone could experience delays in new product introductions. GreyStone’s new products could contain undetected or unresolved errors in the software code base when they are first introduced or when newer versions of the earlier products are released. Despite extensive testing, GreyStone may not detect all software errors in its new products and product upgrades. Delays in product introductions and undetected errors in software could result in an inability of GreyStone products to gain market acceptance. GreyStone’s inability to resolve these issues could have a negative effect on business and operations.

Government markets are intensely competitive and GreyStone may not be able to compete successfully.

      GreyStone competes against established corporations that have substantially greater resources than GreyStone. GreyStone has often worked closely with several companies as a sub-contractor, but there can be no assurances that GreyStone will be successful in maintaining or enhancing these relationships in the future.

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      GreyStone considers its principal competitors for government products and services to include SAIC, Cubic Corporation, Logicon, TRW and others. There can be no assurance that GreyStone will be able to compete with these and other companies for future government contracts. Even if GreyStone is awarded contracts, there can be no assurance that the contracts will be on terms favorable to GreyStone.

      GreyStone believes that competition will intensify in the future, and that its ability to compete successfully depends on a number of factors, including the following:

	•		GreyStone’s market presence;
	•		the reliability and quality of its software products and the hardware on which GreyStone’s software products operate;
	•		the pricing and timing of services and products by GreyStone and its competitors;
	•		GreyStone’s ability to retain and attract qualified and experienced engineering and other technical personnel,
	•		GreyStone’s ability to react to changes in the market; and
	•		industry and economic trends.

      While GreyStone believes that its products may compare favorably to those offered by competitors, there can be no assurance that GreyStone’s products will gain market acceptance or that they will compete successfully. Moreover, competitors might develop products or technologies that will have broader market acceptance than GreyStone’s or make GreyStone’s products non-competitive for other reasons. In addition, GreyStone believes that the game industry is consolidating, which may lead to the creation of larger, better-financed competitors. If GreyStone is not able to compete effectively with other 3-D software vendors, GreyStone’s business and results of operations will be harmed.

GreyStone depends largely on its intellectual property, for which legal protection may not be available nor sufficient.

      GreyStone relies on a combination of patent, trade secret, contract, copyright and trademark law to protect its products and technology. As of the date of this report, GreyStone had one patent issued, one registered copyright and two registered trademarks.

      While GreyStone generally enters into confidentiality and/or license agreements with its employees, customers and potential customers and limits access and distribution of its products, documentation and other proprietary information, there can be no assurance that these steps will be sufficient to prevent the theft or independent third party development of its technology.

If technology or intellectual property of GreyStone infringes on the intellectual property of others, GreyStone may incur liabilities and expense and may be required to stop using the infringing technology.

      While GreyStone believes that its technology does not infringe upon the intellectual property rights of other parties, there can be no assurance that third parties will not assert infringement claims against GreyStone. If any such claims are asserted and upheld, there could be a material adverse effect on GreyStone’s business and results of operations.

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      Risks Relating to Security Markets

There has been limited public market for GreyStone stock and the stock price is likely to be highly volatile.

      GreyStone’s common stock is quoted on the OTC-BB. Its total average daily trading volume during the 20 trading period preceding the date of this report was 83,060 shares with an average daily total quoted trading value of $19,042 (based on the daily high bid price). There can be no assurance that the trading volume or price for GreyStone common stock will increase in the near future.

The market price of GreyStone’s common stock may be subject to significant fluctuations.

      Some factors which may cause fluctuation include:

	•		changes in the business, operations, financial results and prospects of GreyStone;
	•		announcements of new products by competitors;
	•		fluctuations in the stock market that are unrelated to the operating performance of particular companies;
	•		more shares of GreyStone stock being available for sale after the issuance of preferred stock conversion shares and shares underlying options and warrants;
	•		general market and economic conditions; and
	•		other factors, such as the exercise of warrants, options, or sale of new common or preferred shares.

Because 33% of the outstanding stock of GreyStone is beneficially owned by directors and officers as a group, other investors will have limited influence over management decisions.

      As of June 30, 2001, directors and executive officers of GreyStone, as a group, beneficially owned approximately 33% of the outstanding stock of GreyStone (including shares underlying exercisable options and warrants to purchase GreyStone stock). Richard A. Smith, GreyStone’s founder owns directly and with his spouse, approximately 26% of the outstanding stock. As a result, the current directors and executive officers of GreyStone, if acting together, would be able to significantly influence most matters requiring the approval of the stockholders of GreyStone. The voting power of these stockholders can delay a change in control of GreyStone.

GreyStone’s board of directors will have broad discretion in issuing preferred stock, which may have an adverse effect on the rights of the holders of common stock.

      The board of directors of GreyStone is authorized to issue 3,000,000 shares of preferred stock without any vote or action by the stockholders of GreyStone. The board of directors have the authority to issue preferred stock in one or more series and to fix the rights, preferences, and restrictions thereof, including:

	•		Dividend rights and rates,
	•		Conversion rights,
	•		Voting rights,

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	•		Terms of redemption,
	•		Redemption prices,
	•		Liquidation preferences, and
	•		The number of shares constituting a series or the designation of such series.

      GreyStone believes the power to issue preferred stock provides desirable flexibility in connection with possible acquisitions or other corporate purposes. However, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control of GreyStone without further actions by the stockholders. In addition, it may adversely affect the market price of the common stock and the voting rights of the holders of common stock.

Conversion of our preferred stock and subsequent public sale of our common stock while its market price is declining may result in further decreases in its price.

      As of June 30, 2001, we had outstanding 3,184 shares of convertible preferred stock. Each share of preferred stock has a stated value of $1,000 per share and is convertible into common stock at a conversion price equal to the lesser of (i) $4.00 per share or (ii) 80% of the volume weighted average price per share of the 250,000 shares traded preceding the conversion notice date. Since there is no minimum conversion price, there is no limit on the number of shares of common stock that holders of preferred stock may acquire upon conversion. Holders of our preferred stock may sell at market price the shares of common stock they have acquired upon conversion at a 20% discount to prevailing market prices concurrently with, or shortly after, conversion, realizing a profit equal to the difference between the conversion price and the market price. The holders of the preferred stock also could engage in short sales of our common stock after delivering a notice of conversion to us, which could contribute to a decline in the market price of the common stock and give them the opportunity to profit from that decrease by covering their short position with shares acquired upon conversion at a 20% discount to the prevailing market price. The conversion of the preferred stock and subsequent sale of a large number of shares of common stock acquired upon conversion during periods when the market price of the common stock declines, or the possibility of such conversions and sales, may exacerbate the decline or impede increases in the market price of the common stock.

Conversion of our outstanding preferred stock, the exercise of our outstanding warrants and stock options and subsequent public sale of our common stock will result in substantial dilution to existing stockholders.

      As of July 6, 2001, we had outstanding 29,749,034 shares of common stock. An indeterminate number of shares may be acquired upon conversion of our outstanding preferred stock since there is no minimum conversion price. At an assumed conversion price of $0.13 per share (based on 80% of the closing price of GreyStone’s common stock on July 6, 2001), holders of preferred stock could acquire upon conversion 33,077,091 shares of common stock, or approximately 111% of the shares outstanding as of July 6, 2001. On that same date 11,009,096 shares may be acquired upon exercise of outstanding warrants at exercise prices ranging from $.60 to $12.00 per share and 5,911,851 shares may be acquired upon exercise of outstanding stock options at exercise prices ranging from $.275 to $6.80 per share. Existing stockholders will experience substantial dilution in their percentage ownership of our common stock if our preferred stock is converted and warrants and stock options are exercised. If all of the outstanding preferred stock are converted at an assumed conversion price of $.13 per share, and all outstanding warrants and stock options are exercised, the number of outstanding shares of common stock will increase by 49,998,038 shares, representing approximately 168% of the outstanding common stock as of July 6, 2001.

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Sales of substantial amounts of our common stock, or the possibility of such sales, may have an adverse effect on the market price of our common stock and impair our ability to raise capital through an offering of equity securities in the future.

      If our securityholders sell publicly a substantial number of shares they own or may acquire upon exercise of outstanding options and warrants or upon conversion of our preferred stock, then the market price of our common stock may decline. Public perception that those sales will occur may also exert downward pressure on our common stock. A decline in the price of our common stock may also impair our ability to raise capital through the sale of equity securities.

Item 2. Properties

      GreyStone leases approximately 27,600 feet of office and research and development space at 4950 Murphy Canyon Road, San Diego, CA 92123. The initial term of the lease expires on December 14, 2003, and can be renewed for an additional five year term subject to an adjustment of the rent to market rates. As of August 1, 2001, GreyStone will reduce its occupancy to one-half of the leased space, with the building’s owner occupying the other half. We believe that the reduced facilities will be adequate to meet our needs throughout the remainder of the lease period.

Item 3. Legal Proceedings

      On December 29, 2000 the Company initiated a temporary suspension of conversions of Series A preferred stock into common stock in order to prevent further degradation in the market price of the Company’s common stock. On January 5, 2001 one of the 13 Series A preferred stockholders filed suit against the Company in the United States District Court, Southern District of New York for breach of contract for failure to honor conversions, and for an order to compel the Company to honor conversions. The stockholder also asked for a temporary injunction to be issued compelling the Company to honor any of stockholder’s conversion notices. The order was granted on January 12, 2001. A second preferred stockholder joined the suit in March 2001, and the case was dismissed on June 19, 2001. A similar case was filed in the same court by a group of four other preferred stockholders on March 2, 2001, and the case was dismissed on March 23, 2001. Both suits were dismissed upon the company’s agreement to continue to honor all conversion notices.

      On May 25, 2001 a lawsuit was filed against GreyStone by Mahan & Nash, a public relations service provider, in the Superior Court of the State of California, County of Los Angeles for the payment of $68,000 in unpaid fees earned under a service contract. The Company has answered with a general denial and hopes to have the matter settled before the status conference, which is scheduled for September 14, 2001.

      On June 29, 2001 a lawsuit was filed against GreyStone and Richard A. Smith by Capital Solutions Fund LLC, the lender of the Company’s February 2001 line of credit, in the Superior Court of the State of California, County of San Diego for breach of contract and fraud. A total of $1,050,000 (including $205,000 in loan fees) was drawn on the line of credit before the line was called by the lender. The line was called as a result of the March 2001 dissolution of GreyStone’s exclusive distributor of the MercRacer entertainment system by the distributor’s parent corporation. GreyStone’s answer to the suit is due by August 2, 2001. Both GreyStone and its CEO, Richard Smith, vehemently deny the claims and intend to vigorously defend against the suit.

Item 4. Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders during the quarter ended March 31, 2001.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

      (a) The Company’s Common Stock, $0.001 par value per share, traded on The Nasdaq OTC Bulletin Board under the symbol “EXCC” from May 1988 until December 23, 1999, and under the symbol “GSTN” from December 23, 1999 until August 21, 2000. The Company’s Common Stock traded on the Nasdaq Small Cap Market under the trading symbol “GSTN” from August 22, 2000 until June 21, 2001, when it was delisted for failing to meet the minimum market capitalization/net tangible assets/net income criteria, an also for not having the requisite minimum three independent members of the audit committee of the board of directors. The Company’s Common Stock has traded on the Nasdaq OTC Bulletin Board under the symbol “GSTN” since June 21, 2001. The following table sets forth the range of high and low bid prices for the Common Stock as reported by the Nasdaq OTC Bulletin Board and Nasdaq Small Cap Market during each full quarterly period during the three most recent fiscal years. The data through December 23, 1999 gives retroactive effect to a 41.66667 to 1 (reverse) stock split.

      The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

      (b) As of June 30, 2001 there were 21,727,034 shares of common stock outstanding held by approximately 1,750 holders of record.

      (c) No cash dividends have been paid on the Company’s Common Stock during the Company’s two most recent fiscal years, and the Company does not intend to pay cash dividends on its Common Stock in the foreseeable future.

      On May 22, 2000 GreyStone completed the sale of $5,000,000 in convertible preferred stock to a group of 13 accredited investors. The sale was made in reliance upon the exemption from securities registration afforded by Rule 506 of Regulation D as promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933, as amended or Section 4(2) of the Act, which permits a sale of securities by an issuer for fewer than 35 accredited or knowledgeable investors. The company issued 5,000 shares of Series A Preferred Stock, convertible into common stock at a rate of the lower of (1) 250 shares of common stock per share of preferred stock (equivalent to an investment of $4.00 per share of common stock issued) or (2) 80% of the volume weighted average price for the previous 250,000 shares traded prior to submission by the preferred shareholder of a conversion notice to the company. The preferred stock carries a dividend of 8% per year, payable at the election of the company in common stock or cash. The Series A investors also received 5-year warrants to purchase 1,250,000 shares of common stock at an exercise price of $5.38 per share, and registration rights on the conversion shares and the shares issuable upon the exercise of the warrants. After payment of a 10%

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commission for introducing the investors to the company, and legal fees totaling approximately $50,000, the company received net proceeds of $4,450,000 which it used for general corporate purposes.

      On July 7, 2001 GreyStone completed the sale of $631,000 of common stock to 11 accredited investors. The sale was made in reliance upon the exemption from securities registration afforded by Regulation D as promulgated by the United States Securities and Exchange Commission under the Securities Act of 1993, as amended, or Section 4(2) of the Act, which permits a sale of securities by an issuer for fewer than 35 accredited or knowledgeable investor. The company issued 8,022,000 shares of common stock, which included 1,112,000 shares issued to 2 parties who introduced the investors to the company’s private placement. The proceeds were used for general corporate purposes.

Item 6. Selected Financial Data

      The selected financial data as of March 31, 2001, 2000, 1999, 1998, and 1997 and for each of the years in the five year period ended March 31, 2001 have been derived from the Company’s audited financial statements. The selected data set forth below is qualified in its entirety by reference to and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements and related notes thereto included elsewhere in this report.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      Except for the historical information contained herein, the following contains forward-looking statements that involve risks and uncertainties. GreyStone’s actual results in future periods could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1 “Business” and “Factors which may effect future performance”, as well as those discussed elsewhere and any document incorporated herein by reference. Also see GreyStone’s financial statements included herein.

Overview

      In December 1999, GreyStone Technology, Inc., a privately held company merged with Express Capital Concepts, Inc., a company which had no previous operations and was traded on the Over-the-Counter Bulletin Board. GreyStone Technology, Inc.’s operations continue today as a wholly-owned subsidiary of GreyStone Digital Technology, Inc., (formerly Express Capital Concepts, Inc.) All references to “GreyStone’s” operations in this report are those of the wholly-owned subsidiary, under which all of GreyStone Digital Technology, Inc.’s operations are currently conducted.

      GreyStone designs, develops and markets real-time, interactive, and networked three dimensional software. It develops and delivers its 3-D software principally for defense (i.e., training and simulation) applications. GreyStone applies its skills and experience in using real-time distributed and networked interactivity, 3-D graphics, artificial intelligence and physics-based behavioral modeling to create software which enables participants to interact realistically in a simulated environment. The same kills can be applied to create interactive products for education, “edutainment”, medicine and transportation.

      GreyStone’s operations are currently consolidated into one business unit: the Government Strategic Business Unit (“SBU”). During the past three months the Company closed all operations in the Commercial Business Unit and suspended development activities for Virtual Info-Space and the Technology Business Unit. Since GreyStone commenced business in 1989 and until the fiscal year ending March 31, 1993 it earned all of its revenues from work performed on government contracts. During the fiscal year ending March 31, 1994, GreyStone’s commercial SBU began to apply its technical expertise and knowledge to the development of products and services suited to commercial application and uses in an effort for GreyStone to achieve greater size and growth. GreyStone has suffered losses every year since 1993. As of March 31, 2001, GreyStone had an accumulated deficit of $52,555,464. GreyStone’s losses have resulted principally from costs incurred in developing products and from general and administrative expenses associated with operations. Additional losses will likely be incurred as GreyStone develops its products.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Years Ended March 31, 2001 and 2000

      Revenues for the year ended March 31, 2001 were $2,367,731 as compared to $1,850,883 for the year ended March 31, 2000, reflecting an increase in revenue of $516,848 or approximately 28%. During both these periods, the Government Strategic Business Unit (SBU) generated essentially all revenues The increase in revenue was primarily the result of an expanded government customer base and increased funding to current tasking with the SPARWARSYSCEN — San Diego. In March 1999, GreyStone was awarded a $15.1 million delivery order contract from SPARWARSYSCEN — San Diego. Approximately $3.5 million in delivery orders have been authorized under this contract through March 31, 2001, leaving an available ceiling of approximately $11.6 million during the remaining 33 months of the contract. The broad scope and extended performance period of this prime contract allows numerous end government customers cost effective access to the Company’s modeling and simulation capabilities. For the twelve month period ending March 31, 2001, government customers other than SPARWARSYSCEN — San Diego, have funded eleven additional delivery orders. The Company anticipates that this trend will continue. As of March 31, 2001, the company’s backlog was approximately $850,000. All of the backlog is expected to be completed within the next twelve months.

      As a result of the dissolution of the product distributor for the MercRacer 3000 entertainment system and the subsequent calling of the 12 month $2.5M line of credit by the lender, the Company has terminated the employment of the team developing the next game title for the MercRacer 3000 and has suspended the MercRacer 3000 program.

      Cost of revenues increased to $2,160,860 for the current year, compared to $1,153,586 for the previous year. As a percentage of revenues, costs of revenues were 91% in the current period, compared to 62% in the previous period. Cost of revenues increased in the current period due to an increase in purchased engineering services costs in support of new government related contractual work, an increase in the use of subcontractors and an increase in the Government SBU overhead rate and company fringe benefit rate applied to contractual work Additionally, included in the cost of revenues in the current period is a charge of $330,000 for finished goods inventory purchased from a potential acquisition candidate. It has been determined that the value of these assets has been impaired and therefore they have been written off. The Government SBU overhead rate increase was the result of additional costs associated with recruiting and hiring qualified engineering software personnel in support of Government SBU activities during the current year. The fringe rate applied to the cost of revenues in the current year is greater than the previous year due to higher medical claims in the current year. Additionally, direct travel costs were higher in the current year as a result of GreyStone’s increased support of overseas and domestic military exercises and contracts.

      The components that make up the cost of revenues include burdened labor, direct travel, other direct costs, direct material, subcontracts and applicable SBU burden. These cost components can vary in amount from period to period and are highly dependent on such factors as the nature of the work performed, location and duration of the work (company vs. contractor site), who performed the work (company personnel vs. subcontractors) and who provided any required equipment (company vs. customer).

      Marketing and sales expenses were $965,039 or 41% of revenues in the current year compared to $733,506 or 40% of revenues for the previous year, an increase of $231,533 in the current year. The increase reflects a greater level of marketing effort in support of the company’s UAV Toolkit^TM and RAGE^TM software products. In general, marketing and sales expenses result from bid and proposal activity as well as attendance at trade shows, company product demonstrations and in-house marketing related activities such as product brochures and marketing software development. These types of expenses can vary from period to period and are highly dependent upon the extent and manner in which the company focuses its efforts regarding potential future opportunities during the reporting period.

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      Research and development expenses were $634,312 for the current year, compared to $568,063 for the previous year, resulting in an increase of $66,249. The increase was the result of continued development work on RAGE^TM software products.

      General and administrative expenses were $3,759,060 compared to $3,482,062 for the previous year, resulting in an increase of $277,018. The increase in general and administrative cost in the current year was public relations expenses and outside professional services, including consultants.

      Other income (expense) of $(2,640,901) consisted of interest income of $83,563, interest expense of $(668,000) and reserves for notes receivables, contract receivable and subscriptions receivables including accrued interest, net of recoveries, and investment in Optmark in the amount of $(2,073,837). (See Liquidity and Capital Resources below for a further discussion.) Additionally, there was miscellaneous income of $17,373 in the current period.

      The loss from continuing operations was $7,792,441 for the current period, compared with $4,001,907 in the previous period, an increase of $3,790,534. The increase from the loss from operations was $1,065,226 in the current period, while other expense increased by $2,725,308.

      The loss from discontinued operations for the current period was $1,920,056, as compared to $485,319 for the previous period. The current period marketing and sales expenses for the discontinued operations were higher due to the attendance of a trade show in November 2000. Also, research and development expenses were higher in the current period as the Company continued work on the MercRacer 3000^TM entertainment system, creating a new title for play and developing a 3D virtual workspace environment.

      The loss from disposal of the commercial segment was $418,000 in the current period and includes the labor and non-labor costs after the current period year end to close down the Commercial SBU.

      The net loss of $10,130,497 increased by $5,643,271 from the $4,487,226 net loss reported in the previous year. In summary, the loss from continuing operations increased by $3,790,534 in the current period, while the loss from discontinued operations and loss on disposal from commercial segment increased by $1,434,737 and $418,000, respectively. During the current period, the Company recorded a one time imputed (non-cash) preferred stock dividends of $3,645,250 in connection with the issuance of detachable warrants associated with sale of $5,000,000 convertible preferred stock, in May 2000 and $804,103 of imputed stock dividends for the beneficial conversion features associated with the issuance of the preferred shares. The Company also recorded a non-cash preferred stock dividend of $311,103, due to the 8% cumulative preferred stock dividend feature.

      The net loss applicable to common stock attributable to continuing operations was $12,552,897. This compares to $4,001,907 in the previous period.

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Years Ended March 31, 2000 and 1999

      Revenues for the year ended March 31, 2000 were $1,850,883, as compared to $2,090,902 for the year ended March 31, 1999. During both of these periods, the Government SBU generated essentially all revenues. The sales decline in the Government SBU between years was the result of a delay in funding of government contracts. As a result, the company redirected a portion of its engineering staff to product development efforts in support of RAGE^TM version 2.x product release.

      Cost of revenues declined to $1,153,586 for the current year compared to $1,261,798 for the previous year. As a percentage of revenues, costs of revenues were 62% in the current year compared to 60% in the previous year. Cost of revenues increased in the current year due to an increase in

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material/subcontract costs for computers and software tools in support of contractual work. Additionally, travel costs were higher as a result of GreyStone’s support of overseas military experiments.

      The components that make up the cost of revenues include burdened labor, direct travel, other direct costs, direct material, subcontracts and applicable SBU burden. These cost components can vary in amount from period to period and are highly dependent on such factors as the nature of the work performed, location and duration of the work (company vs. contractor site), who performed the work (company personnel vs. subcontractors) and who provided any required equipment (company vs. customer).

      Marketing and sales expenses were $733,506 or 40% of revenues in the current year compared to $654,759 or 31% of revenues for the previous year. Government SBU marketing and sales expenses actually increased by $78,747. Marketing and sales expenses result from bid and proposal activity as well as attendance at trade shows, company product demonstrations and in-house marketing related activities. These types of expenses vary from period to period and are highly dependent upon the extent and manner in which the company focuses its efforts regarding potential future opportunities during the reporting period.

      Research and development expenses increased to $568,063 for the current year compared to $232,653 for the previous year, a net increase of $335,410. Government SBU research and development expenses increased as a result of development efforts on RAGE^TM version 2.x.

      General and administrative expenses increased to $3,482,042 compared to $2,044,392 for the previous year, resulting in an increase of $1,437,650. General and administrative increases were the result of legal, accounting and other related costs associated with the completion of the business combination with Express Capital Concepts, Inc. in December 1999 and becoming a publicly Trading and reporting company. Additionally, there was an increase in general and administrative expenses of approximately $191,000 in the current year that was associated with the granting of warrants and stock options.

      Interest expense was $10,260 for the current year compared to $99,944 for the previous period, a decline of $89,684 and reflects the paying down and/or conversion of certain company indebtedness to equity. Interest income in the current year was $94,667.

      The loss from continuing operations was $4,001,907 for the current period compared with $2,202,644 for the previous period. The loss from operation increased by $1,983,614 in the current period, while other income increased by $184,351. The loss on discontinued operations for the current year was $485,319, as compared to $1,056,687 for the previous year. The current period saw a decline in research and development expense for discontinued operations as well as a decline in marketing and sales expenses.

      The net loss of $4,487,226 increased by $1,227,895 or 38% from the $3,259,331 net loss reported in the previous year. In summary, the loss from continuing operations increased by $1,799,263 in the current period while the loss from discontinued operations decreased by $571,368.

      The net loss applicable to common stock attributable to continuing operations was $4,001,907. This compares to $2,202,644 in the previous period.

Liquidity and Capital Resources

      Net cash used in operating activities for the year ended March 31, 2001 was $2,796,124 whereas cash used for operating activities for the years ended March 31, 2000 and 1999 was $3,611,999 and $1,372,164. The net loss for the current year was $10,130,497, an increase from the previous reporting period net loss amounts of $4,487,226 for the year ended march 31, 2000 and $3,259,331 for 1999. The loss from discontinued operations was $1,920,056 in the current period as compared to $485,319 in the previous period and $1,056,687 in 1999 and the loss on disposal of the commercial segment was $418,000 in the current period. During the current reporting period, the company received $78,301 (valued at current market) in the return of GreyStone common stock toward the settlement of a debt for the exercise price of warrants in December 1999. Additionally, non cash expenses were $4,082,475, as compared to $790,465 in the previous reporting period and $584,364 in 1999. Depreciation and compensation expense was $689,432 in the current reporting period, compared to $790,465 in the previous reporting period and $629,364 in 1999. Valuation reserves were

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$2,725,043 in the current reporting period and consisted of notes receivable including accrued interest of $643,151, related party notes receivable, including accrued interest of $56,655, forensic vehicle of $330,000, contract receivable of $135,000, subscriptions receivable, including accrued interest of $1,530,237, and an investment in OptMark, Inc. of $30,000. The write off of the line of credit fees in the current reporting period was $668,000 and included $205,000 in loan origination fees and $463,000 in additional interest expense associated with the granting of warrants in conjunction with the line of credit. Additionally, accounts receivable decreased by $106,733, (after recovery of a $40,000 valuation allowance), other assets decreased by $96,471 and accounts payable and accrued expenses increased by $788,939 in the current period. The net cash used in discontinued operations was $1,695,659 in the current period, as compared to $472,725 in the previous period and $1,073,958 in 1999. The net cash used in operating activities was $4,491,783 in the current period, compared to $4,084,724 in the previous period and $2,446,122 in 1999.

      Net cash used in investing activities was $896,399 during the current reporting period compared to $941,913 for the previous reporting period and $5,772 in 1999. Current period investing activities included purchases of software licenses, equipment and leasehold improvements of $369,362 and the June 2000 purchase of finished goods inventory in the amount of $330,000 from a target company that GreyStone entered into a letter of intent to acquire. Additionally, in June 2000, the Company gave the target Company $135,000 for the right to receive future payments on invoices to be generated by the target company upon the completion of work in progress. GreyStone has hired an agent to assist in the sale of the finished goods inventory and negotiations are underway regarding the goods’ sale. Additionally $30,000 was used to make an investment in OptMark, Inc. The $30,000 has been reserved. Due to the uncertainty of collection on the contract receivable and the finished goods inventory, reserves of $135,000 and $330,000 have been established. Additionally, notes receivable accrued interest was $32,037.

      Net cash provided by financing activities was $5,604,853 in the current period compared to $4,398,456 for the previous period and $3,242,291 in 1999. $4,449,353 of the cash provided by financing activities was the net result of the sale on May 22, 2000 of $5,000,000 in convertible preferred stock to a group of private investors and is net of a 10% commission and legal fees. The net proceeds were used by the Company for general corporate purposes. The balance of the net cash provided by financing activities was made up of $186,500 of loans from the principal stockholder, $74,000 of loans by officers to the company, $50,000 (net) from the issuance of short term notes and $845,000 from a line of credit borrowing. In the previous period $1,703,796 was provided by the exercise of warrants and options, $3,250,470 from the sale of common stock and $49,500 from a subscription receivable. Payments on loans and notes were $600,810 and $4,500 was returned upon cancellation of stock upon exercise of a recession offer. In 1999, cash provided by sales of common stock were $2,424,610, exercise of warrants and options were $11,400, and loans and notes provided cash of $1,141,281. Repayments of notes payable were $335,000 in 1999.

      In December 1999, the company took a promissory note in the amount of $1,183,292 for the partial payment of common stock issued for the exercise of warrants by close advisors to the Company. The note was collateralized by a lien on property owned by the advisors and carried an interest rate of 10% per year. The maturity date of the note was extended three times and last matured on December 22, 2000. Total principal and unpaid interest accrued through March 31, 2000 was $1,202,737. The Company has not accrued any interest on the note during the current period. A valuation reserve of $1,202,737 was established while the Company pursued collection of the note. In March 2001, in order to meet critical cash needs, the Company negotiated a settlement wherein the Company agreed to release the lien on the property which collateralized the note in exchange for a cash payment of $200,000, the return of the previously issued stock, valued at $78,301 (the trading value on the date received), less transaction costs of $13,750.

      At March 31, 2001, the Company had $383,970 in cash and cash equivalents, as compared to $167,299 for the fiscal year ended March 31, 2000. The Company anticipates that in the future, it will need to obtain additional debt or equity financing to continue its operations for at least the next 12 months.

      As of the date of this report, the Company had approximately $45,000 in cash, approximately $195,000 in accounts receivable, and current liabilities of almost $3,000,000. These obligations include accounts payable of approximately $1,000,000 (approximately $691,000 of which is over 90 days) and short term notes payable of approximately $468,000. The company has been requested to make an immediate repayment of the $1,050,000 that had been advanced under the line of credit. Overdue salary obligations are approximately $441,000. Two Company officers have recently resigned. Overdue salary obligations to the remaining seven Company officers are equal to the seven most recent (twice monthly) pay periods. Back salary is also owed to the two resigned officers. Additionally, many employees have not been paid for the most recent one or two pay periods prior to the filing of this report, and most employee and officer expense reimbursement requests remain unpaid.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

      Not Applicable.

Item 8. Financial Statements and Supplemental Data

      See the Index to Financial Statements on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

PART III

Item 10. Directors and Executive Officers of the Registrant

      The information required by this Item will be set forth in the section headed “Proposal 1 — Election of Directors” in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders of the Company (the “Proxy Statement”) which is expected to be filed not later than 120 days after the end of the Company’s fiscal year ended March 31, 2000, and is incorporated in this report by reference.

Item 11. Executive Compensation

      The information required by this Item is set forth in the section headed “Executive Compensation” in the Company’s definitive Proxy Statement and is incorporated in this report by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

      The information required by this Item is set forth in the section headed “Security Ownership of Certain Beneficial Owners and Management” in the Company’s definitive Proxy Statement and is incorporated in this report by reference.

Item 13. Certain Relationships and Related Transactions

      Founders Stock Restriction Agreement and Promissory Notes

      In order to provide incentives for certain founders of GreyStone, GreyStone sold shares to three persons in August 1991 in exchange for certain promissory notes bearing interest at 8.2% per annum (the “Founders Notes”). The Founders Notes were collateralized by these shares. All of the shares of common stock owned by these Founders are subject to a stock restriction agreement dated August 16, 1991 among GreyStone, the Founders, GreyStone’s chief executive officer Richard A. Smith, and Mr. Smith’s wife. The stock restriction agreement contains certain prohibitions on transfer of any common stock owned by the individuals, a right of first refusal in favor of GreyStone upon a proposed sale of the common stock and a covenant not to compete by each individual upon a sale of such individual’s stock which is subject to the stock restriction agreement. In May l992, GreyStone reacquired certain of these shares from the three individuals and reduced the principal balances of the Founders Notes. The founders were compensated in March 2000 for the 1992 reacquisition by the issuance of a total of 550,000 options to purchase additional shares of common stock at an exercise price of $6.00 per share under the company’s 1991 Stock Option Plan. The Founders Notes mature on the earlier of:

	•		August 16, 2001,
	•		ninety (90) days after the termination of the Stock Restriction Agreement,
	•		the dissolution, bankruptcy or insolvency of GreyStone or
	•		GreyStone’s initial public offering of its securities.

      In December 1999 the founders notes were amended to reduce the collateral requirements to one-half of the founders’ shares in order to provide for the founders to make gifts of some of their shares to their family members. In March 2000 the Founders and the Company terminated the stock restriction agreement and the founders’ notes were amended to establish the maturity date of founders’ notes to be August 16, 2001. The outstanding principal balances and the number of shares of common stock securing the Founders Notes as of June 30, 2000 were: Carl A. Beaudet —$195,000/400,000 shares; Thomas D. Aldern —$35,000/80,000 shares; and David C. Vineyard —$97,500/200,000 shares.

      Because of the continued financial difficulties of the company there is substantial doubt that the notes will ever be collected, and therefore, for the period ended March 31, 2001, a non-cash accounting reserve was charged in the amount of $327,500

      Services Agreement and Loans from and to Director Jon Reynolds

      In July and September 1993 GreyStone borrowed $100,000 and $50,000 from Kenwood Capital Limited Partnership. Kenwood is affiliated with Jon M. Reynolds, a director of GreyStone. GreyStone has repaid the loans in full, in cash and by issuing 14,286 shares of GreyStone common stock at a price of $7.00 per share.

      On November 22, 1993, GreyStone issued warrants to The Pointe Force Company to acquire the aggregate of 400,000 shares of common stock of GreyStone at an exercise price of $10.00 per share. The Pointe Force warrants terminate on November 22, 2003. As of the date of this report, none of the Pointe Force warrants had been exercised.

      In March 1996, GreyStone and Pointe Force entered into a services agreement which provides for Pointe Force, through its agent Jon Reynolds, who was at the time an officer and director of GreyStone, to provide continuing general financial and management advisory

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services to GreyStone, including the services of Mr. Reynolds as the president and chief operating officer of GreyStone. In the services agreement, GreyStone acknowledged that it owed Pointe Force for services rendered through March 31, 1996 under a previous agreement in the aggregate sum of $92,954.14 and that for the period commencing April 1, 1996 GreyStone would accrue compensation to Pointe Force in the amount of $10,000 per month until the earlier of Mr. Reynolds’ ceasing to perform services as president and chief operating officer of GreyStone or thirty (30) days after GreyStone’s receipt of an infusion of debt or equity in an amount of not less than $2 million (the “Capital Infusion”). The parties agreed that upon receiving the Capital Infusion,

	•		GreyStone would pay as soon as reasonably practical to Pointe Force the sum of $92,954.14 plus the sum of $10,000 per month from April 1, 1996 until 30 days after the Capital Infusion,
	•		Pointe Force and Reynolds would cease to be entitled to any further compensation; and
	•		the parties would negotiate in good faith a compensation package for Mr. Reynolds in accordance with the parties’ understanding and agreement on the future involvement of Mr. Reynolds with GreyStone.

      The services agreement terminated upon his resignation as president and chief operating officer of GreyStone effective as of January 1, 1997. The $92,954.14 and all accrued compensation has been paid to Mr. Reynolds.

      In addition to the Point Force warrants, on March 29, 1996, GreyStone granted Point Force warrants to purchase 100,000 shares of common stock. Effective, January 1, 1997, all of these warrants were fully vested. Each of these warrants has a term of ten years from date of issuance and are exercisable at $10 per share.

      Commencing in July 1999, Mr. Reynolds’ services to GreyStone resumed under an agreement with The Pointe-Force Company, Inc., an entity controlled by Mr. Reynolds’ spouse. Mr. Reynolds provides consulting services to GreyStone in the areas of mergers and acquisitions, strategic planning, corporate financing, and relations with the investment community. Under this continuing advisory services agreement, the company pays Mr. Reynolds $11,000 per month, exclusive of expenses. In September 2000 Mr. Reynolds was appointed to the position of GreyStone Executive Vice President for Corporate Development.

      GreyStone loaned $20,000 on August 6, 1999, $10,000 on September 22, 1999, and $20,000 on November 17, 1999 to The Pointe-Force Company, Inc. and its principal, GreyStone director Jon Reynolds. The loans are for a one year term and bear interest at a rate of 8.75%. All of the loans have matured and are in default. The company has deferred collection at this time and has recorded a valuation reserve to operations for the total amount of the obligation, including accrued interest.

      Loans from and Guarantees by Richard Smith

      Between December 1994 and December 1995, Richard A. Smith, GreyStone’s chief executive officer and principal stockholder, borrowed in excess of $2,700,000 from various persons and loaned those funds to GreyStone (“Smith Loans”). The notes which Mr. Smith delivered to those individual lenders (“Creditor Notes”) bear interest at the rate of 9% per annum and contain a provision which enables the holders to convert the amount owed into shares of GreyStone’s common stock owned by Mr. Smith at the rate of $4.50 per share, except that the loans from three creditors for the aggregate amount of $147,500 bear interest at the rate of 18.0% per annum and are convertible at the option of the holder on maturity into

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shares of GreyStone’s common stock owned by Mr. Smith at the rate of $7.14 per share. The Smith Loans are evidenced by promissory notes issued by GreyStone in favor of Richard Smith and have substantially the same terms as the Creditor Notes, with the exception that the Smith Notes do not contain the right to convert the principal amount of the loans into shares of GreyStone common stock. During calendar year 1996, holders of Creditor Notes in the aggregate principal amount of $385,880 plus unpaid accrued interest either converted their respective notes into shares of GreyStone’s common stock owned by Mr. Smith or were paid in full.

      In March 1997, GreyStone expressed its desire to satisfy its obligation to repay the Smith Notes by assuming the obligation of Mr. Smith to repay the Creditor Notes, and agreed that if the creditors desired to convert their respective Creditor Notes into shares of GreyStone’s common stock, then GreyStone would permit such conversion from the authorized shares of GreyStone, provided that the creditors exercising their conversion rights concurred. As of March 31, 1999, creditors holding an aggregate of $2,597,399 in outstanding principal of the Creditor Notes plus unpaid accrued interest were either paid in full or had agreed to the assumption of the debt by GreyStone and the conversion of such debt at $4.50 per share.

      From time to time through March 31, 1997, GreyStone made cash advances to Mr. Smith in the cumulative amount of $122,629. Since April 1, 1997, interest has accrued at a rate of 9% per year. As of March 31, 1999, a total of $21,955 in interest had accrued for a total balance of $144,584.

      In the quarter ended March 31, 1999, Mr. Smith elected to forego having GreyStone repay its obligations to him evidenced by outstanding notes payable of $216,485 and accrued interest of $16,877. In return, GreyStone agreed to forgive advances to Mr. Smith of $122,629, plus accrued interest of $21,955. Mr. Smith agreed to contribute $80,778 to GreyStone. This amount has been included in additional paid in capital. The balance of $8,000 was paid to Mr. Smith by GreyStone in the year ended March 31, 2000.

      Beginning in 1989 and from time to time subsequently, GreyStone has borrowed money or leased equipment under terms which required GreyStone’s Chief Executive Officer, Richard Smith, personally to guarantee GreyStone’s repayment performance. In January 1995, GreyStone leased internal computer network equipment for a three year period, during which GreyStone was obligated to make $57,886 in payments. The lease provided for GreyStone’s payment obligations to be guaranteed personally by Mr. Smith. The lease has been fully paid. In February 1995, GreyStone leased a phone call processing system for a five year period during which GreyStone was obligated to make payments of $75,517. The lease provided for GreyStone’s payment to be guaranteed personally by Mr. Smith. The lease has been fully paid.

      In December 1998, GreyStone borrowed $200,000 from an individual for a period of five weeks. The terms of the note provided for a personal collateralized guarantee by Mr. Smith. The note was repaid by GreyStone before the maturity date. In December 2000 and January 2001 Mr. Smith either borrowed and in turn lent to GreyStone, or personally guaranteed a total of $240,000 in short-term debt from accredited GreyStone stockholders. One 40-day $100,000 note was collateralized by 107,000 shares of Richard Smith's GreyStone common stock. On February 12, 2001, the date the note matured, the lender agreed under the terms of the agreement to receive the shares of Mr. Smith's stock in lieu of repayment in the form of cash by GreyStone. As of March 31, 2001 $175,500 had not been repaid.

      Subscriptions receivable and Services Agreements with AB Investments

      In December 1999, the company accepted a promissory note in the amount of $1,183,292 as a partial payment of common stock issued upon the exercise of warrants by

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AB Investments, LLC, and entity owned by close advisors to the Company, Allen Gelbard and Robert Beaton. The note was collateralized by a lien on property owned by AB Investments and bore an interest rate of 10% per year. The maturity date of the note was extended three times and last matured on December 22, 2000. Total principal and unpaid interest accrued through March 31, 2000 was $1,202,737. The Company has not accrued any interest on the note during the year ended March 31, 2001. A valuation reserve of $1,202,737 was established and charged to continuing operations while the Company pursued collection of the note. In March 2001, in order to meet critical cash needs, the Company negotiated a settlement wherein the Company agreed to release the lien on the property which collateralized the note in exchange for a cash payment of $200,000, the return of the previously issued stock, valued at $78,301 (the trading value on the date received), less transaction costs of $13,750.

      AB Investments, Allen Gelbard, or Robert Beaton have provided advisory and introduction services to GreyStone since July 1997. In late May 2000, the company paid AB Investments $150,000. The company paid Allen Gelbard $60,000 in July 2000, $60,000 in October 2000, and accrued $60,000 in May 2001 for serviced performed through March 31, 2001. Allen Gelbard’s current service agreement expires on September 30, 2001 and includes tasking to develop sales and marketing programs, assist with possible acquisition or joint venture opportunities, locate and attract third party debt or equity funding for the company or its major interests, and provide general management services.