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

For the fiscal year ended December 31, 2008

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

GRAYMARK HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)

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

210 Park Avenue, Ste. 1350
Oklahoma City, Oklahoma 73102
(Address of principal executive offices)
(405) 601-5300
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.0001 Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company þ

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

As of June 30, 2008, the aggregate market value of Graymark Healthcare, Inc. common stock, par value $.0001, held by non-affiliates (based upon the closing transaction price on The Nasdaq Stock Market) was approximately $29,435,000.

As of March 31, 2009, 28,169,113 shares of the registrant’s common stock, $.0001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE    None

 

 

GRAYMARK HEALTHCARE, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2008

TABLE OF CONTENTS

Part I.
Item 1. Business			3
Item 1A. Risk Factors			15
Item 1B. Unresolved Staff Comments			23
Item 2. Properties			23
Item 3. Legal Proceedings			25
Item 4. Submission of Matters to a Vote of Security Holders			25
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			25
Item 6. Selected Financial Data			27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			38
Item 8. Financial Statements and Supplementary Data			38
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure			38
Item 9A. Controls and Procedures			39
Item 9A(T). Controls and Procedures			39
Item 9B. Other Information			41
Part III.
Item 10. Directors, Executive Officers and Corporate Governance			41
Item 11. Executive Compensation			43
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			49
Item 13. Certain Relationships and Related Transactions, and Director Independence			51
Item 14. Principal Accounting Fees and Services			53
Part IV.
Item 15. Exhibits, Financial Statement Schedules			54
SIGNATURES			58
EX-10.31
EX-10.32
EX-21
EX-31.1
EX-31.2
EX-32.1
EX-32.2

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     Certain statements under the captions “Item 1. Business,” “Item 1A. Risk Factors,” and “Item 7. Management’s Discussion and Analysis Financial Condition and Results of Operations,” and elsewhere in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “expects,” “may,” “will,” or “should” or other variations thereon, or by discussions of strategies that involve risks and uncertainties. Our actual results or industry results may be materially different from any future results expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include general economic and business conditions; our ability to implement our business strategies; competition; availability of key personnel; increasing operating costs; unsuccessful promotional efforts; changes in brand awareness; acceptance of new product offerings; and changes in, or the failure to comply with, and government regulations.

   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 Healthcare, Inc. and its subsidiaries, including SDC Holdings LLC and ApothecaryRx LLC, and their executive officers and directors.

PART I

Item 1. Business.

Overview

     We, at Graymark Healthcare, Inc. (“Graymark”) are organized in Oklahoma. Prior to December 31, 2007, we were named Graymark Productions, Inc. and an independent producer and distributor of film entertainment content. On January 2, 2008, we completed the acquisition of ApothecaryRx, LLC, (“ApothecaryRx”) and SDC Holdings, LLC (“SDC Holdings”), collectively referred to as the “Graymark Acquisition.” For financial reporting purposes, Graymark was deemed acquired by ApothecaryRx and SDC Holdings and, accordingly, the historical financial statements prior to December 31, 2007 are those of ApothecaryRx and SDC Holdings as adjusted for the effect of the Graymark Acquisition. ApothecaryRx and SDC Holdings were collectively considered to be the acquiring entity because they were under common control prior to the Graymark Acquisition. The activities of Graymark prior to the Graymark Acquisition are not reflected in the historical financial statements because Graymark was considered to have been acquired by ApothecaryRx and SDC Holdings. Goodwill of $5,426,815 was recorded as a result of the Graymark Acquisition reflecting the fair market value of common stock issued and liabilities assumed in excess of Graymark’s identifiable assets at the date of the Graymark Acquisition. In conjunction with the Graymark Acquisition, all former motion picture production operations of Graymark Productions were discontinued.

     On March 13, 2008, our board of directors approved a reverse split of our common stock at a ratio of one-for-five shares. The effective date of the reverse split was April 11, 2008. The effect of the reverse split was a reduction of our outstanding common stock shares from 117,701,997 to 23,540,399 shares, subject to adjustment for elimination of fractional shares.

     ApothecaryRx is organized in Oklahoma and began its operations on July 3, 2006. Through ApothecaryRx, we operate independent retail pharmacy stores selling prescription drugs and a small assortment of general merchandise including diabetic merchandise, over the counter drugs, beauty products and cosmetics, seasonal merchandise, greeting cards, and convenience foods. As of March 15, 2009, we operated 18 stores in Colorado, Illinois, Minnesota, Missouri and Oklahoma. The results of operations from our retail pharmacy locations are included in our “Apothecary” operating segment.

     SDC Holdings is organized in Oklahoma and began its operations on February 1, 2007. Through SDC Holdings, we provide diagnostic sleep testing services and treatment for sleep disorders. As of March 15, 2009 we operated 14 sleep disorder diagnostic testing facilities in Nevada, Oklahoma and Texas and we managed two sleep disorder testing facilities. Our products and services are used primarily by patients with obstructive sleep apnea. These testing facilities provide monitored sleep diagnostic testing services to determine sleep disorders in the patients being tested. The majority of the sleep testing is to determine if a patient has obstructive sleep apnea. Positive airway pressure provided by sleep/personal ventilation (or “CPAP”) equipment is the American Academy of Sleep Medicines’ preferred method of treatment for obstructive sleep apnea. Our sleep diagnostic facilities also determine the correct pressure settings for patient treatment with positive airway pressure. We sell CPAP equipment and supplies to patients who have tested positive for sleep apnea and have had their positive airway pressure determined. The CPAP equipment is a medical device and can only be dispensed pursuant to a physician’s prescription. There are minority ownership interests in some of our testing facilities. The minority owners are generally physicians in the geographical area being served by the diagnostic sleep testing facility. The results of operations from our sleep diagnostic testing facilities are included in our “SDC” operating segment.

     Historically, our strategic focus has been to grow through acquisitions in both our Apothecary and SDC operating segments. At the present time, we are projecting that the majority of our focus and resources will be on acquisitions in our SDC operating segment. We may still make acquisitions at Apothecary, but most likely they will be small in size.

Apothecary Operating Segment

     As of March 15, 2009, we owned and operated 18 retail pharmacies located in Colorado, Illinois, Missouri, Minnesota, and Oklahoma. Historically, we have acquired financially successful independently-owned retail pharmacies from long-term owners that are approaching retirement. Our acquired pharmacies have successfully maintained market share due to the convenient proximity to health care providers and services, high customer service levels, longevity in the community, competitive pricing and supportive services and products such as compounded pharmaceuticals, durable medical equipment, and assisted and group living deliveries. Our stores are in mid-size, economically-stable communities. We believe that a significant amount of the value of the acquired pharmacies resides in their name and key staff relationships in the community. Following acquisition, we maintain the historic store name and key staff personnel.

     In our Apothecary operating segment, we derive our revenue primarily from the retail sale of prescription drugs, non-prescription over-the-counter drugs and health related products. We are unlike traditional full-line retail pharmacies in that most of our stores offer a very limited amount of what is known as “front-end merchandise” (that is, cosmetics, gift and sundry items and photographic development services). Two of our 18 pharmacies provide pharmaceutical compounded prescriptions. Compounded pharmaceuticals are physician prescribed and are specifically mixed and blended from bulk chemicals for patients’ treatment, generally for conditions that the attending physician deems are not effectively treated by manufactured pharmaceuticals available in standard formats or dosages or to which the patient has some form of sensitivity. Our pharmacies are generally located within or closely adjacent to hospitals and major medical complexes, and cater to patients of those healthcare providers. Other than some compounded prescriptions, our pharmacy services do not typically include intravenous infusion and injectable medications that are offered by hospital or home infusion pharmacies.

     We believe that our conveniently located stores, strong local market position, pricing policies and reputation for high quality healthcare products and pharmaceutical services provide a competitive advantage in attracting pharmacy business from individual customers as well as managed-care organizations, insurance companies, employers and other third-party payers. The percentage of our total prescription drug sales covered by third-party plans decreased to approximately 81% in 2008 from approximately 87% in 2007.

     The national rate of growth in pharmacy retail sales is currently in the low double to single digits. This growth rate is lower than in previous years. This slowed growth is primarily attributable to the shifting of branded drugs to generic drugs along with a number of factors, including a decline in demand for hormonal replacement medications, increasing third-party plan co-payments, negative publicity surrounding certain medications, conversion of certain prescription drugs to over-the-counter status and increased mail order and internet penetration. These trends, along with the continued pressure on the part of third-party plans to reduce reimbursement rates to participating providers, combined with a number of other factors, will put pressure on our organic growth and profitability as drug and labor cost inflation offset same store sales growth.

     All of our pharmacies operate on a standardized computer platform. The computer platform we use is commercially available and represents modest investment but it allows for standardized pricing models, comparison of site metrics, low cost training and ease of reporting. Our pharmacy computer system profiles customer medical and other relevant information, supplies customers with information concerning their drug purchases for income tax and insurance purposes and prepares prescription labels and receipts. The computer platform also expedites transactions with third-party plans by electronically transmitting prescription information directly to the third-party plan and providing on-line adjudication. At the time a prescription is filled, on-line adjudication confirms customer eligibility, prescription coverage, pricing and co-payment requirements and automatically bills the respective plan. On-line adjudication also reduces losses from rejected claims and eliminates a portion of the administrative burden related to the billing and collection of receivables and related costs.

     Our pharmacy front-end merchandising strategy is to provide a limited selection of competitively priced branded drugstore healthcare products and gift items, unlike the larger pharmacy chains that carry a variety of non-healthcare products. To further enhance customer service and loyalty, we attempt to maintain a consistent in-stock position in our offered healthcare merchandise. We offer primarily brand name healthcare care products, including over-the-counter items, and some gift product items.

     Our Apothecary operating segment uses its internet presence to meet the needs of two target constituencies. Our interactive website, www.apothecaryrxllc.com, is focused toward independent retail pharmacy owners that want to sell their pharmacy and are looking for options. This website gives these owners general and contact information about ApothecaryRx. Additionally most of the acquired stores have a store specific website through which store customers can refill prescriptions, purchase over-the-counter medications and healthcare products and ask questions about store services or medications. For stores that do not have a website, we help them launch one. The store based internet strategy has been to use the websites as an additional vehicle to deliver superior customer service, further supporting our strength as a “brick-and-mortar” retailer. While sales generated on the websites to date have been immaterial to our business overall, we believe our websites better position us to mitigate some of the adverse impact of mail-order and internet-based pharmacy distributors.

SDC Operating Segment

     As of March 15, 2009, we operated 14 sleep diagnosis centers in Nevada, Oklahoma and Texas and we operated two sleep diagnosis centers under management agreements. Each sleep center located in Nevada and Oklahoma is owned by a limited liability company and each of the sleep centers located in Texas is owned by a limited partnership. The limited liability companies and some of the limited partnerships are not wholly-owned by us. We are the manager of each limited liability company and the general partner of each limited partnership.

     At these sleep centers, we conduct sleep studies to determine whether the patients referred to us suffer from sleep disorders and if so the severity of their condition. Our facilities are designed to diagnose and assist in the treatment of the full range of sleep disorders (there are currently over 80 different possible diagnoses of sleep disorders); however, the most common referral to our facilities is Obstructive Sleep Apnea (“OSA”). If a patient is determined to suffer from obstructive sleep apnea, the patient and the patient’s referring physician are offered a comprehensive sleep program. This includes diagnosis, titration procedure (that is, the process of determining the optimal pressure to prescribe for the Continuous Positive Airway Pressure, or CPAP device), and the therapeutic intervention. This offering provides a one-stop-shop approach to servicing patient’s needs. The principal sleep disorder products we currently market are personal non-invasive ventilation support systems and the associated disposable supplies that are used in the treatment of obstructive sleep apnea to prevent temporary airway closure during sleep.

     Obstructive sleep apnea is considered to be one of the most common sleep problems. OSA, is a condition that causes the soft tissue in the rear of the throat to narrow and repeatedly close during sleep. Oxygen deficiency, elevated blood pressure and increased heart rate associated with OSA are related to increased risk of cardiovascular morbidity, stroke and heart attack. Additionally, OSA may result in excessive daytime sleepiness, reduced cognitive functions, including memory loss, lack of concentration, depression and irritability. According to the National Heart, Blood and Lung Institute, it is estimated that 12 million Americans have obstructive sleep apnea.

     The diagnosis of obstructive sleep apnea typically requires monitoring a patient during sleep. During overnight testing, which usually takes place in a clinical setting, respiratory parameters and sleep patterns are monitored along with other vital signs, providing information about the quality of an individual’s sleep.

     Continuous positive airway pressure therapy, commonly referred to as CPAP therapy, has evolved as the primary method for the treatment of obstructive sleep apnea, in part because it is less invasive and more cost-effective than surgery. Unlike surgery, which may only result in reduced snoring, CPAP therapy actually reduces or eliminates the occurrence of obstructive sleep apnea. During this therapy, a patient sleeps with a nasal or facial mask connected by a tube to a small portable airflow generator that delivers room air at a predetermined continuous

positive pressure. The continuous air pressure acts as a pneumatic splint to keep the patient’s upper airway open and unobstructed. As a result, the cycle of airway closures that leads to the disruption of sleep and other symptoms which characterize obstructive sleep apnea, is prevented or dramatically reduced.

     CPAP is generally not a cure but a therapy for managing the chronic condition of obstructive sleep apnea, and therefore, must be used on a daily basis as long as treatment is required. Patient compliance has been a major factor in the efficacy of CPAP treatment. Early generations of CPAP units provided limited patient comfort and convenience. More recently, product innovations to improve patient comfort and compliance have been developed.

     The primary product we sell is a continuous positive airway pressure system, commonly referred to as CPAP system, that consists of a compact flow generator connected to a dual-port, air-filled cushion face mask and are used as therapy for obstructive sleep apnea. The face mask is attached to a single-patient use positive end expiratory pressure valve designed to maintain positive airway pressure with the objective of increasing patient comfort and acceptance of the treatment. The CPAP systems provide a non-invasive and more comfortable way for treating obstructive sleep apnea.

     CPAP flow generators are electro-mechanical devices that deliver continuous positive airway pressure through a nasal or full face mask to a patient suffering from obstructive sleep apnea in order to keep the patient’s airway open during sleep. Given the importance of patient compliance in treating obstructive sleep apnea, the products are easy to use, lightweight, small and quiet, making them relatively unobtrusive at the bedside. The latest generation of these products are self-adjusting CPAP devices that use pattern recognition technology to respond to changes in breathing patterns, as individual patient needs change. It is the responsibility of the physician prescribing the CPAP to determine the appropriate type of device that we will supply for each patient.

     For patients with more severe or complex obstructive sleep apnea, the bi-level CPAP is available. These electro-mechanical devices allow inspiratory and expiratory pressures to be independently adjusted.

Mergers and Acquisitions

     On January 2, 2008, the Graymark Acquisition was completed. Although the Graymark Acquisition was completed on January 2, 2008, we have accounted for the Graymark Acquisition as though it occurred on December 31, 2007 because our shareholders approved the Graymark Acquisition in December 2007 and in effect consummated the change in control. As part of the Graymark Acquisition, we delivered 102,000,000 shares of our common stock (20,400,000 shares after giving effect to 1 for 5 stock split) to the former equity interest owners of ApothecaryRx and SDC Holdings. Mr. Roy T. Oliver and Mr. Stanton Nelson received 33,875,730 and 12,861,180 shares of common stock (6,775,146 and 2,572,236 shares after giving effect to 1 for 5 reverse split), respectively, as a result of their direct and indirect equity interests in ApothecaryRx and SDC Holdings. Prior to the Graymark Acquisition, Mr. Nelson served on our Board of Directors and Mr. Oliver was one of our greater than 10% shareholders.

     For financial reporting purposes, ApothecaryRx and SDC Holding were considered the acquiring entities because they were under common control. The historical financial statements prior to December 31, 2007 reflect the activities of ApothecaryRx and SDC Holdings as adjusted for the effect of the Graymark Acquisition. Motion picture activities of Graymark prior to the Graymark Acquisition are no longer reflected in the historical financial statements appearing elsewhere in this report. Goodwill of $5,426,815 was recorded in connection with the Graymark Acquisition reflecting the fair market value of common stock issued and liabilities assumed in excess of Graymark’s identifiable assets at the date of the merger.

     During the period from January 1, 2007 to February 28, 2009, our Apothecary and SDC operating segments completed the following acquisitions:

								Amount
Acquisition		Business		Purchase				Financed by
Date		Acquired(1)		Price				Seller
Apothecary:
January 2007		Cox Pharmacy (“Cox”)		$	2,450,500			$	1,140,000
March 2007		Bolerjack Discount Drug (“Bolerjack”)			2,136,500				650,000
May 2007		Corner Drug (“Corner”)			2,797,017				—
August 2007		Barnes Pharmacy and Barbs Gifts (“Barnes”)			2,329,688				920,000
October 2007		Wolfs Wayzata Pharmacy (“Wolfs”)			1,014,292				271,250
January 2008		Rambo Pharmacy (“Rambo”)			2,558,564				1,020,215
February 2008		Thrifty White Store 726 (“Thrifty")(2)			824,910				99,444
March 2008		Newt's Pharmacy (“Newt's”)			1,381,066				486,209
March 2008		Professional Pharmacy (“Professional”)			942,809				263,100
June 2008		Parkway Drug (“Parkway”)			7,360,998				1,489,814
November 2008		Hardamon Drug (“Hardamon”)(2)			253,362				44,821
SDC:
January 2007		Otter Creek Investments, LLC (“Otter Creek”)			14,950,000				—
April 2008		Minority interests in sleep centers (“Minority”)			1,616,356				—
June 2008		Sleep Center of Waco, Ltd.,
June 2008		Plano Sleep Center, Ltd. and
June 2008		Southlake Sleep Center, Ltd. (“Texas Labs”)			960,000				—
June 2008		Nocturna Sleep Center, LLC (“Nocturna”)			2,172,790				726,190

     In connection with the acquisitions during 2008 and 2007, our Apothecary operating segment recorded goodwill of $9,783,179 and intangible assets of $7,688,741 consisting of covenants not to compete having a value of $1,168,445 (amortizable over the period of the covenants not to compete, three to five years) and customer lists of $6,520,296 (amortizable over 5 to 15 years).

     In connection with the acquisitions during 2008 and 2007, our SDC operating segment recorded goodwill of $16,809,785 and intangible assets of $630,000 consisting of covenants not to compete having a value of $100,000 (amortizable over the period of the covenants not to compete, three years), customer lists of $480,000 (amortizable over 15 years) and trademarks of $50,000 (amortizable over 15 years).

Impairment of Acquisition Goodwill

     Goodwill and other indefinite-lived assets are not amortized, but are subject to impairment reviews annually, or more frequent if necessary. We are required to evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the related operating unit below its carrying amount. These circumstances may include without limitation

•		a significant adverse change in legal factors or in business climate,
•		unanticipated competition, or
•		an adverse action or assessment by a regulator.

     In evaluating whether goodwill is impaired, we must compare the fair value of the operating unit to which the goodwill is assigned to the operating unit’s carrying amount, including goodwill. The fair value of the operating

unit will be estimated using a combination of the income, or discounted cash flows, approach and the market approach that utilize comparable companies’ data. If the carrying amount of the operating unit (i.e., pharmacy or sleep center laboratory) exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of an operating unit to its carrying amount. In calculating the implied fair value of the operating unit goodwill, the fair value of the operating unit will be allocated to all of the other assets and liabilities of that operating unit based on their fair values. The excess of the fair value of an operating unit over the amount assigned to its other assets and liabilities will be the implied fair value of goodwill. An impairment loss will be recognized when the carrying amount of goodwill exceeds its implied fair value.

     Our evaluation of goodwill completed during 2008 resulted in no impairment losses. In 2007, our annual impairment tests resulted in a non-cash impairment charge of $5,426,815 and $204,000 related to write-downs of the goodwill attributable to the Graymark Acquisition and our SDC operating segment, respectively. The impairment of goodwill related to the Graymark Acquisition was due to the discontinuance of our film production activities. The impairment of goodwill related to our SDC operating segment was due to the financial performance of one of our sleep testing facilities in Texas.

Pharmacy Store Operations

     Our retail pharmacy stores range in size from under 500 to 5,000 square feet, with an average of 2,500 square feet per store. Each store is designed to facilitate customer movement and convenience. We believe that their shelf configurations allow customers to find merchandise easily and allow store managers, cashiers and stock clerks to effectively monitor customer behavior. We attempt to group merchandise logically in order to enable customers to locate items quickly.

     We establish each store’s hours of operation in an attempt to best serve customer traffic patterns and purchasing habits and to optimize store labor productivity. Most stores are generally open six days per week. However, store operating hours, including opening on Sundays may be utilized when warranted by customer need and or market competition. All of our stores offer delivery services as an added customer convenience. Customers can arrange for delivery by phone, fax, internet or at the store. Each store is supervised by a store pharmacy manager and one or more non pharmacist department managers.

Sleep Centers and Clinics

     Our sleep center and clinic facilities typically accommodate 2 to 8 patients per night. At these facilities, we conduct sleep studies to determine whether the patients referred to us suffer from sleep disorders. If a patient is determined to suffer from obstructive sleep apnea, we can offer follow-up diagnostic and monitoring services to the patient and may, under certain circumstances, be in a position to sell our sleep products to the patient. A sleep study is the process of recording various measurements used to identify different sleep stages and classify various sleep problems. During sleep testing, the activities that occur in a patient’s body during sleep, including brain waves, muscle movements, eye movements, breathing through the mouth and nose, snoring, heart rate, and leg movements, are monitored by small electrodes and sensors applied to the patient. These functions can be normal while the individual is awake, but abnormal during sleep. All of this information is transmitted from the equipment being worn to a special recorder that saves these measurements for technicians to compile into a sleep report. The referring physician receives a sleep report that includes an interpretation, by a physician who is board certified in sleep medicine and who is typically affiliated with us, of the data and a diagnosis of any sleep related problem.

     Our sleep centers and clinics are a combination of free standing sleep diagnostic centers and clinics that are affiliated with hospitals and other medical complexes. Those centers and clinics that are affiliated with hospitals and other medical complexes provide us with direct access to patients at the point of diagnosis. We believe that the knowledge derived from our centers and clinics enable us to improve our sleep diagnostic services and treatment and sell sleep disorder and personal ventilation products.

     Our ability to sell sleep disorder and personal ventilation products is restricted by strict federal regulations that prohibit us from diverging from a physician’s prescription. If a physician prescribes a sleep disorder or personal ventilation product by name other than one of the products we offer, we are prohibited by federal regulations from substituting a different sleep disorder product.

Pharmacy Purchasing and Distribution

     After purchase of a retail pharmacy, we generally shift all drug, over the counter and health and beauty aids purchases to a nationally negotiated long-term contract with a distribution company. Approximately 89% of our pharmacy inventory at December 31, 2008 was purchased through this national agreement. This percentage will increase as the stores sell the pre-acquisition inventory.

Sleep Disorder Product Supplier Relationships

     We purchase our sleep disorder and personal ventilation products from Nelcor Puritan Bennet, Fisher & Paykell, Respironics, Resmed and others. Generally these products are purchased on terms ranging from a net 30-day payment to long-term purchase agreements.

     If the supply of these sleep disorder products should be interrupted for any reason, we would seek to find alternative suppliers. In this event, we may experience disruption in our sales of sleep disorder products. While there are one or more alternate suppliers, there is no assurance that, in the event of an interruption or cessation, we could, in fact, obtain its sleep disorder products of equal quality and functionality and in a quantity and at a cost that would not have a material adverse effect on its business and operating results. We maintain a limited inventory of sleep disorder products to lessen the impact of any temporary supply disruption.

Advertising and Promotion

     We regularly promote key pharmacy items at reduced retail prices during promotional periods. In some pharmacy stores, we use store window banners and in-store signs to communicate savings and value to shoppers. We usually do not rely on distributed print media to promote our stores.

     We regularly promote sleep health issues and our sleep testing facilities through radio commercials and billboard displays. We also use direct marketing representatives to market to area physicians about our sleep services.

Management Information Systems

     We employ up-to-date pharmacy and inventory management information systems. We use a scanning point-of-sale (“POS”) system in each of our stores that is integrated with the pharmacy computer platform. These systems provide improved control of pricing, inventory management and shrink. These point-of-sale systems also provide sales analysis that allows for improved labor scheduling and helps optimize product shelf space allocation and design.

     We employ an integrated sleep diagnostic and management information system. We utilize an in-house information system that provides the secure transfer of sleep diagnostic studies and other information from the sleep centers to our corporate office. The sleep studies are then accessible to physicians or corporate personnel. We also employ up-to-date scheduling and medical billing information systems. The scheduling system allows for optimal utilization of available beds for sleep studies and labor scheduling.

Pharmacy Competition

     Our pharmacy stores principally compete on the basis of convenience of location, customer service, community reputation and price. Our competition comes from major drugstore chains and mass merchandisers including CVS, Rite Aid, Walgreens, Wal-Mart and independent pharmacies located within the market area of each

pharmacy store. We believe that we have significant competitive advantages over our competitors within the market areas served because of the locations within close proximity of hospitals and within medical complexes and the long-term community presence of our pharmacies.

     An adverse trend for pharmacy retailers is the rapid growth in mail-order and internet-based prescription processors. These prescription distribution methods have grown in market share relative to brick-and-mortar pharmacy retailers as a result of the rapid rise in drug costs experienced in recent years. Mail-order prescription distribution methods are perceived by employers and insurers as being less costly than traditional distribution methods and are being mandated by an increasing number of third-party pharmacy benefit managers, many of which also own and manage mail-order distribution operations. In addition to these forms of mail-order distribution, there are an increasing number of internet-based prescription distributors that specialize in offering certain high-demand, lifestyle drugs at deeply discounted prices. A number of these internet-based distributors operate illicitly and outside the reach of regulations that govern legitimate pharmacy retailers. These alternate distribution channels have restrained the rate of sales growth for traditional pharmacy retailers in recent years.

     The drugstore chains including CVS, Rite Aid, Walgreens and mass merchandisers, including Wal-Mart, have increased their market share of prescription sales by offering an assortment of front-end merchandise as a means of increasing customer traffic and increasing profits. Drugstore chains have slightly increased their market share from 40% of prescription sales in 1996 to 41% in 2006 and mail-order market share has increased from approximately 12% in 1996 to approximately 20% in 2006, predominantly at the expense of independent drug retailers like us. Within the industry, it is expected that the increase in market share for mail-order will continue, which will continue to restrain growth for brick-and-mortar market participants and cause negative pricing pressure. While mail-order market shares are expected to continue to increase, we believe that the value of mail-order is limited in our locations due to the time delay associated with mail-order sales, which limits the ability of customers to use this channel to obtain drugs to treat acute conditions. Additionally, we believe that the cost savings associated with mail-order prescriptions are generally achieved through large volume orders. When prescriptions are changed or doses are modified in efforts to improve the clinical outcome, as is true with many acute and chronic prescriptions, large amounts of product is wasted and costs are duplicated in mail order systems. Retail pharmacies like ours are less expensive for prescriptions that are likely to change. Medication compliance is also improved through retail pharmacies where the pharmacist is able to talk directly with the patient and ensure that the patient understands how and when to take their medication. These interactions with the pharmacist are easier in retail environments than through the mail and are more effective in retail locations like our pharmacies, where long-term staff relationships between the pharmacist and patient improve the patient affinity, rapport and trust.

Sleep Disorder Diagnostic and Treatment Competition

     Competition within the sleep disorder diagnostic and treatment market is intense. The principal basis for competition in the market include price, quality, patient or client service, and achieved treatment results. We believe that our services and products compete favorably with respect to these factors. We compete with healthcare providers that provide similar services, including hospitals operated “for profit” or “not for profit,” and offer for sale sleep disorder products, including the manufacturers of those products, many of which have greater financial and marketing resources, broader business segments or both. Our primary competitors include the following entities and their affiliates: Apria Healthcare, Lincare Holdings, various hospitals and locally maintained sleep centers, and durable medical equipment suppliers.

Intellectual Property

     In the course of our operations, we develop trade secrets and trade marks that may assist in maintaining any developed competitive position. When determined appropriate, we may enforce and defend our developed and established trade secrets and trade marks. In an effort to protect our trade secrets, we require certain employees, consultants and advisors to execute confidentiality and proprietary information agreements upon commencement of employment or consulting relationships with us.

Government Regulation

     Our operations are and will be subject to extensive federal, state and local regulations. These regulations cover required qualifications, day-to-day operations, reimbursement and documentation of activities. We continuously monitor the effects of regulatory activity on its pharmacy and non-pharmacy related operations.

Licensure and Registration Laws

     Each state requires that companies operating a pharmacy within the state be licensed by the state board of pharmacy. We currently have pharmacy licenses for each pharmacy we operate. In addition, pharmacies are required to be registered with state and federal authorities under statutes governing the regulation of controlled substances. Pharmacists who provide services as part of our operations are required to obtain and maintain professional licenses and are subject to state regulations regarding professional standards of conduct.

     With respect to our sleep centers, there has been a trend developing to require facilities that provide sleep diagnostic testing to become accredited by the American Academy of Sleep Medicine as well as additional credentialing for physicians diagnosing sleep studies and the licensing of technical personnel to perform diagnostic testing procedures. As of March 15, 2009, two of our sleep centers have been accredited by the American Academy of Sleep Medicine. We are actively working on having our other sleep centers accredited. We believe we will have the remaining centers accredited by mid-2010.

Medicare and Medicaid

     Our pharmacies and sleep centers operate under regulatory and cost containment pressures from federal and state legislation primarily affecting Medicaid and Medicare.

     We receive reimbursement from government sponsored third-party plans, including Medicaid and Medicare, non-government third-party plans, including managed-care organizations, and also directly from individuals (i.e., private-pay). During 2008, our pharmacy payer mix, as a percentage of total prescription sales, was approximately 40% managed care organizations, 41% Medicaid/Medicare and 19% private-pay. During 2008, our sleep center payer mix, as a percentage of total sleep center revenues, was approximately 94% managed care organizations, 6% Medicaid/Medicare and less than 1% private-pay. Pricing for private-pay patients is based on prevailing regional market rates.

     Federal laws and regulations contain a variety of requirements relating to the reimbursement and furnishing of prescription drugs under Medicaid. First, states are given authority, subject to applicable standards, to limit or specify conditions for the coverage of some drugs. Second, as discussed below, federal Medicaid law establishes standards for pharmacy practice, including patient counseling and drug utilization review. Third, federal regulations impose reimbursement requirements for prescription drugs furnished to Medicaid beneficiaries. Prescription drug benefits under Medicare are paid pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 or the Medicare Drug Act, that created the Medicare Part D benefit that became effective on January 1, 2006. The effect of the Medicare Drug Act and the Medicare Part D benefit on our business currently remains uncertain. In addition to requirements mandated by federal law, individual states have substantial discretion in determining administrative, coverage, eligibility and reimbursement policies under their respective state Medicaid programs that may affect our pharmacy and sleep center operations.

     The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, executive orders and freezes and funding restrictions, all of which may significantly impact our pharmacy and sleep center operations. There is no assurance that payments for pharmaceuticals, sleep testing services and durable medical equipment under the Medicare and Medicaid programs will continue to be based on current methodologies or even remain similar to present levels. We may be subject to rate reductions as a result of federal or state budgetary constraints or other legislative changes related to the Medicare and Medicaid programs including, but not limited to, the Medicare Part D drug benefit.

Fraud and Abuse Laws

     We are subject to federal and state laws and regulations governing financial and other arrangements among healthcare providers. Commonly referred to as the Fraud and Abuse laws, these laws prohibit certain financial relationships between pharmacies, physicians, vendors and other referral sources. During the last several years, there has been increased scrutiny and enforcement activity by both government agencies and the private plaintiffs’ bar relating to pharmaceutical marketing practices under the Fraud and Abuse laws. Violations of Fraud and Abuse laws and regulations could subject us to, among other things, significant fines, penalties, injunctive relief, pharmacy shutdowns and possible exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid. Changes in healthcare laws or new interpretations of existing laws may significantly affect our business. Some of the Fraud and Abuse Laws that have been applied are discussed below.

     Federal Anti-Kickback Statute: The federal anti-kickback statute, Section 1128B(b) of the Social Security Act (42 U.S.C. 1320a-7b(b)), prohibits, among other things, the knowing and willful offer, payment, solicitation or acceptance of remuneration, directly or indirectly, in return for referring an individual to a provider of services for which payment may be made in whole or in part under a federal healthcare program, including the Medicare or Medicaid programs. Remuneration has been interpreted to include any type of cash or in-kind benefit, including long-term credit arrangements, gifts, supplies, equipment, prescription switching fees, or the furnishing of business machines. Several courts have found that the anti-kickback statute is violated if any purpose of the remuneration, not just the primary purpose, is to induce referrals.

     Potential sanctions for violations of the anti-kickback statute include felony convictions, imprisonment, substantial criminal fines and exclusion from participation in any federal healthcare program, including the Medicare and Medicaid programs. Violations may also give rise to civil monetary penalties in the amount of $50,000, plus treble damages.

     Although we believe that our relationships with vendors, physicians, and other potential referral sources comply with Fraud and Abuse laws, including the federal anti-kickback statute, the Department of Health and Human Services has acknowledged in its industry compliance guidance that many common business activities potentially violate the anti-kickback statute. There is no assurance that a government enforcement agency, private litigant, or court will not interpret our business relations to violate the Fraud and Abuse laws.

     The False Claims Act: Under the False Claims Act (“FCA”), civil penalties may be imposed upon any person who, among other things, knowingly or recklessly submits, or causes the submission of false or fraudulent claims for payment to the federal government, for example in connection with Medicare and Medicaid. Any person who knowingly or recklessly makes or uses a false record or statement in support of a false claim, or to avoid paying amounts owed to the federal government, may also be subject to damages and penalties under the FCA.

     Furthermore, private individuals may bring “whistle blower” (“qui tam”) suits under FCA, and may receive a portion of amounts recovered on behalf of the federal government. These actions must be filed under seal pending their review by the Department of Justice. Penalties of between $5,500 and $11,000 and treble damages may be imposed for each violation of FCA. Several federal district courts have held that FCA may apply to claims for reimbursement when an underlying service was delivered in violation of other laws or regulations, including the anti-kickback statute.

     In addition to FCA, the federal government has other civil and criminal statutes that may be utilized if the Department of Justice suspects that false claims have been submitted. Criminal provisions that are similar to FCA provide that if a corporation is convicted of presenting a claim or making a statement that it knows to be false, fictitious or fraudulent to any federal agency, it may be fined not more than twice any pecuniary gain to the corporation, or, in the alternative, no more than $500,000 per offense. Many states also have similar false claims statutes that impose liability for the types of acts prohibited by FCA. Finally, the submission of false claims may result in termination of our participation in federal or state healthcare programs. Members of management and persons who actively participate in the submission of false claims can also be excluded from participation in federal healthcare programs.

     We believe that we have sufficient procedures in place to provide for the accurate completion of claim forms and requests for payment. Nonetheless, given the complexities of the Medicare and Medicaid programs, we may code or bill in error, and such claims for payment may be treated as false claims by the enforcing agency or a private litigant.

Drug Utilization Review

     The Omnibus Budget Reconciliation Act of 1990 (“OBRA 90”), establishes a number of regulations regarding state Medicaid prescription drug benefits. Although OBRA 90 primarily focuses on drug manufacturers’ obligations to provide drug rebates under state Medicaid programs, it also requires states to create drug utilization review (“DUR”), requirements in order to combat fraud, abuse, gross overuse, inappropriate or medically unnecessary care as well as to educate patients about potential adverse reactions. DUR requires pharmacists to discuss with patients relevant information in connection with dispensing drugs to patients. This information may include the name and description of the medication, route and dosage form of the drug therapy, special directions and precautions for patients, side effects, storage, refill and what a patient should do upon a missed dosage. Under DUR requirements, pharmacists are also required to make a reasonable effort to obtain the patient’s identification information, medical and drug reaction history and to keep notes relevant to an individual’s drug therapy. We believe our pharmacists provide the required drug use consultation with their customers.

Healthcare Information Practices

     The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), sets forth standards for electronic transactions; unique provider, employer, health plan and patient identifiers; security and electronic signatures as well as privacy protections relating to the exchange of individually identifiable health information. The Department of Health and Human Services (“DHHS”) has released several rules mandating compliance with the standards set forth under HIPAA. We believe our pharmacies and sleep centers achieved compliance with DHHS’s standards governing the privacy of individually identifiable health information and DHHS’s standards governing the security of electronically stored health information. In addition, we have fully implemented the required uniform standards governing common healthcare transactions. Finally, we have taken or will take all necessary steps to achieve compliance with other HIPAA rules as applicable, including the standard unique employer identifier rule, the standard health care provider identifier rule and the enforcement rule.

     We continue to evaluate the effect of the HIPAA standards on our business. At this time, we believe that our pharmacies and sleep centers have taken all appropriate steps to achieve compliance with the HIPAA requirements. Moreover, HIPAA compliance is an ongoing process that requires continued attention and adaptation. We do not currently believe that the cost of compliance with the existing HIPAA requirements will be material to our operations; however, we cannot predict the cost of future compliance with HIPAA requirements. Noncompliance with HIPAA may result in criminal penalties and civil sanctions. The HIPAA standards have increased our regulatory and compliance burden and have significantly affected the manner in which our pharmacies and sleep centers use and disclose health information, both internally and with other entities.

     In addition to the HIPAA restrictions relating to the exchange of healthcare information, individual states have adopted laws protecting the confidentiality of patient information which impact the manner in which pharmacy and patient records are maintained. Violation of patient confidentiality rights under common law, state or federal law could give rise to damages, penalties, civil or criminal fines and/or injunctive relief. We believe that our pharmacy operations, prescription file-buying program and sleep center operations are in compliance with federal and state privacy protections. However, an enforcement agency or court may find a violation of state or federal privacy protections arising from our pharmacy operations, prescription file-buying program or sleep center operations.

Healthcare Reform and Federal Budget Legislation

     In recent years, a number of federal acts have been enacted resulting in major changes in the healthcare system. The Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (“BIPA”), addresses

attempts to modify the calculation of average wholesale prices of drugs, or AWPs, upon which Medicare and Medicaid pharmacy reimbursement has been based. The federal government has been actively investigating whether pharmaceutical manufacturers have been improperly manipulating average wholesale prices, and several pharmaceutical manufacturers have paid significant civil and criminal penalties to resolve litigation relating to allegedly improper practices affecting AWP.

     In response to BIPA and other criticisms of AWP pricing methodologies, the Medicare Drug Act described above contains a number of drug pricing reforms, including Medicare Part D drug benefit that became effect in 2006.

     In January 2005, the Centers for Medicare and Medicaid Services, or CMS, published a final rule to implement the Medicare Part D drug benefit. Under the Medicare Part D drug benefit, Medicare beneficiaries are eligible to enroll in prescription drug plans offered by private entities or, to the extent private entities fail to offer a plan in a given market area, through a government contractor. Medicare Part D prescription drug plans include both plans providing the drug benefit on a stand-alone basis and Medicare Advantage plans that provide drug coverage as a supplement to an existing medical benefit under the applicable Medicare Advantage plan. Pursuant to the CMS final rule, we will be reimbursed for drugs that it provides to enrollees of a given Medicare Part D prescription drug plan in accordance with the terms of the agreements negotiated between the Medicare Part D plan and us. We accept most Medicare Part D plans in our market areas. The amount of reimbursement under Medicare Part D plans is often less than the amount under state Medicaid, and generally less than the traditional non-governmental third-party plans. CMS is continuing to issue sub-regulatory guidance statements on many additional aspects of the CMS final rule. We monitor these government pronouncements and statements of guidance and we cannot predict at this time the ultimate effect of the CMS final rule or other potential developments relating to its implementation on our business or results of operations.

     Beginning in 2005, many drugs have been reimbursed under new pricing methodologies. Although reporting obligations that currently arise under the AWP system and Medicaid Best Price statutes are imposed on pharmaceutical manufacturers, current and future changes in pricing methodologies may affect reimbursement rates, pharmaceutical marketing practices and the offering of discounts and incentives to purchasers, including retail pharmacies, in ways that are uncertain at this time.

     Currently there is substantial uncertainty regarding near-term and long-term healthcare reform initiatives, if any, that will be implemented, or whether there will be other changes in the administration of governmental healthcare programs or interpretations of governmental policies or other changes affecting the healthcare system. We provide no assurances that future healthcare or budget legislation or other changes, including those referenced above, will not materially adversely impact our pharmacy business.

Third-Party Reimbursement

     The cost of medical care in the United States and many other countries is funded substantially by government and private insurance programs. We receive payment for our products or services directly from these third-party payors and our continued success is dependent upon the ability of patients and their healthcare providers to obtain adequate reimbursement for those products and sleep disorder diagnostic services. In most major markets, our services and supplies are utilized and purchased primarily by patients suffering from obstructive sleep apnea. Patients are generally covered by private insurance. In those cases, the patient is responsible for his or her co-payment portion of the fee and we invoice the patient’s insurance company for the balance. Billings for the products or services reimbursed by third-party payors, including Medicare and medicaid, are recorded as revenues net of allowances for differences between amounts billed and the estimated receipts from the third-party payors. In hospitals, we contract with the hospital on a “fee for service” basis and the hospital assumes the risk of billing.

     The third-party payors include Medicare, Medicaid and private health insurance providers. These payors may deny reimbursement if they determine that a device has not received appropriate FDA clearance, is not used in accordance with approved applications, or is experimental, medically unnecessary or inappropriate. Third-party payors are also increasingly challenging prices charged for medical products and services, and certain private insurers have initiated reimbursement systems designed to reduce healthcare costs. The trend towards managed

healthcare and the growth of health maintenance organizations, which control and significantly influence the purchase of healthcare services and products, as well as ongoing legislative proposals to reform healthcare, may all result in lower prices for our products and services. There is no assurance that our sleep disorder products and services will be considered cost-effective by third-party payors, that reimbursement will be available or continue to be available, or that payors’ reimbursement policies will not adversely affect our ability to sell our products and services on a profitable basis, if at all.

Minimum Wage Requirements

     We are impacted by recent legislation in states that increase the minimum hourly wages to $7.25 on July 25, 2009. While the increase in minimum hourly wages impacts our cost of labor, most of our employees are skilled and are already above the minimum hourly wage level. Additionally, we believe we can offset a significant portion of any cost increase through initiatives designed to further improve labor efficiency.

Employees

     As of December 31, 2008, we had 342 full-time employees including 7 corporate level employees, 195 employees at our Apothecary operating segment and 140 employees at our SDC operating segment. Our Apothecary and SDC operating segments also have 96 and 11 part-time employees, respectively. Our Apothecary operating segment has contracted with a national professional employer organization (“PEO”) through which its employees, managers and executives are employed. We lease these employees from the PEO for a fee. Our employees are not represented by a labor union.

     Our future performance depends in significant part upon the continued service of our key management personnel, and our continuing ability to attract and retain highly qualified and motivated personnel in all areas of our operations. Competition for qualified personnel is intense, and there can be no assurance that we can retain key employees or that we can attract, assimilate or retain other highly qualified personnel in the future.

Item 1A. Risk Factors.

     The following factors and the matters discussed below and elsewhere in this report should be considered when evaluating our business operations and strategies. Additionally, there may be risks and uncertainties that we are not aware of or that we currently deem immaterial, which may become material factors affecting our operations and business success. Many of the factors are not within our control. We provide no assurance that one or more of these factors will not:

•

adversely affect

	•		the market price of our common stock,
	•		our future operations, and
	•		our business,
	•		financial condition, or
	•		results of operations

•		require significant reduction or discontinuance of our operations,
•		require us to seek a merger partner or
•		require us to sell additional stock on terms that are highly dilutive to our shareholders, and

•

may ultimately result in a decline in or complete loss of the value of our securities.

Forward-looking statements are included in this report.

     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 in the report and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We undertake no obligation to publicly revise forward-looking statements to reflect events or circumstances that may arise after the date of this report.

We face a high level of competition in our markets.

     We operate in highly competitive markets. Our pharmacies compete with national, regional and local drugstore chains, discount drugstores, supermarkets, combination food and drugstores, discount general merchandise stores, mass merchandisers, independent drugstores and local merchants. Major chain competitors include CVS, Rite Aid, Wal-Mart, Target and Walgreens. In addition, other chain stores may enter market areas in which we operate and become significant competitors in the future. Many of our competitors have greater financial and other resources than we have. If any of our current competitors, or new competitors, were to devote significant resources to enhancing or establishing an increased presence within our market areas, they could make it difficult for us to maintain or grow our market share or maintain our margins, and our advertising and promotional costs could increase. In addition to competition from the drugstore chains, we also compete with hospitals, health maintenance organizations and Canadian imports.

     Another adverse trend for retail store (“brick and mortar” stores) pharmacies has been the rapid growth in mail-order and internet-based prescription processors. These prescription distribution methods have grown in market share relative to retail store pharmacies in response to the rapid rise in drug costs experienced in recent years. Mail-order prescription distribution methods are perceived by employers and insurers as being less costly than traditional distribution methods and are being mandated by an increasing number of third-party pharmacy benefit managers, many of which also own and manage mail-order distribution operations as well as a growing number of employers and unions. In addition to these forms of mail-order distribution, there have also been an increasing number of internet-based prescription distributors that specialize in offering certain high demand lifestyle drugs at deeply discounted prices. A number of these internet-based distributors operate illicitly and outside the reach of regulations that govern legitimate retail store pharmacies. Competition from Canadian imports has also been increasing significantly and also creates volume and pricing pressure. Imports from foreign countries may increase further if recently introduced legislation seeking to legalize the importation of drugs from Canada and other countries is eventually enacted. These alternate distribution channels have acted to restrain the rate of sales growth for traditional retail store pharmacies as well as the chain drug retailers in the last few years.

The markets for sleep diagnostic disorders and sale of the related products are highly competitive and we compete against substantially larger healthcare provides, including hospitals and clinics.

     Competition among companies that provide healthcare services and supplies is intense. If we are unable to compete effectively with existing or future competitors, we may be prevented from retaining our existing customers or from attracting new customers, which could materially impair our business. There are a number of companies that currently offer or are in the process of offering services and supplies that compete with our sleep diagnostic services and related product and supplies sales. These competitors may succeed in providing services and products that are more effective, less expensive or both than those currently offered by us or that would render some of our services or supplies obsolete or non-competitive. Many of our competitors have greater financial, research and development, manufacturing and marketing resources than we have and may be in a better position than us to withstand the adverse effects on gross margins and profitability caused by price decreases prevalent in this competitive environment.

Our pharmacy and sleep diagnostic center operations are concentrated in six states and may be adversely affected by the economic conditions within the particular state or the metropolitan area served.

     Our pharmacies are located in Colorado, Illinois, Missouri, Minnesota, and Oklahoma and our sleep diagnostic centers are located in Texas, Nevada and Oklahoma. We are sensitive to, and our success will be substantially affected by, economic conditions and other factors affecting these states, including the regulatory environment, the cost of energy, real estate, insurance, taxes and rent, weather, demographics, the availability of labor, and geopolitical factors including terrorism. A prediction of the future economic conditions in the states with certainty is not possible. During an economic downturn, our revenues and profitability could be materially adversely affected because of, among other things, a reduction in the size of the workforce in a state or the metropolitan area serviced by a pharmacy or sleep center, reduced income levels, a resulting increase in shrinkage or a decline in population growth. Our pharmacies and sleep centers located in the more urbanized or metropolitan markets (level one and two markets, including Las Vegas and Chicago) may experience a higher rate of population shrink compared to the less densely populated markets (level three and lower markets). Furthermore, our operating results may be negatively affected by increased labor costs associated with the ongoing shortage of pharmacists or qualified technicians within the areas served by the pharmacies or sleep centers and to a much lesser extent the increase in minimum wage rates. Any other unforeseen events or circumstances that affect the area could also materially adversely affect our revenues, profitability, financial condition and working capital liquidity.

Government and private insurance plans may further reduce or discontinue healthcare reimbursements which could result in reductions in our revenue and operating margins.

     A substantial portion of the costs of medical care in the United States is funded by managed care organizations, insurance companies, government funded programs, employers and other third-party payers, which are collectively referred to as “third-party plans.” These plans continue to seek cost containment. If this funding were to be further reduced in terms of coverage or payment rates or become unavailable to our pharmacy customers or sleep disorder patients, our business will be adversely affected. Furthermore, managed care organizations and insurance companies are evaluating approaches to reduce costs by decreasing the frequency of treatment or the utilization of the device or product. These cost containment measures have caused the decision-making function with respect to purchasing to shift in many cases from the physician to the third-party plans or payors, resulting in an increased emphasis on reduced price, as opposed to clinical benefits or a particular product’s features. Efforts by U.S. governmental and private payors to contain costs will likely continue. Because we generally receive payment for our pharmacy sales and sleep diagnostic services and related products directly from these third-party plans, our business operations are dependent upon our ability to obtain adequate and timely reimbursement for our pharmacy sales and sleep diagnostic services and related products.

     The third-party payors include Medicare, Medicaid and private health insurance providers. These payors may deny reimbursement if they determine that a diagnostic test was not performed properly or a device is not used in accordance with approved indications, or is unnecessary or deemed to be inappropriate treatment for the patient. Third-party payors are also increasingly challenging prices charged for medical products and services. There is no assurance that our sleep diagnostic services and the related products will be considered cost-effective by third-party

payors, that reimbursement will be available, or that payors’ reimbursement policies will not adversely affect our ability to offer and sell its services and products on a profitable basis, if at all.

Our pharmacy sales have low-profit margins and those margins are subject to unfavorable trends that are not within our control.

     Our pharmacy sales, which are lower-margin than front-end store sales, represent a substantial percentage of our total revenue. Pharmacy sales, including resales of certain retail inventory, accounted for approximately 94% of total pharmacy store sales in 2008 and approximately 93% of total sales in 2007. Pharmacy sales not only have lower margins than non-pharmacy sales but are also subject to increasing margin pressure from third-party plans seeking cost containment. In addition, an increasing number of employers are now requiring participants in their plans to obtain some of their prescription drugs, especially those for non-acute conditions, through mail-order providers. These factors and other factors related to pharmacy sales had a negative impact on our pharmacy sales in 2008 and could continue to have a negative impact in the future.

The continued conversion of prescription drugs to over-the-counter medications will result in reduced pharmacy sales.

     The continued conversion of various prescription drugs to over-the-counter medications may materially reduce our pharmacy sales and customers may seek to purchase those medications at non-pharmacy stores, including discount retail stores. Also, if the rate at which new prescription drugs become available slows or if new prescription drugs that are introduced into the market fail to achieve popularity, our pharmacy sales may be adversely affected. The withdrawal of certain drugs from the market or concerns about the safety or effectiveness of certain drugs or negative publicity surrounding certain categories of drugs may also have a negative effect on our pharmacy sales or may cause shifts in our pharmacy and front-end product mix.

Changes in reimbursement levels for prescription drugs and sleep diagnostic services and related products continue to reduce our margins and could have a material, adverse effect on our overall operating results.

     During 2008 and 2007, we were wholly or partially reimbursed by third-party plans for approximately 81% and 87% of the prescription drugs that we sold during 2008 and 2007, respectively, and 99% of our 2008 and 2007 revenue from sleep diagnostic services and product sales. The percentage of prescription sales revenues reimbursed by third-party plans has been increasing, and we expect that percentage to continue to increase. These prescription sales and sleep diagnostic revenue reimbursed by third-party plans, including Medicare and Medicaid plans, in general have lower gross margins compared to sales or services paid outside a third-party plan. Third-party plans may not increase reimbursement rates sufficiently to offset expected increases in the costs of our pharmaceuticals and sleep related products, as well as general costs of operations, thereby reducing our margins and adversely affecting our profitability. In addition, continued increases in co-payments by third-party plans may result in decreases in sales and revenue, operating and cash flow losses, and may deplete working capital reserves.

     In particular, Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective reimbursement rate adjustments, administrative rulings, executive orders and freezes and funding restrictions, all of which may significantly impact our operations. During 2008 and 2007, 41% and 43%, respectively, of our total prescription sales and 6% and 7% of our sleep diagnostic revenues, during 2008 and 2007, were attributable to Medicaid and Medicare reimbursement. Over the last several years, a number of states experiencing budget deficits have moved to reduce Medicaid reimbursement rates as part of healthcare cost containment.

     The Medicare Drug Act, enacted in 2003, created a new Medicare Part D benefit that expanded Medicare coverage of prescription drugs for senior citizens not participating in third-party plans and became effective in 2006. Sales to those customers represented 32% and 39% of our total pharmacy revenue during 2008 and 2007, respectively. This revised Medicare coverage is expected to result in decreased pharmacy margins resulting from lower reimbursement rates than our current margins on prescriptions that are not subject to third-party plan reimbursement.

Our failure to comply with all of the government regulations may result in substantial reimbursement obligations, damages, penalties, injunctive relief or exclusion from participation in federal or state healthcare programs.

     Our pharmacy and sleep diagnostic operations are subject to a variety of complex federal, state and local government laws and regulations, including federal and state civil fraud, anti-kickback and other laws. We endeavor to structure all of our relationships to comply with these laws. However, if any of our operations are found to violate these or other government regulations, we could suffer severe penalties, including suspension of payments from government programs, loss of required government certifications, loss of authorizations to participate in or exclusion from government reimbursement programs (including Medicare and Medicaid programs), loss of licenses, and significant fines or monetary penalties for anti-kickback law violations, submission of false claims or other failures to meet reimbursement program requirements. Also, violations of federal, state, and common law privacy protections could give rise to significant damages, penalties, or injunctive relief.

     Federal and state laws require our pharmacists to offer counseling, without additional charge, to its customers regarding medication, dosage, delivery systems, common side effects and other information the pharmacists deem significant. Our pharmacists may also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or negate these effects. Additionally, we are subject to federal and state regulations relating to our pharmacy operations, including purchasing, storing and dispensing of controlled substances.

We rely on primary suppliers of pharmaceutical and sleep related products to sell their products to us on satisfactory terms and a disruption in our relationship with these suppliers could have a material, adverse effect on our business.

     We are dependent on merchandise vendors to provide pharmaceutical and sleep disorder related products for our resale. The largest of the pharmaceutical supplies is Cardinal Healthcare, Inc., which supplied approximately 89% and 71% of our pharmaceutical products during 2008 and 2007, respectively. Our largest sleep product supplier is Fisher & Paykel Healthcare, which supplied approximately 44% and 80% of our sleep supplies in 2008 and 2007, respectively. In our opinion, if any of these agreements were terminated or if any contracting party were to experience events precluding fulfillment of our needs, we would be able to find a suitable alternative supplier, but possibly not without significant disruption to our business. This could take a significant amount of time and result in a loss of customers and revenue, operating and cash flow losses and may deplete working capital reserves.

We may be unable to attract, hire and retain qualified pharmacists, which could harm our business.

     As our business expands, we believe that our future success will depend greatly on our ability to attract and retain highly skilled and qualified pharmacists. The pharmacy industry is experiencing an ongoing shortage of licensed pharmacists. As a result, competition for qualified pharmacists and other pharmacy professionals has been especially strong, resulting in higher salaries, which we continue to match by raising the salaries of our pharmacists. Although we have generally been able to meet our pharmacist staffing requirements, our inability to do so in the future at costs that are favorable to us, or at all, could negatively impact our revenue, and our customers could experience lower levels of customer service.

We may be subject to significant liability should the consumption of any of our products cause injury, illness or death.

     Products that we sell, especially pharmaceuticals, could become subject to contamination, product tampering, mislabeling or other damage requiring us to recall products previously dispensed or sold. In addition, errors in the dispensing and packaging of pharmaceuticals could lead to serious injury or death. Product liability claims may be asserted against us with respect to any of the products or pharmaceuticals we sell and we may be obligated to recall products that we previously sold. A product liability judgment against us or a product recall could have a material, adverse effect on our business, financial condition or results of operations, and may deplete working capital reserves.

We depend on our management team, and the loss of their services could have a material, adverse effect on our business.

     Our success depends to a large extent on the continued service of our executive officers. Departures by our executive officers could have a negative impact on our business, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. We do not maintain key-man life insurance on any of our executive officers.

Continued volatility in insurance related expenses and the markets for insurance coverage could have a material adverse effect on us.

     The costs of employee health, workers’ compensation, property and casualty, general liability, and other types of insurance have continued to rise. These conditions have been exacerbated by rising healthcare costs, legislative changes, and economic conditions. To mediate the risks of these costs in our Apothecary operating segment, we entered into a co-employment relationship with a national professional employer organization (“PEO”). Through this relationship the PEO negotiates employee health and workers’ compensation premiums on behalf of a large number of small and medium sized employers and can offer these coverages at a significantly lower cost than we could. Additionally, the larger population in the pool of employees protects us from some of the volatility characteristic of small employee groups. If our insurance-related costs through the PEO or directly continue to increase significantly, or if we are unable to obtain adequate levels of insurance, our financial position and results of operations could be materially adversely affected.

Certain risks are inherent in providing healthcare services, especially pharmacy services, and our insurance may not be adequate to cover any claims against us.

     Pharmacies are exposed to risks inherent in the packaging, dispensing and distribution of pharmaceuticals and other healthcare products and to a less extent providers of sleep diagnostic services. Although we maintain professional liability and errors and omissions liability insurance, the coverage limits under these insurance programs may not be adequate to protect us against all future claims, and we may not be able to maintain this insurance coverage on acceptable terms in the future, which could materially adversely affect our business.

The failure to comply with the Health Insurance Portability and Accountability Act of 1996 potentially would result in liability and the cost of compliance may be material.

     We collect and use information about individuals and their medical conditions. The Health Insurance Portability and Accountability Act of 1996 and the privacy regulations promulgated by The Department of Health and Human Services (“HIPAA”) impose extensive restrictions on the use and disclosure of individually identifiable health information. The applicable HIPAA regulations standardize electronic transactions between health plans, providers and clearinghouses. Healthcare plans, providers and claims administrators are required to conform their electronic and data processing systems to HIPAA electronic transaction requirements. While it is believed that we currently comply with HIPAA, there is some uncertainty of the extent to which the enforcement or interpretation of the HIPAA regulations will affect our business. Continuing compliance and the associated costs with these regulations may have a significant impact on our business operations. Criminal and civil sanctions are imposed for failing to comply with HIPAA.

Healthcare reform proposals are gaining substantial support in the United States Congress and state legislatures and could impact the profitability of our business.

     The United States healthcare industry is subject to several reform proposals, including more stringent regulations. It is uncertain whether and when these proposals will become legal requirements affecting our business operations and their effect on our operations. Changes in the law or new interpretations of existing laws may have a dramatic effect on the costs associated with doing business and the amount of reimbursement patients and customers receive from both government and third-party plans or payors. Federal, state and local government representatives will, in all likelihood, continue to review and assess alternative regulations and payment methodologies.

     Healthcare reform and enforcement initiatives of federal and state governments may also affect our sales and revenue. These initiatives include:

•		proposals designed to significantly reduce spending on Medicare, Medicaid and other government programs;
•		changes in programs providing for reimbursement for the cost of prescription drugs and other healthcare products by third-party plans or payors;
•		the Medicare Drug Act;
•		increased scrutiny of, and litigation relating to, prescription drug manufacturers’ pricing and marketing practices; and
•		regulatory changes relating to the approval process for prescription drugs and healthcare products in general.

     These initiatives could lead to the enactment of, or changes to, federal regulations and state regulations that could adversely impact our prescription drug sales and, accordingly, its results of operations. There is uncertainty regarding the nature of additional healthcare reform initiatives, if any, that may be implemented, or whether there will be other changes in the administration of governmental healthcare programs or interpretations of governmental policies or other changes affecting the healthcare system. Future healthcare or budget legislation or other changes, including those referenced above, may materially adversely affect our business resulting in operating and cash flow losses, depletion of working capital reserves and adversely affect our financial condition.

Failure to comply with environmental health and safety laws and regulations may have a material adverse effect on business operations.

     Our business operations are subject to numerous environmental health and safety laws and regulations, including those governing the use and disposal of hazardous materials. Failure to comply with those laws and regulations could have a material adverse effect on our business operations, financial condition and results of operations.

Our failure to successfully implement our growth plan may adversely affect our financial performance.

     Both of our operating segments (Apothecary and SDC) have grown primarily through acquisitions. We intend to continue to grow incrementally through acquisitions with our current focus primarily on sleep center acquisitions. As this growth plan is pursued, we may encounter difficulties expanding and improving our operating and financial systems to maintain pace with the increased complexity of the expanded operations and management responsibilities.

     The success of our growth strategy will also depend on a number of other factors, including:

•		economic conditions;
•		competition;
•		consumer preferences and purchasing power;
•		financing and working capital requirements;
•		the ability to negotiate store leases on favorable terms; and
•		the availability of new store locations at a reasonable cost.

     Even if we succeed in acquiring established sleep centers as planned, those acquired facilities may not achieve the projected revenue or profitability levels comparable to those of currently owned centers in the time periods we estimate or at all. Moreover, our newly acquired sleep centers may adversely affect the revenues and profitability of our existing locations and other operations. The failure of our growth strategy may have a material adverse effect on our operating results and financial condition.

The goodwill acquired pursuant to our acquisition of pharmacies and sleep centers may become impaired and require a write-down and the recognition of a substantial impairment expense.

     At December 31, 2008, we had approximately $29.7 million in goodwill that was recorded in connection with the acquisition of our pharmacies and sleep centers during 2006, 2007 and 2008. In the event that this goodwill is determined to be impaired for any reason, we will be required to write-down or reduce the value of the goodwill and recognize an impairment expense. The impairment expense may be substantial in amount and, in which case, adversely affect the results of our operations for the applicable period and may negatively affect the market value of our common stock.

We require a significant amount of cash flow from operations and third-party financing to pay our indebtedness, to execute our business plan and to fund our other liquidity needs.

     We may not be able to generate sufficient cash flows from operations, and future borrowings may not be available to us under existing loan facilities or otherwise in an amount we will need to pay our indebtedness, to execute our business plan or to fund our other liquidity needs. We anticipate the need for substantial cash flow to fund future acquisitions of additional sleep centers. In addition, we may need to refinance some or all of its current indebtedness at or before maturity.

     We incurred indebtedness with an outstanding balance at December 31, 2008 of approximately $39.5 million to fund the acquisition of our existing pharmacies and sleep centers. This indebtedness requires quarterly accrued interest payments at floating variable interest rates (4.0 to 5.0% interest rate at December 31, 2008) and quarterly principal payments beginning in September 2011. The quarterly principal payments will be calculated on a seven year amortization based on the unpaid principal balance on June 1, 2011.

     At December 31, 2008, we had total liabilities of approximately $58.8 million. Because of our lack of significant historical operations, there is no assurance that our operating results will provide sufficient funding to pay our liabilities on a timely basis . There is no assurance that we will be able to refinance any of our current indebtedness on commercially reasonable terms or at all. Failure to generate or raise sufficient funds may require us to modify, delay or abandon some of its future business growth strategies or expenditure plans.

The public market prices and values of our common stock or redeemable warrants may fluctuate widely.

     In any developed market for our common stock the market prices may be subject to significant fluctuations in response to, and may be adversely affected by

•		variations in quarterly operating results,
•		changes in earnings estimates by analysts,
•		developments in the healthcare industry generally and more particularly the retail pharmacy and sleep disorder diagnostic segments, and
•		general stock market conditions.

     As of March 31, 2009, we have 471,240,284 shares of our common stock and 10,000,000 shares of preferred stock available for issuance. We have the right to offer these shares at offering prices to be determined in sole discretion of our board of directors. The sale of these shares may result in substantial dilution to our shareholders. Also the preferred stock may have rights superior to those of our common stock. These stock issuances may adversely affect the market price or value of our common stock.

     Since June 30, 2008, we have not received any written comments from the staff of the Securities and Exchange Commission regarding our periodic or current reports that remain unresolved.

     Our corporate headquarters and offices and the executive offices of our SDC operating segment are located at 210 Park Avenue, Suite 1350, Oklahoma City, Oklahoma. These office facilities consist of approximately 9,700 square feet and are occupied under a 60-month lease with Oklahoma Tower Realty Investors, LLC, requiring monthly rental payments of approximately $10,300. Mr. Roy T. Oliver, one of our greater than 5% shareholders and affiliates, controls Oklahoma Tower Realty Investors, LLC. Upon termination of this occupancy arrangement, we believe there is adequate office space and facilities available in the Oklahoma City area.

     As of December 31, 2008, we operated 18 pharmacies in Colorado, Illinois, Minnesota, Missouri and Oklahoma. Each pharmacy location is occupied under multiple-year (or long-term) lease arrangement requiring monthly rental payments. The following table presents as of December 31, 2008 the locations, date of acquisition, annual rental payments, total rent payable under the leases, and lease expiration dates of occupancy leases of each pharmacy.

Occupancy Lease Information

Total

Lease

Pharmacy Locations

Date

Annual

Rent

Expiration

(City and State)

Opened(1)

Rent

Payable(2)

Date

Colorado:

Sterling (contains two locations)

Aug. 2007

$

90,750

$

358,500

Oct. 2012

Illinois:

Decatur

Jan. 2008

42,000

376,250

Jan. 2018

Glencoe

Jun. 2008

132,547

279,031

Jan. 2011

Chicago

Jun. 2008

73,728

985,348

Dec. 2018

Wilmette

Jun. 2008

95,832

167,706

Oct. 2010

Chicago

Jun. 2008

70,875

421,896

Jun. 2014

Minnesota:

St. Cloud

Nov. 2006

11,400

19,950

Sep. 2010

St. Cloud

Nov. 2006

16,368

113,212

Dec. 2015

Red Wing

May 2007

63,780

217,915

May 2012

Red Wing

May 2007

16,200

48,600

Dec. 2011

Wayzata

Oct. 2007

44,826

82,956

Oct. 2010

Missouri:

Mountain View

Mar. 2007

24,000

193,000

Feb. 2017

Okahoma:

Norman

Jul. 2006

22,620

56,550

May 2011

Occupancy Lease Information

Total

Lease

Pharmacy Locations

Date

Annual

Rent

Expiration

(City and State)

Opened(1)

Rent

Payable(2)

Date

Tahlequah

Jan. 2007

24,000

74,000

Dec. 2011

Keys

Jan. 2007

14,400

14,400

May 2009

Guthrie

Mar. 2008

42,000

84,000

Dec. 2010

Oklahoma City

Mar. 2008

39,389

75,496

Nov. 2010

Total

$

824,715

$

3,568,810

     Our Apothecary operating segment executive offices, located at 5500 Wayzata Boulevard, Suite 210, Golden Valley, Minnesota 55416 and consisting of 3,000 square feet, are occupied under a multiple-year (or long-term) lease arrangement that expires February 2010. The annual rental payments under the lease arrangement is $90,192.

     As of December 31, 2008, we operated 13 sleep diagnosis centers in Nevada, Oklahoma and Texas. Each location is occupied under multiple-year (or long-term) lease arrangements requiring monthly rental payments. The following table presents as of December 31, 2008, the locations, date of opening, annual rental payments, total rent payable under the leases, and lease expiration dates of occupancy leases of each sleep center or clinic.

Occupancy Lease Information

Total

Lease

Sleep Center and Clinic

Date

Annual

Rent

Expiration

(City and State)

Opened(1)

Rent

Payable(2)

Date

Nevada:

Charleston

Jun. 2008

$

60,560

$

105,980

Oct. 2010

Henderson

Jun. 2008

211,725

809,690

Dec. 2013

Oklahoma:

Tulsa — Midtown

Oct. 2004

33,600

82,000

Aug. 2012

Tulsa — South

Apr. 2006

60,932

121,865

Dec. 2010

Oklahoma City

Apr. 2004

112,769

648,420

Sep. 2014

Edmond

Dec. 2003

18,333

18,333

Month-to-month

Texas:

Southlake — Keller

Nov. 2006

82,695

480,861

Jul. 2013

McKinney

Feb. 2007

111,580

316,810

Sep. 2011

Plano

Jun. 2007

42,370

144,771

May 2012

Granbury

Aug. 2007

55,080

128,880

Apr. 2011

Bedford

Jun. 2008

67,572

270,300

Dec. 2013

Waco

Jun. 2008

131,730

1,247,225

Jan. 2018

Willow Bend

Jun. 2008

60,000

265,000

May. 2013

Total

$

1,048,946

$

4,640,135

Item 3. Legal Proceedings.

     In the normal course of business, we may become involved in litigation or in settlement proceedings relating to claims arising out of our operations. We are not a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

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

     On November 28, 2008, certain of our shareholders owning 15,851,062 shares representing 57.5% and a majority of our outstanding common stock shares consented to the election of our directors, the approval and adoption of the Graymark Healthcare, Inc. 2008 Long-Term Incentive Plan and the ratification and appointment of Eide Bailly LLP as our independent accounting firm for fiscal 2008 as reported in the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 9, 2008 and as described in our Definitive Information Statement on Schedule 14C filed on December 5, 2008.

PART II

     On March 13, 2008, our board of directors approved a reverse split of our common stock at a ratio of one-for-five shares. The effective date of the reverse split was set as April 11, 2008. The effect of the reverse split reduced our outstanding common stock shares from 117,701,997 to 23,540,399 shares as of the date of the reverse split.

     Our common stock is listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol GRMH. The closing sale prices reflect inter-dealer prices without adjustment for retail markups, markdowns or commissions and may not reflect actual transactions. The following table sets forth the high and low sale prices of our common stock during the calendar quarters presented as reported by the Nasdaq and OTC Bulletin Board for the periods prior to our listing on Nasdaq . Prices prior to our reverse split in April 2008 have been adjusted to give effect to the one-for-five reverse stock split.

		Bid Price
		Common Stock
Quarter Ended		High				Low
December 31, 2008		$	4.91			$	1.25
September 30, 2008		$	8.00			$	3.90
June 30, 2008		$	9.00			$	3.90
March 31, 2008		$	5.25			$	3.00
December 31, 2007		$	3.75			$	1.35
September 30, 2007		$	2.25			$	1.25
June 30, 2007		$	3.45			$	1.35
March 31, 2007		$	2.25			$	1.10

     On March 26, 2009, the closing bid price of our common stock as quoted on Nasdaq was $1.94.

     The market price of our common stock is subject to significant fluctuations in response to, and may be adversely affected by

•		variations in quarterly operating results,
•		changes in earnings estimates by analysts,
•		developments in the retail pharmacy and sleep center industries,
•		announcements and introductions of product or service innovations, and
•		general stock market conditions.

Dividend Policy

     We do not intend to pay and you should not expect to receive cash dividends on our common stock. Our dividend policy is to retain earnings to support the expansion of our operations. If we were to change this policy, any future cash dividends will depend on factors deemed relevant by our board of directors. These factors will generally include future earnings, capital requirements and our financial condition. Furthermore, in the event we issue preferred stock shares, although unanticipated, no dividends may be paid on our outstanding common stock shares until all dividends then due on our outstanding preferred stock will have been paid.

Holders of Equity Securities

     As of November 28, 2008, we have approximately 400 owners of our common stock shares, 150 record owners and approximately 250 owners in street name.

Unregistered Sales of Equity Securities

     During the three months ended December 31, 2008, we awarded restricted stock awards of 150,000 common stock shares under and pursuant to our Long-Term Incentive Plan. On November 29, 2008, we issued 20,000 common stock shares to two employees at $3.85 per share. These shares will vest in November 2009. On December 15, 2008, we issued 30,000 common stock shares to Rick D. Simpson, our Chief Financial Officer, and 100,000 common stock shares to Joseph Harroz Jr., our President, Chief Operating Officer and one of our Directors, at $1.54 per share. These shares will vest in two 50% installments in July 2009 and 2010. In connection with this the issuance of these common stock shares, no underwriting discounts or commissions were paid or will be paid. The common stock shares were sold without registration under the Securities Act of 1933, as amended, in reliance on the registration exemption afforded by Regulation D and more specifically Rule 506 of Regulation D.

     All of our other equity securities sales during 2008 have been previously reported in the Quarterly Reports on Form 10-Q and in a Current Report on Form 8-K.

Securities Authorized for Issuance under Equity Compensation Plans

     The following table sets forth as of December 31, 2008, information related to each category of equity compensation plan approved or not approved by our shareholders, including individual compensation arrangements with our non-employee directors. The equity compensation plans approved by our shareholders are our 2008 Long-Term Incentive Plan, 2003 Stock Option Plan and 2003 Non-Employee Stock Option Plan. All stock options and rights to acquire our equity securities are exercisable for or represent the right to purchase our common stock.

		Number of
		Securities to be								Number of
		issued upon								securities remaining
		exercise of				Weighted-average				available for future
		outstanding				exercise price of				issuance under
		options, warrants				outstanding options,				equity
Plan category		and rights				warrants and rights				compensation plans
Equity compensation plans approved by security holders:
2008 Long-Term Incentive Plan			9,091			$	3.85				2,860,909
2003 Stock Option Plan			28,000			$	4.57				32,000
2003 Non-Employee Stock Option Plan			32,000			$	4.57				28,000
Equity compensation plans not approved by security holders:
Warrants issued to SXJE, LLC			300,000			$	2.50				—
Warrants issued to ViewTrade Financial and its assigns			66,512			$	1.65				—
Options issued to employees			60,000			$	3.75				—
Options issued to directors			60,000			$	3.75				—
Options issued in acquisition of Texas Labs			35,000			$	5.00				—
Total			590,603								2,920,909

Item 6. Selected Financial Data.

     We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and, accordingly, not required to provide the information required by Item 301 of Regulation S-K with respect to Selected Financial Data.

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

     We are a diversified medical company that owns and operates independent pharmacies that serve the needs of local markets (through our Apothecary operating segment) and diagnostic sleep centers that treat a wide range of sleep disorders, and a medical equipment company that provides both disposable and durable medical equipment (through our SDC operating segment).

     The following table summarizes our locations as of December 31, 2008, 2007 and 2006 by operating segment:

		Number of Locations
Location Type		2008				2007				2006
Apothecary:
Pharmacies			18				11				3
SDC:
Sleep centers			13				9				—
Managed sleep centers			1				1				—
Total			32				21				3

     The following table summarizes unit sales and other operating statistics for the years ended December 31, 2008 and 2007 by operating segment:

		2008				2007
Apothecary:
Scripts filled			1,417,032				955,559
% of scripts filled — generic			65	%			67	%
% of scripts filled — brand			35	%			33	%
SDC:
Sleep studies performed			8,842				5,299
CPAP units sold			1,752				1,332

     Historically, our strategic focus has been to grow through acquisitions in both our Apothecary and SDC operating segments. At the present time, we are projecting that the majority of our focus and resources will be on acquisitions in our SDC operating segment. We may still make acquisitions at Apothecary, but most likely any acquisition will be small in size.

Results of Operations

     The following table sets forth selected results of our operations for the years ended December 31, 2008 and 2007. We operate in two reportable business segments: Apothecary and SDC. The Apothecary operating segment includes the operations of our retail pharmacy stores. The SDC operating segment includes the operations from our sleep diagnostic testing facilities. Our film production and distribution activities are included as discontinued operations. The following information was derived and taken from our audited financial statements appearing elsewhere in this report.

Comparison of 2008 and 2007

Consolidated Totals

		For the Years Ended
		December 31,
		2008				2007
Net revenues		$	96,621,322			$	50,317,971
Cost of sales and services			67,803,667				35,056,584
Operating expenses			25,390,156				12,333,342
Impairment of goodwill			—				204,000
Operating income			3,427,499				2,724,045
Net other (expense)			(2,055,063	)			(1,788,897	)
Net income before minority interests and provision for income taxes			1,372,436				935,148
Minority interests			(552,970	)			(664,862	)
Provision for income taxes			(136,000	)			—
Net income from continuing operations			683,466				270,286
Income (loss) from discontinued operations, net of taxes			60,932				(5,426,815	)
Net income (loss)		$	744,398			$	(5,156,529	)

Discussion of Years Ended December 31, 2008 and 2007

     Net revenues increased $46.3 million (a 92% increase) during 2008 to $96.6 million from $50.3 million in 2007. The increase in net revenues was primarily due to:

•

the seven acquisitions made by our Apothecary operating segment during 2008, which resulted in an increase in revenue of $27.1 million;

•

the six acquisitions made by our Apothecary operating segment during 2007 resulted in an increase of revenue of $13.5 million related to a full 12 months of operations during 2008 versus operations in 2007 ranging from three to 12 months;

•

the two acquisitions made by our SDC operating segment in June 2008 resulted in an increase of revenue of $2.2 million related to the seven months of operations in 2008;

•

the acquisition made by our SDC operating segment on January 31, 2007 resulted in an increase of revenue of $0.9 million related to 12 months of operations in 2008 versus 11 months in 2007; and

•

an increase in the number of sleep studies performed, in existing locations, during 2008, compared with 2007, resulted in an increase in net revenues of approximately $2.6 million.

See the “Segment Analysis” below, for additional information.

     Cost of sales and services increased $32.7 million (a 93% increase) during 2008 to $67.8 million from $35.1 million in 2007. The increase in cost of sales and services was primarily due to:

•

the seven acquisitions made by our Apothecary operating segment during 2008 which resulted in an increase in cost of sales and services of $20.3 million;

•

the six acquisitions made by our Apothecary operating segment during 2007 resulted in an increase of cost of sales and services of $10.3 million related to a full 12 months of operations during 2008 versus operations in 2007 ranging from three to 12 months;

•

the two acquisitions made by our SDC operating segment in June 2008 resulted in an increase of cost of sales and services of $1.0 million related to the seven months of operations in 2008;

•

the acquisition made by our SDC operating segment on January 31, 2007 resulted in an increase of cost of sales and services of $0.3 million related to 12 months of operations in 2008 versus 11 months in 2007; and.

•

an increase in the number of sleep studies performed, in existing locations, during 2008, compared with 2007, resulted in an increase in cost of sales and services of approximately $0.8 million.

See the “Segment Analysis”, below, for additional information.

     Operating expenses increased $13.1 million (a 106% increase) to $25.4 million during 2008 from $12.3 million in 2007. The increase in operating expenses was partly due to the acquisitions made by our Apothecary and SDC operating segments which resulted in an increase in operating expenses of $7.5 million and $1.0 million, respectively. In addition, operating expenses at our SDC operating segment increased $1.2 million due to additional overhead required to support increased operations and an increase in the allowance for doubtful accounts. Included in the consolidated operating expenses is approximately $2.1 million of overhead incurred at our corporate parent level which includes the costs of being a public company. See the “Segment Analysis” below, for additional information.

     Net other expense increased approximately $266,000 (a 15% increase) to $2.1 million during 2008 from $1.8 million in 2007. The increase in net other expense was primarily due to an increase in borrowings resulting from the acquisitions made by our Apothecary and SDC operating segments, which was offset by a reduction in the interest rate paid on our borrowings and an increase in interest income.

     Minority interests decreased approximately $112,000 during 2008 compared with 2007. The minority interests are the equity ownership interests in our SDC subsidiaries that are not wholly-owned. The decrease in minority interests was primarily due to the minority interests share in additional allowances for sales adjustment and doubtful accounts, and the amount of minority interest ownerships we purchased in April 2008, which was offset by the increased net income of our SDC subsidiaries attributable to the equity ownership interests we do not own.

     Provision for income taxes was $136,000 during 2008. During 2007, our operations were conducted as limited liability companies that were classified as partnerships for federal and state income tax purposes and were not subject to income tax. The effective tax rate in 2008 was 16.6%.

     Income from discontinued operations was approximately $61,000, net of tax, during 2008 and represents the net income from the distribution of our motion picture film assets. Our motion picture operations were discontinued on January 1, 2008.

     Net income was approximately $0.7 million (0.8% of approximately $96.6 million of net revenues) during 2008, compared to a net loss of approximately $5.2 million (on net revenues of approximately $50.3 million) during 2007.

Apothecary Operating Segment

		For the Years Ended
		December 31,
		2008				2007
Net revenues		$	81,329,158			$	40,764,741
Cost of sales and services			62,023,749				31,422,655
Operating expenses			17,064,836				8,620,537
Operating income			2,240,573				721,549
Net other (expense)			(1,358,882	)			(853,023	)
Net income (loss) before provision for income taxes		$	881,691			$	(131,474	)

     Net revenues increased $40.6 million (a 100% increase) to $81.3 million during 2008 from $40.8 million in 2007. During 2008, we operated 12 pharmacy locations until:

•

February 29, 2008 when we acquired the customer files from another pharmacy which were incorporated into our existing facilities,

•

March 26, 2008 when we acquired two pharmacy locations for a total of 14 locations, and

•

June 1, 2008 when we acquired four additional pharmacy locations for a total of 18 locations.

In November 2008, we acquired the customer files from another pharmacy which were incorporated into one of our existing facilities. During 2007, we operated 5 to 11 pharmacy locations. The increase in our pharmacy locations resulted in an increase in net revenues of $40.8 million. Revenues during 2008 from existing (or same store) pharmacy locations decreased $0.2 million compared with 2007. The decrease in same store revenues was primarily due to an opportunity in 2007 to resupply one of our clinic clients with a sizable amount of vaccines that did not repeat in 2008, a reduction in the ongoing level of vaccine purchases from that same client and an increase in the percentage of generic drug prescriptions which have a lower average price per prescription. This was partially offset by an increase in the volume of prescriptions filled.

     Cost of sales increased $30.6 million (a 98% increase) to $62.0 million during 2008 from $31.4 million in 2007. This increase was primarily due to the increase in pharmacy locations operated in 2008. Cost of sales as a percentage of net revenues was 76% and 77%, respectively, during 2008 and 2007.

     Operating expenses increased $8.4 million (a 98% increase) to $17.0 million during 2008 from $8.6 million in 2007. This increase was primarily due to:

•		approximately $7.5 million in additional expenses associated with new pharmacy locations;
•		$0.3 million in increased costs at existing (or same store) locations and
•		$0.6 million in increased operational overhead.

     Net other expense increased approximately $506,000 (a 59% increase) to $1.4 million during 2008 from $0.9 million in 2007. The increase in net interest expenses was primarily due to the increase in borrowings resulting from pharmacy acquisitions. Total borrowings for our Apothecary operating segment were approximately $29.1 million and $16.1 million at December 31, 2008 and 2007, respectively.

     Net income or loss before provision for income taxes. Our Apothecary operating segment operations resulted in net income before provision for income taxes of approximately $882,000 (1.1% of approximately $81.3 million of net revenues) during 2008, compared to a net loss before provision of income taxes of approximately $131,000 (0.3% of approximately $40.8 million of net revenues) during the 2007.

SDC Operating Segment

		For the Years Ended
		December 31,
		2008				2007
Net revenues		$	15,292,164			$	9,553,230
Cost of sales and services			5,779,918				3,633,929
Operating expenses			6,228,607				3,712,805
Impairment of goodwill			—				204,000
Operating income			3,283,639				2,002,496
Net other (expense)			(870,806	)			(935,874	)
Net income before minority interests and provision for income taxes			2,412,833				1,066,622
Minority interests			(552,970	)			(664,862	)
Net income before provision for income taxes		$	1,859,863			$	401,760

     Net revenues increased $5.7 million (a 60% increase) to $15.3 million during 2008 from $9.6 million in 2007. This increase was primarily due to:

•		the acquisition of our sleep operations on January 31, 2007 that resulted in only eleven months of operations during 2007, compared with twelve months of operations during 2008, resulted in an increase in net revenues of approximately $0.9 million;
•		the acquisition of Nocturna and Texas Labs on June 1, 2008 resulted in an increase in net revenues of approximately $2.2 million; and
•		an increase in the number of sleep studies performed, in existing locations, during 2008, compared with 2007, resulted in an increase in net revenues of approximately $2.6 million.

     Cost of sales and services increased approximately $2.1 million (a 59% increase) to $5.8 million during 2008 from $3.6 million in 2007. This increase was primarily due to:

•		the acquisition of our sleep operations on January 31, 2007, which resulted in only eleven months of operations during 2007, compared with twelve months of operations during 2008, resulted in an increase in cost of sales and services of approximately $0.3 million;
•		the acquisition of Nocturna and Texas Labs on June 1, 2008 resulted in an increase in cost of sales and services of approximately $1.0 million; and
•		an increase in the number of sleep studies performed, in existing locations, during 2008, compared with 2007, resulted in an increase in cost of sales and services of approximately $0.8 million.

     Cost of sales and services as a percent of net revenues was 38% during 2008 and 2007.

     Operating expenses increased approximately $2.5 million (a 68% increase) to $6.2 million during 2008 from $3.7 million in 2007. This increase was primarily due to:

•		an increase in operating expenses $0.3 million associated with having twelve months of operation in 2008 versus only eleven months in 2007,
•		the acquisition of Nocturna and Texas Labs on June 1, 2008 resulted in an increase in operating expenses of approximately $1.0 million; and
•		an increase in the allowance for doubtful accounts of $0.9 million due to changes in the factors used to estimate the ultimate contractual allowances incurred from third-party insurance companies, and
•		an increase in operational overhead of $0.3 million associated with an increase in our operational infrastructure needed to absorb the acquisitions made to date along with anticipated acquisitions in the near term.

     Net other expense decreased approximately $65,000 during 2008 compared with 2007. This decrease was due to a reduction in the interest rate paid on borrowings.

     Minority interests decreased approximately $112,000 during 2008 compared with 2007. The minority interests are the equity ownership interests in our SDC subsidiaries that are not wholly-owned. The decrease in minority interests was primarily due to the minority interests share in additional allowances for sales adjustment and doubtful accounts, and the amount of minority interest ownerships we purchased in April 2008, which was offset by increased net income of our SDC subsidiaries attributable to the equity ownership interests we do not own.

     Net income before provision for income taxes of our SDC operating segment was approximately $1.9 million (12% of approximately $15.3 million of net revenues) during 2008, compared to a net income before provision for income taxes of approximately $0.4 million (4% of approximately $9.6 million net revenues) during 2007.

Liquidity and Capital Resources

     Our liquidity and capital resources are provided principally through cash generated from operations, debt proceeds and equity offerings. Our cash and cash equivalents at December 31, 2008 totaled approximately $15.4 million. As of December 31, 2008, we had working capital of approximately $22.3 million.

     Our operating activities in 2008 provided net cash of approximately $229,000 compared to operating activities in 2007, which provided approximately $1,240,000. The decrease in cash flows provided by operating activities was primarily attributable to an increase in accounts receivable which was offset by an increase in net income after adjustments for non cash items. In 2008, our operating activities included net income of $744,398 that was increased by depreciation and amortization of $1,571,292, minority interests of $650,623 and stock based compensation of $336,750.

     Our investing activities in 2008 used net cash of approximately $12,883,000 compared to 2007 when we used approximately $21,175,000 for investing activities. The decrease in the cash used in investing activities was attributable to less acquisitions being made in 2008. In 2008, we used $11,364,706 for the purchases of businesses compared to $22,696,727 in 2007.

     Our financing activities in 2008 provided net cash of approximately $25,962,000 compared to 2007 when financing activities provided approximately $21,203,000. The increase in net cash provided by financing activities is due to proceeds from the issuance of common stock in 2008 of $15,988,547 which was offset by a decrease in debt proceeds and capital contributions and an increase in debt payments. During 2007, we received $2,990,000 in capital contributions. Debt proceeds were $13,396,867 during 2008 compared with $20,408,248 during 2007. Debt payments were $3,045,256 during 2008 compared with $1,645,090 during 2007.

     We expect to meet our obligations as they become due through available cash and funds generated from our operations, supplemented as necessary by debt financing. We expect to generate positive working capital through our operations. However, there are no assurances that we will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations or (2) obtain additional financing through debt financing to support our capital commitments and working capital requirements. Our principal capital commitments during the next 12 months primarily involve payments of our indebtedness obligations of approximately $9,065,000 as of December 31, 2008.

     Effective May 21, 2008, we and each of Oliver Company Holdings, LLC, Roy T. Oliver, The Roy T. Oliver Revocable Trust, Stanton M. Nelson, Vahid Salalati, Greg Luster, Kevin Lewis, Roger Ely and, Lewis P. Zeidner (the “Guarantors”) entered into a Loan Agreement with Arvest Bank (the “Arvest Credit Facility”). The Arvest Credit Facility consolidated the prior loan to our subsidiaries, SDC Holdings and ApothecaryRx in the principal amount of $30 million (referred to as the “Term Loan”) and provided an additional credit facility in the principal amount of $15 million (the “Acquisition Line”) for total principal of $45 million. The Loan Agreement was amended in January 2009 (the “Amendment”). As of December 31, 2008, the outstanding principal amount of the Arvest Credit Facility was $39,477,063.

   Personal Guaranties. The Guarantors unconditionally guarantee payment of our obligations owed to Arvest Bank and our performance under the Loan Agreement and related documents. The initial liability of the Guarantors as a group is limited to $15 million of the last portion or dollars of our obligations collected by Arvest Bank. The liability of the Guarantors under the guaranties initially was in proportion to their ownership of our common stock shares as a group on a several and not joint basis. In conjunction with the employment termination of Mr. Luster, we agreed to obtain release of his guaranty. The Amendment released Mr. Luster from his personal guaranty and the personal guaranties of the other Guarantors were increased, other than the guaranties of Messrs. Salalati and Ely. In the event there are no existing defaults under the Loan Agreement and related documents, on Arvest Bank’s acceptance of our financial statements and our certification of the accuracy and correctness of those financial statements, reflecting our maintenance of certain “Guaranty Debt Service Coverage Ratio” of not less than:

•		1.50-to-1 for four consecutive calendar quarters the guaranteed amount will be reduced to $10 million;
•		1.75-to-1 for four consecutive calendar quarters the guaranteed amount will be reduced to $5 million;
•		2.00-to-1 for four consecutive calendar quarters the guaranties will be released.

The “Guaranty Debt Service Coverage Ratio” for any period is the ratio of:

•

that our net income (i) increased (to the extent deducted in determining net income) by the sum, without duplication, of all interest expense, amortization, depreciation, and non-recurring expenses as approved by Arvest Bank, and (ii) decreased (to the extent included in determining net income and without duplication) by the amount of minority interest share of net income and distributions to minority interests for taxes, if any, to

•

annual debt service including interest expense and current maturities of indebtedness.

However, for purposes of these ratios the debt service includes principal and interest on the Arvest Credit Facility as if payable in equal monthly payments on a 20-year amortization from the date of the Term Loan and each respective principal advance of the Acquisition Line; all as determined in accordance with generally accepted accounting principles.

   Furthermore, the Guarantors agreed to not sell, transfer or otherwise dispose of or create, assume or suffer to exist any pledge, lien, security interest, charge or encumbrance on our common stock shares owned by them that exceeds, in one or an aggregate of transactions, 20% of the respective common stock shares owned at May 21, 2008, except after notice to Arvest Bank. Also, the Guarantors agreed to not sell, transfer or permit to be transferred voluntarily or by operation of law assets owned by the applicable Guarantor that would materially impair the financial worth of the Guarantor or Arvest Bank’s ability to collect the full amount of our obligations.

   Maturity Dates. Each advance or tranche of the Acquisition Line will become due on the sixth anniversary of the first day of the month following the date of advance or tranche (the “Tranche Note Maturity Date”). The Term Loan will become due on May 21, 2014.

   Interest Rate. The outstanding principal amounts of Acquisition Line and Term Loan bear interest at the prime rate as reported in the “Money Rates” section of The Wall Street Journal (the “WSJ Prime Rate”). The WSJ Prime Rate is adjusted annually then in effect on May 21 of each year of the Term Loan and the anniversary date of each advance or tranche of the Acquisition Line. In the event of our default under the terms of the Arvest Credit Facility, the outstanding principal will bear interest at the per annum rate equal to the greater of 15% or the WSJ Prime Rate plus 5%.

   Interest and Principal Payments. Provided we are not in default, the Term Note is payable in quarterly payments of accrued and unpaid interest on each September 1, December 1, March 1, and June 1. Commencing on September 1, 2011, and quarterly thereafter on each December 1, March 1, June 1 and September 1, we are obligated to make equal payments of principal and interest calculated on a seven-year amortization of the unpaid principal balance of the Term Note as of June 1, 2011 at the then current WSJ Prime Rate, and adjusted annually thereafter for any changes to the WSJ Prime Rate as provided herein. The entire unpaid principal balance of the Term Note plus all accrued and unpaid interest thereon will be due and payable on May 21, 2014.

   Furthermore, each advance or tranche of the Acquisition Line is repaid in quarterly payments of interest only for up to three years and thereafter, principal and interest payments based on a seven-year amortization until the balloon payment on the Tranche Note Maturity Date. We agreed to pay accrued and unpaid interest only at the WSJ Prime Rate in quarterly payments on each advance or tranche of the Acquisition Line for the first three years of the term of the advance or tranche commencing three months after the first day of the month following the date of advance and on the first day of each third month thereafter. Commencing on the third anniversary of the first quarterly payment date, and each following anniversary thereof, the principal balance outstanding on an advance or tranche of the Acquisition Line, together with interest at the WSJ Prime Rate on the most recent anniversary date of the date of advance, will be amortized in quarterly payments over a seven-year term beginning on the third anniversary of the date of advance, and recalculated each anniversary thereafter over the remaining portion of such seven-year period at the then applicable WSJ Prime Rate. The entire unpaid principal balance of the Acquisition Line plus all accrued and unpaid interest thereon will be due and payable on the respective Tranche Note Maturity Date.

   Use of Proceeds. All proceeds of the Term Loan are to be used solely for the funding of the acquisition and refinancing of the existing indebtedness and loans owed to Intrust Bank, the refinancing of the existing indebtedness owed to Arvest Bank; and other costs we incur or incurred by Arvest Bank in connection with the preparation of the loan documents, subject to approval by Arvest Bank.

   The proceeds of the Acquisition Line are to be used solely for the funding of up to 70% of either the purchase price of the acquisition of existing pharmacy business assets or sleep testing facilities or the startup costs of new

sleep labs and other costs incurred by us or Arvest Bank in connection with the preparation of the Loan Agreement and related documents, subject to approval by Arvest Bank.

     Collateral. Payment and performance of our obligations under the Arvest Credit Facility are secured by the personal guaranties of the Guarantors and in general our assets.

     Debt Service Coverage Ratio. Commencing with the calendar quarter ending June 30, 2009 and thereafter during the term of the Arvest Credit Facility, based on the latest four rolling quarters, we agreed to continuously maintain a “Debt Service Coverage Ratio” of not less than 1.25 to 1. Debt Service Coverage Ratio is, for any period, the ratio of:

•		the net income of Graymark Healthcare (i) increased (to the extent deducted in determining net income) by the sum, without duplication, of our interest expense, amortization, depreciation, and non-recurring expenses as approved by Arvest, and (ii) decreased (to the extent included in determining net income and without duplication) by the amount of minority interest share of net income and distributions to minority interests for taxes, if any, to
•		the annual debt service including interest expense and current maturities of indebtedness as determined in accordance with generally accepted accounting principles.

     Default and Remedies. In addition to the general defaults of failure to perform our obligations and those of the Guarantors, collateral casualties, misrepresentation, bankruptcy, entry of a judgment of $50,000 or more, failure of first liens on collateral, default also includes our delisting by The Nasdaq Stock Market, Inc. In the event a default is not cured within 10 days or in some case five days following notice of the default by Arvest Bank (and in the case of failure to perform a payment obligation for three times with notice), Arvest Bank will have the right to declare the outstanding principal and accrued and unpaid interest immediately due and payable.

     Compliance with Debt Service Coverage Ratio. As noted above, commencing with the calendar quarter ending June 30, 2009, we are required to maintain a Debt Service Coverage Ration of 1.25 to 1. As of December 31, 2008, our Debt Service Coverage Ratio is 1.07 to 1. The Debt Service Coverage Ratio is calculated using the latest four rolling quarters. During 2008, we made several acquisitions that negatively impact the calculation since the earnings from those acquisitions have not been included in our earnings for four rolling quarters. We are working with Arvest Bank to change the Debt Service Coverage Ratio requirement or change the manner in which it is calculated with respect to acquisitions. However, there is no assurances that we will be able to achieve compliance by June 30, 2009.

     Financial Commitments

     Office Space Arrangement. Our corporate headquarters and offices and the executive offices of our SDC operating segment are located at 210 Park Avenue, Suite 1350, Oklahoma City, Oklahoma. These office facilities consist of approximately 9,700 square feet and are occupied under a 60-month lease with Oklahoma Tower Realty Investors, LLC, requiring monthly rental payments of approximately $10,300. Roy T. Oliver, one of our greater than 5% shareholders and affiliates, controls Oklahoma Tower Realty Investors, LLC. Upon termination of this occupancy arrangement, we believe there is adequate office space and facilities available in the Oklahoma City area.

     Additional Financial Commitments. Other than our commitments discussed above, we do not have any material capital commitments during the next 12 months. Although we have not entered into any definitive arrangements for obtaining additional capital resources, either through long-term lending arrangements or equity offering, we continue to explore various capital resource alternatives to replace our long-term bank indebtedness.

     We have grown primarily through acquisitions principally financed with borrowed funds. In the current credit environment, we anticipate that additional borrowing arrangements will not be available during 2009 to fund future acquisitions. We intend to continue our acquisition growth strategy with our focus primarily on sleep center acquisitions. Furthermore, as this growth plan is pursued, we may be required to enhance, expand and improve our

operating and financial systems to maintain pace with the increased complexity of the expanded operations and management responsibilities.

     The implementation and success of our growth strategy will depend on a number of factors, including available capital resources and working capital requirements. Even if we succeed in acquiring established sleep centers as planned, those acquired facilities may not achieve the projected revenue or profitability levels comparable to those of currently owned centers in the time periods we estimate or at all. Moreover, our newly acquired sleep centers may adversely affect the revenues and profitability of our existing locations and other operations. The failure of our growth strategy may have a material adverse effect on our operating results, financial condition, and available capital resources.

     We may not be able to generate sufficient cash flows from operations, and future capital resources may not be available to us in an amount needed to pay our indebtedness as it become due, or to fund our other liquidity needs. We plan to make significant acquisitions of established sleep centers during 2009 through 2011 requiring substantial capital resources. In addition, we may need to refinance some or all of our current indebtedness at or before maturity.

     At December 31, 2008, our bank indebtedness used to fund the acquisitions of our existing pharmacies and sleep centers was approximately $39.5 million. This indebtedness requires quarterly accrued interest payments at floating variable interest rates (5.0% interest rate at December 31, 2008) and quarterly principal payments beginning in September 2011. The quarterly principal payments will be calculated on a seven year amortization based on the unpaid principal balance on June 1, 2011. At December 31, 2008, we had amounts due under seller financing notes and non-compete agreements of $5.7 million and $1.1 million respectively. The notes and non-compete agreements bear interest at fixed rates. We are required to make varying periodic payments of principal and interest under the seller financing and non-compete agreements.

     At December 31, 2008, we had total liabilities of approximately $58.8 million. Because of our lack of significant historical operations, there is no assurance that our operating results will provide sufficient funding to pay our liabilities on a timely basis . There is no assurance that we will be able to refinance any of our current indebtedness on commercially reasonable terms or at all. Failure to generate or raise sufficient funds may require us to modify, delay or abandon some of our future business growth strategies or expenditure plans.

     Future commitments under contractual obligations by expected maturity date at December 31, 2008 are as follows:

		< 1 year				1-3 years				3-5 years				> 5 years				Total
Short-term debt		$	565,190			$	—			$	—			$	—			$	565,190
Long-term debt			6,244,380				9,902,063				13,758,957				27,952,540				57,857,940
Operating leases			2,255,745				3,588,034				2,135,993				1,614,480				9,594,252
		$	9,065,315			$	13,490,097			$	15,894,950			$	29,567,020			$	68,017,382

     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 audited consolidated financial statements appearing elsewhere in this report.

     Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (or U.S. GAAP).

Recent Accounting Pronouncements

     FIN 48 - In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the law is uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on our financial position, results of operations, or cash flows as of December 31, 2008 and 2007.

     SAB 108 - In September 2006, the Securities Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is material, companies will record the effect as a cumulative effect adjustment to beginning of year retained earnings and disclose the nature and amount of each individual error being corrected in the cumulative adjustment. We adopted SAB 108 on January 1, 2007 and the initial adoption of SAB 108 did not have a material impact on our financial position, results of operations, or cash flows.

     SFAS 155 - In February 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), which amends FASB Statement Nos. 133 and 140. SFAS 155 permits fair value remeasurement for any hybrid financial instrument containing an embedded derivative that would otherwise require bifurcation, and broadens a Qualified Special Purpose Entity’s (“QSPE”) permitted holdings to include passive derivative financial instruments that pertain to other derivative financial instruments. This Statement is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring after the beginning of an entity’s first fiscal year beginning after September 15, 2006. We adopted SFAS 155 on January 1, 2007 and the initial adoption of SFAS 155 did not have a material impact on our financial position, results of operations, or cash flows.

     SFAS 157 - In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until January 1, 2009. We adopted SFAS 157 on January 1, 2008 and the initial adoption of SFAS 157 did not have a material impact on our financial position, results of operations, or cash flows.

     SFAS 159 - In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not intend to adopt SFAS 159 that was effective January 1, 2008.

     SFAS 141(R) and SFAS 160 - In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations” (“SFAS 141(R)”), replacing SFAS No. 141, “Business Combinations” (“SFAS 141”), and SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51” (“SFAS 160”). SFAS 141(R) retains the fundamental requirements of SFAS 141, and broadens its scope by applying the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses, and requires, among other things, that assets acquired and liabilities assumed be measured at fair value as of the acquisition date, that liabilities related to contingent consideration be recognized at the acquisition date and

remeasured at fair value in each subsequent reporting period, that acquisition-related costs be expensed as incurred, and that income be recognized if the fair value of the net assets acquired exceeds the fair value of the consideration transferred. SFAS 160 establishes accounting and reporting standards for noncontrolling interests (i.e., minority interests) in a subsidiary, including changes in a parent’s ownership interest in a subsidiary and requires, among other things, that noncontrolling interests in subsidiaries be classified as a separate component of equity. Except for the presentation and disclosure requirements of SFAS 160, which are to be applied retrospectively for all periods presented, SFAS 141(R) and SFAS 160 are to be applied prospectively in financial statements issued for fiscal years beginning after December 15, 2008. We are assessing the impact SFAS 160 will have on our consolidated financial statements.

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 in the report and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. 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 7A. Quantitative and Qualitative Disclosures about Market Risk.

     We are a smaller reporting entity as defined in Rule 12b-2 of the Exchange Act and as such, are not required to provide the information required by Item 305 of Regulation S-K with respect to Quantitative and Qualitative Disclosures about Market Risk.

Item 8. Financial Statements and Supplementary Data.

     Our financial statements which are prepared in accordance with Regulation S-X are set forth in this report beginning on page F-1.

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

     On August 1, 2008, the firm of Murrell, Hall, McIntosh & Co. PLLP resigned as their operations had been acquired by Eide Bailly LLP. Effective December 8, 2008 the Audit Committee approved the engagement of Eide Bailly LLP as our independent registered public accounting firm.

     During 2007 and 2008, there were no disagreements concerning matters of accounting principle or financial statement disclosure between us and our independent accountants of the type requiring disclosure hereunder.

Item 9A. 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. The controls and procedures are those defined in Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934. 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 as defined in Rule 13a-15 of the Securities Exchange Act of 1934. These internal controls over financial reporting 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

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pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

•

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

•

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, conducted their evaluation using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. 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 reporting were not fully effective as of the last day of the period covered by this report due to the material weaknesses disclosed in Item 9A(T), and reported to our auditors and the audit committee of our board of directors that changes had 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 certain significant deficiencies and material weaknesses were discovered, certain corrective actions were necessary or taken to correct significant deficiencies and material weaknesses in our internal controls and disclosure controls and procedures.

Item 9A(T). Controls and Procedures.

     This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this report. (See “Item 9A. Controls and Procedures,” above for management’s report.)

Accounts Receivable Reporting at SDC Holding

     During the three months ended December 31,2008, we recognized certain control and reporting material weaknesses related to our accounts receivable. Sleep center services and product sales of our SDC operating segment are recognized in the accounting period in which services and related products are provided to customers and are recorded at net realizable amounts estimated to be paid by customers and third-party payers. Insurance benefits are assigned to us and, accordingly, we bill on behalf of our customers. We have established an allowance to account for sales adjustments that result from differences between the amount billed and the expected realizable amount. Actual adjustments that result from differences between the payment amount received and the expected realizable amount are recorded against the allowance for sales adjustments and are typically identified and ultimately recorded at the point of cash application or when otherwise determined pursuant to our collection procedures. Revenues are then reported for financial control and reporting net of those adjustments.

     Due to the nature of the healthcare industry and the reimbursement environment in which we operate, certain estimates are required to record net revenues and accounts receivable at their net realizable values at the time products or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payers may result in adjustments to amounts originally recorded.

     Furthermore, included in our reported accounts receivable are earned but unbilled receivables. Unbilled accounts receivable represent charges for services delivered to customers for which invoices have not yet been generated by our billing system. Prior to the delivery of services or equipment and supplies to customers, we perform certain certification and approval procedures to ensure collection is reasonably assured and that unbilled accounts receivable is recorded at net amounts expected to be paid by customers and third-party payers. Billing delays, ranging from several weeks to several months, can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources, interim transactions occurring between cycle billing dates established for each customer within the billing system and new sleep testing facilities awaiting assignment of new provider enrollment identification numbers. In the event that a third-party payer does not accept the claim for payment, the customer is ultimately responsible.

     We perform analysis to evaluate the net realizable value of accounts receivable during the 2008 fourth quarter. Specifically, we considered historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions. Because of continuing changes in the healthcare industry and third-party reimbursement, it is possible that our prior estimates may change resulting in a material adverse impact on our operating results and cash flows as previously reported.

     In performing the 2008 fourth quarter evaluation of the net realizable value of accounts receivable, we discovered that our realizable accounts receivable and accordingly our 2008 revenues should have been recorded net of an additional $735,000 to more closely reflect collectability of accounts receivable and to net that amount against revenue. In addition to contractual allowance adjustment of $735,000, we recorded an additional allowance for bad debts of approximately $916,000 due to changes in the factors used to estimate the ultimate contractual allowances incurred from third-party insurance companies.

     We continue to remediate the accounts receivable issue by enhancing the analytical procedures used to analyze and estimate the contractual allowances incurred on our SDC revenue. In addition, during January 2009, we implemented a new software system at SDC which will enhance the reporting and controls surrounding accounts receivable and revenue. We will continue to strengthen our internal controls over this area and anticipate that all of our remediation efforts will be completed by June 30, 2009.

Management Controls over Financial Reporting at SDC Holdings

     During the three months ended December 31,2008, we recognized certain control and reporting material weaknesses related to our oversight of the financial reporting process at SDC. The material weakness included a combination of control deficiencies noted by us in relation to the audit adjustments proposed during the audit of our

financial statements. None of the adjustments or control deficiencies noted were deemed material on an individual basis, but we deemed the control deficiencies to be material in the aggregate. The control deficiencies noted included the process to approve journal entries and the process to ensure that all accounts are reviewed and reconciled where appropriate.

     We will remediate the control deficiencies by enhancing the review and approval controls over financial reporting including the approval of all significant journal entries and review and where appropriate reconciliation of all significant accounts. We anticipate that our remediation efforts will be completed by June 30, 2009.

Item 9B. Other Information.

     During the three months ended December 31, 2008, all items required to be reported on Form 8-K were reported.

     Set forth below is certain information with respect to our executive officers (including members of our Executive Officer Committee) and directors. Directors are generally elected at the annual shareholders’ meeting and hold office until the next annual shareholders’ meeting and until their successors are elected and qualify. Executive officers and members of our Executive Officer Committee are elected by the Board of Directors and serve at its discretion. Our Bylaws provide that the Board of Directors shall consist of such number of members as the Board of Directors may from time to time determine by resolution or election, but not less than three and not more than nine. Our Board of Directors currently consists of five individuals.

Name		Age				Position with the Company
Stanton Nelson(1)(3)			38			Chief Executive Officer, Chairman of the Board and Chairman of the Executive Officer Committee
Rick D. Simpson			49			Chief Financial Officer and member of the Executive Officer Committee
Joseph Harroz, Jr.			42			President, Chief Operating Officer, member of the Executive Officer Committee and Director
Lewis P. Zeidner			53			Member of the Executive Officer Committee
James A. Cox, RPh			37			Member of the Executive Officer Committee
Scott Mueller (1)(2)(3)			38			Director
S. Edward Dakil, M.D.(1)(2)(3)			53			Director
William Ransome Oliver.(1)(2)(3)			28			Director

     The following is a brief description of the business background of our executive officers, members of our Executive Officer Committee and directors:

     Stanton Nelson was named as our Chief Executive Officer during January 2008 and has served as one of our directors since August 2003. In addition to his position with Graymark, Mr. Nelson serves as Executive Vice President of R.T. Oliver Investment Company, a privately-held company engaged in oil and gas exploration, retail and commercial real estate and banking. R.T. Oliver Investments is controlled by Roy T. Oliver, one of our greater than 5% shareholders. Mr. Nelson also serves on the board of directors of Valliance Bank as its Vice Chairman. Previously, Mr. Nelson was the chief executive officer of Monroe-Stephens Broadcasting, a privately-held company that owned and operated radio stations in Southwest Oklahoma and Dallas, Texas. Mr. Nelson began his career as a staff member for United State Senator David Boren. Mr. Nelson has a Bachelor of Business Administration in business management from the University of Oklahoma.

     Rick D. Simpson was named as our Chief Financial Officer in July 2008. In February 2000, Mr. Simpson founded CFO-Partner, a privately-held chief financial officer consulting firm, and since has served as its Managing Partner. He currently serves as a Director of Kirkpatrick Bank (since 2005), a privately-held banking institution, and VersaTeq, a privately-held provider of banking forms (since 1996). He has been a member of the American Institute of Certified Public Accountants and Oklahoma Society of Certified Public Accountants since February 1987 and received a Bachelor of Science in Accounting from East Central Oklahoma State University in 1981.

     Joseph Harroz, Jr. was named as our President and Chief Operating Officer in July 2008 and has served as one of our directors since December 2007. Previously, Mr. Harroz served as Vice President and General Counsel of the Board of Regents, University of Oklahoma since 1996 and has been an Adjunct Professor, University of Oklahoma Law School since 1997 and has served as the Managing Member of Harroz Investments, LLC (commercial enterprise) since 1998. He is also a member and Chairman of the Board of Trustees of Ivy Funds and a Trustee of Waddell and Reed Advisors Fund, both open-ended mutual fund complexes, a Consultant for MTV Associates (2004 to 2005); and serves as a Director of Valliance Bank NA (beginning in 2004), Mewbourne Family Support (2000 to 2008), Norman Economic Development Coalition (2004 to 2008) and Oklahoma Foundation for Excellence (beginning in 2008).

     Lewis P. Zeidner serves on our Executive Officer Committee and has served as the President and Chief Executive Officer of ApothecaryRx since its founding in 2006. In 2003, he co-founded PrairieStone Pharmacy, LLC, a retail pharmacy chain that built and operated small footprint, highly automated pharmacies in grocery stores. In 1996, Mr. Zeidner co-founded MedManagement, LLC a company that outsourced hospital and health system pharmacies. He was President of MedManagement from 1999 until 2003. Prior to 1999, Mr. Zeidner held various executive positions within healthcare companies including Baxter Healthcare and the Greenville Hospital System.

     James A. Cox, RPh serves on our Executive Officer Committee and has served as Vice President for Operations of ApothecaryRx since its founding in 2006. Prior to joining ApothecaryRx, Mr. Cox was the Director of Operations for PrairieStone Pharmacy, LLC, a chain of retail pharmacies in Minnesota and Michigan. From 1993 through 2004, Mr. Cox held various operational management roles for Snyder Drug Stores, a regional chain of retail pharmacies. He has his pharmacy degree from Drake University School of Pharmacy.

     Scott Mueller is one of our nominee directors. Mr. Mueller is currently employed by TLW Trading. Prior to joining TLW Trading, he was employed at Goldman Sachs from 1999 through May 2008. Mr. Mueller earned a Masters of business Administration from the University of Texas in 1999 and graduated from the Honors College at Michigan State University in 1992 with a Bachelor of Arts in General Administration — Pre Law. Mr. Mueller also serves on the boards of Consero Global Solutions and The Grace Foundation.

     S. Edward Dakil, M.D. is one of our nominee directors. Dr. Dakil is a practicing physician and in 1987 began his employment with Norman Urology Associates, P.C. Commencing in 1990 he began serving as a clinical instructor for the Department of Urology of the University of Oklahoma Health Science Center and in 1998 became a member of the Board of Directors of the Oklahoma Lithotripsy Center. Dr. Dakil was graduated from the University of Oklahoma, first with a Bachelor of Science (Chemistry) in 1987 and a Doctorate of Medicine in 1982 and is a member of various medical associations, including American Urologic Association and American Association of Clinical Urologists.

     William Ransome Oliver is one of our nominee directors. Mr. Oliver has been employed as a Vice President of R.T. Oliver Investments, Inc., a privately-held company, since April 2006. Mr. Oliver was employed by Bricktown Media/Big Rig Network as the West Region Manager during April 2005 through April 2006 and Grubb & Ellis Levy Beffort in Property Management-Brokerage during April 2004 through April 2005. He graduated from the College of Arts & Science at the University of Oklahoma in 2004 with a Bachelor of Arts.

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, officers, and persons who own more than 10% of our common stock or other registered class of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% shareholders are required to furnish us with copies of all Section 16(a) forms they file.

     Based solely on our review of the copies of the forms we received covering purchase and sale transactions in our common stock during 2008, we believe that each person who, at any time during 2008, was a director, executive officer, or beneficial owner of more than 10% of our common stock complied with all Section 16(a) filing requirements during 2008.

Item 11. Executive Compensation.

     We do not compensate directors for serving on our board or attending meetings of the board or any committee thereof. However, it is anticipated that restricted stock grants and stock options will be granted to our directors on terms to be determined by our board.

     Our board of directors has established a formal compensation committee which reviews and establishes the compensation of our executive officers, as well as our directors. The following table sets forth the total compensation of our Chief Executive Officers and Chief Financial Officers and our other executive officers who received compensation in excess of $100,000 during the three years ending in 2008.

																						All Other
														Stock				Option				Compen-
Name and Principal Position		Year				Salary				Bonus				Awards(1)				Awards(2)				sation(3)				Total
Stanton Nelson			2008			$	—			$	169,362			$	—			$	26,337			$	130,726			$	326,425
Chief Executive Officer			2007			$	—			$	—			$	—			$	—			$	—			$	—
			2006			$	—			$	—			$	—			$	5,422			$	—			$	5,422
John Simonelli			2008			$	24,000			$	—			$	—			$	—			$	—			$
Former Chief Executive			2007			$	24,000			$	—			$	—			$	—			$	—			$	24,000
Officer			2006			$	36,000			$	—			$	—			$	5,422			$	—			$	41,422
Rick D. Simpson			2008			$	67,500			$	25,403			$	3,600			$	26,337			$	19,403			$	142,243
Chief Financial Officer			2007			$	—			$	—			$	—			$	—			$	—			$	—
			2006			$	—			$	—			$	—			$	—			$	—			$	—
Mark R. Kidd			2008			$	60,000			$	—			$	—			$	26,337			$	—			$	86,337
Former Chief Financial			2007			$	60,000			$	—			$	—			$	5,422			$	—			$	65,422
Officer			2006			$	60,000			$	—			$	—			$	—			$	—			$	60,000
Joseph Harroz, Jr.			2008			$	114,583			$	84,681			$	12,000			$	26,337			$	58,637			$	296,238
President and			2007			$	—			$	—			$	—			$	—			$	—			$	—
Chief Operating Officer			2006			$	—			$	—			$	—			$	—			$	—			$	—
Lewis P. Zeidner			2008			$	190,000			$	—			$	—			$	—			$	—			$	190,000
ApothecaryRx, President			2007			$	187,692			$	—			$	—			$	—			$	—			$	187,692
and Chief Executive Officer			2006			$	60,000			$	—			$	—			$	—			$	—			$	60,000
James A. Cox			2008			$	162,462			$	—			$	—			$	—			$	—			$	162,462
ApothecaryRx, Vice President			2007			$	160,000			$	28,756			$	—			$	—			$	—			$	188,756
			2006			$	74,000			$	9,231			$	—			$	—			$	—			$	83,231

Aggregate Option and Restrictive Stock Grants and Exercises in 2008 and Year-End Values

     Stock Options and Option Values. On April 23, 2008, we granted each director five-year stock options exercisable for the purchase of 15,000 shares of our common stock for $3.75 per share. On July 23, 2008, we granted two new directors five-year stock options exercisable for the purchase of 15,000 shares of our common stock for $3.75 per share. These stock options were granted for services during 2008. The purchase price of the shares was equal to or in excess of the closing sale price of our common stock on the grant date of the stock options.

     Restricted Stock Grant Awards. On December 5, 2008, we granted restrictive stock grant awards to our Chief Financial Officer and our President in the amount 30,000 shares and 100,000 shares, respectively. The stock grant awards were valued at $1.60 per share which was the closing sale price of our common stock on the grant date of the stock grant awards. The stock grant awards vest over a two-year period with 50% of the shares vesting in July 2009 and the remaining shares vesting in July 2010.

     Outstanding Equity Awards. The following table sets forth information related to the number of stock options and stock grants that have not vested held by the named executive officer at December 31, 2008. During 2008, no options to purchase our common stock were exercised by the named executive officers.

		Outstanding Equity Awards at December 31, 2008
		Option Awards
		Number of																Shares of Stock That
		Common Stock								Option				Option				Have Not Vested
		Underlying Options								Exercise				Expiration								Market
Name		Exercisable				Unexercisable				Price(1)				Date				Number				Value
Stanton Nelson			15,000				—			$	3.75				4/23/2013				—				—
			4,000				—			$	3.75				9/30/2011
			4,000				—			$	5.50				12/31/2009
Rick D. Simpson			15,000				—			$	3.75				4/23/2013				30,000			$	46,200
Joseph Harroz, Jr.			15,000				—			$	3.75				4/23/2013				100,000			$	154,000

Employment Arrangements and Lack of Keyman Insurance

     We have a three-year employment agreement with each of Joseph Harroz, Jr., Rick D. Simpson and Lewis P. Zeidner (the “executive officer”). The material terms of the employment agreements are summarized below:

     Executive Officer Position. In accordance with the terms of the employment agreements, the employment of each of Messrs. Harroz, Simpson and Zeidner is full time requiring best efforts and due diligence, and may be terminated with or without cause. Mr. Harroz is to serve as President and Chief Operating Officer of both Graymark and SDC Holdings. Mr. Simpson is to serve as Chief Financial Officer of both Graymark and SDC Holdings. Mr. Zeidner is to serve as Chief Executive Officer of ApothecaryRx. Except to a limited extent and as expressly permitted by ApothecaryRx, SDC Holdings or our Board of Directors, each of Messrs. Harroz, Simpson and Zeidner is prohibited from serving as an officer or director of a publicly-held company, own an interest in a company that interferes with his full-time employment or that is engaged in a business activity similar to Graymark, ApothecaryRx or SDC Holdings, as may be applicable. Each of Messrs. Harroz, Simpson and Zeidner is to serve on our Executive Officer Committee.

     Compensation. Each of Messrs. Harroz, Simpson and Zeidner is to receive an annual base salary of $250,000, $135,000 and $190,000, respectively, as well as any bonus compensation as determined at the discretion of Graymark, ApothecaryRx or SDC Holdings. Each will be entitled to participate in the employee benefit plans and programs maintained and provided to our executive officers and employees. Each is entitled to reimbursement of reasonable and ordinary expenses incurred on behalf of Graymark, ApothecaryRx or SDC Holdings based upon substantiated documentation of the expenditure. The executive officer is entitled to four weeks of fully paid calendar-year vacation.

     Employer Termination. Each agreement is for a three year term, subject to termination with or without cause. Graymark, ApothecaryRx and SDC Holdings has the right to terminate the employment agreement without cause (for any reason) on at least 30-day advance notice (“Without Cause Termination”). In the event of Without Cause Termination, the executive officer will be entitled to one year of his base salary payable over 24 months and the continuance of all employee benefits for one year, unless he asserts any provision of his employment agreement is invalid or unenforceable. Any Without Cause Termination requires as a condition that the executive officer be discharged and released from all personal guarantees of the debts of Graymark, ApothecaryRx or SDC Holdings.

     Graymark, ApothecaryRx and SDC Holdings may terminate the executive officer’s employment agreement in the event of the following:

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He engages in gross personal misconduct which materially injures us, or any fraud or deceit regarding our business or customers or suppliers;

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He enters a plea of nolo contendere to or is convicted of a felony;

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He willfully and repeatedly fails to perform his duties after receiving notice and being provided an opportunity to correct such actions or

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He breaches any material term or provision of his employment agreement (“For Cause Termination”).

     Prior to any For Cause Termination, a written determination specifying the reasons for termination must be delivered and received and the executive officer will thereafter have 30 days to request a meeting to be heard and contest the reasons for termination. In the event Any For Cause Termination of the executive officer all personal guarantees of the debts of Graymark, ApothecaryRx or SDC Holdings will continue.

     Executive Officer Termination. Each of Messrs. Harroz, Simpson and Zeidner has the right to terminate his employment agreement, either with or without cause. A without cause termination requires the providing of 30-days advance notice to ApothecaryRx or SDC Holdings. In the event of a without cause termination, all future obligations under the employment agreement will terminate and all personal guarantees of the debt of ApothecaryRx and SDC Holdings will continue.

     The executive officer has the right to terminate his employment agreement for cause in the event Graymark, ApothecaryRx or SDC Holdings fails to pay the base compensation or provide employee benefits in accordance with his employment agreement after providing 30-days advance notice (“Employer Breach”). In the event of termination

as a result of Employer Breach, the executive officer will be entitled to receive as termination compensation equal to one year of his base compensation payable within 30 days following the termination date and continuance of all employee benefits for one year.

     Disability; Death. In the event a physical or mental condition prevents performance of the executive officer’ duties and responsibilities, in the reasonable judgment of Graymark, ApothecaryRx and SDC Holdings, from performing his duties for a period of three consecutive months, the employment of the executive officer may be terminated for cause. In this case, all compensation and benefits payable under his employment agreement will continue for six months, reduced by any disability plan benefits to which he is entitled.

     Upon the death of the executive officer, his employment agreement will terminate; however, the estate of the executive officer will be entitled to receive six months of the base salary of the deceased executive officer and employee benefits provided under the employment agreement.

     In the event of termination of the executive officer’s employment agreement as a result of his disability or death and the executive officer was not otherwise in default under the terms of his employment agreement, we and Graymark, ApothecaryRx or SDC Holdings will be required to cause the executive officer or his estate to be discharged and released from all personal guarantees of our debt or that of Graymark, ApothecaryRx or SDC Holdings.

     Confidentiality. The executive officer will be required to maintain the confidentiality of the information that constitutes trade secrets or is of a business or confidential nature, regardless of the source of the confidential information or how it was obtained. This confidentiality is to be maintained during employment and the two years following termination of the employment agreement.

     Non-competition and Non-solicitation Covenants. During the 24 months following employment termination, the executive officer agreed as follows:

•

Not to acquire, attempt to acquire, solicit, perform services (directly or indirectly) in any capacity for, or aid another in the acquisition or attempted acquisition of an interest in any business similar to that or ApothecaryRx or SDC Holdings in any city of a state in the United States where Graymark, ApothecaryRx or SDC Holdings owns any interest in a sleep center or that is within 40 miles of a pharmacy owned by ApothecaryRx or sleep center location owned by SDC Holdings; or

•

Not to solicit, induce, entice or attempt to entice (directly or indirectly) any employee, officer or director (except the executive officer’s personal secretary, if any), contractor, customer, vendor or subcontractor of ApothecaryRx or SDC Holdings or ours to terminate or breach any relationship with ApothecaryRx or SDC Holdings or us or any of our affiliates, or

•

Not to solicit, induce, entice or attempt to entice any customer, vendor or subcontractor of ApothecaryRx or SDC Holdings or ours to cease doing business with SDC Holdings or us or any of our affiliates.

     Arbitration. Any dispute or controversy arising out or relating to the executive officer’s employment or employment termination that cannot be resolved by agreement will be submitted to binding arbitration before a single arbitrator in accordance with the Rules for Commercial Cases of the American Arbitration Association and in accordance with the Federal Arbitration Act. The arbitrator’s judgment will be final and binding, subject solely to challenge on the grounds of fraud or gross misconduct. The arbitrator will be limited to awarding compensatory damages. The arbitration proceedings will be the sole and exclusive remedies and procedures for the resolution of disputes and controversies; however, a preliminary injunction or other provisional judicial relief may be sought if deemed reasonably necessary to avoid irreparable damage or to preserve the status quo pending arbitration.

Loss of Key Personnel

     Our success depends to a significant degree upon the efforts, contributions and abilities of our management. The loss of services of Messrs. Nelson, Harroz, Simpson, Zeidner, Cox and other key employees could have a material adverse effect on our business, results of operations or financial condition.

Compensation of Directors

     Other than through the receipt of discretionary stock option grants and restrictive stock grant awards, our directors are not compensated for attending board or committee meetings. Directors who are also our employees receive no additional compensation for serving as directors or on committees. We reimburse our directors for travel and out-of-pocket expenses in connection with their attendance at meetings of our board. During 2008, our directors received five-year stock options exercisable for the purchase of 15,000 shares of our common stock for $3.75 per share.

Equity Compensation Plans

     For the benefit of our employees, directors and consultants, we have adopted three stock option plans, the 2008 Long-Term Incentive Plan (the “Incentive Plan”), the 2003 Stock Option Plan (the “Employee Plan”) and the 2003 Non-Employee Stock Option Plan (the “Non-Employee Plan”).

     The 2008 Long-Term Incentive Plan For the benefit of our employees, directors and consultants, we adopted the 2008 Long-Term Incentive Plan (the “Incentive Plan”). The Incentive Plan was established to create equity compensation incentives designed to motivate our directors and employees to put forth maximum effort toward our success and growth and enable our ability to attract and retain experienced individuals who by their position, ability and diligence are able to make important contributions to our success. The Incentive Plan provides for the grant of stock options, including incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)),restricted stock awards, performance units, performance bonuses and stock appreciation rights to our employees and the grant of nonqualified stock options, stock appreciation rights and restricted stock awards to non-employee directors, subject to the conditions of the Incentive Plan (“Incentive Awards”).

     The Incentive Plan consists of three separate stock incentive plans, a Non-Executive Officer Participant Plan, an Executive Officer Participant Plan and a Non-Employee Director Participant Plan. Except for administration and the category of employees eligible to receive incentive awards, the terms of the Non-Executive Officer Participant Plan and the Executive Officer Participant Plan are identical. The Non-Employee Director Plan has other variations in terms and only permits the grant of nonqualified stock options and restricted stock awards. Each incentive award will be pursuant to a written award agreement. The Incentive Plan is designed to provide flexibility to meet our needs in a changing and competitive environment while minimizing dilution to our shareholders. We do not intend to use all incentive elements of the Incentive Plan at all times for each participant but will selectively grant the incentive awards and rights to achieve long-term goals.

     The Plan became effective on October 29, 2008 and was approved and adopted by our board of directors on October 30, 2008, and has a term ending October 29, 2018 during which incentive awards may be granted; the Incentive Plan will continue in effect until all matters relating to the payment of incentive awards and administration are settled.

     The 2003 Employee Plan. For the benefit of our employees, directors and consultants, we adopted the 2003 Employee Plan. This plan provides for the issuance of options intended to qualify as incentive stock options for federal income tax purposes to our employees and non-employees, including employees who also serve as our directors. Qualification of the grant of options under the plan as incentive stock options for federal income tax purposes is not a condition of the grant and failure to so qualify does not affect the ability to exercise the stock options. The number of shares of common stock authorized and reserved for issuance under the plan is 60,000. As of the date of this report, we have granted stock options under this plan that are exercisable for the purchase of 12,000 common stock shares at $5.50 per share on or before December 31, 2009 and options exercisable for the purchase of 16,000 common stock shares at $3.75 per share on or before September 30, 2011.

     Our Board of Directors administers and interprets this plan (unless delegated to a committee) and has authority to grant options to all eligible participants and determine the types of options granted, the terms, restrictions and conditions of the options at the time of grant.

     The exercise price of options may not be less than 85% of the fair market value of our common stock on the date of grant of the option and to qualify as an incentive stock option may not be less than the fair market value of common stock on the date of the grant of the incentive stock option. Upon the exercise of an option, the exercise price must be paid in full, in cash, in our common stock (at the fair market value thereof) or a combination thereof.

     Options qualifying as incentive stock options are exercisable only by an optionee during the period ending three months after the optionee ceases to be our employee, a director, or non-employee service provider. However, in the event of death or disability of the optionee, the incentive stock options are exercisable for one year following death or disability. In any event options may not be exercised beyond the expiration date of the options. Options may be granted to our key management employees, directors, key professional employees or key professional non-employee service providers, although options granted non-employee directors do not qualify as incentive stock options. No option may be granted after December 31, 2009. Options are not transferable except by will or by the laws of descent and distribution.

     All outstanding options granted under the plan will become fully vested and immediately exercisable if (i) within any 12-month period, we sell an amount of common stock that exceeds 50% of the number of shares of common stock outstanding immediately before the 12-month period or (ii) a “change of control” occurs. For purposes of the plan, a “change of control” is defined as the acquisition in a transaction or series of transactions by any person, entity or group (two or more persons acting as a partnership, limited partnership, syndicate or other group for the purpose of acquiring our securities) of beneficial ownership of 50% or more (or less than 50% as determined by a majority of our directors) of either the then outstanding shares of our common stock or the combined voting power of our then outstanding voting securities.

     The 2003 Non-Employee Stock Option Plan. The Non-Employee Plan provides for the grant of stock options to our non-employee directors, consultants and other advisors . Our employees are not eligible to participate in the Non-Employee Plan. Under the provisions of this plan, the options do not qualify as incentive stock options for federal income tax purposes and accordingly will not qualify for the favorable tax consequences thereunder upon the grant and exercise of the Options. The total number of shares of common stock authorized and reserved for issuance upon exercise of Options granted under this plan will be 60,000. As of the date of this report, we have granted stock options under this plan that are exercisable for the purchase of 16,000 common stock shares at $5.50 per share on or before December 31, 2009 and options exercisable for the purchase of 16,000 common stock shares at $3.75 per share on or before September 30, 2011.

     Our Board of Directors administers and interprets this plan and has authority to grant options to all eligible participants and determine the basis upon which the options are to be granted and the terms, restrictions and conditions of the options at the time of grant.

     Options granted under this plan are exercisable in such amounts, at such intervals and upon such terms as the option grant provides. The purchase price of the common stock under the option is determined by our board; however, the purchase price may not be less than the closing sale price of our common stock on the date of grant of the option. Upon the exercise of an option, the stock purchase price must be paid in full, in cash by check or in our common stock held by the option holder for more than six months or a combination of cash and common stock.

     Options granted under this plan may not under any circumstance be exercised after 10 years from the date of grant. No option under the Non-Employee Plan may be granted after July 30, 2008. Options are not transferable except by will, by the laws of descent and distribution, by gift or a domestic relations order to a “family member.” Family member transfers include transfers to parents (and in-laws) to nieces and nephews (adopted or otherwise) as well as trusts, foundations and other entities principally for their benefit. This plan terminated on July 30, 2008.

Director Liability and Indemnification

     As permitted by the provisions of the Oklahoma General Corporation Act, our Certificate of Incorporation (the “Certificate”) eliminates in certain circumstances the monetary liability of our directors for a breach of their fiduciary duty as directors. These provisions do not eliminate the liability of a director (i) for a breach of the director’s duty of loyalty to us or our shareholders; (ii) for acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for liability arising under Section 1053 of the Oklahoma General Corporation Act (relating to the declaration of dividends and purchase or redemption of shares in violation of the Oklahoma General Corporation Act); or (iv) for any transaction from which the director derived an improper personal benefit. In addition, these provisions do not eliminate liability of a director for violations of federal securities laws, nor do they limit our rights or the rights of our shareholders, in appropriate circumstances, to seek equitable remedies such as injunctive or other forms of non-monetary relief. Such remedies may not be effective in all cases.

     Our Bylaws provide that we will indemnify our directors and officers. Under such provisions, any director or officer, who in his or her capacity as an officer or director, is made or threatened to be made, a party to any suit or proceeding, may be indemnified if the director or officer acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interest. The Bylaws further provide that this indemnification is not exclusive of any other rights that an officer or director may be entitled. Insofar as indemnification for liabilities arising under the Bylaws or otherwise may be permitted to our directors and officers, we have been advised that in the opinion of the Securities and Exchange Commission indemnification is against public policy and is, therefore, unenforceable.

     Furthermore, we have entered into indemnity and contribution agreements with each of our directors and executive officers, including member of our Executive Officer Committee. Under these indemnification agreements we have agreed to pay on behalf of the indemnitee, and his executors, administrators and heirs, any amount that he is or becomes legally obligated to pay because the

•

indemnitee served as one of our directors or officers, or served as a director, officer, employee or agent of a corporation, partnership, joint venture, trust or other enterprise at our request or

•

indemnitee was involved in any threatened, pending or completed action, suit or proceeding by us or in our right to procure a judgment in our favor by reason that the indemnitee served as one of our directors or officers, or served as a director, officer, employee or agent of a corporation, partnership, joint venture, trust or other enterprise at our request.

     To be entitled to indemnification, indemnitee must have acted in good faith and in a manner that he reasonably believed to be in or not opposed to our best interests. In addition, no indemnification is required if the indemnitee is determined to be liable to us unless the court in which the legal proceeding was brought determines that the indemnitee was entitled to indemnification. The costs and expenses covered by these agreements include expenses of investigations, judicial or administrative proceedings or appeals, amounts paid in settlement, attorneys’ fees and disbursements, judgments, fines, penalties and expenses of enforcement of the indemnification rights.

     We maintain insurance to protect our directors and officers against liability asserted against them in their official capacities for events occurring after September 1, 2008. This insurance protection covers claims and any related defense costs of up to $10,000,000 based on alleged or actual securities law violations, other than intentional dishonest or fraudulent acts or omissions, or any willful violation of any statute, rule or law, or claims arising out of any improper profit, remuneration or advantage derived by an insured director or officer. In addition, the insurance protection covers non-indemnifiable losses on individual directors and officers up to $5,000,000.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     The following table presents certain information regarding the beneficial ownership of our common stock as of March 31, 2009 of (i) the only persons known by us to own beneficially more than 5% of our common stock, (ii)

each of our directors and executive officers (including those executive officers named in the Summary Compensation Table, see “Item 11. Executive Compensation”) and (iii) all of our executive officers and directors as a group, together with their percentage holdings of the beneficially owned outstanding shares. All persons listed have sole voting and investment power with respect to their shares unless otherwise indicated, and there is no family relationship among our executive officers and directors. For purposes of the following table, the number of shares and percent of ownership of outstanding common stock that the named person beneficially owns includes common stock shares that the named person has the right to acquire within 60 days of the date of this report (pursuant to exercise of stock options, warrants or conversion rights) and are deemed to be outstanding, but are not deemed to be outstanding for the purposes of computing the number of shares beneficially owned and percent of outstanding common stock of any other named person.

		Common Stock Beneficial Ownership(1)
		Shares				Rights
		Owned of				to				Total				Ownership
Name (and Address) of Beneficial Owner		Record				Acquire				Shares				Percent(2)
Roy T. Oliver(3)			7,028,992				—				7,028,992				25.0	%
101 N. Robinson, Ste. 900 Oklahoma City, Oklahoma 73102
Oliver Company Holdings, LLC(3)			7,028,992				—				7,028,992				25.0	%
101 N. Robinson, Ste. 900 Oklahoma City, Oklahoma 73102
Lewis P. Zeidner(7)			3,468,000				—				3,468,000				12.3	%
5400 Union Terrace Lane North Plymouth, Minnesota 55442
Stanton Nelson(7)			2,561,802				23,000				2,584,802				9.2	%
101 North Robinson, Suite 900 Oklahoma City, Oklahoma 73102
Vahid Salalati			1,938,000				—				1,938,000				6.9	%
415 Foxborough Ct. Norman, Oklahoma 73072
Dalea Partners LP(4)			1,703,969				—				1,703,969				6.0	%
4801 Gaillardia Parkway, Suite 350 Oklahoma City, Oklahoma 73142
Malone Mitchell(4)			1,703,969				—				1,703,969				6.0	%
4801 Gaillardia Parkway, Suite 350 Oklahoma City, Oklahoma 73142
William R. Oliver(3)(7)(10)			1,657,608				15,000				1,672,608				5.9	%
101 North Robinson, Suite 900 Oklahoma City, Oklahoma 73102
Black Oak II, LLC(6)			1,609,212				—				1,609,212				5.7	%
101 N. Robinson, Ste. 800 Oklahoma City, Oklahoma 73102
MTV Investments, LTD(6)			1,609,212				—				1,609,212				5.7	%
101 N. Robinson, Ste. 800 Oklahoma City, Oklahoma 73102
P. Mark Moore(6)			1,609,212				—				1,609,212				5.7	%
101 N. Robinson, Ste. 800 Oklahoma City, Oklahoma 73102
TLW Securities LLC(5)			1,564,842				—				1,564,842				5.6	%
PO Box 54525 Oklahoma City, Oklahoma 73154
Tom Ward(5)			1,564,842				—				1,564,842				5.6	%
PO Box 54525 Oklahoma City, Oklahoma 73154
Joseph Harroz, Jr.(7)(8)			490,473				15,000				505,473				1.8	%

		Common Stock Beneficial Ownership(1)
		Shares				Rights
		Owned of				to				Total				Ownership
Name (and Address) of Beneficial Owner		Record				Acquire				Shares				Percent(2)
James Cox(7)			255,000				—				255,000				0.9	%
Rick D. Simpson(7)(9)			184,572				15,000				199,572				0.7	%
Scott Mueller(7)(10)			49,181				15,000				64,181				0.2	%
S. Edward Dakil, M.D.(7)(10)			43,571				15,000				58,571				0.2	%
Executive Officers and Directors as a group (8 individuals)			8,710,207				98,000								30.8	%

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Certain Relationships and Related Transactions

     Contained below is a description of transactions and proposed transactions we entered into with our officers, directors and shareholders that beneficially own more than 5% of our common stock during 2008 and 2007. These transactions will continue in effect and may result in conflicts of interest between us and these individuals. Although our officers and directors have fiduciary duties to us and our shareholders, there can be no assurance that conflicts of interest will always be resolved in favor of us and our shareholders.

     Acquisition of SDC Holdings and ApothecaryRx. On January 2, 2008, we completed our acquisition of SDC Holdings and ApothecaryRx by exchanging 102,000,000 shares of our common stock (20,400,000 shares after giving effect to 1 for 5 reverse split) for the equity ownership interests in SDC Holdings and ApothecaryRx. Roy T. Oliver, one of our principal shareholders, and Stanton Nelson, one of our directors, jointly and indirectly, controlled SDC Holdings and ApothecaryRx. In exchange for their equity ownership interests in SDC Holdings and ApothecaryRx, Messrs. Oliver and Nelson received 33,875,730 and 12,861,180 common stock shares, respectively, (6,775,146 and 2,572,236 shares, respectively, after giving effect to 1 for 5 reverse split) that in the aggregate

represents effective shareholder voting control. Furthermore, Lewis P. Zeidner, Vahid Salalati, Greg Luster and James A. Cox, members or former members of our Executive Officer Committee, exchanged their equity ownership interests in ApothecaryRx and SDC Holdings for 17,340,000, 9,690,000, 9,690,000 and 1,275,000 shares of our common stock, respectively (3,468,000, 1,938,000, 1,938,000 and 255,000 shares, respectively, after giving effect to 1 for 5 reverse stock split). In addition, W. Ransome Oliver, the son of Roy T. Oliver, exchanged his equity ownership interests in SDC Holdings and ApothecaryRx for 8,213,040 shares of our common stock (1,642,608 after giving effect to 1 for 5 reverse stock split).

     Acquisition of Otter Creek Investments and Advanced Medical Enterprises. On January 31, 2007, SDC Holdings acquired its sleep center operations by purchase of Otter Creek Investments, LLC, a limited liability company, and its wholly owned subsidiary Advanced Medical Enterprises, LP for $14,950,000. As partial owners of Otter Creek Investments, LLC, Vahid Salalati and Greg Luster were distributed $3,917,851 and $2,259,756, respectively, and in turn made capital contributions of $568,000 and $568,000, respectively, to SDC Holdings. The purchase price was funded with capital contributions of the equity interest owners of $2,990,000 and proceeds of a $11,960,000 loan from Arvest Bank (“Arvest Loan”). In connection with this acquisition, SDC Holdings recorded goodwill of $13,407,354 that represented the purchase price in excess of the value of the assets of Otter Creek Investments.

     The Arvest Loan requires quarterly interest only payments that began May 1, 2007 through February 1, 2008 at a variable rate based on a function of London Interbank Offering Rate (or LIBOR). Required quarterly payments of principal in the amount of $291,635 begin May 1, 2008 and continue through February 1, 2014, plus accrued interest. The principal amount of the Arvest Loan is amortized over 20 years with all principal and accrued interest becoming due on May 1, 2014. This loan is secured by the assets of SDC Holdings, the guarantee of all SDC Subsidiaries and entities related by common ownership, and the ownership interests of SDC Holdings and is further secured by the limited guaranties of Vahid Salalati, Kevin Lewis, Roger Ely, Roy T. Oliver and Stanton Nelson.

     On May 1, 2008, a replacement Loan Agreement with Arvest Bank was executed modifying the terms of the Arvest Loan. On June 19, 2008, Greg Luster’s employment was terminated “without cause” and as a condition of his Employment Agreement, dated January 2, 2008, a release of Mr. Luster’s personal guaranty of the Arvest Loan was obtained in October 2008.

     SXJE, LLC Loan Transactions. In two separate lending transactions on August 5 and October 25, 2005, we issued a two-year promissory note each in the principal amount of $750,000 to SXJE, LLC (controlled by Sam Eyde) evidencing loans aggregating $1,500,000. The two notes are secured by all assets of our and our subsidiaries’ assets and bear interest at 8% per annum. Upon consummation of a qualified financing by us, the outstanding principal amount of the Notes and all accrued and unpaid interest (collectively the “note balance” at any applicable time) were to automatically convert into our common stock shares 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 common stock shares into which the note balance converts was limited to the equivalent of $1.10 per common stock share or not less than 1,636,364 shares. During 2005, we issued 10,726 shares of our common stock (2,145 shares after giving effect to 1 for 5 reverse split) in payment of $10,833 accrued interest under the notes. During 2006, we issued 272,956 shares of our common stock (54,591 shares after giving effect to 1 for 5 reverse split) in payment of $116,167 accrued interest under the notes. During 2007, we issued 389,894 shares of our common stock (77,979 after giving effect to 1 for 5 reverse split) in payment of $152,000 in accrued interest under the notes.

     Furthermore, in connection with the two lending transactions and subsequent extension of the lending transactions, we entered into three common stock purchase warrant agreements with SXJE, LLC, each of these agreements evidence warrants exercisable on or before October 25, 2010, in the aggregate for the purchase of 100,000 common stock shares at $2.50 each. The number of common stock shares purchasable will be appropriately adjusted in the event of any merger, consolidation, recapitalization, reclassification, stock dividend, stock split or similar transaction. For the period ending October 25, 2010, we agreed to include the common stock shares underlying the common stock purchase warrants in any registration statement we file with the United States Securities and Exchange Commission at our sole cost and expense.

     In January 2008, pursuant to a Note Conversion and Prepayment Agreement dated November 7, 2007, SXJE to accept a principal payment of one of the $750,000 notes (plus accrued interest) and converted the other $750,000 note into 3,750,000 shares of our common stock (750,000 shares after giving effect to 1 for 5 reverse split).

     Office Space Lease. In October 2008, we entered into a 60-month lease with Oklahoma Tower Realty Investors, LLC which is controlled by Roy T. Oliver, one of our greater than 5% shareholders and affiliates, for occupancy of our and SDC Holdings offices in Oklahoma City. Under this lease arrangement, we are required to pay rent of approximately $10,300 per month. Mr. Stanton Nelson, our chief executive officer, owns a non-controlling interest in Oklahoma Tower Realty Investors, LLC.

     Construction of Leasehold Improvements. During 2008, we paid Specialty Construction Services, LLC approximately $126,000 to construct the leasehold improvements at our and SDC Holding’s offices in Oklahoma City. Non-controlling interests in Specialty Construction Services, LLC are held by Roy T. Oliver, one of our greater than 5% shareholders and affiliates, and Mr. Stanton Nelson, our chief executive officer.

     Cash Deposit Accounts and Borrowings. As of December 31, 2008, we have approximately $12.8 million on deposit at Valliance Bank. Valliance Bank is controlled by Roy T. Oliver, one of our greater than 5% shareholders and affiliates. In addition, our SDC operating segment is obligated to Valliance Bank under certain sleep center capital notes totaling approximately $189,000 at December 31, 2008. The interest rates on the notes are fixed and range from 4.25% to 8.75%. Non-controlling interests in Valliance Bank are held by Mr. Stanton Nelson, our chief executive officer, Mr. Joseph Harroz, Jr., our president and chief operating officer, and the William R. Oliver GST Exempt Trust. Mr. William R. Oliver is one of our directors.

     We believe that the transactions described above were on terms no less favorable to us than could have been obtained with unrelated third parties. All material future transactions between us and our officers, directors and 5% or greater shareholders

•

will be on terms no less favorable than could be obtained from unrelated third parties and

•

must be approved by a majority of our disinterested-independent members of our board of directors.

Director Independence

     For purposes of determining whether a member of our Board of Directors qualifies as an “independent director,” we have selected and utilize the definition of “independent director” within the meaning of Rule 4200 of The Nasdaq Stock Market, LLC marketplace rules. Currently the members of our Board of Directors that qualifies as an “independent director” are S. Edward Dakil, M.D., Scott R. Mueller and William R. Oliver.

Item 14. Principal Accountant Fees and Services

Fees for Independent Auditors

     On August 1, 2008, the firm of Murrell, Hall, McIntosh & Co. PLLP resigned as our independent registered public accountants as a result of their operations having been acquired by Eide Bailly LLP. Effective December 8, 2008 our Audit Committee approved the engagement of Eide Bailly LLP as our independent registered public accounting firm.

     Audit Fees. Total audit fees for 2008 and 2007 were approximately $251,000 and $123,000, respectively. The aggregate audit fees included fees billed for the audit of our annual financial statements and for reviews of our financial statements included in our Quarterly Reports on Form 10-Q and other public filings.

     Audit-Related Fees. There were no aggregate fees billed for audit-related services for 2008 and 2007.

     Tax Fees. There were no aggregate fees billed for tax services for 2008 and 2007.

     All Other Fees. We were not billed for any other accounting services.

     In reliance on the review and discussions referred to above, our Audit Committee and Board of Directors approved the audited financial statements for the fiscal year ended December 31, 2008, for filing with the Securities and Exchange Commission.

     Audit Committee Pre-Approval Procedures. Rules and regulations of the Securities and Exchange Commission implemented in accordance with the requirements of Sarbanes-Oxley Act of 2002 require audit committees of companies reporting under and pursuant to the Securities Exchange Act of 1934 to pre-approve audit and non-audit services. Our Audit Committee follows procedures pursuant to which audit, audit-related and tax services, and all permissible non-audit services, are pre-approved by category of service. During a year circumstances may arise that require engagement of the independent public accountants for additional services not contemplated in the original pre-approval. In those instances, we obtain the specific pre-approval of our Audit Committee before engaging our independent public accountants. The procedures require our Audit Committee to be informed of each service, and the procedures do not include any delegation of our Audit Committee’s responsibilities to management. Our Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom this authority is delegated will report any pre-approval decisions to our Audit Committee at its next scheduled meeting.

     For 2008, all of the audit-related fees, tax fees and all other fees were pre-approved by our Audit Committee or the Chairman of the Audit committee pursuant to delegated authority.

Item 15. Exhibits

(a) Exhibits:

Exhibit No.		Description
3.1.1		Registrant’s Certificate of Incorporation, incorporated by reference to Exhibit 3.1 of Registrant’s Registration Statement on Form SB-2 (No. 333-111819) as filed with the Commission on January 2, 2004.
3.1.2		Registrant’s First Amendment to Certificate of Incorporation, incorporated by reference to Registrant’s Schedule 14 Information Statement filed with the U.S. Securities and Exchange Commission on December 5, 2007.
3.2		Registrant’s First Amendment to the Certificate of Incorporation, dated December 27, 2007 and filed with the Secretary of State of the State of Oklahoma on December 31, 2007, is incorporated by reference to the Schedule 14 Information Statement filed with the Commission on December 5, 2007.
3.3		Registrant’s Bylaws, incorporated by reference to Exhibit 3.2 of Registrant’s Registration Statement on Form SB-2 (No. 333-111819) as filed with the Commission on January 9, 2004.
4.1		Form of Certificate of Common Stock of Registrant, incorporated by reference to Exhibit 4.1 of Registrant’s Registration Statement on Form SB-2 (No. 333-111819) as filed with the Commission on January 9, 2004.
4.2		Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-1 to the Form of Senior Promissory Note dated August 5, 2005, incorporated by reference to Exhibit 4.2 of Form 8-K filed with the Commission on August 11, 2005.

Exhibit No.		Description
4.3		Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-2 to the Form of Senior Promissory Note dated August 5, 2005, incorporated by reference to Exhibit 4.3 of Form 8-K filed with the Commission on August 11, 2005.
4.4		Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-1 to the Form of Senior Promissory Note dated October 24, 2005, incorporated by reference to Exhibit 4.2 of Form 8-K filed with the Commission on November 1, 2005.
4.5		Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-2 to the Form of Senior Promissory Note dated October 24, 2005, incorporated by reference to Exhibit 4.3 of Form 8-K filed with the Commission on November 1, 2005.
10.1		Graymark Productions, Inc. 2003 Stock Option Plan, incorporated by reference to Exhibit 10.5 of Registrant’s Registration Statement on Form SB-2 (No. 333-111819) as filed with the Commission on January 9, 2004.
10.2		Graymark Productions, Inc. 2003 Non-Employee Stock Option Plan, incorporated by reference to Exhibit 10.6 of Registrant’s Registration Statement on Form SB-2 (No. 333-111819) as filed with the Commission on January 9, 2004.
10.3		Exchange Agreement between Registrant, SDC Holdings, LLC, SDOC Investors, LLC, Vahid Salalati, Greg Luster, Kevin Lewis, Roger Ely, ApothecaryRx, LLC, Oliver RX Investors, LLC, Lewis P. Zeidner, Michael Gold, James A. Cox, and John Frick, dated October 29, 2007, is incorporated by reference to Registrant’s Schedule 14 Information Statement filed with the U.S. Securities and Exchange Commission on December 5, 2007.
10.4		Employment Agreement between Registrant, ApothecaryRx, LLC and Lewis P. Zeidner, dated January 2, 2008, is incorporated by reference to Registrant’s Schedule 14 Information Statement filed with the U.S. Securities and Exchange Commission on December 5, 2007.
10.5		Employment Agreement between Registrant, SDC Holdings, LLC and Vahid Salalati, dated January 2, 2008, is incorporated by reference to Registrant’s Schedule 14 Information Statement filed with the U.S. Securities and Exchange Commission on December 5, 2007.
10.6		Employment Agreement between Registrant, SDC Holdings, LLC and Greg Luster, dated January 2, 2008, is incorporated by reference to Registrant’s Schedule 14 Information Statement filed with the U.S. Securities and Exchange Commission on December 5, 2007.
10.7		Registration Rights Agreement between Registrant, Oliver Company Holdings, LLC, Lewis P. Zeidner, Stanton Nelson, Vahid Salalati, Greg Luster, William R. Oliver, Kevin Lewis, John B. Frick Revocable Trust, Roger Ely, James A. Cox, Michael Gold, Katrina J. Martin Revocable Trust, dated January 2, 2008, is incorporated by reference to Registrant’s Schedule 14 Information Statement filed with the U.S. Securities and Exchange Commission on December 5, 2007.
10.8		Pharmacy Purchase Agreement between ApothecaryRx, LLC and Rambo Pharmacy, Inc., dated January 3, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 29, 2008.
10.9		Goodwill Protection Agreement between ApothecaryRx, LLC and Norman Greenburg, dated January 17, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 29, 2008.

Exhibit No.		Description
10.10		Goodwill Protection Agreement between ApothecaryRx, LLC and Aric Greenburg, dated January 17, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 29, 2008.
10.11		Transition Agreement between ApothecaryRx, LLC, Rambo Pharmacy, Inc. and Norman Greenburg, dated January 17, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 29, 2008.
10.12		Lease Agreement between ApothecaryRx, LLC and Rambo Pharmacy, Inc., dated January 12, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 29, 2008.
10.13		Pharmacy Purchase Agreement between ApothecaryRx, LLC and Thrifty Drug Stores, Inc., dated February 29, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on March 6, 2008.
10.14		Goodwill Protection Agreement between ApothecaryRx, LLC and Thrifty Drug Stores, Inc., dated February 29, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on March 6, 2008.
10.15		Pharmacy Purchase Agreement between ApothecaryRx, LLC, Rehn-Huerbinger Drug Co., 666 Drug Co., Wilmette-Huerbinger Drug Co., Edward Cox, Simpson Gold, Lawrence Horwitz, and Steven Feinerman, dated May 2, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 6, 2008.
10.16		First Amendment to Pharmacy Purchase Agreement between ApothecaryRx, LLC, Rehn-Huerbinger Drug Co., 666 Drug Co., Wilmette-Huerbinger Drug Co., Edward Cox, Simpson Gold, Lawrence Horwitz, and Steven Feinerman, dated May 23, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 6, 2008.
10.17		Second Amendment to Pharmacy Purchase Agreement between ApothecaryRx, LLC, Rehn-Huerbinger Drug Co., 666 Drug Co., Wilmette-Huerbinger Drug Co., Edward Cox, Simpson Gold, Lawrence Horwitz, and Steven Feinerman, dated June 3, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 6, 2008.
10.18		Goodwill Protection agreement between ApothecaryRx, LLC, Edward Cox, Simpson Gold, Lawrence Horwitz, and Steven Feinerman, dated May 2, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 6, 2008.
10.19		Employment Agreement between ApothecaryRx, LLC and Lawrence Horwitz, dated May 2, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 6, 2008.
10.20		Employment Agreement between ApothecaryRx, LLC and Steven Feinerman, dated May 2, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 6, 2008.

Exhibit No.		Description
10.21		Employment Agreement between ApothecaryRx, LLC and Simpson Gold, dated May 2, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 6, 2008.
10.24		Employment Agreement between ApothecaryRx, LLC and Edward Cox, dated May 2, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 6, 2008.
10.25		Purchase Agreement between TCSD of Waco, LLC and Sleep Center of Waco, Ltd., dated May 30, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 13, 2008.
10.26		Purchase Agreement between Capital Sleep Management, LLC, Plano Sleep Center, Ltd., and Southlake Sleep Center, Ltd., dated May 30, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 13, 2008.
10.27		Purchase Agreement between SDC Holdings, LLC, Christina Molfetta and Hanna Friends Trust, dated June 1, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 13, 2008.
10.28		Employment Agreement between Registrant and Joseph Harroz, Jr., dated December 5, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on December 12, 2008.
10.29		Employment Agreement between Registrant and Rick D. Simpson, dated December 5, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on December 12, 2008.
10.30		Graymark Healthcare, Inc. 2008 Long-term Incentive Plan adopted by Registrant on the effective date of October 29, 2008, is incorporated by reference to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on November 17, 2008.
10.31		Loan Agreement between Registrant, SDC Holdings, LLC, ApothecaryRx, LLC, Oliver Company Holdings, LLC, Roy T. Oliver, Stanton M. Nelson, Roy T. Oliver as Trustee of the Roy T. Oliver Revocable Trust dated June 15, 2004, Vahid Salalati, Greg Luster, Kevin Lewis, Roger Ely and Lewis P. Zeidner and Arvest Bank, dated May 21, 2008.
10.32		Amendment to Loan Agreement between Registrant, SDC Holdings, LLC, ApothecaryRx, LLC, Oliver Company Holdings, LLC, Roy T. Oliver, Stanton M. Nelson, Roy T. Oliver as Trustee of the Roy T. Oliver Revocable Trust dated June 15, 2004, Vahid Salalati, Greg Luster, Kevin Lewis, Roger Ely and Lewis P. Zeidner and Arvest Bank, effective May 21, 2008.
21		Subsidiaries of Registrant.
31.1		Certification of Stanton Nelson, Chief Executive Officer of Registrant.
31.2		Certification of Rick D. Simpson, 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 Stanton Nelson, 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 Rick D. Simpson, Chief Financial Officer and Controller of Registrant.

     In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 31, 2009

Date: March 31, 2009

     In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature		Title		Date
/S/ STANTON NELSON		Chief Executive Officer and Chairman of the		March 31, 2009
Stanton Nelson		Board
/S/ JOSEPH HARROZ, JR.		President, Chief Operating Officer and Director		March 31, 2009
Joseph Harroz, Jr.
/S/ SCOTT MUELLER		Director		March 31, 2009
Scott Mueller
/S/ S. EDWARD DAKIL, M.D.		Director		March 31, 2009
S. Edward Dakil, M.D.
/S/ WILLIAM RANSOME OLIVER		Director		March 31, 2009
William Ransome Oliver