The following information should be read in conjunction with the Company's condensed consolidated financial statements and related footnotes contained in this report which have been prepared assuming that we will continue as a going concern, and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008.

As discussed and presented in the Form 10-K for the year ended December 31, 2008, we restated the unaudited interim financial statements as of and for the three and six months ended June 30, 2008.

Results of Operations

Net Revenue. Net revenue is comprised of net rental and sales of products and consumable supplies revenue. Net revenue for the three and six months ended June 30, 2009 was $4,346,588 and $8,578,922 an increase of $1,306,128 or 43% and $2,949,742 or 52% compared to $3,040,460 and $5,629,180 for the three and six months ended June 30, 2008 as previously restated. The increase in net revenue for the three and six months ended June 30, 2009, compared to the three and six months ended June 30, 2008 was due primarily to a greater number of products in use during the periods ended June 30, 2009. Products in use create monthly rental revenue and sales of consumable supplies for those products. The increase in the number of products in use resulted from increased prescriptions (orders) in the current as well as prior periods. The increased orders resulted from the expansion of the experienced sales force from 2007 through 2009 and greater awareness of the Company's products by end users and physicians.

Net revenue by quarter were as follows:

                                          2009             2008

                   First quarter       $ 4,232,334     $  2,588,720
                   Second quarter        4,346,588        3,040,460
                   Third quarter                 -        2,198,738
                   Fourth quarter                -        3,935,640

                   Total net revenue   $ 8,578,922     $ 11,763,558

Our revenue is reported net, after deductions for uncollectible accounts receivable 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 "Revenue Recognition, Allowances for Provider Discounts and uncollectibile accounts receivable" in Note 2 to the Condensed Consolidated Financial Statements in this Report. These deductions, which are reflected in the allowance for provider discounts, have increased as third party payors have delayed payments and restricted amounts to be reimbursed for products provided by the Company. One significant reason is the need to adequately train billing personnel hired as a result of growth in the business.

We are introducing during the third quarter of 2009 a new product for our line of electrotherapy products. The product, called TruWave Plus, is based upon the Company's existing hardware platform. TruWave Plus is capable of delivering three modalities of stimulation, traditional Transcutaneous Electrical Nerve Stimulation (TENS), inferential and NeuroMusculas Electrical Stimulation (NMES), within the same product. We do not know what reimbursement levels will be allowed by third party payors for sale or rental of this new product and we do not know whether coverage will be denied under any disallowance policies.

Net Product Rental Revenue. Net product rental revenue for the three and six months ended June 30, 2009 was $2,599,499 and $5,249,369 an increase of $498,794 or 24% and $1,356,401 or 35% compared to $2,100,705 and $3,892,968 for the three and six months ended June 30, 2008 as previously restated. The increase in net product rental revenue for the three and six months June 30, 2009 was due primarily to a greater number of products in use during the periods ended June 30, 2009. Reasons for greater number of products in use are indicated in "Net Revenue" above.

Net product rental revenue for the three and six months ended June 30, 2009 made up 60% and 61% of net revenue compared to 69% and 69% for the three and six months ended June 30, 2008. The decrease in the percentage of total net revenue from product rental revenue during the first three months of 2009 was due primarily to increased orders for sales of products compared to orders for rentals of products and increased sales of consumable products. The increase in net supplies sales revenue for the three and six months ended June 30, 2009 was due primarily to a greater number of products in use during the periods ended June 30, 2009 generating sales of consumable supplies to users of the Company's products

Our products may be rented on a monthly basis or purchased. Renters are primarily patients and third party insurance payors that pay on their behalf. 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, 2009 was $1,747,089 and $3,329,553 an increase of $807,334 or 86% and $1,593,341 or 92% compared to $939,755 and $1,736,212 for the three and six months ended June 30, 2008 as previously restated. Net sales of products (not including consumable supplies) revenue for the three and six months ended June 30, 2009 was $381,816 and $808,560 an increase of $228,106 or 148% and $585,135 or 262% compared to $153,710 and $223,425 for the three and six months ended June 30, 2008. The increase in net sales revenue for such products for the three and six months ended June 30, 2009, compared to the three and six months ended March 31, 2008 was due primarily to increased orders for sales of products for the reasons indicated in "Net Revenue" above.

Net sales revenue includes sales of consumable supplies for the three and six months ended June 30, 2009 was $1,365,273 and $2,520,993 an increase of $579,227 or 74% and $1,008,205 or 67% compared to $786,046 and $1,512,788 for the three and six months ended June 30, 2008 as previously restated. The increase in net supplies sales revenue for the three and six months ended June 30, 2009 was due primarily to a greater number of products in use during the periods ended June 30, 2009 generating sales of consumable supplies to users of the Company's products. Reasons for the greater number of products in use are indicated in "Net Revenue" above. The majority of this revenue is derived from surface electrodes sent to existing patients each month.

Net product sales revenue for the three and six months ended June 30, 2009 made up 40% and 39% of net revenue compared to 31% and 31% for the three and six months ended June 30, 2008. The increase in the percentage of total net revenue during the first six months of 2009 was due primarily to a greater number of products in use during the periods ended June 30, 2009 generating sales of consumable supplies to users of the Company's products.

Our products may be purchased. 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.

Gross Profit. Gross profit for the three and six months ended June 30, 2009, was $3,569,944 and $7,319,617 or 82% and 85% of net rental and sales revenue.

For the three months ended June 30, 2009, this represents an increase of $807,696 or 29% compared to $2,762,248 or 91% of net rental and sales revenue for the three months ended June 30, 2008. The increase in gross profit for the three months ended June 30, 2009 compared to the three months ended June 30, 2008 is primarily because net revenue increased. The decrease in gross profit percentage for the three months ended June 30, 2009 as compared with the same period in 2008 is primarily from increases in the estimate for insurance company reimbursement deductions which increased the allowance for provider discounts and reduced revenue.

For the six months ended June 30, 2009, this represents an increase of $2,425,363 or 50% compared to $4,894,254 or 87% of net rental and sales revenue for the six months ended June 30, 2008. The increase in gross profit for the six months ended June 30, 2009 compared to the six months ended June 30, 2008 is primarily because net revenue increased. The decrease in gross profit percentage for the six months ended June 30, 2009 as compared with the same period in 2008 is primarily from increases in the estimate for insurance company reimbursement deductions which increased the allowance for provider discounts and reduced revenue

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three and six months ended June 30, 2009 was $2,463,322 and $4,877,127 an increase of $386,422 or 19% and $1,243,960 or 34% compared to $2,076,900 and $3,633,167 for the three and six months ended June 30, 2008 as previously restated. Selling expenses increased primarily due to increases in sales representative commissions. Commissions are earned by sales representatives on orders received during the period. General and administrative expenses increased primarily due to increased payroll and benefits. Selling, general and administrative expenses increased 34% while net revenue increased 52% during the six months ended June 30, 2009; this difference is due in large part to the recurring revenue from net product rentals and reoccurring sales of consumable supplies where the commission expense was recorded in a prior period.

Other Income (Expense). Interest and other income (expense) is comprised of interest income, interest expense, other income (expense) and gain on the value of a derivative liability.

Interest income for the three and six months ended June 30, 2009 was $1,744 and $2,805, compared to $210 and $1,071 for the same periods in 2008.

Interest expense for the three and six months ended June 30, 2009 was $40,045 and $74,306, compared to $7,722 and $23,639 for the same periods in 2008. The increase in interest expense resulted primarily from the Company's borrowing under the line of credit established in September 2008.

Other income or expense for the three and six months ended June 30, 2009 was other expense of $101 and $1,175, compared to other income of $27,201 and $27,201 for the same periods in 2008. The expense in 2009 was a loss on foreign exchange. The income in 2008 was a gain on an asset disposal.

The gain on value of a derivative liability of $196,600 for the six months ended June 30, 2009 reflects a reduction in the market value of certain outstanding warrants. See "Derivative Warrant Liability" in Note 7 to the Condensed Consolidated Financial Statements in this Report.

Income Tax Expense. We reported income tax expense, which expense includes interest and penalties, in the amount of $907,000 for the six months ended June 30, 2009 compared to $746,000 of expense for the same period in 2008 as restated. This is primarily due to our having higher income before taxes of $2,566,414 for the six months ended June 30, 2009 compared to income before taxes of $1,265,720 for the same period in 2008. The six months ended June 30, 2008 showed an effective tax rate (approximately 59%) which is higher than the statutory tax rate. This was primarily due to permanent differences between book income and taxable income, as well as interest and penalties on unpaid 2007 income taxes for the year ended December 31, 2008.

Liquidity and Capital Resources.

The Company's financial statements for the three and six month periods ended June 30, 2009 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. The Report of our Independent Registered Public Accounting Firm on the Company's financial statements as of and for the year ended December 31, 2008 includes a "going concern" explanatory paragraph which means that the auditors stated that conditions exist that raise substantial doubt about the Company's ability to continue as a going concern.

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 half 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.

Line of Credit

Please see Note 6 of the Condensed Consolidated Financial Statements in this Report and Item 1A, Risk Factors, below for information on a line of credit established with Marquette Healthcare Finance in September 2008. On April 30, 2009, we entered into an amendment to the Loan and Security Agreement with Marquette Healthcare Finance, which amendment covers matters stated in a prior letter agreement of April 7, 2009. In the amendment, Marquette waived Zynex's not meeting the EBITDA and debt service coverage ratio covenants as of December 31, 2008 and not meeting the EBITDA covenant as of March 31, 2009. Marquette did not apply any default fee or default interest rate. Marquette also waived any breach of representation warranty or covenant concerning the accuracy of the unaudited financial statements for the first three quarters of 2008 which were restated. Marquette reserved the right to declare an event of default and any other claim with respect to the restated financial statements for these quarterly periods and any fraud or misrepresentation in connection with the original financial statements for these quarterly periods. Marquette revised the minimum EBITDA covenant (on a trailing 12 month basis) as of the end of each quarterly period to be as follows:

June 30, 2009:                                        $1,436,000
September 30, 2009:                                   $3,242,000
December 31, 2009:                                    $4,111,000
Thereafter:         To be determined in lender's sole discretion

The amendment increased the margin to 3.25% and increased 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%.

Limited Liquidity

We have limited liquidity. Our limited liquidity is primarily a result of (a) the required high levels of inventory with sales representatives that are standard in the electrotherapy industry, (b) the payment of commissions to salespersons based on sales or rental orders 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 increasing level of delayed payments and restricted amounts for reimbursements by third party payors for the Company's products, (e) the need for improvements to the Company's internal billing processes and (f) 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 plans of the 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 ($2,618,000 available as of June 30, 2009, remaining availability of $788,682). The balance on the line of credit at June 30, 2009 was $1,829,318. At August 12, 2009, the balance on the line was $1,499,112.

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.

In May 2009, the Company paid approximately $660,000 of federal income taxes and related interest and penalties owed for 2007. The funds for this payment were obtained through borrowings under the Company's line of credit.

Cash provided by operating activities was $588,257 for the six months ended June 30, 2009 compared to $430,897 of cash provided by operating activities for the six months ended June 30, 2008. The primary reasons for the increase in cash flow was a reduction in inventory purchases in 2009 compared to 2008 and larger net income in 2009.

Cash used in investing activities for the six months ended June 30, 2009 was $493,707 compared to cash used in investing activities of $499,597 for the six months ended June 30, 2008. Cash used in investing activities primarily represents the purchase and in-house production of rental products as well as some purchases of capital equipment. In 2008 this was partially offset by proceeds from the disposal of equipment.

Cash used in financing activities was $69,997 for the six months ended June 30, 2009 compared with cash provided by financing activities of $258,320 for the six months ended June 30, 2008. The primary financing uses of cash in 2009 were repayment of the bank overdraft, notes payable and loans from a stockholder. The uses of cash in 2009 were partially offset by proceeds from the sale of common stock upon the exercise of outstanding options and advances on our line of credit. The primary financing source of cash in 2008 were from proceeds from the sales of common stock partially offset by payments on notes payable including the notes payable to a bank.

Recently issued accounting pronouncement:

On January 1, 2009, the Company adopted the provisions of Emerging Issues Task Force ("EITF") 07-05, Determining whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock, which provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in paragraph 11(a) of SFAS 133. Upon the adoption of EITF 07-05, the Company reclassified certain warrants that were previously classified equity to a derivative liability (Note 7).

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS No. 157 also expands financial statement disclosure requirements about a company's use of fair value measurements, including the effect of such measures on earnings. In February 2008, the FASB issued Staff Position FAS 157-2, which delayed the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted Staff Position FAS 157-2 on January 1, 2009.

On January 1, 2009, the Company adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 establishes accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Because the Company's subsidiary is wholly-owned by the Company, there are no noncontrolling interests, and as a result, the adoption of this standard had no effect on the Company's consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position ("FSP") SFAS 107-1 and Accounting Principles Board ("APB") 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP 107-1"), which will require that the fair value disclosures required for all financial instruments within the scope of SFAS 107, "Disclosures about Fair Value of Financial Instruments", be included in interim financial statements. This FSP also requires entities to disclose the method and significant assumptions used to estimate the fair value of financial instruments on an interim and annual basis and to highlight any changes from prior periods. FSP 107-1 is effective beginning with this interim period ending June 30, 2009. The adoption of FSP 107-1 did not have a material impact on the Company's financial statements.

In June 2009, the FASB approved its Accounting Standards Codification ("Codification") as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification which changes the referencing of financial standards is effective for interim or annual periods ending after September 15, 2009. Therefore in the third quarter of fiscal year 2009, all references made to US GAAP will use the new Codification numbering system prescribed by the FASB. As the codification is not intended to change or alter existing US GAAP, it is not expected to have any impact on the Company's financial position or results of operations, upon adoption.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There are several accounting policies that involve management's judgments and estimates and are critical to understanding our historical and future performance, as these policies and estimates affect the reported amounts of revenue and other significant areas in our reported financial statements.

Please refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operation" located within our 10-K filed on April 15, 2009 for the year ended December 31, 2008, for further discussion of our "Critical Accounting Policies".

On January 1, 2009, the Company adopted the provisions of Emerging Issues Task Force ( "EITF") 07-05, Determining whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock, which provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in paragraph 11(a) of SFAS 133. Upon the adoption of EITF 07-05, the Company reclassified certain warrants that were previously classified equity to a derivative liability. On January 1, 2009, we adopted the following additional critical accounting policy as a result of a newly-adopted accounting standard:

Derivative warrant liability

SFAS 133, as amended, requires all derivatives to be recorded on the balance sheet at fair value. As a result, beginning January 1, 2009, certain derivative warrant liabilities are now separately valued and accounted for on our balance sheet, with any changes in fair value recorded in earnings.

We utilize the Black-Scholes option-pricing model to estimate fair value. Key assumptions of the Black-Scholes option-pricing model include the market price of the Company's stock, applicable volatility rates, risk-free interest rates and the instrument's remaining term. These assumptions require significant management judgment. In addition, changes in any of these variables during a period can result in material changes in the fair value (and resultant gains or losses) of this derivative instrument.

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain information included in this quarterly report contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities, as well as other capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks include the need for additional capital in order to grow our business, our dependence on the 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 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 below and in our 10-K Report for the year ended December 31, 2008.