U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-KSB/A


Amendment No.
1





(Mark
One)


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





For the
year ended December
31, 2007






[ ] 
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the transition period from _____ to _____





Commission
file number 33-26787-D




ZYNEX MEDICAL HOLDINGS,
INC.


(Name of
small business issuer in its charter)




Nevada
            90-0214497(State
      or other jurisdiction of
              incorporation
      or organization)
            (IRS
      Employer Identification No.)




8022 Southpark Cir,
      Suite 100, Littleton, Colorado
            80120(Address
      of principal executive offices)
            (Zip
      Code)





Issuer's
telephone number: (303)
703-4906





Securities
registered under Section 12(b) of the Exchange Act:  None





Securities
registered under Section 12(g) of the Exchange Act:  None





Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. [ ]





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





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]





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





The
issuer's revenues for its most recent year were $8,048,253





The
aggregate market value of the 10,698,195 common shares held by non-affiliates of
the registrant was $14,549,545 computed by reference to the closing price of
such stock as listed on the OTC Bulletin Board on April 11, 2008. This
computation is based on the number of issued and outstanding shares held by
persons other than officers, directors and shareholders of 5% or more of the
registrant's common shares.





As of
April 15, 2008, 28,943,695 shares of common stock are issued and
outstanding.




Documents
incorporated by reference: None.





Transitional
Small Business Disclosure Form (check one):   Yes [ ]   No
[X]











This
Amendment No. 1 to Zynex Medical Holdings, Inc.’s Form 10-KSB for the year ended
December 31, 2007 supersedes in its entirety the original Form 10-KSB Report
filed on April 16, 2008.  The original Report was unintentionally
filed prior to certain changes being made.  The
Company's independent registered public accounting firm had not approved the
release of their report in the previously filed Form
10-KSB.  Management has examined the corrections, which were omitted
from the previously filed report.  The corrections do not affect the
reported results of the Company's operations and management of the Company does
not believe that they are material to the consolidated financial
statements.




CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION





Certain
statements in this annual report contain or may contain forward-looking
statements that are subject to known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing numerous
assumptions and other factors that could cause our actual results to differ
materially from those in the forward-looking statements. These factors include,
but are not limited to the need to obtain additional capital in order to grow
our business, larger competitors with greater financial resources, the need to
keep pace with technological changes, our dependence on the reimbursement from
insurance companies for products sold or rented to our customers, our dependence
upon third party manufacturers to produce our goods on time and to our
specifications, the acceptance of our products by hospitals and clinicians,
implementation of our sales strategy including a strong direct sales force and
other risks described in this Report. Readers are cautioned not to place undue
reliance on these forward-looking statements and readers should carefully review
this annual report in its entirety, including the risks described in "Risk
Factors." We undertake no obligation to update any forward-looking statements to
reflect any future events or developments. These forward-looking statements
speak only as of the date of this Report, and you should not rely on these
statements without also considering the risks and uncertainties associated with
these statements and our business.





When used
in this annual report, the terms the "Company," "Zynex", "we," "us," "ours," and
similar terms refer to Zynex Medical Holdings, Inc., a Nevada corporation, and
its wholly-owned subsidiary, Zynex Medical, Inc.




-
2 -






TABLE
OF CONTENTS





FORM
10 KSB/A


(Amendment
No. 1)




ANNUAL
REPORT - FISCAL YEAR 2007




ZYNEX
MEDICAL HOLDINGS, INC.







PAGEPART
      IItem
      1.
              Description
      of Business
              4Item
      2.
              Description
      of Property
              13Item
      3.
              Legal
      Proceedings
              13Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              13PART
      IIItem
      5.
              Market
      for Common Equity and Related Stockholder Matters and Small Business
      Issuer Purchases of Equity Securities
              13Item
      6.
              Management's
      Discussion and Analysis or Plan of Operation
              14Item
      7.
              Financial
      Statements
              25Item
      8.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              25Item
      8A.
              Controls
      and Procedures
              25Item
      8B.
              Other
      Information
              26PART
      IIIItem
      9.
              Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange Act
              27Item
      10.
              Executive
      Compensation
              28Item
      11.
              Security
      Ownership of Certain Beneficial Owners and Management And Related
      Stockholder Matters
              31Item
      12.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              32Item
      13.
              Exhibits
              33Item
      14.
              Principal
      Accountant Fees and Services
              37






-
3 -




ITEM
1. DESCRIPTION OF BUSINESS





History





Zynex
Medical Holdings, Inc. (the "Company" or "Zynex"), formerly Fox River Holdings,
Inc., was initially organized on December 26, 1991 as a Delaware corporation
under the name of Life Medical Technologies, Inc. The Company engaged in the
business of bringing new medical product technology to the health care market
place. Between 1995 and 2003, the Company changed its corporate name and
business several times. Zynex's corporate history prior to February 11, 2004 is
detailed in the Company's December 31, 2004 10-KSB filed on April 15,
2005.





On
February 11, 2004, Zynex Medical Holdings, Inc. acquired 100% of the common
stock of Zynex Medical, Inc., a privately held Colorado corporation ("Zynex
Medical"), pursuant to an acquisition agreement by issuing 19,500,000 shares of
common stock to Thomas Sandgaard the sole shareholder of Zynex Medical.
Immediately after the transaction, the former shareholder of Zynex Medical owned
approximately 88.5 percent of the Company's common stock.





Zynex is
the parent company of Zynex Medical. Zynex Medical designs, manufactures and
markets FDA approved medical devices for the electrotherapy and stroke
rehabilitation markets. The Company's headquarters are located in Littleton,
Colorado.





Dan Med,
Inc, (“DMI”) was incorporated by Mr. Sandgaard under the laws of the State of
Colorado on October 31, 1996. Zynex Medical was incorporated by Mr. Sandgaard as
Stroke Recovery Systems, Inc, ("SRSI") under the laws of the State of Colorado
on March 3, 1998. On October 1, 2003, SRSI acquired by merger the assets and
liabilities of DMI. Mr. Sandgaard operated SRSI as a privately-ownedcorporation
from inception until the February 11, 2004 Zynex acquisition.





For
accounting purposes, Zynex Medical is treated as the acquiring corporation, and
financial statements for years prior to 2004 are those of Zynex
Medical.





DMI's
primary activity was importing and marketing European-made electrotherapy
devices from its inception until 1999 when DMI began to develop, assemble and
market its own line of electrotherapy products. Its own products constituted
over 80% of DMI revenues at the time of its acquisition by SRSI.





Prior to
acquiring DMI, SRSI's primary activities were to develop and market homecare
electrotherapy devices for US stroke survivors suffering impaired mobility and
loss of functionality. In early 2002, SRSI engaged its own sales force and began
to market DMI's entire line of standard electrotherapy products. The DMI
products accounted for over 75% of Zynex Medical's 2002 revenue.





Current
Business





Zynex
engineers, manufactures, markets and sells its own design of FDA cleared medical
devices into two distinct markets (1) standard electrotherapy products for pain
relief / pain management and (2) the NeuroMove(TM) for stroke and spinal cord
injury ("SCI") rehabilitation.


-
4 -




All Zynex
products are intended to be patient friendly and designed for home use. The
products are cost effective when compared to traditional physical therapy, and
often result in better mobility, less pain and increased potential for a patient
to return to work and a fuller life significantly earlier than with traditional
therapies alone. The NeuroMove has been the subject of nine successfully
completed clinical trials and is currently being evaluated in four additional
trials





The U.S.
Food and Drug Administration (the "FDA") has cleared all of our products for
sale in the United States (the "U.S.") and our products require a physician's
prescription, authorization or order before they can be dispensed in the U.S.
Our primary business model considers the physician's prescription as an "order",
and it is on this basis we provide the product to the patient and either bill
the patient directly or the patient's private or government insurer (Medicare or
Medicaid) for payment.





We
believe our products assist in improving the quality of life for patients
suffering with impaired mobility from stroke or SCI, and those suffering from
debilitating and chronic pain.




Our Zynex
produced electrotherapy products, the IF8000, IF8100, TruWave and E-Wave, are
marketed through physicians and therapists primarily by our independent
contractor sales representatives, some of whom receive additional compensation
to serve as Regional Sales Managers. We also employ inside sales personnel. The
NeuroMove is marketed directly to end-user patients and physicians who
specialize in stroke and SCI rehabilitation.





To
increase revenues, we added several experienced sales representatives in 2006
and in 2007 we engaged over 25 sales representatives. In 2008 we intend to hire
or contract with additional sales representatives, and such additions are part
of our 2008 business plan.





To expand
our international sales we have obtained representation commitments from well
established local medical device distributors and have engaged an
internationally regarded consulting firm to assist us in preparing to apply for
European Union CE Marking. See “Regulatory Approval and Process”
below.





Our
Products





We
currently market and sell five Zynex produced products and resell seven products
purchased from others, all as indicated below:




Product
      Name
            DescriptionOur
      ProductsIF
      8000
            Combination
      Interferential and Muscle Stimulation device.IF
      8100
            An
      easier to use, fixed program version of the IF8000.E-Wave
            Dual
      Channel NMES DeviceTruWave
            Dual
      Channel TENS DeviceNM
      900
            NeuroMove.
      EMG triggered Electrical Stimulation Device




-
5 -







Resale
      ProductsElpha
      3000
            Dual
      Channel NMES deviceConti4000
            Electrical
      Stimulation Device for Incontinence TreatmentValuTENS
            Dual
      Channel TENS DeviceElpha
      1000
            Dual
      Channel TENS DeviceDCHT
            Cervical
      Traction DeviceLHT
            Lumbar
      Traction DeviceElectrodes
            Supplies,
      re-usable for delivery of electrical current to the
  body





The
Company received a majority of its revenue in 2007 from the sale and rental of
transcutaneous electrical nerve stimulation (“TENS”), interferential and muscle
stimulation devices as well as electrode supplies.




Pain
Management





Standard
electrotherapy is a clinically proven and medically accepted alternative
modality to manage acute and chronic pain. Electrotherapy is not known to have
any negative side effects, a significant advantage over most pain relief
medications. The benefits of electrotherapy can include: pain relief, increased
blood flow, reduced edema, prevention of venous thrombosis, increased
range-of-motion, prevention of muscle disuse atrophy, and reduced urinary
incontinence.





Electrotherapy
introduces an electrical current applied through surface electrodes. The
electrical current "distorts" a pain signal on its way to the central nervous
system and the brain, thus reducing the pain. Additionally, by applying higher
levels of electricity muscles contract and such contraction may assist in the
treatments mentioned above.





Stroke and Spinal Cord
Injury Rehabilitation





Our
proprietary, patent pending NeuroMove is a Class II medical device that has been
cleared by the FDA for stroke and spinal cord injury ("SCI") rehabilitation and
is only dispensed with a physician's prescription. The NeuroMove was introduced
to the market in late 2003. Stroke and SCI usually affect a survivor's mobility,
functionality, speech, and memory, and the NeuroMove helps the survivor regain
movement and functionality.





According
to information published by the American Heart Association approximately 4
million, 73%, of the estimated 5.7 million U.S. stroke survivors, a population
that is estimated to be growing about 9% or 400,000 new survivors a year, have
mobility impairments following the acute stage of the stroke.





Because
there has not been an overall SCI incidence study since the 1970s and many cases
are unreported as such, definitive statistics are not available. However, the
National Spinal Cord Injury Association reports that in 2006, living U.S.
victims range between 227,000 and 300,000 and the SCI Injury Information Network
estimate 11,000 new cases each year.




-
6 -




In most
cases, the survivors and their caregivers for both stroke and SCI victims
believe they must live with the disability for the rest of their lives and this
inability to move one or more extremities has, we believe, a substantial
negative psychological impact on the survivor's recovery potential. By using the
NeuroMove as recommended, we believe the patient has a viable opportunity to
achieve improvement beyond their current physical plateau and that such positive
results will be a major contributor to the recovery process. The NeuroMove has
also been proven in clinical studies to show beneficial effects when combined
with physical therapy.





By
conscientiously using the NeuroMove for three to twelve months, the majority of
Neuromove patients can reestablish the connection between the brain and impaired
muscle and thus regain movement and functionality.When movement and
functionality are restored, the patient may experience increased mobility,
increased productivity, an improved outlook, and a reduced risk of accidents,
and may be able to engage in activities they were precluded from before using
the NeuroMove.





NeuroMove Clinical
Review





The
NeuroMove utilizes the relatively new science of "neuroplasticity", the process
by which healthy parts of the brain learn to compensate and assume functions
previously carried out by the damaged areas. To accomplish this task, the
extraordinarily sensitive NeuroMove technology monitors muscle activity and
detects brain signals that indicate-- even without any visible movement-- the
brain's effort to move a specific muscle or area of the body. Once the effort is
detected, the NeuroMove induces actual movement through electrical stimulation,
thus providing effective feedback to initiate relearning in the healthy part of
the brain.





We
believe the NeuroMove is unique because its built-in microprocessor can
recognize low-level attempts by muscles to contract and then "reward" such
detection with electrical stimulation. We do not believe there are similar
products in the stroke rehabilitation market.





Because
the NeuroMove increases the likelihood and reduces the time required for
noticeable physical improvement as compared to traditional therapies used
without the NeuroMove, we believe it can have positive effect in reducing
society's annual stroke and SCI victim cost. The American Heart Association
estimated that in 2007 alone stroke costs would total more than $62 billion
dollars. Similar data for SCI victims has not been compiled but the Spinal Cord
Injury Network estimates lifetime per victim costs range from $. 0.5 million to
$2.9 million depending on age and the type of injury. NeuroMove related cost
savings will come from reduced physical therapy, less medication, fewer post
stroke accidents, less hospitalization and rehabilitation, more motivated
patients, less support personnel and equipment, and reduced productivity
loss.





Several
independent NeuroMove clinical studies have been published in peer-reviewed
journals. Abstracts from the studies can be reviewed at www.NeuroMove.com and
the full studies can be obtained directly from the Company.




-
7 -




Pain Management and
Control





Electrical
stimulation has been shown to reduce most types of local pain, such as tennis
elbow, neck or lower back pain, arthritis, and others. The devices used to
accomplish this are commonly described as in the transcutaneous electrical nerve
stimulation (“TENS”) family of devices.





Numerous
clinical studies have been published over several decades showing the
effectiveness of TENS for pain relief. Zynex has developed three products in the
TENS category that have been cleared by the FDA: the TruWave, a digital TENS
device, and the IF8000 and upgraded IF8100 interferential stimulators which
provide deeper stimulation. The TruWave is a "traditional" TENS type unit that
delivers pain-alleviating electrotherapy, whereas the IF8000 is a more
sophisticated unit with deeper pain alleviating and neuromuscular training
settings.





Muscle related
problems.





Neuromuscular
Electrical Stimulation ("NMES") increases the electrical intensity to cause
muscle contraction and is otherwise applied in the same manner as with TENS
units. We have developed the E-Wave, a specific digital device, for this
application. Additionally, the IF8000 and IF8100 can be programmed for NMES
applications. The FDA has cleared the IF8000, IF8100 and the
E-Wave.





A
built-in timer in our E-Wave and IF8000 products assures that the muscles do not
fatigue too easily. Many pain relief and “NMES” devices for use in a patient's
home can replace therapeutic treatments usually performed with regular physical
therapy. Common applications can prevent disuse atrophy, increase strength,
increase range-of-motion, and increase local blood circulation. NMES is commonly
considered complementary treatment with physical therapy to improve overall
patient outcomes.





Post-op
recovery.





Electrical
stimulation is also effective in preventing deep venous thrombosis immediately
after orthopedic and others surgery, as well as for postoperative pain relief,
to improve local blood circulation and for reducing edema. We believe the IF8000
is the most effective of our products for these applications.





Our
Markets





Based on
the latest public information, including filings with the Securities and
Exchange Commission, of the largest product manufactures in our industry, we
estimate the annual domestic market for standard electrotherapy products at
approximately $450 - $500 million and growing an estimated 5% a year.





We plan
to increase our penetration of the standard electrotherapy market by further
expanding our sales organization and broadening our product offering. We
currently produce gross margins of between 85% and 95% and expect those margins
to continue in the future. The high margins are possible in part because the
products use a common technology platform with different software
configurations.





The
domestic and international markets for stroke and SCI rehabilitation technology
are in the initial stages of development. According to information of the
American Stroke Association on January 27, 2007, with approximately 5.7 million
stroke survivors, growing approximately 9% a year, and approximately 227,000-
300,000 SCI survivors, growing approximately 11,000 per year, in the U.S. alone
there is a significant need for medically proven and effective stroke and SCI
rehabilitative equipment. We believe these markets offer significant
opportunity for profitable growth.





-
8 -


Key characteristics of our
markets are:





-
            Often
      more than 100 days is required to collect initial payment from insurance
      carriers and considerably longer from many attorney, personal injury and
      worker's compensation cases. Such delayed payment impacts the Company's
      cash flow and can slow its growth





-
            Prior
      to payment the third party payers often make significant payment
      "adjustments or discounts".





-
            The
      stroke and SCI markets have demonstrated that many patients and their
      caregivers will privately pay for the
NeuroMove.





Market
Strategies





We plan
to use our core technology to grow in the standard electrotherapy, stroke and
SCI markets in the U.S. and to expand internationally.





In the
U.S. we market our products through commissioned, independent sales
representatives who call on doctors and therapists. We also market the NeuroMove
directly to end users with advertisements and articles in relevant publications
and on the Internet.





Product Assembly And
Processing





Our
product assembly strategy consists of the following elements:





-
            At
      all times, comply with relevant regulatory requirements and
      regulations.





-
            Use
      contract manufacturers as much as possible, thereby allowing us to quickly
      respond to changes in volume and avoid large capital investments for
      assembly and manufacturing equipment. Domestically and internationally,
      there is a large pool of highly qualified contract manufacturers for the
      type of devices we assemble.





-
            Test
      all units 100% in a real-life, in-house environment to help ensure the
      highest possible quality, patient safety, and reduce the cost of warranty
      repairs.





Vendors
located in the United States, Asia and Europe currently manufacture our
products. We do not have contracts with these vendors for our standard
electrotherapy products and utilize purchase orders for our ongoing needs. We
are currently contracted with a vendor to manufacture the NeuroMove. We believe
there are numerous suppliers that can manufacture our products and pricing,
quality and service will continue to determine which manufacturers we
use.





Our
principal suppliers as of February 2008 are:





Axelgaurd Manufacturing Co., LTD,
Fallbrook, CA, US


Byers Peak, Wheat Ridge, CO,
US


Spectramed, Mount Vernon, OH,
US


The Saunders Group (acquired by EMPI),
Chaska, MN, US





Our
employees develop the software used in our products.


-
9 -




Revenue





Our
products may be purchased or rented on a monthly basis.  Renters and
purchasers are primarily patients, health care providers and dealers. If the
patient is covered by health insurance the third party payer typically
determines whether the patient will rent or purchase a unit depending on the
anticipated time period for its use. If a rental continues until an amount equal
to the purchase price is paid, we transfer ownership of the product to the
patient and cease rental charges. When a rental unit is returned, it is
refurbished, tested and made available for additional rentals.





A
majority of our revenue is derived from private health insurance carriers and
HMOs on behalf of their insureds. We also receive revenues from Medicare and
Medicaid, worker's compensation agencies, attorneys representing injured
patients, hospitals, U.S. and international distributors.





A source
of recurring revenue is the sale of surface electrodes sent to existing patients
each month. The electrodes transmit the electrical charge from the device to the
patient and are an essential component of the treatment modality.





For
fiscal 2007 approximately 65 % of revenue was derived from rental (compared to
63% for 2006) and 35 % (compared to 37% for 2006) from sales, including
electrode sales.





Our
employees work with the commercial insurance and government third party payers,
patients and commercial clients to collect product rental and purchase
payments.




Products Purchased For
Resale





In
addition to our own products, we distribute a number of products from other
domestic and international manufacturers in order to complement our core product
line. These products include electrical stimulation devices and patient
supplies, such as electrodes. Customarily, there are no formal contracts between
vendors in the durable medical equipment industry. Replacement products and
components are easily found, either from our own products or other
manufacturers, and purchases are made by purchase order.





Intellectual
Property





We have
applied for a patent with 22 claims for our NeuroMove technology. With regard to
our other products, we believe that the products contain certain proprietary
software that protects them from being copied. In the future, we may seek
patents for advances to our existing products and for new products as they are
developed.





We hold
registered trademarks for NeuroMove in the U.S. and the European Union. Zynex
Medical is trademarked in the U.S.





We
utilize non-disclosure and trade secret agreements with employees and third
parties to protect our proprietary information.




-
10 -




Regulatory Approval And
Process





All our
products are classified as Class II (Medium Risk) devices by the Food and Drug
Administration (FDA), and clinical studies with our products are considered to
be NSR (Non-Significant Risk Studies). Our business is governed by the FDA, and
all products typically require 510(k) market clearance before they can be put in
commercial distribution. Section 510(k) of the Federal Food, Drug and Cosmetics
Act, is available in certain instances for Class II (Medium Risk) products. It
requires that before introducing most Class II devices into interstate commerce,
the company introducing the product must first submit information to the FDA
demonstrating that the device is substantially equivalent in terms of safety and
effectiveness to a device legally marketed prior to March 1976. When the FDA
determines that the device is substantially equivalent, the agency issues a
"clearance" letter that authorizes marketing of the product. We are also
regulated by the FDA's QSR division (Quality Systems Regulation), which is
similar to the ISO9000 and the European EN46000 quality control regulations. All
our products currently produced for us or resold by us are cleared for marketing
in the United States under FDA's 510(k) regulations.





Zynex
expects to enter the European market through high quality and well-established
local distributors after obtaining European Union ("EU") CE Marking. CE Marking
is certification that a product meets the standards established by the 25
nations EU and qualifies for sale in the EU and 4-nation European Free Trade
Association ("EFTA"). We are focusing much effort and significant resources on
preparation of the CE application, and it is targeted for completion, submission
and approval in 2008. In anticipation of such approval we have had discussions
with, and received verbal or written distribution commitments from local
distributors





CE
Marking will also enhance our entry into other developed countries, and we plan
to engage local distributors in those countries in the second half of 2008
and/or 2009.





The Far
East, Middle East, Eastern Europe, and Latin American markets have different
regulatory requirements. We intend to comply with applicable requirements if and
when we decide to enter those markets.





In March
2008, Zynex received its ISO13485 : 2003 certification for its compliance with
international standards in quality assurance for design, development,
manufacturing and distribution of medical devices. This certification is not
only important as an assurance that we have the appropriate quality systems in
place but is also crucial to our efforts international expansion around the
world as many countries require this certification as part of their regulatory
approval. Zynex was audited by a corporation authorized by the International
Organization for Standardization (ISO).





Healthcare
Regulation





The
delivery of health care services and products has become one of the most highly
regulated of professional and business endeavors in the United States. Both the
federal government and individual state governments are responsible for
overseeing the activities of individuals and businesses engaged in the delivery
of health care services and products. Federal law and regulations are based
primarily upon the Medicare and Medicaid programs. Each program is financed, at
least in part, with federal funds. State jurisdiction is based upon the state's
interest in regulating the quality of health care in the state, regardless of
the source of payment. We believe we are materially complying with applicable
laws concerning our products; however, we have not received or applied for a
legal opinion from counsel or from any federal or state judicial or regulatory
authority. Additionally, many aspects of our business have not been the subject
of state or federal regulatory interpretation. The laws applicable to us are
subject to evolving interpretations. If our operations are reviewed by a
government authority, we may receive a determination that could be adverse to
us. Furthermore, laws that are applicable to us may be amended in a manner that
could adversely affect us.





Federal
health care laws apply to us when we submit a claim to Medicare, Medicaid or any
other federally funded health care program. The principal federal laws that we
must abide by in these situations include:




-
11 -




-
            Those
      that prohibit the filing of false or improper claims for federal
      payment.





-
            Those
      that prohibit unlawful inducements for the referral of business
      reimbursable under federally funded health care
  programs.





The
federal government may impose criminal, civil and administrative penalties on
anyone who files a false claim for reimbursement from Medicare, Medicaid or
other federally funded programs.





A federal
law commonly known as the "anti-kickback law" prohibits the knowing or willful
solicitation, receipt, offer or payment of any remuneration made in return
for:





-
            The
      referral of patients covered under Medicare, Medicaid and other
      federally-funded health care programs;
or





-
            The
      purchasing, leasing, ordering, or arranging for any goods, facility, items
      or service reimbursable under those
programs.





Employees





As of
December 31, 2007, we employed 45 full time employees (an increase from 17 as of
December 31, 2006). We also engage a number of independent contractor,
commission-only sales representatives. We believe our relations with all of our
employees and independent contractors are good. We are subject to the minimum
wage and hour laws and provide usual and customary employee benefits such as
vacation, sick leave and health and dental insurance.




Executive Officers Of The
Registrant





The
following table sets forth information as to the name, age and office held by
the two executive officers of the Company as of December 31, 2007:





Name
            Age
            PositionThomas
      Sandgaard
            49
            President,
      Chief Executive Officer and Director.Set
      forth below is a biographical description ofMr.
      Sandgaard based on information supplied by himFritz
      G. Allison
            48
            Chief
      Financial Officer.Set
      forth below is a biographical description ofMr.
      Allison based on information supplied by
him.








Mr.
Sandgaard founded the Company in 1996 after a successful European based career
in the semiconductor, telecommunications and medical equipment industries with
ITT, Siemens and Philips Telecom. Mr. Sandgaard held middle and senior
management positions in the areas of international sales and distribution,
technology transfers, mergers and acquisitions and marketing. Mr. Sandgaard
holds a degree in electronics engineering from Odense Teknikum, Denmark and an
MBA from the Copenhagen Business School.





Mr.
Allison was elected as Chief Financial Officer of Zynex, effective February 19,
2007. Prior to joining Zynex, Mr. Allison served as a Financial Consultant for
MSS Technologies, a Phoenix-based provider of business application solutions,
since 2004. From December 2000 until March 2004, Mr. Allison was the
Vice-President, Controller and Chief Financial Officer of Orange Glo
International, Inc, a manufacturer of cleaning products in the consumer package
goods industry. Previous positions include Manager of Corporate Accounting for
J.D. Edwards & Co., Controller at Powercom-2000 and International Controller
for CH2M Hill International. Mr. Allison holds a B.A. in Business Administration
from the University of Southern California and has been a Certified Public
Accountant.




-
12 -





ITEM
2. DESCRIPTION OF PROPERTY





In
November 2007, the Company moved its headquarters, office, plant and warehouse
to a new facility in Littleton, Colorado. This new space, consisting of 16,553
square feet, is sub-leased under a 25-month agreement at an annual cost of
$100,975 plus property taxes and common area maintenance expenses. The Company
also maintains its prior facility, which is under a five-year lease expiring in
February 2009. The base rent on that facility was originally $93,642 per year
plus common area maintenance expenses. Base rent increased to $96,106 March 1,
2007 and increases to $98,570 March 2, 2008. The present configuration of the
both spaces will accommodate 100-125 employees. The Company believes that the
leased property is sufficient to support its requirements until the sub-lease
expires.







ITEM
3. LEGAL PROCEEDINGS





We are
not a party to any material pending or threatened legal
proceedings.






ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None




PART
II





ITEM
5. MARKET FOR COMMON EQUITY, AND RELATED
STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES





Our
common stock is currently traded on the OTC Bulletin Board under the symbol
"ZYNX".





The
following table sets forth the range of high and low bid quotations for our
common stock for each quarter of the last two fiscal years, as reported on the
Bulletin Board. The quotations represent inter-dealer prices without retail
markup, markdown or commission, and may not necessarily represent actual
transactions.





PERIOD
            HIGH
            LOWYear
      ended December 31, 2006First
      Quarter
            $0.55
            $0.31Second
      Quarter
            $0.50
            $0.25Third
      Quarter
            $0.50
            $0.25Fourth
      Quarter
            $0.45
            $0.21Year
      ended December 31, 2007First
      Quarter
            $0.45
            $0.20Second
      Quarter
            $0.95
            $0.34Third
      Quarter
            $1.43
            $0.90Fourth
      Quarter
            $1.49
            $1.18




As of
April 15, 2008, there were 28,943,695 shares of common stock outstanding and
approximately 242 registered holders of our common stock.





The
Company has never paid any cash dividends on our capital stock and does not
anticipate paying any cash dividends on the common shares in the foreseeable
future. The Company intends to retain future earnings to fund ongoing operations
and future capital requirements of our business. Any future determination to pay
cash dividends will be at the discretion of the Board of Directors (the "Board")
and will be dependent upon our financial condition, results of operations,
capital requirements and such other factors as the Board deems
relevant.




-
13 -





During
the third quarter of 2007, Zynex issued 49,524 shares of common stock from the
exercise of then outstanding warrants at an exercise price of $0.01 per share,
and 1,238 shares of common stock at $0.95 per share in cash. These warrants were
originally issued in June 2004.  During the fourth quarter of 2007,
Zynex issued 9,524 shares of common stock from the exercise of then outstanding
warrants at an exercise price of $0.01 per share. These warrants were originally
issued in June 2004.  In these issuances, Zynex made no general
solicitation, Zynex believes that purchasers of the securities were accredited
investors, Zynex believes that the investment bankers, lender and investor
relations firms were accredited investors or met the standards for a purchaser
is a non-public offering, and Zynex relied upon an exemption from securities
registration for non-public offerings.








ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





For 2007,
Zynex reported $8,048,253 revenue, an increase of 215% from 2006 and net income
of $2,131,350, an increase from a net loss in 2006 of $320,370. The revenue
increase was primarily accomplished through implementation of our 2004-2007
strategic and operating plans, recruitment of experienced sales representative
in 2006 and 2007, and effective utilization of funds received from two 2004
private placements, 2005 and 2006 term loans from Silicon Valley Bank and
proceeds from a 2006 non public offering to accredited investors and bridge
loan. In the fall of 2005 the Company established a $400,000, three year term
loan and banking relationship with Silicon Valley Bank, Costa Mesa, California
and Boulder, Colorado. The relationship was expanded with an additional $240,000
three-year term loan in March 2006. Also in 2006 the Company raised a net
$604,476 from the sale of 2,175,000 shares of common stock in a non public
offering to accredited investors, and a net $206,563 from a bridge loan. For
information on the repayment of the Silicon Valley Bank loan, see “Liquidity and
Capital Resources” below.





The
incremental addition of industry experienced sales representatives during 2007
and the second half of 2006 allowed us to increase our market presence and
increase orders in during 2007. As a result of the sales force expansion our
total orders increased 284% from 2,705 in 2006 to 10,383 in 2007





RESULTS
OF OPERATIONS





Net sales
and rental income for the quarter and twelve months ended December 31, 2007,
were $3,101,869 and $8,048,253 an increase of $2,354,798 and $5,491,444 or 315%
and 215% compared to $747,071 and $2,556,809 for the quarter and twelve months
ended December 31, 2006. The increase in net sales and rental income for the
quarter and twelve months ended December 31, 2007, compared to the quarter and
twelve months ended December 31, 2006 was due primarily to an increase in
prescriptions (orders) for rentals and purchases of the Company’s standard
electrotherapy products resulting from the expansion of the sales force as
discussed above, greater awareness of the Company's products by end users and
physicians resulting from its increased 2006 and 2005 marketing investments,
growing market penetration and increased rental income from the greater number
of Zynex products placed in use during the prior periods.





Net sales
and rental income by quarter were as follows:




2007
            
            
            2006First
      quarter
            
            $
            1,336,731
            
            
            $
            505,091Second
      quarter
            
            
            1,505,207
            
            
            
            560,860Third
      quarter
            
            
            2,104,446
            
            
            
            743,787Fourth
      quarter
            
            
            3,101,869
            
            
            
            747,071Total
      net sales and rental income
            
            $
            8,048,253
            
            
            $
            2,556,809




Our sales
and rental income is reported net, after deductions for bad debt and estimated
insurance company reimbursement deductions. The deductions are known throughout
the health care industry as “contractual adjustments” and describe the process
whereby the healthcare insurers unilaterally reduce the amount they reimburse
for our products as compared to the rental rates and sales prices charged by us.
The amounts deducted from gross sales and rental income for these charges were
$7,997,932 for the twelve months ended December 31, 2007 compared to $2,363,485
for the 2006 year, an increase of $5,634,447 or 238%.




-
14 -




Gross
profit increased $5,066,117 over 2006, an increase of 225%. Gross profit as a
percent of net sales and rental income was 90.9% in 2007 compared to 88.1% in
2006. The improvement in gross profit amounts and percent in 2007 compared to
2006 was due to an increase in revenue and increased rental income as a
percentage of total revenue (rental equipment is depreciated and not part of the
cost of goods sold). The company also benefited from reductions in costing of
certain items in cost of goods sold based on volume purchase
discounts.





Selling,
general and administrative expenses increased from $2,326,793 in 2006 to
$4,003,432 in 2007, an increase of 72%. The increase was consistent with the
growth in revenue and was primarily in the areas of sales commissions, salaries
and wages, utilities,office expense,
automobile,consulting
expenses, postage and delivery, and travel and entertainment. The expense
increases were somewhat offset by decreased expenses related to advertising,
public company expense and equipment rental.





Depreciation
increased $59,432, from $94,009 in 2006 to $153,441 in 2007. The increase
results primarily from higher levels of rental inventory, which is considered
property and equipment.





Interest
expense increased $88,326 in 2007 compared to 2006.  The increases
resulted primarily from the note issued to Ascendiant Capital as well
as loans from its majority stockholder, which is described in
Note 3 to the consolidated financial statements in this
report.





Income tax
expense.  We reported expenses for income taxes in the amount
of $790,000 in 2007.  This is primarily due to our having an income
before taxes of $2,921,350. We expect to consume our net operating loss
carry-forward, and therefore we will have to pay taxes on income going forward.
Deferred tax assets have increased due to the effects of temporary differences
primarily attributable to an increase in the allowance for doubtful accounts
receivable.




LIQUIDITY
AND CAPITAL RESOURCES





Cash
provided by operating activities was $746,864 for the year ended December 31,
2007 compared with cash used in operating activities of $483,460 for the year
ended December 31, 2006. The primary reasons for the increase in cash provided
by operating activities was the net income for 2007 compared to the net loss for
2006. Accounts receivable increased primarily due to increased billings in the
last half of 2007 compared to 2006. These factors were somewhat offset by growth
in accounts payable and accrued liabilities due to purchases to build rental
inventory for new orders and accruing commissions payable to sales
representatives.





Cash used
in investing activities was $758,310 for the year ended December 31, 2007
compared to cash used in investing activities of $151,586 for the year ended
December 31, 2006. Cash used in investing activities represents the purchase of
furniture, equipment and inventory rented to customers.





Cash used
by financing activities was $253,751 for the year ended December 31, 2007
compared with cash provided by financing activities of $881,510 for the year
ended December 31, 2006. The primary use of cash in financing activities during
2007, were the repayment of the bridge loan and principal payments on notes
payable and a capital lease. Financing activities in 2006 include working
capital loans from the principal stockholder and Chief Executive Officer, Thomas
Sandgaard, a term loan from Silicon Valley Bank, net proceeds from an equity
private placement and net proceeds from a bridge loan.




-
15 -




Our cash
requirements increase as our operations expand for the reasons indicated below
for our limited liquidity.  We have begun to see our operations provide
enough cash for our current requirements, and our planned operations might also
provide sufficient cash to implement our business plan.  However, there can
be no assurance that our operations will provide enough cash in the
future.  For this reason we may raise additional capital through debt
or equity financing in 2008. There can be no assurance that we will be able
to raise such additional financing or do so on terms that are acceptable to the
Company.




Our
limited liquidity is primarily a result of (a) the required high levels of
consignment inventory that are standard in the electrotherapy industry, (b) the
payment of commissions to salespersons based on sales or rentals prior to
reimbursement for such transaction, (c) the high level of outstanding accounts
receivable because of the deferred payment practices of third party health
payers, and (d) the delayed cost recovery inherent in rental transactions. Our
growth results in higher cash needs.





Contingencies
such as unanticipated shortfalls in revenues or increases in expenses could
affect our projected revenue, cash flows from operations and
liquidity.




Payments
Due by Period




Significant Contractual
      Obligations
            
            Total
            
            1
      Year
            
            2-3
      Years
            
            4-5
      Years
            
            5
      YearsNotes
      payable (1)
            
            $
            397,041
            
            $
            354,009
            
            $
            43,032
            
            $
            --
            
            $
            --Capital
      lease obligations
            
            
            31,448
            
            
            18,869
            
            
            12,579
            
            
            --
            
            
            --Operating
      leases
            
            
            396,148
            
            
            206,490
            
            
            189,658
            
            
            --
            
            
            --Total
      contractual cash obligations
            
            $
            824,637
            
            $
            579,368
            
            $
            245,269
            
            $
            --
            
            $
            --





(1)In February 2008, the
Company paid $191,071 in full payment of the outstanding amounts under the notes
to Silicon Valley Bank.  Of this amount, $168,371 was due within one
year and $22,700 was due within two to three years.





On
October 5, 2005 Zynex received $400,000 under a three-year term loan agreement
with Silicon Valley Bank, Santa Clara, California and Boulder, Colorado (the
"Lender"). The loan incurred interest at a per annum fixed rate of 7.84%. The
loan was guaranteed by Zynex Chairman, President and Chief Executive Officer
Thomas Sandgaard and was collateralized by a first perfected security interest
in accounts, inventory, chattel paper, equipment, fixtures, general intangibles,
including intellectual property and other assets. The loan was payable in 36
equal monthly payments of principal and interest. The loan included financial
covenants for minimum liquidity and minimum debt service coverage. In connection
with the loan, the Lender was granted a seven-year warrant to purchase 50,000
shares of Zynex Common Stock at an exercise price of $0.71 per
share.





On March
15, 2006 Zynex received another loan in the amount of $240,000 under a Default
Waiver and First Amendment To Loan and Security Agreement with Silicon Valley
Bank dated September 29, 2005. The Amendment to the existing loan agreement of
September 29, 2005 provided for this second term loan and waived one covenant
violation for the time period ended December 31, 2005. The new loan bore
interest at a per annum fixed rate of 8.48%. Zynex began repaying the loan in 36
equal monthly payments of principal and interest, beginning April 1, 2006. All
other terms and conditions were as stated in the September 29, 2005 loan
agreement. This loan was also guaranteed by Zynex Chairman, President, Chief
Executive Officer and major shareholder Thomas Sandgaard and was collateralized
by a first security interest in accounts, inventory, chattel paper, equipment,
fixtures, general intangibles, including intellectual property and other
assets.





As
indicated in the table above, the Silicon Valley Bank notes were repaid in full
during February 2008.





On
October 18, 2006, the Company entered into a loan transaction with Ascendiant
Capital Group, LLC (an affiliate of Ascendiant Securities, LLC) and issued to
Ascendiant Capital (a) a secured Note in the total principal amount of $275,000
(the "Note") and (b) a five-year warrant to purchase a total of 429,867 shares
of our common stock at a fixed exercise price of $0.39 per share.
The Note was convertible into common stock at a fixed conversion price of
$0.32 per share. Net proceeds of approximately $206,000 from the transaction
were used for general working capital.


-
16 -




In May
2007, the Company and Ascendiant Capital agreed to extend the maturity date of
the loan and to modify extension terms of the Note.  Under the
modified agreement the principal was to be paid in six equal monthly
installments plus interest at 21%, although prepayment was permitted without
penalty.  The entire amount was to be repaid no later than October 18,
2007.  For extending the Note, the Company issued 75,000 shares of
common stock in May 2007.  The shares were valued at $26,250. The
extension agreement called for additional shares to be issued every month as
long as an outstanding balance remained on the Note.  The number of
shares to be issued monthly depended upon the balance of the Note, up to an
aggregate maximum of 450,000 shares of common stock, which number included the
75,000 shares of common stock issued in May 2007.  Previously, 450,000
shares were to be issued upon the extension.





In May
2007, the Company repaid principal of $100,000 of the Ascendiant Capital note,
interest of $4,812 and issued 50,000 shares of common stock valued at
$21,500.





In June
2007, the Company repaid principal of $76,000, interest of $3,062 and issued
25,000 shares of common stock valued at $21,250.





On June
21, 2007, Ascendiant Capital surrendered the Note for conversion into common
stock at the fixed conversion price of $0.32 per share.  The
remaining principal of $99,000 plus accrued interest of $173 were converted into
309,916 shares of common stock.




Effective
March 1, 2006 a previously non-interest bearing loan from Thomas Sandgaard,
President and Chief Executive Officer, in the amount of $14,980 was converted to
a 24 month, 8.25% term loan, with equal monthly payments of principal and
interest commencing April 1, 2006.  As of December 31, 2007, this loan
had been paid in full.





In 2006
Mr. Sandgaard loaned the Company $146,900, of which $50,000 was converted to a
24 month, 8.25% term loan, with equal monthly payments of principal and interest
commencing April 1, 2006. As of December 31, 2007, $14,592 of this amount
remained outstanding   The remaining $96,900 was represented by
8.25% demand notes and will be repaid as the Company's cash position and its
financing covenants allow. As of December 31, 2007, $4,171 of this amount
remained outstanding. The loans from Mr. Sandgaard were used for working capital
purposes.





In May
and June 2007, Mr. Sandgaard made 24-month unsecured loans to the Company in the
principal amounts of $50,000 and $24,000 for a total amount of $74,000, The
loans bear interest at 8.25% per annum and require monthly payments of $2,267,
commencing June 2007 and $1,088 commencing July 2007, for a total of
$3,355.  As of December 31, 2007, $36,256 and $18,365 remain
outstanding. The loans from Mr. Sandgaard were used for working capital purposes
and repayment of the Note Payable to Ascendiant Capital Group, LLC.





In
September 2007, Mr. Sandgaard made a loan to the Company in the principal amount
of $59,500.  The loan bears interest at 8.25% per annum commencing
September 30,2007 and is a demand note.  As of December 31, 2007,
$60,736 remains outstanding.  The loan from Mr. Sandgaard was used for
working capital purposes.





CRITICAL
ACCOUNTING POLICIES





Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
monitor our estimates on an on-going basis for changes in facts and
circumstances, and material changes in these estimates could occur in the
future. Changes in estimates are recorded in the period in which they become
known. We base our estimates on historical experience and other assumptions that
we believe to be reasonable under the circumstances. Actual results may differ
from our estimates if past experience or other assumptions do not turn out to be
substantially accurate.





We have
identified the policies below as critical to our business operations and the
understanding of our results of operations.


-
17 -





Revenue
Recognition. Sales and rental income for patient transactions is recognized when
a product has been medically prescribed and dispensed to a patient and an
invoice sent to the patient or a claim prepared by the Company has been filed
with the patient's insurance provider. Revenue for a non-patient purchaser or
rental, for example a hospital, is recognized when an invoice has been sent and
the product shipped to the person or entity. Product and rental revenues are
recognized net of a reserve for collectibility.





Provision
for Sales Returns, Allowances and Collectibility. The Company maintains a
collectibility reserve for sales and rentals. The reserve is charged when
reimbursements from insurance carriers and other third party payers are less
than amounts claimed, as provided by agreement, where the amount claimed by the
Company exceeds the insurance provider's usual, customary and reasonable
reimbursement rate and when units are returned because of benefit denial. The
provision is accounted for by reducing gross revenue by a portion of the amount
invoiced during the relevant period. The amount of the reduction is estimated
based on historical experience.





Reserve
for Obsolete/Excess Inventory. Inventories are stated at the lower of cost or
market. We regularly review our inventories and, when required, will record a
provision for excess and obsolete inventory based on factors that may impact the
realizable value of our inventory including, but not limited to, technological
changes, market demand, regulatory requirements and significant changes in our
cost structure. If ultimate usage varies significantly from expected usage, or
other factors arise that are significantly different than those anticipated by
management, inventory write-downs or increases in reserves might be
required.





Share-based
compensation. In
December 2004, the FASB issued SFAS No. 123 (R) Share-Based Payment, which
addresses the accounting for share-based payment transactions. SFAS No. 123(R)
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, and generally requires instead that such transactions
be accounted and recognized in the statement of income based on their fair
value. SFAS No. 123 (R) was effective and adopted by the Company as of January
1, 2006.





Transactions
in which the Company issues stock-based compensation for goods or services
received from non-employees are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is the more reliably measurable. The Company often utilizes pricing
models in determining the fair values of options and warrants issued as
stock-based compensations to non-employees. These pricing models utilize the
market price of the Company’s common stock and the exercise price of the option
or warrant, as well as time value and volatility factors underlying the
positions.





RISKS
RELATED TO OUR BUSINESS




WE MAY BE
UNABLE TO OBTAIN ADDITIONAL CAPITAL REQUIRED TO GROW OUR BUSINESS. WE MAY HAVE
TO CURTAIL OUR BUSINESS IF WE CANNOT FIND ADEQUATE FUNDING.





Our
ability to grow depends significantly on our ability to expand our operations
through internal growth and by acquiring other companies or assets. This will
require significant capital resources. We may need to seek additional capital
from public or private equity or debt sources to fund our operating plans and
respond to other contingencies such as:





-
            shortfalls
      in anticipated revenues or increases in
  expenses;





-
            the
      development of new products; or





-
            the
      expansion of our operations, including the recruitment of additional sales
      personnel.




-
18 -


During
2006, we sold shares of our common stock and related warrants in a non-public
offering in order to provide funds for working capital and growth. We cannot be
certain that we will be able to raise additional capital in the future on terms
acceptable to us or at all. If alternative sources of financing are insufficient
or unavailable, we may be required to modify our growth and operating plans in
accordance with the extent of available financing. Any additional equity
financing may involve substantial dilution to our then existing
shareholders.





WE HAVE
LIMITED LIQUIDITY BECAUSE OUR CASH REQUIREMENTS INCREASE AS OUR OPERATIONS
EXPAND





Our
limited liquidity is primarily a result of (a) the required high levels of
consignment inventory that are standard in the electrotherapy industry, (b) the
payment of commissions to salespersons based on sales or rentals prior to
reimbursement for such transactions, (c) the high level of outstanding accounts
receivable because of deferred payment practices of third party health payers,
and (d) the delayed cost recovery inherent in rental transactions.





OUR
POTENTIALCOMPETITORS
COULD BE LARGER THAN US AND HAVE GREATER FINANCIAL AND OTHER RESOURCES THAN WE
DO AND THOSE ADVANTAGES COULD MAKE IT DIFFICULT FOR US TO COMPETE WITH
THEM.





Substantial
competition may be expected in the future in the area of stroke rehabilitation
that may directly compete with our NeuroMove product. Competitors to our
products may have substantially greater financial, technical, marketing, and
other resources. Competition could result in price reductions, fewer orders,
reduced gross margins, and loss of market share. These companies may use
standard or novel signal processing techniques to detect muscular movement and
generate stimulation to such muscles. Other companies may develop rehabilitation
products that perform better and/or are less expensive than our products. Our
products are regulated by the U.S. Food and Drug Administration. Competitors may
develop products that are substantially equivalent to our FDA approved products,
thereby using our products as predicate devices to more quickly obtain FDA
approval for their own. If overall demand for our products should decrease it
could have a materially adverse affect on our operating results.





FAILURE
TO KEEP PACE WITH THE LATEST TECHNOLOGICAL CHANGES COULD RESULT IN DECREASED
REVENUES.





The
market for our products is characterized by rapid change and technological
improvements. Failure to respond in a timely and cost-effective way to these
technological developments could result in serious harm to our business and
operating results. We have derived, and we expect to continue to derive, a
substantial portion of our revenues from creating products in the medical device
industry. As a result, our success will depend, in part, on our ability to
develop and market product offerings that respond in a timely manner to the
technological advances of our competitors, evolving industry standards and
changing client preferences.





WE ARE
DEPENDENT ON REIMBURSEMENT FROM INSURANCE COMPANIES AND GOVERNMENT (MEDICARE AND
MEDICAID) AGENCIES; CHANGES IN INSURANCE REIMBURSEMENT POLICIES COULD RESULT IN
DECREASED OR DELAYED REVENUES





A large
percentage of our revenues comes from insurance company and government agency
reimbursement. Upon delivery of our products to our customers, we directly bill
the customers' private insurance company or government payer for reimbursement.
If the billed payers do not pay their bills on a timely basis or if they change
their policies to exclude coverage for our products, we would experience delayed
revenue recognition or a decline in our revenue as well as cash flow
issues.




A
MANUFACTURER'S INABILITY TO PRODUCE OUR GOODS ON TIME AND TO OUR SPECIFICATIONS
COULD RESULT IN LOST REVENUE.





Third-party
manufacturers assemble and manufacture to our specifications most of our
products. The inability of a manufacturer to ship orders of our products in a
timely manner or to meet our quality standards could cause us to miss the
delivery date requirements of our customers for those items, which could result
in cancellation of orders, refusal to accept deliveries or a reduction in
purchase prices, any of which could have a material adverse affect on our
revenues. Because of the timing and seriousness of our business, and the medical
device industry in particular, the dates on which customers need and require
shipments of products from us are critical. Further, because quality is a
leading factor when customers, doctors, health insurance providers and
distributors accept or reject goods, any decline in quality by our third-party
manufacturers could be detrimental not only to a particular order, but also to
our future relationship with that particular customer.


-
19 -




IF WE
NEED TO REPLACE MANUFACTURERS, OUR EXPENSES COULD INCREASE RESULTING IN SMALLER
PROFIT MARGINS.





We
compete with other companies for the production capacity of our manufacturers
and import quota capacity. Some of these competitors have greater financial and
other resources than we have, and thus may have an advantage in the competition
for production and import quota capacity. If we experience a significant
increase in demand, or if we need to replace an existing manufacturer, we may
have to expand our third-party manufacturing capacity. We cannot assure that
this additional capacity will be available when required on terms that are
acceptable to us or similar to existing terms, which we have with our
manufacturers, either from a production standpoint or a financial standpoint. We
enter into a number of purchase order commitments specifying a time for
delivery, method of payment, design and quality specifications and other
standard industry provisions, but do not have long-term contracts with any
manufacturer. None of the manufacturers we use produces our products
exclusively.





Should we
be forced to replace one or more of our manufacturers, we may experience
increased costs or an adverse operational impact due to delays in distribution
and delivery of our products to our customers, which could cause us to lose
customers or lose revenue because of late shipments.





OUR
BUSINESS IS EXPOSED TO DOMESTIC INTEREST RATES AND FOREIGN CURRENCY
FLUCTUATIONS; NEGATIVE CHANGES IN EXCHANGE RATES COULD RESULT IN GREATER
COSTS.





Most of
Zynex's revenue, expenses, and capital spending have been transacted in US
dollars. Zynex's exposure to market risk for changes in interest rates relate
primarily to Zynex's cash and cash equivalent balances, marketable securities,
investment in sales-type leases, and loan agreements. The majority of Zynex's
investments, if any, may be in short-term instruments and therefore subject to
fluctuations in US interest rates. Due to the nature of such short-term
investments, we cannot assure that this will not have a material adverse impact
on our financial condition and results of operations.





IF WE ARE
UNABLE TO RETAIN THE SERVICES OF MR. SANDGAARD OR IF WE ARE UNABLE TO
SUCCESSFULLY RECRUIT QUALIFIED MANAGERIAL AND SALES PERSONNEL HAVING EXPERIENCE
IN OUR BUSINESS, WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS.





Our
success depends to a significant extent upon the continued service of Mr. Thomas
Sandgaard, our Chief Executive Officer and currently sole director. Loss of the
services of Mr. Sandgaard could have a material adverse effect on our growth,
revenues, and prospective business. We do not maintain key-man insurance on the
life of Mr. Sandgaard. In addition, in order to successfully implement and
manage our business plan, we will be dependent upon, among other things,
successfully recruiting qualified managerial and sales personnel having
experience in business. Competition for qualified individuals is intense. There
can be no assurance that we will be able to find, attract and retain qualified
new employees and retain existing employees.





HOSPITALS
AND CLINICIANS MAY NOT BUY, PRESCRIBE OR USE OUR PRODUCTS IN SUFFICIENT NUMBERS,
WHICH COULD RESULT IN DECREASED REVENUES.





Hospitals
and clinicians may not accept the NeuroMove NM900, IF8000, IF8100, TruWave or
E-Wave products as effective, reliable, and cost-effective. Factors that could
prevent such institutional customer acceptance include:





-
            If
      customers conclude that the costs of these products exceed the cost
      savings associated with the use of these
  products;





-
            If
      customers are financially unable to purchase these
    products;





-
            If
      adverse patient events occur with the use of these products, generating
      adverse publicity;





-
            If
      we lack adequate resources to provide sufficient education and training to
      Zynex's customers; and





-
            If
      frequent product malfunctions occur, leading clinicians to believe that
      the products are unreliable.





If any of
these or other factors results in the non-use or non-purchase of our products,
we will have reduced revenues and may not be able to fully fund
operations.


-
20 -




AS A
RESULT OF BEING IN THE MEDICAL DEVICE INDUSTRY, WE NEED TO MAINTAIN SUBSTANTIAL
INSURANCE COVERAGE, WHICH COULD BECOME VERY EXPENSIVE OR HAVE LIMITED
AVAILABILITY.





Our
marketing and sale of products and services related to the medical device field
creates an inherent risk of claims for liability. As a result, we carry product
liability insurance with an aggregate limit of $5,000,000 and $2,000,000 per
occurrence and will continue to maintain insurance in amounts we consider
adequate to protect us from claims. We cannot, however, be assured to have
resources sufficient to satisfy liability claims in excess of policy limits if
required to do so. Also, there is no assurance that our insurance provider will
not drop our insurance or that our insurance rates will not substantially rise
in the future, resulting in increased costs to us or forcing us to either pay
higher premiums or reduce our coverage amounts, which would result in increased
liability to claims.





OUR
FUTURE DEPENDS UPON OBTAINING REGULATORY APPROVAL OF ANY NEW PRODUCTS AND/OR
MANUFACTURING OPERATIONS WE DEVELOP; FAILURE TO OBTAIN REGULATORY APPROVAL COULD
RESULT IN INCREASED COSTS AND LOST REVENUE.





Before
marketing any new products, we will need to complete one or more clinical
investigations of each product. There can be no assurance that the results of
such clinical investigations will be favorable to us. We may not know the
results of any study, favorable or unfavorable to us, until after the study has
been completed. Such data must be submitted to the FDA as part of any regulatory
filing seeking approval to market the product. Even if the results are
favorable, the FDA may dispute the claims of safety, efficacy, or clinical
utility and not allow the product to be marketed. The sale price of the product
may not be enough to recoup the amount of our investment in conducting the
investigative studies.





WE MAY
INCUR SUBSTANTIAL EXPENSES AND MAY INCUR LOSSES.





The area
of medical device research is subject to rapid and significant technological
changes. Developments and advances in the medical industry by either competitors
or neutral parties can affect our business in either a positive or negative
manner. Developments and changes in technology that are favorable to us may
significantly advance the potential of our research while developments and
advances in research methods outside of the methods we are using may severely
hinder, or halt completely our development.





We are a
small company in terms of employees, technical and research resources and
capital. We expect to have research and development and significant sales and
marketing, and general and administrative expenses for several years. These
amounts may be expended before any commensurate incremental revenue from these
efforts may be obtained. These factors could hinder our ability to meet changes
in the medical industry as rapidly or effectively as competitors with more
resources.





WE MAY BE
UNABLE TO PROTECT OUR TRADEMARKS, TRADE SECRETS AND OTHER INTELLECTUAL PROPERTY
RIGHTS THAT ARE IMPORTANT TO OUR BUSINESS.





We regard
our trademarks, particularly our NeuroMove trademark which is registered in the
United States and the European Union, our trade secrets and other intellectual
property as an integral component of our success. We rely on trademark law,
patents, and trade secret protection and confidentiality agreements with
employees, customers, partners and others to protect our intellectual property.
Effective trademark and trade secret protection may not be available in every
country in which our products are available. We cannot be certain that we have
taken adequate steps to protect our intellectual property, especially in
countries where the laws may not protect our rights as fully as in the United
States. In addition, if our third-party confidentiality agreements are breached
there may not be an adequate remedy available to us. If our trade secrets become
publicly known, we may lose our competitive position.


-
21 -


SUBSTANTIAL
COSTS COULD BE INCURRED DEFENDING AGAINST CLAIMS OF INFRINGEMENT.





Other
companies, including competitors, may obtain patents or other proprietary rights
that would limit, interfere with, or otherwise circumscribe Zynex's ability to
make, use, or sell products. Should there be a successful claim of infringement
against us and if we could not license the alleged infringed technology,
business and operating results could be adversely affected. There has been
substantial litigation regarding patent and other intellectual property rights
in the medical device industry. The validity and breadth of claims covered in
medical technology patents involve complex legal and factual questions for which
important legal principles remain unresolved. Any litigation claims against us,
independent of their validity, may result in substantial costs and the diversion
of resources with no assurance of success. Intellectual property claims could
cause us to:




-
            Cease
      selling, incorporating, or using products that incorporate the challenged
      intellectual property,





-
            Obtain
      a license from the holder of the infringed intellectual property right on
      reasonable terms, if at all, and





-
            Re-design
      Zynex's products incorporating the infringed intellectual
      property.





COMMERCIALIZATION
OF OUR PRODUCTS COULD FAIL IF IMPLEMENTATION OF OUR SALES AND MARKETING STRATEGY
IS UNSUCCESSFUL.





A
significant sales and marketing effort may be necessary to achieve the level of
market awareness and sales needed to achieve our financial projections. To
increase sales and rental of our products we may utilize some or all of the
following strategies in the future:





-
            Contract
      with, hire and train sales and clinical
  specialists;





-
            Build
      a largerdirect
      sales force;





-
            Manage
      geographically dispersed
operations;





-
            Explore
      potential reseller and original equipment manufacturer (OEM) relationships
      and assure that reseller and OEMs provide appropriate educational and
      technical support;




-
              Promote
      frequent product use to increase sales of consumables;
  and
  -
                Enter
      into relationships with well-established distributors in foreign
      markets.


These
strategies could be costly and may impact our operating results.  If
these strategies do not generate increased revenue, the result will be increased
operating expenses greater than the revenue, resulting in a reduction of net
income or even a net loss.




OUR
BUSINESS COULD BE ADVERSELY AFFECTED BY RELIANCE ON SOLE SUPPLIERS.





Notwithstanding
our current multiple supplier approach, in the future certain essential product
components may be supplied by separate sole, or a limited group of, suppliers.
Most of our products and components are purchased through purchase orders rather
than through long term supply agreements and large volumes of inventory may not
be maintained. There may be shortages and delays in obtaining certain product
components. Disruption of the supply or inventory of components could result in
a significant increase in the costs of these components or could result in an
inability to meet the demand for our products. In addition, if a change in the
manufacturer of a key component is required, qualification of a new supplier may
result in delays and additional expenses in meeting customer demand for
products. These factors could affect our revenues and ability to retain our
experienced sales force.




-
22 -


WE MAY
NOT BE ABLE TO OBTAIN CLEARANCE OF A 510 (K) NOTIFICATION OR APPROVAL OF A
PRE-MARKET APPROVAL APPLICATION WITH RESPECT TO ANY PRODUCTS ON A TIMELY BASIS,
IF AT ALL.





If timely
FDA clearance or approval of new products is not obtained, our business could be
materially adversely affected. Clearance of a 510 (k) notification may also be
required before marketing certain previously marketed products, which have been
modified after they have been cleared. Company personnel currently believe that
certain planned enhancements to our current products will not necessitate the
filing of a new 510(k) notification. Should the FDA so require, the filing of a
new 510(k) notification for the modification of the product may be required
prior to marketing any modified devices.





THE FDA
ALSO REQUIRES ADHERENCE TO GOOD MANUFACTURING PRACTICES (GMP) REGULATIONS, WHICH
INCLUDE PRODUCTION DESIGN CONTROLS, TESTING, QUALITY CONTROL, STORAGE AND
DOCUMENTATION PROCEDURES.





To
determine whether adequate compliance has been achieved, the FDA may inspect our
facilities at any time. Such compliance can be difficult and costly to achieve.
Our compliance status may change due to future changes in, or interpretations
of, FDA regulations or other regulatory agencies. Such changes may result in the
FDA withdrawing marketing clearance or requiring product recall. In addition,
any changes or modifications to a device or its intended use may require us to
reassess compliance with Good Manufacturing Practices guidelines, potentially
interrupting the marketing and sale of products. Failure to comply with
regulations could result in enforceable actions, including product seizures,
product recalls, withdrawal of clearances or approvals, and civil and criminal
penalties.





OUR
BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, THE FAILURE TO COMPLY
WITH WHICH COULD RESULT IN SIGNIFICANT PENALTIES.





Numerous
state and federal government agencies extensively regulate the manufacturing,
packaging, labeling, advertising, promotion, distribution and sale of our
products. Our failure or inability to comply with applicable laws and
governmental regulations may result in civil and criminal penalties, which we
are unable to pay or may cause us to curtail or cease operations. We must also
expend resources from time to time to comply with newly adopted regulations, as
well as changes in existing regulations. If we fail to comply with these
regulations, we could be subject to disciplinary actions or administrative
enforcement actions.




CHANGES
IN COVERAGE AND REIMBURSEMENT POLICIES FOR OUR PRODUCTS BY MEDICARE OR
REDUCTIONS IN REIMBURSEMENT RATES FOR OUR PRODUCTS COULD ADVERSELY AFFECT OUR
BUSINESS AND RESULTS OF OPERATIONS.





In the
United States, our products are prescribed by physicians for their patients.
Based on the prescription, which Zynex considers an order, we submit a claim for
payment directly to third party payers such as private commercial insurance
carriers, Medicare or Medicaid and others as appropriate and the payer
reimburses Zynex directly. Federal and
state statutes, rules or other regulatory measures that restrict coverage of our
products or reimbursement rates could have an adverse effect on our ability to
sell or rent our products or cause physical therapists and physicians to
dispense and prescribe alternative, lower-cost products.




With the
passage of the Medicare Prescription Drug, Improvement, and Modernization Act of
2003, or Medicare Modernization Act, a number of changes have been mandated to
the Medicare payment methodology and conditions for coverage of our durable
medical equipment, including our TENS and NMES devices. These changes include a
freeze in payments for our durable medical equipment from 2004 through 2008,
competitive bidding requirements, and new clinical conditions for payment and
quality standards. Although these changes affect our products generally,
specific products may be more or less affected bythe Medicare
Modernization Act's provisions.




-
23 -


Certain
off-the-shelf durable medical equipment (DME), including TENS devices, may
become subject to competitive bidding, in order to reduce costs and
reimbursements to DME suppliers. Under competitive bidding, if implemented,
Medicare will change its approach to reimbursing certain items and services
covered by Medicare from the current fee schedule amount to an amount
established through a bidding process between the government and suppliers.
Competitive bidding may reduce the number of suppliers providing certain items
and services to Medicare beneficiaries and the amounts paid for such items and
services. Also, Medicare payments in regions not subject to competitive bidding
may be reduced using payment information from regions subject to competitive
bidding. Any payment reductions or the inclusion of certain of our products in
competitive bidding, in addition to the other changes to Medicare reimbursement
and standards contained in the Medicare Modernization Act, could have a material
adverse effect on our results of operations.





In
addition, in 2003, the Centers for Medicare and Medicaid Services, or CMS made
effective an interim final regulation implementing "inherent reasonableness"
authority, which allows adjustments to payment amounts for certain items and
services covered by Medicare when the existing payment amount is determined to
be "grossly excessive" or "grossly deficient " The regulation lists factors that
may be used to determine whether an existing reimbursement rate is grossly
excessive or grossly deficient and to determine what is a realistic and
equitable payment amount. The regulation remains in effect after the enactment
of the Medicare Modernization Act, although the new legislation precludes the
use of inherent reasonableness authority for payment amounts established under
competitive bidding. Medicare and Medicaid accounted for approximately 5% of our
total sales and rental income for 2006. When using the inherent reasonableness
authority, CMS may reduce reimbursement levels for certain of our products,
which could have a material adverse effect on our results of
operations.




OUR
PRODUCTS ARE SUBJECT TO RECALL EVEN AFTER RECEIVING FDA OR FOREIGN CLEARANCE OR
APPROVAL, WHICH WOULD HARM OUR REPUTATION AND BUSINESS.





We are
subject to medical device reporting regulations that require us to report to the
FDA or respective governmental authorities in other countries if our products
cause or contribute to a death or serious injury or malfunction in a way that
would be reasonably likely to contribute to death or serious injury if the
malfunction were to recur. The FDA and similar governmental authorities in other
countries have the authority to require the recall of our products in the event
of material deficiencies or defects in design or manufacturing. A government
mandated or voluntary recall by us could occur as a result of component
failures, manufacturing errors or design defects, including defects in labeling.
 Any recall would
divert managerial and financial resources and could harm our reputation with
customers. We cannot assure you that we will not have product recalls in the
future or that such recalls would not have a material adverse effect on our
business. We have not undertaken any voluntary or involuntary recalls to
date.




OUR
PRINCIPAL OFFICER AND DIRECTOR OWNS A CONTROLLING INTEREST IN OUR VOTING STOCK
AND INVESTORS WILL NOT HAVE ANY VOICE IN OUR MANAGEMENT.





Our Chief
Executive officer and current sole director, Thomas Sandgaard, beneficially owns
approximately 63.0% of our outstanding common stock as of April 15, 2008. As a
result, Mr. Sandgaard has the ability to control substantially all matters
submitted to our stockholders for approval, including:




-
            Election
      of our board of directors;





-
            Removal
      of any of our directors;





-
            Amendment
      of our certificate of incorporation or bylaws;
  and





-
            Adoption
      of measures that could delay or prevent a change in control or impede a
      merger, takeover or other business combination involving
    us.





As a
result of his ownership and position, Mr. Sandgaard is able to influence all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. In addition, sales of
significant amounts of shares held by Mr. Sandgaard, or the prospect of these
sales, could adversely affect the market price of our common stock. Mr.
Sandgaard's stock ownership may discourage a potential acquirer from making a
tender offer or otherwise attempting to obtain control of us, which in turn
could reduce our stock price or prevent our stockholders from realizing a
premium over our stock price.


-
24 -


RISKS
RELATING TO OUR COMMON STOCK





OUR
COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING
MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK
CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.





Since our
common stock is not listed or quoted on any stock exchange and no other
exemptions currently apply, trading in our common stock on the Over-The-Counter
Bulletin Board is subject to the "penny stock" rules of the SEC. These rules
require, among other things, that any broker engaging in a transaction in our
securities provide its customers with a risk disclosure document, disclosure of
market quotations, if any, disclosure of the compensation of the broker and its
salespersons in the transaction, and monthly account statements showing the
market values of our securities held in the customer's accounts. The brokers
must provide bid and offer quotations and compensation information before making
any purchase or sale of a penny stock and also provide this information in the
customer's confirmation. Generally, brokers may be less willing to execute
transactions in securities subject to the "penny stock" rules. This may make it
more difficult for investors to dispose of our common stock and cause a decline
in the market value of our stock.







ITEM
7. FINANCIAL STATEMENTS.





The
consolidated financial statements, the notes thereto, and the report thereon of
GHP Horwath P.C. dated April 15, 2008, are filed as part of this report starting
on page F-1 below.







ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.





None.






ITEM
8A(T). CONTROLS AND PROCEDURES.





Disclosure Controls and
Procedures





The
Company under the supervision and with the participation of the Company’s
management, including the Company’s Chief Executive Officer and Chief Financial
Officer, performed an evaluation of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures as of December 31,
2007.  Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, because of the material weaknesses in internal
control over financial reporting described below, the Company’s disclosure
controls and procedures were not effective as of December 31, 2007.




Management’s Report on
Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in the Securities
Exchange Act of 1934 Rule 13a-15(f). Our Chief Executive Officer and Chief
Financial Officer conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control -
Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO Framework").





Based on
this evaluation, management has concluded that our internal control over
financial reporting was not effective as of December 31, 2007. Our principal
Chief Executive Officer and Chief Financial Officer concluded that the Company
has a material weakness in its ability to produce financial statements free from
material misstatements. Management reported a material weakness resulting from
the combination of the following significant deficiencies:


-
25 -





·
            Lack
      of documentation and review of financial information by our accounting
      personnel with direct oversight responsibility, and lack of analysis and
      reconciliation of certain accounts on a periodic
  basis.





·
            Lack
      of timely reconciliation of inventory quantities and inventory location
      and lack of timely calculation and review of unit costs applied to the
      valuation of our inventory.





·
            Lack
      of timely write off of uncollectible and duplicate billings that result in
      an overstatement of our accounts
receivable.





As a
result of the above material weakness, our management concluded that, as of
December 31, 2007, our internal controls over financial reporting are not
effective.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the company to provide only management’s report on
internal control in this annual report.





Changes in Internal Control
Over Financial Reporting





There
were no changes in internal control over financial reporting that occurred
during the fourth quarter of 2007 that have materially affected, or are
reasonably likely to affect, the Company’s internal control over financial
reporting, except as disclosed above.





In order
to remediate the material weakness described above, our management has begun to
implement the following changes to our internal control over financial reporting
during the first quarter of 2008:





-
            we
      have hired additional accounting personnel to assist us in the timely
      identification, research and resolution of accounting issues and with our
      documentation processes;


-
            the
      hiring of additional high-level accounting personnel with experience in US
      GAAP;


-
            the
      engagement of a third-party financial consulting firm to assist management
      in evaluating complex accounting issues on an as-needed basis, and the
      implementation of systems to improve control and review procedures over
      all financial statement and account
balances.





We expect
that if the steps that we implement are effective throughout a period of time,
the material weakness described above will be remediated. We do not believe that
the costs of remediation for the above material weakness will have a material
effect on our financial position, cash flow, or results of
operations.







ITEM
8B. OTHER INFORMATION.





None.


-
26 -






ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT





The
following table provides information concerning each of the Company's directors
and executive officers at March 1, 2008:




DirectorName
            Age
            Since
            Position or OfficeThomas
      Sandgaard
            49
            1996
            President,
      Chief Executive Officer, Director and ChairmanFritz
      G. Allison
            48
            N/A
            Chief
      Financial Officer




During
the five years preceding the date of this report, the director and executive
officers named above have not been convicted in any criminal proceeding nor are
they subject to any pending criminal proceeding.





Mr.
Sandgaard founded the Company in 1996 after a successful European based career
in the semiconductor, telecommunications and medical equipment industries with
ITT, Siemens and Philips Telecom. Mr. Sandgaard held middle and senior
management positions in the areas of international sales and distribution,
technology transfers, mergers and acquisitions and marketing. Mr. Sandgaard
holds a degree in electronics engineering from Odense Teknikum, Denmark and an
MBA from the Copenhagen Business School.





Mr.
Allison was elected as Chief Financial Officer of Zynex, effective February 19,
2007. Prior to joining Zynex, Mr. Allison served as a Financial Consultant for
MSS Technologies, a Phoenix-based provider of business application solutions,
since 2004. From December 2000 until March 2004, Mr. Allison was the
Vice-President, Controller and Chief Financial Officer of Orange Glo
International, Inc, a manufacturer of cleaning products in the consumer package
goods industry. Previous positions include Manager of Corporate Accounting for
J.D. Edwards & Co., Controller at Powercom-2000 and International Controller
for CH2M Hill International. Mr. Allison holds a B.A. in Business Administration
from the University of Southern California and has been a Certified Public
Accountant.





The
Company does not have an active audit committee or an audit committee financial
expert.





We do not
have procedures by which a security holder may recommend director nominees to
our Board of Directors.





Code of
Ethics





The
Company has not adopted a written code of ethics for its senior executive and
financial officers. The Board endeavors to hold these officers to high ethical
standards in their conduct of our business and may decide to implement a code of
ethics when the Company has additional resources.




-
27 -




ITEM
10. EXECUTIVE COMPENSATION





Summary
Compensation Table





The
following table shows, as to the Chief Executive Officer and the Chief Financial
Officer, the only highly compensated executive officers whose salary plus bonus
exceeded $100,000, information concerning compensation paid for services to the
Company in all capacities during the years ended December 31, 2007 and December
31, 2006:





Name
      and Principal Position
            
            Year
            Salary
              ($)
            Bonus
              ($)
            Stock
              Awards
              ($)
            Option
              Awards
              ($)
      (3)
            Non-Equity
      Incentive Plan Compensation
              ($)
            Change
      in
              Pension
              Value
      and Nonqualified Deferred Compensation Earnings
              ($)
            All
      Other Compensation
              ($)
            Total
              ($)Thomas
      Sandgaard
            
            2007
            100,000
            50,000
            0
            0
            0
            0
            51,414(1)
            245,414Chief
      Executive Officer
            
            2006
            144,000
            16,000
            0
            0
            0
            0
            43,880(1)
            203,880Fritz
      G. Allison
            
            2007
            98,354
            0
            0
            3,217
            0
            0
            1,472(2)
            103,033Chief
      Financial Officer
            
            2006
            N/a
            N/a
            N/a
            N/a
            N/a
            N/a
            N/a
            N/aPeter
      J. Leveton
            
            2007
            21,327
            0
            0
            13,475
            0
            0
            0
            21,327Former
      Chief Financial Officer
            
            2006
            83,063
            102,500
            0
            0
            0
            0
            0
            185,563


______________





(1)
            We
      pay for 100% of Mr. Sandgaard's health and dental insurance. In addition,
      two company vehicles and two home telephone lines are provided to Mr.
      Sandgaard at our expense.





(2)
            We
      pay for 100% of Mr. Allison's health and dental
  insurance.





(3)
            The
      Option Awards represents the dollar amount recognized for financial
      statement reporting purposes with respect to 2006 and 2007 for the fair
      value of stock options granted to each of the named executive officers, in
      accordance with SFAS 123R.





Mr.
Leveton’s employment with us was terminated on February 16,
2007.





Employment
Agreements





Thomas
Sandgaard





On
February 1, 2004, Zynex Medical, Inc. entered into a three-year employment
agreement with the Company's President, Chief Executive Officer and former sole
shareholder. The agreement expired January 31, 2007 and the agreement was
automatically extended for an additional two-year period. The initial annual
base salary under the agreement was $174,000 and may be increased annually at
the board of director's discretion. The agreement also provides for a 50% annual
bonus if annual net revenue exceeds $2.25 million, medical and life insurance,
and a vehicle. The agreement contains a non-compete provision for the term of
the agreement and 24 months following termination of the
agreement.


-
28 -




On
January 1, 2005, the agreement was amended to provide an annual base salary of
$144,000 and quarterly bonuses pursuant to the following schedule; provided that
if the Company does not have net income for that quarter then only half of the
bonus amount listed below shall be paid:





Quarterly Revenue
            Quarterly Bonus$0
      to $600,000
            $
      0$600,001
      - $800,000
            $
      10,000$800,001
      - $1,000,000
            $
      25,000$1,000,001
      and greater
            $
      50,000





Fritz G.
Allison





The
Company has established the following compensation arrangements with Mr.
Allison, effective February 19, 2007: A base salary of $8,000 per month, before
taxes, for the first three months and $10,000 per month, before taxes,
thereafter; grant under the Company’s 2005 stock option plan of an option to
purchase up to 100,000 shares of the Company’s common stock, with a ten year
term starting February 19, 2007, an exercise price equal to $0.45 per share, the
fair market value of the Company’s common stock on such date, and a vesting
schedule of 25,000 shares vesting on the first anniversary of the date of grant
and 25,000 shares vesting on each subsequent anniversary of the date of grant; a
bonus payable in 2008 in the amount of $20,000 cash and an option grant for an
additional 50,000 shares in the event (a) the Company’s net revenue meets a
revenue targetfor
the 2007 year,(b) the Company has a positive net income for the 2007 year, and
(c) the Company does not have any restatements of its financial statements
during 2007 and for any periods during 2007 or the year 2007 on or prior to the
completion of the audit of the 2007 financial statements. Mr. Allison also
received full health and dental insurance coverage through the
Company.





Peter J.
Leveton





On May
31, 2005, Zynex Medical Holdings, Inc. entered into a compensation agreement
with Peter J. Leveton, the Company's Chief Financial Officer to be effective as
of April 18, 2005 (the "Effective Date"). Mr. Leveton’s employment with the
Company was terminated on February 16, 2007. The agreement provided for a
monthly salary of $2,250 per month. It also provided for an increase in the
monthly salary of an additional $4,000 per month (the "First Raise") in the
event (a) the Company obtained a line of credit of at least $250,000, or (b) the
Company received third party equity or debt investment of at least $1,000,000,
or (c) the Company had annual audited "positive net cash provided by operating
activities" of at least $500,000, or (d) the Company underwent a liquidity event
with a valuation of at least $10,000,000 (items (b) through (d) shall be
referred to as "Raise Events"). Mr. Levetonmet the
standard for the First Raise and it was in effect. The agreement also provided
for an additional increase in the monthly salary of $5,000 per month (the
"Second Raise") in the event the Company undergoes a Raise Event. Mr. Leveton
met the standard for the Second Raise in 2006, and it was in effect. The First
Raise and Second Raise, once earned and vested, were paid in arrears with
respect to each month of employment beginning as of the Effective Date through
the month of vesting, and then were paid currently through the date of
termination of Mr. Leveton's employment. Mr. Leveton and the Company entered
into a Separation Agreement whereby Mr. Leveton agreed to extend payment of the
previously earned portion of the second raise over the ten-month period
January-October 2007 with interest at 8.25%.





Under the
Agreement Mr. Leveton received stock options to purchase up to 350,000 shares of
the Company's Common Stock. Such options have a ten-year term, except options
for 100,000 shares which expire on April 17, 2010, and an exercise price equal
to the fair market value of the Common Stock on the date of grant, April 18,
2005. Such options were subject to vesting as follows: 100,000 shares vested on
the date of grant; 25,000 shares vested on June 30, 2005; and 25,000 shares
vested as of the last day of each full calendar quarter beginning as of July 1,
2005 through March 31, 2007, provided that Mr. Leveton was employed as of such
dates; and 50,000 shares vested upon a Raise Event which was completed in
January, 2007. All unvested quarterly options would have immediately vested and
become exercisable upon a liquidity event with a valuation of at least
$10,000,000; provided the liquidity event occured during Mr. Leveton's
employment or if Mr. Leveton played an active, integral and key role in
accomplishing such event, within 90 days of involuntary termination. All
unvested options expired upon the termination of Mr. Leveton’s employment. As of
February 16, 2007, Mr. Leveton’s termination date, 325,000 of the options had
vested.  In
February 2008, Mr. Leveton exercised all 325,000 option for 282,440 shares of
common stock in a cashless exercise.


-
29 -




OUTSTANDING
EQUITY AWARDS AT 2007 YEAR-END





The
following table sets forth information concerning unexercised options, stock
that is not vested and equity incentive plan awards for each executive officer
named in the Summary Compensation Table as of December 31, 2007:





Option
Awards:




Number
      of
              Securities
              Underlying
              Unexercised
              Options
              (#)
            Number
      of
              Securities
              Underlying
              Unexercised
              Options
              (#)
            Equity
              Incentive
              Plan Awards:
              Number
      of
              Securities
              Underlying
              Unexercised
              Unearned
              Options
            Option
              Exercise
            Option
              ExpirationName
            Exercisable
            Unexercisable
            (#)
            Price
            DateThomas
      Sandgaard
            --
            --
            --
            --
            --Fritz
      G. Allison (2)
            --
            100,000
            --
            $0.45
            February
      17, 2017Fritz
      G. Allison (2)
            --
            2,000
            --
            $0.45
            June
      30, 2017Fritz
      G. Allison (2)
            --
            2,000
            --
            $0.45
            September
      30, 2017Peter
      J. Leveton (2)
            325,000
            --
            --
            $0.22
            April 18,
      2015


____________




(1)
            For
      information on the vesting of the options for 100,000 shares of common
      stock held by Mr. Allison, see "Employment Agreements – Fritz G. Allison"
      above in this Item. Mr. Allison also participates in the 2005 Stock Option
      Plan discussed below. The options under the Plan vest over a four year
      period.





(2)
            For
      information on the vesting of the options held by Mr. Leveton, see
      "Employment Agreements - Peter J. Leveton" above in this
    Item.




Director
Compensation





We have
only one director, Mr. Sandgaard. He receives no additional compensation for
serving as a director.




-
30 -




ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.





The
following table contains certain information regarding beneficial ownership of
the Company's common stock as of April 15, 2008 by (i) each person who is
known by the Company to own beneficially more than 5% of the Company’s common
stock, (ii) each of the Company’s directors, (iii) the Company’s executive
officers named in the Summary Compensation Table above and (iv) all directors
and executive officers as a group. The information provided regarding beneficial
ownership of the principal stockholders is based on publicly available filings
and, in the absence of such filings, on the shares held of record by such
persons.





Number
      of Shares
            PercentBeneficially
            OfName
            Class of Stock
            Owned(2)
            ClassExecutive
      Officers:Thomas
      Sandgaard
              8022
      Southpark Cir. Suite 100
              Littleton,
      CO  80120
            Common
            18,245,500
            63.0%Fritz
      Allison
              8022
      Southpark Cir. Suite 100
              Littleton,
      CO  80120
            Common
            25,000(3)
            --Other 5% Beneficial
      OwnersRegency
      Group4600
      S Ulster St., Suite 975
              Denver,
      Colorado (1)
            Common
            1,900,000
            6.2%All
      Directors andNamed
      Executive OfficersAs
      a Group
            Common
            18,270,500
            63.1%


_____________





(1)
            On
      September 27, 2004, the Company issued options valued at $11,707 to
      acquire 1,900,000 shares of common stock to this financial consulting firm
      in exchange for consulting services provided in connection with the
      Company's reverse acquisition and past investor relations. The options,
      which expire September 26, 2009, permit the purchase of common stock in
      certain quantities and at various prices ranging from $.40 per share to
      $4.00 per share, as set forth in Note 5 of the Notes to Consolidated
      Financial Statements.





(2)
            A
      person has beneficial ownership of any securities to which the person,
      directly or indirectly, through any contract, arrangement, undertaking,
      relationship or otherwise has or shares voting power and/or investment
      power or as to which such person has the right to acquire such voting
      and/or investment power within 60 days from April 15, 2007. The percentage
      of beneficial ownership as to any person as of a particular date is
      calculated by dividing the number of shares beneficially owned by such
      person by the sum of the number of shares outstanding as of such date and
      the number of unissued shares as to which the person has the right to
      acquire voting and/or investment power within 60
  days.




(3)
              These
      shares are subject to stock options held by Mr.
  Allison.


-
31 -




EQUITY
COMPENSATION PLAN INFORMATION





The
following table provides information as of December 31, 2007 about shares of
Common Stock available for issuance under the Company's equity incentive
plans.





Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights
            
            Weighted
      Average Exercise Price
            
            Number
      of Securities Remaining available for future issuance under Equity
      Compensation Plans (excluding securities reflected in column
      (a)Plan Category
            (a)
            
            (b)
            
            (c)Plans
      Approved by Shareholders (1), (2)
            496,000
            
            $0.33
            
            2,504,000Plans
      Not Approved by Shareholders
            325,000
            
            $0.22
            
            NoneTotal
            821,000
            
            $0.27
            
            2,504,000


____________





(1)
            All
      of the listed securities are available for issuance under the Zynex
      Medical Holdings, Inc. 2005 Stock Option Plan, approved by the Board of
      Directors on January 3, 2005.





(2)
            (2)
      Effective December 30, 2005, the primary stockholder, Thomas Sandgaard,
      approved the 2005 Stock Option Plan ("2005 Plan") that authorized the
      granting of options to purchase 3,000,000 shares of the Company's common
      stock, subject to adjustment for stock splits, recapitalizations and
      similar events. Options granted under the 2005 Plan may be either
      non-qualified or incentive and may be granted to employees, directors,
      independent contractors and consultants. at the discretion of the Board of
      Directors (the "Board"). The 2005 Plan is available for option grants
      until December 31, 2014. The 2005 Plan is administered by Zynex's
      President and Chief Executive Officer (the "Administrator"). The option
      price per share under the 2005 Plan must be the fair market value of the
      Company’s common stock on the date of grant unless such option is granted
      in substitution of options granted by a new employee's previous employer
      or the optionee pays or foregoes compensation in the amount of any
      discount. The options have a maximum term of ten years and will vest as
      determined by the Administrator. Options cease to be exercisable one month
      after termination of an optionee's continuous service due to reasons other
      than cause, and twelve months after death, disability or retirement.
      Options may be suspended or terminated if the Administrator or any person
      designated by the Administrator reasonably believes that the optionee has
      committed an act of misconduct against Zynex. Options are not transferable
      unless specified by the
Administrator.





For
information on the options for 100,000 shares of common stock held by Mr.
Allison, see "Employment Agreements – Fritz G. Allison" in Item 10
above





For
information on Mr. Leveton's compensation arrangement, which includes options
not approved by stockholders, see Item 10 above.








ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





The
Company has entered into loans to the Company by Thomas Sandgaard. Interest
payable on these loans for 2007 was a total of $7,617, and the Company has paid
this interest to Mr. Sandgaard. For a full description and the terms of these
notes please see Note-4 “Notes Payable and Leases” in the notes to the
consolidated financial statements below in this report.


-
32 -





The loans
with Silicon Valley Bank in the amount of $400,000 and $240,000, made in 2005
and 2006, as described above, were guaranteed by Zynex Chairman, President and
Chief Executive Officer, Thomas Sandgaard, and were collateralized by a first
perfected security interest in accounts, inventory, chattel paper, equipment,
fixtures, general intangibles, including intellectual property and other assets.
Mr. Sandgaard did not receive any compensation for this guarantee.





Our sole
director, Mr. Sandgaard, is not an independent director as defined in rules of
the NASDAQ Stock Market.





Mr.
Sandgaard, because of his stock ownership and position as the sole director, may
be considered a “parent” of the Company.





We employ
Mr. Sandgaard’s wife in a full time position as Billing Manager.  In
addition, we employ Mr. Sandgaard’s two children in part time
positions.  The following table sets forth their
compensation:




Name
      and Principal Position
              
              Year
              Salary
                ($)
              Bonus
                ($)
              Stock
                Awards
                ($)
              Option
                Awards
                ($)
      (1)
              Non-Equity
      Incentive Plan Compensation
                ($)
              Change
      in
                Pension
                Value
      and Nonqualified Deferred Compensation Earnings
                ($)
              All
      Other Compensation
                ($)
              Total
                ($)Birgitte
      Sandgaard
              
              2007
              66,000
              0
              0
              580
              0
              0
              0
              66,580Billing
      Manager
              
              2006
              50,400
              0
              0
              200
              0
              0
              0
              50,600Joachim
      Sandgaard
              
              2007
              33,791
              0
              0
              580
              0
              0
              0
              34,371Insurance
      Claims
              
              2006
              17,528
              0
              0
              200
              0
              0
              0
              17,728Martin
      Sandgaard
              
              2007
              10,082
              0
              0
              65
              0
              0
              0
              10,147Accounts
      Receivable
                Specialist
              
              2006
              0
              0
              0
              0
              0
              0
              0
              0







(1)
            The
      Option Awards represents the dollar amount recognized for financial
      statement reporting purposes with respect to 2006 and 2007 for the fair
      value of stock options granted to each of the named related parties, in
      accordance with SFAS 123R






ITEM 13. EXHIBITS





Exhibit
              Number
            Description3.1
            Articles
      of Incorporation of Ibonzi.com, Inc, incorporated byreference
      to Exhibit 3.1 of the Company's Current Report onForm
      8-K, filed January 31, 2002.3.2
            Articles
      of Merger of Ibonzi.com, Inc. with and intoIbonzi.com,
      to effect a migratory merger, incorporated byreference
      to Exhibit 2.1 of the Current Report on Form 8-K,filed
      January 31, 2002.3.3
            Amendment
      to Articles of Incorporation of Ibonzi.com, Inc.,changing
      the company's name to China Global Development, Inc.,by
      reference to Exhibit 3.2 of the Company's CurrentReport
      on Form 8-K, filed January 31, 2002.3.4
            Certificate
      of Correction to Amendment to Articles ofIncorporation,
      incorporated by reference to Exhibit 3.3 of theCompany's
      Current Report on Form 8-K, filed January 31, 2002.3.5
            Amendment
      to the Articles of Incorporation, changing theCompany's
      name to Arizona Ventures, Inc. and effecting a 1:10reverse
      split of common stock, incorporated by reference toExhibit
      3.5 of the Company's registration statement filed onForm
      SB-2, filed July 6, 2004.3.6
            Amendment
      to the Articles of Incorporation, changing theCompany's
      name to Fox River Holdings, Inc., incorporated byreference
      to Exhibit 3.6 of the Company's registrationstatement
      filed on Form SB-2, filed July 6, 2004.3.7
            Amendment
      to the Articles of Incorporation, effecting a 1:40reverse
      split of common stock, incorporated by reference toExhibit
      3.7 of the Company's registration statement filed onForm
      SB-2, filed July 6, 2004.3.8
            Amendment
      to the Articles of Incorporation, changing theCompany's
      name to Zynex Medical Holdings, Inc., incorporated byreference
      to Exhibit 3.8 of the Company's registrationstatement
      filed on Form SB-2, filed July 6, 2004.3.9
            Bylaws
      of the Company, incorporated by reference to Exhibit
3.4of
      the Company's Current Report on Form 8-K, filed January
  31,2002.




-
33 -




Exhibit
              Number
            Description4.1
            Subscription
      Agreement, dated as of June 4, 2004, by and amongthe
      Company, Alpha Capital Aktiengesellschaft, StonestreetLimited
      Partnership, Whalehaven Funds Limited, Greenwich GrowthFund
      Limited and Ellis International Limited, Inc.,incorporated
      by reference to Exhibit 4.1 of the Company'sregistration
      statement filed on Form SB-2, filed July 6, 2004.4.2
            Form
      of A Common Stock Purchase Warrant, incorporated byreference
      to Exhibit 4.2 of the Company's registrationstatement
      filed on Form SB-2, filed July 6, 2004.4.3
            Form
      of B Common Stock Purchase Warrant, incorporated byreference
      to Exhibit 4.3 of the Company's registrationstatement
      filed on Form SB-2, filed July 6, 2004.4.4
            Form
      of C Common Stock Purchase Warrant, incorporated byreference
      to Exhibit 4.4 of the Company's registrationstatement
      filed on Form SB-2, filed July 6, 2004.4.5
            Escrow
      Agreement, dated as of June 4, 2004, by and among ZynexMedical
      Holdings, Inc., Alpha Capital Aktiengesellschaft,Stonestreet
      Limited Partnership, Whalehaven Funds Limited,Greenwich
      Growth Fund Limited, Ellis International Limited Inc.and
      Grushko & Mittman, P.C., incorporated by reference
  toExhibit
      4.5 of the Company's registration statement filed onForm
      SB-2, filed July 6, 2004.4.6
            Form
      of Securities Purchase Agreement, incorporated by reference
    toExhibit
      10.1 of the Company’s Current Report on Form 8-K filedJanuary
      30, 2007.4.7
            Form
      of Registration Rights Agreement, incorporated by reference
    toExhibit
      10.2 of the Company’s Current Report on Form 8-K filedJanuary
      30, 2007.4.8
            Form
      of Warrant, incorporated by reference to Exhibit 10.4 of
    theCompany’s
      Quarterly Report on Form 10-QSB, filed August 18, 2006.10.1
            Acquisition
      Agreement, dated as of January 27, 2004, by andamong
      Zynex Medical Holdings, Inc., Zynex Medical, Inc. andThomas
      Sandgaard, incorporated by reference to Exhibit 10 ofZynex
      Medical Holdings, Inc.'s Current Report on Form 8-K,filed
      February 20, 2004.




-
34 -




Exhibit
              Number
            Description10.2
            Thomas
      Sandgaard Employment Agreement, incorporated byreference
      to Exhibit 10.2 of the Company's registrationstatement
      filed on Form SB-2, filed July 6, 2004.10.3
            Amendment
      to Thomas Sandgaard Employment Agreement datedFebruary
      1, 2004, incorporated by reference to Exhibit 10.3 ofZynex
      Medical Holdings, Inc.'s Annual report on Form 10-Kfiled
      April 15, 2005.10.4
            Multi-Tenant
      Lease, dated January 20, 2004, by and betweenFirst
      Industrial, L.P., a Delaware limited partnership andZynex
      Medical, Inc. a Colorado corporation , incorporated byreference
      to Exhibit 10.4 of Zynex Medical Holdings, Inc.'sAnnual
      report on Form 10-K filed April 15, 2005..
      10.5
            2005
      Stock Option Plan , incorporated by reference to
Exhibit10.5
      of Zynex Medical Holdings, Inc.'s Annual report on Form10-K
      filed April 15, 2005.10.6
            Compensation
      Agreement dated as of April 18, 2005 betweenZynex
      Medical Holdings, Inc. and Peter J. Leveton,incorporated
      by reference to Exhibit 10.1 of Zynex MedicalHoldings,
      Inc.'s Quarterly Report on Form 10-Q, filed August12,
      2005.10.7
            Loan
      and Security Agreement among Zynex Medical Holdings,
  Inc.,Zynex
      Medical, Inc. and Silicon Valley Bank, datedSeptember
      29, 2005, incorporated by reference to Exhibit 10.1of
      Zynex Medical Holdings, Inc.'s Current Report on Form
  8-K,filed
      October 7, 2006.10.8
            Warrant
      to Purchase Stock from Zynex Medical Holdings, Inc. toSilicon
      Valley Bank, incorporated by reference to Exhibit10.2
      of Zynex Medical Holdings, Inc.'s Current Report onForm
      8-K, filed October 7, 2006.10.9
            Unconditional
      Guaranty by Thomas Sandgaard for Silicon ValleyBank,
      dated September 29, 2005, incorporated by reference toExhibit
      10.3 of Zynex Medical Holdings, Inc.'s Current Reporton
      Form 8-K, filed October 7, 2006.10.10
            Default
      Waiver and First Amendment to Loan and SecurityAgreement,
      dated March 6, 2006, incorporated by referenceto
      Exhibit 10.1 of Zynex Medical Holdings, Inc.'s CurrentReport
      on Form 8-K, filed March 20, 2006.10.11
            Unconditional
      Guaranty by Thomas Sandgaard for Silicon ValleyBank,
      dated March 6, 2006, incorporated by reference toExhibit
      10.2 of Zynex Medical Holdings, Inc.'s Current Reporton
      Form 8-K, filed March 20, 2006.


-
35 -





Exhibit
              Number
            Description10.12
            Promissory
      Note dated March 1, 2006 to Thomas Sandgaard,Incorporated
      by reference to Exhibit 10.1 of the Company’sQuarterly
      Report on Form 10-QSB filed August 17, 200610.13
            Promissory
      Note dated March 1, 2006 to Thomas Sandgaard,incorporated
      by reference to Exhibit 10.2 of the Company’sQuarterly
      Report on Form 10-QSB filed August 17, 2006.10.14
            Promissory
      Note dated June 30, 2006 to Thomas Sandgaard,incorporated
      by reference to Exhibit 10.3 of the Company’sQuarterly
      Report on Form 10-QSB filed August 17, 2006.10.15
            Convertible
      Secured Promissory Note dated October 18, 2006 byZynex
      Medical Holdings, Inc., incorporated by reference toExhibit
      10.1 of the Company’s Current Report on Form 8-K filedOctober
      18, 2006.10.16
            Warrant
      dated October 18, 2006 by Zynex Medical Holdings, Inc.to
      Ascendiant Capital Group, LLC, incorporated by reference
  toExhibit
      10.2 of the Company’s Current Report on Form 8-K filedOctober
      18, 2006.10.17
            Security
      Agreement between Ascendiant Capital Group, LLC andZynex
      Medical Holdings, Inc., incorporated by reference toExhibit
      10.3 of the Company’s Current Report on Form 8-K filedOctober
      18, 2006.10.18
            Subordination
      Agreement dated October 17, 2006 amongAscendiant
      Capital Group, LLC, Silicon Valley Bank and ZynexMedical
      Holdings, Inc., incorporated by reference to Exhibit
  10.4of
      the Company’s Current Report on Form 8-K filed October 18,
      2006.10.19
            Separation
      Agreement dated February 16, 2007 between Peter J.
  Levetonand
      Zynex Medical Holdings, Inc., incorporated by reference to Exhibit
      10.19
              of
      the Company’s Annual report on Form 10-KSB filed April 17,
      2007.10.20
            Letter
      Agreement, dated May 3, 2007 with Ascendiant Capital Group,
      LLC,
              incorporated
      by reference to Exhibit 10.1 of the Company’s Quarterly
report
              on
      Form 10-QSB filed May 18, 2007.10.21
            Promissory
      Note dated May 16, 2007 by Zynex Medical Holdings, Inc.,
              to
      Thomas Sandgaard, incorporated by reference to Exhibit 10.1 of the
      Company’s
              Current
      Report on Form 8-K filed June 29, 2007.10.22
            Promissory
      Note dated June 15, 2007 by Zynex Medical Holdings, Inc.,
              to
      Thomas Sandgaard, incorporated by reference to Exhibit 10.2 of the
      Company’s
              Current
      Report on Form 8-K filed June 29, 2007.10.23
            Promissory
      Note dated September 30, 2007 by Zynex Medical Holdings,
Inc.,
              to
      Thomas Sandgaard, incorporated by reference to Exhibit 10.1 of the
      Company’s
              Quarterly
      report on Form 10-QSB filed November 19, 200721
            List
      of Subsidiaries, incorporated by reference to Exhibit 21 of Zynex
      Medical
              Holdings,
      Inc.’s Annual Report on Form 10-KSB, filed April 15,
  2005.23*
            Consent
      of Independent Registered Public Accounting Firm.31.1*
            Certification
      of Chief Executive Officer Pursuant to Rule13a-14(a)/15d-14(a)
      as Adopted Pursuant to Section 302 ofSarbanes-Oxley
      Act of 2002.31.2*
            Certification
      of Chief Financial Officer Pursuant to Rule13a-14(a)/15d-14(a)
      as Adopted Pursuant to Section 302 ofSarbanes-Oxley
      Act of 2002.32.1*
            Certification
      Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant
      to Section 906 of the Sarbanes-Oxley Act of
  2002.






-
36 -


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
following is a description of the fees billed to the Company by its independent
auditor for each of the years ended December 31, 2007 and December 31,
2006.




GHP
      Horwath, P.C,2007
            
            2006Audit FeesIncludingReviews
      of 10QSB and SB-2
            
            $
            80,000
            
            
            $
            90,000Audit Related
      Fees
            
            $
            -
            
            
            
            -Tax
      Related Fees
            
            
            8,000
            
            
            
            12,000All
      Other Fees For General
      Consultation
            
            
            -
            
            
            
            -Total
            
            $
            88,000
            
            
            $
            102,000





The tax
related services provided by GHP Horwath, P.C. consisted of preparation and
filing of the Company's Federal and state tax returns.





The
Company's director, in reliance on statements by management and the independent
auditors, has determined that the provision of the non-audit services described
above was compatible with maintaining the independence of GHP Horwath,
P.C.





GHP
Horwath served as the Company's independent auditors for the fiscal years ended
December 31, 2007 and 2006.


-
37 -




SIGNATURES





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





ZYNEX
      MEDICAL HOLDINGS, INC.Date: April 16,
      2008
            By:
            /s/
      Thomas SandgaardThomas
      SandgaardPresident,
      Chairman and Chief Executive
Officer




Date: April 16,
      2008
            By:
            /s/
      Fritz G. AllisonFritz
      G. Allison,
              Chief
      Financial Officer




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





Date
            Name and
      Title
            SignatureApril
      16, 2008
            Thomas
      Sandgaard, Chief
            /s/
      Thomas SandgaardExecutive
      Officer and SoleDirectorApril
      16, 2008
            Fritz
      G. Allison, Chief FinancialOfficer
            /s/
      Fritz G. Allison




-
38 -







Zynex
Medical Holdings, Inc.




Consolidated
Financial Statements


December
31, 2007










REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











Board of
Directors


Zynex
Medical Holdings, Inc.








We have
audited the accompanying consolidated balance sheet of Zynex Medical Holdings,
Inc. and subsidiary (the “Company”) as of December 31, 2007 and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the years in the two-year period ended December 31, 2007. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Zynex Medical Holdings, Inc.
and subsidiary as of December 31, 2007, and the results of their operations and
their cash flows for each of the years in the two-year period ended December 31,
2007 in conformity with accounting principles generally accepted in the United
States of America.







/s/ GHP Horwath,
P.C.


GHP
Horwath, P.C.





Denver,
Colorado


April 15,
2008




F
- 1




Zynex
Medical Holdings, Inc.


Consolidated
Balance Sheet


December
31, 2007






ASSETSCurrent
      Assets:Accounts
      receivable, less allowance for uncollectibleaccounts
      of $5,901,724
              
              $
              4,475,932Inventory
              
              
              937,694Deferred
      financing fees
              
              
              5,525Prepaid
      expenses
              
              
              34,795Deferred
      tax asset
              
              
              210,000Other
      current assets
              
              
              47,715Total
      current assets
              
              
              5,711,661Property
      and equipment, less accumulateddepreciation
      of $412,315
              
              
              932,222Deposits
              
              
              21,286$
              6,665,169LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Bank
      overdraft
              
              $
              89,347Notes
      payable
              
              
              252,573Loan
      from stockholder
              
              
              118,451Capital
      lease
              
              
              17,932Accounts
      payable
              
              
              817,429Income
      taxes payable
              
              
              910,000Accrued
      payroll and payroll taxes
              
              
              213,935Other
      accrued liabilities
              
              
              498,709Total
      current liabilities
              
              
              2,918,376Loan
      from stockholder, less current maturities
              
              
              20,332Notes
      payable, less current maturities
              
              
              6,732Capital
      lease, less current maturities
              
              
              12,189Long-term
      deferred tax liability
              
              
              90,000Total
      liabilities
              
              
              3,047,629Contingencies
      and Commitments
              
              
              --Stockholders'
      Equity:Preferred
      stock, $.001 par value, 10,000,000 shares authorized,
              
              
              --no
      shares issued or outstandingCommon
      stock, $0.001, par value, 100,000,000 shares authorized,
              
              
              26,83126,831,113
      shares issued and outstandingAdditional
      paid-in capital
              
              
              2,634,075Retained
      earnings
              
              
              956,634Total
      stockholders' equity
              
              
              3,617,540$
              6,665,169


See
accompanying notes to financial statements.


F
- 2




Zynex
Medical Holdings, Inc.


Consolidated
Statements of Operations


Years
ended December 31,






2007
              
              
              2006Net
      sales and rental income
              
              $
              8,048,252
              
              
              $
              2,556,809Cost
      of sales and rentals
              
              
              729,046
              
              
              
              303,719Gross
      profit
              
              
              7,319,206
              
              
              
              2,253,090Operating
      expenses:Selling,
      general and administrative, includingcommon
      stock and warrants issued for consulting servicesof
      $101,250 and $102,250 in 2007 and 2006, respectively
              
              
              4,003,432
              
              
              
              2,326,793Depreciation
              
              
              153,442
              
              
              
              94,0094,156,874
              
              
              
              2,420,802Income
      (loss) from operations
              
              
              3,162,332
              
              
              
              (167,712
              )Other
      income (expense):Interest
      income
              
              
              24
              
              
              
              1,370Interest
      expense
              
              
              (244,840
              )
              
              
              (155,492
              )Other
      income
              
              
              3,834
              
              
              
              1,4642,921,350
              
              
              
              (320,370
              )Income
      tax expense
              
              
              790,000
              
              
              
              --Net
      income (loss)
              
              $
              2,131,350
              
              
              $
              (320,370
              )Net
      income (loss) per common and common equivalent shareBasic
              
              $
              0.08
              
              
              
              *Diluted
              
              $
              0.07
              
              
              
              *Weighted
      average number of shares outstandingBasic
              
              
              26,595,967
              
              
              
              24,026,988Diluted
              
              
              28,455,447
              
              
              
              24,026,988




* Less
than $0.01 per share





See
accompanying notes to financial statements.


F
- 3




Zynex
Medical Holdings, Inc.


Consolidated
Statements of Cash Flows


Years
Ended December 31,




2007
              
              
              2006Cash
      flows from operating activities:Net
      income (loss)
              
              $
              2,131,350
              
              
              $
              (320,370
              )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
              
              
              153,442
              
              
              
              94,009Provision
      for losses in accounts receivable
              
              
              4,801,724
              
              
              
              386,518Amortization
      of deferred consulting and financing fees
              
              
              156,303
              
              
              
              108,816Issuance
      of common stock and warrants for consulting services, interest and loan
      fees
              
              
              68,537
              
              
              
              46,000Deferred
      income tax benefit
              
              
              (120,000
              )
              
              
              --Provision
      for obsolete inventory
              
              
              109,886
              
              
              
              16,000Amortization
      of discount on note payable to interest expense
              
              
              56,548
              
              
              
              38,670Amortization
      of beneficial conversion feature to interest expense
              
              
              3,961
              
              
              
              3,533Employee
      stock based compensation expense
              
              
              28,797
              
              
              
              20,110Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (7,939,783
              )
              
              
              (1,029,501
              )Inventory
              
              
              (486,567
              )
              
              
              (87,782
              )Prepaid
      expenses
              
              
              3,271
              
              
              
              (2,252
              )Refundable
      income taxes
              
              
              --
              
              
              
              7,586Other
      current assets
              
              
              (36,465
              )
              
              
              (9,818
              )Deposits
      and other assets
              
              
              (10,348
              )
              
              
              --Accounts
      payable
              
              
              419,444
              
              
              
              94,566Accrued
      liabilities
              
              
              495,589
              
              
              
              150,455Income
      taxes payable
              
              
              910,000
              
              
              
              --Net
      cash produced by (used in) operating activities
              
              
              745,689
              
              
              
              (483,460
              )Cash
      flows from investing activities:Purchases
      of equipment
              
              
              (751,310
              )
              
              
              (151,586
              )Net
      cash used in investing activities
              
              
              (751,310
              )
              
              
              (151,586
              )Cash
      flows from financing activities:Increase
      in bank overdraft
              
              
              89,347
              
              
              
              --Payments
      on notes payable and capital lease
              
              
              (429,331
              )
              
              
              (208,275
              )Proceeds
      from sale of common stock and exercise warrants, net
              
              
              1,767
              
              
              
              604,476Proceeds
      from loans payable
              
              
              --
              
              
              
              446,563Proceeds
      from loans from stockholder
              
              
              133,500
              
              
              
              146,900Repayment
      of loans from stockholder
              
              
              (54,859
              )
              
              
              (108,154
              )Net
      cash (used in) financing activities
              
              
              (259,576
              )
              
              
              881,510(Decrease)
      increase in cash and cash equivalents
              
              
              (265,197
              )
              
              
              246,464Cash
      and cash equivalents at beginning of period
              
              
              265,197
              
              
              
              18,733Cash
      and cash equivalents at end of period
              
              $
              --
              
              
              $
              265,197Supplemental
      cash flow information:Conversion
      of notes payable to common stock
              
              $
              99,175
              
              
              $
              --Acquisition
      of furniture in exchange for note payable
              
              $
              7,000


See
accompanying notes to financial statements.


F
- 4




Zynex
Medical Holdings, Inc.


Consolidated
Statements of Stockholders' Equity




AdditionalNumber
              
              
              
              
              
              Paid
      in
              
              
              Accumulatedof
      Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              TotalJanuary
      1, 2006
              
              
              23,199,421
              
              
              $
              23,199
              
              
              $
              1,465,024
              
              
              $
              (854,346
              )
              
              $
              633,877Private
      placement of common stock, net of offering costs
              
              
              2,429,475
              
              
              
              2,430
              
              
              
              602,046
              
              
              
              --
              
              
              
              604,476Warrants
      granted upon issuance of note payable and for financing
fee
              
              
              --
              
              
              
              --
              
              
              
              107,537
              
              
              
              --
              
              
              
              107,537Conversion
      feature of note payable
              
              
              --
              
              
              
              --
              
              
              
              8,593
              
              
              
              --
              
              
              
              8,593Issuance
      of common stock for financing fee
              
              
              65,000
              
              
              
              65
              
              
              
              21,385
              
              
              
              --
              
              
              
              21,450Issuance
      of common stock for consulting services
              
              
              575,612
              
              
              
              576
              
              
              
              202,924
              
              
              
              --
              
              
              
              203,500Employee
      stock compensation expense
              
              
              --
              
              
              
              --
              
              
              
              20,110
              
              
              
              --
              
              
              
              20,110Issuance
      of common stock in satisfaction of payable
              
              
              41,403
              
              
              
              41
              
              
              
              8,240
              
              
              
              --
              
              
              
              8,281Net
      loss
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (320,370
              )
              
              
              (320,370
              )December
      31, 2006
              
              
              26,310,911
              
              
              
              26,311
              
              
              
              2,435,859
              
              
              
              (1,174,716
              )
              
              
              1,287,454Issuance
      of common stock for loan extension and conversion
              
              
              459,916
              
              
              
              460
              
              
              
              167,713
              
              
              
              --
              
              
              
              168,173Issuance
      of common stock for the exercise of warrants
              
              
              59,048
              
              
              
              59
              
              
              
              531
              
              
              
              --
              
              
              
              590Issuance
      of common stock for cash
              
              
              1,238
              
              
              
              1
              
              
              
              1,175
              
              
              
              --
              
              
              
              1,176Employee
      stock compensation expense
              
              
              --
              
              
              
              --
              
              
              
              28,797
              
              
              
              --
              
              
              
              28,797Net
      income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              2,131,350
              
              
              
              2,131,350December
      31, 2007
              
              
              26,831,113
              
              
              $
              26,831
              
              
              $
              2,634,075
              
              
              $
              956,634
              
              
              $
              3,617,540




See
accompanying notes to financial statements.




F
- 5




ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








NOTE 1 -
ORGANIZATION AND NATURE OF BUSINESS





Zynex
Medical, Inc. was incorporated under the laws of the state of Colorado on March
3, 1998, under the name of "Stroke Recovery Systems, Inc." (SRSI). On October 1,
2003, Zynex Medical, Inc. acquired, through merger, the assets and liabilities
of Dan Med, Inc. (DMI), a Colorado corporation under common control. The
companies were merged in order to simplify the operating and capital structure
of both companies. SRSI concurrently changed its name to Zynex Medical, Inc.
Zynex Medical Holdings, Inc. (the “Company”) was created in February 2004
through a reverse acquisition.





At
present, Zynex Medical, Inc. generates substantially all its revenue in North
America from sales and rentals of its products to patients, dealers and health
care providers. The amount of net revenue derived from Medicare and Medicaid
programs for 2007 and 2006 is approximately 6% and 5% respectively.





The
Company designs, assembles and commercializes a line of FDA cleared medical
devices for the electrotherapy and stroke rehabilitation markets. The Company
also purchases electrotherapy devices and supplies from other domestic and
international suppliers for resale.


F
- 6




ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





PRINCIPLES
OF CONSOLIDATION





The
accompanying consolidated financial statements include the accounts of Zynex
Medical Holdings, Inc. and Zynex Medical, Inc. for all of the periods presented.
All inter company balances and transactions have been eliminated in
consolidation.





REVENUE
RECOGNITION





Sales and
rental income is recognized when a product has been medically prescribed and
dispensed to a patient and, when applicable, a claim prepared by the Company has
been filed with the patient's insurance provider. Product and rental income is
recognized net of the estimated uncollectible percentage of sales as described
below.





RESERVE
FOR SALES RETURNS, ALLOWANCES AND COLLECTIBILITY





The
Company maintains a reserve for sales allowances, returns and collectibility.
Sales returns and allowances result from reimbursements from insurance providers
that are less than amounts claimed, as provided by agreement, where the amount
claimed by the Company exceeds the insurance provider's usual, customary and
reasonable reimbursement rate and when units are returned because of benefit
denial. The provision is provided for by reducing gross revenue by a portion of
the amount invoiced during the relevant period. The amount of the reduction is
estimated based on historical experience.





Changes
in the allowance for uncollectible accounts receivable for the years ended
December 31, 2007 and 2006 are as follows:




2007
              
              
              2006Balances,
      beginning of year
              
              $
              1,100,000
              
              
              $
              713,481Additions
      credited to net sales and rental income
              
              
              8,033,045
              
              
              
              1,128,734Write-offs
      credited to accounts receivable
              
              
              (3,231,321
              )
              
              
              (742,215
              )$
              5,901,724
              
              
              $
              1,100,000




USE OF
ESTIMATES





Preparation
of financial statements in conformity with generally accepted accounting
principles in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Ultimate results could differ from those estimates. The most significant
management estimates used in the preparation of the accompanying financial
statements are associated with collectibility of accounts
receivable.





CASH AND
CASH EQUIVALENTS





Cash and
cash equivalents are stated at cost. Cash equivalents consist of all highly
liquid investments with maturities of three months or less when
acquired.




F
- 7




ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





FAIR
VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK





The
Company's financial instruments primarily consist of cash, receivables and
payables for which current carrying amounts approximate fair value.
Additionally, interest rates on outstanding borrowings are at rates that
approximate market rates for borrowings with similar terms and average
maturities. The fair value of the loan from stockholder is not practicable to
estimate, due to the related party nature of the underlying
transactions.





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade receivables.





The
Company has recorded trade receivables from business operations. Management
regularly evaluates the collectibility of accounts receivable and believes that
net receivables recorded as of December 31, 2007 to be collectible.





INVENTORY





Inventories
are valued at the lower of cost (average) or market. Finished goods include
products held at different locations by health care providers or other third
parties for rental or sale to patients.





The
Company monitors inventory for turnover and obsolescence, and records losses for
excess and obsolete inventory as appropriate. At December 31, 2007, the Company
had a reserve balance for slow moving inventory of approximately
$125,000.





PROPERTY
AND EQUIPMENT





Property
and equipment are stated at cost. The Company removes the cost and the related
accumulated depreciation from the accounts of assets sold or retired, and the
resulting gains or losses are included in the results of operations.
Depreciation is computed using the straight-line method. Cost and related
estimated useful lives of property and equipment as of December 31, 2007 are as
follows:




Cost
            
            Useful
      livesOffice
      furniture and equipment
            
            $
            198,173
            
            3-7
      yearsRental
      inventory
            
            
            1,068,303
            
            5
      yearsVehicles
            
            
            59,833
            
            5
      yearsLeasehold
      Improvements
            
            
            8,500
            
            5
      yearsAssembly
      equipment
            
            
            9,728
            
            7
      years1,344,537Less
      accumulated depreciation
            
            
            (412,315
            )Net
            
            $
            932,222





Repairs
and maintenance costs are charged to expense as incurred.





SHIPPING
COSTS





Shipping
costs are included in cost of sales and rentals.


F
- 8




ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








STOCK-BASED
COMPENSATION





Effective
January 2006, the Company has adopted Statement of Financial Accounting
Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”). SFAS 123R requires the recognition of the cost of employee services
received in exchange for an award of equity instruments in the financial
statements and is measured based on the grant date fair value of the award that
is ultimately expected to vest during the period. SFAS 123R requires the stock
compensation expense to be recognized over the period during which an employee
is required to provide service in exchange for the award (the requisite service
period, which in the Company’s case is the same as the vesting
period).




In
March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 (SAB 107) relating to SFAS 123R. The Company has applied the
provisions of SAB 107 in its adoption of SFAS 123R. Prior to our adopting SFAS
123R, we accounted for our employee stock-based compensation plans under
Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock
Issued to Employees” (“APB 25”). Under APB 25, generally no compensation expense
was recorded when the terms of the award were fixed and the exercise price of
the employee stock option equaled or exceeded the fair value of the underlying
stock on the date of grant.


F
- 9




ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





ADVERTISING





The
Company expenses advertising costs as they are incurred. Advertising expenses
for the years ended December 31, 2007 and 2006 totaled $32,008 and $146,814,
respectively.





RESEARCH
AND DEVELOPMENT





Research
and development costs are expensed when incurred. There were $15,705 in research
and development expenses for the year ended December 31, 2007 and no research
and development expenses in 2006. Research and development costs as well as
salaries related to research and development are included in selling, general
and administrative expenses.


INCOME
TAXES





Income
taxes are computed using the liability method. The provision for income taxes
includes taxes payable or refundable for the current period and the deferred
income tax consequences of transactions that have been recognized in the
Company's financial statements or income tax returns. The carrying value of
deferred income taxes is determined based on an evaluation of whether the
Company is more likely than not to realize the assets. Temporary differences
result primarily from basis differences in property and equipment and net
operating loss carry forwards. The valuation allowance is reviewed periodically
to determine the amount of deferred tax asset considered
realizable.





COMPREHENSIVE
INCOME





There are
no adjustments necessary to the net income (loss) as presented in the
accompanying statement of operations to derive comprehensive income in
accordance with SFAS No. 130, "Reporting Comprehensive Income."





SEGMENT
REPORTING





In June
1997, SFAS 131, "Disclosure about Segments of an Enterprise and Related
Information," was issued. Operating segments, as defined in the pronouncement,
are components of an enterprise about which separate financial information is
available and that are evaluated regularly by management in deciding how to
allocate resources and assess performance. To date, the Company has only had one
operating segment.




F
- 10




ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





EARNINGS
PER SHARE





The
Company computes net earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share", which establishes standards for computing and presenting
net earnings (loss) per share. Basic earnings (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding and the number of dilutive potential common share equivalents during
the period. The effects of potential common stock equivalents have not been
included in the computation of diluted net loss per share for the year ended
December 31, 2006 as their effect is anti-dilutive.





The
calculation of basic and diluted earnings per share for 2007 is as
follows:





BASIC
            
            2007Net
      income applicable to common stockholders
            
            $
            2,131,350Weighted
      average shares outstanding - basic
            
            
            26,595,967Net
      income per share - basic
            
            $
            0.08DILUTEDNet
      income applicable to common stockholders
            
            $
            2,131,350Weighted
      average shares outstanding - basic
            
            
            26,595,967Dilutive
      securities
            
            
            1,859,480Weighted
      average shares outstanding - diluted
            
            
            28,455,447Net
      income per share - diluted
            
            $
            0.07




F
- 11




ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





RECENT
ACCOUNTING PRONOUNCEMENTS





In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations(“SFAS
141 (R)”) which becomes effective for fiscal periods beginning after
December 15, 2008. SFAS No. 141 (R) requires all business
combinations completed after the effective date to be accounted for by applying
the acquisition method (previously referred to as the purchase method).
Companies applying this method will have to identify the acquirer, determine the
acquisition date and purchase price and recognize at their acquisition date fair
values of the identifiable assets acquired, liabilities assumed, and any
non-controlling interests in the acquiree. In the case of a bargain purchase the
acquirer is required to reevaluate the measurements of the recognized assets and
liabilities at the acquisition date and recognize a gain on that date if an
excess remains. The Company is currently assessing the impact that the adoption
of this statement may have on its consolidated financial
statements.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB 51(“SFAS 160”)
which becomes effective for fiscal periods beginning after December 15,
2008. This statement amends ARB 51 to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. The statement requires ownership interests in
subsidiaries held by parties other than the parent be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent’s equity. The statement also
requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the non-controlling interest with
disclosure on the face of the consolidated statement of income, of the amounts
of consolidated net income attributable to the parent and to the non-controlling
interest. In addition this statement establishes a single method of accounting
for changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation and requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. The Company does not expect the
adoption of this statement to have a material impact on its consolidated
financial statements.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment to FASB Statement
No. 115 .This statement permits companies to choose to measure many
financial instruments and other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurement of accounting for financial instruments. This statement applies to
all entities, including not for profit. The fair value option established by
this statement permits all entities to measure eligible items at fair value at
specified election dates. This statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. The Company
is currently assessing the impact that the adoption of this statement may have
on its consolidated financial statements.





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS
No. 157”). This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement applies under other
accounting pronouncements that require or permit fair value measurements. SFAS
No. 157 is effective for fiscal years beginning after November 15,
2008 for non-financial assets and liabilities, and is effective for fiscal years
beginning after November 15, 2007 for financial assets and liabilities.. The
Company is currently assessing the impact that the adoption of this statement
may have on its consolidated financial statements.


F
- 12




ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3 -
NOTES PAYABLE AND LEASES





On
October 5, 2005 Zynex received $400,000 under a three-year term loan agreement
with Silicon Valley Bank, Santa Clara, California and Boulder, Colorado (the
"Lender"). The loan bore interest at a per annum fixed rate of 7.84%. The loan
was guaranteed by Zynex Chairman, President and Chief Executive Officer Thomas
Sandgaard and was collateralized by a first perfected security interest in
accounts, inventory, chattel paper, equipment, fixtures, general intangibles,
including intellectual property and other assets. The Company was to repay the
loan in 36 equal monthly payments of principal and interest. The loan included
financial covenants for minimum liquidity and minimum debt service coverage,
which the Company was in compliance with as of December 31, 2007 and 2006. In
connection with the loan, the Lender was granted a seven-year warrant to
purchase 50,000 shares of Zynex Common Stock at an exercise price of $0.71 per
share.





On March
15, 2006 Zynex received $240,000 under a three-year term loan agreement with
Silicon Valley Bank, Santa Clara, California and Boulder, Colorado (the
"Lender"). The loan bore interest at a per annum fixed rate of 8.48%. The loan
was guaranteed by Zynex Chairman, President and Chief Executive Officer Thomas
Sandgaard and was collateralized by a first perfected security interest in
accounts, inventory, chattel paper, equipment, fixtures, general intangibles,
including intellectual property and other assets. The Company was to repay the
loan in 36 equal monthly payments of principal and interest. The loan included
financial covenants for minimum liquidity and minimum debt service coverage,
which the Company was in compliance with as of December 31, 2007 and
2006.





On
October 18, 2006, the Company entered into a loan transaction with Ascendiant
Capital Group, LLC (an affiliate of Ascendiant Securities, LLC) and issued to
Ascendiant Capital (a) a secured Note in the total principal amount of $275,000
(the "Note") and (b) a five-year warrant to purchase a total of 429,867 shares
of our common stock at a fixed exercise price of $0.39 per share. The
warrants were valued at the date of grant at $113,437 using the Black-Scholes
option-pricing model. The relative fair value of the warrants ($80,310) was
accounted for as a discount applied against the face amount of the Note. The
discount was amortized over the term of the promissory note to interest expense.
For the years ended December 31, 2007 and 2006, the Company recorded $47,294 and
$33,016 interest expense, respectively. The Note was convertible into
common stock at a fixed conversion price of $0.32 per share. The conversion of
the Note was deemed to be beneficial as the Note converted to common stock at
$0.32 per share and the estimated fair value of the common stock was determined
to be $0.33 per share on the date the transaction was entered into. The
intrinsic value of the beneficial conversion feature of $8,593 was amortized as
additional interest expense over the term of the Note. Net proceeds of
approximately $206,000 from the transaction were used for general working
capital.





In
connection with the Note, the Company issued 65,000 shares of common stock to
Ascendiant Capital as a fee and granted a warrant to purchase 103,130 shares of
common stock with an exercise price of $0.39 per share as a placement fee to
Ascendiant Securities.  The shares were values at $21,450 (based on
the closing market price of $0.33 per share at the date the transaction was
closed) and the warrants were valued at $27,227 using the Black Scholes
option-pricing model. These fees and $32,000 of financial fees paid at closing
were amortized over the six month term.





In May
2007, the Company and Ascendiant Capital agreed to extend the maturity date of
the loan and to modify extension terms of the Note.  Under the
modified agreement the principal was to be paid in six equal monthly
installments plus interest at 21%, although prepayment was permitted without
penalty.  The entire amount was to be repaid no later than October 18,
2007.  For extending the Note, the Company issued 75,000 shares of
common stock in May 2007.  The shares were valued at $26,250. The
extension agreement called for additional shares to be issued every month as
long as an outstanding balance remained on the Note.  The number of
shares to be issued monthly depended upon the balance of the Note, up to an
aggregate maximum of 450,000 shares of common stock, which number included the
75,000 shares of common stock issued in May 2007.  Previously, 450,000
shares were to be issued upon the extension.




F
- 13




ZYNEX
MEDICAL HOLDINGS, INC.
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


In May
2007, the Company repaid principal of $100,000, interest of $4,812 and issued
50,000 shares of common stock valued at $21,500.





In June
2007, the Company repaid principal of $76,000, interest of $3,062 and issued
25,000 shares of common stock valued at $21,250.





On June
21, 2007, Ascendiant Capital surrendered the Note for conversion into common
stock at the fixed conversion price of $0.32 per share.  The
remaining principal of $99,000 plus accrued interest of $173 were converted into
309,916 shares of common stock.





In
November 2006, the Company issued a note payable in the amount of $25,881 in
satisfaction of a payable due to a sales representative of the company. This
note is unsecured and bears interest at 8.25%. Interest that accrues through
March 31, 2007 was due and payable on that date. The note is being paid in 12
equal payments of $2,224 through March 1, 2008. Principal payments of $19,300
were made through December 31, 2007.




Notes
payable at December 31, 2007 consisted of the following:





Note
      payable to a bank, principal and interest payments of $12,531 due on a
      monthlybasis
      through September, 2008. Annual interest rate of 7.84%,
      collateralizedby
      accounts, inventory, chattel papers, equipment, fixtures, and general
      intangibles,including
      intellectual property. The note was guaranteed by the President
      andChief
      Executive Officer and largest shareholder
            
            $
            120,994Note
      payable to a bank, principal and interest payments of $7,559 due on a
      monthlybasis
      through March, 2009. Annual interest rate of 8.48%,
      collateralizedby
      accounts, inventory, chattel papers, equipment, fixtures, and general
      intangibles,Including
      intellectual property. The note was guaranteed by the President
      andChief
      Executive Officer and largest shareholder
            
            
            107,221Motor
      vehicle contract payable in 60 monthlyinstallments
      of $1,351, annual interest at15.1%,
      secured by automobile.
            
            
            18,350Note
      payable to a sales representative of the Company, principal and
      interestpayments
      of $2,239 due in 12 equal installments from April 1, 2007
      throughMarch
      31, 2008, annual interest at 8.25%, unsecured.
            
            
            6,580Note
      payable to landlord for furniture payable in 25 monthly installments of
      $280, annual interest of 8.2%, secured by furniture.
            
            
            6,440Total
            
            
            259,585Less
      current maturities
            
            
            (252,853
            )Long-term
      maturities
            
            $
            6,732




Future
maturities of the notes payable are as follows:




Year ending December
      31,2008
            
            $
            252,8532009
            
            
            6,713$
            259,585


F
- 14


ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Effective
March 1, 2006 a previously non-interest bearing loan from Thomas Sandgaard,
President and Chief Executive Officer, in the amount of $14,980 was converted to
a 24 month, 8.25% term loan, with equal monthly payments of principal and
interest commencing April 1, 2006.  As of December 31, 2007, this loan
had been paid in full.





In 2006
Mr. Sandgaard loaned the Company $146,900, of which $50,000 was converted to a
24 month, 8.25% term loan, with equal monthly payments of principal and interest
commencing April 1, 2006. As of December 31, 2007, $14,592 of this amount
remained outstanding   The remaining $96,900 was represented by
8.25% demand notes and will be repaid as the Company's cash position and its
financing covenants allow. As of December 31, 2007, $4,171 of this amount
remained outstanding. The loans from Mr. Sandgaard were used for working capital
purposes.





In May
and June 2007, Mr. Sandgaard made 24-month unsecured loans to the Company in the
principal amounts of $50,000 and $24,000 for a total amount of $74,000. The
loans bear interest at 8.25% per annum and require monthly payments of $2,267,
commencing June 2007 and $1,088 commencing July 2007, for a total of
$3,355.  As of December 31, 2007, $40,920 and $18,365 remain
outstanding. The loans from Mr. Sandgaard were used for working capital purposes
and repayment of the Note payable to Ascendiant Capital Group, LLC.





In
September 2007, Mr. Sandgaard made a loan to the Company in the principal amount
of $59,500.  The loan bears interest at 8.25% per annum commencing
September 30, 2007 and is a demand note.  As of December 31, 2007,
$60,735 remains outstanding.  The loan from Mr. Sandgaard was used for
working capital purposes.





Future
maturities of these loans are as follows:




Year
      ending December 31,2008
            
            $
            118,4512009
            
            
            20,332$
            138,783




The
Company has commitments under various operating and capital leases that are
payable in monthly installments. In November 2007, the Company entered into a
25-month sublease of office, plant and warehouse space in Littleton, Colorado.
The lease provides for annual rent of $100,975 plus property taxes and
maintenance costs. As of December 31, 2007, future minimum lease payments under
non-cancelable operating and capital leases are as follows:




Capital
              
              
              OperatingLease
              
              
              Leases2008
              
              $
              18,869
              
              
              $
              206,4802009
              
              
              12,579
              
              
              
              175,0832010
              
              
              
              
              
              
              14,575Total
      future minimum lease payments
              
              
              31,448
              
              
              $
              396,138Less
      amount representing interest
              
              
              1,327Present
      value of net minimum lease payments
              
              
              30,121Less
      current portion
              
              
              (17,932
              )Long-term
      capital lease obligation
              
              $
              12,189


Rent
expense under operating leases for 2007 and 2006 was $114,553 and $122,206,
respectively.


F
- 15





ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE 4 -
INCOME TAXES





Income
tax (benefit) expense consists of the following for the year ended December 31,
2007:




Current
      tax (benefit) expenseFederal
              
              $
              800,000State
              
              
              110,000910,000Deferred
      tax (benefit) expenseFederal
              
              
              (110,000
              )State
              
              
              (10,000
              )Decrease
      in valuation allowance
              
              
              (120,000
              )$
              790,000


There is
no federal or state income taxes for the year ended December 31,
2006.





A
reconciliation of income tax computed at the U.S. statutory rate of 35% to the
effective income tax rate is as follows:




2007
              
              
              2006Statutory
      rate
              
              
              (35
              )%
              
              
              (35
              )%State
      taxes
              
              
              (2
              )%
              
              
              (5
              )%Permanent
      differences
              
              
              (2)
              %
              
              
              10
              %Temporary
      timing differences
              
              
              10
              %
              
              
              1
              %Net
      operating loss carryover and other
              
              
              2
              %
              
              
              29
              %Combined
      effective rate
              
              
              27
              %
              
              
              0
              %




The tax
effects of temporary differences that give rise to deferred tax assets
(liabilities) at December 31, 2007 are as follows:




Current
      deferred tax assets:Accrued
      expenses
              
              $
              14,000Accounts
      receivable
              
              
              185,000Inventory
              
              
              47,000246,000Valuation
      allowance
              
              
              (36,000
              )Net
      current deferred tax asset
              
              $
              210,000Long-term
      deferred tax liabilities:Property
      and equipment
              
              $
              90,000Net
      long-term deferred tax liability
              
              $
              90,000




F
- 16




ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








SFAS 109
requires that all deferred tax balances be determined using the tax rates and
limitations expected to be in effect when the taxes will actually be paid or
recovered. Consequently, the income tax provision will increase or decrease in
the period in which a change in tax rate or limitation is enacted. As of
December 31, 2007, the Company had total deferred tax assets of $210,000 and
deferred tax liabilities of $90,000. The Company recorded a valuation allowance
in the amount of $36,000 at December 31, 2007, against the amount by which
deferred tax assets exceed deferred tax liabilities. The valuation reserve at
December 31, 2007 has been provided due to the uncertainty of the amount of
future taxable income. The Company provides a valuation allowance in the full
amount of its deferred tax assets that exceed deferred tax liabilities because
under the criteria of SFAS No. 109, the Company does not have a basis to
conclude that it is more likely than not that it will realize the deferred tax
assets.





NOTE 5 -
Stockholders' Equity, Common Stock and Warrants





On
November 3, 2006, the Company entered into a twelve-month consulting services
agreement with Ascendiant Capital, in which this party agreed to advise the
Company in business and financial matters for the twelve-month term of the
agreement. Compensation consisted of 150,000 shares of the Company’s restricted
common stock with a market value of approximately $67,500 (based on the closing
market price of $0.45 per share at the date the transaction was entered into).
The deferred cost was amortized on a straight-line basis over the twelve-month
period from the date of the agreement. During the years ended December 31, 2007
and 2006, $56,250 and $11,250, respectively, was expensed.





On July
1, 2006, the Company entered into a twelve-month agreement with a consultant for
investor relations services. Compensation consists of (a) a monthly fee of
$8,000 cash and either $4,000 cash or 13,333 shares and (b) 300,000 of the
Company’s restricted common stock with a market value of approximately $90,000
(based on the closing market price of $0.30 per share at the date the
transaction was entered into). In October 2006, the client renegotiated its
agreement with the consultant to exclude the $8,000 cash payment. In November,
the number of shares to be issued as part of the monthly retainer was reduced to
10,000 per month, effective October 1. During the year ended December 31, 2006,
69,999 shares were issued under the agreement with a fair market value of
$21,000. The deferred cost of $90,000 was being amortized on a straight-line
basis over the twelve-month period from the date of the agreement. During each
of the years ended December 31, 2007 and 2006, $45,000 was
expensed.





F
- 17





ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS






During
2006, in terms of unregistered sales of securities, the Company (a) sold
2,175,000 shares of common stock, and five-year warrants to purchase a total of
1,740,000 shares of common stock at $0.32 per share, to accredited investors in
a non public offering, (b) issued 254,475 shares to investment bankers
responsible for the non public offering, issued to the provider of the
convertible $275,000 bridge loan five-year warrants to purchase a total of
429,867 shares of common stock at $0.39 per share and a fee of 65,000 shares of
common stock, (d) issued to the investment banker for the loan five-year
warrants to purchase a total of 103,139 shares of common stock at $0.39 per
share, (e) issued 150,000 shares to the investment banker responsible for such
loan for future consulting services and (f) issued 425,612 shares to investor
relations firms for services rendered including 55,613 shares with a total
market value of $25,000 were issued to the Wall Street Group in return for
investor relations services. In these issuances, the Company made no general
solicitation, the Company believes that purchasers of the securities were
accredited investors, the Company believes that the investment bankers, lender
and investor relations firms were accredited investors or met the standards for
a purchaser is a non-public offering, and the Company relied upon an exemption
from securities registration for a non-public offering.





During
the year ended December 31, 2005, the Company issued 312,500 warrants to
purchase common stock with a fair market value of $41,250, 129,044 shares of
unregistered common stock with a total market value of $46,500 and paid $6,250
to The Wall Street Group in return for investor relations services. The Company
also issued (a) 8,333 warrants to purchase common stock at a fair market value
of $2,870 to a financial consultant for preparation of financial projections and
introduction to Silicon Valley Bank; (b) 50,000 warrants to purchase common
stock with a fair market value of $22,100 to Silicon Valley Bank in connection
with their September 2005, $400,000 term loan; (c) and 100,000 warrants to
purchase common stock with a fair market value of $17,200 to an investment
banking firm for services rendered. The agreement with The Wall Street Group
ended in April 2006. The $22,100 additional compensation to Silicon Valley Bank
was being amortized over the three-year term of the agreement and $5,525 has
been deferred at December 31, 2007.




In, 2004,
the Company sold 685,715 shares of common stock to five investors at $1.75 per
share. The proceeds realized from the sale were $897,789, net of offering
expenses and the fair value of Broker Warrants issued. In connection with the
sales, the Company granted Class A Warrants to purchase an additional 342,859
shares of common stock at $1.75 per share, Class B Warrants to purchase an
additional 685,715 shares of common stock at $2.00 per share, Class C Warrants
to purchase 22,858 shares of common stock at $.01 per share and Broker Warrants
to purchase 45,715 shares of common stock at $.01 per share.





The Class
B, Class C and Broker's Warrants expire on June 4, 2009. The Class A Warrants
expired February 20, 2006. The Company's registration statement, filed July 16,
2004 on Form SB-2/A, became effective July 20, 2004 and a First Amendment on
Form SB-2/A became effective June 7, 2005.





Upon
exercise of the warrants, the Company is required to pay Warrant Exercise
Compensation equal to 10 percent of the cash proceeds payable to the Company.
The Company is further required to issue one Broker's Warrant for each 10 shares
of Class A, Class B and Class C Warrants exercised by the
subscribers.





During
the year ended December 31, 2007, the Company issued 59,048 shares of common
stock upon the exercise of Class B and Class C Warrants and received
$590.




F
- 18


ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







In
September 2004, the Company issued options to acquire 1,900,000 shares of common
stock to a financial consulting firm in exchange for consulting services
provided in connection with the Company's reverse acquisition, private placement
and ongoing investor relations. The options, which expire September 26, 2009,
permit the purchase of common stock in quantities and at prices set forth as
follows:





Number
      of Shares
            Price
      Per Share100,000
            $0.40400,000
            $1.75200,000
            $2.00200,000
            $2.25200,000
            $2.50200,000
            $2.75200,000
            $3.00200,000
            $3.50200,000
            $4.00





Also
during 2004, the Company issued 120,000 warrants to purchase common stock for
five years to two consultants and one employee; 110,000 of these warrants are
exercisable at $3.00 per share and 10,000 are exercisable at $0.55 per
share.




During
2006 and 2005, the Company also issued common stock and common stock warrants to
consultants and debtors - see Note 3 - Notes payable and leases.





Stock
Options:





On
January 3, 2005, the Company established the 2005 Stock Option Plan (the "Option
Plan") and reserved 3,000,000 shares of common stock for issuance under the
Option Plan. Vesting provisions are determined by the Board of Directors. All
stock options expire 10 years from the date of grant.





A summary
of stock option activity under the Option Plan for the year ended December 31,
2007 is presented below:





WeightedWeighted
            
            AverageShares
            
            
            Average
            
            Remaining
            
            AggregateUnder
            
            
            Exercise
            
            Contractual
            
            IntrinsicOption
            
            
            Price
            
            Life
            
            ValueOutstanding
      at January 1, 2007
            
            
            286,670
            
            
            $
            0.34Granted
            
            
            352,000
            
            
            $
            0.68Exercised
            
            
            --
            
            
            $
            --Forfeited
            
            
            (142,670
            )
            
            $
            0.36Outstanding
      at December 31, 2007
            
            
            496,000
            
            
            $
            0.58
            
            8.52
      Years
            
            
            $
            276,640Exercisable
      December 31, 2007
            
            
            91,500
            
            
            $
            0.34
            
            7.74
      Years
            
            
            $
            89,040




F
- 19





ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
following table summarizes information about stock options outstanding as of
December 31, 2007:





Options
      Outstanding
            
            
            Options
      ExercisableRemainingExercise
            
            
            Number
      of
            
            
            contractual
            
            
            Number
      of
            
            
            Exerciseprices
            
            
            options
            
            
            life
      (years)
            
            
            options
            
            
            price$0.30
            
            
            80,000
            
            
            7.00
            
            
            40,000
            
            
            $0.30$0.23
            
            
            10,000
            
            
            7.25
            
            
            5,000
            
            
            $0.23$0.50
            
            
            14,000
            
            
            7.50
            
            
            6,000
            
            
            $0.26$0.75
            
            
            14,000
            
            
            7.75
            
            
            7,000
            
            
            $0.50$0.27
            
            
            92,000
            
            
            8.50
            
            
            6,000
            
            
            $0.26$0.33
            
            
            14,000
            
            
            8.75
            
            
            23,000
            
            
            $0.27$0.26
            
            
            24,000
            
            
            9.00
            
            
            3,500
            
            
            $0.33$0.45
            
            
            100,000
            
            
            9.25$0.42
            
            
            22,000
            
            
            9.25$0.85
            
            
            32,000
            
            
            9.50$1.32
            
            
            74,000
            
            
            9.75$1.33
            
            
            10,000
            
            
            9.80$1.43
            
            
            10,000
            
            
            9.90496,000
            
            
            
            
            
            91,500




For the
years ended December 31, 2007 and 2006, the Company recorded compensation
expense related to stock options that decreased net income (increased net
loss) from operations and decreased net income (increased net loss) by
$28,797 and $20,110, respectively. The stock compensation expense was included
in selling, general and administrative expenses in the accompanying condensed
consolidated statements of operations.




During
the year ended December 31, 2007 the Company granted stock options to acquire
352,000 shares of common stock to employees at exercise prices that ranged from
90,000 shares of common stock at $0.26 per share, 100,000 shares of common stock
at an exercise price of $0.45 per share, 28,000 shares of common stock at an
exercise price of $0.42 per share, 38,000 shares of common stock at an exercise
price of $0.85 per share, 76,000 shares of common stock at an exercise price of
$1.32 per share, 10,000 shares of common stock at an exercise price of $1.33 per
share and 10,000 shares of common stock at an exercise price of $1.43 per share.
The fair value of stock options at the date of grant during the three months
ended December 31, 2007 was $1.199, $1.203 and $1.291 respectively. During the
year ended December 31, 2006 the Company granted stock options to acquire
146,000 shares of common stock at an exercise prices that ranged from $0.27 to
$0.33. The Company used the following assumptions to determine the fair value of
stock option grants during the years ended December 31, 2007 and
2006:





2007
            
            2006Expected
      life
            6.25
      years
            
            4
      yearsVolatility
            114
      - 123%
            
            121.00%Risk-free
      interest rate
            3.9
      – 4.7%
            
            4.10%Dividend
      yield
            0%
            
            0%





The
expected life of stock options represents the period of time that the stock
options granted are expected to be outstanding and was calculated using the
simplified method per the guidance of SAB 107 “Share Based Payment” (“SAB107”)
for “plain vanilla” options.. The expected volatility is based on the historical
price volatility of our common stock. The risk-free interest rate represents the
U.S. Treasury bill rate for the expected life of the related stock options. The
dividend yield represents our anticipated cash dividend over the expected life
of the stock options. The estimated average forfeiture rate for the year ended
December 31, 2007 was 35% and for the year ended December 31, 2006 was
50%.


F
- 20


ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








A summary
of status of the Company’s non-vested shares as of and for the year ended
December 31, 2007 is presented below:


WeightedShares
            
            
            AverageUnder
            
            
            Grant
      DateOption
            
            
            Fair
      ValueNonvested
      at January 1, 2007
            
            
            251,503
            
            
            $
            0.26Granted
            
            
            352,000
            
            
            $
            0.68Vested
            
            
            (69,168
            )
            
            $
            0.26Forfeited
            
            
            (129,835
            )
            
            $
            0.26Nonvested
      at December 31, 2007
            
            
            404,500
            
            
            $
            0.55





As of
December 31, 2007, we had $155,386 of unrecognized compensation cost related to
stock options that will be recognized over a weighted average period of
approximately 4 years.





In
addition, stock options to acquire 350,000 shares of common stock were granted
to an employee prior to January 1, 2007, which were granted separate from the
Option Plan.  Upon the employee’s termination in February 2007,
options for 325,000 shares of common stock were vested and options for 25,000
shares of common stock were unvested and forfeited.  The options for
325,000 shares of common stock remain outstanding; these options have an
exercise price of $0.22 and a term of 10 years, except options for 100,000
shares of common stock, which terminate in April 2010.








Note 6 -
MAJOR SUPPLIERS





The
Company purchased approximately 20% 2007 additions to inventory from one
supplier and an additional 14% from a second supplier.  In 2006, the
Company purchased approximately 14%, respectively, of its entire inventory
purchases from one European supplier.  The Company has purchased 100%
of its NeuroMove inventory from one supplier. Management believes that its
relationships with these suppliers is strong, however, if necessary these
relationships can be replaced. If the relationships were to be replaced, there
may be a short term disruption to operations, a period of time in which products
would not be available and additional expenses may be
incurred.





Note 7 -
EMPLOYMENT AGREEMENTS





On
February 1, 2004, Zynex Medical, Inc. entered into a three-year employment
agreement with the Company's President and Chief Executive Officer. The
agreement expired January 31, 2007 and was automatically extended for an
additional two-year period. The initial annual base salary under the agreement
was $174,000 and may be increased annually at the board of director's
discretion. The agreement also provides for a 50% annual bonus if annual net
revenue exceeds $2.25 million, medical and life insurance, and a vehicle. The
agreement contains a non-compete provision for the term of the agreement that
extends for 24 months following termination of the agreement.





F
- 21


ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








On
January 1, 2005, the agreement was amended to provide an annual base salary of
$144,000 and quarterly bonuses as follows:




Quarterly
      Revenue
            Quarterly
      Bonus$0
      to $600,000
            $
      0$600,001
      - $800,000
            $
      10,000$800,001
      - $1,000,000
            $
      25,000$1,000,001
      and greater
            $
      50,000





The bonus
amounts reflected in the above table shall be reduced by one-half if the Company
sustains a net loss during the quarter. At December 31, 2007, the Company
recorded a $100,000 accrual related to this bonus.





On
May 31, 2005, Zynex Medical Holdings, Inc. entered into a compensation agreement
with Peter J. Leveton, the Company's Chief Financial Officer to be effective as
of April 18, 2005 (the "Effective Date"). Mr. Leveton’s employment with the
Company was terminated on February 16, 2007. The agreement provided for a
monthly salary of $2,250 per month. It also provided for an increase in the
monthly salary of an additional $4,000 per month (the "First Raise") in the
event (a) the Company obtained a line of credit of at least $250,000, or (b) the
Company received third party equity or debt investment of at least $1,000,000,
or (c) the Company had annual audited "positive net cash provided by operating
activities" of at least $500,000, or (d) the Company underwent a liquidity event
with a valuation of at least $10,000,000 (items (b) through (d) shall be
referred to as "Raise Events"). Mr. Leveton met the standard for the First Raise
and it was in effect. The agreement also provided for an additional increase in
the monthly salary of $5,000 per month (the "Second Raise") in the event the
Company undergoes a Raise Event. Mr. Leveton met the standard for the Second
Raise in 2006, and it was in effect. The First Raise and Second Raise, once
earned and vested, were paid in arrears with respect to each month of employment
beginning as of the Effective Date through the month of vesting, and then were
paid currently through the date of termination of Mr. Leveton's employment. Mr.
Leveton and the Company entered into a Separation Agreement whereby Mr. Leveton
agreed to extend payment of the previously earned portion of the second raise
over the ten-month period January-October 2007 with interest at
8.25%.





Under the
Agreement Mr. Leveton received stock options to purchase up to 350,000 shares of
the Company's Common Stock. Such options had a ten-year term, except options for
100,000 shares which expire on April 17, 2010, and an exercise price equal to
the fair market value of the Common Stock on the date of grant, April 18, 2005.
Such options were subject to vesting as follows: 100,000 shares vested on the
date of grant; 25,000 shares vested on June 30, 2005; and 25,000 shares vested
as of the last day of each full calendar quarter beginning as of July 1, 2005
through March 31, 2007, provided that Mr. Leveton was employed as of such
dates; and 50,000 shares vested upon a Raise Event which was completed in
January, 2007. All unvested quarterly options would have immediately vested and
become exercisable upon a liquidity event with a valuation of at least
$10,000,000; provided the liquidity event occurred during Mr. Leveton's
employment or if Mr. Leveton played an active, integral and key role in
accomplishing such event, within 90 days of involuntary termination. All
unvested options expired upon the termination of Mr. Leveton’s employment. As of
February 16, 2007, Mr. Leveton’s termination date, 325,000 of the options had
vested.





Effective
February 19, 2007, the Company entered into a compensation arrangement with its
new Chief Financial Officer, Fritz G. Allison. The arrangement provides for a
monthly salary of $8,000 per month, before taxes, for the first three months and
$10,000 per month, before taxes, thereafter; grant under the Company’s 2005
stock option plan of an option to purchase up to 100,000 shares of the Company’s
common stock, with a ten year term starting February 19, 2007, an exercise price
equal to $0.45 per share, the fair market value of the Company’s common stock on
such date, and a vesting schedule of 25,000 shares vesting on the first
anniversary of the date of grant and 25,000 shares vesting on each subsequent
anniversary of the date of grant; a bonus payable in 2008 in the amount of
$20,000 cash and an option grant for an additional 50,000 shares in the event
(a) the Company’s net revenue meets a revenue targetfor 2007, (b) the
Company has a positive net income for 2007, and (c) the Company does not have
any restatements of its financial statements during 2007 and for any periods
during 2007 or the year 2007 on or prior to the completion of the audit of the
2007 financial statements. Mr. Allison also received full health and dental
insurance coverage through the Company.


F
- 22


ZYNEX
MEDICAL HOLDINGS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








NOTE 8 -
RELATED PARTY TRANSACTIONS





The
Company provides the President with two automobiles for personal use costing
$2,287 per month.





NOTE 9 -
SUBSEQUENT EVENTS





In
January 2008, the Company notified warrant holders from the 2006 private
placement that an event had occurred which accelerated the expiration date of
the warrants.  In February 2008 the Company had received notices of
exercise and payments from all the warrant holders notified.  The
Company issued 1,740,000 shares of common stock to the warrant holders and
received $678,600 in proceeds from them.  The Company is obligated to
pay $67,860 to the two investment firms that originally aided in the 2006
private placement as fees related to the warrant exercise.





In
January 2008, the Company defaulted on the monthly installment payable to the
Lender.  As a result of this default, the Lender called the
outstanding balances of both term loans payable to the Lender. The loans were
paid off in February 2008. These loans were presented as a current liability at
December 31, 2007.





In
February 2008, the Company received a notice of exercise related to a warrant
for 100,000 shares of common stock; 80,392 shares of common stock were issued in
a cashless exercise.





In
February 2008, the Company issued 2,000 shares of common stock to an employee
for a cash payment of $2,618.





In March
2008, the Company received a notice of exercise related to options for 325,000
shares of common stock; 282,440 shares of common stock were issued in a cashless
exercise.





In March
2008, the Company issued 7,750 shares of common stock to an individual for a
cash payment of $10,145.





F -
23