**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-KSB**





(Mark
      One)


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





For
      the
      year ended  **December
      31, 2006**






[
      ] 
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.)







8100
                Southpark Way, Suite A-9, 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. [X]
 
 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 $2,556,809
 
 The
        aggregate market value of the 7,330,583 common shares held by non-affiliates
        of
        the registrant was $1,905,952 computed by reference to the average closing
        bid
        and ask price of such stock as listed on the OTC Bulletin Board on February
        15,
        2007. 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
        February 15, 2007, 26,310,911 shares of common stock are issued and outstanding.
  Documents
        incorporated by reference: None.
 
 Transitional
        Small Business Disclosure Form (check one):   Yes [ ]   No
        [X]











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, risks
      and
      delays associated with product development, risk of market acceptance of
      products, technology or product obsolescence, competitive risks, reliance on
      manufacturing partners, dependence on reimbursement from insurance companies,
      additional capital needs 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.





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          2
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**TABLE
      OF CONTENTS**





**FORM
      10-KSB ANNUAL REPORT - FISCAL YEAR 2006**




**ZYNEX
      MEDICAL HOLDINGS, INC.**








PAGEPART
                IItem
                1.
            Description
                of Business
            4Item
                2.
            Description
                of Property
            12Item
                3.
            Legal
                Proceedings
            12Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            13PART
                IIItem
                5.
            Market
                for CommonEquityandRelated StockholderMatters
                and Small Business Issuer Purchases of Equity Securities
            14Item
                6.
            Management's
                Discussion and Analysis or Plan of Operation
            14Item
                7.
            Financial
                Statements
            27Item
                8.
            Changes
                in and Disagreements with Accountants onAccountingandFinancialDisclosure
            27Item
                8A.
            Controls
                and Procedures
            27Item
                8B.
            Other
                Information
            27PART
                IIIItem
                9.
            Directors,
                Executive Officers,Promoters,Control Personsand Corporate Governance;
                Compliance with Section 16(a) of the Exchange Act
            28Item
                10.
            Executive
                Compensation
            31Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management And Related
                Stockholder Matters
            32Item
                12.
            Certain
                Relationships and RelatedTransactions,
                and Director Independence
            34Item
                13.
            Exhibits
            35Item
                14.
            Principal
                Accountant Fees and Services
            39




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          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, Thomas
      Sandgaard. 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 - owned  corporation
      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.
      In 2007 we intend to hire or contract with additional sales
      representatives , and such
      additions are part of our 2007 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






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          5
          -*





Resale
                ProductsElpha
                3000
            Dual
                Channel NMES deviceConti4000
            Electrical
                Stimulation Device for Incontinence TreatmentArista
                2000
            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 receives a
      majority of its revenue from the sale and rental of transcutaneous
      electrical nerve stimulation (“TENS”) ,
      interferential and muscle stimulation devices as well as electrode supplies
      and
      a significant portion of its revenue from the sale and rental of the NeuroMove





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 225,000 and 296,000 and the SCI Injury Information
      Network estimate 11,000 new cases each year.






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          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.





In
      most
      instances when the patient doesn't improve, it is because they have a cognitive
      defect or are unwilling or unable to expend the repetitive effort and concentration necessary for success.





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
      estimates that in 2007 alone stroke costs will 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.







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          7
          -*







PATIENT
      NEEDS AND CLINICAL OUTCOMES





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 225,000-
      296,000 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 .




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          8
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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 paymentimpactsthe Company's cash flow andcan
                slowits
                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
      employees develop the software used in our products.







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          9
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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 2006 approximately 63 % of revenue was derived from rental and 37 % 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.






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          10
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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 2007. 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 2007
      and/or 2008.





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.





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:








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          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, 2006, we employed 17 full time employees (an
      increase from 14 as of December 31, 2005) .
      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, 2006:





Name
            Age
            PositionThomas
                Sandgaard
            48
            President,
                Chief Executive Officerand Director.Set
                forth below is abiographical description ofMr.
                Sandgaardbased on information supplied by himPeter
                J. Leveton
            69
            Chief
                Financial Officer.Set
                forth below is a biographical description ofMr.
                Leveton based on informationsupplied by him.





NOTE:
      Mr.
      Leveton was replaced subsequent to December 31, 2006.





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.
      Leveton has served as the Chief Executive Officer and Chief Financial Officer
      of
      public and private companies in medical devices, healthcare, chemical
      manufacturing / natural resources, and commercial/residential real estate
      development. Mr. Leveton served as CEO of Surgical Acuity, Inc., a privately
      owned medical and dental products manufacturer; CEO of Romed Corporation, a
      diversified subsidiary of Rose Health Care Systems and concurrently as CFO
      of
      the Rose System; and CFO and subsequently CEO of NASDAQ listed Earth Sciences,
      Inc. (now ADA-ES). Mr. Leveton holds an undergraduate degree from Willamette
      University, Salem, Oregon and an MBA from New York University.








**ITEM2.
      DESCRIPTION OF PROPERTY**





The
      Company leases its headquarters,
      office, plant and warehouse in Littleton, Colorado. The facility is under a
      five-year lease expiring in February 2009. Current base rent is $ 93,642 per year
      plus common area maintenance expenses. Base rent increases to $96,106 March
      1,
      2007 and increases to
      $98,570 March 2, 2008. The present configuration of the space will accommodate
      40-50 employees. The Company believes that the leased property is sufficient
      to
      support its requirements until the lease expires.




*-
          12
          -*


**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 COMMONEQUITY,ANDRELATEDSTOCKHOLDER 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, 2005:First
                Quarter
            $0.35
            $0.22Second
                Quarter
            $0.48
            $0.20Third
                Quarter
            $0.82
            $0.36Fourth
                Quarter
            $0.79
            $0.40Year
                ended December 31, 2006First
                Quarter
            $0.55
            $0.31Second
                Quarter
            $0.50
            $0.25Third
                Quarter
            $0.50
            $0.25Fourth
                Quarter
            $0.45
            $0.21




As
      of
      February 15, 2007, there were 26,310,911 shares of common stock outstanding
      and
      approximately 239 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. Our
      loan agreement with Silicon Valley Bank prohibits the payment of any dividends
      or distributions with respect to our capital stock.




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, (c) 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.  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.





*-
            13
            -*





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





For
      2006,
      Zynex reported $2,556,809 revenue, an increase of 22% from 2005 and a $320,370
      net loss, a decrease from 2005 net income of $301,064. The revenue increase
      was
      primarily accomplished through implementation of our 2004-2006 strategic and
      operating plans, recruitment of a net 17 experienced sales representative in
      2006, 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.





The
      incremental addition of 17 industry experienced sales representatives during
      the
      second half of 2006 allowed us to increase our market presence and increase
      orders in the last quarter of 2006. We also added a dedicated NeuroMove sales
      representative and began to implement an expanded NeuroMove sales program
      directly to physicians and stroke centers. As a result of the sales force
      expansion our total orders increased 66% from 1,627 in 2005 to 2,705 in
      2006





RESULTS
      OF OPERATIONS





Net
      sales
      and rental income for the quarter and twelve months ended December 31, 2006,
      were $747,071 and $2,556,809 an increase of $389,514 and $458,401 or 109% and
      22% compared to $357,557 and $2,098,408 for the quarter and twelve months ended
      December 31, 2005. The increase in net sales and rental income for the quarter
      and twelve months ended December 31, 2006, compared to the quarter and twelve
      months ended December 31, 2005 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: ****




2006
            
            2005First
                quarter
            
            $
            505,091
            
            $
            547,227Second
                quarter
            
            
            560,860
            
            
            589,483Third
                quarter
            
            
            743,787
            
            
            604,141Fourth
                quarter
            
            
            747,071
            
            
            357,557Total
                net sales and rental income
            
            $
            2,556,809
            
            $
            2,098,408




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
      $ 2,363,485 for
      the
      twelve months ended December 31, 2006 year compared to $1,180,635 for the 2005
      year, an increase of $1,182,850 or 100%.








*-
            14
            -*





Gross
      profit increased $271,201 over 2005, an increase of 13.7%. Gross profit as
      a
      percent of net sales and rental income was 88.1% in 2006 compared to 94.4%
      in
      2005. The improvement in gross profit in 2006 compared to 2005 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
      decrease in gross profit margin in 2006 compared to 2005 was due to increases
      in
      insurance company reimbursement deductions, which reduced our net sales while
      cost of sales remained in line with the gross sales.





Selling,
      general and administrative expenses increased from $1,717,575 in 2005 to
      $2,326,793 in 2006. The increase was consistent with the growth in revenue
      and
      was primarily in the areas of sales commissions, public company expenses,
      utilities, **** office
      expense, advertising, marketing and promotion **,** depreciation
      expense related to the increased amount of rental products, accounting and
      auditing expenses, payroll expense, postage and delivery, and travel and
      entertainment. . The expense increases were somewhat offset by decreased
      expenses related to consulting, finance charges and late fees, equipment rental,
      bank service charges, and insurance premiums.





Depreciation
      increased $29,211, from $64,798 in 2005 to $94,009 in 2006. The increase results
      primarily from higher levels of rental inventory.





The
      Company's federal tax loss carry forward as of December 31, 2006 is
      $191,203.





Interest
      expense increased $118,172 in 2006 compared to 2005 because of the Company’s
      higher level of debt as discussed below and the bridge loan discussed
      below.





Other
      Income decreased $137,170 in 2006 because 2006 did not reflect any benefit
      from
      the elimination of potential unclaimed liabilities, as was the case in 2005.





LIQUIDITY
      AND CAPITAL RESOURCES





Cash
      used
      in operating activities was $483,460 for the year ended December 31, 2006
      compared with cash used in operating activities of $127,063 for the year ended
      December 31, 2005. The primary reasons for the increase in cash used in
      operating activities were the net loss for 2006 compared to net income for
      2005
      and the growth in accounts receivable. Accounts receivable increased primarily
      due to increased billings in the last half of 2006 compared to 2005. 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 $151,586 for the year ended December 31, 2006
      compared to cash used in investing activities of $106,079 for the year ended
      December 31, 2005. Cash used in investing activities represents the purchase
      of
      equipment and inventory rented to customers.





Cash
      provided from financing activities was $881,510 for the year ended December
      31,
      2006 compared with cash provided by financing activities of $248,797 for the
      year ended December 31, 2005. Financing activities 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
            -*





The
      Company's principal capital requirement is for working capital to fund
      continuing operations and expansion of the business, including further expansion
      of the Company's sales force. The electrotherapy industry is capital intensive
      due to the required high levels of consigned inventory, high accounts
      receivables outstanding because of the deferred payment practices of third
      party
      health payers, the delayed cost recovery inherent in rental transactions and
      the
      payment of commissions to salespersons based on sales or rentals prior to
      reimbursement for the transaction .
      In
      order to fully implement our business plan in 2007, we may need to raise
      additional debt or equity financing. In the event we enter into any financing,
      the terms thereto may be dilutive to or contain other terms that may adversely
      impact our existing shareholders.





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





Payments
      Due by Period




Significant
                Contractual Obligations
            
            Total
            
            1
                Year
            
            2-3
                Years
            
            4-5
                Years
            
            5
                YearsNotes
                payable
            
            $
            712,241
            
            $
            458,445
            
            $
            253,796
            
            $
            --
            
            $
            --Capital
                lease obligations
            
            
            50,317
            
            
            18,869
            
            
            31,448
            
            
            --
            
            
            --Operating
                leases
            
            
            214,962
            
            
            100,375
            
            
            114,587
            
            
            --
            
            
            --Total
                contractual cash obligations
            
            $
            977,520
            
            $
            577,689
            
            $
            399,831
            
            $
            --
            
            $
            --





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 bears interest at a per annum fixed rate of 7.84%. The
      loan
      is guaranteed by Zynex Chairman, President and Chief Executive Officer Thomas
      Sandgaard and is collateralized by a first perfected security interest in
      accounts, inventory, chattel paper, equipment, fixtures, general intangibles,
      including intellectual property and other assets. The Company will repay the
      loan in 36 equal monthly payments of principal and interest. The loan includes
      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 bears
      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 are as stated in the September 29, 2005 loan
      agreement. This loan is also guaranteed by Zynex Chairman, President, Chief
      Executive Officer and major shareholder Thomas Sandgaard and is collateralized
      by a first security interest in accounts, inventory, chattel paper, equipment,
      fixtures, general intangibles, including intellectual property and other
      assets.








*-
            16
            -*





On
      October 18, 2006 the Company received a net $206,563 under a one year $275,000
      subordinated and convertible bridge loan with Ascendiant Capital Group, LLC,
      Irvine, California. The net amount includes deductions for prepaid interest,
      a
      5% original issue discount and the lender’s legal fees. The loan bears interest
      at a per annum fixed rate of 15% from inception through January 17, 2007, 18%
      per annum fixed rate from January 18, 2007 through April 18, 2007 and 21 %
      per
      annum fixed rate from April 19, 2007 on the amount outstanding from time to
      time
      until paid no later than October 18, 2007. We must redeem the bridge loan within
      two business days after closing an equity or debt financing or series of
      financings resulting in aggregate gross cash proceeds of $1 million or more
      within 12 months of the date of the loan or after the “Sale of Maker.” Interest
      for the first and second periods was prepaid and deducted from the proceeds
      of
      the loan. The loan is collateralized by and lender holds a second priority
      security interest in the Company’s accounts, documents, general intangibles,
      goods, including inventory, equipment and fixtures, instruments, investment
      property, letters of credit rights and other supporting obligations, records,
      commercial tort claims and all other assets. The lender entered into a
      subordination agreement with Silicon Valley Bank in which the security interest
      and payment rights of the lender were made subordinate to the Company’s
      indebtedness to Silicon Valley Bank. The lender at its election may convert
      the
      then outstanding balance loan and accrued but unpaid interest into the Company’s
      common stock at any time at an initial conversion rate of $0.32 per share of
      common stock. We also issued to the lender 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. Among other things, we in addition issued to a broker affiliated
      with
      the lender a placement fee of $22,000 in cash and issued to that broker a
      five-year warrant for 103,139 shares of common stock at an exercise price of
      $0.39 per share. This bridge loan is further described in our Form 10-QSB Report
      for the third quarter ended September 30, 2006.




I n
      2005
      Thomas Sandgaard, Zynex’s President, Chief Executive Officer and major
      shareholder, loaned the Company $99,136, of which $14,980 was outstanding on
      December 31, 2005. Effective March 1, 2006 this previously non interest bearing
      loan 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 March 31, 2006.
      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. The remaining $96,900 was represented by
      8.25% demand notes was repaid in part in the amount of $87,135 during the
      remainder of 2006 and will be repaid as the Company's cash position and its
      financing covenants allow. As of February 15, 2007, $9,902 of this amount and
      $37,823 of the term loans remained outstanding. All payments of principal and
      interest on the loans are current as of the filing of this Form 10-KSB. The
      loans from Mr. Sandgaard were 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.





Stock-based
      compensation.  SFAS No. 123, Accounting for Stock-Based Compensation,
      defines a fair-value-based method of accounting for stock-based employee
      compensation plans and transactions in which an entity issues its equity
      instruments to acquire goods or services from non-employees, and encourages
      but
      does not require companies to record compensation cost for stock-based employee
      compensation plans at fair value. Prior to January 1, 2006, the Company chose
      to
      account for employee stock-based compensation using the intrinsic value method
      prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25),
      Accounting for Stock Issued to Employees, and related interpretations.
      Accordingly, prior to January 1, 2006, employee compensation cost for stock
      options was measured as the excess, if any, of the estimated fair value of
      the
      Company’s stock at the date of the grant over the amount an employee must pay to
      acquire the stock.





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.











*-
            18
            -*






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 that 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.





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.





MANY
      OF
      OUR POTENTIAL  COMPETITORS
      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.
      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.








*-
            19
            -*





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 come 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 could
      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.





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.








*-
            20
            -*





OUR
      BUSINESS IS EXPOSED TO DOMESTIC INTEREST RATESAND 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 needed to fund operations.














*-
            21
            -*








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 $2,000,000 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
      CAN
      BE EXPECTED TO 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
      substantially 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.






*-
          22
          -*







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
                alargerdirectsales 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; and





*-*  Promote
      frequent product use to increase sales of consumables.





-  Enter
      into relationships with well-established distributors in foreign
      markets.







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 .






*-
          23
          -*







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
      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 .







*-
            24
            -*







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
      by  the
      Medicare Modernization Act's provisions.





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, which will be phased in beginning in 2007, 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.










*-
            25
            -*









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 70.5% of our outstanding common stock. 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.





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 exchange or on NASDAQ 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.







*-
            26
            -*







**ITEM
      7. FINANCIAL STATEMENTS.**





The
      consolidated financial statements, the notes thereto, and the report thereon
      of
      GHP Horwath P.C. dated April 16, 2007, 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, 2006.  Based
      on
      that evaluation, the Chief Executive Officer and Chief Financial Officer
      concluded that, because of a material weakness in internal control over
      financial reporting relating to inventory as discussed in Note 12 to
      the December
      31, 2005 Condensed Consolidated Financial Statements filed as
      part of the Amendment No. 1 to the December 31, 2005 Form
      10-KSB ,
      the
      Company’s disclosure controls and procedures were not effective as of December
      31, 2005
      and
      2006.





*Remediation
      Efforts*





In the
      fourth quarter of 2006, we implemented systems, procedures and controls relating
      to the cost and quantity of our inventory and in particular our rental products
      and finished goods. These systems and procedures include a comprehensive
      inventory tracking by serial number throughout our organization and on rental
      with our customers. We will
      continue to review its internal controls and procedures and will take further
      action as appropriate .





*Changes
      in Internal Control Over Financial Reporting*





There were
      no
      changes in internal control over financial reporting that occurred during the
      fourth quarter of 2006 that have materially affected, or are reasonably likely
      to affect, the Company’s internal control over financial reporting ,
      except
      as disclosed above .







**ITEM
      8B. OTHER INFORMATION.**





None.







*-
            27
            -*







ITEM
      9. DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS,CONTROL
      PERSONSAND
      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, 2007 :




DirectorName
            Age
            Since
            Position
                or OfficeThomas
                Sandgaard
            48
            1996
            President,Chief
                Executive Officer,
                Director and ChairmanFritz
                G. Allison
            47
            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.











*-
            28
            -*







**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, 2006
      and
      December 31, 2005:





Name
                and Principal Position
            
            Year
            Salary
              ($)
            Bonus
              ($)
            Stock
              Awards
              ($)
            Option
              Awards
              ($)***
            Non-Equity
                Incentive Plan Compensation
              ($)
            Change
                in
              Pension
              Value
                and Nonqualified Deferred Compensation Earnings
              ($)
            All
                Other Compensation
              ($)
            Total
              ($)Thomas
                Sandgaard
            
            2006
            144,000
            16,000
            0
            0
            0
            0
            43,880**
            203,880Chief
                Executive Officer
            
            2005
            163,897*
            0
            0
            0
            0
            0
            43,590**
            207,487OfficerPeter
                J. Leveton
            
            2006
            83,063
            102,500
            0
            0
            0
            0
            0
            185,563FormerChief
                Financial
            
            2005
            49,837
            0
            0
            0****
            0
            0
            0
            49,837Officer


______________





*
      Of this
      amount, $19,897 was deferred from 2004.





**
      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.





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





****
      Mr.
      Leveton received a grant of a stock option in 2005; however, SFAS 123R was
      not
      applicable in 2005.





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 be 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.





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:





*-
            29
            -*











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







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. 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 have a ten-year term, and an exercise
      price equal to the fair market value of the Common Stock on the date of grant,
      April 18, 2005. Such options are subject to vesting as follows: 100,000 shares
      vest on the date of grant; 25,000 shares vest on June 30, 2005, provided that
      Mr. Leveton is employed as of such date; and 25,000 shares vest as of the last
      day of each full calendar quarter beginning as of July 1, 2005 through March
      31,
      2007, provided that Mr. Leveton is employed as of such dates; and 50,000 shares
      vest upon a Raise Event if Mr. Leveton is employed as of such dates or if Mr.
      Leveton played an active, integral and key role in accomplishing such event,
      and
      such event occurred within 30 days of voluntary termination or within 90 days
      of
      involuntary termination. All unvested quarterly options immediately vest and
      become exercisable upon a liquidity event with a valuation of at least
      $10,000,000; provided the liquidity event occurs
      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.
      Except in the case of a liquidity event described above, all unvested options
      will expire upon the voluntary or involuntary termination of employment. As
      of February
      16, 2007, 325,000 of the
      options had vested .








*-
            30
            -*





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 target **** for
      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.








OUTSTANDING
      EQUITY AWARDS AT 2006 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,
      2006:





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
              --
              --
              --
              --
              --Peter
                  J. Leveton (1)
              325,000
              --
              25,000
              $0.22
              April 18,
                  2015






(1)
      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 .







*-
          31
          -*







**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  March
      1, 2007 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
            Common
            18,544,000
            70.5%Fritz
                Allison
            Common
            --
            --Other
                5% Beneficial OwnersRegency
                GroupDenver,
                Colorado (1)
            Common
            1,900,000
            6.7%All
                Directors andNamed
                Executive OfficersAs
                a Group
            Common
            18,554,000
            70.5%





_____________





(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 more clearly
      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 March 1, 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.








*-
            32
            -*





EQUITY
      COMPENSATION PLAN INFORMATION





The
      following table provides information as
      of
      December 31, 2006 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)
            286,670
            
            $0.33
            
            2,713,330Plans
                Not Approved by Shareholders
            350,000
            
            $0.22
            
            NoneTotal
            636,670
            
            $0.27
            
            2,713,330


____________





(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)
      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 Mr. Leveton's compensation arrangement, which includes options
      not approved by stockholders, see Item 10 above.











*-
            33
            -*





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 2006 was a total of $6,757, and the Company has
      paid this interest to Mr. Sandgaard. For
      a
      full description and the terms of these notes please see NOTE-3 NOTES PAYABLE
      AND LEASES in the notes to the consolidated financial statements.





The
      loans
      with Silicon Valley Bank, Santa Clara, California and Boulder, Colorado in
      the
      amount of $400,000 and $ 240,000,
      made in 2005 and 2006, as
      described above in Part II, Item 6, are guaranteed by Zynex Chairman, President
      and Chief Executive Officer Thomas Sandgaard and are 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.






*-
          34
          -*
 
  **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.
   *-
                35
                -*
  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.
  *-
                36
                -*
  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.
   *-
                37
                -*
   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.21
                  List
                      of Subsidiaries, incorporated by reference to Exhibit 21 of
                      Zynex
                      MedicalHoldings,
                      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.




*-
          38
          -*
 
   **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, 2006 and December 31,
          2005. GHP
          Horwath, P.C. billed for work commencing in December, 2005 and Gordon,
          Hughes
& Banks, LLP billed for work prior to December, 2005.
  GHP
                    Horwath, P.C,
                
                Gordon
                    Hughes & BanksAudit
                    Fees
                
                2006
                
                2005
                
                2006
                
                2005Audit
                    Related FeesIncludingReviews
                    of 10QSBand
                
                $
                50,000
                
                $
                96,000
                
                
                -
                
                $
                $42,130SB-2Tax
                    Related Fees
                
                
                6,000
                
                
                4,500
                
                
                *-*
                
                
                5,265All
                    Other Fees For
                
                
                -
                
                
                -
                
                
                *-*
                
                
                -General
                    ConsultationTotal
                
                $
                56,000
                
                $
                100,500
                
                
                -
                
                $
                $47,395
 
 The
          tax
          related services provided by GHP Horwath, P.C. and Gordon, Hughes and Banks,
          LLP
          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. and
          Gordon, Hughes & Banks, LLP.
 
 GHP
          Horwath served as the Company's independent auditors for the fiscal years
          ended
          December 31, 2005 and 2006. The Company paid no fees to GHP Horwath during
          fiscal 2005.
   *-
              39
              -*
 
   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
                        17, 2007
                    By*:*
                    /s/
                        Thomas SandgaardThomas
                        SandgaardPresident,
                        Chairman and Chief Executive
                        Officer
  **Date:April
                          17, 2007
                      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 in the capacities and on the
                dates
                indicated.
 
 Date
                    Name and Title
                    SignatureApril
                        17, 2007
                    Thomas
                        Sandgaard, Chief
                    /s/
                        Thomas SandgaardExecutive
                        Officer and SoleDirectorApril
                        17, 2007
                    Fritz
                        G. Allison, Chief FinancialOfficer
                    /s/
                        Fritz G. Allison
 
   *-
                  40
                  -*
    *______________________*
  
 Zynex
              Medical Holdings, Inc.
 Consolidated
              Financial Statements
 December
              31, 2006
  *______________________*
   
 
 
  
 **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, 2006 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, 2006. 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, 2006, and the results of their operations
              and
              their cash flows for each of the years in the two-year period ended
              December 31,
              2006 in conformity with accounting principles generally accepted in
              the United
              States of America.
 
 As
              discussed in Note 2 to the consolidated financial statements, effective
              January
              1, 2006, the Company adopted Statement of Financial Accounting Standards
              No.
              123R, “Share-Based Payment.”
 .
 
 
 /s/
              GHP Horwath, P.C.
 GHP
              Horwath, P.C.
 
 Denver,
              Colorado
 April
              16,
              2007
 
  *F-1*
 
   Zynex
                Medical Holdings, Inc.
 Consolidated
                Balance Sheet
 December
                31, 2006
 
 ASSETSCurrent
                          Assets:Cash
                          and cash equivalents
                      
                      $
                      265,197Accounts
                          receivable, less allowance for uncollectibleaccounts
                          of $1,100,000
                      
                      
                      1,337,873Inventory
                      
                      
                      561,013Deferred
                          consulting fees
                      
                      
                      101,250Deferred
                          financing fees
                      
                      
                      60,402Prepaid
                          expenses
                      
                      
                      38,066Deferred
                          tax asset
                      
                      
                      55,000Other
                          current assets
                      
                      
                      11,250Total
                          current assets
                      
                      
                      2,430,051Property
                          and equipment, less accumulateddepreciation
                          of $258,873
                      
                      
                      327,353Deposits
                      
                      
                      10,940$
                      2,768,344LIABILITIES
                          AND STOCKHOLDERS' EQUITYCurrent
                          Liabilities:Notes
                          payable
                      
                      $
                      458,445Loan
                          from stockholder
                      
                      
                      42,830Capital
                          lease
                      
                      
                      15,655Accounts
                          payable
                      
                      
                      342,452Accrued
                          payroll and payroll taxes
                      
                      
                      152,844Other
                          accrued liabilities
                      
                      
                      119,745Total
                          current liabilities
                      
                      
                      1,131,971Loan
                          from stockholder, less current maturities
                      
                      
                      10,896Notes
                          payable, less current maturities
                      
                      
                      253,796Capital
                          lease, less current maturities
                      
                      
                      29,227Long-term
                          deferred tax liability
                      
                      
                      55,000Total
                          liabilities
                      
                      
                      1,480,890Contingencies
                          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,
                      
                      
                      26,31126,310,911
                          shares issued and outstandingAdditional
                          paid-in capital
                      
                      
                      2,435,859Accumulated
                          deficit
                      
                      
                      (1,174,716
                      )Total
                          stockholders' equity
                      
                      
                      1,287,454$
                      2,768,344
  See
                accompanying notes to financial statements.
  *F-2*
 
  Zynex
                Medical Holdings, Inc.
 Consolidated
                Statements of Operations
 Years
                ended December 31,
 
 2006
                      
                      2005Net
                          sales and rental income
                      
                      $
                      2,556,809
                      
                      $
                      2,098,408Cost
                          of sales and rentals
                      
                      
                      303,719
                      
                      
                      116,519Gross
                          profit
                      
                      
                      2,253,090
                      
                      
                      1,981,889Operating
                          expenses:Selling,
                          general and administrative, includingcommon
                          stock and warrants issued for consulting servicesof
                          $203,500 and $49,289, respectively
                      
                      
                      2,326,793
                      
                      
                      1,717,575Depreciation
                      
                      
                      94,009
                      
                      
                      64,798Loss
                          on disposal of equipment
                      
                      
                      --
                      
                      
                      --2,420,802
                      
                      
                      1,782,373(Loss)
                          income from operations
                      
                      
                      (167,712
                      )
                      
                      199,516Other
                          income (expense):Interest
                          income
                      
                      
                      1,370
                      
                      
                      234Interest
                          expense
                      
                      
                      (155,492
                      )
                      
                      (37,320
                      )Other
                          income
                      
                      
                      1,464
                      
                      
                      138,634(320,370
                      )
                      
                      301,064Provision
                          (benefit) for income taxes
                      
                      
                      --
                      
                      
                      --Net
                          (loss) income
                      
                      $
                      (320,370
                      )
                      $
                      301,064Basic
                          and diluted net (loss) income per common share
                      
                      $
                      (0.01
                      )
                      $
                      0.01Weighted
                          average number of shares outstandingBasic
                      
                      
                      24,026,988
                      
                      
                      23,117,042Diluted
                      
                      
                      24,026,988
                      
                      
                      23,506,011
 
 See
                accompanying notes to financial statements.
 
 *F-3*
 
  Zynex
                Medical Holdings, Inc.
 Consolidated
                Statements of Cash Flows
 Years
                Ended December 31,
 
  2006
                      
                      2005Cash
                          flows from operating activities:Net
                          income (loss)
                      
                      $
                      (320,370
                      )
                      $
                      301,064Adjustments
                          to reconcile net income (loss) to net cash used in operating
                          activities:Depreciation
                      
                      
                      94,009
                      
                      
                      64,798Provision
                          for losses in accounts receivable
                      
                      
                      386,518
                      
                      
                      429,407Amortization
                          of deferred consulting and financing fees
                      
                      
                      108,816
                      
                      
                      --Issuance
                          of common stock and warrants for consulting services
                      
                      
                      46,000
                      
                      
                      95,789Issuance
                          of warrants for loan financing
                      
                      
                      --
                      
                      
                      1,842Amortization
                          of discount on note payable
                      
                      
                      38,670
                      
                      
                      --Amortization
                          of beneficial conversion feature
                      
                      
                      3,533
                      
                      
                      --Employee
                          stock compensation expense
                      
                      
                      20,110
                      
                      
                      --Changes
                          in operating assets and liabilities:Accounts
                          receivable
                      
                      
                      (1,029,501
                      )
                      
                      (934,209
                      )Inventory
                      
                      
                      (71,782
                      )
                      
                      (169,533
                      )Deferred
                          tax asset
                      
                      
                      (55,000
                      )
                      
                      --Prepaid
                          expenses
                      
                      
                      (2,252
                      )
                      
                      --Refundable
                          income taxes
                      
                      
                      7,586
                      
                      
                      4,105Other
                          current assets
                      
                      
                      (9,818
                      )
                      
                      8,322Other
                          assets
                      
                      
                      --
                      
                      
                      2,730Accounts
                          payable
                      
                      
                      94,566
                      
                      
                      101,887Accrued
                          liabilities
                      
                      
                      150,455
                      
                      
                      (33,265
                      )Deferred
                          tax liability
                      
                      
                      55,000
                      
                      
                      --Net
                          cash used in operating activities
                      
                      
                      (483,460
                      )
                      
                      (127,063
                      )Cash
                          flows from investing activities:Purchases
                          of equipment
                      
                      
                      (151,586
                      )
                      
                      (106,079
                      )Net
                          cash used in investing activities
                      
                      
                      (151,586
                      )
                      
                      (106,079
                      )Cash
                          flows from financing activities:Payments
                          on notes payable and capital lease
                      
                      
                      (208,275
                      )
                      
                      (166,183
                      )Proceeds
                          from sale of common stock, net
                      
                      
                      604,476
                      
                      
                      --Proceeds
                          from loans payable
                      
                      
                      446,563
                      
                      
                      400,000Proceeds
                          from loans from stockholder
                      
                      
                      146,900
                      
                      
                      99,136Repayment
                          of loans from stockholder
                      
                      
                      (108,154
                      )
                      
                      (84,156
                      )Net
                          cash provided by financing activities
                      
                      
                      881,510
                      
                      
                      248,797Increase
                          in cash and cash equivalents
                      
                      
                      246,464
                      
                      
                      15,655Cash
                          and cash equivalents at beginning of period
                      
                      
                      18,733
                      
                      
                      3,078Cash
                          and cash equivalents at end of period
                      
                      $
                      265,197
                      
                      $
                      18,733Supplemental
                          cash flow information:Interest
                          paid
                      
                      $
                      56,706
                      
                      $
                      28,513Income
                          taxes paid
                      
                      
                      --
                      
                      
                      --Non-cash
                          investing and financing activities -Common
                          stock and warrants issued in exchange for deferred consulting
                          fees
                      
                      
                      157,500
                      
                      
                      32,289Common
                          stock and warrants issued in exchange for financing fees
                      
                      
                      48,677
                      
                      
                      --Warrants
                          issued in connection with note payable
                      
                      
                      80,310
                      
                      
                      --Deferred
                          loan financing fees
                      
                      
                      32,000
                      
                      
                      --Accounts
                          payable converted into a note payable
                      
                      
                      25,881
                      
                      
                      --Issuance
                          of common stock in satisfaction of payable
                      
                      
                      8,281
                      
                      
                      --Conversion
                          feature of note payable
                      
                      
                      8,593
                      
                      
                      --
  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
                      
                      TotalDecember
                          31, 2004
                      
                      
                      23,070,377
                      
                      $
                      23,070
                      
                      $
                      1,335,233
                      
                      $
                      (1,155,410
                      )
                      $
                      202,893Net
                          income
                      
                      
                      --
                      
                      
                      --
                      
                      
                      --
                      
                      
                      301,064
                      
                      
                      301,064Common
                          stock issued to consultants
                      
                      
                      129,044
                      
                      
                      129
                      
                      
                      46,371
                      
                      
                      --
                      
                      
                      46,500Warrants
                          issued for services
                      
                      
                      --
                      
                      
                      --
                      
                      
                      83,420
                      
                      
                      --
                      
                      
                      83,420December
                          31, 2005
                      
                      
                      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
                      
                      
                      --
                      
                      
                      203,500Issuance
                          of common stock in satisfaction of payable
                      
                      
                      41,403
                      
                      
                      41
                      
                      
                      8,240
                      
                      
                      --
                      
                      
                      8,281Employee
                          stock compensation expense
                      
                      
                      --
                      
                      
                      --
                      
                      
                      20,110
                      
                      
                      --
                      
                      
                      20,110Net
                          loss
                      
                      
                      --
                      
                      
                      --
                      
                      
                      --
                      
                      
                      (320,370
                      )
                      
                      (320,370
                      )December
                          31, 2006
                      
                      
                      26,310,911
                      
                      $
                      26,311
                      
                      $
                      2,435,859
                      
                      $
                      (1,174,716
                      )
                      $
                      1,287,454
 
 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 2006 and 2005 is approximately 5% and 7% 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.
 
 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, 2006 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.
 
 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,
                2006 are as
                follows:
  Cost
                      
                      Useful
                          livesOffice
                          furniture and equipment
                      
                      $
                      159,601
                      
                      
                      3-7
                          yearsRental
                          inventory
                      
                      
                      366,036
                      
                      
                      5
                          yearsVehicles
                      
                      
                      59,833
                      
                      
                      5
                          yearsAssembly
                          equipment
                      
                      
                      757
                      
                      
                      7
                          years586,227Less
                          accumulated depreciation
                      
                      
                      (258,874
                      )Net
                      
                      $
                      327,353
 
 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
 
 The
                Company has a 2005 Stock Option Plan (the "Option Plan") and has
                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 no
                later than ten (10) years from the date of grant.
 
 Effective
                January 1, 2006, the Company adopted Statement of Financial Standards
                (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using
                the modified prospective method. 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
 
 
 Had
                compensation cost for the Company's stock plan been determined based
                on fair
                value at the grant dates for awards under the plan consistent with
                the method
                prescribed under SFAS No. 123 for 2005, the Company's net income
                and net income
                per share would have changed to the pro forma amounts indicated
                below:
 2005Net
                          income as reported
                      
                      $
                      301,064Total
                          stock based employee compensationexpense
                          determined under fair valuebased
                          method for all awards
                      
                      
                      (24,325
                      )Net
                          income, pro forma
                      
                      $
                      276,739Net
                          income per share as reported
                      
                      $
                      0.01Net
                          income per share pro forma
                      
                      $
                      0.01
  The
                fair
                value of options granted during 2006 and 2005 was estimated on the
                date of grant
                using the Black-Scholes option-pricing model with the following weighted
                average
                assumptions:
  2006
                      2005Expected
                          dividend yield
                      0%
                      0%Expected
                          stock price volatility
                      121%
                      125%Risk-free
                          interest rate
                      4.10%
                      4.95%Expected
                          life of options
                      4
                          years
                      2
                          years
   
 *F-10*
 
  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, 2006 and 2005 totaled $146,814 and
                $92,949
                respectively.
 
 RESEARCH
                AND DEVELOPMENT
 
 Research
                and development costs are expensed when incurred. There were no research
                and
                development expenses for years ended December 31, 2006 and 2005.
 
 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.
 
 RECLASSIFICATIONS
 
 Certain
                amounts in the 2005 financial statements have been reclassified to
                conform to
                the presentation used in 2006.
 
  *F-11*
  
 
 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 2005 is as
                follows:
 
 BASIC
                      
                      2005Net
                          income applicable to common stockholders
                      
                      $
                      301,064Weighted
                          average shares outstanding - basic
                      
                      
                      23,117,042Net
                          income per share - basic
                      
                      $
                      0.01DILUTEDNet
                          income applicable to common stockholders
                      
                      $
                      301,064Weighted
                          average shares outstanding - basic
                      
                      
                      23,117,042Dilutive
                          securities
                      
                      
                      388,969Weighted
                          average shares outstanding - diluted
                      
                      
                      23,506,011Net
                          income per share - diluted
                      
                      $
                      0.01
   *F-12*
  
 ZYNEX
                MEDICAL HOLDINGS, INC.
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 
 RECENT
                ACCOUNTING PRONOUNCEMENTS
 
 In
                February 2007, the Financial Accounting Standards Board (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
                certain 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
                adoption of SFAS No. 159 will have on its consolidated financial
                statements.
 
 In
                September 2006, the FASB issued SFAS No. 157, “ *Fair
                Value Measurement* ”.
                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, 2007. The Company is
                currently assessing the impact of the adoption of SFAS No. 157 will have on
                its consolidated financial statements.
 
 In
                September 2006, the SEC issued SAB No. 108 in order to eliminate the
                diversity of practice surrounding how public companies quantify financial
                statement misstatements. In SAB No. 108, the SEC staff established an
                approach that requires quantification of financial statement misstatements
                based
                on the effects of the misstatements on each of the company’s financial
                statements and the related financial statement disclosures. SAB No. 108 is
                effective for fiscal years ending after November 15, 2006. The Company
                believes that complying with the interpretive guidance of SAB No.
                108 will not
                have a material impact to its consolidated financial statements.
 
 In
                July 2006, the FASB issued FASB Interpretation No. 48, “ *Accounting
                for Uncertainty in Income Taxes, an interpretation of FASB Statement
                109* ”
(“FIN
                48”). FIN 48 requires that a position taken or expected to be taken
                in a tax
                return be recognized in the financial statements when it is more
                likely than not
                (i.e. a likelihood of more than fifty percent) that the position
                would be
                sustained upon examination by tax authorities. A recognized tax position
                is then
                measured at the largest amount of benefit that is greater than fifty
                percent
                likely of being realized upon ultimate settlement. Upon adoption,
                the cumulative
                effect of applying the recognition and measurement provisions of
                FIN 48, if any,
                shall be reflected as an adjustment to the opening balance of retained
                earnings.
                The effective date of this interpretation is for fiscal years beginning
                after
                December 15, 2006. The Company is currently in the process of evaluating
                the impact of this interpretation on its consolidated financial
                statements.
  
 *F-13*
 
 
 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 bears interest at a per annum fixed rate of 7.84%.
                The loan
                is guaranteed by Zynex Chairman, President and Chief Executive Officer
                Thomas
                Sandgaard and is collateralized by a first perfected security interest
                in
                accounts, inventory, chattel paper, equipment, fixtures, general
                intangibles,
                including intellectual property and other assets. The Company is
                to repay the
                loan in 36 equal monthly payments of principal and interest. The
                loan includes
                financial covenants for minimum liquidity and minimum debt service
                coverage,
                which the Company is in compliance with as of December 31, 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 bears interest at a per annum fixed rate of 8.48%.
                The loan
                is guaranteed by Zynex Chairman, President and Chief Executive Officer
                Thomas
                Sandgaard and is collateralized by a first perfected security interest
                in
                accounts, inventory, chattel paper, equipment, fixtures, general
                intangibles,
                including intellectual property and other assets. The Company is
                to repay the
                loan in 36 equal monthly payments of principal and interest. The
                loan includes
                financial covenants for minimum liquidity and minimum debt service
                coverage,
                which the Company is in compliance with as of December 31, 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 is being amortized over the term of the promissory note.
                At December
                31, 2006, the Company had amortized $33,016 of the discount as additional
                interest expense. The Note is convertible into common stock at a fixed
                conversion price of $0.32 per share. The conversion of the note is
                deemed to be
                beneficial as the note converts 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 is being amortized as additional interest
                expense
                over the term of the note. Net proceeds of approximately $206,000
                from the
                transaction have been or will be used for general working capital.
 
 The
                principal and interest on the Note are due in one lump sum on April
                18, 2007.
                However, we may extend the maturity date so that the outstanding
                principal
                balance and accrued and unpaid interest become due and payable in
                six equal
                monthly installments beginning on the original maturity date and
                ending on
                October 18, 2007. Interest on amounts outstanding under the Note
                are at the rate
                of 15% per annum through January 17, 2007, 18% per annum from January
                18, 2007
                to the original maturity date, and, if the maturity date is extended,
                21% from
                the original maturity date to the extended maturity date. Events
                of default
                include, among other things, a failure to make payment of principal
                or interest
                due under the note and the occurrence of any event of default under
                an
                obligation for borrowed money in excess of $50,000. The note is secured
                by a
                second priority security interest in all of our assets. We issued
                the Note with
                an original issue discount of 5%, and on October 18, 2006 we made
                a
                non-refundable prepayment of interest through April 18, 2007. The
                effective
                interest rate on the note is 26%.
 
 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 103,139
                shares
                with an exercise price of $0.39 as a placement fee to Ascendiant
                Securities. The
                shares were valued 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. The deferred
                financing
                fees are being amortized over the term of the Note. During the year
                ended
                December 31, 2006, $20,012 was expensed. In addition, $32,000 of
                financing fees
                paid at closing are being amortized over the six month term and $13,156
                were
                expensed at year end.
 
 We
                may
                prepay the convertible note in whole or part at any time provided
                all accrued
                but unpaid interest is included in any prepayment. We must redeem
                the Note
                within two business days after (1) closing an equity or debt financing
                or series
                of such financings resulting in an aggregate gross cash proceeds
                of $1,000,000
                or more within 12 months of the date of the Note or (2) the “Sale of
                Maker.”
 
 Both
                the
                Note and warrant contain anti-dilution provisions. These provisions
                are not
                triggered by a decline in the stock price and include, with certain
                exclusions:
                in the case of the Note, the issuance of common stock, securities
                convertible
                into common stock or rights to acquire common stock at a price below
                $0.32 per
                share; and in the case of the warrant, the issuance of options or
                other rights
                to acquire common stock at below $0.39 per share. We have provided
                to Ascendiant
                Capital piggyback registration rights for the common stock underlying
                the Note
                and warrants and for the shares issued as the placement fee.
 
 Ascendiant
                Capital, Silicon Valley Bank and the Company have entered into a
                subordination
                agreement dated October 17, 2006 in which the security interest and
                payment
                rights of the Note are made subordinate to our indebtedness to Silicon
                Valley
                Bank. The holder of the Note is not to demand payment or exercise
                any remedy
                relating to the Note until our indebtedness to Silicon Valley Bank
                is fully
                paid, except that we may pay Ascendiant Capital regularly scheduled
                payments of
                interest or principal pursuant to the terms of the Note so long as
                there is not
                an event of default under our loan and security agreement with the
                Bank.
 
  *F-14*
  
 ZYNEX
                MEDICAL HOLDINGS, INC.
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 
 
  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 is due and payable on that date. The note will then
                  be paid in 12
                  equal payments, with the first payment due on April 1, 2007.
  No tes
                  payable at December 31, 2006 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 is guaranteed by the President
                          andChief
                          Executive Officer and largest shareholder
                      
                      $
                      255,825Note
                          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 is guaranteed by the President
                          andChief
                          Executive Officer and largest shareholder
                      
                      
                      185,108Motor
                          vehicle contract payable in 60 monthlyinstallments
                          of $1,351, annual interest at15.1%,
                          secured by automobile.
                      
                      
                      30,877Note
                          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.
                      
                      
                      25,881Note
                          payable to Ascendiant Capital due in one single payment
                          on April 18,
                          2007,which
                          may be extended to October 18, 2007, annual interest at
                          15% through
                          January17,
                          2007 and 18% through original maturity date, secured by
                          all
                          assets.
                      
                      
                      214,550Total
                      
                      
                      712,241Less
                          current maturities
                      
                      
                      (458,445
                      )Long-term
                          maturities
                      
                      $
                      253,796
  Future
                maturities of the notes payable are as follows:
  Year
                          ending December 31,2007
                      
                      $
                      458,4452008
                      
                      
                      227,4262009
                      
                      
                      26,370$
                      712,241
   *F-15*
   ZYNEX
                MEDICAL HOLDINGS, INC.
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 
 In
                2005
                Mr. Sandgaard loaned the Company $99,136, of which $14,980 was outstanding
                on
                December 31, 2005. Effective
                March 1, 2006 this previously non-interest bearing loan 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,
                2006, $8,755
                of this amount remained outstanding
 
 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, 2006, $35,206 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, 2006, $9,765 of this amount remained outstanding.
                The
                loans from Mr. Sandgaard were used for working capital purposes
 
 Future
                maturities of these loans are as follows:
 Year
                          ending December 31,2007
                      
                      $
                      42,8302008
                      
                      
                      10,896$
                      53,726
  The
                Company has commitments under various operating and capital leases
                that are
                payable in monthly installments. As of December 31, 2006, future
                minimum lease
                payments under non-cancelable operating and capital leases are as
                follows:
  Capital
                      
                      OperatingLease
                      
                      Leases2007
                      
                      $
                      18,869
                      
                      $
                      100,3752008
                      
                      
                      18,869
                      
                      
                      98,1592009
                      
                      
                      12,579
                      
                      
                      16,428Total
                          future minimum lease payments
                      
                      $
                      50,317
                      
                      $
                      214,962Less
                          amount representing interest
                      
                      
                      5,435Present
                          value of net minimum leasepayments
                      
                      
                      44,882Less
                          current portion
                      
                      
                      (15,655
                      )Long-term
                          capital lease obligation
                      
                      $
                      29,227
  Rent
                expense under operating leases for 2006 and 2005 was $122,206 and
                $116,691,
                respectively.
   *F-16*
 
 
 ZYNEX
                MEDICAL HOLDINGS, INC.
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
                4 -
                INCOME TAXES
 
 There
                are
                no federal or state income taxes for the years ended December 31,
                2006 and
                2005.
 
 A
                reconciliation of income tax computed at the U.S. statutory rate
                of 35% to the
                effective income tax rate is as follows:
  2006
                      
                      2005Statutory
                          rate
                      
                      
                      (35
                      )%
                      
                      35
                      %State
                          taxes
                      
                      
                      (5
                      )%
                      
                      5
                      %Permanent
                          differences
                      
                      
                      10
                      %
                      
                      6
                      %Basis
                          difference in property and equipment
                      
                      
                      1
                      %
                      
                      (5
                      )%Net
                          operating loss carryover and other
                      
                      
                      29
                      %
                      
                      (41
                      )%Combined
                          effective rate
                      
                      
                      0
                      %
                      
                      0
                      %
 
 The
                tax
                effects of temporary differences that give rise to deferred tax assets
                (liabilities) at December 31, 2006 are as follows:
 
 Current
                          deferred tax assets:
                      
                      **Accrued
                          expenses
                      
                      $
                      52,000Accounts
                          receivable
                      
                      
                      408,000Inventory
                      
                      
                      6,000Net
                          operating loss carry forwards
                      
                      
                      74,000540,000Valuation
                          allowance
                      
                      
                      (485,000
                      )Net
                          current deferred tax asset
                      
                      $
                      55,000Long-term
                          deferred tax liabilities:Property
                          and equipment
                      
                      $
                      55,000Net
                          long-term deferred tax liability
                      
                      $
                      55,000
 
 
 *F-17*
 
  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, 2006, the Company had total deferred tax assets of $540,000
                and
                deferred tax liabilities of $55,000. The Company recorded a valuation
                allowance
                in the amount of $485,000 at December 31, 2006, against the amount
                by which
                deferred tax assets exceed deferred tax liabilities. The valuation
                reserve at
                December 31, 2006 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.
 
 The
                Company has accumulated net operating loss carry forwards of approximately
                $191,000 (net of loss carry forwards of $246,174 utilized in 2006).
                To the
                extent not used, the net operating loss carry forwards expire in
                varying amounts
                beginning in 2024 through 2025. As of December 31, 2006, all identified
                deferred
                tax assets, by the amount that they exceed deferred tax liabilities,
                are reduced
                by a valuation allowance. Therefore, any additional operating loss
                carry
                forwards not recognized would not result in a benefit in the provision
                for
                income taxes due to the uncertainty of future realization of those
                additional
                loss carry forwards.
 
 
 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 is being amortized on a straight-line basis over
                the
                twelve-month period from the date of the agreement. During the year
                ended
                December 31, 2006, $11,250 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 is being amortized on a straight-line
                basis over the twelve-month period from the date of the agreement.
                During the
                year ended December 31, 2006, $45,000 was expensed.
  
 *F-18*
  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
                is being amortized over the three-year term of the agreement, and
                $12,892 has
                been deferred at December 31, 2006.
  On
                June
                4, 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 fair
                value of the Broker Warrants was $132,198 at June 4, 2004 using the
                Black-Scholes option-pricing model.
 
 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.
   *F-19*
 ZYNEX
                  MEDICAL HOLDINGS, INC.
 
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 On
                September 27, 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.
  *F-20*
  
 ZYNEX
                MEDICAL HOLDINGS, INC.
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 
 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 the Option Plan is as follows:
 Weighted
                      Weighted
                      
                      
                      Weighted
                      Weightedaverage
                      average
                      
                      
                      average
                      averageexercise
                      grant
                          date
                      
                      
                      exercise
                      grant
                          dateShares
                      
                      
                      price
                      fair
                          value
                      Shares
                      
                      price
                      fair
                          valueOutstanding,
                          beginning of year
                      
                      176,670
                      
                      $
                      0.42
                      0.20
                      
                      0
                      
                      $
                      0
                      0Granted
                      
                      146,000
                      
                      $
                      0.28
                      0.21
                      
                      279,670
                      
                      $
                      0.34
                      0.24Expired
                          or forfeited
                      
                      36,000
                      
                      $
                      0.40
                      0.31
                      
                      103,000
                      
                      $
                      0.32
                      0.25Exercised
                      
                      0
                      
                      
                      0
                      0
                      
                      0
                      
                      
                      0
                      0Outstanding,
                            end of year
                      
                      286,670
                      
                      $
                      0.34
                      0.27
                      
                      176,670
                      
                      $
                      0.42
                      0.20Options
                          exercisable atend
                          of year
                      
                      35,168
                      
                      
                      0.40
                      0.32
                      
                      0
                      
                      
                      0
                      0
 
 The
                following table summarizes information about stock options outstanding
                as of
                December 31, 2006:
 
 Options
                          Outstanding
                      
                      Options ExercisableRemainingExercise
                      Number
                          of
                      contractual
                      
                      
                      Number
                          of
                      Exerciseprices
                      options
                      life
                          (years)
                      
                      
                      options
                      price$0.30
                      82,000
                      8.00
                      
                      
                      20,500
                      $0.30$0.23
                      12,000
                      8.25
                      
                      
                      3,000
                      $0.23$0.50
                      16,000
                      8.50
                      
                      
                      4,000
                      $0.50$0.57
                      12,670
                      8.50
                      
                      
                      3,168
                      $0.50$0.75
                      18,000
                      8.75
                      
                      
                      4,500
                      $0.75$0.27
                      122,000
                      9.50$0.33
                      24,000
                      9.75286,670
                      
                      
                      
                      35,168
  
 *F-21*
 
 
 ZYNEX
                MEDICAL HOLDINGS, INC.
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 
 
 Note
                6 -
                MAJOR SUPPLIERS
 
 During
                2006 and 2005, the Company purchased approximately 14% and 10%, respectively,
                of
                its entire inventory purchases from one European supplier and 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, 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
                that
                extends for 24 months following termination of the agreement.
 
 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.
 
 *F-22*
 
 
 ZYNEX
                MEDICAL HOLDINGS, INC.
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
   .
 
 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 shall have a ten year term,
                and an
                exercise price equal to the fair market value of the Common Stock
                on the date of
                grant, April 18, 2005. Such options are subject to vesting as follows:
                100,000
                shares vest on the date of grant; 25,000 shares vest on June 30,
                2005, provided
                that Mr. Leveton is employed as of such date; and 25,000 shares vest
                as of the
                last day of each full calendar quarter beginning as of July 1, 2005
                through
                March 31, 2007, provided that Mr. Leveton is employed as of such
                date; and
                50,000 shares vest upon a Raise Event if Mr. Leveton is employed
                as of such
                dates or if Mr. Leveton played an active, integral and key role in
                accomplishing
                such event, and such event occurred within 30 days of voluntary termination
                or
                within 90 days of involuntary termination. All unvested quarterly
                options
                immediately vest and become exercisable upon a liquidity event with
                a valuation
                of at least $10,000,000; provided the liquidity event occurs 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.
                Except
                in the case of a liquidity event described above, all unvested options
                will
                expire upon the voluntary or involuntary termination of employment.
                As of
                February 16, 2007, 325,000 of the options had vested.
  *F-23*
 
  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 EVENT
 
 In
                February 2007 there was a change in the Chief Financial Officer
                position.
 
 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 target **** for
                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-24*