U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





(Mark
One)


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


ACT
OF 1934





For the
year ended December
31, 2008






[ ] 
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,
INC.


(Name of
small business issuer in its charter)




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




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





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





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





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





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





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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   .  [X]
Yes          [  ]
No





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large
accelerated filer
[  ]           Accelerated
filer
[  ]               Non-accelerated
filer
[  ]               Smaller
reporting company [X]





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





The
aggregate market value of the 10,866,696 common shares held by non-affiliates of
the registrant was $18,507,383 computed by reference to the closing price of
such stock as listed on the OTC Bulletin Board on June 30, 2008. This
computation is based on the number of issued and outstanding shares held by
persons other than officers, directors and shareholders of 5% or more of the
registrant's common shares





As of
March 27, 2009, 29,971,041 shares of common stock are issued and
outstanding.




Documents
incorporated by reference: None.











CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION





Certain
statements in this annual report contain or may contain forward-looking
statements that are subject to known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing numerous
assumptions and other factors that could cause our actual results to differ
materially from those in the forward-looking statements. These factors include,
but are not limited to the need for external capital in order to grow our
business, our dependence on reimbursement from insurance companies for products
sold or rented to our customers, acceptance of our products by health insurance
providers for reimbursement, acceptance of our products by hospitals and
clinicians, larger competitors with greater financial resources, the need to
keep pace with technological changes, our dependence on the reimbursement from
insurance companies for products sold or rented to our customers, our dependence
upon third party manufacturers to produce our goods on time and to our
specifications, implementation of our sales strategy including a strong direct
sales force, the uncertain outcome of pending material litigation 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, Inc., a Nevada corporation, and its wholly-owned
subsidiary, Zynex Medical, Inc.


-
2 -





TABLE
OF CONTENTS





FORM
10-K ANNUAL REPORT - FISCAL YEAR 2008




ZYNEX,
INC.


PAGEPART
      IItem
      1.
                                    Business
                                    4Item
      1A.
                                    Risk
      Factors
                                    11Item
      1.B
                                    Unresolved
      Staff Comments
                                    19Item
      2.
                                    Properties
                                    19Item
      3.
                                    Legal
      Proceedings
                                    19Item
      4.
                                    Submission
      of Matters to a Vote of Security Holders
                                    20PART
      IIItem
      5.
                                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                    20Item
      6.
                                    Selected
      Financial Data
                                    21Item
      7.
                                    Management's
      Discussion and Analysis or Plan of Operation
                                    21Item
      7A.
                                    Quantitative
      and Qualitative Disclosures About Market Risk
                                    44Item
      8.
                                    Financial
      Statements and Supplementary Data
                                    44Item
      9.
                                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                    44Item
      9A.
                                    Controls
      and Procedures
                                    44Item
      9B.
                                    Other
      Information
                                    45PART
      IIIItem
      10.
                                    Directors,
      Executive Officers and Corporate Governance
                                    45Item
      11.
                                    Executive
      Compensation
                                    47Item
      12.
                                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                    51Item
      13.
                                    Certain
      Relationships and Related Transactions, and Director
      Independence
                                    52Item
      14.
                                    Principal
      Accounting Fees and Services
                                    54PART
      IVItem
      15.
                                    Exhibits
                                    54Signatures
                                    
                                    59




-
3 -








PART
I




ITEM
1. BUSINESS





History





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





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





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





For
accounting purposes, Zynex Medical was 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.





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 to
market 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.





-
4 -





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




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 for
the NeuroMove. The NeuroMove is marketed directly to end-user patients and
physicians who specialize in stroke and SCI rehabilitation.





To
increase revenues, we added experienced sales representatives in 2006, 2007 and
2008.  At this time the Company is controlling its costs in order to
improve its cash flow.





To expand
our international sales, we have obtained representation commitments from well
established local medical device distributors.  We obtained in the
second half of 2008 European Union CE Marking for the following
products:  TruWave; IF 8000; IF 8100; and NM 900 (which products are
described below).  CE Marking will also enhance our entry into other
developed countries.  We plan to engage local distributors in Europe
during the second half of 2009 and/or 2010.  See “Regulatory Approval
and Process” below.





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.
      Electromyography (EMG) triggered Electrical Stimulation
    Device





Resale ProductsConti4000
                Electrical
      Stimulation Device for Incontinence TreatmentValuTENS
                Dual
      Channel TENS DeviceDCHT
                Cervical
      Traction DeviceLHT
                Lumbar
      Traction DeviceElectrodes
                Supplies,
      re-usable for delivery of electrical current to the
  body





The
Company received most of its revenue in 2008 from the sale and rental of
transcutaneous electrical nerve stimulation (“TENS”), interferential and muscle
stimulation devices and electrode supplies.  Revenue from the sale and
rental of the NeuroMove is a small part of our total revenue.








-
5 -





Pain Management and
Control





Standard
electrotherapy is a clinically proven and medically accepted alternative
modality to manage acute and chronic pain.  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.  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.





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.





Stroke and Spinal Cord
Injury Rehabilitation





Our
proprietary 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 in 2009, there is an
estimated 6.5 million stroke survivors in the U.S., a population that is
estimated to be growing by about 8% or 500,000 per year.  Stroke is a
leading cause of serious, long term disability in the United States according to
a survey of the US Bureau of the Census.





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 2007, living U.S.
victims range between 250,000 and 400,000 and the SCI Injury Information Network
estimate 7,800 new survivors each year.




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.








-
6 -





NeuroMove Clinical
Review





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





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





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





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





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 for this
purpose.





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 manufacturers 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.





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 published December 15, 2008, with approximately 6.5
million stroke survivors, growing approximately 8% a year, and approximately
250,000- 400,000 SCI survivors, growing approximately 7,800 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.





-
7 -





Key
characteristics of our markets are:





-
            Often,
      time for collection of initial payment from insurance carriers can range
      from 30 days to many months and considerably longer for many attorney,
      personal injury and worker's compensation cases. Such delayed payment
      impacts the Company's cash flow and can slow its
      growth.  Collections are also impacted by whether effective
      contacts are made by our billing and collections department with the
      insurance carriers.





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





-
            Some
      insurance companies do not as a matter of policy cover some of our
      products, which can result in the denial of payment or a demand for
      refund.





-
            For
      marketing reasons, we typically do not require any payments from patients
      and instead look only to insurers.





-
            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.





Our
long-term plan is to increase our penetration of the standard electrotherapy
market by further expanding our sales organization and broadening our product
offering.  We currently produce relatively high gross margins for our
products.  See Item 7 Management’s Discussion and Analysis of
Financial Condition and Results of Operations.  The high margins are
possible in part because the products use a common technology platform with
different software configurations and some products are refurbished to original
condition after being returned to the Company.





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 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 currently
contract 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
significant suppliers as of February 2009 are:





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


Battery
Warehouse Direct, Barrington, IL US


Byers Peak,
Wheat Ridge, CO, US


Spectramed,
Mount Vernon, OH, US





-
8 -





Our
employees develop the software used in our products.




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.





More than
a majority of our revenue is derived from private health insurance carriers with
insurance plans, typically known as HMO or PPO, on behalf of their
insureds.  The balance of the revenue is received from Medicare and
Medicaid, worker's compensation agencies, attorneys representing injured
patients, hospitals, U.S. and international distributors.





More than
a majority of our revenue depends upon recurring revenue.  Recurring
revenue results from renting our products typically for two to five
months.  In terms of sales of products, our primary 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.





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 products.
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
believe that our 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.  A
patent application for NeuroMove technology has been withdrawn during 2008, and
we currently own no patents.





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





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




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 cGMP and 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.





-
9 -





In 2008,
Zynex received European Union ("EU") CE Marking approval for several products.
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.  See “Current Business” above.





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





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





Healthcare
Regulation




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





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





-
            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, 2008, we employed 76 full time employees (an increase from 45 as of
December 31, 2007). We also engage a number of independent contractors,
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.




-
10 -





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, 2008:





Name
                    Age
                    PositionThomas
      Sandgaard
                    50
                    President,
      Chief Executive Officer and Director.Set
      forth below is a biographical description ofMr.
      Sandgaard based on information supplied by himFritz
      G. Allison
                    49
                    Chief
      Financial Officer.Set
      forth below is a biographical description ofMr.
      Allison based on information supplied by
him.








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





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







ITEM
1A. RISK FACTORS





RISKS
RELATED TO OUR BUSINESS





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





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





-
            shortfalls
      in anticipated revenues or increases in
  expenses;





-
            the
      development of new products; or





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





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 stockholders.  Any debt financing would
require the approval of Marquette, which is the lender under our line of
credit.








-
11 -





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





Our
limited liquidity is primarily a result of (a) the required high levels of
consignment inventory that are standard in the electrotherapy industry, (b) the
payment of commissions to salespersons based on sales or rentals prior to
payments for the corresponding product by insurers and whether or not there is a
denial of any payment by an insurer, (c) the high level of outstanding accounts
receivable because of deferred payment practices of third-party health payers,
(d) the need for improvements to the Company’s internal billing processes, and
(e) the delayed cost recovery inherent in rental transactions.





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.





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. Our products are regulated by
the U.S. Food and Drug Administration. Competitors may develop products that are
substantially equivalent to our FDA cleared 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.  Substantial competition may
be expected in the future in the area of stroke rehabilitation that may directly
compete with our NeuroMove product.  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.





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 patient preferences.





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





A large
percentage of our revenues comes from insurance company and government agency
reimbursement. Upon delivery of our products to our customers, we directly bill
the customers' private insurance company or government payer for reimbursement.
If the billed payers do not pay their bills on a timely basis or if they change
their policies to exclude coverage for our products, we would experience a
decline in our revenue as well as cash flow issues.  In addition, we
may deliver products to customers based on past practices and billing
experiences with health insurance companies and have a health insurance company
later deny coverage for such products. In some cases our delivered product may
not be covered pursuant to a policy statement of a health insurance provider,
despite a payment history of the insurance provider and benefits to the
patients. In November 2008, we settled a refund claim by Anthem Blue Cross Blue
Shield for payments made by Anthem for certain medical devices which were rented
or sold to insureds of Anthem and which were disallowed under an Anthem
policy.




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.





-
12 -





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.





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. 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 retaining and
recruiting qualified managerial and sales personnel having experience in
business. Competition for qualified individuals is intense. Various factors,
such as marketability of our products, our reputation and our liquidity, can
affect our ability to find, attract or retain sales personnel. There can be no
assurance that we will be able to find, attract and retain qualified new
employees and sales representatives and retain existing employees and sales
representatives.





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 IF8000, IF8100, TruWave, E-Wave or NeuroMove
NM900 products as effective, reliable, and cost-effective. Factors that could
prevent such institutional customer acceptance include:





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





-
            If
      customers are financially unable to purchase these
    products;





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





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





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





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





-
13 -





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





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





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





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





WE MAY
INCUR SUBSTANTIAL EXPENSES AND MAY INCUR LOSSES.





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





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





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





We regard
our trademarks, our trade secrets and other intellectual property as an integral
component of our success. We rely on trademark law 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.





-
14 -





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, our
business and operating results could be adversely affected. There has been
substantial litigation regarding patent and other intellectual property rights
in the medical device industry. The validity and breadth of claims covered in
medical technology patents involve complex legal and factual questions for which
important legal principles remain unresolved. Any litigation claims against us,
independent of their validity, may result in substantial costs and the diversion
of resources with no assurance of success. Intellectual property claims could
cause us to:




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





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





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





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





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





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





-
            Build
      a largerdirect
      sales force;





-
            Manage
      geographically dispersed
operations;





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




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


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




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





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





-
15 -





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





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





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





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





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





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





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





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




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





-
16 -





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





In
addition, in 2003, the Centers for Medicare and Medicaid Services, or CMS made
effective an interim final regulation implementing "inherent reasonableness"
authority, which allows adjustments to payment amounts for certain “outlier”
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 9% of our total sales and rental income for 2008. When using the
inherent reasonableness authority, CMS may reduce reimbursement levels for
certain of our products, which could have a material adverse effect on our
results of operations.





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





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




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





Our Chief
Executive Officer and a director, Thomas Sandgaard, beneficially owns
approximately 61.0% of our outstanding common stock as of March 27, 2009. 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.








-
17 -





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.





MATERIAL
WEAKNESSES IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING COULD MATERIALLY AND
ADVERSELY IMPACT OUR BUSINESS.





We have
reported material weaknesses in internal control over financial reporting for
the last four years (including at December 31, 2008).  Our remediation
steps have to date not eliminated material weaknesses.  A continuation
of material weaknesses could result in future financial statements with material
errors or inaccuracies.  If these types of problems occur in the future, in
addition to any impact on our stock price, they could also result in defaults
under our line of credit and could affect adversely our reputation, which
collaterally could affect our ability to retain sales personnel and business
relationships with insurance companies paying for our products and
vendors.




INCOME
TAX OBLIGATIONS MUST BE MET
  The
Company has a liability for approximately $600,000 on 2007 federal income
taxes. The Company must arrange a proposed payment schedule with the
Internal Revenue Service and then make timely payments under such a
schedule.  Failure to do so could result in collection actions by the
IRS against the Company and its assets.





ECONOMIC
CONDITIONS MAY ADVERSELY AFFECT US.





The
United States is experiencing severe instability in the commercial and
investment banking systems which is likely to continue to have far-reaching
effects on the economic activity in the country for an indeterminable period.
The United States is also experiencing relatively high levels of unemployment
and a recession. The long-term impact of these matters on the United States
economy and the Company’s operating activities and ability to raise capital
cannot be predicted at this time, but may be substantial.





AN
UNFAVORABLE OUTCOME IN PENDING LITIGATION COULD AFFECT ADVERSELY OUR FINANCIAL
CONDITION AND OPERATIONS.





We are
currently the subject of pending lawsuits, brought in April 2009, alleging
securities law violations in regard to financial statements for the first three
quarters of 2008 which were restated.  If these lawsuits are
ultimately not covered by our insurance, or if any liability, settlement or
defense costs cumulatively exceed our insurance limit of $5 million, these
lawsuits could materially and adversely affect our cash flow, financial
condition and financial results to the detriment of our Company.





THE
UNCERTAINTY REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN MAY AFFECT OUR
BUSINESS RELATIONSHIPS.





We have
forecasted sufficient liquidity and the ability to satisfy financial covenants
of our revolving line of credit in 2009, but these matters are not
certain.  As a result, the report of our independent registered public
accounting firm on our consolidated financial statements, as of and for the year
ended December 31, 2008, refers to an explanatory Note regarding the uncertainty
of our ability to continue as a going concern.  Any such concerns
about our financial condition could impact our ability to retain sales
representatives or employees and could affect the willingness of insurers and
suppliers to work with us.  Any continuation of such concerns could
thus have a material adverse effect on our business and results of operations in
the future.








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.








-
18 -





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





OUR
TRADING ON THE OVER THE COUNTER BULLETIN BOARD DEPENDS ON OUR FILING PERIODIC
REPORTS WITH THE SECURITIES AND EXCHANGE COMMISSION ON A TIMELY
BASIS





We were
late in filing two periodic reports with the SEC in 2008. If we have a “third
strike” consisting of another late report within a period of 24 months, our
common stock would be removed from the OTCBB and then would probably be traded
on the Pink Sheets.








ITEM
1B. UNRESOLVED STAFF COMMENTS





None








ITEM
2. PROPERTIES





In
November 2007, the Company moved its headquarters, office, plant and warehouse
to a facility in Littleton, Colorado. This space, consisting of 16,553 square
feet, is sub-leased under a 25-month agreement, expiring in November 2009, at an
annual cost of $113,802 plus property taxes and common area maintenance
expenses. The Company believes that the leased property is sufficient to support
its requirements until the sub-lease expires.










ITEM
3. LEGAL PROCEEDINGS





A lawsuit
was filed against the Company, its President and Chief Executive Officer and its
Chief Financial Officer on April 6, 2009, in the United States District Court
for the District of Colorado (Marjorie and David Mishkin v. Zynex,
Inc. et al.).  On April 9, 2009, a lawsuit was filed by Robert
Hanratty in the same court against the same defendants.  On April 10,
2009, a lawsuit was filed by Denise Manandik in the same court against the same
defendants.  These lawsuits allege substantially the same
matters.  The lawsuits refer to the April 1, 2009 announcement of the
Company that it will restate its unaudited financial statements for the first
three quarters of 2008.  The lawsuits purport to be a class action on
behalf of purchasers of the Company securities between May 21, 2008 and March
31, 2009.  The lawsuits allege, among other things, that the
defendants violated Section 10 and Rule 10b-5 of the Securities Exchange Act of
1934 by making intentionally or recklessly untrue statements of material fact
and/or failing to disclose material facts regarding the financial results and
operating conditions for the first three quarters of 2008.  The
plaintiffs ask for a determination of class action status, unspecified damages
and costs of the legal action.  The Company believes that the
allegations are without merit and will vigorously defend itself in the
lawsuits.  The Company has notified its directors and officers
liability insurer of the claims.





We are
not a party to any other material pending or threatened legal
proceedings.  For information on a recent refund claim and settlement
of it during the fourth quarter of 2008, please see Note 12 to the Consolidated
Financial Statements in this Report, which Note is incorporated herein by
reference.





-
19 -





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





None





PART
II





ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES





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





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, 2007First
      Quarter
                $0.45
                $0.20Second
      Quarter
                $0.95
                $0.34Third
      Quarter
                $1.43
                $0.90Fourth
      Quarter
                $1.49
                $1.18Year
      ended December 31, 2008First
      Quarter
                $1.78
                $1.15Second
      Quarter
                $1.81
                $1.30Third
      Quarter
                $6.14
                $1.74Fourth
      Quarter
                $5.20
                $1.23




As of
March 27, 2009, there were 29,971,041 shares of common stock outstanding and
approximately 229registered 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.
  In
October 2008, the Company received notices of exercise related to options for
150,000 shares of common stock; 150,000 shares of common stock were issued in
exchange for cash of $55,000.  In November 2008, the Company received
notices of exercise related to options for 50,000 shares of common stock; 50,000
shares of common stock were issued in exchange for cash of
$16,000.  In November 2008, the Company received notices of exercise
related to warrants for 103,139 shares of common stock; 92,267 shares of common
stock were issued in cashless exercises.  In December 2008, the
Company issued 19,000 shares of common stock to individuals as non-cash
compensation for services rendered, valued at $29,450 We made no general
solicitation, and we believe that the issuance of shares met the standards for
purchases under an exemption for a non-public offering or for an exchange of
securities.


During
the fourth quarter of 2008, the Company issued 19,000 shares of common stock to
outside sales representatives as incentive awards.  We made no general
solicitation, and we believe that the issuance of the shares met the standards
for purchases under an exemption for a non-public offering or did not constitute
a sale.





There
were there no stock repurchases by the Company during 2008 or 2007.





-
20 -







ITEM
6. SELECTED FINANCIAL DATA





Not
applicable.








ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION





For 2008,
Zynex reported $11,763,558 revenue, an increase of 46% from 2007 and net income
of $110,952, a decrease of 95% from 2007.  The revenue increase was
primarily accomplished through recruitment of experienced sales representatives
in 2006, 2007 and 2008.
 
 The
decrease in net income was primarily due to decreasing the amounts we expect to
collect from insurance providers in 2008. We increased our reserves to reflect
the reduced collection expectations because of higher levels of claim denials by
medical insurers and the need to improve the processes in our billing and
collection department. This significantly impacted both revenue and net income
in 2008. Refer to Note 13 to the consolidated financial statements.
 
 In 2008
the percentage increase in revenues was significantly less than the percentage
increase in orders received for the Company’s products primarily because of
higher levels of claim denials by medical insurers; the need to improve the
processes in our billing and collection department; increased reserves for
returns, allowances and collectability, which reduced gross revenue; and net
income.  See Note 2 for information on “Revenue Recognition and
Allowances for Provider Discounts and Collectibility.”  Net revenue
was also impacted significantly by our not recognizing revenues (approximately
$1,075,000) from the rental of certain devices to insureds of Anthem Blue Cross
Blue Shield during the third quarter due to a refund claim of Anthem which was
settled in November 2008.  See Note 12 to the Consolidated
Financial Statements in this Report.


The
incremental addition of industry experienced sales representatives during 2007
and 2008 allowed us to increase our market presence and increase orders during
2007 and 2008. As a result of the sales force expansion, our total orders
increased 140% from 10,383 in 2007 to 24,888 in 2008.  The level of
orders for our products is significant in terms of (1) rental income which we
anticipate receiving on a recurring basis over the time which patients use our
products, subject to our ability to collect the rentals and the contractual
adjustments by insurers, and (2) also corresponding recurring sales of
electrodes and other supplies for the products.





Management
believes that our overall business remains stable, with doctors and patients
continuing to have a readiness to use our products.








RESULTS
OF OPERATIONS





The
following information should be read in conjunction with the Company’s
Consolidated Financial Statements and related Notes contained in this
Report.





Net Rental Revenue.
Net rental revenue for the year ended December 31, 2008, was $7,938,323 an
increase of $2,596,735 or 49% compared to $5,341,588 for the year ended December
31, 2007. The increase in net rental revenue for the year ended December 31,
2008 was due primarily to an increase in prescriptions (orders) for rentals of
the Company’s electrotherapy products. Other reasons for the increase in net
rental revenue are indicated in “Net Sales and Rental Revenue” below. Net rental
revenue was also significantly impacted by increased reserves as mentioned
above. In addition, net rental revenue slowed in the third and fourth quarter of
2008 because we did not recognize revenues from the rental of certain devices to
insureds of Anthem Blue Cross Blue Shield during the quarters due to a refund
claim of Anthem which was settled in November 2008. As part of the settlement
the Company agreed to pay Anthem $679,930 and forego unpaid claims in existence
at June 30, 2008 of $329,664. Substantially all of this $1,009,594 relates to
and decreased net rental revenue. See Note 12 to the Consolidated Financial
Statements in this Report.





-
21 -





Net
rental revenue for the year ended December 31, 2008 made up 67% of net sales and
rental revenue compared to 66% for the year ended December 31,
2007.





Our
products may be rented on a monthly basis or purchased. Renters and purchasers
are primarily patients and healthcare providers; there are also purchases by
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 contractually arranged, a rental
continues until an amount equal to the purchase price is paid when we transfer
ownership of the product to the patient and cease rental charges.





Net Sales Revenue.
Net sales revenue for the year ended December 31, 2008, was $3,825,235, an
increase of $1,118,571 or 41% compared to $2,706,664 for the year ended December
31, 2007. The increase in net sales revenue for the year ended December 31,
2008, compared to the year ended December 31, 2007 was due primarily to more
products in use generating sales of consumable supplies to users of the
Company’s products as well as higher levels of products sold. The majority of
net sales revenue is derived from surface electrodes sent to existing patients
each month and other consumable supplies for our products. Other reasons for the
increase in net sales revenue are indicated in “Net Sales and Rental Revenue”
below.  Net sales revenue was also significantly impacted by increased
reserves as mentioned above.





Net sales
revenue for the year ended December 31, 2008 made up 33% of net sales and rental
revenue compared to 34% for the year ended December 31, 2007.





Net Sales and Rental
Revenue. Net sales and rental revenue for the year ended December 31,
2008, was $11,763,558, an increase of $3,715,307or 46% compared to $8,048,252
for the year ended December 31, 2007. The increase in net sales and rental
revenue for the year ended December 31, 2008, compared to the year ended
December 31, 2007 was due primarily to an increase in prescriptions (orders) for
rentals and purchases of the Company’s electrotherapy products. The increase
resulted from the expansion of the sales force in 2007 and 2008, greater
awareness of the Company's products by end users and physicians resulting from
marketing investments in 2007 and 2006; growing market penetration; and
increased rental revenue from the greater number of Zynex products placed in use
during prior periods.  The increase in net revenue rental was offset
by the settlement of the refund claim mentioned above, the increase in
allowances applied against gross revenues also mentioned above and inefficient
processes at our billing and collection departments.





Our sales
and rental revenue is reported net, after deductions for uncollectable 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 deductions from gross revenue also take into
account the estimated denials of claims for our products placed with patients
and other factors which may affect collectability.  See Note 2 to the
Consolidated Financial Statements in this Report.





Net sales
and rental revenue by quarter were as follows.




2008
                    
                    
                    2007First
      quarter
                    
                    $
                    2,588,720
                    
                    
                    $
                    1,336,731Second
      quarter
                    
                    
                    3,040,460
                    
                    
                    
                    1,505,207Third
      quarter  (see Note 12 to the Consolidated Financial
      Statements)
                    
                    
                    2,198,738
                    
                    
                    
                    2,104,446Fourth
      quarter
                    
                    
                    3,935,640
                    
                    
                    
                    3,101,868Total
      net sales and rental revenue
                    
                    $
                    11,763,558
                    
                    
                    $
                    8,048,252




Gross Profit. Gross
profit for the year ended December 31, 2008, was $9,523,924 or 81% of net sales
and rental revenue compared to $7,205,163 or 90% in 2007.  The
increase in gross profit for the year ended December 31, 2008 as compared with
the same period in 2007 is primarily because revenue increased from the year
ended December 31, 2007. The decrease in gross profit percentage for the year
ended December 31, 2008 as compared with the year ended December 31, 2007 is
primarily from the increased reserves as described above and from not
recognizing revenue from the rental of certain devices to insureds of Anthem
during the third quarter of 2008 which reduced net sales and rental revenue in
the third and fourth quarters of 2008.





-
22 -





Selling, General and
Administrative. Selling, general and administrative expenses for the year
ended December 31, 2008, was $9,214,748, an increase of $5,171,919 or 128%
compared to $4,042,829 for the year ended December 31, 2007.  The increase
was primarily due to increases in sales representative commissions, payroll,
public company expenses, legal expenses, accounting services and office
expenses.  The increases were in part offset by lower marketing and
promotion costs.





The year
ended December 31, 2008 included expenses for commissions earned by sales
representatives on orders which did not result in collections, including in the
third quarter rentals and sales of certain devices to the insureds of Anthem
which the Company did not bill to Anthem.  The impact in 2008 was more
significant than in prior years.  The Company pays commission based on
orders, with the collections dependent upon policies of the insurers and our
internal processes.





Interest and other income or
expense.  Interest and other income or expense for the year ended
December 31, 2008, was $38,223, a decrease of $202,761 or 84% compared to
$240,984 for the year ended December 31, 2007. We anticipate increases in the
interest expense level in 2009 and future years because of our borrowing under
the line of credit established in September 2008. The decrease in interest
expense resulted primarily from the Company's repayment in 2007 of the note
issued to Ascendiant Capital in June of 2007, and the Company’s repayment
of the loans payable to Silicon Valley Bank in February 2008. The Company also
recorded other income of $27,201 in the quarter ended June 30, 2008 resulting
from the disposal of leased equipment which had been treated as a capital
lease.


Income tax
expense.  We reported expenses for income taxes in the amount
of $160,000 for the year ended December 31, 2008 compared to $790,000 of expense
for the year ended December 31, 2007.  This is primarily due to our
having lower income before taxes of $270,953 for the year ended December 31,
2008 compared to $2,921,350 of income before taxes for the year ended December
31, 2007. The decrease in income before taxes was primarily due to decreasing
the amounts we expect to collect from insurance providers as described
above.





LIQUIDITY
AND CAPITAL RESOURCES





Line
of Credit





Please
see Note 7 of the Consolidated Financial Statements in this Report for
information on a line of credit established with Marquette Healthcare Finance in
September 2008.  On April 7, 2009, we entered into a letter agreement
with Marquette in which Marquette states its willingness to waive breaches of
financial covenants by us. In the letter agreement, Marquette indicates that
Zynex did not meet the EBITDA covenant and debt service coverage ratio covenant
as of December 31, 2008 and that Zynex would not meet the EBITDA covenant as of
March 31, 2009. Marquette stated its willingness to forebear taking action on
these financial covenant defaults for the quarters ended December 31, 2008 and
March 31, 2009 and to waive any default fee or default interest
rate.  Marquette and we also agreed on amounts for resetting the
minimum EBITDA covenant, which is on a trailing 12 month basis, as of the end of
each quarterly period in 2009.  When available, financial projections
for 2010 will be used to set future EBITDA covenant targets in Marquette’s sole
discretion.  With respect to Zynex’s restatement of financial
statements for the first three quarters of 2008, Marquette waived any breach of
a representation, warranty or covenant concerning the accuracy of the original
unaudited financial statements for these quarterly
periods.  Notwithstanding such waiver, Marquette expressly reserved
any right to declare a default, and any other claim, right or remedy with
respect to (a) the restated financial statements for these quarterly periods and
(b) any fraud or intentional misrepresentation in connection with the original
financial statements for these quarterly periods.  Further, Marquette
and we will amend the line of credit to increase the margin to 3.25% and
increase the collateral monitoring fee to $1,750 per month. The interest rate
for the line of credit is the margin plus the higher of the (i) a floating prime
rate; or (ii) the floating LIBOR rate plus 2%.








-
23 -





Limited
Liquidity





We have
limited liquidity.  Our limited liquidity is primarily a result of (a)
the required high levels of consignment inventory that are standard in the
electrotherapy industry, (b) the payment of commissions to salespersons based on
sales or rentals prior to payments for the corresponding product by insurers,
(c) the high level of outstanding accounts receivable because of the deferred
payment practices of third-party health payors, (d) the need for improvements to
the Company’s internal billing processes and (e) delayed cost recovery inherent
in rental transactions. Our growth results in higher cash needs.





Our
long-term business plan continues to contemplate growth in revenues and thus to
require, among other things, funds for the purchases of equipment, primarily for
rental inventory, and the payment of commissions to an increasing number of
sales representatives.





The
Company’s independent registered public accounting firm have included a going
concern emphasis paragraph in their report for the December 31, 2008
consolidated financial statements. See Note 1 to the consolidated financial
statements. The plans of Company’s management indicate that, while uncertain,
the Company’s projected cash flows from operating activities and borrowing
available under the Marquette line of credit will fund our cash requirements for
the year ending December 31, 2009.  The availability of the line of
credit depends our ongoing compliance with covenants, representations and
warranties in the agreement for the line of credit and borrowing base
limitations. Although the maximum amount of the line of credit is $3,000,000,
the amount available for borrowing under the line of credit is subject to a
ceiling based upon eight trailing weeks of collections and other limitations and
is thus less than the maximum amount ($2,202,000 maximum as of December 31,
2008). The balance on the line of credit at December 31, 2008 was
$1,780,701.


There is
no assurance that our operations and available borrowings will provide enough
cash for operating requirements or for the additional purchases of
equipment.  For this reason or to lower expenses, we may seek to
reduce expenses during 2009.  We have no arrangements for any
additional external financing of debt or equity, and we are not certain whether
any such financing would be available on acceptable terms.  Any
additional debt would require the approval of Marquette.





Our
limited liquidity and dependence on operating cash flow means that risks
involved in our business can significantly affect our
liquidity.  Contingencies such as unanticipated shortfalls in revenues
or increases in expenses could affect our projected revenue, cash flows from
operations and liquidity.





Cash used
by operating activities was $715,160 for the year ended December 31, 2008
compared to $745,689 of cash provided by operating activities for the year ended
December 31, 2007. The primary reasons for the decrease in cash flow was the
increase to accounts receivable and inventory in 2008 compared to 2007, offset
by an increase in non-cash expenses including provision for losses on accounts
receivable, provisions for payment provider discounts or denials and income
taxes payable.





Cash used
in investing activities for the year ended December 31, 2008 was $1,400,895
compared to cash used in investing activities of $751,310 for the year ended
December 31, 2007. Cash used in investing activities primarily represents the
purchase and in-house production of rental products as well as some purchases of
capital equipment.





Cash
provided by financing activities was $2,116,055 for the year ended December 31,
2008 compared with cash used in financing activities of $259,576 for the year
ended December 31, 2007.  The primary financing source of cash in 2008
were from proceeds from borrowings under the Marquette line of credit and the
sales of common stock partially offset by payments on notes payable including
the notes payable to Silicon Valley Bank.  The primary financing uses
of cash in 2007 were payments on notes payable partially offset by proceeds of
loans issued to a stockholder.





The
following table summarizes the future cash disbursements to which we are
contractually committed as of December 31, 2008.








-
24 -





Payments
Due by Period:
  Significant Contractual
      Obligations
                        
                        Total
                        
                        
                        1
      Year
                        
                        
                        2-3
      Years
                        
                        
                        4-5
      Years
                        
                        
                        5
      YearsNotes
      payable
                        
                        $
                        1,818,059
                        
                        
                        $
                        1,818,059
                        
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        --Anthem
      obligation
                        
                        
                        606,981
                        
                        
                        
                        606,981
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --Capital
      lease obligations
                        
                        
                        164,961
                        
                        
                        
                        37,884
                        
                        
                        
                        75,768
                        
                        
                        
                        51,309
                        
                        
                        
                        --Operating
      leases
                        
                        
                        150,239
                        
                        
                        
                        128,377
                        
                        
                        
                        21,862
                        
                        
                        
                        --
                        
                        
                        
                        --Total
      contractual cash obligations
                        
                        $
                        2,740,240
                        
                        
                        $
                        2,591,301
                        
                        
                        $
                        97,630
                        
                        
                        $
                        51,309
                        
                        
                        $
                        --


In
addition to the above contractual obligations, the Company must pay
approximately $600,000 of federal income taxes still owed for 2007. 
The Company intends to propose a payment plan for these
taxes.


In
September 2008, the Company entered into a Loan and Security Agreement with
Marquette Business Credit, Inc., d/b/a Marquette Healthcare Finance. The Loan
Agreement provides Zynex with a revolving credit facility of up to $3,000,000.
As of December 31, 2008, the balance on the facility was
$1,780,701.  See “Line of Credit” above and Note 7 to the Consolidated
Financial Statements.





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





In 2006
Mr. Sandgaard loaned the Company $146,900, of which $50,000 was converted to a
24 month, 8.25% term loan, with equal monthly payments of principal and interest
commencing April 1, 2006. As of December 31, 2008, this loan had been paid in
full.  The loans from Mr. Sandgaard were used for working capital
purposes.





In May
and June 2007, Mr. Sandgaard made 24-month unsecured loans to the Company in the
principal amounts of $50,000 and $24,000 for a total amount of $74,000, The
loans bear interest at 8.25% per annum and require monthly payments of $2,267,
commencing June 2007 and $1,088 commencing July 2007, for a total of
$3,355.  As of December 31, 2008, $13,567 and $9,527 remain
outstanding. The loans from Mr. Sandgaard were used for working capital purposes
and repayment of the Note Payable to Ascendiant Capital Group, LLC.





In
September 2007, Mr. Sandgaard made a loan to the Company in the principal amount
of $59,500.  The loan bears interest at 8.25% per annum commencing
September 30, 2007 and is a demand note.  As of December 31, 2008,
$1,760 remains outstanding.  The loan from Mr. Sandgaard was used for
working capital purposes.





CRITICAL
ACCOUNTING POLICIES





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





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








-
25 -





Revenue Recognition And
Allowances For Provider Discounts And Collectability:  The
Company recognizes revenue when each of the following four conditions are met:
1) a contract or sales arrangement exists; 2) products have been shipped and
title has transferred or rental services have been rendered; 3) the price of the
products or services is fixed or determinable; and 4) collectability is
reasonably assured. Accordingly, the Company recognizes revenue, both rental and
purchase, when products have been dispensed to the patient and the patient’s
having insurance has been verified.  For medical products that are
sold from inventories consigned at clinic locations, the Company recognizes
revenue when it receives notice that the product has been prescribed and
dispensed to the patient and the patient’s having insurance has been verified or
preauthorization has been obtained from the insurance company, when
required.  Revenue from the rental of products is normally on a
month-to-month basis and is recognized ratably over the products’ rental period.
Products on rental contracts are placed in property and equipment and
depreciated over their estimated useful life. All revenue is recognized at
amounts estimated to be paid by customers or third-party providers using the
Company’s established rates, net of estimated provider discounts.  The
Company recognizes revenue from distributors when it ships its
products.





A
significant portion of the Company’s revenues are derived, and the related
receivables are due, from insurance companies or other third-party providers.
The nature of these receivables within this industry has typically resulted in
long collection cycles. The process of determining what products will be
reimbursed by third-party providers and the amounts that they will reimburse is
complex and depends on conditions and procedures that vary among providers and
may change from time to time. The Company maintains an allowance for provider
discounts and records additions to the allowance to account for the risk of
nonpayment. Provider discounts result from reimbursements from insurance
providers that are less than amounts claimed, where the amount claimed by the
Company exceeds the insurance provider's usual, customary and reasonable
reimbursement rate, amounts subject to insureds’ deductibles, and when there is
a benefit denial. The Company sets the amount of the allowance, and adjusts the
allowance at the end of each reporting period, based on a number of factors,
including historical rates of collection, trends in the historical rates of
collection and current relationships and experience with insurance companies or
other third-party providers. If the rates of collection of past-due receivables
recorded for previous fiscal periods changes, or if there is a trend in the
rates of collection on those receivables, the Company may be required to change
the rate at which they provide for additions to the allowance. A change in the
rates of the Company’s collections can result from a number of factors,
including turnover in personnel, changes in the reimbursement policies or
practices of providers, or changes in industry rates of reimbursement.
Accordingly, the provision for provider discounts recorded in the income
statement as a reduction of revenue has fluctuated and may continue to fluctuate
significantly from quarter to quarter. Such allowances have increased as
third-party providers have delayed payments and restricted amounts to be
reimbursed for products provided by the Company.





Due to
the nature of the industry and the reimbursement environment in which the
Company operates, estimates are required to record net revenues and accounts
receivable at their net realizable values. Inherent in these estimates is the
risk that they will have to be revised or updated as additional information
becomes available. Specifically, the complexity of third-party billing
arrangements and the uncertainty of reimbursement amounts for certain products
or services from providers may result in adjustments to amounts originally
recorded. Due to continuing changes in the health care industry and third-party
reimbursement, it is possible that management’s estimates could change in the
near term, which could have an impact on results of operations and cash flows.
Any differences between estimated settlements and final determinations are
reflected as a reduction to revenue in the period known.





In
addition to the allowance for provider discounts, the Company provides for
uncollectible accounts receivable. These uncollectible accounts receivable are a
result of non-payment from patients who have been direct billed for co-payments
or deductibles; lack of appropriate insurance coverage; and disallowances of
charges by third-party providers. The reserve is based on historical trends,
current relationships with providers, and internal process improvements. If
there were a change to a material insurance provider contract or policies or
application of them by a provider, a decline in the economic condition of
providers, or a significant turnover of Company personnel, the current level of
the reserve for uncollectible accounts receivable may not be adequate and may
result in an increase of these levels in the future.





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





-
26 -





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.





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.





Based on
management’s assessment of Financial Interpretation Number (FIN) 48, it was
concluded that the adoption of FIN 48, as of January 1, 2007, had no significant
impact on the Company’s results of operations or financial position, and
required no adjustments to the opening balance sheet accounts.  The
year-end analysis supports the same conclusion, and the Company does not have an
accrual for uncertain tax positions as of December 31, 2008.  The Company
recognized income tax related interest and penalties assessed on 2007 income
taxes recorded and charged approximately $27,000 in interest and penalties to
income tax expense.  It is not anticipated that unrecognized tax benefits
would significantly increase or decrease within 12 months of the reporting
date.  The Company files income tax returns in the U.S. and various state
jurisdictions and there are open statutes of limitations for taxing authorities
to audit the Company’s tax returns from 2005 through the current
period.




RESTATEMENT
OF QUARTERLY FINANCIAL RESULTS





The Board
of Directors and Audit Committee have concluded that our unaudited financial
statements for the quarters ended March 31, 2008, June 30, 2008 and September
30, 2008, included in its quarterly reports, should be revised to reflect
adjustments to the allowance for provider discounts, accounts receivable and net
revenue for such periods.  These quarterly adjustments were determined
after an evaluation of adjustments identified in connection with the 2008
year-end closing and the audit of the 2008 financial statements.  See
Note 13 to the Consolidated Financial Statements in this Report.





The
adjustments identified in connection with the year-end closing and 2008 year-end
audit result in a decrease in net accounts receivable and related net revenues
of approximately $5.1 million as of and for the year ended December 31, 2008. A
substantial part of these adjustments applies to the first three quarters of
2008. These adjustments are based on a re-evaluation of the estimated allowance
for provider discounts that management believes should have been utilized in
2008. The change in the provider discount rates is based on management’s
analysis of business conditions, recent rates of collection and additional
methodologies that the Company applied in estimating these rates at year end,
which management believes are more accurate than previously applied rates during
the quarterly periods in 2008. Zynex’s allowance for provider discounts is
recorded to account for the risk of non-payment arising from reimbursements from
insurance providers that are less than amounts claimed, amounts subject to
patients’ deductibles and benefit denials.





The
following is managements discussion and analysis of financial results and
unaudited restated financial statements for the quarters ended March 31, 2008,
June 30, 2008 and September 30, 2008





Quarter Ended March 31, 2008
– Results of Operations:


Net Rental Revenue.
Net rental revenue for the three months ended March 31, 2008, was $1,792,263 an
increase of $989,201 or 123% compared to $803,062 for the three months ended
March 31, 2007. The increase in net rental revenue for the three months ended
March 31, 2008 was due primarily to an increase in prescriptions (orders) for
rentals of the Company’s electrotherapy products. Other reasons for the increase
in net rental revenue are indicated in “Net Sales and Rental Revenue” below. Net
rental revenue was also significantly impacted by increased reserves as
mentioned above.





-
27 -





Net
rental revenue for the three months ended March 31, 2008 made up 69% of net
sales and rental revenue compared to 60% for the three months ended March 31,
2007. The increase in the percentage of total net sales and rental revenue from
rental revenue was due primarily to increased orders for rentals of products
compared to orders for sales of products and, once rented, continuation of
rental revenue while the products are used or until sold.





Our
products may be rented on a monthly basis or purchased. Renters and purchasers
are primarily patients and healthcare providers; there are also purchases by
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 contractually arranged, a rental
continues until an amount equal to the purchase price is paid when we transfer
ownership of the product to the patient and cease rental charges.





Net Sales Revenue.
Net sales revenue for the three months ended March 31, 2008, was $796,458, an
increase of $262,789 or 49% compared to $533,669 for the three months ended
March 31, 2007. The increase in net sales revenue for the three months ended
March 31, 2008, compared to the three months ended March 31, 2007 was due
primarily to more products in use generating sales of consumable supplies to
users of the Company’s products as well as higher levels of products sold. The
majority of net sales revenue is derived from surface electrodes sent to
existing patients each month and other consumable supplies for our products.
Other reasons for the increase in net sales revenue are indicated in “Net Sales
and Rental Revenue” below.  Net sales revenue was also significantly
impacted by increased reserves as mentioned above.





Net sales
revenue for the three months ended March 31, 2008 made up 31% of net sales and
rental revenue compared to 40% for the three months ended March 31, 2007. The
decrease in the percentage of total net sales and rental revenue was due
primarily to increased orders for rentals of products compared to orders for
purchases of products.





Net Sales and Rental
Revenue. Net sales and rental revenue for the three months ended March
31, 2008, was $2,588,720, an increase of $1,251,989 or 94% compared to
$1,336,731 for the three months ended March 31, 2007. The increase in net sales
and rental revenue for three months ended March 31, 2008, compared to the three
months ended March 31, 2007 was due primarily to an increase in prescriptions
(orders) for rentals and purchases of the Company’s electrotherapy products. The
increase resulted from the expansion of the sales force in 2007 and 2008,
greater awareness of the Company's products by end users and physicians
resulting from marketing investments in 2007 and 2006; growing market
penetration; and increased rental revenue from the greater number of Zynex
products placed in use during prior periods.  The increase in net
revenue rental was offset by the increase in allowances applied against gross
revenues also mentioned above and inefficient processes at our billing and
collection departments.  The increase in allowances reflect reduced
collections expectations because of higher levels of claim denials by medical
insurers and the need to improve the processes in our billing and collection
department.





Gross Profit. Gross
profit for the three months ended March 31, 2008, was $2,132,006 or 82% of net
revenue. For three months ended March 31, 2008, this represents an increase of
$913,955 or 75% from the gross profit of $1,218,051 or 91% of net revenue for
the three months ended March 31, 2007. The increase in gross profit for the
three months ended March 31, 2008 as compared with the same period in 2007 is
primarily because revenue increased from the prior period. The decrease in gross
profit percentage for the three months ended March 31, 2008 as compared with the
same period in 2007 is primarily from the increased reserves as described
above.




Selling, General and
Administrative. Selling, general and administrative expenses for the
three months ended March 31, 2008 were $1,556,267 an increase of $777,680 or
100% compared to $778,587 for the same period in 2007.  The increase was
primarily due to increases in sales representative commissions, payroll, public
company expenses, legal expenses, accounting services and office expenses. 
The increases were in part offset by lower advertising, marketing and promotion
costs, and temporary services.  .





Interest and other income or
expense.  Interest and other income or expense for the three months
ended March 31, 2008 were $15,056 of expense, compared to $122,083 of expense
for the same period in 2007. The decrease resulted primarily from the Company's
repayment of the note issued to Ascendiant Capital in June of 2007, and the
Company’s repayment of the loans payable to Silicon Valley Bank in February
2008.





-
28 -





Income tax
expense.  We reported expenses for income taxes in the amount
of $330,000 for the three months ended March 31, 2008 compared to $85,700 of
expense for the same period in 2007.  This is primarily due to our
having higher income before taxes of $560,683 for the three months ended March
31, 2008 compared to income before taxes of $317,381 for the same period in
2007.





The
following is the unaudited, restated statement of operations for the 3 months
ended March 31, 2008:





UnauditedFor
      the 3 months ended:31-Mar-08
                                            
                                            
                                            adjustment
                                            
                                            
                                            31-Mar-08
                                            
                                            
                                            31-Mar-07restated
                                            
                                            
                                            
                                            
                                            
                                            as
      filedNet
      rental revenue
                                            
                                            $
                                            1,792,263
                                            
                                            
                                            
                                            (797,783
                                            )
                                            
                                            $
                                            2,590,046
                                            
                                            
                                            $
                                            803,062Net
      sales revenue
                                            
                                            
                                            796,458
                                            
                                            
                                            
                                            (354,524
                                            )
                                            
                                            
                                            1,150,982
                                            
                                            
                                            
                                            533,669Net
      rental and sales revenue
                                            
                                            
                                            2,588,720
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3,741,028
                                            
                                            
                                            
                                            1,336,731Cost
      of rentals
                                            
                                            
                                            103,019
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            103,019
                                            
                                            
                                            
                                            25,648Cost
      of sales
                                            
                                            
                                            353,695
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            353,695
                                            
                                            
                                            
                                            93,032Cost
      of rentals and sales
                                            
                                            
                                            456,714
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            456,714
                                            
                                            
                                            
                                            118,680Gross
      profit
                                            
                                            
                                            2,132,006
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3,284,314
                                            
                                            
                                            
                                            1,218,051Selling,
      general and administrative
                                            
                                            
                                            1,556,267
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,556,267
                                            
                                            
                                            
                                            778,587Income
      from operations
                                            
                                            
                                            575,739
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,728,047
                                            
                                            
                                            
                                            439,464Other
      income (expense):Interest
      income
                                            
                                            
                                            861
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            861
                                            
                                            
                                            
                                            -Interest
      expense
                                            
                                            
                                            (15,917
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            (15,917
                                            )
                                            
                                            
                                            (122,083
                                            )(Loss)
      gain on disposal of equipment
                                            
                                            
                                            -
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -560,683
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,712,991
                                            
                                            
                                            
                                            317,381Income
      tax expense
                                            
                                            
                                            330,000
                                            
                                            
                                            
                                            (190,000
                                            )
                                            
                                            
                                            520,000
                                            
                                            
                                            
                                            85,700Net
      income
                                            
                                            $
                                            230,683
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            1,192,991
                                            
                                            
                                            $
                                            231,681Net
      income per common andcommon
      equivalent share:Basic
                                            
                                            $
                                            0.01
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            0.04
                                            
                                            
                                            $
                                            0.01Diluted
                                            
                                            $
                                            0.01
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            0.04
                                            
                                            
                                            $
                                            0.01Weighted
      average number ofshares
      outstandingBasic
                                            
                                            
                                            27,717,457
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            27,717,457
                                            
                                            
                                            
                                            26,310,911Diluted
                                            
                                            
                                            29,332,966
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            29,332,966
                                            
                                            
                                            
                                            27,399,773








-
29 -





The
following is the unaudited, restated balance sheet as of March 31,
2008:





unauditedAs
      of
                        
                        
                        As
      of31-Mar-08
                        
                        
                        31-Mar-08restated
                        
                        
                        as
      filedASSETSCurrent
      Assets:Cash
      and cash equivalents
                        
                        $
                        45,287
                        
                        
                        $
                        45,287Accounts
      receivable, net of allowance for providerdiscounts
      and collectibility
                        
                        
                        4,932,389
                        
                        
                        
                        6,084,697Inventory
                        
                        
                        1,125,039
                        
                        
                        
                        1,125,039Deferred
      financing fees
                        
                        
                        -
                        
                        
                        
                        -Prepaid
      expenses
                        
                        
                        22,054
                        
                        
                        
                        22,054Deferred
      tax asset
                        
                        
                        290,000
                        
                        
                        
                        290,000Other
      current assets
                        
                        
                        52,791
                        
                        
                        
                        52,791Total
      current assets
                        
                        
                        6,467,560
                        
                        
                        
                        7,619,868Property
      and equipment, less accumulateddepreciation
                        
                        
                        1,006,783
                        
                        
                        
                        1,006,783Deferred
      financing fees
                        
                        
                        21,286
                        
                        
                        
                        21,286$
                        7,495,629
                        
                        
                        $
                        8,647,937LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Bank
      overdraft
                        
                        $
                        -
                        
                        
                        $
                        -Notes
      payable
                        
                        
                        18,126
                        
                        
                        
                        18,126Loan
      from stockholder
                        
                        
                        114,204
                        
                        
                        
                        114,204Capital
      lease
                        
                        
                        17,650
                        
                        
                        
                        17,650Accounts
      payable
                        
                        
                        869,343
                        
                        
                        
                        869,343Income
      taxes payable
                        
                        
                        945,000
                        
                        
                        
                        1,135,000Accrued
      payroll and payroll taxes
                        
                        
                        206,447
                        
                        
                        
                        206,447Other
      accrued liabilities
                        
                        
                        713,689
                        
                        
                        
                        713,689Total
      current liabilities
                        
                        
                        2,884,459
                        
                        
                        
                        3,074,459Loan
      from stockholder, less current maturities
                        
                        
                        11,401
                        
                        
                        
                        11,401Notes
      payable, less current maturities
                        
                        
                        2,520
                        
                        
                        
                        2,520Capital
      lease, less current maturities
                        
                        
                        4,652
                        
                        
                        
                        4,652Long-term
      deferred tax liability
                        
                        
                        115,000
                        
                        
                        
                        115,000Total
      liabilities
                        
                        
                        3,018,032
                        
                        
                        
                        3,208,032Stockholders'
      Equity:Preferred
      Stock; $.001 par value, 10,000,000 sharesauthorized,
      no shares issued or outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      Stock, $.001 par value, 100,000,000 sharesauthorized.
                        
                        
                        28,943
                        
                        
                        
                        28,943Paid-in
      capital
                        
                        
                        3,261,337
                        
                        
                        
                        3,261,337Retained
      earnings
                        
                        
                        1,187,317
                        
                        
                        
                        2,149,625Total
      stockholders' equity
                        
                        
                        4,477,597
                        
                        
                        
                        5,439,905$
                        7,495,629
                        
                        
                        $
                        8,647,937








-
30 -





The
following is the unaudited, restated statement of cash flows for the 3 months
ended March 31, 2008:





UnauditedThree
      Months Ended:31-Mar-08
                                
                                
                                31-Mar-08restated
                                
                                
                                as
      filedCash
      flows from operating activities:Net
      income
                                
                                $
                                230,683
                                
                                
                                $
                                1,192,991Adjustments
      to reconcile net income to net cash provided byoperating
      activities:Depreciation
                                
                                
                                71,643
                                
                                
                                
                                71,643Provision
      for losses in accounts receivable (uncollectability)
                                
                                
                                -
                                
                                
                                
                                -Provision
      for provider discounts
                                
                                
                                3,283,758
                                
                                
                                
                                2,131,450Amortization
      of deferred consulting and financing fees
                                
                                
                                5,525
                                
                                
                                
                                5,525Issuance
      of common stock and warrants for services,interest,
      loan fees and employee incentive
                                
                                
                                -
                                
                                
                                
                                -Provision
      for obsolete inventory
                                
                                
                                12,000
                                
                                
                                
                                12,000Amortization
      of discount on note payable
                                
                                
                                -
                                
                                
                                
                                -Amortization
      of beneficial conversion feature
                                
                                
                                -
                                
                                
                                
                                -Gain
      on disposal of equipment
                                
                                
                                -
                                
                                
                                
                                -Employee
      stock based compensation expense
                                
                                
                                9,892
                                
                                
                                
                                9,892Deferred
      tax benefit
                                
                                
                                (55,000
                                )
                                
                                
                                (55,000
                                )Changes
      in operating assets and liabilities:Accounts
      receivable
                                
                                
                                (3,740,215
                                )
                                
                                
                                (3,740,215
                                )Inventory
                                
                                
                                (199,345
                                )
                                
                                
                                (199,345
                                )Deferred
      financing fees, current
                                
                                
                                -
                                
                                
                                
                                -Prepaid
      expenses
                                
                                
                                12,741
                                
                                
                                
                                12,741Deferred
      financing fees, non-current
                                
                                
                                -
                                
                                
                                
                                -Other
      current assets
                                
                                
                                (5,076
                                )
                                
                                
                                (5,076
                                )Deposits
      and other assets
                                
                                
                                -
                                
                                
                                
                                -Accounts
      payable
                                
                                
                                51,914
                                
                                
                                
                                51,914Accrued
      liabilities
                                
                                
                                207,490
                                
                                
                                
                                207,490Income
      taxes payable
                                
                                
                                35,000
                                
                                
                                
                                225,000Net
      cash provided by operating activities
                                
                                
                                (78,990
                                )
                                
                                
                                (78,990
                                )Cash
      flows from investing activities:Proceeds
      from disposal of equipment
                                
                                
                                -
                                
                                
                                
                                -Purchases
      of equipment
                                
                                
                                (146,202
                                )
                                
                                
                                (146,202
                                )Net
      cash used in investing activities
                                
                                
                                (146,202
                                )
                                
                                
                                (146,202
                                )Cash
      flows from financing activities:Increase
      in bank overdraft
                                
                                
                                (89,347
                                )
                                
                                
                                (89,347
                                )Payments
      on notes payable and capital lease
                                
                                
                                (246,478
                                )
                                
                                
                                (246,478
                                )Proceeds
      from loans from stockholder
                                
                                
                                (13,178
                                )
                                
                                
                                (13,178
                                )Proceeds
      from loans and capital lease
                                
                                
                                -
                                
                                
                                
                                -Repayments
      of loans from stockholder
                                
                                
                                -
                                
                                
                                
                                -Issuance
      of common stock for cash, net
                                
                                
                                619,482
                                
                                
                                
                                619,482Net
      cash (used in) provided by financing activities
                                
                                
                                270,479
                                
                                
                                
                                270,479Net
      (decrease) increase in cash and cash equivalents
                                
                                
                                45,287
                                
                                
                                
                                45,287Cash
      and cash equivalents at beginning of period
                                
                                
                                -
                                
                                
                                
                                -Cash
      and cash equivalents at end of period
                                
                                $
                                45,287
                                
                                
                                $
                                45,287Supplemental
      cash flow information:Interest
      paid
                                
                                $
                                5,991
                                
                                
                                $
                                5,991Income
      taxes paid
                                
                                $
                                350,000
                                
                                
                                $
                                350,000






-
31 -





Quarter Ended June 30, 2008
– Results of Operations:


Net Rental Revenue.
Net rental revenue for the three and six months ended June 30, 2008, was
$2,100,705 and $3,892,967 an increase of $1,135,641 and $2,124,841or 118% and
120% compared to $965,064 and $1,768,126 for the three and six months ended June
30, 2007. The increase in net rental revenue for the three and six months ended
June 30, 2008 was due primarily to an increase in prescriptions (orders) for
rentals of the Company’s electrotherapy products. Other reasons for the increase
in net rental revenue are indicated in “Net Sales and Rental Revenue” below. Net
rental revenue was also significantly impacted by increased reserves as
mentioned above.





Net
rental revenue for the three and six months ended June 30, 2008 made up 69% and
69% of net sales and rental revenue compared to 64% and 62% for the three and
six months ended June 30, 2007. The increase in the percentage of total net
sales and rental revenue from rental revenue during the first six months of 2008
was due primarily to increased orders for rentals of products compared to orders
for sales of products and, once rented, continuation of rental revenue while the
products are used or until sold.





Our
products may be rented on a monthly basis or purchased. Renters and purchasers
are primarily patients and healthcare providers; there are also purchases by
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 contractually arranged, a rental
continues until an amount equal to the purchase price is paid when we transfer
ownership of the product to the patient and cease rental charges.





Net Sales Revenue.
Net sales revenue for the three and six months ended June 30, 2008, were
$939,755 and  $1,736,212 an increase of $399,612 and $662,400 or 74%
and 62% compared to $540,143 and $1,073,812 for the three and six months ended
June 30, 2007. The increase in net sales revenue for the three and six months
ended June 30, 2008, compared to the three and six months ended June 30, 2007
was due primarily to more products in use generating sales of consumable
supplies to users of the Company’s products as well as higher levels of products
sold. The majority of net sales revenue is derived from surface electrodes sent
to existing patients each month and other consumable supplies for our products.
Other reasons for the increase in net sales revenue are indicated in “Net Sales
and Rental Revenue” below. Net sales revenue was also significantly impacted by
increased reserves as mentioned above.





Net sales
revenue for the three and six months ended June 30, 2008 made up 31% and 31% of
net sales and rental revenue compared to 36% and 38% for the three and six
months ended June 30, 2007. The decrease in the percentage of total net sales
and rental revenue during the first six months of 2008 was due primarily to
increased orders for rentals of products compared to orders for purchases of
products.





Net Sales and Rental
Revenue. Net sales and rental revenue for the three and six months ended
June 30, 2008, were $3,040,460 and  $5,629,180 an increase of
$1,535,253 and $2,787,242 or 102% and 98% compared to $1,505,207 and $2,841,938
for the three and six months ended June 30, 2007. The increase in net sales and
rental revenue for the three and six months ended June 30, 2008, compared to the
three and six months ended June 30, 2007 was due primarily to an increase in
prescriptions (orders) for rentals and purchases of the Company’s electrotherapy
products. The increase resulted from the expansion of the sales force in 2007
and 2008, greater awareness of the Company's products by end users and
physicians resulting from marketing investments in 2007 and 2006; growing market
penetration; and increased rental revenue from the greater number of Zynex
products placed in use during prior periods.  The increase in net
revenue rental was offset by the increase in allowances applied against gross
revenues also mentioned above and inefficient processes at our billing and
collection departments.  The increase in allowances reflect reduced
collections expectations because of higher levels of claim denials by medical
insurers and the need to improve the processes in our billing and collection
department.





Gross Profit. Gross
profit for the three and six months ended June 30, 2008, was $2,762,248 and
$4,894,254 or 91% and 87 % of net sales and rental revenue. For three and six
months ended June 30, 2008, this represents an increase of $1,456,745 and
$2,370,700 or 112% and 94% from the gross profit of $1,305,503 or 87% and
$2,523,554 or 89% of net sales and rental revenue for the three and six months
ended June 30, 2007. The increase in gross profit for the three and six months
ended June 30, 2008 as compared with the same periods in 2007 is primarily
because revenue increased from the prior periods. The increase in gross profit
percentage for the three months ended June 30, 2008 as compared with the same
periods in 2007 is primarily from the increased percentage of net rental
revenue, which has a higher gross profit percentage, due to cost of product
being depreciated over its useful life. The decrease in gross profit percentage
for the six months ended June 30, 2008 as compared with the same periods in 2007
is primarily from increased reserves as mentioned above.


-
32 -





Selling, General and
Administrative. Selling, general and administrative expenses for the t
three and six months ended June 30, 2008 were $2,076,900 and $3,633,167 an
increase of $1,351,798 and $2,129,478 or 186% and 142%, compared to $725,102 and
$1,503,689 for the same periods in 2007.  The increase was primarily due to
increases in sales representative commissions, payroll, public company expenses,
legal expenses, accounting services and office expenses.  The increases
were in part offset by lower marketing and promotion costs, and temporary
services.





Interest and other income or
expense.  Interest and other income or expense for the three and six
months ended June 30, 2008 were $19,689 of income and $4,633 of income, compared
to $98,553 of expense and $220,636 of expense for the same periods in 2007. The
decrease in interest expense resulted primarily from the Company's repayment in
2007 of the note issued to Ascendiant Capital in June of 2007, and the
Company’s repayment of the loans payable to Silicon Valley Bank in February
2008. The Company also recorded other income of $27,201 in the quarter ended
June 30, 2008 resulting from the disposal of leased equipment which had been
treated as a capital lease.


Income tax
expense.  We reported expenses for income taxes in the amount
of $416,000 and $746,000 for the three and six months ended June 30, 2008
compared to $130,300 and $216,000 of expense for the same periods in
2007.  This is primarily due to our having higher income before taxes
of $1,265,720 for the six months ended June 30, 2008 compared to income before
taxes of $799,229 for the same period in 2007.








-
33 -





The
following is the unaudited, restated statement of operations for the 3 months
ended June 30, 2008:





UnauditedFor
      the 3 months ended:30-Jun-08
                                                
                                                
                                                adjustment
                                                
                                                
                                                30-Jun-08
                                                
                                                
                                                30-Jun-07restated
                                                
                                                
                                                
                                                
                                                
                                                as
      filedNet
      rental revenue
                                                
                                                $
                                                2,100,705
                                                
                                                
                                                
                                                (1,386,791
                                                )
                                                
                                                $
                                                3,487,496
                                                
                                                
                                                $
                                                965,064Net
      sales revenue
                                                
                                                
                                                939,755
                                                
                                                
                                                
                                                (620,384
                                                )
                                                
                                                
                                                1,560,139
                                                
                                                
                                                
                                                540,143Net
      rental and sales revenue
                                                
                                                
                                                3,040,460
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                5,047,635
                                                
                                                
                                                
                                                1,505,207Cost
      of rentals
                                                
                                                
                                                113,209
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                113,209
                                                
                                                
                                                
                                                68,155Cost
      of sales
                                                
                                                
                                                165,003
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                165,003
                                                
                                                
                                                
                                                131,549Cost
      of rentals and sales
                                                
                                                
                                                278,212
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                278,212
                                                
                                                
                                                
                                                199,704Gross
      profit
                                                
                                                
                                                2,762,248
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                4,769,423
                                                
                                                
                                                
                                                1,305,503Selling,
      general and administrative
                                                
                                                
                                                2,076,900
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,076,900
                                                
                                                
                                                
                                                725,102Income
      from operations
                                                
                                                
                                                685,348
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,692,523
                                                
                                                
                                                
                                                580,401Other
      income (expense):Interest
      income
                                                
                                                
                                                210
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                210
                                                
                                                
                                                
                                                -Interest
      expense
                                                
                                                
                                                (7,722
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                (7,722
                                                )
                                                
                                                
                                                (98,553
                                                )(Loss)
      gain on disposal of equipment
                                                
                                                
                                                27,201
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                27,201
                                                
                                                
                                                
                                                -705,037
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,712,212
                                                
                                                
                                                
                                                481,848Income
      tax expense
                                                
                                                
                                                416,000
                                                
                                                
                                                
                                                (444,000
                                                )
                                                
                                                
                                                860,000
                                                
                                                
                                                
                                                130,300Net
      income
                                                
                                                $
                                                289,037
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                1,852,212
                                                
                                                
                                                $
                                                351,548Net
      income per common andcommon
      equivalent share:Basic
                                                
                                                $
                                                0.01
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                0.06
                                                
                                                
                                                $
                                                0.01Diluted
                                                
                                                $
                                                0.01
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                0.06
                                                
                                                
                                                $
                                                0.01Weighted
      average number ofshares
      outstandingBasic
                                                
                                                
                                                29,132,219
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                29,132,219
                                                
                                                
                                                
                                                26,427,002Diluted
                                                
                                                
                                                30,277,702
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                30,277,702
                                                
                                                
                                                
                                                27,823,336








-
34 -





The
following is the unaudited, restated statement of operations for the 6 months
ended June 30, 2008:





UnauditedFor
      the 6 months ended:30-Jun-08
                            
                            
                            adjustment
                            
                            
                            30-Jun-08
                            
                            
                            30-Jun-07restated
                            
                            
                            
                            
                            
                            as
      filed
                            
                            
                            as
      filedNet
      rental revenue
                            
                            $
                            3,892,967
                            
                            
                            
                            (2,184,575
                            )
                            
                            $
                            6,077,542
                            
                            
                            $
                            1,768,126Net
      sales revenue
                            
                            
                            1,736,212
                            
                            
                            
                            (974,909
                            )
                            
                            
                            2,711,121
                            
                            
                            
                            1,073,812Net
      rental and sales revenue
                            
                            
                            5,629,180
                            
                            
                            
                            
                            
                            
                            
                            8,788,663
                            
                            
                            
                            2,841,938Cost
      of rentals
                            
                            
                            216,228
                            
                            
                            
                            
                            
                            
                            
                            216,228
                            
                            
                            
                            93,803Cost
      of sales
                            
                            
                            518,698
                            
                            
                            
                            
                            
                            
                            
                            518,698
                            
                            
                            
                            224,581Cost
      of rentals and sales
                            
                            
                            734,926
                            
                            
                            
                            
                            
                            
                            
                            734,926
                            
                            
                            
                            318,384Gross
      profit
                            
                            
                            4,894,254
                            
                            
                            
                            
                            
                            
                            
                            8,053,737
                            
                            
                            
                            2,523,554Selling,
      general and administrative
                            
                            
                            3,633,167
                            
                            
                            
                            
                            
                            
                            
                            3,633,167
                            
                            
                            
                            1,503,689Income
      from operations
                            
                            
                            1,261,087
                            
                            
                            
                            
                            
                            
                            
                            4,420,570
                            
                            
                            
                            1,019,865Other
      income (expense):Interest
      income
                            
                            
                            1,071
                            
                            
                            
                            
                            
                            
                            
                            1,071
                            
                            
                            
                            -Interest
      expense
                            
                            
                            (23,639
                            )
                            
                            
                            
                            
                            
                            
                            (23,639
                            )
                            
                            
                            (220,636
                            )(Loss)
      gain on disposal of equipment
                            
                            
                            27,201
                            
                            
                            
                            
                            
                            
                            
                            27,201
                            
                            
                            
                            -1,265,720
                            
                            
                            
                            
                            
                            
                            
                            4,425,203
                            
                            
                            
                            799,229Income
      tax expense
                            
                            
                            746,000
                            
                            
                            
                            (634,000
                            )
                            
                            
                            1,380,000
                            
                            
                            
                            216,000Net
      income
                            
                            $
                            519,720
                            
                            
                            
                            
                            
                            
                            $
                            3,045,203
                            
                            
                            $
                            583,229Net
      income per common andcommon
      equivalent share:Basic
                            
                            $
                            0.02
                            
                            
                            
                            
                            
                            
                            $
                            0.11
                            
                            
                            $
                            0.02Diluted
                            
                            $
                            0.02
                            
                            
                            
                            
                            
                            
                            $
                            0.10
                            
                            
                            $
                            0.02Weighted
      average number ofshares
      outstandingBasic
                            
                            
                            28,424,838
                            
                            
                            
                            
                            
                            
                            
                            28,424,838
                            
                            
                            
                            26,369,277Diluted
                            
                            
                            29,976,696
                            
                            
                            
                            
                            
                            
                            
                            29,976,696
                            
                            
                            
                            27,250,434











-
35 -





The
following is the unaudited, restated balance sheet as of June 30,
2008:





unauditedAs
      of
                                              
                                              
                                              As
      of30-Jun-08
                                              
                                              
                                              30-Jun-08restated
                                              
                                              
                                              as
      filedASSETSCurrent
      Assets:Cash
      and cash equivalents
                                              
                                              $
                                              189,620
                                              
                                              
                                              $
                                              189,620Accounts
      receivable, net of allowance for providerdiscounts
      and collectibility
                                              
                                              
                                              4,791,463
                                              
                                              
                                              
                                              7,950,946Inventory
                                              
                                              
                                              1,482,452
                                              
                                              
                                              
                                              1,482,452Deferred
      financing fees
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Prepaid
      expenses
                                              
                                              
                                              68,189
                                              
                                              
                                              
                                              68,189Deferred
      tax asset
                                              
                                              
                                              390,000
                                              
                                              
                                              
                                              390,000Other
      current assets
                                              
                                              
                                              57,600
                                              
                                              
                                              
                                              57,600Total
      current assets
                                              
                                              
                                              6,979,324
                                              
                                              
                                              
                                              10,138,807Property
      and equipment, less accumulateddepreciation
                                              
                                              
                                              1,299,366
                                              
                                              
                                              
                                              1,299,366Deferred
      financing fees
                                              
                                              
                                              21,286
                                              
                                              
                                              
                                              21,286$
                                              8,299,976
                                              
                                              
                                              $
                                              11,459,459LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Bank
      overdraft
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -Notes
      payable
                                              
                                              
                                              14,750
                                              
                                              
                                              
                                              14,750Loan
      from stockholder
                                              
                                              
                                              106,248
                                              
                                              
                                              
                                              106,248Capital
      lease
                                              
                                              
                                              25,558
                                              
                                              
                                              
                                              25,558Accounts
      payable
                                              
                                              
                                              965,352
                                              
                                              
                                              
                                              965,352Income
      taxes payable
                                              
                                              
                                              1,351,000
                                              
                                              
                                              
                                              1,985,000Accrued
      payroll and payroll taxes
                                              
                                              
                                              286,262
                                              
                                              
                                              
                                              286,262Other
      accrued liabilities
                                              
                                              
                                              666,747
                                              
                                              
                                              
                                              666,747Total
      current liabilities
                                              
                                              
                                              3,415,917
                                              
                                              
                                              
                                              4,049,917Loan
      from stockholder, less current maturities
                                              
                                              
                                              3,582
                                              
                                              
                                              
                                              3,582Notes
      payable, less current maturities
                                              
                                              
                                              1,386
                                              
                                              
                                              
                                              1,386Capital
      lease, less current maturities
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Long-term
      deferred tax liability
                                              
                                              
                                              75,000
                                              
                                              
                                              
                                              75,000Total
      liabilities
                                              
                                              
                                              3,495,885
                                              
                                              
                                              
                                              4,129,885Stockholders'
      Equity:Preferred
      Stock; $.001 par value, 10,000,000 sharesauthorized,
      no shares issued or outstanding
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Common
      Stock, $.001 par value, 100,000,000 sharesauthorized.
                                              
                                              
                                              29,133
                                              
                                              
                                              
                                              29,133Paid-in
      capital
                                              
                                              
                                              3,298,604
                                              
                                              
                                              
                                              3,298,604Retained
      earnings
                                              
                                              
                                              1,476,354
                                              
                                              
                                              
                                              4,001,837Total
      stockholders' equity
                                              
                                              
                                              4,804,091
                                              
                                              
                                              
                                              7,329,574$
                                              8,299,976
                                              
                                              
                                              $
                                              11,459,459








-
36 -





The
following is the unaudited, restated statement of cash flows for the 6 months
ended June 30, 2008:





UnauditedSix
      Months Ended:30-Jun-08
                            
                            
                            30-Jun-08restated
                            
                            
                            as
      filedCash
      flows from operating activities:Net
      income
                            
                            $
                            519,720
                            
                            
                            $
                            3,045,203Adjustments
      to reconcile net income to net cash provided byoperating
      activities:Depreciation
                            
                            
                            159,655
                            
                            
                            
                            159,655Provision
      for losses in accounts receivable (uncollectability)
                            
                            
                            755,908
                            
                            
                            
                            755,908Provision
      for provider discounts
                            
                            
                            11,049,195
                            
                            
                            
                            7,889,712Amortization
      of deferred consulting and financing fees
                            
                            
                            5,525
                            
                            
                            
                            5,525Issuance
      of common stock and warrants for services,interest,
      loan fees and employee incentive
                            
                            
                            7,400
                            
                            
                            
                            7,400Provision
      for obsolete inventory
                            
                            
                            24,000
                            
                            
                            
                            24,000Amortization
      of discount on note payable
                            
                            
                            -
                            
                            
                            
                            -Amortization
      of beneficial conversion feature
                            
                            
                            -
                            
                            
                            
                            -Gain
      on disposal of equipment
                            
                            
                            (27,201
                            )
                            
                            
                            (27,201
                            )Employee
      stock based compensation expense
                            
                            
                            35,078
                            
                            
                            
                            35,078Deferred
      tax benefit
                            
                            
                            (195,000
                            )
                            
                            
                            (195,000
                            )Changes
      in operating assets and liabilities:Accounts
      receivable
                            
                            
                            (12,120,634
                            )
                            
                            
                            (12,120,634
                            )Inventory
                            
                            
                            (568,758
                            )
                            
                            
                            (568,758
                            )Deferred
      financing fees, current
                            
                            
                            -
                            
                            
                            
                            -Prepaid
      expenses
                            
                            
                            (33,394
                            )
                            
                            
                            (33,394
                            )Deferred
      financing fees, non-current
                            
                            
                            -
                            
                            
                            
                            -Other
      current assets
                            
                            
                            (9,885
                            )
                            
                            
                            (9,885
                            )Deposits
      and other assets
                            
                            
                            -
                            
                            
                            
                            -Accounts
      payable
                            
                            
                            147,923
                            
                            
                            
                            147,923Accrued
      liabilities
                            
                            
                            240,365
                            
                            
                            
                            240,365Income
      taxes payable
                            
                            
                            441,000
                            
                            
                            
                            1,075,000Net
      cash provided by operating activities
                            
                            
                            430,897
                            
                            
                            
                            430,897Cash
      flows from investing activities:Proceeds
      from disposal of equipment
                            
                            
                            47,000
                            
                            
                            
                            47,000Purchases
      of equipment
                            
                            
                            (546,597
                            )
                            
                            
                            (546,597
                            )Net
      cash used in investing activities
                            
                            
                            (499,597
                            )
                            
                            
                            (499,597
                            )Cash
      flows from financing activities:Increase
      in bank overdraft
                            
                            
                            (89,347
                            )
                            
                            
                            (89,347
                            )Payments
      on notes payable and capital lease
                            
                            
                            (247,733
                            )
                            
                            
                            (247,733
                            )Proceeds
      from loans from stockholder
                            
                            
                            -
                            
                            
                            
                            -Proceeds
      from loans and capital lease
                            
                            
                            -
                            
                            
                            
                            -Repayments
      of loans from stockholder
                            
                            
                            (28,953
                            )
                            
                            
                            (28,953
                            )Issuance
      of common stock for cash, net
                            
                            
                            624,353
                            
                            
                            
                            624,353Net
      cash (used in) provided by financing activities
                            
                            
                            258,320
                            
                            
                            
                            258,320Net
      (decrease) increase in cash and cash equivalents
                            
                            
                            189,620
                            
                            
                            
                            189,620Cash
      and cash equivalents at beginning of period
                            
                            
                            -
                            
                            
                            
                            -Cash
      and cash equivalents at end of period
                            
                            $
                            189,620
                            
                            
                            $
                            189,620Supplemental
      cash flow information:Interest
      paid
                            
                            $
                            6,566
                            
                            
                            $
                            6,566Income
      taxes paid
                            
                            $
                            500,000
                            
                            
                            $
                            500,000

















-
37 -





Quarter Ended September 30,
2008 – Results of Operations:


Net Rental Revenue.
Net rental revenue for the three and nine months ended September 30, 2008, was
$2,164,827 and $6,057,794 an increase of $806,963 and $2,931,804 or 59% and 94%
compared to $1,357,863 and $3,125,990 for the three and nine months ended
September 30, 2007. The increase in net rental revenue for the three and nine
months ended September 30, 2008 was due primarily to an increase in
prescriptions (orders) for rentals of the Company’s electrotherapy products.
Other reasons for the increase in net rental revenue are indicated in “Net Sales
and Rental Revenue” below. The rate of increase in rental revenue slowed in the
third quarter of 2008 because we did not recognize revenues (approximately
$1,075,000) from the rental of certain devices to insureds of Anthem Blue Cross
Blue Shield during the quarter due to a refund claim of Anthem which was settled
in November 2008. Net rental revenue was also significantly impacted by
increased reserves as mentioned above.





Net
rental revenue for the three and nine months ended September 30, 2008 made up
67% and 69% of net sales and rental revenue compared to 65% and 63% for the
three and nine months ended September 30, 2007. The increase in the percentage
of total net sales and rental revenue from rental revenue during the first nine
months of 2008 was due primarily to increased orders for rentals of products
compared to orders for sales of products and, once rented, continuation of
rental revenue while the products are used or until sold. The level of net
rental revenue for the third quarter of 2008 was affected by the refund claim
mentioned above.





Our
products may be rented on a monthly basis or purchased. Renters and purchasers
are primarily patients and healthcare providers; there are also purchases by
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 contractually arranged, a rental
continues until an amount equal to the purchase price is paid when we transfer
ownership of the product to the patient and cease rental charges.





Net Sales Revenue.
Net sales revenue for the three and nine months ended September 30, 2008, were
$1,043,505 and  $2,779,719 an increase of $296,923 and $959,325 or 40%
and 53% compared to $746,582 and $1,820,394 for the three and nine months ended
September 30, 2007. The increase in net sales revenue for the three and nine
months ended September 30, 2008, compared to the three and nine months ended
September 30, 2007 was due primarily to more products in use generating sales of
consumable supplies to users of the Company’s products as well as higher levels
of products sold. The majority of net sales revenue is derived from surface
electrodes sent to existing patients each month and other consumable supplies
for our products. Other reasons for the increase in net sales revenue are
indicated in “Net Sales and Rental Revenue” below. Net rental revenue was also
significantly impacted by increased reserves as mentioned above.





Net sales
revenue for the three and nine months ended September 30, 2008 made up 33% and
31% of net sales and rental revenue compared to 36% and 37% for the three and
nine months ended September 30, 2007. The decrease in the percentage of total
net sales and rental revenue during the first nine months of 2008 was due
primarily to increased orders for rentals of products compared to orders for
purchases of products. The rental revenue as a percentage of net revenues for
the third quarter of 2008 decreased because of the refund claim described
above.





Provider Settlement
Provision. As mentioned above, in November 2008 the Company settled a
refund claim with Anthem Blue Cross Blue Shield. As part of the settlement the
Company agreed to pay Anthem $679,930 and forego unpaid claims in existence at
June 30, 2008 of $329,664. Substantially all of the $1,009,594 relates to net
rental revenue; if this amount had been a direct reduction to net rental revenue
it would not allow the comparison of net rental revenue for the three months
ended September 30, 2008.





The
Company records its normal provision for provider discounts as direct reductions
of rental and sales revenues; however, because of the size and retrospective
nature of the Anthem settlement, the Company has treated it as a change in
estimate and displayed the additional provision needed of $1,009,594 as a
separate line reducing total revenue in the Condensed Consolidated Statement of
Operations.








-
38 -





Net Sales and Rental
Revenue. Net sales and rental revenue for the three and nine months ended
September 30, 2008, were $2,198,738 and  $7,827,919 an increase of
$94,292 and $2,881,535 or 5% and 58% compared to $2,104,445 and $4,946,384 for
the three and nine months ended September 30, 2007. The increase in net sales
and rental revenue for the three and nine months ended September 30, 2008,
compared to the three and nine months ended September 30, 2007 was due primarily
to an increase in prescriptions (orders) for rentals and purchases of the
Company’s electrotherapy products. The increase resulted from the expansion of
the sales force in 2007 and 2008; greater awareness of the Company's products by
end users and physicians resulting from marketing investments in 2007 and 2006;
growing market penetration; and increased rental revenue from the greater number
of Zynex products placed in use during prior periods. The claim mentioned above
offset in part the increase.  Net rental revenue was also
significantly impacted by increased reserves as mentioned
above.


Gross Profit. Gross
profit for the three and nine months ended September 30, 2008, was $1,745,140
and $6,639,395 or 79% and 85 % of net sales and rental revenue. For three and
months ended September 30, 2008, this represents a decrease of $165,294 or 9%
and an increase $2,205,407 or 50% from the gross profit of $1,910,433 or 91% and
$4,433,988 or 90% of net revenue for the three and nine months ended September
30, 2007. The decrease in gross profit for the three months ended September 30,
2008 as compared with the same period in 2007 is from not recognizing revenue
from the rental of certain devices to insureds of Anthem during the third
quarter of 2008 and the provider settlement provision which reduced net sales
and rental revenue in the third quarter of 2008. The decrease in gross profit
percentage for the three and nine months ended September 30, 2008 as compared
with the same periods in 2007 is primarily from not recognizing revenue from the
rental of certain devices to insureds of Anthem during the third quarter of 2008
and the provider settlement provision which reduced net sales and rental revenue
in the third quarter of 2008. The decrease in gross profit percentage for the
three and nine months ended September 30, 2008 as compared with the same periods
in 2007 was also impacted by increased reserves as mentioned above.





The
Company does not plan to request many of Anthems insureds to return the devices
subject to the settlement before use is completed. Since most of the devices
were rentals and not sales, there was nominal effect on cost of rentals since
most of such cost was depreciation of the cost of the devices.




Selling, General and
Administrative. Selling, general and administrative expenses for the
three and nine months ended September 30, 2008 were $2,636,228 and $6,269,395 an
increase of $1,581,938 and $3,711,416 or 150% and 145%, compared to $1,054,290
and $2,557,979 for the same periods in 2007.  The increase was primarily
due to increases in sales representative commissions, payroll, public company
expenses, legal expenses, accounting services and office expenses.  The
increases were in part offset by lower marketing and promotion costs, and
temporary services.





The three
and nine months ended September 30, 2008 include expenses for commissions earned
by sales representatives in the third quarter on primarily rentals and sales of
certain devices to the insureds of Anthem which the Company will not bill to
Anthem. The Company decided that the settlement with Anthem should not affect
the compensation of its sales representatives.





Interest and other income or
expense.  Interest and other income or expense for the three and
nine months ended September 30, 2008 were $2,331 of expense and $2,302 of
income, compared to $14,679 of expense and $235,315 of expense for the same
periods in 2007. The decrease in interest expense resulted primarily from the
Company's repayment in 2007 of the note issued to Ascendiant Capital in
June of 2007, and the Company’s repayment of the loans payable to Silicon Valley
Bank in February 2008. The Company also recorded other income of $27,201 in the
quarter ended June 30, 2008 resulting from the disposal of leased equipment
which had been treated as a capital lease.


Income tax
expense.  We reported expenses for income taxes in the amount
of $220,000 for nine months ended September 30, 2008 compared to $443,000 of
expense for the same period in 2007.  The decrease is primarily due to
our having lower income before taxes of $372,301 for the nine months ended
September 30, 2008 compared to income before taxes of $1,640,694 for the same
period in 2007.







-
39 -





The
following is the unaudited, restated statement of operations for the 3 months
ended September 30, 2008:





UnauditedFor
      the 3 months ended:30-Sep-08
                                              
                                              
                                              adjustment
                                              
                                              
                                              30-Sep-08
                                              
                                              
                                              30-Sep-07restated
                                              
                                              
                                              
                                              
                                              
                                              as
      filedNet
      rental revenue
                                              
                                              $
                                              2,164,827
                                              
                                              
                                              
                                              (880,048
                                              )
                                              
                                              $
                                              3,044,875
                                              
                                              
                                              $
                                              1,357,864Net
      sales revenue
                                              
                                              
                                              1,043,505
                                              
                                              
                                              
                                              (424,208
                                              )
                                              
                                              
                                              1,467,713
                                              
                                              
                                              
                                              746,582Provider
      Settlement (see Note 12)
                                              
                                              
                                              (1,009,594
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              (1,009,594
                                              )
                                              
                                              
                                              -Net
      rental and sales revenue
                                              
                                              
                                              2,198,738
                                              
                                              
                                              
                                              (1,304,256
                                              )
                                              
                                              
                                              3,502,994
                                              
                                              
                                              
                                              2,104,446Cost
      of rentals
                                              
                                              
                                              215,029
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              215,029
                                              
                                              
                                              
                                              72,518Cost
      of sales
                                              
                                              
                                              238,569
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              238,569
                                              
                                              
                                              
                                              121,494Cost
      of rentals and sales
                                              
                                              
                                              453,598
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              453,598
                                              
                                              
                                              
                                              194,012Gross
      profit
                                              
                                              
                                              1,745,140
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              3,049,396
                                              
                                              
                                              
                                              1,910,434Selling,
      general and administrative
                                              
                                              
                                              2,636,228
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              2,636,228
                                              
                                              
                                              
                                              1,054,290Income
      from operations
                                              
                                              
                                              (891,088
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              413,168
                                              
                                              
                                              
                                              856,144Other
      income (expense):Interest
      income
                                              
                                              
                                              4,863
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              4,863
                                              
                                              
                                              
                                              -Interest
      expense
                                              
                                              
                                              (6,965
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              (6,965
                                              )
                                              
                                              
                                              (14,679
                                              )(Loss)
      gain on disposal of equipment
                                              
                                              
                                              (229
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              (229
                                              )
                                              
                                              
                                              -(893,419
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              410,837
                                              
                                              
                                              
                                              841,465Income
      tax expense
                                              
                                              
                                              (527,000
                                              )
                                              
                                              
                                              (732,000
                                              )
                                              
                                              
                                              205,000
                                              
                                              
                                              
                                              227,000Net
      income
                                              
                                              $
                                              (366,419
                                              )
                                              
                                              
                                              
                                              
                                              
                                              $
                                              205,837
                                              
                                              
                                              $
                                              614,465Net
      income per common andcommon
      equivalent share:Basic
                                              
                                              $
                                              (0.01
                                              )
                                              
                                              
                                              
                                              
                                              
                                              $
                                              0.01
                                              
                                              
                                              $
                                              0.02Diluted
                                              
                                              $
                                              (0.01
                                              )
                                              
                                              
                                              
                                              
                                              
                                              $
                                              0.01
                                              
                                              
                                              $
                                              0.02Weighted
      average number ofshares
      outstandingBasic
                                              
                                              
                                              29,311,220
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              29,311,220
                                              
                                              
                                              
                                              26,807,712Diluted
                                              
                                              
                                              31,666,011
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              31,666,011
                                              
                                              
                                              
                                              29,332,352











-
40 -





The
following is the unaudited, restated statement of operations for the 9 months
ended September 30, 2008:





UnauditedFor
      the 9 months ended:30-Sep-08
                                              
                                              
                                              adjustment
                                              
                                              
                                              30-Sep-08
                                              
                                              
                                              30-Sep-07restated
                                              
                                              
                                              
                                              
                                              
                                              as
      filed
                                              
                                              
                                              as
      filedNet
      rental revenue
                                              
                                              $
                                              6,057,794
                                              
                                              
                                              
                                              (3,064,623
                                              )
                                              
                                              $
                                              9,122,417
                                              
                                              
                                              $
                                              3,125,990Net
      sales revenue
                                              
                                              
                                              2,779,719
                                              
                                              
                                              
                                              (1,399,116
                                              )
                                              
                                              
                                              4,178,835
                                              
                                              
                                              
                                              1,820,394Provider
      Settlement (see Note 12)
                                              
                                              
                                              (1,009,594
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              (1,009,594
                                              )
                                              
                                              
                                              -Net
      rental and sales revenue
                                              
                                              
                                              7,827,919
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              12,291,658
                                              
                                              
                                              
                                              4,946,384Cost
      of rentals
                                              
                                              
                                              431,257
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              431,257
                                              
                                              
                                              
                                              166,321Cost
      of sales
                                              
                                              
                                              757,267
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              757,267
                                              
                                              
                                              
                                              346,075Cost
      of rentals and sales
                                              
                                              
                                              1,188,524
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              1,188,524
                                              
                                              
                                              
                                              512,396Gross
      profit
                                              
                                              
                                              6,639,395
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              11,103,134
                                              
                                              
                                              
                                              4,433,988Selling,
      general and administrative
                                              
                                              
                                              6,269,396
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              6,269,396
                                              
                                              
                                              
                                              2,557,979Income
      from operations
                                              
                                              
                                              369,999
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              4,833,738
                                              
                                              
                                              
                                              1,876,009Other
      income (expense):Interest
      income
                                              
                                              
                                              5,934
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              5,934
                                              
                                              
                                              
                                              -Interest
      expense
                                              
                                              
                                              (30,604
                                              )
                                              
                                              
                                              
                                              
                                              
                                              
                                              (30,604
                                              )
                                              
                                              
                                              (235,315
                                              )(Loss)
      gain on disposal of equipment
                                              
                                              
                                              26,972
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              26,972
                                              
                                              
                                              
                                              -372,301
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              4,836,040
                                              
                                              
                                              
                                              1,640,694Income
      tax expense
                                              
                                              
                                              220,000
                                              
                                              
                                              
                                              (1,365,000
                                              )
                                              
                                              
                                              1,585,000
                                              
                                              
                                              
                                              443,000Net
      income
                                              
                                              $
                                              152,301
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              3,251,040
                                              
                                              
                                              $
                                              1,197,694Net
      income per common andcommon
      equivalent share:Basic
                                              
                                              $
                                              0.01
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              0.11
                                              
                                              
                                              $
                                              0.05Diluted
                                              
                                              $
                                              0.00
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              0.11
                                              
                                              
                                              $
                                              0.04Weighted
      average number ofshares
      outstandingBasic
                                              
                                              
                                              28,722,456
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              28,722,456
                                              
                                              
                                              
                                              26,518,714Diluted
                                              
                                              
                                              30,576,626
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              30,576,626
                                              
                                              
                                              
                                              28,588,545











-
41 -





The
following is the unaudited, restated balance sheet as of September 30,
2008:





unauditedAs
      of
                
                
                As
      of30-Sep-08
                
                
                30-Sep-08restated
                
                
                as
      filedASSETSCurrent
      Assets:Cash
      and cash equivalents
                
                $
                -
                
                
                $
                -Accounts
      receivable, net of allowance for providerdiscounts
      and collectibility
                
                
                4,969,662
                
                
                
                9,433,401Inventory
                
                
                2,074,255
                
                
                
                2,074,255Deferred
      financing fees
                
                
                17,500
                
                
                
                17,500Prepaid
      expenses
                
                
                52,038
                
                
                
                52,038Deferred
      tax asset
                
                
                395,000
                
                
                
                395,000Other
      current assets
                
                
                66,411
                
                
                
                66,411Total
      current assets
                
                
                7,574,866
                
                
                
                12,038,605Property
      and equipment, less accumulateddepreciation
                
                
                1,523,402
                
                
                
                1,523,402Deferred
      financing fees
                
                
                56,286
                
                
                
                56,286$
                9,154,554
                
                
                $
                13,618,293LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Bank
      overdraft
                
                $
                99,136
                
                
                $
                99,136Notes
      payable
                
                
                437,306
                
                
                
                437,306Loan
      from stockholder
                
                
                51,514
                
                
                
                51,514Capital
      lease
                
                
                -
                
                
                
                -Accounts
      payable
                
                
                1,029,449
                
                
                
                1,029,449Income
      taxes payable
                
                
                868,000
                
                
                
                2,233,000Accrued
      payroll and payroll taxes
                
                
                475,754
                
                
                
                475,754Other
      accrued liabilities
                
                
                1,562,812
                
                
                
                1,562,812Total
      current liabilities
                
                
                4,523,971
                
                
                
                5,888,971Loan
      from stockholder, less current maturities
                
                
                -
                
                
                
                -Notes
      payable, less current maturities
                
                
                1,386
                
                
                
                1,386Capital
      lease, less current maturities
                
                
                -
                
                
                
                -Long-term
      deferred tax liability
                
                
                37,000
                
                
                
                37,000Total
      liabilities
                
                
                4,562,357
                
                
                
                5,927,357Stockholders'
      Equity:Preferred
      Stock; $.001 par value, 10,000,000 sharesauthorized,
      no shares issued or outstanding
                
                
                -
                
                
                
                -Common
      Stock, $.001 par value, 100,000,000 sharesauthorized.
                
                
                29,513
                
                
                
                29,513Paid-in
      capital
                
                
                3,453,749
                
                
                
                3,453,749Retained
      earnings
                
                
                1,108,935
                
                
                
                4,207,674Total
      stockholders' equity
                
                
                4,592,197
                
                
                
                7,690,936$
                9,154,554
                
                
                $
                13,618,293








-
42 -





The
following is the unaudited, restated statement of cash flows for the 9 months
ended September 30, 2008:





UnauditedNine
      Months Ended:30-Sep-08
                              
                              
                              30-Sep-08restated
                              
                              
                              as
      filedCash
      flows from operating activities:Net
      income
                              
                              $
                              152,301
                              
                              
                              $
                              3,251,040Adjustments
      to reconcile net income to net cash provided byoperating
      activities:Depreciation
                              
                              
                              262,983
                              
                              
                              
                              262,983Provision
      for losses in accounts receivable (uncollectability)
                              
                              
                              491,739
                              
                              
                              
                              1,169,446Provision
      for provider discounts
                              
                              
                              5,981,030
                              
                              
                              
                              5,303,323Amortization
      of deferred consulting and financing fees
                              
                              
                              5,525
                              
                              
                              
                              5,525Issuance
      of common stock and warrants for services,interest,
      loan fees and employee incentive
                              
                              
                              66,370
                              
                              
                              
                              66,370Provision
      for obsolete inventory
                              
                              
                              114,000
                              
                              
                              
                              114,000Amortization
      of discount on note payable
                              
                              
                              -
                              
                              
                              
                              -Amortization
      of beneficial conversion feature
                              
                              
                              -
                              
                              
                              
                              -Gain
      on disposal of equipment
                              
                              
                              (21,975
                              )
                              
                              
                              (21,975
                              )Employee
      stock based compensation expense
                              
                              
                              60,823
                              
                              
                              
                              60,823Deferred
      tax benefit
                              
                              
                              (238,000
                              )
                              
                              
                              (238,000
                              )Changes
      in operating assets and liabilities:Accounts
      receivable
                              
                              
                              (6,966,499
                              )
                              
                              
                              (11,430,238
                              )Inventory
                              
                              
                              (1,250,561
                              )
                              
                              
                              (1,250,561
                              )Deferred
      financing fees, current
                              
                              
                              (17,500
                              )
                              
                              
                              (17,500
                              )Prepaid
      expenses
                              
                              
                              (17,243
                              )
                              
                              
                              (17,243
                              )Deferred
      financing fees, non-current
                              
                              
                              (35,000
                              )
                              
                              
                              (35,000
                              )Other
      current assets
                              
                              
                              (18,696
                              )
                              
                              
                              (18,696
                              )Deposits
      and other assets
                              
                              
                              -
                              
                              
                              
                              -Accounts
      payable
                              
                              
                              212,020
                              
                              
                              
                              212,020Accrued
      liabilities
                              
                              
                              1,325,922
                              
                              
                              
                              1,325,922Income
      taxes payable
                              
                              
                              (42,000
                              )
                              
                              
                              1,323,000Net
      cash provided by operating activities
                              
                              
                              65,239
                              
                              
                              
                              65,239Cash
      flows from investing activities:Proceeds
      from disposal of equipment
                              
                              
                              47,000
                              
                              
                              
                              47,000Purchases
      of equipment
                              
                              
                              (879,188
                              )
                              
                              
                              (879,188
                              )Net
      cash used in investing activities
                              
                              
                              (832,188
                              )
                              
                              
                              (832,188
                              )Cash
      flows from financing activities:Increase
      in bank overdraft
                              
                              
                              9,789
                              
                              
                              
                              9,789Payments
      on notes payable and capital lease
                              
                              
                              (281,053
                              )
                              
                              
                              (281,053
                              )Proceeds
      from loans from stockholder
                              
                              
                              6,935
                              
                              
                              
                              6,935Proceeds
      from loans and capital lease
                              
                              
                              430,318
                              
                              
                              
                              430,318Repayments
      of loans from stockholder
                              
                              
                              (94,203
                              )
                              
                              
                              (94,203
                              )Issuance
      of common stock for cash, net
                              
                              
                              695,163
                              
                              
                              
                              695,163Net
      cash (used in) provided by financing activities
                              
                              
                              766,949
                              
                              
                              
                              766,949Net
      (decrease) increase in cash and cash equivalents
                              
                              
                              -
                              
                              
                              
                              -Cash
      and cash equivalents at beginning of period
                              
                              
                              -
                              
                              
                              
                              -Cash
      and cash equivalents at end of period
                              
                              $
                              -
                              
                              
                              $
                              -Supplemental
      cash flow information:Interest
      paid
                              
                              $
                              30,604
                              
                              
                              $
                              30,604Income
      taxes paid
                              
                              $
                              500,000
                              
                              
                              $
                              500,000







-
43 -





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.








ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
consolidated financial statements, the notes thereto, and the report thereon of
GHP Horwath P.C. dated April 14, 2009, are filed as part of this report starting
on page F-1 below.







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





None.






ITEM
9A(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,
2008.  Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, because of the material weaknesses in internal
control over financial reporting described below, the Company’s disclosure
controls and procedures were not effective as of December 31, 2008.








Management’s Report on
Internal Control over Financial Reporting





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





Based on
this evaluation, management has concluded that our internal control over
financial reporting was not effective as of December 31, 2008. Our principal
Chief Executive Officer and Chief Financial Officer concluded that the Company
has a material weakness in its ability to produce financial statements free from
material misstatements. Management reported a material weakness resulting from
the combination of the following significant deficiencies:





·
            Lack
      of timely write off of uncollectible accountsthat result in an
      overstatement of our accounts receivable and net
  revenue.





·
            A
      method for calculating the allowance for provider discounts and
      collectability that was not reactive to rapid changes and was dependent
      upon write-offs which were not done timely. Application of an allowance
      for provider discounts and collectability throughout the year that is
      dependent on annual calculations.




·
            Application
      of inventory pricing that does not reflect additions to purchased
      items.




As a
result of the above material weakness, our management concluded that, as of
December 31, 2008, our internal controls over financial reporting are not
effective.





-
44 -





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





Changes in Internal Control
Over Financial Reporting





There
were no changes in internal control over financial reporting that occurred
during the fourth quarter of 2008 that have materially affected, or are
reasonably likely to affect, the Company’s internal control over financial
reporting, except as disclosed above.





In order
to remediate the material weakness described above, our management has begun to
implement the following changes to our internal control over financial reporting
during the first quarter of 2009:





·
            We
      have accelerated the process of writing off uncollectible
      accounts,


·
            We
      are developing a new model for analyzing the collectability of our
      accounts receivable and one that can be updated on a timely basis
      throughout the year;


·
            We
      have updated our inventory pricing to reflect the additions to purchased
      items.





We
applied these changes to our work in connection with the December 31, 2008
financial statements included with this report.





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








ITEM
9B. OTHER INFORMATION.





None.







PART
III




ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The
following table provides information concerning each of the Company's directors
and executive officers at March 27, 2009:




DirectorName
              Age
              Since
              Position or OfficeThomas
      Sandgaard
              50
              1996
              President,
      Chief Executive Officer, Director and ChairmanFritz
      G. Allison
              49
              N/A
              Chief
      Financial OfficerTaylor
      Simonton
              64
              2008
              Director,
      Chair of Audit CommitteeMary
      Beth Vitale
              55
              2008
              Director,
      Member of Audit Committee




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.








-
45 -





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 was a Certified Public
Accountant.





Taylor
Simonton was elected to the Board in October 2008.  Mr. Simonton spent
35 years at Pricewaterhouse Coopers LLP, including 23 years as an audit partner
in the firm’s Accounting and Business Advisory Services practice before retiring
in 2001. While serving in the PricewaterhouseCoopers National office from 1998
to 2001, Mr. Simonton was a member of the Risk & Quality Group that handled
all auditing and accounting standards, SEC, corporate governance, risk
management and quality matters for the firm. Prior to that, Mr. Simonton
participated in the firm’s Partner International Program for three years, during
which time he assisted Colombian companies in-country with capital-raising
activities in the United States, consulted to major companies and coordinated
IPO assistance and advised on due diligence and SEC regulatory matters. Until
February 2007, Mr. Simonton served on the Board of Directors of Fischer Imaging
Corporation, a public company that designed, manufactured and marketed specialty
medical imaging systems, and served as its Audit Committee chair. Since October
2005, Mr. Simonton has been the Chair of the Audit Committee of Red Robin
Gourmet Burgers, Inc., a public company that is a casual dining restaurant chain
focused on serving high quality gourmet burgers in a family-friendly atmosphere.
Since June 2008, he has been the Lead Director and Chair of the Audit Committee
of Keating Capital, Inc., a publicly reporting closed-end investment
fund.  Mr. Simonton is also currently the president of the Colorado
chapter of the National Association of Corporate Directors.





Mary Beth
Vitale was elected to the Board in October 2008.  Ms. Vitale is a
co-founder of Pellera, a strategic communications and business development firm
started in 2001. Ms. Vitale is a general management executive with 25 years
experience in the telecommunications and consumer products industries.
Previously, she had served as President, CEO and Chairman of the Board of
WestwindMedia.com, President and COO of RMI.NET, and President-western states
for AT&T. She was also a Commissioner on former Colorado Governor Bill
Owens' Commission for Science and Technology. Ms. Vitale previously served on
the Board of Intrado, Inc., a publicly-traded technology company, from 1999 to
2004, sitting on the Audit, Compensation and Corporate Governance committees,
and on the Board of RMI.Net, a publicly traded national e-business and
convergent communications company from 1997 to 2000, sitting on the Audit
Committee. Since January 2005, Ms Vitale has been a director of CoBiz Financial
Inc., a public company which is a diversified financial holding company
headquartered in Denver, Colorado and includes among its businesses a
full-service business banking institution serving Colorado and Arizona. Ms.
Vitale has been Chair of the Audit Committee of CoBiz Financial since May, 2006.
Ms. Vitale is also currently the treasurer of the


Colorado
chapter of the National Association of Corporate Directors (NACD).





Mr.
Sandgaard is not an independent director as defined in rules of the NASDAQ Stock
Market.  Mr. Simonton and Ms. Vitale are independent directors as
defined in rules of the NASDAQ Stock Market.  We have an Audit
Committee consisting of Mr. Simonton, Chair, and Ms. Vitale.  The
Board of Directors has designated Mr. Simonton and Ms. Vitale each as an “audit
committee financial expert” within the meaning of the applicable SEC
rules.





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 adopted a written code of ethics for each employee, including its
Chief Executive Officer and Chief Financial Officer.








-
46 -





ITEM
11. 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, 2008 and December
31, 2007:





Name
      and Principal Position
                            
                            Year
                            Salary
                              ($)
                            Bonus
                              ($)
                            Stock
                              Awards
                              ($)
                            Option
                              Awards
                              ($)
      (3)
                            Non-Equity
      Incentive Plan Compensation
                              ($)
                            Change
      in
                              Pension
                              Value
      and Nonqualified Deferred Compensation Earnings
                              ($)
                            All
      Other Compensation
                              ($)
                            Total
                              ($)Thomas
      Sandgaard
                            
                            2008
                            144,000
                            175,000
                            0
                            0
                            0
                            0
                            44,296(1)
                            363,296Chief
      Executive Officer
                            
                            2007
                            144,000
                            150,000
                            0
                            0
                            0
                            0
                            51,414(1)
                            245,414Fritz
      G. Allison
                            
                            2008
                            132,000
                            0
                            0
                            6,435
                            0
                            0
                            4,667(2)
                            141,332Chief
      Financial
                            
                            2007
                            98,354
                            0
                            0
                            3,217
                            0
                            0
                            1,472(2)
                            103,033Officer


______________





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





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





(3)           The
Option Awards represents the dollar amount recognized for financial statement
reporting purposes with respect to 2008 and 2007 for stock options granted to
each of the named executive officers, in accordance with SFAS
123R.  Pursuant to SEC rules, the amounts shown exclude the impact of
estimated forfeitures related to service-based vesting
conditions.  These amounts reflect the Company’s accounting expense
for these awards and do not correspond to the actual value that may be
recognized by the executive officers





Employment
Agreements





Thomas
Sandgaard





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





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:





-
47 -








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





Fritz G.
Allison





The
Company has established the following compensation arrangements with Mr.
Allison, effective February 19, 2007: A base salary of $8,000 per month, before
taxes, for the first three months and $10,000 per month, before taxes,
thereafter; a 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 (vesting over four years) in the event (a) the
Company’s net revenue meets a revenue targetfor the 2007 year,(b)
the Company has a positive net income for the 2007 year, and (c) the Company
does not have any restatements of its financial statements during 2007 and for
any periods during 2007 or the year 2007 on or prior to the completion of the
audit of the 2007 financial statements. The target for 2007 was not met. Mr.
Allison also receives full health and dental insurance coverage through the
Company.





Effective
September 16, 2008 the Company modified the compensation arrangements with Mr.
Allison to the following: A base salary of $12,500 per month, before taxes and a
bonus payable in 2008 in the form of an option grant for an additional 5,000
shares in the event one of the Company’s 10-K and 10-Q reports is filed on or
before the due date and without extension. The target for 2008 was not
met.








Outstanding
Equity Awards at 2008 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, 2008:








-
48 -





Option
Awards:




Number
      of
                Securities
                Underlying
                Unexercised
                Options
                (#)
              Number
      of
                Securities
                Underlying
                Unexercised
                Options
                (#)
              Equity
                Incentive
                Plan Awards:
                Number
      of
                Securities
                Underlying
                Unexercised
                Unearned
                Options
              Option
                Exercise
              Option
                ExpirationName
              Exercisable
              Unexercisable
              (#)
              Price
              DateThomas
      Sandgaard
              --
              --
              --
              --
              --Fritz
      G. Allison (1)
              25,000
              75,000
              --
              $0.45
              February
      17, 2017Fritz
      G. Allison (1)
              500
              1,500
              --
              $0.85
              June
      30, 2017Fritz
      G. Allison (1)
              500
              1,500
              --
              $1.32
              September
      30, 2017Fritz
      G. Allison (1)
              500
              1,500
              --
              $1.28
              December
      31, 2017Fritz
      G. Allison (1)
              --
              2,000
              --
              $1.48
              March
      31, 2018Fritz
      G. Allison (1)
              --
              2,000
              --
              $1.70
              June
      30, 2018


____________




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





Director
Compensation





The
following table shows the annual and other compensation of the non-employee
directors at December 31, 2008 for services to the Company for
2008.





Director
      Compensation for 2008Name
                                    Fees
      Earned
                                      or
      Paid in Cash
                                      ($)
                                    Stock
                                      Awards
                                      ($)
      (1)
                                    Option
                                      Awards
                                      ($)
      (1)
                                    Non-Equity
                                      Incentive
      Plan
                                      Compensation
                                      ($)
                                    Non-Qualified
                                      Deferred
                                      Compensation
                                      Earnings
                                      ($)
                                    All
      Other
                                      Compensation
                                      ($)
                                    Total
                                      ($)Taylor
      Simonton
                                    8,000
                                    11,400(2)
                                    32,136(3)
                                    -
                                    -
                                    -
                                    51,536Mary
      Beth Vitale
                                    6,000
                                    7,600(2)
                                    32,136(3)
                                    -
                                    -
                                    -
                                    42,736








-
49 -







(1)
            Amounts
      shown in the columns “Stock Awards” and “Option Awards” reflect the dollar
      amount recognized for financial statement reporting purposes for the year
      ended December 31, 2008 with respect to stock awards and stock options, in
      accordance with SFAS 123R.  Pursuant to SEC rules, the amounts
      shown exclude the impact of estimated forfeitures related to service-based
      vesting conditions.  These amounts reflect the Company’s
      accounting expense for these awards and do not correspond to the actual
      value that may be recognized by the
directors.





(2)
            Mr.
      Simonton as Chair of the Audit Committee received $11,400 of shares of the
      Company for directors meetings held in 2008, and Ms. Vitale received
      $7,600 in shares of the Company for meetings during 2008.  These
      dollar amounts and the market value on the date that this form of
      compensation were finally agreed to (January 7, 2009) were used in
      determining the number of shares issued to the
  directors.





(3)
            The
      stock compensation for the non-employee directors included a sign-on bonus
      for each non-employee director of a fully vested option to purchase 12,000
      shares of the Company common stock at an exercise price equal to the fair
      market value on the date of grant ($5.10).  The options have a
      term of 10 years and were issued under the existing 2005 Stock Option Plan
      of the Company approved by
shareholders.





The
standard compensation for non-employee directors for 2009, as adopted by the
Board of Directors in January 2009, is:  (1) $1,000 cash ($1,500
in the case of the Chair of the Audit Committee) plus $5,000 ($7,500 in the case
of the Chair of the Audit Committee) of shares of Zynex common stock for each of
four quarterly Board meetings in person and for each of four quarterly Audit
Committee meetings in person, with these amounts being paid for both a quarterly
Audit Committee and a quarterly Board meeting held on or about the same day as
if they were one meeting (the number of shares of common stock resulting from
these dollar amounts is based upon the closing price of the common stock on the
date of the meeting); (2) $1,000 ($1,500 in the case of the Chair of the
Audit Committee) cash for each other Board meeting or Audit Committee meeting in
person, with these amounts being paid for both an Audit Committee and a Board
meeting held on or about the same day as if they were one meeting; and
(3) $500 cash for any telephonic Board meeting or telephonic meeting of the
Audit Committee.





The
following table summarizes information with respect to each non-employee
director’s outstanding stock options at December 31, 2008:





Outstanding Options at
December 31,
2008


Name
            
            Number
      of Securities
              Underlying
      Unexercised Options
              #
              Exercisable
            
            Number
      of Securities
              Underlying
      Unexercised Options
              #
              Unexercisable
            
            Option
              Exercise
              Price
              $
            
            Option
              Expiration
              DateTaylor Simonton
            
            12,000
            
            -
            
            5.10
            
            October
      5, 2018Mary Beth Vitale
            
            12,000
            
            -
            
            5.10
            
            October
      5, 2018











-
50 -








ITEM
12. 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 27, 2009 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(1)
                                  ClassTaylor
      Simonton
                                  Common
                                  12,000(3)
                                  --Mary
      Beth Vitale
                                  Common
                                  12,000(3)
                                  --Thomas
      Sandgaard
                                    8022
      Southpark Cir. Suite 100
                                    Littleton,
      CO  80120
                                  Common
                                  18,245,500
                                  61.0%Fritz
      Allison
                                    8022
      Southpark Cir. Suite 100
                                    Littleton,
      CO  80120
                                  Common
                                  52,000(2)
                                  --Other 5% Beneficial OwnersIntana
      Management, LLC(4)
                                  Common
                                  2,984,552(4)
                                  10.0%All
      Directors andNamed
      Executive OfficersAs
      a Group
                                  Common
                                  18,321,500
                                  61.0%





_____________





(1) 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 20, 2009. 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.





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





(3) These
shares are subject to stock options held by the director.





(4) Based
on Form 13G amendment filed jointly by Intana Management, LLC and
Intana Capital Master Fund Ltd. on February 5, 2009, indicating
shared voting and dispositive power by Intana Management of
2,984,852 shares and shared voting and dispositive power by
Intana Capital Master Fund Ltd. Management of 2,725,869 shares.





-
51 -





EQUITY
COMPENSATION PLAN INFORMATION





The
following table provides information as of December 31, 2008 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)
              732,500
              
              $1.15
              
              2,173,500





(1)           All
of these listed securities are available for issuance under the Zynex, 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.





(3)            See
“Director Compensation” above for information on a sign-on bonus in the form of
stock options for the non-employee directors.





For
information on the options held by Mr. Allison, see "Employment Agreements –
Fritz G. Allison" in Item 10 above.








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





The
Company has entered into loans made to the Company by Thomas
Sandgaard. Interest payable on these loans was a total of $7,775 for 2008
and a total of $7,617 for 2007, and the Company has paid this interest to Mr.
Sandgaard. For a full description and the terms of these notes please see Note-4
“Notes Payable and Leases” in the notes to the Consolidated Financial Statements
below in this Report.





Loans of
the Company with Silicon Valley Bank in the amount of $400,000 and $240,000,
made in 2005 and 2006, as described above, were guaranteed by Zynex Chairman,
President and Chief Executive Officer, Thomas Sandgaard, and were collateralized
by a first perfected security interest in accounts, inventory, chattel paper,
equipment, fixtures, general intangibles, including intellectual property and
other assets of the Company. Mr. Sandgaard did not receive any compensation for
this guarantee.  The Company repaid these loans in 2008.





-
52 -





The line
of credit with Marquette Healthcare Finance with a facility of up to $3,000,000,
made in 2008, as described above required a Validity Guaranty and a
Subordination Agreement from Mr. Sandgaard. Mr. Sandgaard did not receive any
compensation for this Validity Guarantee or Subordination
Agreement.  See Note __ to the Consolidated Financial Statements in
this Report for information on the Validity Guaranty and Subordination
Agreement.





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





We employ
Mr. Sandgaard’s wife in a full time position as Billing Manager.  In
addition, we employ Mr. Sandgaard’s two children in part time
positions.  The following table sets forth their compensation for
services rendered in 2008 and 2007:


Name
      and Principal Position
                                  
                                  Year
                                  Salary
                                    ($)
                                  Bonus
                                    ($)
                                  Stock
                                    Awards
                                    ($)
                                  Option
                                    Awards
                                    ($)
      (1)
                                  Non-Equity
      Incentive Plan Compensation
                                    ($)
                                  Change
      in
                                    Pension
                                    Value
      and Nonqualified Deferred Compensation Earnings
                                    ($)
                                  All
      Other Compensation
                                    ($)
                                  Total
                                    ($)Birgitte
      Sandgaard
                                  
                                  2008
                                  120,000
                                  0
                                  0
                                  **
                                  0
                                  0
                                  0
                                  120,000Billing
      Manager
                                  
                                  2007
                                  66,000
                                  0
                                  0
                                  **
                                  0
                                  0
                                  0
                                  66,000Joachim
      Sandgaard
                                  
                                  2008
                                  21,763
                                  0
                                  0
                                  **
                                  0
                                  0
                                  0
                                  21,763Information
                                    Services
                                  
                                  2007
                                  33,791
                                  0
                                  0
                                  **
                                  0
                                  0
                                  0
                                  33,791Martin
      Sandgaard
                                  
                                  2008
                                  4,298
                                  0
                                  0
                                  **
                                  0
                                  0
                                  0
                                  4,298Payment
                                    Application
                                    Specialist
                                  
                                  2007
                                  10,082
                                  0
                                  0
                                  **
                                  0
                                  0
                                  0
                                  10,147


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





**Amounts
are less than $1,000.





-
53 -





ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES





The
following presents fees for professional services rendered by the Company’s
independent registered public accounting firm (GHP Horwath, P.C.) for each of
the years ended December 31, 2008 and December 31, 2007.


GHP
      Horwath, P.C,2008
                                                  
                                                  
                                                  2007Audit
      Fees, including reviews of 10-Q/
                                                  
                                                  $
                                                  110,000
                                                  
                                                  
                                                  $
                                                  80,00010QSB
      and SB-2 and S-1 registrationstatementsAudit
      Related Fees
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Tax
      Fees
                                                  
                                                  
                                                  11,000
                                                  
                                                  
                                                  
                                                  12,000All
      Other Fees
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Total
                                                  
                                                  $
                                                  121,000
                                                  
                                                  
                                                  $
                                                  92,000


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





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





The Audit
Committee’s policy is to pre-approve all audit and non-audit services provided
by the independent registered public accounting firm.  Pre-approval
will generally be provided for up to one year, and any pre-approval will be
detailed as to the particular service or category of services.





GHP
Horwath served as the Company's independent registered public accounting firm
for the fiscal years ended December 31, 2008 and 2007 and has served as such
auditors since December 2005.











PART
IV





ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES





Consolidated
Financial Statements:





Report of
Independent Registered Public Accounting Firm


Consolidated
Balance Sheets as of December 31, 2008 and 2007


Consolidated
Statements of Operations for the years ended December 31, 2008 and
2007


Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and
2007


Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2008
and 2007


Notes to
Consolidated Financial Statements








-
54 -





Exhibits:




Exhibit
                                                                                  Number
                                                                                Description3.1
                                                                                Amended
      and Restated Articles of Incorporation of Zynex, Inc., incorporated by
      reference to Exhibit10.1
      of the Current Report on Form 8-K filed with the Commission on October 7,
      2008.3.2
                                                                                Amended
      and Restated Bylaws of Zynex, Inc., incorporated by reference to Exhibit
      10.2 ofthe
      Company’s Current Report on Form 8-K filed with the Commission on October
      7, 2008.4.1
                                                                                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 ofthe
      Company’s Current Report on Form 8-K,filed
      February 20, 2004.








-
55 -







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 of
  theCompany's
      Annual report on Form 10-K filed 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 the Company'sAnnual
      report on Form 10-K filed April 15, 2005.10.5
                                                                                Sublease,
      dated October 31, 2007 between the Zynex MedicalHoldings,
      Inc., and Jones/NCTI, Inc., incorporated by referenceto
      Exhibit 10.1 of the Company’s Current Report on Form 8-K
    filedNovember
      16, 2007.10.6
                                                                                2005
      Stock Option Plan , incorporated by reference to
Exhibit10.5
      of the Company's Annual report on Form 10-K filedApril
      15, 2005.10.7
                                                                                Compensation
      Agreement dated as of April 18, 2005 betweenZynex
      Medical Holdings, Inc. and Peter J. Leveton,incorporated
      by reference to Exhibit 10.1 of the Company’sQuarterly
      Report on Form 10-Q, filed August 12, 200510.8
                                                                                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
      the Company's Current Report on Form 8-K, filedOctober
      7, 2006.10.9
                                                                                Warrant
      to Purchase Stock from Zynex Medical Holdings, Inc. toSilicon
      Valley Bank, incorporated by reference to Exhibit10.2
      of the Company's Current Report on Form 8-K, filedOctober
      7, 2006.10.10
                                                                                Unconditional
      Guaranty by Thomas Sandgaard for Silicon ValleyBank,
      dated September 29, 2005, incorporated by reference toExhibit
      10.3 of the Company's Current Report on Form 8-K, filedOctober
      7, 2006.10.11
                                                                                Default
      Waiver and First Amendment to Loan and SecurityAgreement,
      dated March 6, 2006, incorporated by reference toExhibit
      10.1 of the Company's Current Report on Form 8-K, filedMarch
      20, 2006.10.12
                                                                                Unconditional
      Guaranty by Thomas Sandgaard for Silicon ValleyBank,
      dated March 6, 2006, incorporated by reference toExhibit
      10.2 of the Company's Current Report on Form 8-K, filedMarch
      20,
2006.





-
56 -








Exhibit
                                                                                                                                      Number
                                                                                                                                    Description10.13
                                                                                                                                    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, 200610.14
                                                                                                                                    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, 2006.10.15
                                                                                                                                    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, 2006.10.16
                                                                                                                                    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, 2006.10.17
                                                                                                                                    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, 2006.10.18
                                                                                                                                    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, 2006.10.19
                                                                                                                                    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,
      2006.10.20
                                                                                                                                    Separation
      Agreement dated February 16, 2007 between Peter J.
  Levetonand
      Zynex Medical Holdings, Inc., incorporated by reference to Exhibit
      10.19
                                                                                                                                      of
      the Company’s Annual report on Form 10-KSB filed April 17,
      2007.10.21
                                                                                                                                    Letter
      Agreement, dated May 3, 2007 with Ascendiant Capital Group,
      LLC,
                                                                                                                                      incorporated
      by reference to Exhibit 10.1 of the Company’s Quarterly
report
                                                                                                                                      on
      Form 10-QSB filed May 18, 2007.10.22
                                                                                                                                    Promissory
      Note dated May 16, 2007 by Zynex Medical Holdings, Inc.,
                                                                                                                                      to
      Thomas Sandgaard, incorporated by reference to Exhibit 10.1 of the
      Company’s
                                                                                                                                      Current
      Report on Form 8-K filed June 29, 2007.10.23
                                                                                                                                    Promissory
      Note dated June 15, 2007 by Zynex Medical Holdings, Inc.,
                                                                                                                                      to
      Thomas Sandgaard, incorporated by reference to Exhibit 10.2 of the
      Company’s
                                                                                                                                      Current
      Report on Form 8-K filed June 29, 2007.10.24
                                                                                                                                    Promissory
      Note dated September 30, 2007 by Zynex Medical Holdings,
Inc.,
                                                                                                                                      to
      Thomas Sandgaard, incorporated by reference to Exhibit 10.1 of the
      Company’s
                                                                                                                                      Quarterly
      report on Form 10-QSB filed November 19, 200710.25
                                                                                                                                    Form
      of Indemnification Agreement for directors and executive officers (October
      2008),incorporated
      by reference to Exhibit 10.3 of the Company’s Current Report on Form
      8-Kfiled
      with the Commission on October 7,
2008.






-
57 -





Exhibit
                                        Number
                                      Description10.26
                                      Loan
      and Security Agreement, dated September 22, 2008, among Zynex, Inc., Zynex
      Medical, Inc., and Marquette Business Credit, Inc., d/b/a Marquette
      Healthcare Finance and Schedule A thereto, incorporated by reference to
      Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the
      Commission on September 24, 2008.10.27
                                      Promissory
      Note, dated September 22, 2008, of Zynex, Inc. and Zynex Medical, Inc.,
      incorporated by reference to Exhibit 10.2 of the Company’s Current Report
      on Form 8-K filed with the Commission on September 24,
    2008.10.28
                                      Pledge
      Agreement, dated September 22, 2008, between Zynex, Inc. and Marquette
      Business Credit, Inc., d/b/a Marquette Healthcare Finance, incorporated by
      reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K
      filed with the Commission on September 24, 2008.10.29
                                      Validity
      Guaranty, dated September 22, 2008, between Thomas Sandgaard and Marquette
      Business Credit, Inc., d/b/a Marquette Healthcare Finance, incorporated by
      reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K
      filed with the Commission on September 24, 2008.10.30
                                      Subordination
      Agreement, dated September 22, 2008, among Thomas Sandgaard, Zynex, Inc.,
      Zynex Medical, Inc., and Marquette Business Credit, Inc., d/b/a Marquette
      Healthcare Finance, incorporated by reference to Exhibit 10.5 of the
      Company’s Current Report on Form 8-K filed with the Commission on
      September 24, 2008.10.31
                                      Business
      Associate Agreement, dated September 22, 2008, among Zynex, Inc., Zynex
      Medical, Inc., and Marquette Business Credit, Inc., d/b/a Marquette
      Healthcare Finance, incorporated by reference to Exhibit 10.6 of the
      Company’s Current Report on Form 8-K filed with the Commission on
      September 24, 2008.10.33
                                      Letter
      Agreement dated April 7, 2009 with Marquette Healthcare
      Finance.14
                                      The
      Company’s Code of Conduct and Business Ethics, incorporated by reference
      to Exhibit 10.4 ofthe
      Company’s Current Report on Form 8-K filed with the Commission on October
      7, 2008.21
                                      List
      of Subsidiaries, incorporated by reference to Exhibit 21 of the Company’s
      Annual Report on Form 10-KSB, filed April 15, 2005.23
                                      Consent
      of Independent Registered Public Accounting Firm.24
                                      Power
      of Attorney.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.


-
58 -








SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.





ZYNEX,
      INC.Date: April 15,
      2009
              By:
              /s/
      Thomas SandgaardThomas
      SandgaardPresident,
      Chairman and Chief Executive
Officer




Date: April 15,
      2009
              By:
              /s/
      Fritz G. AllisonFritz
      G. Allison,
                Chief
      Financial Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Date
                Name and
      Title
                
                SignatureApril
      15, 2009
                Thomas
      Sandgaard
                )Director,
                )President
      and Chief
                )Executive
      Officer
                )
                /s/ Fritz G. Allison)
                Fritz
      G. Allison, for himselfApril
      15, 2009
                Fritz
      G. Allison,
                )
                and
      as Attorney-in-Fact for theChief
      Financial
                )
                named
      directors who togetherOfficer
                )
                constitute
      all of the members)
                of
      the Board of Directors andApril
      15, 2009
                Taylor
      Simonton,
                )
                for
      the named OfficerDirector
                ))April
      15, 2009
                Mary
      Beth Vitale,
                )Director
                )







-
59 -







______________________







Zynex,
Inc.


Consolidated
Financial Statements


December
31, 2008 and 2007




______________________























REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











Board of
Directors


Zynex,
Inc.








We have
audited the accompanying consolidated balance sheets of Zynex, Inc. and
subsidiary (the “Company”) as of December 31, 2008 and 2007 and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the years then ended. 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 the Company as of December
31, 2008 and 2007, and the results of their operations and their cash flows for
each of the years then ended, in conformity with accounting principles generally
accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, there is uncertainty that the Company will remain in
compliance with certain debt covenants throughout 2009, which would entitle the
lender to terminate the Company’s ability to borrow under its revolving line of
credit facility and accelerate the Company’s obligation to repay outstanding
borrowings. This condition raises substantial doubt about its ability to
continue as a going concern. Management’s plans concerning these matters are
also discussed in Note 1 to the financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





As
discussed in Note 13 to the consolidated financial statements, during the fourth
quarter of 2008, the Company corrected errors in its accounting for discounts
and allowances on accounts receivable and related revenue that occurred in the
first three quarters of 2008.








/s/ GHP Horwath,
P.C.


GHP
Horwath, P.C.





Denver,
Colorado


April 14,
2009





F
- 1





Zynex,
Inc.


Consolidated
Balance Sheets


December
      31,
                          
                          
                          December
      31,2008
                          
                          
                          2007ASSETSCurrent
      Assets:Accounts
      receivable, net
                          
                          $
                          5,614,996
                          
                          
                          $
                          4,475,932Inventory
                          
                          
                          2,209,600
                          
                          
                          
                          937,694Prepaid
      expenses
                          
                          
                          73,324
                          
                          
                          
                          34,795Deferred
      tax asset
                          
                          
                          648,000
                          
                          
                          
                          210,000Other
      current assets
                          
                          
                          70,032
                          
                          
                          
                          47,715Total
      current assets
                          
                          
                          8,615,952
                          
                          
                          
                          5,706,136Property
      and equipment, net
                          
                          
                          2,096,394
                          
                          
                          
                          932,222Deposits
      and deferred financing fees, net
                          
                          
                          71,650
                          
                          
                          
                          26,811$
                          10,783,996
                          
                          
                          $
                          6,665,169LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Bank
      overdraft
                          
                          $
                          112,825
                          
                          
                          $
                          89,347Notes
      payable and other obligations
                          
                          
                          1,818,059
                          
                          
                          
                          270,505Loans
      from stockholder
                          
                          
                          24,854
                          
                          
                          
                          118,451Accounts
      payable
                          
                          
                          1,037,205
                          
                          
                          
                          817,429Income
      taxes payable
                          
                          
                          670,000
                          
                          
                          
                          910,000Accrued
      payroll and payroll taxes
                          
                          
                          292,562
                          
                          
                          
                          213,935Other
      accrued liabilities
                          
                          
                          1,511,126
                          
                          
                          
                          498,709Total
      current liabilities
                          
                          
                          5,466,631
                          
                          
                          
                          2,918,376Loans
      from stockholder, less current maturities
                          
                          
                          -
                          
                          
                          
                          20,332Notes
      payable and other obligations, less current maturities
                          
                          
                          115,287
                          
                          
                          
                          18,921Deferred
      tax liability
                          
                          
                          428,000
                          
                          
                          
                          90,000Total
      liabilities
                          
                          
                          6,009,918
                          
                          
                          
                          3,047,629Stockholders'
      Equity:Preferred
      stock; $.001 par value, 10,000,000 shares authorized,no
      shares issued or outstanding
                          
                          
                          -
                          
                          
                          
                          -Common
      stock, $.001 par value, 100,000,000 shares authorized,29,871,041
      (2008) and 26,831,113 (2007) shares issued and outstanding
                          
                          
                          29,871
                          
                          
                          
                          26,831Paid-in
      capital
                          
                          
                          3,676,621
                          
                          
                          
                          2,634,075Retained
      earnings
                          
                          
                          1,067,586
                          
                          
                          
                          956,634Total
      stockholders' equity
                          
                          
                          4,774,078
                          
                          
                          
                          3,617,540$
                          10,783,996
                          
                          
                          $
                          6,665,169





See accompanying notes to consolidated financial
statements.






F
- 2





Zynex,
Inc.


Consolidated
Statements of Operations


Years
ended December 31,





2008
                                                  
                                                  
                                                  2007Net
      rental revenue
                                                  
                                                  $
                                                  7,938,323
                                                  
                                                  
                                                  $
                                                  5,341,588Net
      sales revenue
                                                  
                                                  
                                                  3,825,235
                                                  
                                                  
                                                  
                                                  2,706,664Net
      rental and sales revenue
                                                  
                                                  
                                                  11,763,558
                                                  
                                                  
                                                  
                                                  8,048,252Cost
      of rentals
                                                  
                                                  
                                                  736,957
                                                  
                                                  
                                                  
                                                  296,439Cost
      of sales
                                                  
                                                  
                                                  1,502,677
                                                  
                                                  
                                                  
                                                  546,650Cost
      of rentals and sales
                                                  
                                                  
                                                  2,239,634
                                                  
                                                  
                                                  
                                                  843,089Gross
      profit
                                                  
                                                  
                                                  9,523,924
                                                  
                                                  
                                                  
                                                  7,205,163Selling,
      general and administrative
                                                  
                                                  
                                                  9,214,748
                                                  
                                                  
                                                  
                                                  4,042,829Income
      from operations
                                                  
                                                  
                                                  309,176
                                                  
                                                  
                                                  
                                                  3,162,334Other
      income (expense):Interest
      income
                                                  
                                                  
                                                  424
                                                  
                                                  
                                                  
                                                  24Interest
      expense, including related partyof
      $7,775 (2008) and $7,617 (2007)
                                                  
                                                  
                                                  (65,620
                                                  )
                                                  
                                                  
                                                  (244,842
                                                  )Gain
      on disposal of equipment
                                                  
                                                  
                                                  26,972
                                                  
                                                  
                                                  
                                                  3,834(38,224
                                                  )
                                                  
                                                  
                                                  (240,984
                                                  )270,952
                                                  
                                                  
                                                  
                                                  2,921,350Income
      tax expense
                                                  
                                                  
                                                  160,000
                                                  
                                                  
                                                  
                                                  790,000Net
      income
                                                  
                                                  $
                                                  110,952
                                                  
                                                  
                                                  $
                                                  2,131,350Net
      income per share:Basic
                                                  
                                                  $
                                                  
                                                  *
                                                  
                                                  $
                                                  0.08Diluted
                                                  
                                                  $
                                                  
                                                  *
                                                  
                                                  $
                                                  0.07Weighted
      average number ofcommon
      shares outstanding:Basic
                                                  
                                                  
                                                  28,988,648
                                                  
                                                  
                                                  
                                                  26,595,967Diluted
                                                  
                                                  
                                                  30,623,924
                                                  
                                                  
                                                  
                                                  28,455,447*
      Less than $0.01 per share




See
accompanying notes to consolidated financial statements.







F
- 3





Zynex,
Inc.


Consolidated
Statements of Cash Flows


Years
Ended December 31,






2008
                          
                          
                          2007Cash
      flows from operating activities:Net
      income
                          
                          $
                          110,952
                          
                          
                          $
                          2,131,350Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
                          
                          
                          424,452
                          
                          
                          
                          153,442Provision
      for losses in accounts receivable (uncollectibility)
                          
                          
                          393,000
                          
                          
                          
                          -Provision
      for provider discounts
                          
                          
                          7,452,399
                          
                          
                          
                          4,801,724Amortization
      of deferred consulting and financing fees
                          
                          
                          12,039
                          
                          
                          
                          156,303Issuance
      of common stock and warrants for services,interest,
      loan fees and employee incentive
                          
                          
                          95,821
                          
                          
                          
                          68,537Provision
      for obsolete inventory
                          
                          
                          204,000
                          
                          
                          
                          109,886Amortization
      of discount on note payable
                          
                          
                          -
                          
                          
                          
                          60,509Gain
      on disposal of equipment
                          
                          
                          (26,972
                          )
                          
                          
                          (3,834
                          )Employee
      stock based compensation expense
                          
                          
                          164,547
                          
                          
                          
                          28,797Deferred
      income tax benefit
                          
                          
                          (100,000
                          )
                          
                          
                          (120,000
                          )Changes
      in operating assets and liabilities:Accounts
      receivable
                          
                          
                          (8,984,463
                          )
                          
                          
                          (7,939,783
                          )Inventory
                          
                          
                          (1,475,906
                          )
                          
                          
                          (486,567
                          )Prepaid
      expenses
                          
                          
                          (38,529
                          )
                          
                          
                          3,271Other
      current assets
                          
                          
                          (22,317
                          )
                          
                          
                          (36,465
                          )Deposits
      and other assets
                          
                          
                          -
                          
                          
                          
                          (10,348
                          )Accounts
      payable
                          
                          
                          224,774
                          
                          
                          
                          423,278Accrued
      liabilities
                          
                          
                          1,091,043
                          
                          
                          
                          495,589Income
      taxes payable
                          
                          
                          (240,000
                          )
                          
                          
                          910,000Net
      cash (used in) provided by operating activities
                          
                          
                          (715,160
                          )
                          
                          
                          745,689Cash
      flows from investing activities:Proceeds
      from disposal of equipment
                          
                          
                          47,000
                          
                          
                          
                          -Purchases
      of equipment
                          
                          
                          (1,447,895
                          )
                          
                          
                          (751,310
                          )Net
      cash used in investing activities
                          
                          
                          (1,400,895
                          )
                          
                          
                          (751,310
                          )Cash
      flows from financing activities:Increase
      in bank overdraft
                          
                          
                          23,478
                          
                          
                          
                          89,347Payments
      on notes payable and other obligations
                          
                          
                          (305,791
                          )
                          
                          
                          (429,331
                          )Proceeds
      from loans from stockholder
                          
                          
                          7,775
                          
                          
                          
                          133,500Proceeds
      from loans
                          
                          
                          1,783,957
                          
                          
                          
                          -Deferred
      financing fees
                          
                          
                          (56,878
                          )
                          
                          
                          -Repayments
      of loans from stockholder
                          
                          
                          (121,704
                          )
                          
                          
                          (54,859
                          )Proceeds
      from sale of common stock andexercised
      warrants, net
                          
                          
                          785,218
                          
                          
                          
                          1,767Net
      cash provided by (used in) financing activities
                          
                          
                          2,116,055
                          
                          
                          
                          (259,576
                          )Net
      decrease in cash and cash equivalents
                          
                          
                          -
                          
                          
                          
                          (265,197
                          )Cash
      and cash equivalents at beginning of period
                          
                          
                          -
                          
                          
                          
                          265,197Cash
      and cash equivalents at end of period
                          
                          $
                          -
                          
                          
                          $
                          -Supplemental
      cash flow information:Interest
      paid
                          
                          $
                          27,629
                          
                          
                          $
                          76,938Income
      taxes paid
                          
                          $
                          500,000Supplemental
      disclosure of non-cash investingand
      financing activity:Equipment
      acquired through capital leases
                          
                          $
                          165,754Conversion
      of notes payable to common stock
                          
                          
                          
                          
                          
                          $
                          99,000Acquisition
      of furniture in exchange for note payable
                          
                          
                          
                          
                          
                          $
                          7,000




See
accompanying notes to consolidated financial statements.







F
- 4








Zynex,
Inc.


Consolidated
Statements of Stockholders' Equity





Number
                
                
                Common
                
                
                Paid-in
                
                
                Retained
                
                
                Totalof
      Shares
                
                
                Stock
                
                
                Capital
                
                
                EarningsJanuary
      1, 2007
                
                
                26,310,911
                
                
                $
                26,311
                
                
                $
                2,435,859
                
                
                $
                (1,174,716
                )
                
                $
                1,287,454Issuance
      of common stock for loan extension and conversion
                
                
                459,916
                
                
                
                460
                
                
                
                167,713
                
                
                
                -
                
                
                
                168,173Issuance
      of common stock for the exercise of warrants
                
                
                59,048
                
                
                
                59
                
                
                
                531
                
                
                
                -
                
                
                
                590Issuance
      of common stock for cash
                
                
                1,238
                
                
                
                1
                
                
                
                1,175
                
                
                
                -
                
                
                
                1,176Employee
      stock compensation expense
                
                
                -
                
                
                
                -
                
                
                
                28,797
                
                
                
                -
                
                
                
                28,797Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,131,350
                
                
                
                2,131,350December
      31, 2007
                
                
                26,831,113
                
                
                
                26,831
                
                
                
                2,634,075
                
                
                
                956,634
                
                
                
                3,617,540Issuance
      of common stock for option exercise
                
                
                724,707
                
                
                
                725
                
                
                
                126,275
                
                
                
                -
                
                
                
                127,000Issuance
      of common stock for warrant exercise
                
                
                251,870
                
                
                
                252
                
                
                
                (252
                )
                
                
                -
                
                
                
                -Issuance
      of common stock for warrant call, net of offering costs
                
                
                1,920,351
                
                
                
                1,920
                
                
                
                604,799
                
                
                
                -
                
                
                
                606,719Issuance
      of common stock for exercise of options from 2005 stock option
      plan
                
                
                94,000
                
                
                
                94
                
                
                
                33,771
                
                
                
                -
                
                
                
                33,865Issuance
      of common stock for cash
                
                
                13,500
                
                
                
                14
                
                
                
                17,620
                
                
                
                -
                
                
                
                17,634Issuance
      of common stock for employee incentive
                
                
                5,000
                
                
                
                5
                
                
                
                7,395
                
                
                
                -
                
                
                
                7,400Issuance
      of common stock for consulting services
                
                
                30,500
                
                
                
                30
                
                
                
                88,391
                
                
                
                -
                
                
                
                88,421Employee
      stock compensation expense
                
                
                -
                
                
                
                -
                
                
                
                164,547
                
                
                
                -
                
                
                
                164,547Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                110,952
                
                
                
                110,952December
      31, 2008
                
                
                29,871,041
                
                
                $
                29,871
                
                
                $
                3,676,621
                
                
                $
                1,067,586
                
                
                $
                4,774,078





See
accompanying notes to consolidated financial statements.







F
- 5





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








(1) ORGANIZATION NATURE OF
BUSINESS, GOING CONCERN AND MANAGEMENT PLANS





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, Inc. (the “Company”) was created in February 2004 through a reverse
acquisition. The Company’s headquarters are located in Littleton,
Colorado.





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.





In 2008
and 2007, the Company generated substantially all of 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 2008 and 2007 was approximately 9% and 6%
respectively.





The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business.





During
2008, the Company has not always had sufficient cash flows from operations to
meet its liquidity requirements, including debt service payments. The Company
has also failed at various times to comply with covenants in its debt
agreements.





At
December 31, 2008 and at March 31, 2009, the Company was in violation of certain
covenants associated with its revolving line of credit facility (the “Line of
Credit”). However, in April 2009, the Company obtained a waiver of the defaults
and an amendment to the line of credit facility and, as a result, the Company
was in compliance with loan covenants as of March 31, 2009 (Note
7).


There is
uncertainty regarding the Company's ability to remain in compliance with certain
debt covenants throughout 2009. Failure to satisfy any of these covenants would
constitute a default under the Line of Credit, which would entitle the lender to
terminate the Company’s ability to borrow under the line of credit and
accelerate the Company’s obligation to repay outstanding borrowings, unless
compliance with the covenants is waived.





If the
Company is unable to remain in compliance with its covenants, the Company would
be required to seek waivers or modifications of the covenants from the lender,
or the Company would need to raise debt and/or equity financing to generate
proceeds sufficient to repay such debt. In light of the difficult
conditions in the global credit markets, the Company cannot give any assurance
that it would be able to successfully take these actions.





These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The Company's ability to continue as a going concern is dependent
on future financial results and, should the Company be in breach of the debt
covenants, its ability to restructure or otherwise amend the terms of that
debt.




Management's
plans in regard to these matters are described below.
 
 The
Company has developed its operating plans with emphasis on cash flow and
remaining compliant with covenants related to the line of credit. Management
believes that its cash flow projections for 2009 are achievable and, based on
billings and collections in the first quarter of 2009, that sufficient cash will
be generated to meet the loan covenants and the Company’s financial obligations.
Management believes that the successful implementation of these plans will
enable the Company to continue as a going concern.
 
 The
Company is developing a new model for analyzing the collectability of accounts
receivable. These changes should enhance the Company’s ability to monitor
collections of accounts receivable, and project cash flow more effectively. In
addition, the Company has instituted various cost reductions. The Company may
implement further cost reductions as needed.
 
 Management
believes that, as indicated above, it has the ability to remain compliant with
the terms of the line of credit, and if the Company were to be in violation of
its covenants in the future, it would, as it has successfully done in the past,
seek to obtain amendments to the debt or waivers of the covenants so that the
Company would no longer be in violation.
 
 The
Company has a significant amount of recurring revenue from rentals of its
products, which combined with the ability to reduce certain discretionary
expenses and to work with its vendors on the timing of payments to them, gives
the Company some flexibility in paying down the line of credit, when needed. As
of March 31, 2009, the balance owed on the line of credit was $1,279,562, down
from $1,780,701 at December 31, 2008.


F
- 6





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS







(2) SIGNIFICANT ACCOUNTING
POLICIES





PRINCIPLES
OF CONSOLIDATION





The
accompanying consolidated financial statements include the accounts of Zynex,
Inc. and Zynex Medical, Inc. All intercompany balances and transactions have
been eliminated in consolidation.





REVENUE
RECOGNITION AND ALLOWANCES FOR PROVIDER DISCOUNTS AND
UNCOLLECTIBILITY





The
Company recognizes revenue when each of the following four conditions are met:
1) a contract or sales arrangement exists; 2) products have been shipped and
title has transferred or rental services have been rendered; 3) the price of the
products or services is fixed or determinable; and 4) collectibility is
reasonably assured. Accordingly, the Company recognizes revenue, both rental and
sales, when products have been dispensed to the patient and the patient’s having
insurance has been verified. For medical products that are sold from inventories
consigned at clinic locations, the Company recognizes revenue when it receives
notice that the product has been prescribed and dispensed to the patient and the
patient’s having insurance has been verified or preauthorization has been
obtained from the insurance company, when required.  Revenue from the
rental of products is normally on a month-to-month basis and is recognized
ratably over the products’ rental period. Products on rental contracts are
placed in property and equipment and depreciated over their estimated useful
life. All revenue is recognized at amounts estimated to be paid by customers or
third-party providers using the Company’s established rates, net of estimated
provider discounts.  The Company recognizes revenue from distributors
when it ships its products.





A
significant portion of the Company’s revenues are derived, and the related
receivables are due, from insurance companies or other third-party providers.
The nature of these receivables within this industry has typically resulted in
long collection cycles. The process of determining what products will be
reimbursed by third-party providers and the amounts that they will reimburse is
complex and depends on conditions and procedures that vary among providers and
may change from time to time. The Company maintains an allowance for provider
discounts and records additions to the allowance to account for the risk of
nonpayment. Provider discounts result from reimbursements from insurance
providers that are less than amounts claimed, where the amount claimed by the
Company exceeds the insurance provider's usual, customary and reasonable
reimbursement rate, amounts subject to insureds’ deductibles, and when there is
a benefit denial. The Company sets the amount of the allowance, and adjusts the
allowance at the end of each reporting period, based on a number of factors,
including historical rates of collection, trends in the historical rates of
collection and current relationships and experience with insurance companies or
other third-party providers. If the rates of collection of past-due receivables
recorded for previous fiscal periods changes, or if there is a trend in the
rates of collection on those receivables, the Company may be required to change
the rate at which they provide for additions to the allowance. A change in the
rates of the Company’s collections can result from a number of factors,
including turnover in personnel, changes in the reimbursement policies or
practices of providers, or changes in industry rates of reimbursement.
Accordingly, the provision for provider discounts recorded in the income
statement as a reduction of revenue has fluctuated and may continue to fluctuate
significantly from quarter to quarter. Such allowances have increased as
third-party providers have delayed payments and restricted amounts to be
reimbursed for products provided by the Company.





Due to
the nature of the industry and the reimbursement environment in which the
Company operates, estimates are required to record net revenues and accounts
receivable at their net realizable values. Inherent in these estimates is the
risk that they will have to be revised or updated as additional information
becomes available. Specifically, the complexity of third-party billing
arrangements and the uncertainty of reimbursement amounts for certain products
or services from providers may result in adjustments to amounts originally
recorded. Due to continuing changes in the health care industry and third-party
reimbursement, it is possible that management’s estimates could change in the
near term, which could have an impact on results of operations and cash flows.
Any differences between estimated settlements and final determinations are
reflected as a reduction to revenue in the period known.







F
- 7








ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





In
addition to the allowance for provider discounts, the Company provides for
uncollectible accounts receivable. These uncollectible accounts receivable are a
result of non-payment from patients who have been direct billed for co-payments
or deductibles; lack of appropriate insurance coverage; and disallowances of
charges by third-party providers. The reserve is based on historical trends,
current relationships with providers, and internal process improvements. If
there were a change to a material insurance provider contract or policies or
application of them by a provider, a decline in the economic condition of
providers, or a significant turnover of Company personnel, the current level of
the reserve for uncollectible accounts receivable may not be adequate and may
result in an increase of these levels in the future.





At
December 31, 2008 and 2007, the allowance for provider discounts and
uncollectible accounts are as follows:





2008
                
                
                2007Allowance
      for provider discounts
                
                $
                12,908,123
                
                
                $
                5,455,724Allowance
      for uncollectible accounts receivable
                
                
                839,000
                
                
                
                446,000$
                13,747,123
                
                
                $
                5,901,724





Changes
in the allowance for provider discounts and uncollectible accounts receivable
for the years ended December 31, 2008 and 2007 are as follows:
  2008
                
                
                2007Balances,
      beginning of year
                
                $
                5,901,724
                
                
                $
                1,100,000Additions
      debited to net sales and rental revenue
                
                
                30,614,649
                
                
                
                8,033,045Write-offs
      credited to accounts receivable
                
                
                (22,769,250
                )
                
                
                (3,231,321
                )$
                13,747,123
                
                
                $
                5,901,724








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 consolidated
financial statements are associated with the allowance for provider discounts
and uncollectible accounts receivable and the reserve for obsolete and damaged
inventory.





RECLASSIFICATIONS





Certain
minor reclassifications in the 2007 financial statements have been made to
conform to the 2008 presentation.







F
- 8





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





FAIR
VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK





The
Company's financial instruments at December 31, 2008, primarily consist of
accounts receivable and payable, for which current carrying amounts approximate
fair value. Additionally, the carrying value of notes payable approximate fair
value because 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 loans from stockholder is not practicable to
estimate, due to the related party nature of the underlying
transactions.





The
Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value Measurements(“SFAS 157”) on January 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, establishes a fair
value hierarchy based on the quality of inputs used to measure fair value and
enhances disclosure requirements for fair value measurements. SFAS 157
defines fair value as the price that would be received to sell an asset or pay
to transfer a liability in an orderly transaction between market participants at
the measurement date. Additionally, SFAS 157 requires the use of valuation
techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs. These inputs are prioritized below:





Level 1:  Observable inputs such as quoted market prices in active
markets for identical assets or liabilities, such as the Company’s equity
securities reflected in the table below.





Level 2:  Observable market-based inputs or unobservable inputs that
are corroborated by market data.





Level 3:
  Unobservable inputs for which there is little or no market data,
which require the use of the reporting entity’s own assumptions.





The
adoption of SFAS 157 did not have a material impact on the Company’s financial
statements, as the Company does not have any financial assets and
liabilities.





Effective
January 1, 2008, the Company also adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB Statement No.
115, which allows an entity to choose to measure certain financial
instruments and liabilities at fair value on a contract-by-contract basis.
Subsequent fair value measurement for the financial instruments and liabilities
an entity chooses to measure will be recognized in earnings. As of December 31,
2008, the Company did not elect such option for its financial instruments and
liabilities.





INVENTORY





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





The
Company monitors inventory for turnover and obsolescence, and records losses for
excess and obsolete inventory as appropriate. At December 31, 2008 and 2007, the
Company had a reserve for obsolete and damaged inventory of approximately
$330,000 and $126,000, respectively.







F
- 9








ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








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. Through March 31, 2008,
the Company recorded depreciation of all property and equipment in a separate
line item within operating expenses. As rental inventory contributes directly to
the revenue generating process, the Company reclassified the depreciation of
rental inventory to cost of sales. The consolidated statements of operations for
the years ended December 31, 2008 and 2007 have been reclassified to reflect
this change. Cost, accumulated depreciation and the related estimated useful
lives of property and equipment as of December 31, 2008 and 2007, are as
follows:




2008
                                        
                                        
                                        2007
                                        
                                        Useful
      livesOffice
      furniture and equipment
                                        
                                        $
                                        329,389
                                        
                                        
                                        $
                                        198,173
                                        
                                        3-7
      yearsRental
      inventory
                                        
                                        
                                        2,466,413
                                        
                                        
                                        
                                        1,068,303
                                        
                                        5
      yearsVehicles
                                        
                                        
                                        59,833
                                        
                                        
                                        
                                        59,833
                                        
                                        5
      yearsLeasehold
      Improvements
                                        
                                        
                                        8,500
                                        
                                        
                                        
                                        8,500
                                        
                                        5
      yearsAssembly
      equipment
                                        
                                        
                                        10,690
                                        
                                        
                                        
                                        9,728
                                        
                                        7
      years2,874,824
                                        
                                        
                                        
                                        1,344,537Less
      accumulated depreciation
                                        
                                        
                                        (778,430
                                        )
                                        
                                        
                                        (412,315
                                        )$
                                        2,096,394
                                        
                                        
                                        $
                                        932,222





Repairs
and maintenance costs are charged to expense as incurred.





SHIPPING
COSTS





Shipping
costs are included in cost of sales and rentals.




STOCK-BASED
COMPENSATION





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





F
- 10








ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








LEGAL
DEFENSE COSTS





The
Company  does not accrue
for  estimated  future  legal
and  related  defense costs,  if any, to be
incurred in  connection  with
outstanding  or  threatened litigation  and
other  disputed  matters but rather records such as period
costs when the services are rendered.




ADVERTISING





The
Company expenses advertising costs as they are incurred. Advertising expenses
for the years ended December 31, 2008 and 2007, totaled approximately $136,000
and $32,000, respectively.





RESEARCH
AND DEVELOPMENT





Research
and development costs are expensed when incurred. Research and development
expense for the years ended December 31, 2008 and 2007, was approximately
$20,000 and $16,000, respectively. Research and development costs as well as
salaries related to research and development are included in selling, general
and administrative expenses.





INCOME
TAXES





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





Based on
management’s assessment of Financial Interpretation Number (“FIN”) 48, it was
concluded that the adoption of FIN 48, as of January 1, 2007, had no significant
impact on the Company’s results of operations or financial position, and
required no adjustments to the opening balance sheet accounts.  The
year-end analysis supports the same conclusion, and the Company does not have an
accrual for uncertain tax positions as of December 31, 2008.  The Company
recognized income tax related interest and penalties assessed on 2007 income
taxes and charged approximately $27,000 in interest and penalties to income tax
expense in 2008.  It is not anticipated that unrecognized tax benefits
would significantly increase or decrease within 12 months of the reporting
date.  The Company files income tax returns in the U.S. and various state
jurisdictions, and there are open statutes of limitations for taxing authorities
to audit the Company’s tax returns from 2005 through the current
period.
 
 
 RECENT
ACCOUNTING PRONOUNCEMENTS
 
 In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141 (R), Business
Combinations(“SFAS No. 141 (R)”) which becomes effective for the Company
on January 1, 2009. SFAS No. 141 (R) requires all business
combinations completed after the effective date to be accounted for by applying
the acquisition method (previously referred to as the purchase method).
Companies applying this method will have to identify the acquirer, determine the
acquisition date and purchase price and recognize at their acquisition date fair
values of the identifiable assets acquired, liabilities assumed, and any
non-controlling interests in the acquiree. In the case of a bargain purchase the
acquirer is required to reevaluate the measurements of the recognized assets and
liabilities at the acquisition date and recognize a gain on that date if an
excess remains. The Company expects SFAS No. 141 (R) will have an impact on
accounting for business combinations once adopted, and the effect is dependent
upon acquisitions at that time.


F
- 11







ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB 51(“SFAS 160”)
which becomes effective for the Company on January 1, 2009. This statement
amends ARB 51 to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. The statement requires ownership interests in subsidiaries held by
parties other than the parent be clearly identified, labeled, and presented in
the consolidated statement of financial position within equity, but separate
from the parent’s equity. The statement also requires consolidated net income to
be reported at amounts that include the amounts attributable to both the parent
and the non-controlling interest with disclosure on the face of the consolidated
statement of income, of the amounts of consolidated net income attributable to
the parent and to the non-controlling interest. In addition this statement
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation and requires that
a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. The Company does not expect the adoption of this statement to
have an impact on its consolidated financial statements.
 RECENT
ACCOUNTING PRONOUNCEMENTS





In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141 (R), Business
Combinations(“SFAS No. 141 (R)”) which becomes effective for the Company
on January 1, 2009. SFAS No. 141 (R) requires all business
combinations completed after the effective date to be accounted for by applying
the acquisition method (previously referred to as the purchase method).
Companies applying this method will have to identify the acquirer, determine the
acquisition date and purchase price and recognize at their acquisition date fair
values of the identifiable assets acquired, liabilities assumed, and any
non-controlling interests in the acquiree. In the case of a bargain purchase the
acquirer is required to reevaluate the measurements of the recognized assets and
liabilities at the acquisition date and recognize a gain on that date if an
excess remains. The Company expects SFAS No. 141 (R) will have an impact on
accounting for business combinations once adopted, and the effect is dependent
upon acquisitions at that time.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB 51(“SFAS 160”)
which becomes effective for the Company on January 1, 2009. This statement
amends ARB 51 to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. The statement requires ownership interests in subsidiaries held by
parties other than the parent be clearly identified, labeled, and presented in
the consolidated statement of financial position within equity, but separate
from the parent’s equity. The statement also requires consolidated net income to
be reported at amounts that include the amounts attributable to both the parent
and the non-controlling interest with disclosure on the face of the consolidated
statement of income, of the amounts of consolidated net income attributable to
the parent and to the non-controlling interest. In addition this statement
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation and requires that
a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. The Company does not expect the adoption of this statement to
have an impact on its consolidated financial statements.





F
- 12





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





(3) 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, calculated using the if-converted and treasury-stock
methods.





The
calculation of basic and diluted earnings per share for 2008 and 2007, is as
follows:





2008
                    
                    
                    2007BASICNet
      income applicable to common stockholders
                    
                    $
                    110,952
                    
                    
                    $
                    2,131,350Weighted
      average shares outstanding, basic
                    
                    
                    28,988,648
                    
                    
                    
                    26,595,967Net
      income per share, basic
                    
                    $
                    
                    *
                    
                    $
                    0.08DILUTEDNet
      income applicable to common stockholders
                    
                    $
                    110,952
                    
                    
                    $
                    2,131,350Weighted
      average shares outstanding, basic
                    
                    
                    28,988,648
                    
                    
                    
                    26,595,967Dilutive
      securities
                    
                    
                    1,635,276
                    
                    
                    
                    1,859,480Weighted
      average shares outstanding, diluted
                    
                    
                    30,623,924
                    
                    
                    
                    28,455,447Net
      income per share, diluted
                    
                    $
                    
                    *
                    
                    $
                    0.07











* Less
than $0.01 per share




F
- 13





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








(4)         STOCK-BASED COMPENSATION
PLANS





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 under the
Option Plan expire no later than ten years from the date of grant.





For the
years ended December 31, 2008 and 2007, the Company recorded compensation
expense related to stock options of $164,547 and $28,797, respectively. The
stock compensation expense was included in selling, general and administrative
expenses in the accompanying consolidated statements of operations.





For the
year ended December 31, 2008, the Company granted stock options to acquire
373,000 shares of common stock to employees at exercise prices that ranged from
$1.28 to $1.70 per share. The Company also granted options to directors to
purchase up to 24,000 shares at $5.10 per share. During the year ended December
31, 2007, the Company granted options to acquire 352,000 shares of common stock
at exercise prices that ranged from $0.26 to $1.43 per share.





The
Company used the following assumptions to determine the fair value of stock
option grants during the years ended December 31, 2008 and 2007:





2008
              2007Expected
      term
              6.25
      years
              6.25
      yearsVolatility
              112-118%
              114-123%Risk-free
      interest rate
              1.9-3.9%
              3.9-4.7%Dividend
      yield
              0%
              0%





The
expected term of stock options represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
the Company’s common stock. The risk-free interest rate represents the U.S.
Treasury bill rate for the expected term of the related stock options. The
dividend yield represents our anticipated cash dividend over the expected term
of the stock options.





A summary
of stock option activity under the Option Plan for the year ended December 31,
2008 is presented below:





WeightedWeighted
                      
                      AverageShares
                      
                      
                      Average
                      
                      Remaining
                      AggregateUnder
                      
                      
                      Exercise
                      
                      Contractual
                      IntrinsicOption
                      
                      
                      Price
                      
                      Life
                      ValueOutstanding
      at January 1, 2008
                      
                      
                      496,000
                      
                      
                      $
                      0.58Granted
                      
                      
                      397,000
                      
                      
                      $
                      1.70Exercised
                      
                      
                      (93,500
                      )
                      
                      $
                      0.36Forfeited
                      
                      
                      (67,000
                      )
                      
                      $
                      1.34Outstanding
      at December 31, 2008
                      
                      
                      732,500
                      
                      
                      $
                      1.15
                      
                      6.9
      Years
                      
                      $
                      386,675Exercisable
      at December 31, 2008
                      
                      
                      131,000
                      
                      
                      $
                      0.64
                      
                      6.1
      Years
                      
                      $
                      118,448







F
- 14





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








A summary
of status of the Company’s non-vested shares as of and for the year ended
December 31, 2008 is presented below:





Nonvested
                    
                    
                    WeightedShares
                    
                    
                    AverageUnder
                    
                    
                    Grant
      DateOption
                    
                    
                    Fair
      ValueNon-vested
      at January 1, 2008
                    
                    
                    404,500
                    
                    
                    $
                    0.55Granted
                    
                    
                    397,000
                    
                    
                    $
                    1.51Vested
                    
                    
                    (135,000
                    )
                    
                    $
                    0.40Forfeited
                    
                    
                    (65,500
                    )
                    
                    $
                    1.18Non-vested
      at December 31, 2008
                    
                    
                    601,000
                    
                    
                    $
                    1.15





As of
December 31, 2008, the Company had approximately $368,000 of unrecognized
compensation cost related to stock options that will be recognized over a
weighted average period of approximately four years.







(5)         LOANS FROM
STOCKHOLDER





Prior to
2007, Mr. Thomas Sandgaard, the majority stockholder, Chief Executive Officer
and Chairman of the Board of Directors, 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. The remaining $96,900 was represented by an
8.25% demand note. During the year ended December 31, 2008, the Company repaid
the loans in full.





In 2007,
Mr. Sandgaard made two 24-month unsecured loans to the Company for a total
amount of $74,000.  The loans bear interest at 8.25% per annum and
require monthly payments of $3,355.  As of December 31, 2008, $23,094
remains outstanding. These loans from Mr. Sandgaard were used for working
capital purposes and repayment of a note payable.





In
September 2007, Mr. Sandgaard made a $59,500 loan to the Company. This loan
bears interest at 8.25% per annum commencing September 30, 2007, and is a demand
note.  Accrued interest not paid is added to the principal. As of
December 31, 2008, $1,760 remains outstanding. This loan from Mr. Sandgaard was
used for working capital purposes.




F
- 15





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





(6)           INCOME
TAXES





Income
tax expense consists of the following for the years ended December 31, 2008 and
2007:





2008
                  
                  
                  2007Current
      tax (benefit) expenseFederal
                  
                  $
                  209,000
                  
                  
                  $
                  800,000State
                  
                  
                  24,000
                  
                  
                  
                  110,000Penalties
      and interest
                  
                  
                  27,000
                  
                  
                  
                  -260,000
                  
                  
                  
                  910,000Deferred
      tax (benefit) expenseFederal
                  
                  
                  (56,000
                  )
                  
                  
                  (110,000
                  )State
                  
                  
                  (8,000
                  )
                  
                  
                  (10,000
                  )(64,000
                  )
                  
                  
                  (120,000
                  )Decrease
      in valuation allowance
                  
                  
                  (36,000
                  )
                  
                  
                  -$
                  160,000
                  
                  
                  $
                  790,000








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




2008
                            
                            2007Statutory
      rate
                            
                            
                            35
                            %
                            35
                            %State
      taxes
                            
                            
                            3
                            %
                            3
                            %Permanent
      differences
                            
                            
                            19
                            %
                            2
                            %Other
                            
                            
                            2
                            %
                            (13
                            )%Combined
      effective rate
                            
                            
                            59
                            %
                            27
                            %







F
- 16





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS











The tax
effects of temporary differences that give rise to deferred tax assets
(liabilities) at December 31, 2008 and 2007, are as follows:




2008
                          
                          
                          2007Current
      deferred tax assets:Accrued
      expenses
                          
                          $
                          80,000
                          
                          
                          $
                          14,000Accounts
      receivable
                          
                          
                          446,000
                          
                          
                          
                          185,000Inventory
                          
                          
                          122,000
                          
                          
                          
                          47,000648,000
                          
                          
                          
                          246,000Valuation
      allowance
                          
                          
                          -
                          
                          
                          
                          (36,000
                          )Net
      current deferred tax asset
                          
                          $
                          648,000
                          
                          
                          
                          210,000Long-term
      deferred tax liabilities:Property
      and equipment
                          
                          $
                          428,000
                          
                          
                          
                          90,000Net
      long-term deferred tax liability
                          
                          $
                          428,000
                          
                          
                          
                          90,000





At
December 31, 2008, income taxes payable included approximately $600,000 of
unpaid 2007 income taxes.







(7)      NOTES
PAYABLE





Marquette
Loan





At
January 1, 2008, the Company had $228,215 outstanding under two term loan
agreements with a bank.  In January 2008, the Company defaulted on the
monthly installment payable to this bank and as a result, the bank called the
outstanding balances of both term loans. The loans were repaid in February
2008.





In
September 2008, the Company entered into a Loan and Security Agreement with
Marquette Business Credit, Inc., d/b/a Marquette Healthcare Finance (“the
Lender”). The Loan Agreement provides Zynex with a revolving credit facility of
up to $3,000,000 (the “Loan”). As of December 31, 2008, maximum borrowings
available were $2,202,000, of which the Company borrowed
$1,780,701.





The
Lender could have asserted that the claim of Anthem Blue Cross Blue Shield
(“Anthem”) described in Note 12 below constitutes a breach of representations
and warranties made to the Lender, which could be an event of default; the
Lender could have also asserted the Anthem claim was a material adverse change
which would affect the Lender’s obligations to make any advances under the
Loan.  The Anthem claim also affected the Company’s financial
statements as of September 30, 2008 and thus financial covenants of the Loan,
one of which was not satisfied as of September 30, 2008.  The Lender
consented to the settlement with Anthem described in Note 11 and stated that it
will not take any action on the financial covenant for the quarter ending
September 30, 2008.  In December 2008, the Company and the Lender
reset the financial covenant regarding EBITDA and amended the interest rate
under the line of credit.





On April
7, 2009, we entered into a letter agreement with Marquette in which Marquette
states its willingness to waive breaches of financial covenants by
us.  In the letter agreement, Marquette indicates that Zynex did not
meet the EBITDA covenant and debt service coverage ratio covenant as of December
31, 2008 and that Zynex would not meet the EBITDA covenant as of March 31, 2009.
Marquette stated its willingness to forebear taking action on these financial
covenant defaults for the quarters ended December 31, 2008 and March 31, 2009
and to waive any default fee or default interest rate.  Marquette and
we also agreed on amounts for resetting the minimum EBITDA covenant, which is on
a trailing 12 month basis, as of the end of each quarterly period in
2009.  When available, financial projections for 2010 will be used to
set future EBITDA covenant targets in Marquette’s sole
discretion.  With respect to Zynex’s restatement of financial
statements for the first three quarters of 2008 (Note 13), Marquette waived any
breach of a representation, warranty or covenant concerning the accuracy of the
original unaudited financial statements for these quarterly
periods.  Notwithstanding such waiver, Marquette expressly reserved
any right to declare a default, and any other claim, right or remedy with
respect to (a) the restated financial statements for these quarterly periods and
(b) any fraud or intentional misrepresentation in connection with the original
financial statements for these quarterly periods.  Further, Marquette
and agreed to amend the line of credit to increase the margin to 3.25% and
increase the collateral monitoring fee to $1,750 per month. The interest rate
for the line of credit is the margin plus the higher of the (i) a floating prime
rate; or (ii) the floating LIBOR rate plus 2%.


F
- 17




ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




The Company may
borrow, repay and re-borrow under the Loan.  The amount available for
advances under the Loan cannot exceed the lesser of the Borrowing Base, which is
in general a percentage of eligible accounts receivable less a reserve and
subject to a ceiling of eight trailing weeks collections, or the Facility Limit
determined from time to time by the Lender.  The Facility Limit is
initially $3,000,000.  At December 31, 2008, the Loan bore interest at
a rate equal to the higher of (a) a floating prime rate plus 2.5% or
(b) 4.5% (5.75% at December 31, 2008).  See above for the
interest rate as amended in April, 2009.  Interest is payable
monthly.  The Loan is secured by a first security interest in all of
the Company’s assets, including accounts, contract rights, inventory, equipment
and fixtures, general intangibles, intellectual property, shares of Zynex
Medical, Inc. owned by the Company, and other assets.  The Loan
terminates, and must be paid in full, on September 23, 2011.





Fees
under the Loan Agreement include an unused line fee of 0.5% per annum payable
monthly on the difference between the average daily balance and the total
Facility Limit.  If the Company terminates the Loan Agreement prior to
the termination date, there is a termination fee of 3% of the Facility Limit
prior to the first anniversary of the Closing Date, 2% of the Facility Limit at
any time between the first and second annual anniversary of the Closing Date and
1% at any time from the second anniversary of the Closing Date to the final
termination date of the Loan.  The Company also pays a collateral
monitoring fee which was $1,500 per month at December 31, 2008 and was amended
in April 2009 to be $1,750 per month, payable monthly in arrears on the first
day of each month.





The Loan
Agreement includes a number of affirmative and negative covenants on the part of
the Company.  Affirmative covenants concern, among other things,
compliance with requirements of law, engaging only in the same businesses
conducted on the Closing Date, accounting methods, financial records, notices of
certain events, and financial reporting requirements.  Negative
covenants include a Minimum EBITDA, a Minimum Debt Service Coverage Ratio, a
Minimum Current Ratio and a prohibition on dividends on shares and purchases of
any Company stock.  Other negative covenants include, among other
things, limitations on capital expenditures in any fiscal year, operating
leases, permitted indebtedness, incurrence of indebtedness, creation of liens,
mergers, sales of assets or acquisitions, and transactions with
affiliates.





Events of
Default under the Loan Agreement include, among other things:  Failure
to pay any obligation under the Loan Agreement when due; failure to perform or
observe covenants or other obligations under the Loan Agreement or other Loan
Documents; the occurrence of a default or an event of default under any other
Loan Document; a breach of any agreement relating to lockbox accounts; the
occurrence of certain events related to bankruptcy or insolvency; the Company’s
majority stockholder ceasing to own at least 51% of the Company’s outstanding
voting capital stock; the Company’s ceasing to own 100% of the capital stock of
Zynex Medical; or a Change in Control.  The Company will have 15 days
to cure any noticed Event of Default other than a failure to pay any of the Loan
when due.  Upon the occurrence of an Event of Default, the Lender may
accelerate the principal of and interest on the Loan by providing notice of
acceleration and the Lender’s commitment to make additional loans would
terminate.





Validity
Guaranty





As
required by the Loan Agreement, Mr. Sandgaard has entered into a Validity
Guaranty with the Lender.  Under the Validity Guaranty, Mr. Sandgaard
is liable to the Lender for any loss or liability suffered by the Lender arising
from any fraudulent or criminal activities of the Company or its executive
officers with respect to the transactions contemplated under the Loan Documents
or any fraudulent or criminal activities arising from the operation of the
business of the Company, which activities are known to Mr.
Sandgaard.  Mr. Sandgaard also warrants the accuracy of financial
statements, the accuracy of the representations and warranties made by the
Company under the Loan Agreement, and certain other matters.  He
agrees to notify the Lender of a breach of any representation, warranty or
covenant made by the Company.  Mr. Sandgaard’s liability under the
Validity Guaranty is not to exceed the amount of the obligations owed by the
Company to the Lender.  The Validity Guaranty terminates from and
after the following:  Mr. Sandgaard ceases to be the Chief Executive
Officer of the Company.





Subordination
Agreement





On the
Closing Date, the Company entered into a Subordination Agreement with Mr.
Sandgaard and the Lender, pursuant to which all indebtedness of the Company owed
to Mr. Sandgaard was subordinated in right of payment to all indebtedness of the
Company owed to the Lender.  As part of this Agreement, Mr. Sandgaard
will not demand or receive payment from the Company or exercise any remedies
regarding the Subordinated Debt so long as the Senior Date remains outstanding,
except that Mr. Sandgaard may receive regularly scheduled payments of principal
and interest on existing promissory notes, including demand payments on the
demand promissory note, so long as there is no default or Event of Default under
any of the Loan Documents.  Mr. Sandgaard also subordinated any
security interest held by him in the Company’s assets to the security interest
of the Lender.





F
- 18





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








Notes
payable at December 31, 2008 and 2007, consisted of the following:





December
      31,
                            
                            
                            December
      312008
                            
                            
                            2007Note
      payable to the Lender, under revolving line of credit
    facility
                            
                            $
                            1,780,701
                            
                            
                            $
                            --Notes
      payable to a bank under term loans; paid in 2008
                            
                            
                            --
                            
                            
                            
                            228,215Motor
      vehicle contract payable in 60 monthly installments of
    $1,351;annual
      interest at 15.1%; collateralized by automobile; matures in
      2009
                            
                            
                            4,036
                            
                            
                            
                            18,350Notes
      payable to a sales representative of the Company; paid in
    2008
                            
                            
                            --
                            
                            
                            
                            6,580Note
      payable to landlord for furniture payable in 25 monthly installments of
      $280;
                              annual
      interestof
      8.2%; secured by furniture; matures in 2009
                            
                            
                            3,019
                            
                            
                            
                            6,440Total
                            
                            
                            1,787,756
                            
                            
                            
                            259,585Less
      current maturities
                            
                            
                            (1,787,756
                            )
                            
                            
                            (252,853
                            )Long-term
      maturities
                            
                            $
                            --
                            
                            
                            $
                            6,732










(8)      LEASES





The
Company has commitments under various operating and capital leases that are
payable in monthly installments. In November 2007, the Company entered into a
25-month sublease of office, plant and warehouse space in Littleton, Colorado,
which expires in November 2009. The lease provides for annual rent of $128,377
plus property taxes and maintenance costs. As of December 31, 2008, future
minimum lease payments under non-cancelable operating and capital leases are as
follows:




Capital
                                                          
                                                          
                                                          OperatingLeases
                                                          
                                                          
                                                          Leases2009
                                                          
                                                          $
                                                          37,884
                                                          
                                                          
                                                          $
                                                          128,3772010
                                                          
                                                          
                                                          37,884
                                                          
                                                          
                                                          
                                                          14,5752011
                                                          
                                                          
                                                          37,884
                                                          
                                                          
                                                          
                                                          7,2872012
                                                          
                                                          
                                                          37,884
                                                          
                                                          
                                                          
                                                          --2013
                                                          
                                                          
                                                          13,425
                                                          
                                                          
                                                          
                                                          --Total
      future minimum lease payments
                                                          
                                                          $
                                                          164,961
                                                          
                                                          
                                                          $
                                                          150,239Less
      amount representing interest
                                                          
                                                          
                                                          (19,371
                                                          )Present
      value of net minimum lease payments
                                                          
                                                          
                                                          145,590Less
      current portion
                                                          
                                                          
                                                          (30,303
                                                          )Long-term
      capital lease obligation
                                                          
                                                          $
                                                          115,287




Rent
expense under operating leases for 2008 and 2007, was approximately $177,000 and
$115,000, respectively.





F
- 19





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





(9)           STOCKHOLDERS'
EQUITY




For stock
warrants or options granted to non-employees, the Company measures fair value of
the equity instruments utilizing the Black-Scholes method if that valuation
method results in a more reliable measurement than the fair value of the
consideration or the services received. For stock granted, the Company measures
fair value of the shares issued utilizing the market price of the shares on the
date the transaction takes place. The Company amortizes such costs over the
related period of service.




NON-EMPLOYEE
WARRANTS:





During
2008 and 2007, the Company has warrants outstanding. The following is a schedule
of activity with these warrants:





Broker
                
                
                OtherClass
      B
                
                
                Class
      C
                
                
                Warrants
                
                
                WarrantsJanuary
      1, 2007
                
                
                685,715
                
                
                
                22,858
                
                
                
                45,715
                
                
                
                2,896,154Granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                (13,334
                )
                
                
                (45,715
                )
                
                
                -Forfeited
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Expired
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -December
      31, 2007
                
                
                685,715
                
                
                
                9,524
                
                
                
                -
                
                
                
                2,896,154Granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Exercised
                
                
                (457,143
                )
                
                
                (1,905
                )
                
                
                -
                
                
                
                (2,193,139
                )Forfeited
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Expired
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -December
      31, 2008
                
                
                228,572
                
                
                
                7,619
                
                
                
                -
                
                
                
                703,015





The
exercise prices and expiration dates of the warrants outstanding at December 31,
2008 are as follows:





Price
                      
                      ExpirationNumber
                      
                      
                      per share
                      
                      DateClass
      B
                      
                      
                      228,572
                      
                      
                      $
                      2.00
                      
                      June
      4, 2009Class
      C
                      
                      
                      7,619
                      
                      
                      $
                      0.01
                      
                      June
      4, 2009Other329,867
                      
                      
                      $
                      0.39
                      
                      October
      18, 2011162,500
                      
                      
                      $
                      0.32
                      
                      April
      11, 2010100,000
                      
                      
                      $
                      3.00
                      
                      March
      1, 200950,000
                      
                      
                      $
                      0.71
                      
                      September
      29, 201232,315
                      
                      
                      $
                      0.39
                      
                      April
      11, 201110,000
                      
                      
                      $
                      3.00
                      
                      March
      16, 200910,000
                      
                      
                      $
                      0.55
                      
                      March
      1, 20105,000
                      
                      
                      $
                      0.45
                      
                      July
      28, 20103,333
                      
                      
                      $
                      0.01
                      
                      July
      28,
2010





Upon
exercise of the Class B, C and Brokerwarrants, 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 B and Class C Warrants exercised by the
subscribers.





In
February 2009, the Company received a notice of exercise related to warrants for
100,000 shares of common stock; 100,000 shares of common stock were issued for a
cash payment of $32,000.




F
- 20





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








NON-EMPLOYEE
STOCK OPTIONS:





In
September 2004, the Company issued options to acquire 1,900,000 shares of common
stock to a financial consulting firm in exchange for consulting services
provided in connection with the Company's reverse acquisition, private placement
and ongoing investor relations. In August 2008, the firm exercised options for
100,000 shares of common stock for which the Company received payment of
$40,000. In October 2008, the firm forfeited options for 600,000 shares in
return for cashless exercise rights on the remaining options.  As of
December 31, 2008, 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 Share400,000
                  $1.75200,000
                  $2.00200,000
                  $2.25200,000
                  $2.50200,000
                  $4.00








2008
COMMON STOCK ISSUANCES:




In
January 2008, the Company notified warrant holders from the 2006 private
placement that an event had occurred which accelerated the expiration date of
the warrants.  In February 2008, the Company had received notices of
exercise and payments from all the warrant holders notified.  The
Company issued 1,740,000 shares of common stock to the warrant holders and
received $678,600 in proceeds from their exercise.  The Company was
obligated to pay $71,881 to the two investment firms that originally aided in
the 2006 private placement as fees related to the warrant
exercise.  The Company was also obligated to issue 180,351 shares of
common stock to the two investment firms that originally aided in the 2006
private placement as fees related to the warrant exercise.





Between
February and August 2008, the Company received notices of exercise related to
warrants for 559,048 shares of common stock; 251,870 shares of common stock were
issued in cashless exercises.





Between
February and May 2008, the Company issued 13,500 shares of common stock for a
cash of $17,634.





In April
2008, the Company issued 5,000 shares of common stock to an employee as non-cash
compensation, valued at $7,400.





Between
March and November 2008, the Company received notices of exercise related to
options for 778,139 shares of common stock: 350,000 of these shares of common
stock were issued for cash of $127,000 and 374,707 shares of common stock were
issued in cashless exercises.





Between
September and December 2008, the Company issued 30,500 shares of common stock to
individuals as non-cash compensation for services rendered, valued at
$88,421.





During
last two quarters of 2008, the Company received notices of exercise related to
options under the 2005 Stock Option Plan for 94,000 shares of common stock;
94,000 shares of common stock were issued for notes receivable and
cash. .




(10)  MAJOR
SUPPLIERS
 
 The
Company purchased approximately 90% of its products from one supplier in
2008.  In 2007, the Company purchased approximately 20% of its
products from one supplier and an additional 14% from a second
supplier.  The Company has purchased 100% of its NeuroMove inventory
from one supplier. Management believes that its relationships with these
suppliers is strong, however, if necessary these relationships can be replaced.
If the relationships were to be replaced, there may be a short term disruption
to operations, a period of time in which products would not be available and
additional expenses may be incurred.








F
- 21







ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








(11)  EMPLOYMENT
AGREEMENTS





Zynex
Medical, Inc. has an employment agreement as amended, with the Company's
President and Chief Executive Officer. The agreement expired January 31, 2007
and was automatically extended for an additional two-year period.The agreement
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.





The
agreement was amended to provide an annual base salary of $144,000 and quarterly
bonuses as follows:




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





The bonus
amounts reflected in the above table shall be reduced by one-half if the Company
sustains a net loss during the quarter. At December 31, 2008 and 2007, the
Company recorded a $75,000 and $100,000 accrual, respectively, related to this
bonus arrangement. The total bonus expense for the years ended December 31, 2008
and 2007, was $175,000 and $100,000, respectively.





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





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





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 (vesting over
four years) in the event (a) the Company’s net revenue meets a revenue
targetfor 2007,
(b) the Company has a positive net income for 2007, and (c) the Company does not
have any restatements of its financial statements during 2007 and for any
periods during 2007 or the year 2007 on or prior to the completion of the audit
of the 2007 financial statements. Mr. Allison also received full health and
dental insurance coverage through the Company.





Effective
September 16, 2008, the Company modified the compensation arrangements with Mr.
Allison to the following:  A base salary of $12,500 per month, before
taxes, and a bonus payable in 2008 in the form of an option grant for an
additional 5,000 shares in the event one of the Company’s 10-K and 10-Q Reports
is filed on or before the due date and without extension.






F
- 22





ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








(12)           REFUND CLAIM AND
SETTLEMENT.





The
Company received and has settled a refund claim by Anthem Blue Cross Blue Shield
which originally concerned payments previously made by Anthem for certain
medical devices (the “devices”) rented or sold to insureds of Anthem by the
Company through July 31, 2008.  In the settlement, the Company agreed
to pay Anthem a total of $679,930 over 12 months and waive rights to payments of
outstanding billings for the devices provided to Anthem’s insureds subsequent to
September 1, 2007 through September 30, 2008.  Accounts receivable for
these billings were $329,664, net of contractual allowances, as of June 30,
2008.  Under the settlement, the Company made an initial payment of
$17,770 and is to make a monthly payment of $55,180 on the first day of each
month commencing December 1, 2008 (which was paid) and ending November 1,
2009.  The Company has made the required payments through February
2009. The remaining liability of $606,981 is recorded in other accrued
liabilities on the Company’s consolidated balance sheet as of December 31, 2008.
The Company may request that patients voluntarily return devices which were the
subject of the settlement, but the Company is not doing so if the return of the
equipment would interfere with the treatment of the
patient.


The
Company recognized no revenue in the third or fourth quarter of 2008 relating to
the devices rented or sold to insureds of Anthem.





The
Company wrote off the accounts receivable ($329,664) from Anthem against the
allowance for provider discounts for the devices; these receivables were unpaid
and arose prior to July 1, 2008. The Company also charged the amount to be
repaid to Anthem ($679,930) against the allowance for provider discounts. The
Company records its normal provision for provider discounts as direct reductions
of rental and sales revenue (see Note 2).


Although
Anthem had paid claims for the devices, including some that were individually
subject to an Anthem review process and resulted in decisions favorable to the
Company, Anthem claimed in a retrospective review that the devices were
considered investigational or not medically necessary under a medical policy
statement of its parent entity and therefore not eligible for
payment.  Anthem originally claimed that it should receive a refund of
approximately $1,065,000.  The Company met with representatives of
Anthem for reconsideration of the claim.  Anthem continued to assert
the claim, and on October 31, 2008, the Company gave notice to appeal the claim
to a higher authority at Anthem.  On November 18, 2008, the Company
and Anthem executed an agreement for the settlement as described
above.





Anthem
has been and continues to be one of the largest health insurers in terms of
payments to the Company for the rental and sale of its products.  The
Company continues to have an agreement (terminable by either party upon advance
notice) with Anthem making the Company part of the Anthem
network.  Neither Anthem nor the Company has indicated that it will
terminate this agreement.  The Company also continues to provide its
products to Anthem insureds, including products which may be used to treat
insureds with the same medical conditions as those using devices subject to the
claim.






F
- 23








ZYNEX,
INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








(13)  RESTATED 2008 QUARTERLY
FINANCIAL INFORMATION





In
connection with preparing the December 31, 2008 consolidated financial
statements, management determined that the Company’s unaudited financial
statements for the quarters ended March 31, 2008, June 30, 2008 and September
30, 2008, included in its Quarterly Reports on Form 10-Q for those quarters,
should be revised to reflect adjustments to Zynex’s allowance for provider
discounts, accounts receivable and net revenue for such
periods.




These
quarterly restatements were determined after an evaluation of adjustments
identified in connection with the 2008 year-end closing and the audit of the
2008 financial statements. The Company has restated its unaudited financial
statements for the first three quarters of 2008 in this Annual Report of Form
10-K.
  The
adjustments identified in connection with the year-end closing and 2008 year-end
audit result in a decrease in net accounts receivable and related net revenues
of approximately $5.1 million as of and for the year ended December 31,
2008.  Approximately $636,000 of these adjustments relates to the
fourth quarter of 2008.  These adjustments are based on a
re-evaluation of the estimated allowance for provider discounts that management
believes should have been utilized in 2008.  The change in the
provider discount rates is based on management’s analysis of business
conditions, recent rates of collection and additional methodologies that the
Company applied in estimating these rates at year end, which management believes
are more accurate than previously applied rates during the quarterly periods in
2008.







(14)  SUBSEQUENT
EVENTS





A lawsuit
was filed against the Company, its President and Chief Executive Officer and its
Chief Financial Officer on April 6, 2009, in the United States District Court
for the District of Colorado (Marjorie and David Mishkin v. Zynex,
Inc. et al.).  On April 9 and April 10, 2009, two other
lawsuits were filed in the same court against the same defendants. These
lawsuits allege substantially the same matters. The lawsuits refer to the April
1, 2009 announcement of the Company that it will restate its unaudited financial
statements for the first three quarters of 2008.  The lawsuits purport
to be a class action on behalf of purchasers of the Company securities between
May 21, 2008 and March 31, 2009.  The lawsuits allege, among other
things, that the defendants violated Section 10 and Rule 10b-5 of the Securities
Exchange Act of 1934 by making intentionally or recklessly untrue statements of
material fact and/or failing to disclose material facts regarding the financial
results and operating conditions for the first three quarters of
2008.  The plaintiffs ask for a determination of class action status,
unspecified damages and costs of the legal action.  The Company
believes that the allegations are without merit and will vigorously defend
itself in the lawsuit.  The Company has notified its directors and
officers liability insurer of the claim. At this time, the Company is not able
to determine the likely outcome of the legal matters described above, nor can it
estimate its potential financial exposure. Litigation is subject to inherent
uncertainties, and if an unfavorable resolution of any of these matters occurs,
the Company’s business, results of operations, and financial condition could be
adversely affected.






F
- 24