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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

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



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| | (Mark One) | 
| | ---------- | 

|    |  |                                                                                     
|--- |  | ------------------------------------------------------------------------------------
|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2001

OR

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________.

Commission File Number 000-28909

GREYSTONE DIGITAL TECHNOLOGY, INC.

(Name of Registrant as Specified in its Charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or Other Jurisdiction of
Incorporation or Organization) |  | 84-1107140
(I.R.S. Employer
Identification No.)

|                                                                                      |  |                 
|------------------------------------------------------------------------------------- |  | ----------------
|4950 Murphy Canyon Rd.
San Diego, California
(Address of Principal Executive Offices) |  | 92123
(Zip Code)

(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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TABLE OF CONTENTS



|               |                                                                                               |                                                              |  |  |  |  |  | 
|-------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------ |  |  |  |  |  | 
|PART I        
|               | Item 1. Business                                                                             
|               | Item 2. Properties                                                                           
|               | Item 3. Legal Proceedings                                                                    
|               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II       
|               | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|               | Item 6. Selected Financial Data                                                              
|               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|               | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          
|               | Item 8. Financial Statements and Supplemental Data                                           
|               | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III      
|               | Item 10. Directors and Executive Officers of the Registrant                                  
|               | Item 11. Executive Compensation                                                              
|               | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|               | Item 13. Certain Relationships and Related Transactions                                      
|PART IV       
|               | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES    
|               |                                                                                               | REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                    
|               |                                                                                               | CONSOLIDATED BALANCE SHEETS                                 
|               |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS                       
|               |                                                                                               | CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
|               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                       
|               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  
|EXHIBITS INDEX
|EXHIBIT 21    



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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-GTM, 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.
Table of ContentsIn 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.EmployeesGreyStone 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 PerformanceRisks Related to GreyStones OperationsGreyStone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.Table of Contents

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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##### Table of Contents





| |  |  | 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.
Table of Contents

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.
Table of Contents

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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##### Table of Contents



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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##### Table of Contents





| |  |  | 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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##### Table of Contents



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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##### Table of Contents






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.

|                          |  |          |        |         |  |   |       | 
|------------------------- |  | -------- | ------ | ------- |  | - | ----- | 
|FISCAL YEAR 2000          |  | HIGH BID |        | LOW BID
|                          |  |          |        |        
|First Quarter to 6/30/99  |  | $        | 20.833 |         |  | $ | 7.917 | 
|                         
|                         
|                         
|                         
|Second Quarter to 9/30/99 |  | $        | 20.833 |         |  | $ | 7.917 | 
|                         
|                         
|                         
|                         
|Third Quarter to 12/31/99 |  | $        | 41.667 |         |  | $ | 9.115 | 
|                         
|                         
|                         
|                         
|Fourth Quarter to 3/31/00 |  | $        | 13.250 |         |  | $ | 4.875 | 

|                          |  |          |       |         |  |   |       | 
|------------------------- |  | -------- | ----- | ------- |  | - | ----- | 
|FISCAL YEAR 2001          |  | HIGH BID |       | LOW BID
|                          |  |          |       |        
|First Quarter to 6/30/00  |  | $        | 5.750 |         |  | $ | 3.125 | 
|                         
|                         
|                         
|                         
|Second Quarter to 9/30/00 |  | $        | 6.500 |         |  | $ | 2.937 | 
|                         
|                         
|                         
|                         
|Third Quarter to 12/31/00 |  | $        | 4.875 |         |  | $ | 0.906 | 
|                         
|                         
|                         
|                         
|Fourth Quarter to 3/31/01 |  | $        | 1.718 |         |  | $ | 0.218 | 

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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##### Table of Contents



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.

|                                                                            |                            |                |             |                       |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |           |           | 
|--------------------------------------------------------------------------- | -------------------------- | -------------- | ----------- | --------------------- | --------- | ---- | ---------- | --------- | --------- | ---- | ---------- | --------- | --------- | - | ---------- | --------- | --------- | - | ---------- | --------- | --------- | 
|                                                                            |                            |                |             | Years Ended March 31,
|                                                                            |                            |                |             |                      
|                                                                            |                            |                |             | 2001                  |           | 2000 |            | 1999      |           | 1998 |            | 1997     
|                                                                            |                            |                |             |                       |           |      |            |           |           |      |            |          
|Statement of Operations Data:                                              
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Revenues                                                                    |                            | $              | 2,367,731   |                       |           | $    | 1,850,883  |           |           | $    | 2,090,902  |           |           | $ | 2,111,966  |           |           | $ | 1,933,593  |          
|                                                                            |                            |                |             |                       |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |          
|Expenses:                                                                  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Cost of revenues           |                |             | 2,160,860             |           |      |            | 1,153,586 |           |      |            | 1,261,798 |           |   |            | 1,181,728 |           |   |            | 1,317,125 |          
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Marketing and sales        |                |             | 965,039               |           |      |            | 733,506   |           |      |            | 654,759   |           |   |            | 490,401   |           |   |            | 504,244   |          
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Research and development   |                |             | 634,312               |           |      |            | 568,063   |           |      |            | 232,653   |           |   |            | 120,902   |           |   |            | 287,360   |          
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | General and administrative |                |             | 3,759,060             |           |      |            | 3,482,042 |           |      |            | 2,044,392 |           |   |            | 3,420,898 |           |   |            | 2,087,877 |          
|                                                                            |                            |                |             |                       |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |          
|                                                                            |                            | Total expenses |             |                       | 7,519,271 |      |            |           | 5,937,197 |      |            |           | 4,193,602 |   |            |           | 5,213,929 |   |            |           | 4,196,606 | 
|                                                                            |                            |                |             |                       |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |          
|Loss from operations                                                        |                            |                | (5,151,540  | )                     |           |      | (4,086,314 | )         |           |      | (2,102,700 | )         |           |   | (3,101,963 | )         |           |   | (2,263,013 | )        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Other
(expense) income                                                      |                            |                | (2,640,901  | )                     |           |      | 84,407     |           |           |      | (99,944    | )         |           |   | (201,941   | )         |           |   | (615,240   | )         |          
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Loss from continuing operations                                             |                            |                | (7,792,441  | )                     |           |      | (4,001,907 | )         |           |      | (2,202,644 | )         |           |   | (3,303,904 | )         |           |   | (2,878,253 | )        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Loss from discontinued operations                                           |                            |                | (1,920,056  | )                     |           |      | (485,319   | )         |           |      | (1,056,687 | )         |           |   | (1,304,897 | )         |           |   | (1,808,377 | )        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Loss on disposal of commercial segment                                      |                            |                | (418,000    | )                     |           |      | -0-        |           |           |      | -0-        |           |           |   | -0-        |           |           |   | -0-        |          
|                                                                            |                            |                |             |                       |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |          
|Net loss                                                                    |                            | $              | (10,130,497 | )                     |           | $    | (4,487,226 | )         |           | $    | (3,259,331 | )         |           | $ | (4,608,801 | )         |           | $ | (4,686,630 | )        
|                                                                            |                            |                |             |                       |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |          
|Imputed preferred stock dividends                                           |                            | $              | (4,760,456  | )                     |           |      | -0-        |           |           |      | -0-        |           |           |   | -0-        |           |           |   | -0-        |          
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net
loss applicable to common stock attributable to continued operations    |                            | $              | (12,552,897 | )                     |           | $    | (4,001,907 | )         |           | $    | (2,202,644 | )         |           | $ | (3,303,904 | )         |           | $ | (2,878,253 | )        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net
loss applicable to common stock attributable to discontinued operations |                            | $              | (2,338,056  | )                     |           | $    | (485,319   | )         |           | $    | (1,056,687 | )         |           | $ | (1,304,897 | )         |           | $ | (1,808,377 | )        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Basic
net loss per share from continued operations                          |                            | $              | (0.76       | )                     |           | $    | (0.25      | )         |           | $    | (0.15      | )         |           | $ | (0.24      | )         |           | $ | (0.24      | )        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Basic
net loss per share from discontinued operations                       |                            | $              | (0.14       | )                     |           | $    | (0.03      | )         |           | $    | (0.07      | )         |           | $ | (0.09      | )         |           | $ | (0.15      | )        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Basic
net loss per share                                                    |                            | $              | (0.90       | )                     |           | $    | (0.28      | )         |           | $    | (0.22      | )         |           | $ | (0.33      | )         |           | $ | (0.39      | )        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Basic weighted average number of
shares outstanding                         |                            |                | 16,528,113  |                       |           |      | 15,756,488 |           |           |      | 14,610,101 |           |           |   | 13,915,377 |           |           |   | 11,888,158 |          





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##### Table of Contents



|                                        |  |                 |            |      |  |      |           |      |  |      |           |   |  |   |            |   |  |   |            |  
|--------------------------------------- |  | --------------- | ---------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                        |  | As of March 31,
|                                        |  |                
|                                        |  | 2001            |            | 2000 |  | 1999 |           | 1998 |  | 1997
|                                        |  |                 |            |      |  |      |           |      |  |     
|Balance Sheet Data:                    
|                                       
|                                       
|                                       
|                                       
|Cash and cash equivalents               |  | $               | 383,970    |      |  | $    | 167,299   |      |  | $    | 795,480   |   |  | $ | 5,083      |   |  | $ | 14,224     |  
|                                       
|                                       
|                                       
|                                       
|Working capital (deficiency)            |  |                 | (3,093,626 | )    |  |      | (395,577  | )    |  |      | (805,406  | ) |  |   | (1,826,674 | ) |  |   | (7,151,324 | )
|                                       
|                                       
|                                       
|                                       
|Total assets                            |  |                 | 1,195,754  |      |  |      | 1,647,482 |      |  |      | 1,276,922 |   |  |   | 915,156    |   |  |   | 1,336,505  |  
|                                       
|                                       
|                                       
|                                       
|Total stockholders equity (deficiency) |  |                 | (2,597,845 | )    |  |      | 657,390   |      |  |      | (524,441  | ) |  |   | (1,314,457 | ) |  |   | (6,199,575 | )




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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##### Table of Contents



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 ToolkitTM and RAGETM 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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##### Table of Contents



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 RAGETM 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). (SeeLiquidity and Capital Resourcesbelow
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
3000TM
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 RAGETM 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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##### Table of Contents



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 RAGETM 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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##### Table of Contents



$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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##### Table of Contents






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



---



##### Table of Contents



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


Table of Contentsshares 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
InvestmentsIn 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


Table of ContentsAB 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.

PART IV

Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K(a)
        
        The following documents are filed as part of this report:FINANCIAL STATEMENTS:Report of Independent AccountantsConsolidated Balance Sheets as of March 31, 2001 and 2000Table of ContentsConsolidated Statements of Operations the Years Ended March 31,
2001, 2000, and 1999Consolidated Statements of Stockholders Equity (Deficiency) for
the Years Ended March 31, 2001, 2000, and 1999Consolidated Statements of Cash Flows for the Years Ended March 31,
2001, 2000, and 1999Notes to Consolidated Financial Statements(b)
        
        Reports on Form 8-KThe Company filed no Current Reports on Form 8-K during the quarter
ended March 31, 2001. The Company file one Current Report since March
31, 2001.1. On May 10, 2001 the Company filed a Current Report addressing Item 5
(Other Events). Disclosures related to the demise of the Companys
exclusive distributor for MercRacer 3000 entertainment systems, the
lender of GreyStones line of credit calling the loan, the failure of
OptMark to fund the Virtual Info-Space development, the eminent
delisting of the Companys securities by Nasdaq, the suspension of the
entertainment business unit, and the resignation of Board of Directors
members Dr. Malcolm Currie and James Johnston.(c)
        
        Exhibits:

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|3.1*    |  | Amended and Restated Certificate of Incorporation of the Company
which was filed as Exhibit 3.1 to the Companys Registration
Statement on Form S-4 (No. 333-65963) is incorporated herein by
reference.                                                                                                                                                                                                                                          
|       
|       
|       
|       
|3.2*    |  | By-laws of the Company which was filed as Exhibit 3.2 to the
Companys Registration Statement on Form S-4 (No. 333-65963) is
incorporated herein by reference.                                                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|4*      |  | Specimen Common Stock Certificate which was filed as Exhibit 4.3 to
the Companys Registration Statement on Form S-4 (No. 333-65963) is
incorporated herein by reference.                                                                                                                                                                                                                                                                         
|       
|       
|       
|       
|10*     |  | Agreement and Plan of Merger and Reorganization by and among Express
Capital Concepts, Inc., Express Capital Acquisition Corp., GreyStone
Technology, Incorporated and Mr. Earnest Mathis, Jr., dated as of
August 11, 1997, and the first and second amendments thereto which
were filed as Exhibits 2.1, 2.2 and 2.3 respectively to the
Companys Registration Statement on Form S-4 (No. 333-65963), is
incorporated herein by this reference.
|       
|       
|       
|       
|21      |  | Subsidiaries of Registrant as of March 31, 2001                                                                                                                                                                                                                                                                                                                                                                                                   



---

|* |  | Previously filed as indicated and incorporated herein by reference.
|- |  | -------------------------------------------------------------------





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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.

| |                                                                  |                     
| | ---------------------------------------------------------------- | --------------------
| | GREYSTONE DIGITAL TECHNOLOGY, INC.                              
|
| | By:                                                              | /s/ RICHARD A. SMITH
| |                                                                 
| | Richard A. Smith
President, Chief Executive Officer and Chairman

July 16, 2001

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates indicated.

|                                       |  |                                                                               |  |              
|-------------------------------------- |  | ----------------------------------------------------------------------------- |  | -------------
|Signature                              |  | Title                                                                         |  | Date         
|                                       |  |                                                                               |  |              
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|/s/ RICHARD A. SMITH

Richard A. Smith |  | President, Chief Executive
Officer and Chairman
(Principal Executive Officer) |  | July 16, 2001
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|/s/ MARSHALL GELLER

Marshall Geller   |  | Chief Financial Officer
(Principal Financial and
Accounting Officer)          |  | July 16, 2001
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|/s/ THOMAS D. ALDERN

Thomas D. Aldern |  | Director                                                                      |  | July 16, 2001
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|/s/ JON M. REYNOLDS

Jon M. Reynolds   |  | Director                                                                      |  | July 16, 2001
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|/s/ ALAN D. STONE

Alan D. Stone       |  | Director                                                                      |  | July 16, 2001





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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
(Formerly GreyStone Technology, Incorporated)
AND SUBSIDIARY



---



REPORT ON CONSOLIDATED FINANCIAL STATEMENTS



---



YEARS ENDED MARCH 31, 2001, 2000 AND 1999





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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

INDEX

|                                                                                                      |  |      |         | 
|----------------------------------------------------------------------------------------------------- |  | ---- | ------- | 
|                                                                                                      |  | PAGE
|                                                                                                      |  |     
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                                              |  |      | F-2     | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND 2000                                                   |  |      | F-3     | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 2001, 2000 AND 1999                       |  |      | F-4     | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY) YEARS ENDED MARCH 31, 2001, 2000 AND 1999 |  |      | F-5/7   | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2001, 2000 AND 1999                       |  |      | F-8/9   | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                            |  |      | F-10/25 | 

*     *     *

F-1



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##### Table of Contents






REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors
   GreyStone Digital Technology, Inc.

We have audited the accompanying consolidated balance sheets of GREYSTONE
DIGITAL TECHNOLOGY, INC. (Formerly GreyStone Technology, Incorporated) AND
SUBSIDIARY as of March 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders equity (deficiency) and cash flows for
each of the three years in the period ended March 31, 2001. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

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

The accompanying consolidated financial statements have been prepared assuming
that GreyStone Digital Technology, Inc. and Subsidiary will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, the
Company had substantial working capital and stockholders deficiencies at March 31,
2001 and substantial losses for the years ended March 31, 2001, 2000 and
1999. In addition, as discussed in Note 9, the Company was in default on
certain of its outstanding debt. These matters raise substantial doubt about
the Companys ability to continue as a going concern. Managements plans in
regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.

San Diego, California
July 14, 2001

F-2



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY




CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND 2000

|                                                     |                                                                                                                                                                                 |                                        |         |             |            |      |         |             |           | 
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ------- | ----------- | ---------- | ---- | ------- | ----------- | --------- | 
|                                                     |                                                                                                                                                                                 |                                        |         | 2001        |            | 2000
|                                                     |                                                                                                                                                                                 |                                        |         |             |            |     
|ASSETS                                              
|                                                    
|                                                    
|                                                    
|                                                    
|Current assets:                                     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash and cash equivalents                                                                                                                                                       |                                        | $       | 383,970     |            |      | $       | 167,299     |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accounts receivable, net of allowance for doubtful
accounts of $40,000 in 2000                                                                                                  |                                        |         | 306,248     |            |      |         | 372,981     |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other current assets                                                                                                                                                            |                                        |         | 9,755       |            |      |         | 54,235      |          
|                                                     |                                                                                                                                                                                 |                                        |         |             |            |      |         |            
|                                                     |                                                                                                                                                                                 | Total current assets                   |         |             | 699,973    |      |         |             | 594,515   | 
|                                                    
|                                                    
|                                                    
|                                                    
|Notes receivable, net                                |                                                                                                                                                                                 |                                        |         |             |            |      | 616,077 |            
|                                                    
|                                                    
|                                                    
|                                                    
|Equipment, furniture and leasehold improvements, net |                                                                                                                                                                                 |                                        | 460,094 |             |            |      | 278,075 |            
|                                                    
|                                                    
|                                                    
|                                                    
|Deposits                                             |                                                                                                                                                                                 |                                        | 35,687  |             |            |      | 87,678  |            
|                                                    
|                                                    
|                                                    
|                                                    
|Related party notes receivable, net                  |                                                                                                                                                                                 |                                        |         |             |            |      | 71,137  |            
|                                                     |                                                                                                                                                                                 |                                        |         |             |            |      |         |            
|                                                     |                                                                                                                                                                                 | Totals                                 |         | $           | 1,195,754  |      |         | $           | 1,647,482 | 
|                                                     |                                                                                                                                                                                 |                                        |         |             |            |      |         |            
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)    
|                                                    
|                                                    
|                                                    
|                                                    
|Current liabilities:                                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accounts payable and accrued expenses                                                                                                                                           |                                        | $       | 2,002,332   |            |      | $       | 970,092     |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Notes payable                                                                                                                                                                   |                                        |         | 1,186,767   |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Notes payable to principal stockholder                                                                                                                                          |                                        |         | 186,500     |            |      |         | 20,000      |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Loss from disposal of discontinued commercial segment                                                                                                                           |                                        |         | 418,000     |           
|                                                     |                                                                                                                                                                                 |                                        |         |             |            |      |         |            
|                                                     |                                                                                                                                                                                 | Total liabilities                      |         |             | 3,793,599  |      |         |             | 990,092   | 
|                                                     |                                                                                                                                                                                 |                                        |         |             |            |      |         |            
|Commitments and contingencies                       
|                                                    
|                                                    
|                                                    
|                                                    
|Stockholders equity (deficiency):                   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Series A Preferred stock, $.001 par value; 1,000 liquidation
preference value per share; 3,000,000 shares authorized;
3,731 shares, Series A Convertible issued and outstanding |                                        |         | 4           |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Additional paid-in capital  Preferred stock                                                                                                                                    |                                        |         | 4,295,605   |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Common stock, $.001 par value; 100,000,000 shares
authorized; 17,301,785 and 16,278,179 shares issued                                                                           |                                        |         | 17,302      |            |      |         | 16,278      |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Additional paid-in capital  Common stock                                                                                                                                       |                                        |         | 45,723,009  |            |      |         | 39,816,415  |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Subscriptions receivable from equity transactions, net                                                                                                                          |                                        |         |             |            |      |         | (1,510,792  | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accumulated deficit                                                                                                                                                             |                                        |         | (52,555,464 | )          |      |         | (37,664,511 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Treasury stock, at cost, 278,652 shares held                                                                                                                                    |                                        |         | (78,301     | )         
|                                                     |                                                                                                                                                                                 |                                        |         |             |            |      |         |            
|                                                     |                                                                                                                                                                                 | Total stockholders equity (deficiency) |         |             | (2,597,845 | )    |         |             | 657,390   | 
|                                                     |                                                                                                                                                                                 |                                        |         |             |            |      |         |            
|                                                     |                                                                                                                                                                                 | Totals                                 |         | $           | 1,195,754  |      |         | $           | 1,647,482 | 
|                                                     |                                                                                                                                                                                 |                                        |         |             |            |      |         |            

See Notes to Consolidated Financial Statements.

F-3



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY




CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999

|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |            |           |  
|------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------ | ----------- | ---------- | ---------- | ---- | ---------- | --------- | --------- | - | ---------- | ---------- | --------- | -
|                                                                          |                                                                                                    |        |             | 2001       |            | 2000 |            | 1999     
|                                                                          |                                                                                                    |        |             |            |            |      |            |          
|Revenues                                                                  |                                                                                                    | $      | 2,367,731   |            |            | $    | 1,850,883  |           |           | $ | 2,090,902  |           
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|Expenses:                                                                
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Cost of revenues                                                                                   |        |             | 2,160,860  |            |      |            | 1,153,586 |           |   |            | 1,261,798  |          
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Marketing and sales                                                                                |        |             | 965,039    |            |      |            | 733,506   |           |   |            | 654,759    |          
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Research and development                                                                           |        |             | 634,312    |            |      |            | 568,063   |           |   |            | 232,653    |          
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | General and administrative                                                                         |        |             | 3,759,060  |            |      |            | 3,482,042 |           |   |            | 2,044,392  |          
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|                                                                          |                                                                                                    | Totals |             |            | 7,519,271  |      |            |           | 5,937,197 |   |            |            | 4,193,602 |  
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|Loss from operations                                                      |                                                                                                    |        | (5,151,540  | )          |            |      | (4,086,314 | )         |           |   | (2,102,700 | )         
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|Other income (expense):                                                  
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Interest income, including $4,964 and 35,930 from
related parties                                  |        |             | 83,563     |            |      |            | 94,667    |          
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Interest expense, including $2,800 and $8,500
on loans from principal stockholder in 2000 and 1999 |        |             | (668,000   | )          |      |            | (10,260   | )         |   |            | (99,944    | )        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Reserve for notes receivable, including accrued
interest of $70,097                                |        |             | (643,151   | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Reserve for contract receivable                                                                    |        |             | (135,000   | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Reserve for subscriptions receivable, including
accrued interest of $19,445                        |        |             | (1,530,237 | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Recovery of subscription receivable reserve                                                        |        |             | 264,551    |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Reserve
for Optmark                                                                                |        |             | (30,000    | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Other                                                                                              |        |             | 17,373     |           
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|                                                                          |                                                                                                    | Totals |             |            | (2,640,901 | )    |            |           | 84,407    |   |            |            | (99,944   | )
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|Loss from continuing operations                                           |                                                                                                    |        | (7,792,441  | )          |            |      | (4,001,907 | )         |           |   | (2,202,644 | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Loss from discontinued operations                                                                  |        |             | (1,920,056 | )          |      |            | (485,319  | )         |   |            | (1,056,687 | )        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Loss on disposal of commercial segment                                                             |        |             | (418,000   | )          |      |            |          |           |   |            |           |          
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|Net loss                                                                  |                                                                                                    |        | (10,130,497 | )          |            |      | (4,487,226 | )         |           |   | (3,259,331 | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Preferred stock dividends:                                               
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Imputed stock dividends related to issuance
of detachable warrants                                 |        |             | (3,645,250 | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Imputed stock dividends for beneficial
conversion feature                                          |        |             | (804,103   | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Imputed cumulative stock dividends at 8%                                                           |        |             | (311,103   | )         
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|Net loss applicable to common stock                                       |                                                                                                    | $      | (14,890,953 | )          |            | $    | (4,487,226 | )         |           | $ | (3,259,331 | )         
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Net
loss applicable to common stock attributed to continuing operations   |                                                                                                    | $      | (12,552,897 | )          |            | $    | (4,001,907 | )         |           | $ | (2,202,644 | )         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Net
loss applicable to common stock attributed to discontinued operations |                                                                                                    | $      | (2,338,056  | )          |            | $    | (485,319   | )         |           | $ | (1,056,687 | )         
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Net
loss applicable to common stock                                       |                                                                                                    | $      | (14,890,953 | )          |            | $    | (4,487,226 | )         |           | $ | (3,259,331 | )         
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Basic
net loss per share from continuing operations                       |                                                                                                    | $      | (0.76       | )          |            | $    | (0.25      | )         |           | $ | (0.15      | )         
|Basic
net loss per share from discontinuing operations                    |                                                                                                    | $      | (0.14       | )          |            | $    | (0.03      | )         |           | $ | (0.07      | )         
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Basic
net loss per share                                                  |                                                                                                    | $      | (0.90       | )          |            | $    | (0.28      | )         |           | $ | (0.22      | )         
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Basic weighted average number of common shares
outstanding                |                                                                                                    |        | 16,528,113  |            |            |      | 15,756,488 |           |           |   | 14,610,101 |           
|                                                                          |                                                                                                    |        |             |            |            |      |            |           |           |   |            |           

See Notes to Consolidated Financial Statements.

F-4



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY




CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999

|                                                                                |  |                 |   |              |  |         |   |        |  |            |   |         |  |  |            |  |  |   |            |            |  |   |           | 
|------------------------------------------------------------------------------- |  | --------------- | - | ------------ |  | ------- | - | ------ |  | ---------- | - | ------- |  |  | ---------- |  |  | - | ---------- | ---------- |  | - | --------- | 
|                                                                                |  | Preferred Stock |   | Common Stock
|                                                                                |  |                 |   |             
|                                                                                |  |                 |   |              |  |         |   |        |  | Additional |   |         |  |  |            |  |  |   |            | Additional
|                                                                                |  |                 |   |              |  |         |   |        |  | Paid-In    |   |         |  |  |            |  |  |   |            | Paid-In   
|                                                                                |  | Shares          |   | At Par       |  | Capital |   | Shares |  | At Par     |   | Capital
|                                                                                |  |                 |   |              |  |         |   |        |  |            |   |        
|Balance, April 1, 1998                                                          |  |                 |   |              |  |         |   |        |  |            |   |         |  |  | 14,548,883 |  |  | $ | 27,037,537 |            |  | $ | 1,894,119 | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock sold for cash                                                      |  |                 |   |              |  |         |   |        |  |            |   |         |  |  | 400,288    |  |  |   | 2,424,610  |            |  |   |           | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued upon
exercise of stock options                              |  |                 |   |              |  |         |   |        |  |            |   |         |  |  | 3,000      |  |  |   | 11,400     |            |  |   |           | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued upon
conversion of convertible
notes payable                |  |                 |   |              |  |         |   |        |  |            |   |         |  |  | 6,667      |  |  |   | 30,000     |            |  |   |           | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued to
pay short-term
notes payable                             |  |                 |   |              |  |         |   |        |  |            |   |         |  |  | 116,042    |  |  |   | 920,000    |            |  |   |           | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued to
reduce balance of notes
payable to principal
stockholder |  |                 |   |              |  |         |   |        |  |            |   |         |  |  | 5,557      |  |  |   | 25,000     |            |  |   |           | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued to pay
for accrued interest                                 |  |                 |   |              |  |         |   |        |  |            |   |         |  |  | 4,625      |  |  |   | 23,693     |            |  |   |           | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued to
pay for services                                         |  |                 |   |              |  |         |   |        |  |            |   |         |  |  | 16,875     |  |  |   | 125,000    |            |  |   |           | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Warrants issued to purchase
common stock                                        |  |                 |   |              |  |         |   |        |  |            |   |         |  |  |            |  |  |   |            |            |  |   | 392,066   | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Stock options to purchase
common stock granted to
non-employees                 |  |                 |   |              |  |         |   |        |  |            |   |         |  |  |            |  |  |   |            |            |  |   | 16,800    | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Effect of principal stockholders
debt forgiveness                               |  |                 |   |              |  |         |   |        |  |            |   |         |  |  |            |  |  |   |            |            |  |   | 80,778    | 
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Net loss                                                                        |  |                 |   |              |  |         |   |        |  |            |   |         |  |  |            |  |  |   |            |            |  |   |           | 
|                                                                                |  |                 |   |              |  |         |   |        |  |            |   |         |  |  |            |  |  |   |            |            |  |   |           | 
|Balance, March 31, 1999                                                         |  |                 |  |              |  | $       |  |        |  | $          |  |         |  |  | 15,101,937 |  |  | $ | 30,597,240 |            |  | $ | 2,383,763 | 
|                                                                                |  |                 |   |              |  |         |   |        |  |            |   |         |  |  |            |  |  |   |            |            |  |   |           | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                |  |               |          |             |  |          |             |       |  |   |   |  |  |   |            |  
|------------------------------------------------------------------------------- |  | ------------- | -------- | ----------- |  | -------- | ----------- | ----- |  | - | - |  |  | - | ---------- | -
|                                                                                |  | Subscriptions
|                                                                                |  | Receivable   
|                                                                                |  | from Equity   |          | Accumulated |  | Treasury
|                                                                                |  | Transactions  |          | Deficit     |  | Stock    |             | Total
|                                                                                |  |               |          |             |  |          |             |      
|Balance, April 1, 1998                                                          |  | $             | (327,500 | )           |  | $        | (29,917,954 | )     |  |   |   |  |  | $ | (1,313,798 | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock sold for cash                                                      |  |               |          |             |  |          |             |       |  |   |   |  |  |   | 2,424,610  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued upon
exercise of stock options                              |  |               |          |             |  |          |             |       |  |   |   |  |  |   | 11,400     |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued upon
conversion of convertible
notes payable                |  |               |          |             |  |          |             |       |  |   |   |  |  |   | 30,000     |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued to
pay short-term
notes payable                             |  |               |          |             |  |          |             |       |  |   |   |  |  |   | 920,000    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued to
reduce balance of notes
payable to principal
stockholder |  |               |          |             |  |          |             |       |  |   |   |  |  |   | 25,000     |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued to pay
for accrued interest                                 |  |               |          |             |  |          |             |       |  |   |   |  |  |   | 23,693     |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Common stock issued to
pay for services                                         |  |               |          |             |  |          |             |       |  |   |   |  |  |   | 125,000    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Warrants issued to purchase
common stock                                        |  |               |          |             |  |          |             |       |  |   |   |  |  |   | 392,066    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Stock options to purchase
common stock granted to
non-employees                 |  |               |          |             |  |          |             |       |  |   |   |  |  |   | 16,800     |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Effect of principal stockholders
debt forgiveness                               |  |               |          |             |  |          |             |       |  |   |   |  |  |   | 80,778     |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Net loss                                                                        |  |               |          |             |  |          | (3,259,331  | )     |  |   |   |  |  |   | (3,259,331 | )
|                                                                                |  |               |          |             |  |          |             |       |  |   |   |  |  |   |            |  
|Balance, March 31, 1999                                                         |  | $             | (327,500 | )           |  | $        | (33,177,285 | )     |  | $ |  |  |  | $ | (523,782   | )
|                                                                                |  |               |          |             |  |          |             |       |  |   |   |  |  |   |            |  

F-5



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999

|                                                                                             |  |                 |  |              |  |         |   |        |  |            |   |         |  |  |            |   |  |   |             |            |  |   |            | 
|-------------------------------------------------------------------------------------------- |  | --------------- |  | ------------ |  | ------- | - | ------ |  | ---------- | - | ------- |  |  | ---------- | - |  | - | ----------- | ---------- |  | - | ---------- | 
|                                                                                             |  | Preferred Stock |  | Common Stock
|                                                                                             |  |                 |  |             
|                                                                                             |  |                 |  |              |  |         |   |        |  | Additional |   |         |  |  |            |   |  |   |             | Additional
|                                                                                             |  |                 |  |              |  |         |   |        |  | Paid-In    |   |         |  |  |            |   |  |   |             | Paid-In   
|                                                                                             |  | Shares          |  | At Par       |  | Capital |   | Shares |  | At Par     |   | Capital
|                                                                                             |  |                 |  |              |  |         |   |        |  |            |   |        
|Balance, April 1, 1999                                                                       |  |                 |  |              |  |         |   |        |  |            |   |         |  |  | 15,101,937 |   |  | $ | 30,597,240  |            |  | $ | 2,383,763  | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock sold for cash,
net of selling expenses of
$201,207                              |  |                 |  |              |  |         |   |        |  |            |   |         |  |  | 575,283    |   |  |   | 3,250,470   |            |  |   |            | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock issued upon
conversion of
notes payable to
principal stockholder                |  |                 |  |              |  |         |   |        |  |            |   |         |  |  | 11,111     |   |  |   | 50,000      |            |  |   |            | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock issued to
pay for
accrued interest                                              |  |                 |  |              |  |         |   |        |  |            |   |         |  |  | 4,296      |   |  |   | 19,332      |            |  |   |            | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Warrants issued to
purchase common
stock                                                     |  |                 |  |              |  |         |   |        |  |            |   |         |  |  |            |   |  |   |             |            |  |   | 549,400    | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Stock options to purchase
common stock
granted to non-employee                               |  |                 |  |              |  |         |   |        |  |            |   |         |  |  |            |   |  |   |             |            |  |   | 50,400     | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock issued
upon exercise
of warrants                                                |  |                 |  |              |  |         |   |        |  |            |   |         |  |  | 335,905    |   |  |   | 1,694,452   |            |  |   |            | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock cancelled
upon exercise
of rescission offer                                     |  |                 |  |              |  |         |   |        |  |            |   |         |  |  | (1,000     | ) |  |   | (4,500      | )          |  |   |            | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock issued upon
exercise of warrants in
exchange for stock
subscriptions receivable |  |                 |  |              |  |         |   |        |  |            |   |         |  |  | 248,147    |   |  |   | 1,232,792   |            |  |   |            | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Collection of subscription
receivable                                                        |  |                 |  |              |  |         |   |        |  |            |   |         |  |  |            |   |  |   |             |            |  |   |            | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Change in par value
of common stock
to $.001 per share                                       |  |                 |  |              |  |         |   |        |  |            |   |         |  |  |            |   |  |   | (36,823,510 | )          |  |   | 36,823,510 | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock issued
upon exercise
of options                                                 |  |                 |  |              |  |         |   |        |  |            |   |         |  |  | 2,500      |   |  |   | 2           |            |  |   | 9,342      | 
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Net loss                                                                                     |  |                 |  |              |  |         |   |        |  |            |   |         |  |  |            |   |  |   |             |            |  |   |            | 
|                                                                                             |  |                 |  |              |  |         |   |        |  |            |   |         |  |  |            |   |  |   |             |            |  |   |            | 
|Balance, March 31, 2000                                                                      |  |                 |  |              |  | $       |  |        |  | $          |  |         |  |  | 16,278,179 |   |  | $ | 16,278      |            |  | $ | 39,816,415 | 
|                                                                                             |  |                 |  |              |  |         |   |        |  |            |   |         |  |  |            |   |  |   |             |            |  |   |            | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                             |  |               |            |             |  |          |             |       |  |   |   |  |  |   |            |  
|-------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ----------- |  | -------- | ----------- | ----- |  | - | - |  |  | - | ---------- | -
|                                                                                             |  | Subscriptions
|                                                                                             |  | Receivable   
|                                                                                             |  | from Equity   |            | Accumulated |  | Treasury
|                                                                                             |  | Transactions  |            | Deficit     |  | Stock    |             | Total
|                                                                                             |  |               |            |             |  |          |             |      
|Balance, April 1, 1999                                                                       |  | $             | (327,500   | )           |  | $        | (33,177,285 | )     |  |   |   |  |  | $ | (523,782   | )
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock sold for cash,
net of selling expenses of
$201,207                              |  |               |            |             |  |          |             |       |  |   |   |  |  |   | 3,250,470  |  
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock issued upon
conversion of
notes payable to
principal stockholder                |  |               |            |             |  |          |             |       |  |   |   |  |  |   | 50,000     |  
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock issued to
pay for
accrued interest                                              |  |               |            |             |  |          |             |       |  |   |   |  |  |   | 19,332     |  
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Warrants issued to
purchase common
stock                                                     |  |               |            |             |  |          |             |       |  |   |   |  |  |   | 549,400    |  
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Stock options to purchase
common stock
granted to non-employee                               |  |               |            |             |  |          |             |       |  |   |   |  |  |   | 50,400     |  
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock issued
upon exercise
of warrants                                                |  |               |            |             |  |          |             |       |  |   |   |  |  |   | 1,694,452  |  
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock cancelled
upon exercise
of rescission offer                                     |  |               |            |             |  |          |             |       |  |   |   |  |  |   | (4,500     | )
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock issued upon
exercise of warrants in
exchange for stock
subscriptions receivable |  |               | (1,232,792 | )          
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Collection of subscription
receivable                                                        |  |               | 49,500     |             |  |          |             |       |  |   |   |  |  |   | 49,500     |  
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Change in par value
of common stock
to $.001 per share                                       |  |               |            |            
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Common stock issued
upon exercise
of options                                                 |  |               |            |             |  |          |             |       |  |   |   |  |  |   | 9,344      |  
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Net loss                                                                                     |  |               |            |             |  |          | (4,487,226  | )     |  |   |   |  |  |   | (4,487,226 | )
|                                                                                             |  |               |            |             |  |          |             |       |  |   |   |  |  |   |            |  
|Balance, March 31, 2000                                                                      |  | $             | (1,510,792 | )           |  | $        | (37,664,511 | )     |  | $ |  |  |  | $ | 657,390    |  
|                                                                                             |  |               |            |             |  |          |             |       |  |   |   |  |  |   |            |  

F-6



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY (CONCLUDED)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999

|                                                                                                                                             |  |                 |        |              |  |         |    |        |  |            |            |         |  |  |            |  |  |   |        |            |  |   |            | 
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | ------------ |  | ------- | -- | ------ |  | ---------- | ---------- | ------- |  |  | ---------- |  |  | - | ------ | ---------- |  | - | ---------- | 
|                                                                                                                                             |  | Preferred Stock |        | Common Stock
|                                                                                                                                             |  |                 |        |             
|                                                                                                                                             |  |                 |        |              |  |         |    |        |  | Additional |            |         |  |  |            |  |  |   |        | Additional
|                                                                                                                                             |  |                 |        |              |  |         |    |        |  | Paid-In    |            |         |  |  |            |  |  |   |        | Paid-In   
|                                                                                                                                             |  | Shares          |        | At Par       |  | Capital |    | Shares |  | At Par     |            | Capital
|                                                                                                                                             |  |                 |        |              |  |         |    |        |  |            |            |        
|Balance, April 1, 2000                                                                                                                       |  |                 |        |              |  |         |    |        |  |            |            |         |  |  | 16,278,179 |  |  | $ | 16,278 |            |  | $ | 39,816,415 | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Preferred stock sold for cash,
net of expenses of $550,647                                                                                   |  |                 | 5,000  |              |  | $       | 5  |        |  | $          | 4,449,348  |         |  |  |            |  |  |   |        |            |  |   |            | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Imputed preferred stock
dividends related
to issuance of
detachable warrants
for common stock in
connection with
the sale of preferred stock |  |                 |        |              |  |         |    |        |  |            |            |         |  |  |            |  |  |   |        |            |  |   | 3,645,250  | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Imputed preferred stock
dividends for
beneficial
conversion feature                                                                          |  |                 |        |              |  |         |    |        |  |            | 804,103    |         |  |  |            |  |  |   |        |            |  |   |            | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Common stock issued as
payment for
notes payable to
principal stockholder                                                                    |  |                 |        |              |  |         |    |        |  |            |            |         |  |  | 4,444      |  |  |   | 5      |            |  |   | 19,995     | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Common stock issued to
pay accrued interest
upon conversion of notes
payable to principal
stockholder                                        |  |                 |        |              |  |         |    |        |  |            |            |         |  |  | 1,852      |  |  |   | 2      |            |  |   | 8,327      | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Warrants issued to
purchase common
stock                                                                                                     |  |                 |        |              |  |         |    |        |  |            |            |         |  |  |            |  |  |   |        |            |  |   | 406,689    | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Warrants issued to
purchase common
stock associated with the line of credit                                                                  |  |                 |        |              |  |         |    |        |  |            |            |         |  |  |            |  |  |   |        |            |  |   | 463,000    | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Stock options to
purchase common stock
granted to non-employees                                                                              |  |                 |        |              |  |         |    |        |  |            |            |         |  |  |            |  |  |   |        |            |  |   | 50,400     | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Common stock issued to
Board of Directors
for annual compensation                                                                            |  |                 |        |              |  |         |    |        |  |            |            |         |  |  | 9,231      |  |  |   | 9      |            |  |   | 44,991     | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Imputed preferred stock
dividends at 8%                                                                                                      |  |                 |        |              |  |         |    |        |  |            | 311,103    |         |  |  |            |  |  |   |        |            |  |   |            | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Preferred stock converted
to common
stock                                                                                                    |  |                 | (1,269 | )            |  |         | (1 | )      |  |            | (1,268,949 | )       |  |  | 1,008,079  |  |  |   | 1,008  |            |  |   | 1,267,942  | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Treasury stock, 278,652
shares held                                                                                                          |  |                 |        |              |  |         |    |        |  |            |            |         |  |  |            |  |  |   |        |            |  |   |            | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Reserve for subscription
receivable                                                                                                          |  |                 |        |              |  |         |    |        |  |            |            |         |  |  |            |  |  |   |        |            |  |   |            | 
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Net loss                                                                                                                                     |  |                 |        |              |  |         |    |        |  |            |            |         |  |  |            |  |  |   |        |            |  |   |            | 
|                                                                                                                                             |  |                 |        |              |  |         |    |        |  |            |            |         |  |  |            |  |  |   |        |            |  |   |            | 
|Balance, March 31, 2001                                                                                                                      |  |                 | 3,731  |              |  | $       | 4  |        |  | $          | 4,295,605  |         |  |  | 17,301,785 |  |  | $ | 17,302 |            |  | $ | 45,723,009 | 
|                                                                                                                                             |  |                 |        |              |  |         |    |        |  |            |            |         |  |  |            |  |  |   |        |            |  |   |            | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                                                             |  |               |            |             |  |          |             |       |  |   |         |   |  |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ----------- |  | -------- | ----------- | ----- |  | - | ------- | - |  | - | ----------- | -
|                                                                                                                                             |  | Subscriptions
|                                                                                                                                             |  | Receivable   
|                                                                                                                                             |  | from Equity   |            | Accumulated |  | Treasury
|                                                                                                                                             |  | Transactions  |            | Deficit     |  | Stock    |             | Total
|                                                                                                                                             |  |               |            |             |  |          |             |      
|Balance, April 1, 2000                                                                                                                       |  | $             | (1,510,792 | )           |  | $        | (37,664,511 | )     |  | $ |        |   |  | $ | 657,390     |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Preferred stock sold for cash,
net of expenses of $550,647                                                                                   |  |               |            |             |  |          |             |       |  |   |         |   |  |   | 4,449,353   |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Imputed preferred stock
dividends related
to issuance of
detachable warrants
for common stock in
connection with
the sale of preferred stock |  |               |            |             |  |          | (3,645,250  | )     |  |   |         |   |  |   |            |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Imputed preferred stock
dividends for
beneficial
conversion feature                                                                          |  |               |            |             |  |          | (804,103    | )     |  |   |         |   |  |   |            |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Common stock issued as
payment for
notes payable to
principal stockholder                                                                    |  |               |            |             |  |          |             |       |  |   |         |   |  |   | 20,000      |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Common stock issued to
pay accrued interest
upon conversion of notes
payable to principal
stockholder                                        |  |               |            |             |  |          |             |       |  |   |         |   |  |   | 8,329       |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Warrants issued to
purchase common
stock                                                                                                     |  |               |            |             |  |          |             |       |  |   |         |   |  |   | 406,689     |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Warrants issued to
purchase common
stock associated with the line of credit                                                                  |  |               |            |             |  |          |             |       |  |   |         |   |  |   | 463,000     |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Stock options to
purchase common stock
granted to non-employees                                                                              |  |               |            |             |  |          |             |       |  |   |         |   |  |   | 50,400      |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Common stock issued to
Board of Directors
for annual compensation                                                                            |  |               |            |             |  |          |             |       |  |   |         |   |  |   | 45,000      |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Imputed preferred stock
dividends at 8%                                                                                                      |  |               |            |             |  |          | (311,103    | )     |  |   |         |   |  |   |            |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Preferred stock converted
to common
stock                                                                                                    |  |               |            |             |  |          |             |       |  |   |         |   |  |   |            |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Treasury stock, 278,652
shares held                                                                                                          |  |               |            |             |  |          |             |       |  |   | (78,301 | ) |  |   | (78,301     | )
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Reserve for subscription
receivable                                                                                                          |  |               | 1,510,792  |             |  |          |             |       |  |   |         |   |  |   | 1,510,792   |  
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|                                                                                                                                            
|Net loss                                                                                                                                     |  |               |            |             |  |          | (10,130,497 | )     |  |   |         |   |  |   | (10,130,497 | )
|                                                                                                                                             |  |               |            |             |  |          |             |       |  |   |         |   |  |   |             |  
|Balance, March 31, 2001                                                                                                                      |  | $             |            |             |  | $        | (52,555,464 | )     |  | $ | (78,301 | ) |  | $ | (2,597,845  | )
|                                                                                                                                             |  |               |            |             |  |          |             |       |  |   |         |   |  |   |             |  

See Notes to Consolidated Financial Statements.

F-7



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY




CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999

|                      |                                                                                                     |                                                                                          |                                       |             |            |            |      |            |            |            |   |            |            |            |  
|--------------------- | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------- | ----------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | -
|                      |                                                                                                     |                                                                                          |                                       |             | 2001       |            | 2000 |            | 1999      
|                      |                                                                                                     |                                                                                          |                                       |             |            |            |      |            |           
|Operating activities:
|                     
|                     
|                     
|                     
|                      | Net loss                                                                                            |                                                                                          | $                                     | (10,130,497 | )          |            | $    | (4,487,226 | )          |            | $ | (3,259,331 | )         
|                     
|                     
|                     
|                     
|                      | Adjustments to reconcile net loss to net cash
used in operating activities of continuing
operation:
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Loss from discontinued operations                                                        |                                       |             | 1,920,056  |            |      |            | 485,319    |            |   |            | 1,056,687  |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Loss on disposal of commercial
segment                                                   |                                       |             | 418,000    |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Return of stock in settlement of debt                                                    |                                       |             | (78,301    | )         
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Depreciation and amortization                                                            |                                       |             | 187,343    |            |      |            | 190,665    |            |   |            | 220,498    |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Recovery of bad debts                                                                    |                                       |             |            |            |      |            |            |            |   |            | (45,000    | )         
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Compensation expense recorded upon issuance
of annual stock award for Board of Directors |                                       |             | 45,000     |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Compensation expense recorded upon issuance
of warrants and compensatory stock options   |                                       |             | 457,089    |            |      |            | 599,800    |            |   |            | 408,866    |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Reserve for notes receivable, including accrued
Interest                                 |                                       |             | 643,151    |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Reserve for related party notes receivable,
Including accrued interest                   |                                       |             | 56,655     |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Forensic vehicle valuation reserve                                                       |                                       |             | 330,000    |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Reserve for contract receivable                                                          |                                       |             | 135,000    |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Reserve for subscription receivable, including
accrued interest of $19,445               |                                       |             | 1,530,237  |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Reserve
for OptiMark                                                                     |                                       |             | 30,000     |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Write-off of line of credit fees                                                         |                                       |             | 668,000    |           
|                     
|                     
|                     
|                     
|                      |                                                                                                     | Changes in operating assets and liabilities:                                            
|                     
|                     
|                     
|                     
|                      |                                                                                                     |                                                                                          | Accounts receivable                   |             |            | 106,733    |      |            |            | (172,504   | ) |            |            | 242,379    |  
|                     
|                     
|                     
|                     
|                      |                                                                                                     |                                                                                          | Other assets                          |             |            | 96,471     |      |            |            | (74,330    | ) |            |            | 16,526     |  
|                     
|                     
|                     
|                     
|                      |                                                                                                     |                                                                                          | Accounts payable and accrued expenses |             |            | 788,939    |      |            |            | (153,723   | ) |            |            | (12,789    | )
|                      |                                                                                                     |                                                                                          |                                       |             |            |            |      |            |            |            |   |           
|                      |                                                                                                     | Net cash used in operating activities
of continuing operation                            |                                       |             | (2,796,124 | )          |      |            | (3,611,999 | )          |   |            | (1,372,164 | )         
|                      |                                                                                                     |                                                                                          |                                       |             |            |            |      |            |            |            |   |           
|                      |                                                                                                     | Net cash used in discontinued operations                                                 |                                       |             | (1,695,659 | )          |      |            | (472,725   | )          |   |            | (1,073,958 | )         
|                      |                                                                                                     |                                                                                          |                                       |             |            |            |      |            |            |            |   |           
|                      |                                                                                                     |                                                                                          | Net cash used in operating activities |             |            | (4,491,783 | )    |            |            | (4,084,724 | ) |            |            | (2,446,122 | )
|                      |                                                                                                     |                                                                                          |                                       |             |            |            |      |            |            |            |   |           
|Investing activities:
|                     
|                     
|                     
|                     
|                      | Purchase of forensic vehicles                                                                       |                                                                                          |                                       | (330,000    | )         
|                     
|                     
|                     
|                     
|                      | Purchase of contract receivables                                                                    |                                                                                          |                                       | (135,000    | )         
|                     
|                     
|                     
|                     
|                      | Investment
in OptiMark                                                                              |                                                                                          |                                       | (30,000     | )         
|                     
|                     
|                     
|                     
|                      | Issuance of notes receivable                                                                        |                                                                                          |                                       |             |            |            |      | (650,000   | )         
|                     
|                     
|                     
|                     
|                      | Notes receivable accrued interest                                                                   |                                                                                          |                                       | (32,037     | )         
|                     
|                     
|                     
|                     
|                      | Purchases of software licenses, equipment,
furniture and leasehold improvements                     |                                                                                          |                                       | (369,362    | )          |            |      | (291,913   | )          |            |   | (5,772     | )         
|                      |                                                                                                     |                                                                                          |                                       |             |            |            |      |            |            |            |   |           
|                      |                                                                                                     |                                                                                          | Net cash used in investing activities |             |            | (896,399   | )    |            |            | (941,913   | ) |            |            | (5,772     | )
|                      |                                                                                                     |                                                                                          |                                       |             |            |            |      |            |            |            |   |           

F-8



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999

|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |           |        |           | 
|---------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ----------------------------------------- | --------- | --------- | --------- | -------- | --------- | ---------- | --------- | ------- | --------- | ------ | --------- | 
|                                                                       |                                                                   |                                                                                                 |                                           |           | 2001      |           | 2000     |           | 1999      
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |           
|Financing activities:                                                 
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Proceeds from (payments of) loans from
principal stockholder net |                                                                                                 |                                           | 186,500   |           |           |          | (58,000   | )          |           |         | 13,471    |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Proceeds from issuance of notes payable                           |                                                                                                 |                                           | 450,000   |           |           |          |           |            |           |         | 987,000   |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Loans (repayments) from (to) officers net                        |                                                                                                 |                                           | 74,000    |           |           |          | (140,810  | )          |           |         | 140,810   |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Proceeds from line of credit borrowings                           |                                                                                                 |                                           | 845,000   |          
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Repayments of notes payable                                       |                                                                                                 |                                           | (400,000  | )         |           |          | (402,000  | )          |           |         | (335,000  | )     
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Exercise of warrants and options for common
stock                 |                                                                                                 |                                           |           |           |           |          | 1,703,796 |            |           |         | 11,400    |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Sale of common stock, net of selling expense                      |                                                                                                 |                                           |           |           |           |          | 3,250,470 |            |           |         | 2,424,610 |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Proceeds from collection of subscription
receivable               |                                                                                                 |                                           |           |           |           |          | 49,500    |           
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Common stock cancelled upon exercise of
rescission offer          |                                                                                                 |                                           |           |           |           |          | (4,500    | )         
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Sale of preferred stock, net of selling expenses                  |                                                                                                 |                                           | 4,449,353 |          
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |          
|                                                                       |                                                                   |                                                                                                 | Net cash provided by financing activities |           |           | 5,604,853 |          |           |            | 4,398,456 |         |           |        | 3,242,291 | 
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |          
|Net increase (decrease) in cash and cash
equivalents                   |                                                                   |                                                                                                 | 216,671                                   |           |           |           | (628,181 | )         |            |           | 790,397 |          
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Cash and cash equivalents, beginning of year                           |                                                                   |                                                                                                 | 167,299                                   |           |           |           | 795,480  |           |            |           | 5,083   |          
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |          
|Cash and cash equivalents, end of year                                 |                                                                   | $                                                                                               | 383,970                                   |           |           | $         | 167,299  |           |            | $         | 795,480 |          
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |          
|Supplemental disclosure of cash flow data:                            
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                   | Interest paid                                                                                   |                                           | $         | 14,679    |           |          | $         | 83,261     |           |         | $         | 76,314 |          
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |          
|Supplemental disclosure of noncash investing
and financing activities:
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                   | Common stock issued upon conversion of
convertible preferred stock                              |                                           | $         | 1,268,950 |          
|                                                                       |                                                                   |                                                                                                 |                                           |          
|                                                                       |                                                                   | Common stock issued upon conversion of
convertible notes payable                                |                                           |           |           |           |          |           |            |           |         | $         | 30,000 |          
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |          
|                                                                       |                                                                   | Common stock issued upon exercise of
warrants for stock subscriptions receivable                |                                           |           |           |           |          | $         | 1,232,792  |          
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |          
|                                                                       |                                                                   | Common stock issued as payment for:                                                            
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                   |                                                                                                 | Short-term notes payable                  |           |           |           |          |           |            |           |         |           | $      | 920,000   | 
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |          
|                                                                       |                                                                   |                                                                                                 | Notes payable to principal stockholder    |           | $         | 20,000    |          |           | $          | 50,000    |         |           | $      | 25,000    | 
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |          
|                                                                       |                                                                   |                                                                                                 | Accrued interest payable                  |           | $         | 8,329     |          |           | $          | 18,332    |         |           | $      | 23,693    | 
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |          
|                                                                       |                                                                   |                                                                                                 | Services                                  |           |           |           |          |           |            |           |         |           | $      | 125,000   | 
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |          
|                                                                       |                                                                   | Additional paid-in capital contributed as a result
of debt forgiveness by principal stockholder |                                           |           |           |           |          |           |            |           |         | $         | 80,778 |          
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |           |            |           |         |          
|                                                                       |                                                                   | Change in par value of common stock                                                             |                                           |           |           |           |          | $         | 36,823,510 |          
|                                                                       |                                                                   |                                                                                                 |                                           |           |           |           |          |          
|                                                                       |                                                                   | Imputed preferred stock dividends                                                               |                                           | $         | 4,760,456 |          
|                                                                       |                                                                   |                                                                                                 |                                           |          

See Notes to Consolidated Financial Statements.

F-9



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Business and summary of significant accounting policies:

Merger and principles of consolidation:



| |  | On December 27, 1999, a merger between Express Capital Concepts,
Inc. and GreyStone Technology, Incorporated was completed,
whereupon Express Capital Concepts was renamed GreyStone Digital
Technology, Inc., underwent a 1-for-41.66667 reverse stock split
(which reduced its issued and outstanding common stock to 480,000
shares), changed the par value of the stock from $.0001 to $.001
per share, and reduced the total authorized common stock from
50,000,000 shares to 30,000,000 shares. Simultaneously, 15,101,937
shares of common stock were issued to GreyStone Technology, Inc.
common stockholders. The transaction has been accounted for as a
reverse acquisition, wherein GreyStone Technology, Incorporated,
the operating company, is treated as the acquirer for reporting
purposes. The consolidated financial statements include the
accounts of GreyStone Digital Technology, Inc, and GreyStone
Technology, Inc. (the Company). All significant intercompany
accounts and transactions are eliminated in consolidation.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Description of operations:



| |  | The Company designs, develops and markets real-time, interactive,
and networked three dimensional, digital media content (digital
media). The Company develops and delivers its 3-D digital media
content principally for defense (i.e., training and simulation)
applications. The Company began operations in 1989 and works
primarily as a contractor for U.S. defense customers. Company
engineers perform systems software engineering, specializing in
the application of advanced software techniques for developing
smarter systems that learn, reason and achieve some level of
intelligence (i.e., artificial intelligence). Substantially all
of the Companys revenue from its inception through March 31, 2001
have been derived from government related contracts.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents:



| |  | The Company considers all highly-liquid investments with
maturities of three months or less when acquired to be cash
equivalents.
| |  | ---------------------------------------------------------------------------------------------------------------------------------

Equipment, furniture, and leasehold improvements:



| |  | Equipment, furniture, and leasehold improvements are stated at
cost and are depreciated over their estimated useful lives of
three to five years using the straight-line method.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Business and summary of significant accounting policies (continued):

Impairment of long-lived assets:



| |  | The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of
(SFAS 121). Under SFAS 121, impairment losses on long-lived
assets, such as property and equipment and intangible assets, are
recognized when events or changes in circumstances indicate that
the undiscounted cash flows estimated to be generated by such
assets are less than their carrying value and, accordingly, all or
a portion of such carrying value may not be recoverable.
Impairment losses are then measured by comparing the fair value of
assets to their carrying amounts.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenue recognition:



| |  | Revenues are earned under a variety of cost reimbursement and
fixed-price contracts with the U.S. Government, subcontracts with
prime contractors and commercial contracts. Contract revenues on
fixed price long-term contracts are recorded using the percentage
of completion method, primarily based on contract costs incurred
to date, compared with total estimated completion costs.
Provisions for estimated losses on contracts are recorded as such
losses become known. Because of the inherent uncertainties in
estimating costs, it is at least reasonably possible that the
estimates used will change significantly within the near term.
Contract revenues on cost reimbursement type contracts are
recognized as the related costs are incurred. Revenues on time and
material contracts are recognized as earned.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost of revenues:



| |  | Cost of revenues consists of direct labor, fringe benefits, direct
costs and overhead. Overhead is allocated based on the amount of
direct labor and fringe benefits incurred on revenue projects.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Advertising:



| |  | The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to continuing operations were
approximately $410,000 in 2001 and were not material in 2000 and
1999.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Research and development:



| |  | Since the technological feasibility of software products has not
been established, costs and expenses related to research and
product development are expensed as incurred.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Business and summary of significant accounting policies (concluded):

Income taxes:



| |  | The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred income tax assets and
liabilities to be computed for temporary differences between the
financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based
on enacted laws and rates applicable to the periods in which the
temporary differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. The
income tax provision is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax
assets and liabilities.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Earnings (loss) per share:



| |  | The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128 Earnings per Share(SFAS 128).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Basic earnings (loss) per common share is calculated by dividing
net income or loss applicable to common shares by the weighted
average number of common shares outstanding during the period.
The calculation of diluted earnings per common share is similar to
that of basic earnings per common share, except that dilutive
earnings per common share reflects the amount of earnings for the
period available to each share of common stock outstanding during
the reporting period, while giving effect to all dilutive
potential common shares that were outstanding during the period
such as common shares that could result from the potential
exercise or conversion of securities and debt into common stock.
Dilutive earnings per share has not been presented due to the
Companys losses. The Companys convertible debt, convertible
preferred stock, options and warrants, however, could potentially
dilute earnings per share in the future.

Use of estimates:



| |  | The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Reclassifications:



| |  | Certain amounts in the accompanying 2000 and 1999 consolidated
financial statements have been reclassified to conform to the 2001
presentation.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------

F-12



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2  Basis of presentation and managements plans:



| |  | As shown in the accompanying consolidated financial statements, the
Company had a working capital deficiency of $3,093,626 at March 31,
2001; net losses applicable to common stock attributed to continued
operations of $12,552,897,
$4,001,907 and $2,202,644 in 2001, 2000 and 1999, respectively; and
an accumulated deficit of $52,555,464 at March 31, 2001. These
matters raise substantial doubt about the ability of the Company to
continue as a going concern.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Historically, the Company has funded its operations primarily through
sales of common stock to, and borrowings from, its principal
stockholder and sales of preferred and common stock and convertible
notes payable to private investors pursuant to private placement
memorandums and exemptions from registration under the Securities Act
of 1933. The Company raised approximately $6,000,000, $4,999,000, and
$3,577,000 during 2001, 2000, and 1999 respectively, through
borrowings from its principal stockholder and officers, issuance of
short-term notes, private sales of preferred and common stock, line
of credit borrowing, the exercising of stock options and warrants and
convertible notes payable. Management plans to obtain the funds
needed to enable the Company to continue as a going concern by
actively pursuing additional investments of capital through
subsequent private placements. However, management cannot provide any
assurance that the Company will be successful in raising additional
capital.
|
| |  | The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America which contemplates (1) that the Company will
continue as a going concern (2) realization
of assets and (3) satisfaction of liabilities in the ordinary course
of business. If the Company is unable to raise additional capital, it
may be required to liquidate assets or take actions which may not be
favorable to the Company. The consolidated financial statements do
not include any adjustments that might result from the outcome of
these uncertainties.                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The Company expects to generate new revenues from the introduction
and sale of new products and associated engineering services to the
government.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-13



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3  Discontinued operations:



| |  | Previously, the Company identified and reported on two industry
segments based on strategic business units that were in turn based
along market lines. The Government Business Unit which works
primarily as a contractor for U.S. defense contractors and the U.S.
Government, and the Commercial Business Unit which developed products
to be sold for entertainment centers and home entertainment. In June
2001, the Company discontinued its Commercial Business Unit and
eliminated that business segment. Accordingly, the consolidated
financial statements have been restated to reflect the losses
associated with this segment as losses from discontinued operations.
In addition, the Company has estimated the additional losses to be
incurred from discontinued operations until the Units operations
totally cease, and has accrued an additional loss for disposing of
the Commercial Business Unit.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 4  Acquisition matters:



| |  | In 2000, the Company identified a potential acquisition candidate
that manufactures forensic and surveillance vehicles. The Company
loaned the acquisition candidates president $500,000 in November
1999 and an additional $100,000 in February 2000. Those notes, which
were originally due in February 2000 and subsequently extended
several times, are currently in default. Accordingly, in 2001 the
Company charged a valuation reserve of $643,151 to continuing operations. These
loans are collateralized by all of the Borrowers stock in the target
company. The Company believes the value of the collateral to be
minimum, and has deferred collection efforts while the teaming
agreement is in existence.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On June 9, 2000, the Company purchased finished goods inventory in
the amount of $330,000 from the target company. Additionally, the
Company paid the target company $135,000 for the right to receive
future payment on invoices to be generated by the target company upon
their completion of work in progress and subsequent delivery of
product. The Company has determined that the value of these assets
has been impaired. As a result, a reserve was charged against
continuing operations of $465,000 in the period ended
March 31, 2001.                                                                                                                                                                        

Note 5  Concentration of credit risk and sales to major customers:



| |  | The Company maintains its cash balances with a financial institution
and in an uninsured money market account. At times, financial
institution balances exceed the Federal Deposit Insurance Corporation
limitation for coverage of $100,000 thereby exposing the Company to
credit risk. The Company reduces its exposure to credit risk by
maintaining such deposits with a high quality financial institution
and investment company. At March 31, 2001, the Company has cash and
cash equivalent balances in excess of Federally insured limits in the
amount of approximately $197,000.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Accounts receivable are financial instruments that also expose the
Company to a concentration of credit risk. The Company routinely
assesses the financial strength of its customers and maintains an
allowance for doubtful accounts that management believes will
adequately provide for credit losses.                                                                                                                                                                                                                                                                                   

F-14



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6  Notes receivable:



| |  | Notes receivable at March 31, 2001, consist of two notes from an
individual originally due on February 20, 2000. The notes accrue
interest at 9.00% and are collateralized by common stock in a company
owned entirely by the individual. The notes were subsequently
extended several times. The last maturity date was November 18, 2000.
The Company has requested repayment of the notes and, as the notes
are currently in default, has reserved for the full amount of the
notes plus accrued interest. The Company has deferred pursuing collection of
the notes.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 7  Equipment, furniture and leasehold improvements:



| |  | Equipment, furniture and leasehold improvements at March 31, 2001 and
2000 consisted of the following:
| |  | ------------------------------------------------------------------------------------------------------

|                                               |        |   |           |         |      |   |           |         | 
|---------------------------------------------- | ------ | - | --------- | ------- | ---- | - | --------- | ------- | 
|                                               |        |   | 2001      |         | 2000
|                                               |        |   |           |         |     
|Computer, other equipment and furniture        |        | $ | 2,848,407 |         |      | $ | 2,564,391 |        
|                                              
|                                              
|                                              
|                                              
|Leasehold improvements                         |        |   | 102,029   |         |      |   | 16,683    |        
|                                               |        |   |           |         |      |   |           |        
|                                               |        |   | 2,950,436 |         |      |   | 2,581,074 |        
|                                              
|                                              
|                                              
|                                              
|Less accumulated depreciation and
amortization |        |   | 2,490,342 |         |      |   | 2,302,999 |        
|                                               |        |   |           |         |      |   |           |        
|                                               | Totals |   | $         | 460,094 |      |   | $         | 278,075 | 
|                                               |        |   |           |         |      |   |           |        

Note 8  Lease commitment:



| |  | The Company has a noncancelable lease for its office space which
expires in December of 2003 and is classified as an operating lease.
The Company has one option to renew for a five year period. Rent
expense approximated $343,000 in 2001, and $332,000 in 2000 and 1999.
On August 1, 2001 the Company will reduce its occupancy to
one-half of the leased space, reducing the base rent by one half for
the remainder of the lease period.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Future minimum lease payments under the operating lease in years
subsequent to March 31, 2001 are as follows:                                                                                                                                                                                                                                                                                                                                  

|            |       |        |         |         | 
|----------- | ----- | ------ | ------- | ------- | 
|Year Ending
|March 31,   |       | Amount
|            |       |       
|2002        |       | $      | 255,000 |        
|           
|           
|           
|           
|2003        |       |        | 198,000 |        
|           
|           
|           
|           
|2004        |       |        | 154,000 |        
|            |       |        |         |        
|            | Total |        | $       | 607,000 | 
|            |       |        |         |        

F-15



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9  Notes payable:



| |  | At March 31, 2001, the Company had an outstanding note payable with a
principal balance of $50,000 that was due and payable on June 22,
2001. The note was unsecured and bore interest at 10%. The note has
been extended to September 20, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In February of 2001, the Company contracted for a line of credit with
a lender that provided for maximum borrowings not to exceed
$2,500,000 to be used to provide working capital for production of
its Merc Racer product by its commercial business unit and for
general corporate matters. The credit facility provides that the
Company pay a loan commitment fee of 8% plus costs of $205,000 and
issued 1,150,000 warrants to purchase common stock. The expense relating to the warrants issued was $463,000,
for a total of $668,000. The loan fee and the fair value of
the warrants was to be
amortized as additional imputed interest expense over the term of the
agreement, 12 months. In addition the note bears interest at 14%.
The credit agreement also provided for certain restrictive covenants
dealing with, among other things, any substantial deterioration of
the Company s financial condition. As of March 31, 2001, in addition
to the $205,000 loan fee, the Company had drawn another $845,000 in
advances. Citing a breech of the loan covenants dealing with
material changes in the Companys financial condition, the lender
declared the line of credit to be in default and has demanded the
balance of $1,050,000 plus accrued interest be paid off immediately.
Since the loan has been declared to be in default, the Company has
written off the entire loan fee and the fair value of the
warrants as a charge to interest expense in the
current year.
|
| |  | As of March 31, 2001, the Company had also borrowed $74,000 from
certain of its officers. The loans were unsecured, non-interest
bearing and due upon demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | At March 31, 1999, the Company had outstanding notes payable with a
principal balance of $402,000 that had initial maturities of six
months or less. The notes were unsecured and bore interest at 9% and
10%. During the year ended March 31, 2000, these notes were paid in
full including accrued interest of approximately $57,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | During the year ended March 31, 1999, 116,042 shares of common stock
were issued to pay for $920,000 of short-term notes payable. The
common shares were issued at the fair value of the common stock at
the date of settlement, which varied from $6.00 to $8.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Note 10  Convertible notes payable:



| |  | During the year ended March 31, 1999, convertible notes payable with
a balance of $30,000 were converted at $4.50 per share into 6,667
shares of common stock as originally provided in the conversion terms
of the debt.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11  Warrants:



| |  | The Company has issued warrants in conjunction with the sale of
convertible notes payable, assisting the Company in acquiring
capital, extending loans, as an incentive to equity investors and as
part of the consideration paid to various consultants. All of the
warrants issued were for services or actions that had already been
rendered at the date of issuance. In addition, the consideration
received for the issuance of the warrants was not considered to be
reliably measurable. Based on the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation(SFAS 123) using the Black-Scholes option-pricing
model and assuming a risk-free interest rate of 6%, expected warrant
lives of one to ten years, expected volatility of 5% to 147% and no
dividends, the compensation expense relating to the warrants issued
was $869,689, $549,400 and $392,066 in 2001, 2000 and 1999,
respectively. Each warrant entitles the holder to purchase one share
of common stock upon exercise. The warrants expire at various dates
from 2002 through 2010. The following is a summary of warrant
activity during 2001, 2000 and 1999:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                            |           |  |           |           |          |   |             |             | 
|----------------------------------------------------------- | --------- |  | --------- | --------- | -------- | - | ----------- | ----------- | 
|                                                            |           |  | Number of |           | Exercise
|                                                            |           |  | Warrants  |           | Price   
|                                                            |           |  |           |           |         
|Outstanding at April 1, 1998                                |           |  | 2,739,340 |           |          | $ | 4.95 to $12 |            
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Granted   |  |           | 2,262,372 |          |   | $           | 6 to $10    | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Exercised |  |           | (27,500   | )        |   | $           | 8           | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Cancelled |  |           | (484,264  | )        |   | $           | 10          | 
|                                                            |           |  |           |          
|Outstanding at March 31, 1999                               |           |  | 4,489,948 |           |          | $ | 4.95 to $12 |            
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Granted   |  |           | 3,363,200 |          |   | $           | 4.95 to $10 | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Exercised |  |           | (584,052  | )        |   | $           | 4.95 to $10 | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Cancelled |  |           | (60,000   | )        |   | $           | 10          | 
|                                                            |           |  |           |          
|Outstanding at March 31, 2000                               |           |  | 7,209,096 |           |          | $ | 4.95 to $12 |            
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Granted   |  |           | 2,700,000 |          |   | $           | 0.60 to $12 | 
|                                                            |           |  |           |          
|Outstanding at March 31, 2001                               |           |  | 9,909,096 |           |          | $ | 0.60 to $12 |            
|                                                            |           |  |           |          
|Warrants exercisable at March 31, 2001                      |           |  | 8,191,097 |           |          | $ | 0.60 to $12 |            
|                                                            |           |  |           |          
|Weighted average fair value of warrants
granted during 2001 |           |  |           |           |          | $ | 1.67        |            
|                                                            |           |  |           |           |          |   |             |            
|Weighted average fair value of warrants
granted during 2000 |           |  |           |           |          | $ | .58         |            
|                                                            |           |  |           |           |          |   |             |            
|Weighted average fair value of warrants
granted during 1999 |           |  |           |           |          | $ | .15         |            
|                                                            |           |  |           |           |          |   |             |            

F-17



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12  Income taxes:



| |  | The Company had net operating loss carryforwards at March 31, 2001 of
approximately $41,711,000 available to reduce future Federal taxable
income and approximately $8,803,000 available to reduce state
taxable income, if any. The Federal net operating losses expire
between 2006 and 2020. State net operating losses of approximately
$2,322,000 expired in 2001 and will continue to expire in 2002.
Pursuant to Internal Revenue Code Section 382, use of the Companys
net operating loss carryforwards may be severely limited if a cumulative
change in ownership of more than 50% occurs within a three-year
period. The Company has net deferred tax assets at March 31, 2001,
2000 and 1999 comprised of the following:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            |                                                |                         |             |            |      |            |             |            |      |            |             |            |   |            | 
|------------------------------------------- | ---------------------------------------------- | ----------------------- | ----------- | ---------- | ---- | ---------- | ----------- | ---------- | ---- | ---------- | ----------- | ---------- | - | ---------- | 
|                                            |                                                |                         |             |            | 2001 |            | 2000        |            | 1999
|                                            |                                                |                         |             |            |      |            |             |            |     
|Deferred tax assets:                       
|                                           
|                                           
|                                           
|                                           
|                                            | Net operating loss carry-
forwards             |                         | $           | 14,960,000 |      |            | $           | 12,155,000 |      |            | $           | 11,215,000 |  
|                                           
|                                           
|                                           
|                                           
|                                            | SFAS 123 stock option
and warrant expense      |                         |             | 569,000    |      |            |             | 412,000    |      |            |             | 136,000    |  
|                                           
|                                           
|                                           
|                                           
|                                            | Accrued salary and
vacation expense            |                         |             | 91,000     |      |            |             | 67,000     |      |            |             | 112,000    |  
|                                           
|                                           
|                                           
|                                           
|                                            | Accrued
loss on disposal of commercial segment |                         |             | 179,000    |      |            |             |            |      |            |             |            |  
|                                           
|                                           
|                                           
|                                           
|                                            | Other                                          |                         |             | 33,000     |      |            |             | 18,000     |      |            |             | 17,000     |  
|                                            |                                                |                         |             |            |      |            |             |            |      |            |             |           
|                                            |                                                |                         | Totals      |            |      | 15,832,000 |             |            |      | 12,652,000 |             |            |   | 11,480,000 | 
|                                           
|                                           
|                                           
|                                           
|Valuation allowance for
deferred tax assets |                                                |                         | (15,832,000 | )          |      |            | (12,652,000 | )          |      |            | (11,480,000 | )         
|                                            |                                                |                         |             |            |      |            |             |            |      |            |             |           
|                                            |                                                | Net deferred tax assets |             | $          |     |            |             | $          |     |            |             | $          |  |           
|                                            |                                                |                         |             |            |      |            |             |            |      |            |             |           



| |  | The Company has offset the net deferred tax assets by an equivalent
valuation allowance due to the uncertainties related to the extent
and timing of its future taxable income.                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The expected Federal income tax benefit, computed based on the
Companys pre-tax losses in 2001, 2000 and 1999 and the statutory
Federal income tax rate, is reconciled to the actual tax provision
reflected in the accompanying consolidated financial statements as
follows:

|                                                      |        |   |            |   |      |   |            |   |  |   |            |   | 
|----------------------------------------------------- | ------ | - | ---------- | - | ---- | - | ---------- | - |  | - | ---------- | - | 
|                                                      |        |   | 2001       |   | 2000 |   | 1999      
|                                                      |        |   |            |   |      |   |           
|Expected tax benefit at
statutory rates               |        | $ | 3,444,000  |   |      | $ | 1,526,000  |   |  | $ | 1,108,000  |  
|                                                     
|                                                     
|                                                     
|                                                     
|Decrease resulting from
change in valuation
allowance |        |   | (3,444,000 | ) |      |   | (1,526,000 | ) |  |   | (1,108,000 | )
|                                                      |        |   |            |   |      |   |            |   |  |   |            |  
|                                                      | Totals |   | $          |  |      |   | $          |  |  |   | $          |  | 
|                                                      |        |   |            |   |      |   |            |   |  |   |            |  

F-18



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13  Issuances of stock:



| |  | The Company sold shares of preferred and common stock to private
investors pursuant to private placement memorandums and exemptions
from registration under the Securities Act of 1933.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On May 22, 2000, the Company completed the sale of $5,000,000 in
convertible preferred stock to a group of private investors. The
Company issued 5,000 shares of Series A Preferred Stock, convertible
immediately at the holders discretion, 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
stockholder of a conversion notice to the Company. Embedded in the
preferred stock is a mandatory conversion requirement effective three
years after the date of issuance. The Series A investors also received
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. The
preferred stock provides for a cumulative dividend of 8% per year,
payable in common stock or cash. After payment of a 10% commission for
introducing the investors to the Company, and legal fees totaling
approximately $50,000, the Company received net proceeds of
approximately $4,449,000 which it has substantially used for general
corporate purposes. In accordance with the Emerging Issues Task Force
(EITF) Issue No 98-5, the Company recognized a beneficial conversion
feature in the amount of $804,103 as a one-time non-cash preferred
stock dividend. The amount represented the difference between the
initial conversion price at the date of issuance of the preferred
shares and the market price of the common stock at that date. In
addition, the Company recorded a one-time, imputed (non-cash)
preferred stock dividend of $3,437,500 as a result of allocating a
portion of the proceeds received to the fair value of the warrants
issued, as determined by the Black-Scholes model.
|
| |  | In connection with the above sale of convertible preferred stock, the
Company issued warrants to purchase 75,000 shares of common stock at
an exercise price of $5.38 per share to the party who introduced the
Company to the Series A private placement group. As a result, the
Company recorded a one-time imputed (non cash) preferred stock
dividend of $207,750.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The aforementioned imputed preferred stock dividends associated with
issuing the stock resulted in a one-time loss applicable to common
stockholders of $(0.27) per share. The Company also recorded a
non-cash preferred stock dividend of $311,103 for the year ended
March 31, 2001, due to the 8% cumulative preferred stock dividend
feature.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | As of March 31, 2001, 1,269
shares of Series A Preferred Stock issued at a price of $1,268,950
had been converted into 1,008,079 shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | During 2000, the Company sold 575,283 shares
of common stock at $6.00 per share
resulting in gross proceeds of $3,451,677. In connection with the
2000 sale of common stock, the Company recorded $201,207 for selling
expenses which reduced the net proceeds to the Company to $3,250,470.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-19



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13  Issuances of stock (concluded):



| |  | In addition, the Company issued 248,147 shares of common stock upon
exercise of warrants for subscriptions receivable in the amount of
$1,232,792 of that amount, $49,500 was collected in full during the
last quarter of the year ended March 31, 2000.                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During 1999, the Company sold 400,288 shares of common stock at $6.00
to $8.00 per share resulting in proceeds of $2,424,610. In addition,
the Company issued 132,891 shares of common stock to retire $998,693
of short-term debt. The Company also issued 16,875 shares of common
stock for $125,000 of services and 3,000 shares of common stock upon
the exercise of related stock options of $11,400.

Note 14  Stock options:



| |  | The Company has three
incentive stock option (ISO) plans  the
1991 Plan, the 1994 Plan and the 2000 Plan. In addition, the
Company granted nonqualified stock options (NSOs) in 1994, 1995,
1997 and 1998. Information related to the plans and the other
options granted follows:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |       |  |      |     |            |  |                |           |                |  |           |           | 
|---- | ----- |  | ---- | --- | ---------- |  | -------------- | --------- | -------------- |  | --------- | --------- | 
|     |       |  |      |     |            |  |                |           |                |  | Options  
|     |       |  |      |     |            |  | Options        |           | Outstanding at
|Year |       |  | Type |     | Authorized |  | March 31, 2001
|     |       |  |      |     |            |  |               
|1991 |       |  |      | ISO |            |  |                | 1,000,000 |                |  |           | 550,000   | 
|    
|    
|    
|    
|1994 |       |  | NSO  |     |            |  | 200,000        |           |                |  | 200,000   |          
|    
|    
|    
|    
|1994 |       |  | ISO  |     |            |  | 2,000,000      |           |                |  | 1,741,851 |          
|    
|    
|    
|    
|1995 |       |  | NSO  |     |            |  | 200,000        |           |                |  | 200,000   |          
|    
|    
|    
|    
|1997 |       |  | NSO  |     |            |  | 640,000        |           |                |  | 640,000   |          
|    
|    
|    
|    
|1998 |       |  | NSO  |     |            |  | 750,000        |           |                |  | 750,000   |          
|    
|    
|    
|    
|2000 |       |  | ISO  |     |            |  | 4,000,000      |          
|     |       |  |      |     |            |  |                |           |                |  |           |          
|     | Total |  |      |     |            |  |                |           |                |  |           | 4,081,851 | 
|     |       |  |      |     |            |  |                |           |                |  |           |          



| |  | Generally, the plans specify that the options to purchase shares may
be granted at prices which approximate their fair market value at the
date of grant. At March 31, 2001, options to purchase 450,000 shares
were available for future grant under the 1991 Plan. The 1991 Plan
will terminate on August 16, 2001.                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In July 1997, the Company modified the 1994 grant to its then Vice
President, Corporate Development and General Counsel of incentive
stock options to purchase 800,000 shares of the Company stock to
provide that in the event his employment was terminated for any
reason, then he would have a period of thirty-six months from the
date of termination to exercise his vested options. Accordingly, the
800,000 ISO options were cancelled and 800,000 of NSO options were
issued. During 1999, 160,000 of non-vested NSO options were cancelled
due to his employment termination.

F-20



---



##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14  Stock options (continued):



| |  | As of March 31, 2001, the Company had issued and outstanding options
to purchase 1,741,851 shares and options to purchase 258,149 shares
were available for future grant under the 1994 Plan. The 1994 Plan
will terminate in July 2004 unless terminated as of an earlier date
by the Board of Directors.                                                                                                                                   
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Options issued under the plans and the other options granted vest
over a five-year period and are exercisable over a ten-year period
from the date of grant.                                                                                                                                                                                                                                                                                 
|
| |  | The amount of compensation expense recognized relating to the
granting of stock options to non-employees based on the fair value of
the options at the grant date under the provisions of SFAS 123 and
assuming a risk-free interest rate of 6%, expected option lives of 5
years, expected volatility of 5% and no dividends was $50,400 in 2001
and 2000 and $16,800 in 1999, respectively.                                                
|
| |  | If compensation cost for the stock options granted to employees had
been determined based on the fair value of the options at the grant
dates under the provisions of SFAS 123 and assuming a risk-free
interest rate of 6%, expected option lives of one to five years,
expected volatility of 5% to 60% and no dividends, the Companys net
loss and net loss per share would have been increased to the pro
forma amounts set forth below:

|                                                                                                      |  |      |             |      |  |      |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                                      |  | 2001 |             | 2000 |  | 1999
|                                                                                                      |  |      |             |      |  |     
|Net loss applicable to common
stock attributed to continued operations  as reported                  |  | $    | (12,552,897 | )    |  | $    | (4,001,907 | ) |  | $ | (2,202,644 | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Net loss applicable to common
stock attributed to continued operations  pro forma                    |  | $    | (13,197,897 | )    |  | $    | (7,329,907 | ) |  | $ | (2,779,644 | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Net loss applicable to common
stock per common share attributed to continued operations  as reported |  | $    | (.76        | )    |  | $    | (.25       | ) |  | $ | (.15       | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Net loss applicable to common
stock per common share attributed to continued operations  pro forma   |  | $    | (.80        | )    |  | $    | (.47       | ) |  | $ | (.19       | )

F-21



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14  Stock options (concluded):



| |  | Additional information regarding options outstanding under the
Companys stock option plans at March 31, 2001, 2000 and 1999 and
changes in outstanding options in 2001, 2000 and 1999 follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                               |  |           |               |          |  |           |      |          |  |           |               |          |  |   |      |  |  |          |               |   |  |   |      | 
|-------------------------------------------------------------- |  | --------- | ------------- | -------- |  | --------- | ---- | -------- |  | --------- | ------------- | -------- |  | - | ---- |  |  | -------- | ------------- | - |  | - | ---- | 
|                                                               |  | 2001      |               | 2000     |  | 1999     
|                                                               |  |           |               |          |  |          
|                                                               |  |           |               |          |  | Weighted  |      |          |  |           |               | Weighted |  |   |      |  |  | Weighted
|                                                               |  | Shares    |               | Average  |  | Shares    |      | Average  |  | Shares    |               | Average 
|                                                               |  | or Price  |               | Exercise |  | or Price  |      | Exercise |  | or Price  |               | Exercise
|                                                               |  | Per Share |               | Price    |  | Per Share |      | Price    |  | Per Share |               | Price   
|                                                               |  |           |               |          |  |           |      |          |  |           |               |         
|Outstanding at beginning
of year                               |  |           | 4,106,762     |          |  | $         | 4.31 |          |  |           | 2,581,050     |          |  | $ | 3.81 |  |  |          | 3,063,550     |   |  | $ | 3.78 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Granted                                                        |  |           | 101,089       |          |  |           | 4.95 |          |  |           | 1,624,750     |          |  |   | 5.10 |  |  |          | 48,500        |   |  |   | 6.80 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Exercised                                                      |  |           |               |          |  |           |      |          |  |           | (2,500        | )        |  |   | 3.83 |  |  |          | (3,000        | ) |  |   | 3.80 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Cancelled                                                      |  |           | (126,000      | )        |  |           | 5.14 |          |  |           | (96,538       | )        |  |   | 4.46 |  |  |          | (528,000      | ) |  |   | 3.93 | 
|                                                               |  |           |               |          |  |           |      |          |  |           |               |          |  |   |      |  |  |          |               |  
|Outstanding at end of year                                     |  |           | 4,081,851     |          |  |           | 4.42 |          |  |           | 4,106,762     |          |  |   | 4.31 |  |  |          | 2,581,050     |   |  |   | 3.81 | 
|                                                               |  |           |               |          |  |           |      |          |  |           |               |          |  |   |      |  |  |          |               |  
|Price range at end of year                                     |  | $         | 2.75 to $6.80 |          |  |           |      |          |  | $         | .275 to $6.80 |          |  |   |      |  |  | $        | .275 to $6.80 |  
|                                                              
|                                                              
|                                                              
|                                                              
|Exercisable at end of year                                     |  |           | 3,954,238     |          |  |           | 4.40 |          |  |           | 3,686,583     |          |  |   | 4.22 |  |  |          | 2,358,683     |   |  |   | 3.71 | 
|                                                               |  |           |               |          |  |           |      |          |  |           |               |          |  |   |      |  |  |          |               |  
|Available for grant at
end of year                             |  |           | 4,918,149     |          |  |           |      |          |  |           | 683,238       |          |  |   |      |  |  |          | 2,208,950     |  
|                                                               |  |           |               |          |  |           |      |          |  |           |               |          |  |   |      |  |  |          |               |  
|Weighted average fair
value of options granted
during the year |  |           |               |          |  | $         | 3.64 |          |  |           |               |          |  | $ | 1.91 |  |  |          |               |   |  | $ | 1.79 | 



| |  | The following table summarizes information about stock options
outstanding at March 31, 2001, all of which are at fixed prices:
| |  | -------------------------------------------------------------------------------------------------------------------------------

| |  |          |       |             |  |                 |           |             |  |                  |            |  |  |  |           | 
| |  | -------- | ----- | ----------- |  | --------------- | --------- | ----------- |  | ---------------- | ---------- |  |  |  | --------- | 
| |  |          |       |             |  |                 |           |             |  | Weighted Average
| |  |          |       |             |  |                 |           |             |  | Remaining       
| |  |          |       |             |  | Number          |           | Contractual |  | Number          
| |  | Exercise |       | of Options  |  | Life of Options |           | of Options 
| |  | Price    |       | Outstanding |  | Exercisable     |           | Exercisable
| |  |          |       |             |  |                 |           |            
| |  | $        | 0.275 |             |  |                 | 200,000   |             |  |                  | 0.37 years |  |  |  | 200,000   | 
|
|
|
|
| |  |          | 1.000 |             |  |                 | 200,000   |             |  |                  | 3.26 years |  |  |  | 200,000   | 
|
|
|
|
| |  |          | 3.825 |             |  |                 | 1,054,762 |             |  |                  | 2.41 years |  |  |  | 1,054,762 | 
|
|
|
|
| |  |          | 4.875 |             |  |                 | 40,589    |             |  |                  | 9.47 years |  |  |  | 13,534    | 
|
|
|
|
| |  |          | 4.950 |             |  |                 | 1,050,000 |             |  |                  | 3.38 years |  |  |  | 1,050,000 | 
|
|
|
|
| |  |          | 5.100 |             |  |                 | 904,000   |             |  |                  | 8.22 years |  |  |  | 848,174   | 
|
|
|
|
| |  |          | 6.800 |             |  |                 | 22,000    |             |  |                  | 7.15 years |  |  |  | 17,600    | 
|
|
|
|
| |  |          | 6.000 |             |  |                 | 553,000   |             |  |                  | 8.93 years |  |  |  | 551,000   | 
|
|
|
|
| |  |          | 5.000 |             |  |                 | 57,500    |             |  |                  | 9.35 years |  |  |  | 19,168    | 
| |  |          |       |             |  |                 |           |             |  |                  |            |  |  |  |           | 
| |  |          |       |             |  |                 | 4,081,851 |             |  |                  |            |  |  |  | 3,954,238 | 
| |  |          |       |             |  |                 |           |             |  |                  |            |  |  |  |           | 

F-22



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15  Related party transactions and balances:



| |  | The Company had outstanding notes payable to its Principal
Stockholder of $186,500 and $20,000 at March 31, 2001 and 2000,
respectively, which were unsecured, nonconvertible and are interest
free bear interest
at 3% in 2001 and 9% in 2000. Accrued interest of approximately
$8,000 at March 31, 2000, respectively, is included in accounts
payable and accrued expenses in the accompanying consolidated balance
sheets.                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Principal Stockholder borrowed a portion of the funds used to
make the loans to the Company from a group of investors by issuing
notes (the Smith Notes) with the same interest rates and due dates
as the notes issued by the Company to the Principal Stockholder. In
addition, the Principal Stockholder granted the holders of the Smith
Notes the right to convert the principal balance and accrued interest
into shares of common stock that he owns at a conversion rate of
$4.50 per share.
|
| |  | During 2001, the Company reduced the principal balance of, and the
accrued interest on, the notes payable to the Principal Stockholder
by $20,000 and $8,329, respectively, by issuing 6,296 shares of
common stock to certain holders of the Smith Notes. The conversions
of the principal balances and accrued interest during 2001 were at
$4.50 per share, as originally provided in the conversion terms of
the debt agreement.                                                                      
|
| |  | During 2000, the Company reduced the principal balance of, and the
accrued interest on, the notes payable to the Principal Stockholder
by $50,000 and $19,332, respectively, by issuing 15,407 shares of
common stock to certain holders of the Smith Notes. The conversions
of the principal balances and accrued interest during 2000 were at
$4.50 per share, as originally provided in the conversion terms of
the debt agreement.                                                                    
|
| |  | During 1999, the Company reduced the principal balance of, and the
accrued interest on, the notes payable to the Principal Stockholder
by $25,000 and $7,625, respectively, by issuing 7,251 shares of
common stock to certain holders of the Smith Notes. The conversions
of the principal balances and accrued interest during 1999 were at
$4.50 per share, as originally provided in the conversion terms of
the debt agreement.                                                                      
|
| |  | In addition, during 1999, the Principal Stockholder forgave $80,778
of the debt by contributing the amounts to additional paid-in
capital.                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Loans payable to officers in the amount of $74,000 at March 31, 2001
were unsecured, non-interest bearing and due upon demand.                                                                                                                                                                                                                                                                                                                                                                            

F-23



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15- Related party transactions and balances (concluded):



| |  | The subscriptions receivable from equity transactions of $327,500
that is reflected as an increase to stockholders deficiency in the
accompanying consolidated balance sheet at March 31, 2001 is
evidenced by notes received as part of the consideration for the sale
of common stock in 1992 to three of the Companys founding
stockholders who were, and remain, employees of the Company, two of
whom are officers. The notes are collateralized by the shares of the
Companys common stock, mature in August 2001 (except under certain
specified circumstances) and bear interest at 8.2% which is payable
at maturity. Because of the continued financial difficulties of the
Company, there is substantial doubt that those receivables will ever
be collected. Accordingly, the Company has charged $327,500 to
continuing operations as of March 31, 2001.                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During 2000, the Company issued 248,147 shares of common stock upon
exercise of warrants in exchange for cash, services and a
subscription receivable in the amount of $1,183,292 from an entity
owned by close advisors of the Company. The note bears interest at
10% and is collateralized by a first deed of trust on residential
property held by the entity. The subscription receivable which was
originally due March 31, 2000, was extended three additional times
and last matured on December 22, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Total principal and unpaid interest accrued is $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, the Company
negotiated a settlement where by the Company agreed to release the
lien on the property 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 incurred of
$13,750.                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The entity and its owners have
provided advisory and introduction services to GreyStone since July
1997. In late May 2000, the company paid the entity $150,000. In
addition, the company paid one of the owners $60,000 in July 2000,
$60,000 in October 2000, and accrued $60,000 in May 2001 for services
performed through March 31, 2001. The 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.                                                                                                                                                                                                                                                                      
|
| |  | In July 1999, a professional services agreement was entered into
between the Company and the Pointe Force Company, Inc. (Pointe
Force), an entity owned by a director and officer of the Company.
Pointe Force supports the Company in the areas of mergers and
acquisitions, strategic planning, corporate financing and relations
with the investment community. Under this one-year advisory services
agreement, the director or Pointe Force is compensated in the amount
of $11,000 per month, exclusive of expenses. Additionally, the
Company loaned $20,000 on August 6, 1999, $10,000 on September 22,
1999 and $20,000 on November 17, 1999 to Pointe Force and its
principal. All loans are for a one-year term and bear interest at
8.75% per year. All of the loans have matured and are in default.
The Company has recorded a valuation reserve to continuing operations
of $56,635, the Company has deferred collection of the note.

F-24



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16  Employee benefit plan:



| |  | The Company maintains a defined contribution Section 401(k)
retirement plan which covers all full-time eligible employees.
Employees may elect to contribute a portion of their salaries
directly to the plan, up to the maximum allowed by the Internal
Revenue Code. The Company matches, on a discretionary basis, up to
50% of each participants annual contributions to the plan; however,
the Companys matching contribution may not exceed 8% of the
participants annual compensation. The Company made approximately
$1,000 and $3,000 in contributions in 2001 and 2000.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 17  Litigation:



| |  | 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 in 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 MereRacer 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.                                                                                                                                                                                                                                                                                                  

Note 18  Subsequent events:



| |  | As of the date of this report, the Company had approximately
$45,000 (unaudited) in cash, approximately $195,000 (unaudited) in accounts receivable, and
current liabilities of almost $3,000,000 (unaudited). These overdue obligations
include accounts payable of approximately $1,000,000 (unaudited) (approximately
$691,000 (unaudited) of which is over 90 days) and short term notes payable of
approximately $468,000 (unaudited). 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 (unaudited).
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.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On May 18, 2001 the Board of Directors authorized the issuance of
warrants to purchase an aggregate of 1,100,000 shares of common stock,
with exercise prices ranging from $1.00 to $2.50 per share. The
warrants were issued to short term lenders of cash. On May 18, 2001 the
Board also authorized the issuance of options to purchase 1,830,000
shares of common stock to employees under the 2000 Stock Option Plan at
an exercise price of $0.20 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | On July 7, 2001 GreyStone completed the sale of $631,000 of common
stock to 11 accredited investors at prices ranging from $0.05 to $0.10
per share. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | From April 1, 2001 until the date of this report the company
issued an aggregate of 4,425,249 shares of common stock upon the
conversion of Series A Preferred Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-25



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.
AND SUBSIDIARY

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

|                                                               |        |   |            |        |         |   |            |        |         |   |            |        |  |   |            |        | 
|-------------------------------------------------------------- | ------ | - | ---------- | ------ | ------- | - | ---------- | ------ | ------- | - | ---------- | ------ |  | - | ---------- | ------ | 
|                                                               |        |   | First      |        | Second  |   | Third      |        | Fourth 
|                                                               |        |   | Quarter    |        | Quarter |   | Quarter    |        | Quarter
|                                                               |        |   |            |        |         |   |            |        |        
|2001                                                          
|                                                              
|                                                              
|                                                              
|                                                              
|Net revenues                                                   |        | $ | 540,044    |        |         | $ | 655,993    |        |         | $ | 470,985    |        |  | $ | 700,709    |       
|                                                              
|                                                              
|                                                              
|                                                              
|Gross margin                                                   |        |   | 116,542    |        |         |   | 161,579    |        |         |   | 38,244     |        |  |   | (109,494   | )     
|                                                              
|                                                              
|                                                              
|                                                              
|Loss from operations                                           |        |   | (1,233,467 | )      |         |   | (1,124,404 | )      |         |   | (1,148,896 | )      |  |   | (1,644,773 | )     
|                                                              
|                                                              
|                                                              
|                                                              
|Net loss from
continuing operations applicable to common stock |        |   | (5,699,248 | )      |         |   | (1,175,680 | )      |         |   | (3,216,016 | )      |  |   | (2,461,953 | )     
|                                                              
|                                                              
|                                                              
|                                                              
|Basic net loss per
share from continuing operations            |        | $ | 0.35       |        |         | $ | 0.07       |        |         | $ | 0.19       |        |  | $ | 0.15       |       
|                                                              
|                                                              
|                                                              
|                                                              
|Common Stock Prices                                            |  High |   | $          | 5.750  |         |   | $          | 6.500  |         |   | $          | 4.875  |  |   | $          | 1.718  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |  Low  |   | $          | 3.125  |         |   | $          | 2.937  |         |   | $          | 0.906  |  |   | $          | 0.218  | 
|                                                              
|                                                              
|                                                              
|                                                              
|2000                                                          
|                                                              
|                                                              
|                                                              
|                                                              
|Net revenues                                                   |        | $ | 459,422    |        |         | $ | 436,234    |        |         | $ | 379,986    |        |  | $ | 575,241    |       
|                                                              
|                                                              
|                                                              
|                                                              
|Gross margin                                                   |        |   | 232,578    |        |         |   | 196,350    |        |         |   | 86,505     |        |  |   | 181,864    |       
|                                                              
|                                                              
|                                                              
|                                                              
|Loss from operations                                           |        |   | (488,607   | )      |         |   | (1,002,889 | )      |         |   | (1,248,049 | )      |  |   | (1,346,769 | )     
|                                                              
|                                                              
|                                                              
|                                                              
|Net loss from continuing operations                            |        |   | (495,789   | )      |         |   | (1,002,981 | )      |         |   | (1,250,586 | )      |  |   | (1,252,551 | )     
|                                                              
|                                                              
|                                                              
|                                                              
|Basic net loss per
share from continuing operations            |        | $ | 0.03       |        |         | $ | 0.06       |        |         | $ | 0.08       |        |  | $ | 0.08       |       
|                                                              
|                                                              
|                                                              
|                                                              
|Common Stock Prices                                            |  High |   | $          | 20.833 |         |   | $          | 20.833 |         |   | $          | 41.667 |  |   | $          | 13.250 | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |  Low  |   | $          | 7.917  |         |   | $          | 7.917  |         |   | $          | 9.115  |  |   | $          | 4.875  | 

F-26



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##### Table of Contents



GREYSTONE DIGITAL TECHNOLOGY, INC.

EXHIBITS INDEX




|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|3.1*    |  | Amended and Restated Certificate of Incorporation of the Company
which was filed as Exhibit 3.1 to the Companys Registration
Statement on Form S-4 (No. 333-65963) is incorporated herein by
reference.                                                                                                                                                                                                                                          
|       
|       
|       
|       
|3.2*    |  | By-laws of the Company which was filed as Exhibit 3.2 to the
Companys Registration Statement on Form S-4 (No. 333-65963) is
incorporated herein by reference.                                                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|4*      |  | Specimen Common Stock Certificate which was filed as Exhibit 4.3 to
the Companys Registration Statement on Form S-4 (No. 333-65963) is
incorporated herein by reference.                                                                                                                                                                                                                                                                         
|       
|       
|       
|       
|10*     |  | Agreement and Plan of Merger and Reorganization by and among Express
Capital Concepts, Inc., Express Capital Acquisition Corp., GreyStone
Technology, Incorporated and Mr. Earnest Mathis, Jr., dated as of
August 11, 1997, and the first and second amendments thereto which
were filed as Exhibits 2.1, 2.2 and 2.3 respectively to the
Companys Registration Statement on Form S-4 (No. 333-65963), is
incorporated herein by this reference.
|       
|       
|       
|       
|21      |  | Subsidiaries of Registrant as of March 31, 2001                                                                                                                                                                                                                                                                                                                                                                                                   



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|* |  | Previously filed as indicated and incorporated herein by reference.
|- |  | -------------------------------------------------------------------