**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

 

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**FORM 10-QSB**

 

**(Mark One)**

** **

**x****QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For thequarterly period ended September 30, 2007**

** **

**o****TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

** **

**For thetransition period from                  to                   **

** **

**CommissionFile Number: 000-50638**

** **

**GRAYMARK PRODUCTIONS, INC.**

(Exactname of small business issuer in its charter)

 

| **OKLAHOMA**                                                   | ** ** | **20-0180812**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State  or other jurisdiction ofincorporation or organization) | ** ** | (I.R.S.  EmployerIdentification No.) |

 

**101 N. Robinson, Suite 920**

**Oklahoma City, Oklahoma 73102**

(Addressof principal executive offices)

** **

**(405) 601-5300**

(Issuer’stelephone number)

 

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(Formername, former address and former fiscal year, if changed since last report)

 

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x No o

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

**APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**

**PROCEEDINGS DURING THE PRECEDING FIVE YEARS**

 

Check whether the registrant filed alldocuments and reports required to be filed by Section 12, 13 or 15(d) of theExchange Act after the distribution of securities under a plan confirmed by acourt. Yes o No o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

State the number of shares outstanding ofeach of issuer’s classes of common equity, as of the latest practicabledate:  As of November 12, 2007, 8,952,001shares of the issuer’s common stock, $0.0001 par value, were outstanding.

 

Transitional Small Business Disclosure Format(Check One): Yes o No x

 

 

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**GRAYMARK PRODUCTIONS, INC**.

FORM10-QSB

Forthe Quarter Ended September 30, 2007

 

TABLEOF CONTENTS

 
| Part I.    | Financial Information                                           |   |
|------------|-----------------------------------------------------------------|--------|
| Item 1.    | Financial Statements                                            |   |
| Item 2.    | Management’s Discussion and  Analysis or Plan of Operation |   |
| Item 3.    | Controls and Procedures                                         |   |
|       |                                                            |   |
| Part II.   | Other Information                                               |   |
| Item 1.    | Legal Proceedings                                               |   |
| Item 2.    | Unregistered Sale of Equity  Securities and Use of Proceeds     |   |
| Item 3.    | Defaults Upon Senior  Securities                                |   |
| Item 4.    | Submission of Matters to a  Vote of Security Holders            |   |
| Item 5.    | Other Information                                               |   |
| Item 6.    | Exhibits                                                        |   |
| SIGNATURES |                                                            |

 

Throughout this report thefirst personal plural pronoun in the nominative case form “we” and itsobjective case form “us”, its possessive and the intensive case forms “our” and“ourselves” and its reflexive form “ourselves” refer collectively to Graymark Productions, Inc., its predecessor,Graymark Productions, L.L.C., and its executive officers and directors. Theterm “independent,” as used in this report, is used to distinguish us from theterm “major studios” that is generally regarded in the entertainment industryto mean Universal Pictures, Warner Bros., Twentieth Century Fox, Sony PicturesEntertainment, Paramount Pictures, The Walt Disney Company, Metro Goldwyn Mayerand their respective affiliates. The terms “low-budget motion pictures,” “low-budgetfilms” or “low-budget movie” within this report, refer to motion pictures thathave a production budget of $250,000 to $3 million.

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.**** ****Financial Statements**

 

Our financial statementspresented in this report were prepared and included in this report inaccordance with Regulation S-X and Regulation S-B and appear in this reportbeginning on page F-1.

 

**Item 2.**** ****Management’s Discussion and Analysis or Plan of Operation**

 

You should read thefollowing discussion in conjunction with our financial statements and notesthereto appearing elsewhere in this report.

 

**Overview**

 

Since commencement of ouroperations in August 2001, 2005 was the first year that we received significantrevenue from our motion picture productions. During 2006 and 2005, we earnedrevenue of $404,276 and $450,000, respectively, from our motion picture filmprojects. During the nine months ending September 30, 2007, we earned revenueof $105,761 from the international distribution of *Cloud 9,**The Hunt*and*Surveillance,*domestic distribution of *The Hunt*and broadcast sales of*Cloud 9*. During March 2007, *The Hunt* was released domestically. Weanticipate the domestic release of *Surveillance*and *Soul’s Midnight* later in 2007.We have completed, but not released our motion picture film project, *Fingerprints*.

 

The following discussioncovers our plan of operations for the next 12 months. As with any plan, thereis no assurance that our operations as described will go as planned or that wewill be successful in achieving the anticipated results.

 

**ProposedAcquisitions**

 

During May 2007, we enteredinto a letter of intent to acquire ApothecaryRx, LLC and SDC Holdings, LLC. Theacquisitions involve exchanging our common stock for the ownership interests inthe two companies. The acquisitions are contingent on further due diligence byour management team and execution of a definitive exchange agreement.

 

ApothecaryRx, LLC owns andoperates 11 independent pharmacies located in Colorado, Missouri, Minnesota,and Oklahoma. SDC Holdings, LLC owns and operates eight state-of-the-art sleepcenters that diagnose and treat a full range of sleep disorders, includinginsomnia and obstructive sleep apnea. The centers are located in Oklahoma andTexas. Controlling interests in both companies are held by Roy T. Oliver, oneof our principal shareholders, and Stanton Nelson, one of our directors.

 

**MovieDevelopment and Production**

 

Themovie industry generally consists of two principal activities, production anddistribution. Production encompasses the development, financing and creation offeature-length movies. Distribution entails the promotion and marketing ofmovies in the various media markets, including theatrical, home video andtelevision presentation. We typically acquire developed or “packaged” filmsfrom third parties, rather than retain and employ personnel to develop filmsfor our production. Furthermore, our movies are typically distributed pursuantto licensing arrangements with unrelated third-parties that are independentlyengaged in the promotion and distribution of movies. Our approach toacquisition, production, and distribution is to balance our financial risksagainst the probability of commercial success of each movie project.

 

We produce English languagemotion pictures intended for domestic ancillary market release (home video andtelevision, including pay-per-view, cable, satellite and network broadcast)that have production budgets of $250,000 to $3 million (“low-budget motionpictures,” “low budget movies” or “low-budget films”). The development andproduction costs of a low-budget film and each cost category varies frommovie-to-movie and this variation may be

 

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substantial. Each movie is unique and thestoryline, special effects, production locations, creative personnel involved,etc. affect the budget amount of each cost category. Accordingly, we believethe cost categories are somewhat indeterminable until the particular movie isidentified and developed.

 

Rather than retain andemploy personnel to develop screenplays and perform other movie developmentactivities, we typically acquire low-budget movie projects for production thatare in the development phase, generally to the point that the initialscreenplay has been written. In the pre-production and production phases of amotion picture, we hire skilled creative and production personnel, includingcinematographers, editors, costume designers, set designers, sound and lightingtechnicians and actors on an as needed basis.

 

We enter into variousproduction cost and revenue sharing arrangements, including joint ventures,partnerships and limited liability companies, on a movie-by-movie basis. Thesesharing arrangements are intended to complement or expand our business topermit the production of a greater number of movies, while sharing thefinancial risks of the movie. We may not realize the anticipated financialbenefits when we enter into these arrangements. In addition, the negotiation ofthese arrangements, whether successful or not, may require us to incursignificant costs and cause diversion of management’s time and resources. Accordingly,the costs of obtaining these sharing arrangements increase our invested cost ina movie without providing a correlating increase in the movie’s revenues and,consequently, adversely affect the financial performance of the movie.

 

Following our production ofa movie, we intend to arrange for distribution through third parties primarilyinto the domestic (United States and Canada) and international ancillary market(home video or pay and free television). Depending upon our ability to obtainfavorable distribution arrangements, which depends in many cases upon thedistributor’s assessment of the movie’s revenue potential, a particular moviemay be distributed in the domestic and international theatrical markets as wellas the ancillary markets. As of the date of this report, we have not enteredinto any arrangements for the theatrical release of our produced andin-production motion pictures. A substantial amount of time may elapse betweenour expenditure of funds in the production of a motion picture and the receiptof revenue from the motion picture we produce.

 

Our produced movies aredistributed domestically pursuant to licensing arrangements with unrelatedthird parties that are independently engaged in the promotion and distributionof movies. Our foreign market distribution arrangements are pursuant to sale orlicense of the international distribution rights to an unrelated third-partydistributor for either a single up-front payment (in U.S. currency) without anyretained participation in international source revenues or for the right toreceive a percentage of gross receipts received by the distributor. As of thedate of this report, we have entered into domestic (United States and Canada)distribution arrangements covering all of our motion picture projects and haveentered into international distribution arrangements covering *Cloud 9, The Hunt,**Surveillance*and*Soul’s Midnight*.

 

Our international marketdistribution, whether in the ancillary market or the theatrical market, will besubject to:

 

•              changes in local regulatory requirements,including restrictions on content,

 

•              changes in the laws and policies affectingtrade, investment and taxes (including laws and policies relating to therepatriation of funds and withholding taxes),

 

•              differing degrees of protection forintellectual property,

 

•              instability of foreign economies andgovernments,

 

•              cultural barriers, and

 

•              wars and acts of terrorism.

 

Any of these factors could have a materialadverse effect on the international distribution rights of any motion picture.

 

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**RecentDevelopments**

 

***Impairment of Film Costs.***During August 2007, John Simonelli, our CEO,traveled to Los Angeles, California and met with our distribution partner forthe international distribution of *The Hunt,Surveillance* and *Soul’s Midnight*.Mr. Simonelli also met with our distribution partner for the domesticdistribution of *The Hunt, Surveillance, Soul’sMidnight* and *Fingerprints*.During these meetings, both distribution partners communicated that the demandfor DVD and broadcast sales of non-theatrically released movies has droppedsignificantly over the last eighteen months. They attributed the decline to anincrease in reality television content and an over supply of horror films. Basedon their outlook for the market and specifically our films, we revised therevenue estimate of all of our films as discussed below.

 

***Cloud 9.***In conjunction with the production of *Cloud 9*, with the other producers of *Cloud 9*, we formed Out of the BlueProductions, LLC (the “Production Company”). The Production Company has enteredinto three agreements covering the domestic (United States and Canada) andinternational distribution of *Cloud 9*in the ancillary market (home video market) and the broadcast rights (pay andfree television, video on demand and pay-per-view) for *Cloud 9*. Pursuant to the agreementcovering domestic distribution (“Domestic Agreement”), the Production Companyreceived in June 2005 a non-refundable advance of $450,000 on our share of thenet receipts from the domestic distribution of *Cloud9* that was distributed to us. This advance was recognized as revenuein June 2005 upon delivery of the completed film. The Domestic Agreement allowsthe licensee to receive a distribution fee equal to 20% of gross domesticreceipts of *Cloud 9*after itsrecoupment of all manufacturing, distribution and marketing costs from thosereceipts. *Cloud 9* was released inthe domestic video market during January 2006. The domestic distributor of *Cloud 9* is not required to report revenueresults to us until 60 days after the end of each calendar quarter. We willrecord revenue from the domestic distribution of *Cloud 9* on the date that we receive detailed reporting ofthe sales results from the domestic distributor and can accurately determineour revenues from this distribution. In July 2006, we received the firstreporting from the domestic distributor and based on the sales data revised ourultimate revenue estimate. This resulted in an impairment charge to film costsof $1,445,014.

 

During June 2005, theProduction Company entered in to an agreement for the internationaldistribution of *Cloud 9*(“InternationalAgreement”). Under the International Agreement the licensee is entitled toreceive recoupment of its manufacturing, distribution and marketing costs andthereafter a distribution fee of equal to 15% of gross international receiptsup to $2,000,000 and 10% of gross international receipts above $2,000,000. During2006, we earned approximately $278,000 of revenue under this agreement. InDecember 2006, based on the actual international receipts to date and thenumber of international territories remaining to be exploited, we revised ourultimate revenue estimate. This resulted in an additional impairment charge tofilm costs of $100,000. This brought the total impairment charge for *Cloud 9* to $1,545,014, as of December 31,2006. During the nine months ended September 30, 2007, we earned approximately$68,000 of revenue under this agreement. Based on discussions with ourinternational distribution partner, we determined that it is not likely thatany additional revenue will be earned in the future.

 

Furthermore, during June2005, the Production Company entered in to a Sales Agency Agreement for themarketing of the broadcast rights (pay and free television, video-on-demand andpay-per-view) of *Cloud 9* (“BroadcastAgreement”). Pursuant to the Broadcast Agreement, the licensee is entitled to afee equal to 20% of the gross receipts from broadcast of *Cloud 9* on pay and free television,video-on-demand and pay-per-view after its recoupment of its distributionexpenses. During the nine months ended September 30, 2007, we earnedapproximately $7,000 of revenue under this agreement. No additional revenue isexpected to be earned under this agreement.

 

During September 2007, basedon our revised revenue estimates for *Cloud 9*,we recorded an impairment charge of $202,593. This brought the total impairmentcharge for *Cloud 9* to $1,747,607and reduced the net carrying value of *Cloud9* to zero.

 

As a result of theagreements with the director, casting company, actors and co-finance providers,our residual net profits interest in *Cloud 9*is 30.6% after recoupment and payment of all distribution costs, expenses andfees. Furthermore, our co-finance providers were entitled to receive the first$500,000 of proceeds we receive from the licensing of the distribution rightsof *Cloud 9* of which we have paidin whole. After giving effect to the recovery of the $500,000 contributions tothe production costs of *Cloud 9*under the co-financing agreements and then the recovery of our production costsand other invested costs and interest, our net profits interest in *Cloud 9* is 30.6%. Our entitlement 

 

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to distributions from the Production Companyand the profits interest granted to Burt Reynolds provide for interest at arate of 2% above the prime rate (limited to 5%) for purposes of determining recoveryof the production and other costs of *Cloud 9*.No payments are expected to be made to Burt Reynolds under his profits interestin *Cloud 9*.

 

***The Hunt*****.**During March 2005, we commenced and completedprincipal filming of our second motion picture project titled, *The Hunt*. *TheHunt* has been released in both the domestic and internationalmarkets. We have incurred total production costs for *The Hunt* of approximately $387,000.

 

In July 2005, we enteredinto an agreement for the domestic distribution of *The Hunt*. The agreement grants the licensee a distributionfee equal to 22.5% of gross receipts and allows for the recoupment of allmanufacturing, distribution and marketing costs. We have also entered into anagreement for the international distribution of *The Hunt*. The agreement grants the licensee a distributionfee equal to 20% of gross receipts and allows for the recoupment of allmanufacturing, distribution and marketing costs. During the nine months endedSeptember 30, 2007, we earned approximately $12,000 from the internationaldistribution of *The Hunt*. During2006, we earned approximately $36,000 from the international distribution of *The Hunt*.

 

In addition, we assigned 35%of the copyright interest in *The Hunt*to the licensee for approximately $214,000, an amount equal to 50% of thebudget of *The Hunt*. The companythat developed the story concept for *TheHunt* retained a 25% interest in the net receipts of *The Hunt*. Net receipts is defined asreceipts after we recoup our production costs, interest and overhead. Inaddition, we entered in to net participation agreements with the director,casting company and others equal to 7% of the net receipts of *The Hunt*.

 

During September 2007, basedon our revised revenue estimates for *TheHunt*, we recorded an impairment charge of $358,244. This reduced thenet carrying value of *The Hunt* tozero.

 

***Surveillance*****.**During August 2005, we commenced andcompleted principal filming of our third motion picture project titled, *Surveillance*. *Surveillance*has been released in the international marketand is expected to be released domestically later in 2007. We have incurredtotal production costs for *Surveillance*of approximately $589,000.

 

In July 2005, we enteredinto an agreement for the domestic distribution of *Surveillance*. The agreement grants the licensee adistribution fee equal to 25% of gross receipts and allows for the recoupmentof all manufacturing, distribution and marketing costs. We have also enteredinto an agreement for the international distribution of *Surveillance*. The agreement grants thelicensee a distribution fee equal to 20% of gross receipts and allows for therecoupment of all manufacturing, distribution and marketing costs. During thenine months ended September 30, 2007, we earned approximately $18,000 from theinternational distribution of *Surveillance*.During 2006, we earned approximately $31,000 from the internationaldistribution of *Surveillance*.

 

In addition, we assigned 50%of the copyright interest in *Surveillance*to the licensee for approximately $312,000, an amount equal to 50% of thebudget of *Surveillance*. Inaddition, we entered in to net participation agreements with the director,casting company and others equal to 8% of the net receipts of *Surveillance*.

 

During September 2007, basedon our revised revenue estimates for *Surveillance*,we recorded an impairment charge of $514,789. This reduced the net carryingvalue of *Surveillance* to $40,000.

 

***Soul’s Midnight*****.**During November 2005, we commenced andcompleted the filming of our fourth motion picture titled, *Soul’s Midnight*. We have incurred totalproduction costs for *Soul’s Midnight*of approximately $664,000.

 

We have entered into anagreement for the domestic distribution of *Soul’sMidnight*. The agreement grants the licensee a distribution fee equalto 25% of gross receipts and allows for the recoupment of all manufacturing,distribution and marketing costs. We have also entered into an agreement forthe international distribution of *Soul’sMidnight*. The agreement grants the licensee a distribution fee equalto 20% of gross receipts and allows for the recoupment of all manufacturing,distribution and marketing costs. During 2006, we received a non-refundableadvance of $60,000 from the international distribution of *Soul’s Midnight*.

 

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In addition, we assigned 25%of the copyright interest in *Soul’s Midnight*to the licensee for approximately, $171,000 an amount equal to 25% of thebudget of *Soul’s Midnight*. Wealso assigned 50% of the copyright interest in *Soul’sMidnight* to the creators of the script for approximately $342,000,an amount equal to 50% of the budget.

 

During September 2007, basedon our revised revenue estimates for *Soul’sMidnight*, we recorded an impairment charge of $581,575. This reducedthe net carrying value of *Soul’s Midnight*to $35,000.

 

***Fingerprints.***During April 2006, we commenced and completedthe filming of our fifth motion picture project titled, *Fingerprints*. We have incurred totalproduction costs for *Fingerprints*of approximately $617,000.

 

We have entered into anagreement for the domestic distribution of *Fingerprints*.The agreement grants the licensee a distribution fee equal to 25% of grossreceipts and allows for the recoupment of all manufacturing, distribution and marketingcosts. In addition, we assigned 42.5% of the copyright interest in *Fingerprints* to the licensee forapproximately $291,000, an amount equal to 42.5% of the budget of *Fingerprints*. We also assigned 20% of thecopyright interest in *Fingerprints*to the creators of the script for approximately $137,000, an amount equal to20% of the budget.

 

During September 2007, basedon our revised revenue estimates for *Fingerprints*,we recorded an impairment charge of $466,670. This reduced the net carryingvalue of *Fingerprints* to$150,000.

 

***Summary Motion Picture RevenueParticipation and Net Rights in Distribution.***The following summarizes the revenueparticipations before and after net profit participations in our films *The Hunt*, *Surveillance,Soul’s Midnight* and *Fingerprints*:

 

 
| ** **                  | ** ** | **Before Payout** | ** ** | **After Payout** | ** ** |
|-----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **Company**            | ** ** | **Other  Members**    | ** ** | **Company** | ** ** | **Other  Members** | ** ** | **Third-  Party  Interest** | ** ** |
|                        |       |                   |       |                  |       |   |   |   |   |   |   |
| The Hunt                    |       |                   |       |                  |       |   |   |   |   |   |   |
| Revenue allocation          |       | 65                     | %          | 35                    | %          | 44 | % | 24 | % | 32 | % |
| Production costs to be paid |       | 50                     | %          | 50                    | %          |   |   |   |   |   |   |
|                        |       |                   |       |                  |       |   |   |   |   |   |   |
| Surveillance                |       |                   |       |                  |       |   |   |   |   |   |   |
| Revenue allocation          |       | 50                     | %          | 50                    | %          | 46 | % | 46 | % | 8 | % |
| Production costs to be paid |       | 50                     | %          | 50                    | %          |   |   |   |   |   |   |
|                        |       |                   |       |                  |       |   |   |   |   |   |   |
| Soul’s Midnight        |       |                   |       |                  |       |   |   |   |   |   |   |
| Revenue allocation          |       | 25                     | %          | 75                    | %          | 24 | % | 72 | % | 4 | % |
| Production costs to be paid |       | 25                     | %          | 75                    | %          |   |   |   |   |   |   |
|                        |       |                   |       |                  |       |   |   |   |   |   |   |
| Fingerprints                |       |                   |       |                  |       |   |   |   |   |   |   |
| Revenue allocation          |       | 35                     | %          | 65                    | %          | 34 | % | 62 | % | 4 | % |
| Production costs to be paid |       | 35                     | %          | 65                    | %          |   |   |   |   |   |   |

 

The table below summarizesthe distribution fees negotiated as of September 30, 2007 on a per movie basis(markets that have no distribution agreements in place are identified as “n/a”):

 
| ** **          | ** ** | **Cloud 9** | ** ** | **The  Hunt** | ** ** | **Surv-  eillance** | ** ** | **Soul’s  Midnight** | ** ** | **Finger-  prints** | ** ** |
|---------------------|------------|------------------|------------|---------------|------------|---------------------|------------|---------------------------|------------|---------------------|------------|
|                |       |             |       |          |       |                |       |                      |       |                |       |
| Domestic DVD market |       | 20               | %          | 22.5          | %          | 25                  | %          | 25                        | %          | 25                  | %          |
| Broadcast           |       | 20               | %          | n/a           |       | n/a                 |       | n/a                       |       | n/a                 |       |
| International       |       | 15               | %          | 20            | %          | 20                  | %          | 20                        | %          | n/a                 |       |

 

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***Convertible Note Financing.***In August and October 2005, we issued twopromissory notes (the “Notes”) in the aggregate principal amount of $1,500,000.The Notes are secured by all of our assets and the assets of our current andfuture subsidiaries. The Notes bear interest at the rate of 8% per annum thatis payable quarterly and can be paid in cash or shares of our common stock. TheNotes become due and payable on the first to occur of:

 

•              July 27, 2007 for the first note and October25, 2007 for the second note which was subsequently extended to January 31,2008 (the “Maturity Dates”);

 

•              the consummation of a “Qualified Financing;”or

 

•              the continuation of and event of default, asdefined in the Notes, for more than 30 days following notice of the occurrenceof an event of default.

 

Upon consummation of aQualified Financing, the outstanding principal amount of the Notes and all accruedand unpaid interest (collectively the “Note Balance”) will automaticallyconvert into shares of our common stock or other equity securities equal to120% of the Note Balance divided by the price per share of our common stock orother equity securities sold in the Qualified Financing. The maximum price orvalue of our common stock or other equity securities into which the NoteBalance converts may not exceed the equivalent of $1.10 per common stock share.Qualified Financing refers to any equity financing pursuant to which we receiveaggregate gross cash proceeds of $2,000,000 or more on or before the MaturityDate.

 

In conjunction with issuanceof the Notes, we and the holder of the Notes entered into common stock purchasewarrant agreements, each evidencing warrants exercisable on or before August 5,2010 for the first note and October 25, 2010 for the second note. Twoagreements provide for the purchase of 250,000 (500,000 total) common stockshares at $2.00 and the other two agreements provide for the purchase of250,000 (500,000 total) common stock shares at $3.00.

 

The fair value of eachwarrant issued was estimated on the date of issuance using the Black-Scholesoption pricing model. The fair value of the options were based on thedifference between the present value of the exercise price of the option andthe estimated fair value price of the common share. The fair value of thewarrants was estimated to be $349,459 and was recorded as paid-in capital andas a discount to the value of the notes. The value of the warrants will beamortized to interest expense over the respective terms of the Notes.

 

In March 2007, we executedamendment agreements with the holder of its convertible notes payable. Underthe amendments, the maturity date of both Notes is extended to January 31, 2008.Interest on the Notes is increased from 8% to 12% per annum from the date ofthe amendment until maturity. As additional consideration for executing theamendments, we lowered the strike price of the previously issued warrantagreements, which allow for the purchase of 1,000,000 shares of common stockshares, to $0.50 per share from the original strike prices of $2.00 and $3.00per share. In addition, we and the holder of the Notes entered into anadditional common stock purchase warrant agreement, evidencing warrantsexercisable on or before April 1, 2012. The agreement provides for the purchaseof 500,000 common stock shares at $0.50.

 

The fair value of therepriced and newly issued warrants was estimated on the date of repricing orissuance using the Black-Scholes option pricing model. The fair value of theoptions were based on the difference between the present value of the exerciseprice of the option and estimated fair value of the common share. The fairvalue of the newly issued warrants was estimated to be $51,614 and was recordedas paid-in capital. The value of the warrants will increase interest expenseover the new life of the Notes. We determined that there was no additional fairvalue (over the value previously recorded) attributable to the repricing of thepreviously issued warrants and no additional expense has been recorded for thismodification.

 

***Output Agreement.***In June 2005, we entered into an agreementproviding Image Entertainment (“Image”) with the first-look right at the movieswe produce (the “Output Agreement”). Image has a “first look” on all projectsup to $2,000,000 that we undertake during the three-year period beginning onthe date of delivery of *The Hunt*which was delivered in February 2006. If Image were to choose not to becomeinvolved in a motion picture project, we have the right to produce anddistribute the motion picture with another person without any furtherobligation to Image. Image 

 

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agreed to fund up to 50% of each productionbudget for mutually agreed upon motion picture projects. This funding ispayable in three installments:  20% ofthe approved production budget through pre-production, 60% through the physicalshooting schedule, and 20% through the post-production process.

 

For a term of 20 years,Image will have domestic distribution rights of each motion picture we co-producewith Image. Image is entitled to receive a 25% distribution fee from grossdomestic sales and a back-end profit participation from all sales after paymentof the distribution fee. In general, the back-end profit participation interestand ownership interest in each co-produced motion picture will be based uponImage’s funding of the budgeted share of production costs. The actual back-endprofit participation percentage is equal to the percentage Image funds of themotion picture project after recovery from sales of the mutually approvedexpenses. Our joint exploitation of the broadcast rights with Image have beenleft to future negotiation.

 

**AccountingMethods**

 

The application of thefollowing accounting policies, which are important in presenting our financialposition and results of operations, requires significant judgments andestimates on the part of management. For a summary of all of our accountingpolicies, including the accounting policies discussed below, see note 2 to theunaudited consolidated financial statements appearing elsewhere in this report.

 

In June 2000, the AccountingStandards Executive Committee of the American Institute of Certified PublicAccountants issued Statement of Position 00-2, Accounting by Producers orDistributors of Films (“SoP 00-2”). SoP 00-2 establishes accounting standardsfor producers or distributors of films, including changes in revenuerecognition, capitalization and amortization of costs of acquiring films andtelevision programs and accounting for exploitation costs, includingadvertising and marketing expenses. These accounting standards are as follows:

 

•              advertising and marketing costs are expensedthe first time the advertising takes place; and

 

•              the capitalization of production costs forepisodic television series is limited to revenue that has been contracted foron an episode-by-episode basis until the time that the criteria for recognizingsecondary market revenues are met.

 

We capitalize the costs ofproduction, including financing costs, to investment in motion pictures. Thesecosts are amortized to direct operating expenses in accordance with SoP 00-2.These costs are stated at the lower of unamortized motion picture costs or fairvalue (net present value). Costs for an individual motion picture are amortizedin the proportion that current period actual revenues bear to management’sestimates of the total revenue expected to be received from the motion pictureover a period not to exceed 10 years from the date of delivery. We are requiredto regularly review and revise when necessary the total revenue estimates ofeach motion picture produced. As a result, if revenue estimates change withrespect to a motion picture, it may be necessary to write down all or a portionof the unamortized costs of the motion picture. There is no assurance thatrevised revenue estimates will not occur that result in significant write-downsaffecting our results of operations and financial condition.

 

Revenue from the sale orlicensing of motion pictures will be recognized upon meeting all recognitionrequirements of SoP 00-2. Revenue from the theatrical release of motionpictures will be recognized at the time of exhibition based on ourparticipation in box office receipts. If applicable, revenue from the sale ofDVDs in the retail market, net of an allowance for estimated returns, isrecognized on the later of shipment to the customer or “street date” (when itis available for sale by the customer). Furthermore, if applicable, underrevenue sharing arrangements, rental revenue is recognized when we becomeentitled to receipts. For contracts that provide for rights to exploit a motionpicture on multiple media (e.g. theatrical, video, television) with a fee for asingle motion picture where the contract specifies the permissible timing ofrelease to various media, the fee is allocated to the various media based on anassessment of the relative fair value of the rights to exploit each media andwill be recognized as the movie is released to each media. For multiple-titlecontracts with a fee, the fee is allocated on a title-by-title basis, based onan assessment of the relative fair value of each title. If applicable, revenuesfrom television licensing are recognized when the motion picture becomesavailable to the licensee for telecast. Cash payments received are recorded asdeferred revenue until all the conditions of revenue recognition have been met.If applicable, we accrue for video returns and provide for

 

7

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allowances in the financial statements basedon previous returns and our allowances history on a title-by-title basis ineach of the video businesses. In this case, there may be differences betweenactual returns and allowances and our historical experience that we currentlydo not have. Revenues earned from the sale of DVDs through distributionagreements are recognized when sales from these distributors are known or canbe accurately estimated.

 

We depend on thedistributors of any motion picture we produce to account for and accuratelyreport our share of exhibition revenue. While we expect to have certain auditrights to verify exhibition revenues received by our North Americandistributors,

 

•              distributors are often in a position toaccount for revenues in a manner that understates or fails accurately toaccount for revenues or

 

•              distributors may fail to maintain appropriateaccounting records making it difficult to determine a producer’s actual shareof revenues upon audit.

 

Although we do not have anyexperience related to auditing distributors’ revenue accounting, we anticipatethat the costs associated with this type of audit may be substantial and mayvary significantly from distributor-to-distributor and even picture-to-picture.Therefore, there is no assurance that, in all cases, we will be able to obtainan accurate accounting of exhibition revenues or that audits will result inincreases in the revenues that justify the associated audit costs.

 

**RecentAccounting Pronouncements**

 

*FIN 48* – In June 2006, the Financial Accounting Standards Board (“FASB”)issued Interpretation 48, *“Accounting forUncertainty in Income Taxes - an Interpretation of FASB Statement No. 109”*(“FIN 48”). FIN 48 is intended to clarify the accounting for uncertainty inincome taxes recognized in a company’s financial statements and prescribes therecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on de-recognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition.

 

Under FIN 48, evaluation ofa tax position is a two-step process. The first step is to determine whether itis more-likely-than-not that a tax position will be sustained upon examination,including the resolution of any related appeals or litigation based on thetechnical merits of that position. The second step is to measure a tax positionthat meets the more-likely-than-not threshold to determine the amount ofbenefit to be recognized in the financial statements. A tax position ismeasured at the largest amount of benefit that is greater than 50 percentlikely of being realized upon ultimate settlement.

 

Tax positions thatpreviously failed to meet the more-likely-than-not recognition threshold shouldbe recognized in the first subsequent period in which the threshold is met. Previouslyrecognized tax positions that no longer meet the more-likely-than-not criteriashould be de-recognized in the first subsequent financial reporting period inwhich the threshold is no longer met.

 

The adoption of FIN 48 atJanuary 1, 2007 did not have a material impact on our financial position,results of operations, or cash flows.

 

*SFAS 157* – In September 2006, the FASB issued Statement No. 157, *“Fair Value Measurements”*  (“SFAS 157”). SFAS 157 addresses howcompanies should measure fair value when they are required to use a fair valuemeasure for recognition or disclosure purposes under GAAP. SFAS 157 definesfair value, establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. SFAS 157 is effective for fiscalyears beginning after November 15, 2007, with earlier adoption permitted. Managementis assessing the impact of the adoption of this SFAS 157.

 

*SFAS 158* – In September 2006, the FASB issued Statement No. 158, *“Employers’ Accounting for Defined*

 

8

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*BenefitPension and Other Postretirement Plans”* (“SFAS 158”), an amendment of FASBStatements No. 87, 88, 106 and 132(R). SFAS 158 requires (a) recognition of thefunded status (measured as the difference between the fair value of the planassets and the benefit obligation) of a benefit plan as an asset or liabilityin the employer’s statement of financial position, (b) measurement of thefunded status as of the employer’s fiscal year-end with limited exceptions, and(c) recognition of changes in the funded status in the year in which thechanges occur through comprehensive income. The requirement to recognize thefunded status of a benefit plan and the disclosure requirements are effectiveas of the end of the fiscal year ending after December 15, 2006. Therequirement to measure the plan assets and benefit obligations as of the dateof the employer’s fiscal year-end statement of financial position is effectivefor fiscal years ending after December 15, 2008. Management adopted thisStatement on December 31, 2006 and the initial adoption did not have a materialimpact to our financial position, results of operations, or cash flows.

 

*SFAS 159* – In February 2007, the FASB issued Statement No. 159, *“The Fair Value Option for Financial Assets andLiabilities”* (“SFAS 159”). SFAS 159 permits companies to choose tomeasure many financial assets and liabilities at fair value. Unrealized gainsand losses on items for which the fair value option has been elected arereported in earnings. SFAS 159 is effective for fiscal years beginning afterNovember 15, 2007. Management is currently assessing the impact of SFAS 159 onour consolidated financial statements.

 

*SAB 108* – In September 2006, the Securities Exchange Commission issued StaffAccounting Bulletin No. 108 (“SAB 108”). SAB 108 addresses how the effects ofprior year uncorrected misstatements should be considered when quantifyingmisstatements in current year financial statements. SAB 108 requires companiesto quantify misstatements using a balance sheet and income statement approachand to evaluate whether either approach results in quantifying an error that ismaterial in light of relevant quantitative and qualitative factors. When theeffect of initial adoption is material, companies will record the effect as acumulative effect adjustment to beginning of year retained earnings anddisclose the nature and amount of each individual error being corrected in thecumulative adjustment. SAB 108 was effective beginning January 1, 2007 and theinitial adoption of SAB 108 did not have a material impact on our financialposition, results of operations, or cash flows.

 

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**Results ofOperations**

 

The following table setsforth selected results of our operations for the three months and nine monthsended September 30, 2007 and 2006. The following information was derived andtaken from our unaudited financial statements appearing elsewhere in thisreport.

 
| ** **                                           | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                               | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue                                              |       | $                                                                      | 28,491     |                                                                  | $          | 154,522 |   | $ | 105,761 |   | $ | 391,388 |   |
| Expenses:                                            |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Direct operating                                     |       | 21,348                                                                 |       | 132,092                                                               |       | 91,567 |   | 323,543 |   |
| Impairment of investment in films                    |       | 2,123,871                                                              |       | —                                                                |       | 2,123,871 |   | 1,445,014 |   |
| General and administrative                           |       | 165,874                                                                |       | 101,521                                                               |       | 331,249 |   | 302,647 |   |
| Depreciation                                         |       | 764                                                                    |       | 1,216                                                                 |       | 2,292 |   | 3,649 |   |
|                                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Total expenses                                       |       | 2,311,857                                                              |       | 234,829                                                               |       | 2,548,979 |   | 2,074,853 |   |
| Operating loss                                       |       | (2,283,366                                                             | )          | (80,307                                                               | )          | (2,443,218 | ) | (1,683,465 | ) |
|                                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Other income (expense):                              |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Interest and other income                            |       | 6,016                                                                  |       | 7,168                                                                 |       | 21,266 |   | 23,814 |   |
| Interest expense                                     |       | (94,221                                                                | )          | (92,945                                                               | )          | (314,776 | ) | (276,784 | ) |
|                                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net other income (expense)                           |       | (88,205                                                                | )          | (85,777                                                               | )          | (293,510 | ) | (252,970 | ) |
|                                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net loss before minority interests and  income taxes |       | (2,371,571                                                             | )          | (166,084                                                              | )          | (2,736,728 | ) | (1,936,435 | ) |
| Minority interests                                   |       | 1,120,713                                                              |       | (13,248                                                               | )          | 1,117,989 |   | (18,088 | ) |
| Provision for income taxes                           |       | —                                                                 |       | —                                                                |       | — |   | — |   |
| Net loss                                             |       | $                                                                      | (1,250,858 | )                                                                     | $          | (179,332 | ) | $ | (1,618,739 | ) | $ | (1,954,523 | ) |

 

**Comparisonof the Three-Month Periods Ended September 30, 2007 and 2006**

 

Our consolidated revenuesfor the three months ended September 30, 2007 (the “2007 3rd Quarter”) were$28,491 and were attributable to the international distribution of *Cloud 9, The Hunt*and*Surveillance* and broadcast sales for *Cloud 9*. We generated revenue in the prioryear’s third quarter of $154,522 from the international distribution of *Cloud 9*, *TheHunt, Surveillance* and*Soul’sMidnight*.

 

Direct operating expensesprimarily include amortization of film costs and participation costs. Ourdirect operating expenses of $21,348 for the 2007 3rd Quarter were 75% ofrevenues. The ratio of direct operating expenses to revenue is dependent on ourestimate of the ultimate revenue of each film. During the third quarter of2006, we incurred direct operating expenses of $132,092 which represented 85%of revenues.

 

During August 2007, we metwith our distribution partners for the international and domestic distributionof *Cloud 9, The Hunt*, *Surveillance,**Soul’s Midnight*and*Fingerprints*. After these meetings, we determined that it was notlikely that our previous revenue estimates would be realized As a result, wewrote down the carrying value of *Cloud 9*by $202,593 to zero, *The Hunt* by$358,244 to zero, *Surveillance* by$514,789 to $40,000, *Soul’s Midnight*by $581,575 to $35,000 and *Fingerprints*by $466,670 to $150,000. The net carrying values at September 30, 2007 areequal to the amounts that management estimates will be collected throughcontinuing domestic, international distribution and broadcast distribution ofthese films.

 

General and administrationexpenses of $165,874 for the 2007 3rd Quarter increased $64,353, or 63%, from$101,521 in the prior year’s quarter. The increase in general andadministration expenses was primarily due to legal and accounting fees incurredin the proposed acquisitions of ApothecaryRx, LLC., and SDC Holdings, LLC. Theincrease in legal and accounting fees was offset by a decrease in salaries.

 

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During the 2007 3rd Quarter,we realized interest income of $6,016, compared to $7,168 in the prior year’s3rd quarter. This decrease was attributable to a corresponding decrease in thebalance of cash and cash equivalents held in interest bearing accounts.

 

We incurred interest expenseof $94,221 during the 2007 3rd Quarter that was attributable to our convertiblenotes payable, amortization of prepaid loan fees and amortization of warrantsissued with the convertible notes payable. We incurred interest expense of$92,945 during the third quarter of 2006. The increase in interest expense wasdue to the increase in the interest rate paid on the convertible notes from 8%to 12% effective March 2007.

 

Minority interests in ourearnings (losses) for the 2007 and 2006 3rd Quarters were ($1,120,713) and$13,248, respectively, and were attributable to minority interests in ourmovies *The Hunt*, *Surveillance,**Soul’s Midnight* and*Fingerprints*.

 

**Comparisonof the Nine-Month Periods Ended September 30, 2007 and 2006**

 

Our consolidated revenuesfor the nine months ended September 30, 2007 (the “2007 3rd Quarter”) were$105,761 and were attributable to the international distribution of *Cloud 9, The Hunt*and*Surveillance* and broadcast sales for *Cloud 9*. We generated revenue in the firstnine months of 2006 of $391,388 from the international distribution of *Cloud 9*, *TheHunt, Surveillance* and*Soul’sMidnight*.

 

Direct operating expensesprimarily include amortization of film costs and participation costs. Ourdirect operating expenses of $91,567 for the nine months ended September 30,2007 were 87% of revenues. The ratio of direct operating expenses to revenue isdependent on our estimate of the ultimate revenue of each film. During thefirst nine months of 2006, we incurred direct operating expenses of $323,543which represented 83% of revenues.

 

During August 2007, we metwith our distribution partners for the international and domestic distributionof *Cloud 9, The Hunt*, *Surveillance,**Soul’s Midnight*and*Fingerprints*. After these meetings, we determined that it was notlikely that our previous revenue estimates would be realized As a result, wewrote down the carrying value of *Cloud 9*by $202,593 to zero, *The Hunt* by$358,244 to zero, *Surveillance* by$514,789 to $40,000, *Soul’s Midnight*by $581,575 to $35,000 and *Fingerprints*by $466,670 to $150,000. The net carrying values at September 30, 2007 areequal to the amounts that management estimates will be collected throughcontinuing domestic, international distribution and broadcast distribution ofthese films. As of June 30, 2006, our domestic distributor for *Cloud 9* had reported to us domestic DVDsales of approximately 100,000 units. Based on the actual results through June30, 2006, we did not believe that we can be reasonably assured of receivingdomestic revenue in excess of the $450,000 non-refundable advance we receivedin 2005. As a result, we wrote down the carrying value of *Cloud 9* by $1,445,014 to $393,000 whichwas equal to the amount that management estimated (as of June 30, 2006) wouldbe collected through continuing international distribution and broadcastdistribution of *Cloud 9*.

 

General and administrationexpenses of $331,249 for the nine months ended September 30, 2007 increased$28,602, or 9%, from $302,647 in the first nine months of 2006. The increase ingeneral and administration expenses was primarily due to legal and accountingfees incurred in the proposed acquisitions of ApothecaryRx, LLC., and SDCHoldings, LLC. The increase in legal and accounting fees was offset by adecrease in salaries.

 

During the nine months endedSeptember 30, 2007, we realized interest income of $21,266, compared to $23,814in the first nine months of September 30, 2007. This decrease was attributableto a corresponding decrease in the balance of cash and cash equivalents held ininterest bearing accounts.

 

We incurred interest expenseof $314,776 during the nine months ended September 30, 2007 that was attributableto our convertible notes payable, amortization of prepaid loan fees andamortization of warrants issued with the convertible notes payable. We incurredinterest expense of $276,784 during the first nine months of 2006. The increasein interest expense was due to the increase in the interest rate paid on theconvertible notes from 8% to 12% effective March 2007.

 

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Minority interests in ourearnings (losses) for the nine months ended September 30, 2007and 2006, were($1,117,989) and $18,088, respectively, and were attributable to minorityinterests in our movies *The Hunt*,*Surveillance,**Soul’s Midnight* and*Fingerprints*.

 

**Liquidityand Capital Resources**

 

Our liquidity and capitalresources are provided principally through cash generated from operations,issuance of convertible notes payable and equity offerings. Our cash and cashequivalents at September 30, 2007 totaled approximately $700,000. As ofSeptember 30, 2007, we had a working capital deficiency of approximately$1,217,000.

 

We expect to meet ourobligations as they become due through available cash and funds generated fromour completed motion pictures supplemented as necessary by debt and equityfinancing. We expect to generate positive working capital through ouroperations. However, there are no assurances that we will be able to either (1)achieve a level of revenues adequate to generate sufficient cash flow fromoperations or (2) obtain additional financing through debt and equity financingto support our working capital requirements. These conditions raise substantialdoubt about our ability to continue as a going concern. The accompanyingfinancial statements do not include any adjustments that might be necessaryshould we be unable to continue as a going concern.

 

In an effort to manage ourworking capital, during March 2007, we executed amendment agreements with theholder of its convertible notes payable. Under the amendments, the maturitydate of both Notes was extended to January 31, 2008. Interest on the Notes wasincreased from 8% to 12% per annum from the date of the amendment untilmaturity. As additional consideration for executing the amendments, we loweredthe exercise price of the previously issued warrant agreements, which allow forthe purchase of 1,000,000 shares of common stock shares, to $0.50 per sharefrom the original strike prices of $2.00 and $3.00 per share. In addition, weentered into an additional common stock purchase warrant agreement with theholder of the Notes, evidencing warrants exercisable on or before April 1, 2012for the purchase of 500,000 common stock shares at $0.50 each.

 

During May 2007, we enteredinto a letter of intent to acquire ApothecaryRx, LLC., and SDC Holdings, LLC. Theacquisitions involve exchanging our common stock for the ownership interests inthe two companies. The acquisitions are contingent on further due diligence byour management team and execution of a definitive exchange agreement.

 

ApothecaryRx, LLC owns andoperates 11 independent pharmacies located in Colorado, Missouri, Minnesota,and Oklahoma. SDC Holdings LLC owns and operates eight state-of-the-art sleepcenters that diagnose and tread a full range of sleep disorders, includinginsomnia and obstructive sleep apnea. The centers are located in Oklahoma andTexas. Controlling interests in both companies are held by Roy T. Oliver, oneof our principal shareholders, and Stanton Nelson, one of our directors.

 

Operating activities for thenine months ended September 30, 2007, used net cash of $132,577 compared tooperating activities for the first nine months of 2006 which used $623,046. Theincrease in cash flows from operating activities was primarily attributable toa decrease in the amount of funds invested in films and unearned revenuereceived on a film project currently in progress.

 

Investing activities for thenine months ended September 30, 2007 used net cash of $16,523 as a result ofpayments made to minority interests on certain film projects. Conversely,during the first nine months of 2006, investing activities generated net cashof $450,385 as a result of contributions made by our minority interests oncertain film projects.

 

There were no financingactivities during the nine months ended September 30, 2007. Financing activitiesfor the nine months ended September 30, 2006, used cash of $50,000 for therepayment of film obligations.

 

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***Financial Commitments***

 

***FilmCapital, Inc. Agreement.***In March 2002, Messrs. Frederickson andStansberry, members of Graymark Productions, L.L.C., entered into an agreementto pay FilmCapital, Inc. $50,000 for services performed. This liability is onlypayable in the event Graymark Productions, L.L.C. or its affiliates obtainfunding for film projects from outside investors. Messrs. Frederickson andStansberry have each represented that their intent was not to cause GraymarkProductions, L.L.C. to be liable for this obligation and each has agreed toindemnify us for any liability that may arise out of this agreement. InDecember 2003, we recorded a consulting expense and liability of $50,000related to the agreement with FilmCapital. At the time that we pay thisrecorded liability, Messrs. Frederickson and Stansberry will be requiredimmediately to reimburse us for the payment.

 

***Registration Obligations.***We agreed, at our expense, to register thecommon stock shares and redeemable warrants offered for sale pursuant to ourprivate placement of 2,995,000 common stock shares and redeemable warrants exercisablefor the purchase of 2,995,000 common stock shares under the 1933 Act and tomaintain effectiveness of the registration for a seven-year period ending onApril 14, 2010. Registration of the common stock shares and redeemable warrantsbecame effective July 13, 2004.

 

Furthermore, we alsosimilarly agreed to register (and maintain effective of the registration underthe 1933 Act for the seven-year period) the 443,250 common stock sharesunderlying the placement agent warrants sold to the underwriter of our privateplacement offering, Viewtrade Financial, and 383,425 common stock shares issuedpursuant to the one-year Financial Advisor Agreement to Viewtrade Financial. Inaccordance with this obligation, we initially included these common stockshares in the registration statement that registered the private placementcommon stock shares and redeemable warrants; however, on February 27, 2004,Viewtrade Financial, on its own behalf as well as the other holders of theplacement agent warrants and the recipients and holders of the common stockshares assigned to affiliates of Viewtrade Financial, elected to remove thoseshares from the registration statement.

 

We have been informed by ourlegal counsel that the common stock shares and redeemable warrants, other thanthose underlying the redeemable warrants and the placement agent warrants, maybe sold without further restriction pursuant to Rule 144 as promulgated by theSecurities and Exchange Commission. Because the exercise prices of theredeemable warrants and the placement agent warrants are substantially inexcess of the market price of our common stock, we do not intend to file a registration statement covering theunderlying common stock shares until the market price of our common stockincreases to a level above the applicable exercise prices.

 

***Office Space Arrangement*****.**Our corporate headquarters and offices arelocated at 101 North Robinson, Suite 920, Oklahoma City, Oklahoma. These officefacilities consist approximately of 1,500 square feet and are occupied under anwritten month-to-month lease arrangement, requiring monthly rental payments ofapproximately $2,100. The costs of building-out and improving our offices wasapproximately $15,000 which we paid rather than Corporate Tower, LLC, ourlandlord. Roy T. Oliver, one of our greater than 5% shareholders andaffiliates, controls Corporate Tower, LLC. Mr. Oliver on behalf of CorporateTower, LLC has orally indicated that as of the date of this report there is nointent to terminate our occupancy of the office facilities. Under Oklahoma law,termination of our month-to-month lease arrangement requires at least 30 daysprior written notice. In the event of this termination, we believe there isadequate office space and facilities available in the Oklahoma City area.

 

***12-Month Overhead Budget***

 

Our budgeted overheadexpenses for the next 12 months are as follows:

 
| **Expenditure**                | ** ** | **Monthly** | ** ** | **12  Months** | ** ** |
|--------------------------------|------------|-------------|------------|----------------|------------|
| Administrative expenditures:   |       |        |       |           |       |
| Executive officer compensation |       | $           | 12,000     |           | $          | 144,000 |   |
| Administrative salaries        |       | 3,000       |       | 36,000         |       |
| Payroll taxes                  |       | 1,200       |       | 14,400         |       |
| Telephone                      |       | 600         |       | 7,200          |       |
|                                |            |             |            |                |            |  |  |

 

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| **Expenditure**                   | ** ** | **Monthly** | ** ** | **12  Months** | ** ** |
|-----------------------------------|------------|-------------|------------|----------------|------------|
| Rent                              |       | 2,100       |       | 25,200         |       |
| Legal                             |       | 3,000       |       | 36,000         |       |
| Accounting                        |       | 3,000       |       | 36,000         |       |
| Public relations                  |       | 500         |       | 6,000          |       |
| Insurance                         |       | 500         |       | 6,000          |       |
| Stock transfer                    |       | 800         |       | 9,600          |       |
| Miscellaneous                     |       | 1,000       |       | 12,000         |       |
| Total Administrative Expenditures |       | $           | 27,700     |           | $          | 332,400 |   |
|                                   |            |             |            |                |            |  |  |

 

***Additional Financial Commitments***

 

Other than our commitmentsdiscussed above, we do not have any capital commitments. Although we do nothave any commitments, we may enter into long-term lending arrangements duringthe next 12 months to provide additional working capital and fund additionalmovie projects we desire to undertake. In addition, we may receive additionalfunds from the exercise of outstanding warrants and stock options, the exerciseof which is generally not within our control.

 

If our production activitiesare successful (of which there is no assurance) or movie production budgetsincrease, we may be required to increase overhead by hiring additionalemployees and increase our office facilities. We anticipate that during thenext 12 months we will not be required to increase the number of our employeesor increase our office facilities.

 

We believe that ouroperations as a result of our motion picture projects will achieveprofitability. We provide no assurance that

 

•              wewill be successful in implementing our business plan or

 

•              unanticipatedexpenses or problems or technical difficulties will not occur which wouldresult in significant delays.

 

Either one of these will adversely affect ourability to become profitable or to maintain profitability.

 

Future commitments undercontractual obligations by expected maturity date at September 30, 2007 are asfollows:

 
| ** **                | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **> 5 years** | ** ** | **Total** | ** ** |
|---------------------------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|----------------------------|------------|-----------|------------|
|                      |       |                      |       |               |       |               |       |                       |       |      |       |
| Convertible notes payable |       | $                         | 1,560,000  |               | $          | —             |       | $                          | —     |      | $          | — |   | $ | 1,560,000 |   |
| Operating leases          |       | 25,608                    |       | —             |       | —             |       | —                     |       | 25,608    |       |
|                      |       |                      |       |               |       |               |       |                       |       |      |       |
|                      |       | $                         | 1,585,608  |               | $          | —             |       | $                          | —     |      | $          | — |   | $ | 1,585,608 |   |

 

**CautionaryStatement Relating to Forward Looking Information**

 

We have included someforward-looking statements in this section and other places in this reportregarding our expectations. These forward-looking statements involve known andunknown risks, uncertainties and other factors which may cause our actualresults, levels of activity, performance or achievements, or industry results,to be materially different from any future results, levels of activity, performanceor achievements expressed or implied by these forward-looking statements. Someof these forward-looking statements can be identified by the use of forward-lookingterminology including “believes,” “expects,” “may,” “will,” “should” or “anticipates”or the negative thereof or other variations thereon or comparable terminology,or by discussions of strategies that involve risks and uncertainties. Youshould read statements that contain these words carefully because they:

 

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•              discussour future expectations;

 

•              containprojections of our future operating results or of our future financialcondition; or

 

•              stateother “forward-looking” information.

 

We believe it is importantto discuss our expectations; however, it must be recognized that events mayoccur in the future over which we have no control and which we are notaccurately able to predict. Readers are cautioned to consider the specificbusiness risk factors described under the caption “Additional Factors that MayAffect Our Future Results” appearing under “Item 1. Description of Business” ofour Annual Report on Form 10-KSB filed with the United States Securities andExchange Commission on March 30, 2007, and not to place undue reliance on theforward-looking statements contained herein, which speak only as of the date ofthis report. We undertake no obligation to publicly revise forward-lookingstatements to reflect events or circumstances that may arise after the date ofthis report.

 

**Item 3. Controls and Procedures**

 

Our Chief Executive Officerand Chief Financial Officer are responsible primarily for establishing andmaintaining disclosure controls and procedures designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”) isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the U.S. Securities and Exchange Commission. Thesecontrols and procedures are designed to ensure that information required to bedisclosed in our reports filed or submitted under the Exchange Act isaccumulated and communicated to our management, including our principalexecutive and principal financial officers, or persons performing similarfunctions, as appropriate to allow timely decisions regarding requireddisclosure.

 

Furthermore, our ChiefExecutive Officer and Chief Financial Officer are responsible for the designand supervision of our internal controls over financial reporting that are theneffected by and through our board of directors, management and other personnel,to provide reasonable assurance regarding the reliability of our financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. These policies andprocedures (i) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of ourassets; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that our receipts andexpenditures are being made only in accordance with authorizations of ourmanagement and directors; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof our assets that could have a material effect on our financial statements.

 

Our Chief Executive Officerand Chief Financial Officer, based upon their evaluation of the effectivenessof our disclosure controls and procedures and the internal controls overfinancial reporting as of the last day of the period covered by this report,concluded that our disclosure controls and procedures and internal controlsover financial reporting were fully effective as of the last day of the periodcovered by this report and reported to our auditors and board of directors thatno change occurred in our disclosure controls and procedures and internalcontrol over financial reporting occurred during the period covered by thisreport that would materially affect or is reasonably likely to materiallyaffect our disclosure controls and procedures or internal control overfinancial reporting. In conducting their evaluation of our disclosure controlsand procedures and internal controls over financial reporting, these executiveofficers did not discover any fraud that involved management or other employeeswho have a significant role in our disclosure controls and procedures andinternal controls over financial reporting. Furthermore, there were nosignificant changes in our disclosure controls and procedures, internalcontrols over financial reporting, or other factors that could significantlyaffect our disclosure controls and procedures or internal controls overfinancial reporting subsequent to the date of their evaluation. Because nosignificant deficiencies or material weaknesses were discovered, no correctiveactions were necessary or taken to correct significant deficiencies andmaterial weaknesses in our internal controls and disclosure controls andprocedures.

 

15

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**PART II OTHER INFORMATION**

 

**Item 1.****  ****Legal Proceedings**

 

None

 

**Item 2.****  ****Unregistered Sales of EquitySecurities and Use of Proceeds**

 

(a)           Duringthe nine months ended September 30, 2007, we issued 264,894 shares of ourcommon stock to SXJE, LLC, the holder of certain convertible promissory notes,in payment of the accrued interest of $107,000 (see Item 2. Management’sDiscussion and Analysis or Plan of Operation – Recent Developments –Convertible Note Financing). These were issued pursuant to registrationexemptions under Section 4(6) of the Securities Act and Rule 506 of RegulationD. SXJE, LLC qualifies as an “accredited investor” within the meaning of Rule501(a) of Regulation D. No commissions or other form of remuneration was paidin connection with the issuance of these shares of common stock.

 

(b)           None

 

(c)           None

 

**Item 3.****  ****Defaults Upon SeniorSecurities**

 

None

 

**Item 4.****  ****Submission of Matters to aVote of Security Holders**

 

None

 

**Item 5.****  ****Other Information**

 

None

 

**Item 6.****  ****Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                              |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                         |
| 3.1             |       | Registrant’s Certificate  of Incorporation, incorporated by reference to Registration Statement on Form  SB-2   (No. 333-111819) filed with the Commission on January 9, 2004.          |
|            |       |                                                                                                                                                                                         |
| 3.2             |       | Registrant’s Bylaws,  incorporated by reference to Registration Statement on Form SB-2 (No.  333-111819) filed with the Commission on January 9, 2004.                                  |
|            |       |                                                                                                                                                                                         |
| 31.1            |       | Certification of John  Simonelli, Chief Executive Officer of Registrant.                                                                                                                     |
|            |       |                                                                                                                                                                                         |
| 31.2            |       | Certification of Mark R.  Kidd, Chief Financial Officer and Controller of Registrant.                                                                                                        |
|            |       |                                                                                                                                                                                         |
| 32.1            |       | Certification Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley  Act of 2002 of John Simonelli, Chief Executive Officer of Registrant.               |
|            |       |                                                                                                                                                                                         |
| 32.2            |       | Certification Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley  Act of 2002 of Mark R. Kidd, Chief Financial Officer and Controller of  Registrant. |

 

16

----

 

**SIGNATURES**

 

In accordance with theExchange Act, the Registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|                    | GRAYMARK PRODUCTIONS, INC.                                                                                      |
|-------------------------|-----------------------------------------------------------------------------------------------------------------|
|                    | (Registrant)                                                                                                    |
|                    | By:                                                                                                             | /S/JOHN SIMONELLI |   |
|                    |             John  Simonelli                         |
|                    |             Chief  Executive Officer                |
| Date: November 14, 2007 |                                                                                                            |
|                    |                                                                                                            |
|                    | By:                                                                                                             | /S/MARK R. KIDD |   |
|                    |             Mark  R. Kidd                           |
|                    |             Chief  Financial Officer and Controller |
| Date: November 14, 2007 |                                                                                                            |
|                         |                                                                                                                 |  |  |  |

 

17

----

 

**GRAYMARK PRODUCTIONS, INC.**

 

**INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

 
| Condensed Consolidated  Balance Sheets as of September 30, 2007 and December 31, 2006                                                              |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                               |   |
| Condensed Consolidated  Statements of Operations for the Three Months Ended September 30, 2007 and  2006                                           |   |
|                                                                                                                                               |   |
| Condensed Consolidated  Statements of Operations for the Nine Months Ended September 30, 2007 and  2006                                            |   |
|                                                                                                                                               |   |
| Condensed  Consolidated Statements of Shareholders’ Equity for the Year Ended December  31, 2006 and the Nine Months Ended September 30, 2007 |   |
|                                                                                                                                               |   |
| Condensed Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2007 and  2006                                            |   |
|                                                                                                                                               |   |
| Notes to Condensed  Consolidated Financial Statements                                                                                              |   |

 

F-1

----

 

**GRAYMARK PRODUCTIONS, INC.**

 

**Condensed Consolidated BalanceSheets**

 
| ** **                                                                                                                                                                            | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **(Unaudited)**              | ** ** |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| **ASSETS**                                                                                                                                                                            |       |                         |       |                        |       |
| ** **                                                                                                                                                                            |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                             |       | $                            | 699,805    |                        | $          | 848,904 |   |
| Accounts receivable                                                                                                                                                                   |       | 2,200                        |       | 7,456                       |       |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| Total current assets                                                                                                                                                                  |       | 702,005                      |       | 856,360                     |       |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| Fixed assets, net                                                                                                                                                                     |       | 9,455                        |       | 11,747                      |       |
| Prepaid loan fees                                                                                                                                                                     |       | 2,568                        |       | 51,986                      |       |
| Investment in films                                                                                                                                                                   |       | 434,369                      |       | 2,387,966                   |       |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| Total assets                                                                                                                                                                          |       | $                            | 1,148,397  |                        | $          | 3,308,059 |   |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                                                                                                              |       |                         |       |                        |       |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| Liabilities:                                                                                                                                                                          |       |                         |       |                        |       |
| Accounts payable and accrued liabilities                                                                                                                                              |       | $                            | 145,407    |                        | $          | 104,650 |   |
| Unearned revenue                                                                                                                                                                      |       | 294,790                      |       | —                      |       |
| Current portion of convertible notes  payable, net of discounts of $20,734 and $112,478 at September 30, 2007 and  December 31, 2006, respectively                                    |       | 1,479,266                    |       | 1,387,522                   |       |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| Total current liabilities                                                                                                                                                             |       | 1,919,463                    |       | 1,492,172                   |       |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| Minority interests                                                                                                                                                                    |       | 312,640                      |       | 1,447,152                   |       |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| Shareholders’ Equity (Deficit):                                                                                                                                                  |       |                         |       |                        |       |
| Preferred stock $0.0001 par value,  10,000,000 authorized; no shares issued and outstanding                                                                                           |       | —                       |       | —                      |       |
| Common stock $0.0001 par value, 90,000,000  shares authorized; 8,827,001 issued and outstanding at September 30, 2007  (8,562,107 shares issued and outstanding at December 31, 2006) |       | 882                          |       | 856                         |       |
| Paid-in capital                                                                                                                                                                       |       | 4,542,273                    |       | 4,376,001                   |       |
| Accumulated deficit                                                                                                                                                                   |       | (5,626,861                   | )          | (4,008,122                  | )          |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| Total shareholders’ equity (deficit)                                                                                                                                             |       | (1,083,706                   | )          | 368,735                     |       |
|                                                                                                                                                                                  |       |                         |       |                        |       |
| Total liabilities and shareholders’ equity  (deficit)                                                                                                                            |       | $                            | 1,148,397  |                        | $          | 3,308,059 |   |

 

SeeAccompanying Notes to Condensed Consolidated Financial Statements

 

F-2

----

 

**GRAYMARK PRODUCTIONS, INC.**

 

**Condensed Consolidated Statementsof Operations**

**(Unaudited)**

 
| ** **                                                               | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                               | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                                     |       |                                                 |       |   |   |
| Revenues                                                                 |       | $                                                    | 28,491     |   | $ | 154,522 |   |
|                                                                     |       |                                                 |       |   |   |
| Expenses:                                                                |       |                                                 |       |   |   |
| Direct operating                                                         |       | 21,348                                               |       | 132,092 |   |
| Impairment of investment in films                                        |       | 2,123,871                                            |       | — |   |
| General and administrative                                               |       | 165,874                                              |       | 101,521 |   |
| Depreciation                                                             |       | 764                                                  |       | 1,216 |   |
|                                                                     |       |                                                 |       |   |   |
| Total expenses                                                           |       | 2,311,857                                            |       | 234,829 |   |
|                                                                     |       |                                                 |       |   |   |
| Operating loss                                                           |       | (2,283,366                                           | )          | (80,307 | ) |
|                                                                     |       |                                                 |       |   |   |
| Other Income (Expense):                                                  |       |                                                 |       |   |   |
| Interest and other income                                                |       | 6,016                                                |       | 7,168 |   |
| Interest expense                                                         |       | (94,221                                              | )          | (92,945 | ) |
|                                                                     |       |                                                 |       |   |   |
| Net other income (expense)                                               |       | (88,205                                              | )          | (85,777 | ) |
|                                                                     |       |                                                 |       |   |   |
| Net loss before minority interests and  provision for income taxes       |       | (2,371,571                                           | )          | (166,084 | ) |
|                                                                     |       |                                                 |       |   |   |
| Minority interests                                                       |       | 1,120,713                                            |       | (13,248 | ) |
| Provision for income taxes                                               |       | —                                               |       | — |   |
|                                                                     |       |                                                 |       |   |   |
| Net loss                                                                 |       | $                                                    | (1,250,858 | ) | $ | (179,332 | ) |
|                                                                     |       |                                                 |       |   |   |
| Net loss per share of common stock, basic  and diluted                   |       | $                                                    | (0.14      | ) | $ | (0.02 | ) |
|                                                                     |       |                                                 |       |   |   |
| Weighted average number of common shares  outstanding, basic and diluted |       | 8,827,001                                            |       | 8,412,107 |   |

 

SeeAccompanying Notes to Condensed Consolidated Financial Statements

 

F-3

----

 

**GRAYMARK PRODUCTIONS, INC.**

 

**Condensed Consolidated Statementsof Operations**

**(Unaudited)**

 
| ** **                                                               | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                               | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
|                                                                     |       |                                                |       |   |   |
| Revenues                                                                 |       | $                                                   | 105,761    |   | $ | 391,388 |   |
|                                                                     |       |                                                |       |   |   |
| Expenses:                                                                |       |                                                |       |   |   |
| Direct operating                                                         |       | 91,567                                              |       | 323,543 |   |
| Impairment of investment in films                                        |       | 2,123,871                                           |       | 1,445,014 |   |
| General and administrative                                               |       | 331,249                                             |       | 302,647 |   |
| Depreciation                                                             |       | 2,292                                               |       | 3,649 |   |
|                                                                     |       |                                                |       |   |   |
| Total expenses                                                           |       | 2,548,979                                           |       | 2,074,853 |   |
|                                                                     |       |                                                |       |   |   |
| Operating loss                                                           |       | (2,443,218                                          | )          | (1,683,465 | ) |
|                                                                     |       |                                                |       |   |   |
| Other Income (Expense):                                                  |       |                                                |       |   |   |
| Interest and other income                                                |       | 21,266                                              |       | 23,814 |   |
| Interest expense                                                         |       | (314,776                                            | )          | (276,784 | ) |
|                                                                     |       |                                                |       |   |   |
| Net other income (expense)                                               |       | (293,510                                            | )          | (252,970 | ) |
|                                                                     |       |                                                |       |   |   |
| Net loss before minority interests and  provision for income taxes       |       | (2,736,728                                          | )          | (1,936,435 | ) |
|                                                                     |       |                                                |       |   |   |
| Minority interests                                                       |       | 1,117,989                                           |       | (18,088 | ) |
| Provision for income taxes                                               |       | —                                              |       | — |   |
|                                                                     |       |                                                |       |   |   |
| Net loss                                                                 |       | $                                                   | (1,618,739 | ) | $ | (1,954,523 | ) |
|                                                                     |       |                                                |       |   |   |
| Net loss per share of common stock, basic  and diluted                   |       | $                                                   | (0.19      | ) | $ | (0.23 | ) |
|                                                                     |       |                                                |       |   |   |
| Weighted average number of common shares  outstanding, basic and diluted |       | 8,731,430                                           |       | 8,358,605 |   |

 

SeeAccompanying Notes to Condensed Consolidated Financial Statements

 

F-4

----

 

**GRAYMARK PRODUCTIONS, INC.**

 

**Condensed Consolidated Statementsof Shareholders’ Equity**

**(Unaudited)**

 
| ** **                                        | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|
| ** **                                        | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit** | ** ** |
|                                              |       |                  |       |        |       |            |       |   |   |
| Balance, December 31, 2005                        |       | 8,289,151             |       | $           | 829        |            | $          | 4,221,852 |   | $ | (1,793,162 | ) |
|                                              |       |                  |       |        |       |            |       |   |   |
| Issuance of stock for convertible notes  interest |       | 272,956               |       | 27          |       | 116,140         |       | — |   |
| Issuance of stock options                         |       | —                |       | —      |       | 38,009          |       | — |   |
| Net loss                                          |       | —                |       | —      |       | —          |       | (2,214,960 | ) |
|                                              |       |                  |       |        |       |            |       |   |   |
| Balance, December 31, 2006                        |       | 8,562,107             |       | 856         |       | 4,376,001       |       | (4,008,122 | ) |
|                                              |       |                  |       |        |       |            |       |   |   |
| Issuance of stock for convertible notes  interest |       | 264,894               |       | 26          |       | 106,974         |       | — |   |
| Issuance of common stock warrants                 |       | —                |       | —      |       | 51,614          |       | — |   |
| Issuance of stock options                         |       | —                |       | —      |       | 7,684           |       | — |   |
| Net loss                                          |       | —                |       | —      |       | —          |       | (1,618,739 | ) |
|                                              |       |                  |       |        |       |            |       |   |   |
| Balance, September 30, 2007                       |       | 8,827,001             |       | $           | 882        |            | $          | 4,542,273 |   | $ | (5,626,861 | ) |

 

SeeAccompanying Notes to Condensed Consolidated Financial Statements

 

F-5

----

 

**GRAYMARK PRODUCTIONS, INC.**

 

**Condensed Consolidated Statementsof Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
|                                                                         |       |                                                |       |   |   |
| Operating activities:                                                        |       |                                                |       |   |   |
| Net loss                                                                     |       | $                                                   | (1,618,739 | ) | $ | (1,954,523 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |       |                                                |       |   |   |
| Depreciation                                                                 |       | 2,292                                               |       | 3,649 |   |
| Amortization of film costs                                                   |       | 91,567                                              |       | 327,710 |   |
| Impairment of investment in films                                            |       | 2,123,871                                           |       | 1,445,014 |   |
| Issuance of common stock for convertible  notes interest                     |       | 107,000                                             |       | 86,167 |   |
| Interest expense allocated to warrants                                       |       | 143,357                                             |       | 130,688 |   |
| Non-cash stock option compensation                                           |       | 7,684                                               |       | 38,009 |   |
| Minority interests                                                           |       | (1,117,989                                          | )          | 18,088 |   |
| Changes in assets and liabilities –                                     |       |                                                |       |   |   |
| Film deposits                                                                |       | —                                              |       | 32,500 |   |
| Accounts receivable                                                          |       | 5,256                                               |       | (26,479 | ) |
| Prepaid loan fees                                                            |       | 49,418                                              |       | 56,096 |   |
| Investment in films                                                          |       | (261,840                                            | )          | (772,431 | ) |
| Accounts payable and accrued liabilities                                     |       | 40,757                                              |       | (7,534 | ) |
| Unearned revenue                                                             |       | 294,790                                             |       | — |   |
|                                                                         |       |                                                |       |   |   |
| Net cash used by operating activities                                        |       | (132,576                                            | )          | (623,046 | ) |
|                                                                         |       |                                                |       |   |   |
| Investing activities:                                                        |       |                                                |       |   |   |
| Minority interests - contributions                                           |       | —                                              |       | 450,385 |   |
| Minority interests - payments                                                |       | (16,523                                             | )          | — |   |
|                                                                         |       |                                                |       |   |   |
| Net cash provided by (used in) investing  activities                         |       | (16,523                                             | )          | 450,385 |   |
|                                                                         |       |                                                |       |   |   |
| Financing activities:                                                        |       |                                                |       |   |   |
| Repayment of film obligations                                                |       | —                                              |       | (50,000 | ) |
|                                                                         |       |                                                |       |   |   |
| Net cash used in financing activities                                        |       | —                                              |       | (50,000 | ) |
|                                                                         |       |                                                |       |   |   |
| Net change in cash and cash equivalents                                      |       | (149,099                                            | )          | (222,661 | ) |
|                                                                         |       |                                                |       |   |   |
| Cash and cash equivalents at beginning of  period                            |       | 848,904                                             |       | 1,153,840 |   |
|                                                                         |       |                                                |       |   |   |
| Cash and cash equivalents at end of period                                   |       | $                                                   | 699,805    |   | $ | 931,179 |   |
|                                                                         |       |                                                |       |   |   |
| Noncash Investing and Financing Activities:                                  |       |                                                |       |   |   |
| Issuance of stock for convertible notes  interest                            |       | $                                                   | 107,000    |   | $ | 86,167 |   |
| Issuance of common stock warrants                                            |       | $                                                   | 51,614     |   | $ | — |   |
|                                                                         |       |                                                |       |   |   |
| Cash Paid for Interest and Income Taxes:                                     |       |                                                |       |   |   |
| Interest expense                                                             |       | $                                                   | —     |   | $ | — |   |
| Income taxes                                                                 |       | $                                                   | —     |   | $ | — |   |

 

SeeAccompanying Notes to Condensed Consolidated Financial Statements

 

F-6

----

 

**GRAYMARK PRODUCTIONS, INC.**

 

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

**For the Periods Ended September 30, 2007 and 2006**

 

Note 1 – Nature of Business

 

Graymark Productions, Inc.(the “Company”) is organized in Oklahoma and is an independent producer anddistributor of film entertainment content. The Company began operations in 2001as Graymark Productions, L.L.C. (“Graymark LLC”), all of the assets of whichwere acquired by the Company through our incorporation-reorganization,effective August 18, 2003.

 

The Company produces anddistributes films that are completed and marketed using smaller budgets thanthose of major studios. The Company has completed the production and releasedits motion picture projects titled, *Cloud 9*,*The Hunt, Surveillance* and*Soul’s Midnight*. The Company hascompleted, but not released its motion picture titled, *Fingerprints*. The Company has negotiatedagreements for the marketing and distribution of all its films. Managementbelieves that producing and distributing low- or modest-budget, commerciallysuccessful films affords the Company access to Hollywood talent and scripts andthird-party production packages for acquisition, without compromisingmanagement’s approach to managing financial risk.

 

Note 2 – Summary of Significant AccountingPolicies

 

*Interim Financial Information* – The unaudited condensed consolidatedfinancial statements included herein have been prepared in accordance withgenerally accepted accounting principles for interim financial statements andwith Regulation S-X. Accordingly, they do not include all of the informationand footnotes required by generally accepted accounting principles for completefinancial statements. In the opinion of management, all adjustments (consistingof normal recurring adjustments) considered necessary for a fair presentationhave been included. Operating results for the three and nine months endedSeptember 30, 2007 are not necessarily indicative of results that may beexpected for the year ended December 31, 2007. The condensed consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s Form 10-KSBfor the year ended December 31, 2006. The December 31, 2006 condensedconsolidated balance sheet was derived from audited financial statements.

 

*Consolidation* – The accompanying consolidated financial statements include theaccounts of Graymark Productions, Inc. and its majority owned and controlledsubsidiaries. The Company controls a subsidiary company through a combinationof existing voting interests and the ability to exercise various rights undercertain shareholder or operating agreements. The Company’s subsidiaries includeGraymark Productions, L.L.C. (the “LLC”), Out of the Blue Productions, LLC (“Outof the Blue”), The Hunt, The Motion Picture LLC (“The Hunt”), Surveillance, TheMotion Picture LLC (“Surveillance”), Soul’s Midnight LLC (“Soul’s Midnight”)and Fingerprints LLC (“Fingerprints”). The LLC became a subsidiary of theCompany in August 2003 as a result of the incorporation-reorganization of theCompany. Out of the Blue was formed in December 2003 as the entity under whichthe Company’s first motion picture project, *Cloud9*, was produced. The Company has funded 100% of the acquisition andproduction costs of *Cloud 9*. TheCompany is entitled to recover its capital contributions to Out of the Blueplus interest at 2% above the prime rate (defined as “investment recoupment”)from cash distributions before the other interest owners and thereafter 50% ofcash distributions and is entitled to receive a majority of the proceeds fromrights sales, distribution and any and all exploitation of the Picture. Underthe terms of the Out of the Blue operating agreement, the Company has 100%voting control of Out of the Blue. The Hunt, Surveillance, Soul’s Midnight andFingerprints are 100% owned by the Company.

 

F-7

----

 

*Use of estimates* – The preparation of financial statements in conformity with generallyaccepted accounting principles requires management of the Company to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates.

 

*Going concern* – The accompanying financial statements have been prepared assumingthe Company will continue as a going concern. As of September 30, 2007, theCompany had a working capital deficit of approximately $1,217,000 primarilybecause the Company’s convertible notes payable mature on January 31, 2008. TheCompany expects to meet its obligations as they become due through availablecash and funds generated from its completed motion pictures supplemented asnecessary by debt and/or equity financing. The Company expects to generatepositive working capital through its operations. However, there are noassurances that the Company will be able to either (1) achieve a level ofrevenues adequate to generate sufficient cash flow from operations or (2)obtain additional financing through debt and/or equity financing to support theCompany’s working capital requirements. These conditions raise substantialdoubt about the Company’s ability to continue as a going concern. Theaccompanying financial statements do not include any adjustments that might benecessary should the Company be unable to continue as a going concern.

 

*Revenue recognition* – Revenues from the sale of the rights to a film are recognized whenthe feature film is available to the distributor for exploitation and noconditions for delivery exist, which under most sales contracts requires thatfull payment has been received from the distributor. Revenues from thetheatrical distribution of motion pictures are recognized when motion picturesare exhibited. Revenues from video sales are recognized on the date that videounits are made widely available for sale by retailers. Revenues from thelicensing of motion picture films are recorded when the material is availablefor telecasting by the licensee and when certain other conditions are met. Revenuesfrom consulting services are recognized when earned.

 

*Investment in Films* – Investment in films includes capitalized direct negative costs,production overhead, interest and development costs and are stated at the lowerof cost, less accumulated amortization, or fair value. Film production andparticipation costs are expensed based on the ratio of the current period’sgross revenues to estimated remaining total gross revenues from all sources onan individual production basis.

 

Investment in films isstated at the lower of amortized cost or estimated fair value on an individualfilm basis. The valuation of investment in films is reviewed on atitle-by-title basis, when an event or change in circumstances indicate thatthe fair value of a film is less than its unamortized cost. The fair value ofthe film is determined using management’s future revenue and cost estimates anda discounted cash flow approach. Additional amortization is recorded in theamount by which the unamortized costs exceed the estimated fair value of thefilm. Estimates of future revenue involve measurement uncertainty and it istherefore possible that reductions in the carrying value of investment in filmsmay be required as a consequence of changes in management’s future revenueestimates.

 

*Recently Issued Accounting Standards* –

 

*FIN 48* – In June 2006, the Financial Accounting Standards Board (FASB) issuedInterpretation 48, *“Accounting forUncertainty in Income Taxes - an Interpretation of FASB Statement No. 109”*(“FIN 48”). FIN 48 is intended to clarify the accounting for uncertainty inincome taxes recognized in a company’s financial statements and prescribes therecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on de-recognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition.

 

Under FIN 48, evaluation ofa tax position is a two-step process. The first step is to determine whether itis more-likely-than-not that a tax position will be sustained upon examination,including the resolution of any related appeals or litigation based on thetechnical merits of that position. The second step is to measure a tax positionthat meets the more-likely-than-not threshold to determine the amount ofbenefit to be recognized in the financial statements. A tax position is measuredat the largest amount of benefit that is greater than 50 percent likely ofbeing realized upon ultimate settlement.

 

F-8

----

 

Tax positions thatpreviously failed to meet the more-likely-than-not recognition threshold shouldbe recognized in the first subsequent period in which the threshold is met. Previouslyrecognized tax positions that no longer meet the more-likely-than-not criteriashould be de-recognized in the first subsequent financial reporting period inwhich the threshold is no longer met.

 

The adoption of FIN 48 atJanuary 1, 2007 did not have a material impact on the Company’s financialposition, results of operations, or cash flows.

 

*SFAS 157* – In September 2006, the FASB issued Statement No. 157, *“Fair Value Measurements”*  (“SFAS No. 157”). SFAS 157 addresses howcompanies should measure fair value when they are required to use a fair valuemeasure for recognition or disclosure purposes under GAAP. SFAS 157 definesfair value, establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. SFAS 157 is effective for fiscalyears beginning after November 15, 2007, with earlier adoption permitted. Managementis assessing the impact of the adoption of this Statement.

 

*SFAS 158* – In September 2006, the FASB issued Statement No. 158, *“Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans”* (“SFAS 158”), an amendment of FASBStatements No. 87, 88, 106 and 132(R). SFAS 158 requires (a) recognition of thefunded status (measured as the difference between the fair value of the planassets and the benefit obligation) of a benefit plan as an asset or liabilityin the employer’s statement of financial position, (b) measurement of thefunded status as of the employer’s fiscal year-end with limited exceptions, and(c) recognition of changes in the funded status in the year in which thechanges occur through comprehensive income. The requirement to recognize thefunded status of a benefit plan and the disclosure requirements are effectiveas of the end of the fiscal year ending after December 15, 2006. Therequirement to measure the plan assets and benefit obligations as of the dateof the employer’s fiscal year-end statement of financial position is effectivefor fiscal years ending after December 15, 2008. Management adopted thisStatement on December 31, 2006 and the initial adoption did not have a materialimpact to the Company’s financial position, results of operations, or cashflows.

 

*SFAS 159* – In February 2007, the FASB issued Statement No. 159, *“The Fair Value Option for Financial Assets andLiabilities”* (“SFAS 159”). SFAS 159 permits companies to choose tomeasure many financial assets and liabilities at fair value. Unrealized gainsand losses on items for which the fair value option has been elected arereported in earnings. SFAS 159 is effective for fiscal years beginning afterNovember 15, 2007. The Company is currently assessing the impact of SFAS 159 onits consolidated financial statements.

 

*SAB 108* – In September 2006, the Securities Exchange Commission issued StaffAccounting Bulletin No. 108 (“SAB 108”). SAB 108 addresses how the effects ofprior year uncorrected misstatements should be considered when quantifyingmisstatements in current year financial statements. SAB 108 requires companiesto quantify misstatements using a balance sheet and income statement approachand to evaluate whether either approach results in quantifying an error that ismaterial in light of relevant quantitative and qualitative factors. When theeffect of initial adoption is material, companies will record the effect as acumulative effect adjustment to beginning of year retained earnings anddisclose the nature and amount of each individual error being corrected in thecumulative adjustment. SAB 108 became effective on January 1, 2007 and theinitial adoption of SAB 108 did not have a material impact on the Company’sfinancial position, results of operations, or cash flows.

 

Note 3 – Investment in Films

 
| ** **                                                | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                      |       |                         |       |                        |       |
| Released, net of accumulated amortization  and impairment |       | $                            | 75,000     |                        | $          | 1,767,795 |   |
| Completed and not released, net of  impairment            |       | 150,000                      |       | 615,171                     |       |
| In progress                                               |       | 209,369                      |       | 5,000                       |       |
|                                                      |       |                         |       |                        |       |
| Total                                                     |       | $                            | 434,369    |                        | $          | 2,387,966 |   |

 

F-9

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The Company estimates that100% of the unamortized investment in films at September 30, 2007 will beamortized within the next three years. Approximately $379,000 of film costs areexpected to be amortized during the next twelve months. No participationliabilities are expected to be paid during the next 12 months.

 

During September 2007,management revised its estimate of the ultimate revenue on its motion pictureprojects titled *Cloud 9, The Hunt,Surveillance, Soul’s Midnight*and*Fingerprints*. As a result, the Company recorded an impairment chargeof $2,123,871 to reduce the carrying value of these motion pictures to theamount that management estimates will be collected through continuing domestic,international distribution and broadcast distribution of these films.

 

Note 4 – Convertible Note Payable

 

In August and October 2005,the Company issued promissory notes (the “Notes”) in the principal amount of$750,000, respectively, $1,500,000 in total. The Notes are secured by allassets of the Company including all purchase agreements and any options orrights to acquire, all intellectual and real property, all assets andproperties of the Company and all of its existing and future subsidiaries. TheNotes bear interest at the rate of 8% per annum. Interest due on the Notes ispayable quarterly and can be paid in cash or shares of Company stock.

 

The Notes become due andpayable on the first to occur of: (i) July 27, 2007 for the first note andOctober 25, 2007 for the second note (the “Maturity Dates”); (ii) theconsummation of a Qualified Financing; or (iii) the continuation of an Event ofDefault, as defined, for more than 30 days following notice of the occurrenceof an event of default. Upon consummation of a Qualified Financing, theoutstanding principal amount of the Notes and all accrued and unpaid interest(collectively the “Note Balances”) will automatically convert into shares ofequity securities of the Company equal to 120% of the Note Balances divided bythe price per share of the equity securities sold in the Qualified Financing. Themaximum price or value of the equity securities into which the Note Balancesconvert may not exceed the equivalent of $1.10 per common stock share. QualifiedFinancing refers to any equity financing pursuant to which the Company receivesaggregate gross cash proceeds of $2,000,000 or more on or before the MaturityDates.

 

In conjunction with issuanceof the Notes, the Company and the holder of the Notes entered into common stockpurchase warrant agreements, each evidencing warrants exercisable on or beforeAugust 5, 2010 for the first note and October 25, 2010 for the second note. Thetwo agreements provide for the purchase of 250,000 (500,000 total) common stockshares at $2.00 and the other two agreements provide for the purchase of250,000 (500,000 total) common stock shares at $3.00.

 

The fair value of eachwarrant issued was estimated on the date of issuance using the Black-Scholesoption pricing model. The fair value of the options were based on thedifference between the present value of the exercise price of the option andthe estimated fair value price of the common share. The fair value of thewarrants was estimated to be $349,459 and was recorded as paid-in capital. Thevalue of the warrants will increase interest expense over the life of theNotes.

 

In addition, the Company’sfinancial advisor was paid fees of $150,000 for services rendered inconjunction with execution of the Notes. The fees were recorded as prepaid loanfees and will be amortized over the life of the Notes.

 

In March 2007, the Companyexecuted amendment agreements with the holder of its convertible notes payable.Under the amendments, the maturity date of both Notes is extended to January31, 2008. Interest on the Notes is increased from 8% to 12% per annum from thedate of the amendment until maturity. As additional consideration for executingthe amendments, the Company lowered the strike price of the previously issued warrantagreements, which allow for the purchase of 1,000,000 shares of common stockshares, to $0.50 per share from the original strike prices of $2.00 and $3.00per share. In addition, the Company and the holder of the Notes entered into anadditional common stock purchase warrant agreement, evidencing warrantsexercisable on or before April 1, 2012. The agreement provides for the purchaseof 500,000 common stock shares at $0.50.

 

F-10

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The fair value of the repricedand newly issued warrants was estimated on the date of repricing or issuanceusing the Black-Scholes option pricing model. The fair value of the optionswere based on the difference between the present value of the exercise price ofthe option and estimated fair value of the common share. The fair value of thenewly issued warrants was estimated to be $51,614 and was recorded as paid-incapital. The value of the warrants will increase interest expense over the newlife of the Notes. The Company determined that there was no additional fairvalue (over the value previously recorded) attributable to the repricing of thepreviously issued warrants and no additional expense has been recorded for thismodification.

 

Note 5 – Unearned Revenue

 

The Company has received$294,790 in revenues from a third-party for the production of a filmdocumentary about the life of Robert S. Kerr. The amount will be recorded asunearned revenue until the film is ready for release.

 

Note 6 – Film Profit Participation and ContingentCompensation

 

Pursuant to an investoragreement between the Company and the developers of the screenplay for *Cloud 9*(the “Picture”), the Companyshares the development and productions costs and revenue of *Cloud 9*. For its financial contribution tothe costs of making *Cloud 9*, theCompany is entitled to receive the following:

 

•                                          100% of revenue and proceeds from the rightssales, distribution and/or any and all exploitation of *Cloud 9* until the Company recovers itsinvestment in the Picture, plus interest at the prime rate plus 2% per annumfrom the date of the contribution until the Company is repaid its investment inthe Picture.

 

•                                          50% of “net profits” received from the rightssales, distribution and/or any and all exploitation of the Picture. “NetProfits” is defined as the sum remaining after deduction of third partydistribution fees; cash deferments to cast, equipment suppliers, rights holdersor any other approved party.

 

The Company’s subsidiary,Out of the Blue Productions, LLC (the “Production Company”), entered intocontingent compensation agreements with the director and certain cast membersof *Cloud 9* in the form of “netand gross profit participations” that are customary in the film industry. Theseparticipations are typically based on the profit of a film after all productionand distribution costs have been recouped (“gross participation”) or allproduction and distribution costs and overhead have been recouped (“netparticipations”). A percentage of these “gross and net profits”, as negotiatedbetween the participants, are paid out as contingent compensation for creativeparticipants in a motion picture film. The participations negotiated by theProduction Company for *Cloud 9*total 23.5% of which the Company’s interest in *Cloud9* is burdened by one-half of these net profit participations. TheCompany’s residual profits interest in *Cloud9* is 30.6% after giving effect to the gross and net profitsparticipations given pursuant to contingent compensation arrangements and theco-finance agreements.

 

The Production Company alsoagreed to pay additional contingent bonuses to certain cast members whenaggregate United States and Canada box office receipts as reported in DailyVariety reach various levels between $8,500,000 and $20,000,000. The totalcontingent amounts that would be paid if box office receipts reach $20,000,000is $300,000.

 

Pursuant to an outputagreement between the Company and a third-party distribution company (“Distributor”),the Distributor has a first-look right at the movies produced by the Company. Pursuantto the agreement, the Distributor has agreed to fund up to 50% of eachproduction budget on mutually agreed upon motion picture projects. TheDistributor will be entitled to a respective percentage of all gross receiptson those projects.

 

The following summarizes therevenue participations before and after net profit participations on theCompany’s films *The Hunt*, *Surveillance, Soul’s Midnight* and *Fingerprints*:

 

F-11

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| ** **                  | ** ** | **Before Payout** | ** ** | **After Payout** | ** ** |
|-----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **Company**            | ** ** | **Other  Members**    | ** ** | **Company** | ** ** | **Other  Members** | ** ** | **Third-  Party  Interest** | ** ** |
|                        |       |                   |       |                  |       |   |   |   |   |   |   |
| The Hunt                    |       |                   |       |                  |       |   |   |   |   |   |   |
| Revenue allocation          |       | 65                     | %          | 35                    | %          | 44 | % | 24 | % | 32 | % |
| Production costs to be paid |       | 50                     | %          | 50                    | %          |   |   |   |   |   |   |
|                        |       |                   |       |                  |       |   |   |   |   |   |   |
| Surveillance                |       |                   |       |                  |       |   |   |   |   |   |   |
| Revenue allocation          |       | 50                     | %          | 50                    | %          | 46 | % | 46 | % | 8 | % |
| Production costs to be paid |       | 50                     | %          | 50                    | %          |   |   |   |   |   |   |
|                        |       |                   |       |                  |       |   |   |   |   |   |   |
| Soul’s Midnight        |       |                   |       |                  |       |   |   |   |   |   |   |
| Revenue allocation          |       | 25                     | %          | 75                    | %          | 24 | % | 72 | % | 4 | % |
| Production costs to be paid |       | 25                     | %          | 75                    | %          |   |   |   |   |   |   |
|                        |       |                   |       |                  |       |   |   |   |   |   |   |
| Fingerprints                |       |                   |       |                  |       |   |   |   |   |   |   |
| Revenue allocation          |       | 35                     | %          | 65                    | %          | 34 | % | 62 | % | 4 | % |
| Production costs to be paid |       | 35                     | %          | 65                    | %          |   |   |   |   |   |   |

 

Note 7 – Distribution Agreements

 

The Company has entered intovarious distribution agreements for the marketing and distribution of its filmsin the domestic, broadcast and international markets. These agreements providefor the distributor to earn a distribution fee from the gross proceedsgenerated by each picture in the applicable market. The table below summarizesthe distribution fees negotiated as of September 30, 2007 (markets that have nodistribution agreements in place are identified as “n/a”):

 
| ** **          | ** ** | **Cloud 9** | ** ** | **The  Hunt** | ** ** | **Surv-  eillance** | ** ** | **Soul’s  Midnight** | ** ** | **Finger-  prints** | ** ** |
|---------------------|------------|------------------|------------|---------------|------------|---------------------|------------|---------------------------|------------|---------------------|------------|
|                |       |             |       |          |       |                |       |                      |       |                |       |
| Domestic DVD market |       | 20               | %          | 22.5          | %          | 25                  | %          | 25                        | %          | 25                  | %          |
| Broadcast           |       | 20               | %          | n/a           |       | n/a                 |       | n/a                       |       | n/a                 |       |
| International       |       | 15               | %          | 20            | %          | 20                  | %          | 20                        | %          | n/a                 |       |

 

Note 8 – Capital Structure

 

During the nine months endedSeptember 30, 2007, the Company issued 264,894 shares of common stock to payaccrued interest due on the Company’s convertible notes payable.

 

Note 9 – Related Party Transactions

 

The Company’s corporateoffices are located in a building owned by an entity controlled by one of ourgreater than 5% shareholders. The office space is occupied under a month tomonth lease. Rent expense applicable to the corporate offices for the ninemonths ended September 30, 2007 and 2006 was $20,728 and $14,570, respectively.

 

Note 10 – Subsequent Events

 

In October 2007, the Companyissued 125,000 shares of common stock to pay accrued interest of $45,000 due,as of September 30, 2007, on the Company’s convertible notes payable.

 

Note 11 – Proposed Acquisitions

 

F-12

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During May 2007, the Companyentered into a letter of intent to acquire ApothecaryRx, LLC., and SDCHoldings, LLC. The acquisitions involve exchanging our common stock for theownership interests in the two companies. The acquisitions are contingent onfurther due diligence by our management team and the signing of a definitiveexchange agreement.

 

ApothecaryRx, LLC owns andoperates eleven independent pharmacies located in Missouri, Minnesota, andOklahoma. SDC Holdings, LLC owns and operates eight state-of-the-art sleepcenters that diagnose and tread a full range of sleep disorders includinginsomnia and obstructive sleep apnea. The centers are located in Oklahoma andTexas. Controlling interests in both companies are held by Roy T. Oliver, oneof the Company’s principal shareholders, and Stanton Nelson, one of itsdirectors.

 

F-13

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