10QSB

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-QSB

(Mark One)

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

For the quarterly period ended September 30, 2005

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

For the transition period from                to               

Commission File Number: 000-50638

GRAYMARK PRODUCTIONS, INC.

(Name of small business issuer in its Charter)

OKLAHOMA	20-0180812
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

101 N. Robinson, Suite 920

Oklahoma City, Oklahoma 73102

(Address of principal executive offices)

(405) 601-5300

(Issuer’s telephone number)

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes o No ý

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of issuer’s classes of common equity, as of the latest practicable date:  As of November 11, 2005, 8,279,151 shares of the issuer’s common stock, $0.0001 par value, were outstanding.

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

GRAYMARK PRODUCTIONS, INC.

FORM 10-QSB

For the Quarter Ended September 30, 2005

TABLE OF 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 the first personal plural pronoun in the nominative case form “we” and its objective 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.  The term “independent,” as used in this report, is used to distinguish us from the term “major studios” that is generally regarded in the entertainment industry to mean Universal Pictures, Warner Bros., Twentieth Century Fox, Sony Pictures Entertainment, Paramount Pictures, The Walt Disney Company, Metro Goldwyn Mayer and their respective affiliates.  The terms “low-budget motion pictures,” “low-budget films” or “low-budget movie” within this report, refer to motion pictures that have a production budget of $250,000 to $3 million.

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

Our financial statements presented in this report were prepared and included in this report in accordance with Regulation S-X and Regulation S-B an appear in this report beginning on page F-1.

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

You should read the following discussion in conjunction with our financial statements and notes thereto appearing elsewhere in this report.

Overview

We operated historically as a limited liability company, GrayMark Productions, L.L.C. that was formed in August 2001.  Since commencement of our operations in August 2001, we did not generate a material amount of revenue from operations until June 2005 when we generated $450,000 of revenue from our first motion film project, Cloud 9.  Effective August 18, 2003, pursuant to an exchange agreement, the owners of the member interests in GrayMark Productions, L.L.C. exchanged their respective member interests in GrayMark Productions, L.L.C. for 4,870,000 shares of our common stock.  As a result of this exchange, GrayMark Productions, L.L.C. became a wholly-owned subsidiary of GrayMark Productions, Inc. and the plan of operation of GrayMark Productions, L.L.C. became that of GrayMark Productions, Inc.

We have completed production of our first motion picture project, Cloud 9, and have entered into licensing agreements covering the foreign and domestic distribution and broadcast rights to this motion picture.  In June 2005, we received a non-refundable advance of $450,000 from the domestic distribution licensee.  We have competed the filming and are in the post-production of our second and third motion picture film projects, The Hunt, and Surveillance, and are in pre-production of our forth motion picture project, Soul’s Midnight.

The following discussion covers our plan of operations for the next 12 months.  As with any plan, there is no assurance that our operations as described will go as planned or that we will be successful in achieving the anticipated results.

Movie Development and Production

The movie industry generally consists of two principal activities, production and distribution.  Production encompasses the development, financing and creation of feature-length movies.  Distribution entails the promotion and marketing of movies in the various media markets, including theatrical, home video and television presentation.

We primarily produce English language motion pictures intended for domestic theatrical release and ancillary market release (home video and television, including pay-per-view, cable, satellite and network broadcast), that have production budgets of $250,000 to $3 million (“low-budget motion pictures,” “low budget movies” or “low-budget films”).  We initially anticipated producing motion pictures that had production budgets of $2 million to $5 million, but based on the production of our first two motion pictures, we believe that a range of $250,000 to $3 million is appropriate.

The development and production costs of a low-budget film and each cost category varies from movie-to-movie and this variation may be substantial.  Each movie is unique and the storyline, special effects, production locations, creative personnel involved, etc. affect the budget amount of each cost category.  Accordingly, we believe the cost categories are somewhat indeterminable until the particular movie is identified and developed.

Rather than retain and employ personnel to develop screenplays and perform other movie development activities, we typically acquire movies for production that are in the development phase, generally to the point that the initial screenplay has been written, and that are low-budget films.  In the pre-production and production phases of a

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motion picture, we intend to hire skilled creative and production personnel, including cinematographers, editors, costume designers, set designers, sound and lighting technicians and actors on an as needed basis.

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

Following our production of the movie, we intend to arrange for distribution through third-parties primarily into the domestic (United States and Canada) and international ancillary market (home video or pay and free television).  Depending upon our ability to obtain favorable distribution arrangements, which depends in many cases upon the distributor’s assessment of the movie’s revenue potential, a particular movie may be distributed in the domestic and international theatrical markets as well as the ancillary markets. As of the date of this report, we have not entered into any arrangements for the theatrical release of our produced and in-production motion pictures.  A substantial amount of time may elapse between our expenditure of funds in the production of a motion picture and the receipt of revenue from the motion picture.

Our produced movies will be distributed domestically pursuant to licensing arrangements with unrelated third-parties that are independently engaged in the promotion and distribution of movies.  Our foreign market distribution arrangements will be pursuant to sale or license of the international distribution rights to an unrelated third-party distributor for either a single up-front payment (in U.S. currency) without any retained participation in international source revenues or for the right to receive a percentage of gross receipts received by the distributor.  As of the date of this report, we have entered into domestic (United States and Canada) distribution arrangements covering our three motion picture projects and have entered into international distribution arrangements covering Cloud 9.

Our ability to obtain international market distribution, whether in the ancillary market or the theatrical market, will be subject to:

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

•changes in the laws and policies affecting trade, investment and taxes (including laws and policies relating to the repatriation of funds and withholding taxes),

•differing degrees of protection for intellectual property,

•instability of foreign economies and governments,

•cultural barriers, and

•wars and acts of terrorism.

Any of these factors could have a material adverse effect on our ability to sell the international distribution rights of any motion picture.

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Recent Developments

Distribution of Cloud 9.  In conjunction with the production of Cloud 9, with the other producers of Cloud 9, we formed Out of the Blue Productions, LLC (the “Production Company”).  The Production Company has entered into three agreements covering the domestic (United States and Canada) and international distribution of Cloud 9 in the ancillary market (home video market) and as the broadcast rights (pay and free television, video on demand and pay-per-view) for Cloud 9.  Pursuant to the agreement covering domestic distribution (“Domestic Agreement”), the Production Company received in June 2005 a non-refundable advance of $450,000 on our share of the net receipts from the domestic distribution of Cloud 9 that was distributed to us.  The Domestic Agreement allows the licensee to receive a distribution fee equal to 20% of gross domestic receipts of Cloud 9 after its recoupment of all manufacturing, distribution and marketing costs from those receipts.  We anticipate that Cloud 9 will be released in the domestic video market during January 2006.

During June 2005, the Production Company entered in to an agreement for the international distribution of Cloud 9 (“International Agreement”).  Under the International Agreement the licensee is entitled to receive recoupment of its manufacturing, distribution and marketing costs and thereafter a distribution fee of equal to 15% of gross international receipts up to $2,000,000 and 10% of gross international receipts above $2,000,000.

Furthermore, during June 2005, the Production Company entered in to a Sales Agency Agreement for the marketing of the broadcast rights (pay and free television, video-on-demand and pay-per-view) of Cloud 9 (“Broadcast Agreement”).  Pursuant to the Broadcast Agreement, the licensee is entitled to a fee 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 distribution expenses.

As a result of the agreements 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 and fees.  Furthermore, our co-finance providers are entitled to receive the first $500,000 of proceeds we receive from the licensing of the distribution rights of Cloud 9 of which we have paid $450,000.  After giving effect to the recovery of the $500,000 contributions to the production costs of Cloud 9 under the co-financing agreements and then the recovery of our production costs and other invested costs and interest, our net profits interest in Cloud 9 will be 30.6%.  In conjunction with the production of Cloud 9, the producers formed Out of the Blue Productions, LLC (the “Production Company”).  Our entitlement to distributions from the Production Company and the profits interest granted to Bert Reynolds provide for interest at a rate of 2% above the prime rate (limited to 5%) for purposes of determining recovery of the production and other costs of Cloud 9.

Post-Production of The Hunt.  During March 2005, we commenced and completed principal filming of our second motion picture project titled, The Hunt.  We are currently in post-production of The Hunt.  We anticipate that the total production costs for The Hunt will be approximately $430,000.

In July 2005, we entered into an agreement for the domestic distribution of The Hunt.  The agreement grants the licensee a distribution fee equal to 22.5% of gross receipts and allows for the recoupment of all manufacturing, distribution and marketing costs.  In addition, we sold 35% of the copyright interest in The Hunt to the licensee for an amount equal to 50% of the budget of The Hunt.  As of September 30, 2005, we have received approximately $214,000 from the licensee under the terms of the agreement.  The company that developed the story concept for The Hunt retained a 25% interest in the net receipts of The Hunt.  Net receipts is defined as receipts after we recoup our production costs, interest and overhead.  In addition, we entered in to net participation agreements with the director, casting company and others equal to 7% of the net receipts of The Hunt.

Post-Production of Surveillance.  During August 2005, we commenced and completed principal filming of our third motion picture project titled, Surveillance.  We are currently in post-production of Surveillance.  We anticipate that our total production costs for Surveillance will be approximately $610,000.

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In July 2005, we entered into an agreement for the domestic distribution of Surveillance.  The agreement grants the licensee a distribution fee equal to 25% of gross receipts and allows for the recoupment of all manufacturing, distribution and marketing costs.  In addition, we sold 50% of the copyright interest in Surveillance to the licensee for an amount equal to 50% of the budget of Surveillance.  As of September 30, 2005, we have received $285,000 from the licensee under the terms of the agreement.  In addition, we entered in to net participation agreements with the director, casting company and others equal to 8% of the net receipts of The Hunt.

Pre-Production and Filming of Soul’s Midnight.  During September 2005, we commenced the pre-production phase of our fourth motion picture project titled, Soul’s Midnight.  We anticipate completing the filming of this movie in November 2005.  We anticipate that our total production costs for Soul’s Midnight will be approximately $650,000.

In October 2005, we entered into an agreement for the domestic distribution of Soul’s Midnight.  The agreement grants the licensee a distribution fee equal to 25% of gross receipts and allows for the recoupment of all manufacturing, distribution and marketing costs.  In addition, we sold 75% of the copyright interest in Soul’s Midnight to the licensee for an amount equal to 75% of the budget of Soul’s Midnight.

Convertible Note Financing

In August 2005, the Company issued a promissory note (the “Note”) in the principal amount of $750,000.  The Note is secured by all assets of the Company including all purchase agreements and any options or rights to acquire, all intellectual and real property, all assets and properties of the Company and all of its existing and future subsidiaries.  The Note bears interest at the rate of 8% per annum.  Interest due on the note is payable quarterly and can be paid in cash or shares of Company stock.

The Note will become due and payable on the first to occur of: (i) July 27, 2007 (the “Maturity Date”); (ii) the consummation of a Qualified Financing; or (iii) the continuation of and Event of Default, as defined, for more than 30 days following notice of the occurrence of an Event of Default.  Upon consummation of a Qualified Financing, the outstanding principal amount of the Note and all accrued and unpaid interest (collectively the “Note Balance”) will automatically convert into shares of equity securities of the Company equal to 120% of the Note Balance divided by the price per share of the equity securities sold in the Qualified Financing.  The maximum price or value of the equity securities into which the Note Balance converts may not exceed the equivalent of $1.10 per common stock share.  Qualified Financing refers to any equity financing pursuant to which the Company receives aggregate gross cash proceeds of $2,000,000 or more on or before the Maturity Date.

In conjunction with issuance of the Note, the Company and the holder of the Note entered into two common stock purchase warrant agreements, each evidencing warrants exercisable on or before August 5, 2010.  One agreement provides for the purchase of 250,000 common stock shares at $2.00 and the other agreement provides for the purchase of 250,000 common stock shares at $3.00.

The fair value of each warrant issued was estimated on the date of issuance using the Black-Scholes option pricing model with the following assumptions used: weighted average risk free interest rate of 4.0%; no dividend yield; volatility of 78%; and expected life less than five years.  The fair value of the options were based on the difference between the present value of the exercise price of the option and the estimated fair value price of the common share.  The fair value of the warrants was estimated to be $244,776 and was recorded as paid-in capital.  The value of the warrants will increase interest expense over the life of the Note.

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Output Agreement

In June 2005 we entered into an agreement providing Image Entertainment (“Image”) with the first-look right at the movies we produce (the “Output Agreement”).  Image will have a “first look” on all projects up to $2,000,000 that we undertake during the three-year period beginning on the date of delivery of The Hunt.  If Image were to choose not to become involved in a motion picture project, we have the right to produce and distribute the motion picture with another person without any further obligation to Image.  Image agreed to fund up to 50% of each production budget for mutually agreed upon motion picture projects.  This funding is payable in three installments:  20% of the approved the production budget through pre-production, 60% of through the physical shooting 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-produce with Image.  Image is entitled to receive a 25% distribution fee from gross domestic sales and a back-end profit participation from all sales after payment of the distribution fee.  In general, the back-end profit participation interest and ownership interest in each co-produced motion picture will be based upon Image’s funding of the budgeted share of production costs.  The actual back-end profit participation percentage shall be equal to the percentage Image funds of the motion picture project after recovery from sales of the mutually approved expenses.  Our joint exploitation of the broadcast rights with Image have been left to future negotiation.

Accounting Methods

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

In June 2000, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 00-2, Accounting by Producers or Distributors of Films (“SoP 00-2”).  SoP 00-2 establishes accounting standards for producers or distributors of films, including changes in revenue recognition, capitalization and amortization of costs of acquiring films and television programs and accounting for exploitation costs, including advertising and marketing expenses. These accounting standards are as follows:

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

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

We capitalize the costs of production, including financing costs, to investment in motion pictures.  These costs will be amortized to direct operating expenses in accordance with SoP 00-2. These costs are stated at the lower of unamortized motion picture costs or fair value (net present value).  These costs for an individual motion picture will be amortized in the proportion that current period actual revenues bear to management’s estimates of the total revenue expected to be received from the motion picture over a period not to exceed 10 years from the date of delivery.  We will be required to regularly review and revise when necessary the total revenue estimates of each motion picture produced.  As a result, if revenue estimates change with respect to a motion picture, it may be necessary to write down all or a portion of the unamortized costs of the motion picture.  There is no assurance that revised revenue estimates will not occur that result in significant write-downs affecting our results of operations and financial condition.

Revenue from the sale or licensing of motion pictures will be recognized upon meeting all recognition requirements of SoP 00-2.  Revenue from the theatrical release of motion pictures will be recognized at the time of exhibition based on our participation in box office receipts.  If applicable, revenue from the sale of DVDs in the retail market, net of an allowance for estimated returns, will be recognized on the later of shipment to the customer or “street date” (when it is available for sale by the customer).  Furthermore, if applicable, under revenue sharing arrangements, rental revenue would be recognized when we would become entitled to receipts.  For contracts that provide for rights to

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exploit a motion picture on multiple media (e.g. theatrical, video, television) with a fee for a single motion picture where the contract specifies the permissible timing of release to various media, the fee will be allocated to the various media based on an assessment of the relative fair value of the rights to exploit each media and will be recognized as the movie is released to each media.  For multiple-title contracts with a fee, the fee will be allocated on a title-by-title basis, based on an assessment of the relative fair value of each title.  If applicable, revenues from television licensing are recognized when the motion picture becomes available to the licensee for telecast.  Cash payments received are to be recorded as deferred revenue until all the conditions of revenue recognition have been met.  If applicable, we will accrue for video returns and provide for allowances in the financial statements based on previous returns and our allowances history on a title-by-title basis in each of the video businesses. In this case, there may be differences between actual returns and allowances and our historical experience that we currently do not have.

We will depend on the distributors of any motion picture we produce to account for and accurately report our share of exhibition revenue.  While we expect to have certain audit rights to verify exhibition revenues received by our North American distributors,

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

•distributors may fail to maintain appropriate accounting records making it difficult to determine a producer’s actual share of revenues upon audit.

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

Recent Accounting Pronouncements

SFAS 123(R) – In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment.  SFAS 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.  SFAS 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award.  Public companies are required to adopt the new standard using a modified prospective method and may elect to restate prior periods using the modified retrospective method.  Under the modified prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively for the unvested portion at time of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards.  No change to prior periods presented is permitted under the modified prospective method.  Under the modified retrospective method, companies record compensation costs for prior periods retroactively through restatement of such periods using the exact pro forma amounts disclosed in the companies’ footnotes.  Also, in the period of adoption and after, companies record compesation cost based on the modified prospective method.  SFAS 123(R) is effective for periods beginning after December 15, 2005.  Early application is encouraged, but not required.

We have not yet determined the date or method of adoption.  If we were to adopt SFAS 123(R) on December 15, 2005 using the modified prospective method, we estimate that there will be no stock-based compensation expense for the year ending December 31, 2005.  If we elect to adopt SFAS 123(R) using the modified retrospective method, we are permitted to either retroactively restate only the 2005 interim periods or restate all prior periods.  If we elect to restate prior periods using the modified retrospective method, net loss for the year ended December 31, 2004, would be restated and would increase by $63,574.  Net loss for the three months ended September 30, 2005, would not be impacted.

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Results of Operations

The following table sets forth selected results of our operations for the three months and six months ended September 30, 2005 and 2004.  The following information was derived and taken from our unaudited financial statements appearing elsewhere in this report.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2005			2004			2005			2004
Revenue	$	—		$	—		$	450,000		$	—
Operating expenses:
Amortization of film costs	10,500			—			419,737			—
Film participation costs	—			—			4,167			—
Salaries and employee benefits	67,628			58,960			203,726			176,951
Legal and professional fees	13,010			3,100			56,324			77,918
Consulting and management fees	24,500			261			24,500			10,261
Stock transfer and reporting costs	2,349			2,762			6,724			5,777
Film marketing	—			6,000			—			10,200
Other	11,315			8,843			27,491			28,221
Total operating expenses	129,302			79,926			742,669			309,328
Operating loss	(129,302		)	(79,926		)	(292,669		)	(309,328		)
Other income (expense):
Interest and other income	3,450			2,551			8,241			13,926
Interest expense	(39,306		)	—			(39,306		)	—
Net other expense	(35,856		)	2,551			(31,065		)	13,926
Net loss before income taxes	(165,158		)	(77,375		)	(323,734		)	(295,402		)
Provision for income taxes	—			—			—			—
Net loss	$	(165,158	)	$	(77,375	)	$	(323,734	)	$	(295,402	)

Comparison of the Three-Month Periods Ended September 30, 2005 and 2004

During the three months ended September 30, 2004, our operations had advanced to the development and production of motion picture projects and we were in the filming phase on our first motion picture project titled Cloud 9.  During the three months ended September 30, 2004, we incurred salary and benefits expense of $58,960 for our management and administrative team.  Legal and professional fees of $3,100 were incurred during the three months ended September 30, 2004 and were attributable to legal and auditing services incurred in conjunction with our United States Securities and Exchange Commission registration and reporting.  We also incurred stock transfer and reporting costs of $2,762.  We incurred $6,000 in film marketing expenses relating the marketing of Cloud 9.  Other expenses of $8,843 were incurred during the three months ended September 30, 2004 and were primarily comprised of expenses associated with the day to day operations of our corporate office.

During the three months ended September 30, 2005, the distributor of our first motion picture, Cloud 9, was planning and developing the marketing plan for Cloud 9.  We anticipate that Cloud 9 will be available for sale in domestic markets during the first quarter of 2006.  We were in the post-production phase on our second and third motion picture projects The Hunt and Surveillance.  We were in the pre-production phase of our fourth motion picture project titled Soul’s Midnight.  Our operational expenses were similar in nature to those incurred in 2004.  During the three months ended September 30, 2005, we incurred salary and benefits expense of $67,628, a $8,668 increase over 2004.

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This increase is attributable to increased salaries for our President, Chief Financial Officer and production accountant.  Legal and professional fees of $13,010 were incurred during the three months ended September 30, 2005 and were attributable to legal and auditing services incurred in conjunction with our United States Securities and Exchange Commission registration and reporting.  We utilized investment banking related consulting services in the amount of $24,500.  We also incurred stock transfer and reporting costs of $2,349.  As of June 30, 2005, we had two film projects in progress that we had incurred $10,500 in costs that had been recorded as investment in films.  During the third quarter, management made the determination that these projects were no longer viable and as a result, the $10,500 investment in films was written-off as amortization of film costs.  Other expenses of $11,315 were incurred during the three months ended September 30, 2005 and were primarily comprised of expenses associated with the day-to-day operations of our corporate office.

Comparison of the Nine-Month Periods Ended September 30, 2005 and 2004

During the nine months ended September 30, 2004, our operations had advanced to the development and production of motion picture projects and we were in the filming phase on our first motion picture project titled Cloud 9.  During the first nine months of 2004, we incurred salary and benefits expense of $176,951 for the management and administrative team put in place during 2004.  Legal and professional fees of $77,918 were incurred during the nine months ended September 30, 2004 and were attributable to legal and auditing services incurred in conjunction with our public filings.  During the nine months ended September 30, 2004, we paid a $10,000 consulting fee for services performed in relation to rewriting a script for a potential film project.  We incurred film marketing costs of $10,200 relating to the marketing of Cloud 9.  We also incurred stock transfer and reporting costs of $5,777.  Other expenses of $28,221 were incurred during the nine months ended September 30, 2004 and were primarily comprised of expenses associated with the day to day operations of our corporate office.

During the nine months ended September 30, 2005, we completed the negotiation of licensing agreements for the foreign, domestic and broadcast rights of Cloud 9.  We generated revenue of $450,000 in conjunction with the domestic licensing of Cloud 9.  Based on our estimate of the total ultimate revenue from Cloud 9, we amortized $409,237 of the film costs incurred on Cloud 9.  As of June 30, 2005, we had two film projects in progress that we had incurred $10,500 in costs that had been recorded as investment in films.  During the third quarter, management made the determination that these projects were no longer viable and as a result, the $10,500 investment in films was written-off as amortization of film costs.  We were in the post-production phase of our second and third motion picture projects, The Hunt and Surveillance.  We were in the pre-production phase of our fourth motion picture project, Soul’s Midnight.  Our operational expenses were similar in nature to those incurred in 2004.  During the nine months ended September 30, 2005, we incurred salary and benefits expense of $203,726, a $26,775 increase over 2004.  This increase is attributable to increased salaries for our President, Chief Financial Officer and production accountant.  Legal and professional fees of $56,324 were incurred during the nine months ended September 30, 2005 and were attributable to legal and auditing services incurred in conjunction with our United States Securities and Exchange Commission registration and reporting.  We utilized investment baking related consulting services in the amount of $24,500. We also incurred stock transfer and reporting costs of $6,724.  Other expenses of $27,491 were incurred during the nine months ended September 30, 2005 and were primarily comprised of expenses associated with the day to day operations of our corporate office.

Liquidity and Capital Resources

In April 2004, we completed our private placement offering of our common stock shares and redeemable warrants in units of one common stock share and one redeemable warrant. During 2003 and 2004, we received net proceeds of $2,535,224 from this private placement offering.  During June 2005, we received a $450,000 non-refundable advance on the domestic revenues of Cloud 9.  The $450,000 was subsequently used to reduce our co-finance liability on Cloud 9 from $500,000 to $50,000.  Based upon our cash and cash equivalents at September 30, 2005 (that totaled $777,521), the anticipated revenue from our motion picture projects, Cloud 9, The Hunt and Surveillance, and the proceeds from the sell of profits interests in The Hunt and Surveillance,  we anticipate that our cash requirements will be met for at least the next 12 months.  In July 2005, we received $750,000 in proceeds from a convertible note payable.

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At September 30, 2005, we had working capital of $690,081.  Operating activities for the nine months ended September 30, 2005, used net cash of $406,412.  We used cash as the result of a net loss of $323,734, which was reduced by depreciation of $3,649, amortization of film costs of $419,737, the issuance of stock for consulting services in the amount of $14,500, a decrease in film deposits of $44,101 and an increase in accrued liabilities of $6,810.  Additional operating uses of cash included the costs we incurred in the production of our motion picture projects totaling $524,948 and a prepaid loan fee of $68,322.  During the first nine months of 2004, our operating activities used net cash of $2,523,724 as the result of a net loss of $295,402 that was offset by depreciation of $3,650 and the issuance of stock for legal services in the amount of $25,000.  Additional operating uses of cash during the nine months ended September 30, 2004, included the costs we incurred in the production of our motion picture project, Cloud 9, totaling $2,148,748 and decrease in accrued liabilities of $1,308.

Financing activities during the nine months ended September 30, 2005, generated $300,000.  In June 2005, we used $450,000 for the repayment of film co-financing agreements and in July 2005, we received $750,000 from the issuance of a convertible note payable.  During the nine months ended September 30, 2004, our financing activities generated $521,750 through the sale of stock of $21,750 and proceeds from film co-financing agreements of $500,000.

Financial Commitments

FilmCapital, Inc. Agreement. In March 2002, Messrs. Frederickson and Stansberry, members of GrayMark Productions, L.L.C., entered into an agreement to pay FilmCapital, Inc. $50,000 for services performed.  This liability is only payable in the event GrayMark Productions, L.L.C. or its affiliates obtain funding for film projects from outside investors.  Messrs. Frederickson and Stansberry have each represented that their intent was not to cause GrayMark Productions, L.L.C. to be liable for this obligation and each has agreed to indemnify us for any liability that may arise out of this agreement.  In December 2003, we recorded a consulting expense and liability of $50,000 related to the agreement with FilmCapital.  At the time that we pay this recorded liability, Messrs. Frederickson and Stansberry will be required immediately to reimburse us for the payment.

Registration Obligations. We agreed, at our expense, to register the common stock shares and redeemable warrants offered for sale pursuant to our private placement of 2,995,000 common stock shares and redeemable warrants exercisable for the purchase of 2,995,000 common stock shares under the 1933 Act and to maintain effectiveness of the registration for a seven-year period ending on April 14, 2010.  Registration of the common stock shares and redeemable warrants became effective July 13, 2004.

Furthermore, we also similarly agreed to register (and maintain effective of the registration under the 1933 Act for the seven-year period) the 443,250 common stock shares underlying the placement agent warrants sold to the underwriter of our private placement offering, Viewtrade Financial, and 383,425 common stock shares issued pursuant to the one-year Financial Advisor Agreement to Viewtrade Financial.  In accordance with this obligation, we initially included these common stock shares in the registration statement that registered the private placement common stock shares and redeemable warrants; however, on February 27, 2004, Viewtrade Financial, on its own behalf as well as the other holders of the placement agent warrants and the recipients and holders of the common stock shares assigned to affiliates of Viewtrade Financial, elected to remove those shares from the registration statement.  These common stock shares are currently subject to a one-year agreement that does not permit sale or transfer except under very limited circumstances.  Although we have been informed by our legal counsel that the common stock shares other than those underlying the placement agent warrant may be sold without further restriction pursuant to Rule 144 as promulgated by the Securities and Exchange Commission, we intend to file a registration statement in accordance with this registration obligation during the last half of 2005.

Office Space Arrangement.  Our corporate headquarters and offices are located at 101 North Robinson, Suite 920, Oklahoma City, Oklahoma.  These office facilities consist approximately of 1,500 square feet and are occupied under an unwritten month-to-month lease arrangement, requiring monthly rental payments of $500.  The costs of building-out and improving our offices was approximately $15,000 which we paid rather than Corporate Tower, LLC, our landlord.  Roy T. Oliver, one of our greater than 5% shareholders and affiliates, controls Corporate Tower, LLC.

9

Mr. Oliver on behalf of Corporate Tower, LLC has orally indicated that as of the date of this report there is no intent to terminate our occupancy of the office facilities.  Under Oklahoma law, termination of our month-to-month lease arrangement requires at least 30 days prior written notice.  In the event of this termination, we believe there is adequate office space and facilities available in the Oklahoma City area.  In the event we are required to move from our current office facilities, the terms of occupancy, including the increased rental payments, will be substantially different than those under which our office space is currently occupied and the annual rental rate will probably be from $8 to $12 per square foot ($12,000 to $18,000 per year based upon 1,500 square feet of office facilities).

12-Month Overhead Budget

Our budgeted overhead expenses for the next 12 months are as follows:

Expenditure	Monthly		12 Months
Administrative expenditures:
Executive officer compensation	$	18,333	$	220,000
Administrative salaries	1,517		18,200
Payroll taxes	2,527		30,330
Film marketing	2,000		24,000
Telephone	700		8,400
Rent	500		6,000
Legal	2,917		35,000
Accounting	2,917		35,000
Public relations	417		5,000
Travel	4,167		50,000
Health insurance	1,020		12,240
Automobile	500		6,000
Miscellaneous	485		5,820
Total Administrative Expenditures	$	38,000	$	455,990

Additional Financial Commitments

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

If our production activities are successful (of which there is no assurance) or movie production budgets increase, we may be required to increase overhead by hiring additional employees and increase our office facilities.  We anticipate that during the next 12 months we will not be required to increase the number of our employees or increase our office facilities.

We believe that our operations as a result of our motion picture projects, Cloud 9, The Hunt and Surveillance, will achieve profitability.  We provide no assurance that

•we will be successful in implementing our business plan or

•unanticipated expenses or problems or technical difficulties will not occur which would result in significant delays.

10

Any one of these will adversely affect our ability to become profitable or to maintain profitability.

Cautionary Statement Relating to Forward Looking Information

We have included some forward-looking statements in this section and other places in this report regarding our expectations.  These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, levels of activity, performance or achievements, or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.  Some of these forward-looking statements can be identified by the use of forward-looking terminology 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.  You should read statements that contain these words carefully because they:

•discuss our future expectations;

•contain projections of our future operating results or of our future financial condition; or

•state other “forward-looking” information.

We believe it is important to discuss our expectations; however, it must be recognized that events may occur in the future over which we have no control and which we are not accurately able to predict.  Readers are cautioned to consider the specific business risk factors described under the caption “Additional Factors that May Affect Our Future Results” appearing under “Item 1. Description of Business” of our Annual Report on Form 10-KSB filed with the United States Securities and Exchange Commission on March 29, 2005, and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date of this report.  We undertake no obligation to publicly revise forward-looking statements to reflect events or circumstances that may arise after the date of this report.

Item 3.  Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer are responsible primarily for establishing and maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission.  These controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Furthermore, our Chief Executive Officer and Chief Financial Officer are responsible for the design and supervision of our internal controls over financial reporting that are then effected by and through our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  These policies and procedures (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Our Executive Officer and Chief Financial Officer, based upon their evaluation of the effectiveness of our disclosure controls and procedures and the internal controls over financial reporting as of the last day of the period covered by this report, concluded that our disclosure controls and procedures and internal controls over financial

11

reporting were fully effective as of the last day of the period covered by this report and reported to our auditors and board of directors that no change occurred in our disclosure controls and procedures and internal control over financial reporting occurred during the period covered by this report that would materially affect or is reasonably likely to materially affect our disclosure controls and procedures or internal control over financial reporting.  In conducting their evaluation of our disclosure controls and procedures and internal controls over financial reporting, these executive officers did not discover any fraud that involved management or other employees who have a significant role in our disclosure controls and procedures and internal controls over financial reporting.  Furthermore, there were no significant changes in our disclosure controls and procedures, internal controls over financial reporting, or other factors that could significantly affect our disclosure controls and procedures or internal controls over financial reporting subsequent to the date of their evaluation.  Because no significant deficiencies or material weaknesses were discovered, no corrective actions were necessary or taken to correct significant deficiencies and material weaknesses in our internal controls and disclosure controls and procedures.

PART II OTHER INFORMATION

Item 1.	Legal Proceedings
	None
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
(a)	None
(b)	None
(c)	None
Item 3.	Defaults Upon Senior Securities
	None
Item 4.	Submission of Matters to a Vote of Security Holders
	None
Item 5.	Other Information
	None
Item 6.	Exhibits

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.

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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.

SIGNATURES

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

	GRAYMARK PRODUCTIONS, INC.
	(Registrant)
	By:		/S/JOHN SIMONELLI
			John Simonelli
			Chief Executive Officer
Date: November 14, 2005
	By:	/S/MARK R. KIDD
		Mark R. Kidd
		Chief Financial Officer and Controller
Date: November 14, 2005

13

GRAYMARK PRODUCTIONS, INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

F-1

GRAYMARK PRODUCTIONS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

	September 30, 2005			December 31, 2004
ASSETS
Cash and cash equivalents	$	771,521		$	877,933
Film deposits	4,500			48,601
Total current assets	776,021			926,534
Investment in films	2,333,156			2,227,945
Prepaid loan fees	68,322			—
Fixed assets, net	17,541			21,190
Total assets	$	3,195,040		$	3,175,669
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued liabilities	$	85,940		$	79,130
Total current liabilities	85,940			79,130
Convertible note payable	527,019			—
Film obligations	50,000			500,000
Total liabilities	662,959			579,130
Shareholders’ Equity:
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; 8,268,425 issued and outstanding at September 30, 2005 (8,258,425 shares issued and outstanding at December 31, 2004)	827			826
Paid-in capital	4,096,964			3,837,689
Accumulated deficit	(1,565,710		)	(1,241,976		)
Total shareholders’ equity	2,532,081			2,596,539
Total liabilities and shareholders’ equity	$	3,195,040		$	3,175,669

See Accompanying Notes to Condensed Consolidated Financial Statements

F-2

GRAYMARK PRODUCTIONS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,
	2005			2004
Revenues	$	—		$	—
Operating expenses:
Amortization of film costs	10,500			—
Salaries and employee benefits	67,628			58,960
Consulting and management fees	24,500			261
Legal and professional fees	13,010			3,100
Stock transfer and reporting costs	2,349			2,762
Film marketing	—			6,000
Other	11,315			8,843
Total operating expenses	129,302			79,926
Operating loss	(129,302		)	(79,926		)
Other Income (Expense):
Interest and other income	3,450			2,551
Interest expense	(39,306		)	—
Net other income (expense)	(35,856		)	2,551
Net loss before provision for income taxes	(165,158		)	(77,375		)
Provision for income taxes	—			—
Net loss	$	(165,158	)	$	(77,375	)
Net loss per share of common stock, basic and diluted	$	(0.02	)	$	(0.01	)	(0.01	)
Weighted average number of common shares outstanding	8,265,092			8,241,758

See Accompanying Notes to Condensed Consolidated Financial Statements

F-3

	Nine Months Ended September 30,
	2005			2004
Revenues	$	450,000		$	—
Operating expenses:
Amortization of film costs	419,737			—
Film participation costs	4,167			—
Salaries and employee benefits	203,726			176,951
Legal and professional fees	56,324			77,918
Consulting and management fees	24,500			10,261
Stock transfer and reporting costs	6,724			5,777
Film marketing	—			10,200
Other	27,491			28,221
Total operating expenses	742,669			309,328
Operating loss	(292,669		)	(309,328		)
Other Income (Expense):
Interest and other income	8,241			13,926
Interest expense	(39,306		)	—
Net other income (expense)	(31,065		)	13,926
Net loss before provision for income taxes	(323,734		)	(295,402		)
Provision for income taxes	—			—
Net loss	$	(323,734	)	$	(295,402	)
Net loss per share of common stock, basic and diluted	$	(0.04	)	$	(0.04	)	(0.04	)
Weighted average number of common shares outstanding	8,260,647			8,227,869

See Accompanying Notes to Condensed Consolidated Financial Statements

F-4

GRAYMARK PRODUCTIONS, INC.

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

	Common Stock			Paid-in		Accumulated
	Shares	Amount		Capital		Deficit
Balance, December 31, 2004	8,258,425	$	826	$	3,837,689	$	(1,241,976	)
Issuance of stock for consulting services	10,000	1		14,499		—
Warrants issued with convertible note payable	—	—		244,776		—
Net loss	—	—		—		(323,734		)
Balance, September 30, 2005	8,268,425	$	827	$	4,096,964	$	(1,565,710	)

See Accompanying Notes to Condensed Consolidated Financial Statements

F-5

GRAYMARK PRODUCTIONS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2005			2004
Operating activities:
Net loss	$	(323,734	)	$	(295,402	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation	3,649			3,650
Amortization of film costs	419,737			—
Issuance of stock for consulting services	14,500			—
Issuance of stock for legal services	—			25,000
Interest expense allocated to warrants	21,795			—
Changes in assets and liabilities –
Film deposits	44,101			(106,916		)
Investment in films	(524,948		)	(2,148,748		)
Prepaid loan fees	(68,322		)	—
Accrued liabilities	6,810			(1,308		)
Net cash used by operating activities	(406,412		)	(2,523,724		)
Financing activities:
Proceeds from convertible note payable	505,224			—
Proceeds from warrants issued with convertible note payable	244,776
Partial repayment of film co-financing agreements	(450,000		)	—
Proceeds from film co-financing agreement	—			500,000
Sale of stock	—			21,750
Net cash provided by financing activities	300,000			521,750
Net change in cash and cash equivalents	(106,412		)	(2,001,974		)
Cash and cash equivalents at beginning of period	877,933			2,953,159
Cash and cash equivalents at end of period	$	771,521		$	951,185

See Accompanying Notes to Condensed Consolidated Financial Statements

F-6

GRAYMARK PRODUCTIONS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

For the Periods Ended September 30, 2005 and 2004

Note 1 – Nature of Business

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

The Company has completed the production of its first motion picture project titled, Cloud 9, completed the filming of its second and third motion pictures titled, The Hunt and Surveillance and is in pre-production of its fourth motion picture project titled, Soul’s Midnight.  The Company has negotiated agreements for the marketing and distribution of all four films.  The Company intends to produce and distribute additional films that are completed and marketed using smaller budgets than those of major studios.  Management believes that producing and distributing low- or modest-budget, commercially successful films will afford the Company access to Hollywood talent and scripts and third-party production packages for acquisition, without compromising management’s approach to managing financial risk.

Note 2 – Summary of Significant Accounting Policies

Interim Financial Information – The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The accompanying financial statements are unaudited, but include all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position at such dates and of the operations and cash flows for the periods then ended.  Operating results for the periods ended September 30, 2005 and 2004 are not necessarily indicative of results that may be expected for the entire year.

Consolidation – The accompanying consolidated financial statements include the accounts of GrayMark Productions, Inc. and its majority owned and controlled subsidiaries.  The Company controls a subsidiary company through a combination of existing voting interests and the ability to exercise various rights under certain shareholder or operating agreements.  The Company’s subsidiaries include GrayMark Productions, L.L.C. (the “LLC”), Out of the Blue Productions, LLC (“Out of the Blue”), The Hunt, The Motion Picture LLC (“The Hunt”), Surveillance, The Motion Picture LLC (“Surveillance”) and Soul’s Midnight LLC (“Soul’s Midnight”).  The LLC became a subsidiary of the Company in August 2003 as a result of the incorporation-reorganization of the Company.  Out of the Blue, a variable interest entity, was formed in December 2003 as the entity under which the Company’s first motion picture project, Cloud 9, was produced.  At September 30, 2005, the Company has funded $2,397,866 of the acquisition and production costs of Cloud 9.  The Company is entitled to recover its capital contributions to Out of the Blue plus interest at 2% above the prime rate (defined as “investment recoupment”) from cash distributions before the other interest owners and thereafter 50% of cash distributions and is entitled to receive a majority of the proceeds from rights sales,

F-7

distribution and any and all exploitation of the Picture.  The Company has 100% voting control of Out of the Blue.  The Hunt, Surveillance and Soul’s Midnight are 100% owned by the Company.

Use of estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

Revenue recognition – Revenues from the sale of the rights to a film are recognized when the feature film is available to the distributor for exploitation and no conditions for delivery exist, which under most sales contracts requires that full payment has been received from the distributor.  Revenues from the theatrical distribution of motion pictures are recognized when motion pictures are exhibited.  Revenues from video sales are recognized on the date that video units are made widely available for sale by retailers.  Revenues from the licensing of motion picture films are recorded when the material is available for telecasting by the licensee and when certain other conditions are met.  Revenues from consulting services are recognized when earned.

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

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

Recently Issued Accounting Standards –

SFAS 123(R) – In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment.  SFAS 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.  SFAS 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award.  Public companies are required to adopt the new standard using a modified prospective method and may elect to restate prior periods using the modified retrospective method.  Under the modified prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively for the unvested portion at time of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards.  No change to prior periods presented is permitted under the modified prospective method.  Under the modified retrospective method, companies record compensation costs for prior periods retroactively through restatement of such periods using the exact pro forma amounts disclosed in the companies’ footnotes.  Also, in the period of adoption and after, companies record compesation cost based on the modified prospective method.  SFAS 123(R) is effective for periods beginning after December 15, 2005.  Early application is encouraged, but not required.

The Company has not yet determined the date or method of adoption.  If the Company were to adopt SFAS 123(R) on December 15, 2005 using the modified prospective method, the Company estimates that there will be no stock-based compensation expense for the year ending December 31, 2005.  If the Company elects to adopt SFAS 123(R) using the modified retrospective method, it is permitted to either retroactively

F-8

restate only the 2005 interim periods or restate all prior periods.  If the Company elects to restate prior periods using the modified retrospective method, net loss for the year ended December 31, 2004, would be restated and would increase by $63,574.  Net loss for the nine months ended September 30, 2005, would not be impacted.

Note 3 – Investment in Films

	September 30, 2005		December 31, 2004
Released, net of accumulated amortization	$	2,010,647	$	—
Completed and not released	130,422		2,217,945
In progress	192,087		—
In development	—		10,000
Total	$	2,333,156	$	2,227,945

The Company estimates that 100% of the unamortized investment in films at September 30, 2005 will be amortized within the next three years.  Approximately $1,293,000 of film costs are expected to be amortized during the next twelve months.  None of the accrued participation liabilities included in accounts payable and accrued liabilities are expected to be paid during the next twelve months.

Note 4 – Convertible Note Payable

In August 2005, the Company issued a promissory note (the “Note”) in the principal amount of $750,000.  The Note is secured by all assets of the Company including all purchase agreements and any options or rights to acquire, all intellectual and real property, all assets and properties of the Company and all of its existing and future subsidiaries.  The Note bears interest at the rate of 8% per annum.  Interest due on the note is payable quarterly and can be paid in cash or shares of Company stock.

The Note will become due and payable on the first to occur of: (i) July 27, 2007 (the “Maturity Date”); (ii) the consummation of a Qualified Financing; or (iii) the continuation of and Event of Default, as defined, for more than 30 days following notice of the occurrence of an Event of Default.  Upon consummation of a Qualified Financing, the outstanding principal amount of the Note and all accrued and unpaid interest (collectively the “Note Balance”) will automatically convert into shares of equity securities of the Company equal to 120% of the Note Balance divided by the price per share of the equity securities sold in the Qualified Financing.  The maximum price or value of the equity securities into which the Note Balance converts may not exceed the equivalent of $1.10 per common stock share.  Qualified Financing refers to any equity financing pursuant to which the Company receives aggregate gross cash proceeds of $2,000,000 or more on or before the Maturity Date.

In conjunction with issuance of the Note, the Company and the holder of the Note entered into two common stock purchase warrant agreements, each evidencing warrants exercisable on or before August 5, 2010.  One agreement provides for the purchase of 250,000 common stock shares at $2.00 and the other agreement provides for the purchase of 250,000 common stock shares at $3.00.

The fair value of each warrant issued was estimated on the date of issuance using the Black-Scholes option pricing model with the following assumptions used: weighted average risk free interest rate of 4.0%; no dividend yield; volatility of 78%; and expected life less than five years.  The fair value of the options were based on the difference between the present value of the exercise price of the option and the estimated fair

F-9

value price of the common share.  The fair value of the warrants was estimated to be $244,776 and was recorded as paid-in capital.  The value of the warrants will increase interest expense over the life of the Note.

In addition, the Company’s financial advisor was paid a fee of $75,000 for services rendered in conjunction with execution of the Note.  The fee was recorded as a prepaid loan fee and will be amortized over the life of the Note.

Note 5 – Film Obligations

During May 2004, the Company obtained $500,000 of funding under co-finance agreements for its motion picture project, Cloud 9.  The terms of the co-financing provide for the investors to recoup their contribution from the first proceeds of Cloud 9.  After all Cloud 9 costs are recouped by the Company, the investors are entitled to a profit participation in the Company’s profit from Cloud 9.  As a group, the investors are entitled to 20% of the net profits paid to the Company, but the investors do not have any ownership rights in the film.  The $500,000 received under the co-financing agreements represents 21% of the anticipated total cost of Cloud 9.  During June 2005, $450,000 was repaid to investors from the first proceeds from Cloud 9.  The funding under the co-financing agreements came from related parties to the Company as described below:

Source of Funding	Original Amount		Remaining Balance
Greater than 5% shareholder	$	250,000	$	—
Company’s chairman and chief executive officer	100,000		50,000
A company 50% owned by the Company’s chief financial officer	100,000		—
Company shareholder	50,000		—
Total	$	500,000	$	50,000

Note 6 – Film Profit Participation and Contingent Compensation

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

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

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

The Company’s subsidiary, Out of the Blue Productions, LLC (the “Production Company”), entered into contingent compensation agreements with the director and certain cast members of Cloud 9 in the form of “net and gross profit participations” that are customary in the film industry.  These participations are typically based on the profit of a film after all production and distribution costs have been recouped (“gross participation”) or all production and distribution costs and overhead have been recouped (“net participations”).  A percentage of these “gross and net profits”, as negotiated between the participants, are paid out as contingent compensation for creative participants in a motion picture film.  The participations negotiated by the Production Company for Cloud 9 total 23.5% of which the Company’s interest in Cloud 9 is burdened by one-half of these net profit participations.  The Company’s residual profits interest in Cloud 9 is 30.6% after giving effect to the gross and net profits participations given pursuant to contingent compensation arrangements and

F-10

the co-finance agreements (see Note 5 – Film Obligations).

The Production Company also agreed to pay additional contingent bonuses to certain cast members when aggregate United States and Canada box office receipts as reported in Daily Variety reach various levels between $8,500,000 and $20,000,000.  The total contingent amounts that would be paid if box office receipts reach $20,000,000 is $300,000.

In July 2005, the Company entered into agreements for the domestic distribution of its motion picture projects titled The Hunt and Surveillance.  The agreement grants the licensee a distribution fee equal to 25% of gross receipts and allows for the recoupment of all manufacturing, distribution and marketing costs.  In addition, the Company sold 35% and 50% of the copyright interests in The Hunt and Surveillance, respectively, for amounts equal to 50% of the budgets for The Hunt and Surveillance.  The Company’s subsidiaries, The Hunt and Surveillance entered into contingent compensation agreements with the director, casting company and others in the form of “net profit participations”.  The net participations negotiated for The Hunt and Surveillance total 7% and 8%, respectively.

Note 7 – Capital Structure

In August 2005, the Company issued 10,000 shares of stock for consulting services to be performed over a 12 month period.  Due to the nature of the consulting services being performed, the Company was not able to establish verifiable output measures of the actual services to be performed over the life of the agreement.  Accordingly, the Company increased paid-in capital and consulting fees for the period ended September 30, 2005, by the market value of the shares issued, $14,500.

In September 2004, the Company issued 25,000 shares of stock to the Company’s legal counsel for services rendered and fully performed.  The shares were valued at the fair value of the services received of $25,000.

Note 8 – Stock Options and Warrants

Information with respect to stock options and warrants outstanding follows:

	Shares	Average Exercise Price
Outstanding at December 31, 2003	3,498,250	$	1.86
Granted at market value	165,000	1.24
Exercised	—	—
Forfeited	—	—
Outstanding at December 31, 2004	3,663,250	1.84
Granted at market value	500,000	2.50
Exercised	—	—
Forfeited	—	—
Outstanding at September 30, 2005	4,163,250	$	1.92

F-11

	Options and Warrants Outstanding				Options and Warrants Exercisable
	Shares Outstanding at 9/30/05	Average Remaining Life (Years)	Average Exercise Price		Shares Outstanding at 9/30/05	Average Exercise Price
$1.01 to $2.00	3,913,250	3.2	$	1.85	3,913,250	$	1.85
$2.01 to $3.00	250,000	4.8	$	3.00	250,000	$	3.00
Total outstanding	4,163,250	3.3	$	1.92	4,163,250	$	1.92

Note 9 – Subsequent Events

In October 2005, the Company issued 10,726 shares of common stock to pay accrued interest due, as of September 30, 2005, under the Company’s convertible note payable.

In October 2005, the Company issued a second promissory note (the “Note”) in the principal amount of $750,000.  The Note is secured by all assets of the Company including all purchase agreements and any options or rights to acquire, all intellectual and real property, all assets and properties of the Company and all of its existing and future subsidiaries.  The Note bears interest at the rate of 8% per annum.

The Note will become due and payable on the first to occur of: (i) October 25, 2007 (the “Maturity Date”); (ii) the consummation of a Qualified Financing; or (iii) the continuation of and Event of Default, as defined, for more than 30 days following notice of the occurrence of an Event of Default.  Upon consummation of a Qualified Financing, the outstanding principal amount of the Note and all accrued and unpaid interest (collectively the “Note Balance”) will automatically convert into shares of equity securities of the Company equal to 120% of the Note Balance divided by the price per share of the equity securities sold in the Qualified Financing.  The maximum price or value of the equity securities into which the Note Balance converts may not exceed the equivalent of $1.10 per common stock share.  Qualified Financing refers to any equity financing pursuant to which the Company receives aggregate gross cash proceeds of $2,000,000 or more on or before the Maturity Date.

In conjunction with issuance of the Note, the Company and the holder of the Note entered into two common stock purchase warrant agreements, each evidencing warrants exercisable on or before October 25, 2010.  One agreement provides for the purchase of 250,000 common stock shares at $2.00 and the other agreement provides for the purchase of 250,000 common stock shares at $3.00.  In addition, the Company’s financial advisor was paid a fee of $75,000 for services rendered in conjunction with execution of the Note which will be amortized over the term of the Note.

F-12

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, John Simonelli, certify that:

1.I have reviewed this Form 10-QSB for the nine months ended September 30, 2005 of GrayMark Productions, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, was made known to us by others within those entities, particularly during the period in which this report was being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2005

/s/ JOHN SIMONELLI John Simonelli Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Mark R. Kidd, certify that:

1.I have reviewed this Form 10-QSB for the nine months ended September 30, 2005 of GrayMark Productions, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, was made known to us by others within those entities, particularly during the period in which this report was being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2005

/s/ MARK R. KIDD	Mark R. Kidd Chief Financial Officer
and Controller

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Executive Officer of GrayMark Productions, Inc. (the “Company”), hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-QSB of the Company for the nine months ended September 30, 2005 (the “Quarterly Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  November 14, 2005	/s/ JOHN SIMONELLI
	Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Financial Executive Officer and Controller of GrayMark Productions, Inc. (the “Company”), hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-QSB of the Company for the nine months ended September 30, 2005 (the “Quarterly Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 14, 2005	/S/MARK R. KIDD
	Chief Financial Officer
	and Controller