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 nine months ended September 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 nine months ended September 30, 2009 was $4,690,715 and $13,269,637 an increase of $2,491,977 or 113% and $5,441,718 or 70% compared to $2,198,738 and $7,827,919 for the three and nine months ended September 30, 2008. The increase in net revenue for the three and nine months ended September 30, 2009, compared to the three and nine months ended September 30, 2008 was due primarily to the Provider Settlement in 2008, which is explained in Note 9 to the Condensed Consolidated Financial Statements in this Report, and a greater number of products in use during the periods ended September 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          4,690,715        2,198,739
Fourth quarter                 -        3,935,639

Total net revenue   $ 13,269,637     $ 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.

We are introducing, during the fourth quarter of 2009, a new product into 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.

The Company is in the process of engaging an additional 25 sales representatives in major cities across the United States. These additions are part of the growth plans of the Company.

Net Product Rental Revenue. Net product rental revenue for the three and nine months ended September 30, 2009 was $2,547,457 and $7,796,826 an increase of $382,630 or 18% and $1,739,032 or 29% compared to $2,164,827 and $6,057,794 for the three and nine months ended September 30, 2008. The increase in net product rental revenue for the three and nine months ended September 30, 2009 was due primarily to a greater number of products in use during the periods ended September 30, 2009. Reasons for greater number of products in use are indicated in "Net Revenue" above.

Net product rental revenue for the three and nine months ended September 30, 2009 made up 54% and 59% of net revenue compared to 67% and 69% for the three and nine months ended September 30, 2008. The decrease in the percentage of total net revenue from product rental revenue during the first nine 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 nine months ended September 30, 2009 was due primarily to a greater number of products in use during the periods ended September 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 payor 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, 2009 was $2,143,258 and $5,472,811 an increase of $1,099,753 or 105% and $2,693,092 or 97% compared to $1,043,505 and $2,779,719 for the three and nine months ended September 30, 2008. Net sales of products (not including consumable supplies) revenue for the three and nine months ended September 30, 2009 was $467,436 and $1,275,996 an increase of $423,384 or 961% and $1,008,519 or 377% compared to $44,052 and $267,477 for the three and nine months ended September 30, 2008. The increase in net sales revenue for such products for the three and nine months ended September 30, 2009, compared to the three and nine months ended September 30, 2008 was due primarily to increased orders for sales of products for the reasons indicated in "Net Revenue" above and sales of products in the three months ended September 30, 2008 which were not recorded as revenue due to the Provider Settlement.

Net sales of consumable supplies for the three and nine months ended September 30, 2009 was $1,675,822 and $4,196,815 an increase of $676,369 or 68% and $1,684,573 or 67% compared to $999,453 and $2,512,242 for the three and nine months ended September 30, 2008. The increase in net supplies sales revenue for the three and nine months ended September 30, 2009 was due primarily to a greater number of products in use during the periods ended September 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 sales revenue for the three and nine months ended September 30, 2009 made up 46% and 41% of net revenue compared to 33% and 31% for the three and nine months ended September 30, 2008. The increase in the percentage of total net revenue during the first nine months of 2009 was due primarily to a greater number of products in use during the periods ended September 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 payor typically determines whether the patient will rent or purchase a unit depending on the anticipated time period for its use.

Provider Settlement. 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. See Note 9 to the Condensed Consolidated Financial Statements in this Report.

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 in the third quarter of 2008.

Gross Profit. Gross profit for the three and nine months ended September 30, 2009, was $3,793,487 and $11,113,104 or 81% and 84% of net rental and sales revenue.

For the three months ended September 30, 2009, this represents an increase of $2,048,347 or 117% compared to $1,745,140 or 54% of net rental and sales revenue for the three months ended September 30, 2008. The increase in gross profit for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 is primarily because of the Provider Settlement in 2008. The increase in gross profit percentage for the three months ended September 30, 2009 as compared with the same period in 2008 is primarily from the effect of the Provider Settlement adjustment in 2008.

For the nine months ended September 30, 2009, this represents an increase of $4,473,709 or 67% compared to $6,639,395 or 75% of net rental and sales revenue for the nine months ended September 30, 2008. The increase in gross profit for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 is primarily because of the Provider Settlement in 2008. The increase in gross profit percentage for the nine months ended September 30, 2009 as compared with the same period in 2008 is primarily because of the Provider Settlement in 2008.

Under the terms of the Provider Settlement discussed above, the Company has agreed to allow insureds of Anthem to continue to use the units for which we agreed to no longer bill Anthem. These units at patients continue to be depreciated and the depreciation expense is included in Cost of Revenue even though no revenue is being derived from those units. The Company does not believe the depreciation expense for these units has significantly impacted operations.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three and nine months ended September 30, 2009 was $2,906,657 and $7,783,784 an increase of $270,429 or 10% and $1,514,388 or 24% compared to $2,636,228 and $6,269,396 for the three and nine months ended September 30, 2008. 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 24% while net revenue increased 70% during the nine months ended September 30, 2009; this difference is due in large part to the Provider Settlement in 2008 and recurring revenue from net product rentals and recurring sales of consumable supplies where the commission expense was recorded in a prior period.

On November 12, 2009, the Company entered into a lease agreement with Spiral Lone Tree, LLC (the "Lease Agreement"). The Lease Agreement provides for the lease of 75,000 square feet in Lone Tree, Colorado (the "Property") beginning January 1, 2010. The Property will serve as the Company's headquarters, office, plant and warehouse, replacing the existing facilities of approximately 17,000 square feet which are under an expiring lease. The move to the larger space was driven by the Company's recent and anticipated growth, including the hiring of additional billing personnel and the planned engagement of 25 more sales representatives.

The term of the Lease Agreement is 69 months; provided, however, that the Lease Agreement may be terminated after 42 months upon payment of a termination fee as set forth in the Lease Agreement. The Lease Agreement provides for a five year renewal option at the then market rental rate.

During the first year of the Lease Agreement, the annual rental payment will be $300,000. In the second, third, fourth and fifth years, the annual rental payment will be $1,650,000, $1,725,000, $1,800,000, and $1,875,000, respectively. For months 61 through 69, the total rental payment will be $1,406,250. Management anticipates that for accounting purposes the Company will have an annual rental expense of approximately $1,440,000 throughout the term of the lease.

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 nine months ended September 30, 2009 was $197 and $3,002, compared to $4,863 and $5,934 for the same periods in 2008.

Interest expense for the three and nine months ended September 30, 2009 was $38,317 and $112,623, compared to $6,965 and $30,604 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 nine months ended September 30, 2009 was other expense of $-- and $1,175, compared to other expense of $229 and other income of $26,972 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 $171,530 for the nine months ended September 30, 2009 reflects a reduction in the market value of certain outstanding warrants (these warrants were exercised in September, 2009 and are no longer outstanding. 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 $1,272,000 for the nine months ended September 30, 2009 compared to $220,000 of expense for the same period in 2008. This is primarily due to our having higher income before taxes of $3,390,054 for the nine months ended September 30, 2009 compared to income before taxes of $372,301 for the same period in 2008. The nine months ended September 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 recorded in the year ended December 31, 2008.

Liquidity and Capital Resources.

The Company's financial statements for the three and nine month periods ended September 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 nine months 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 ($2,289,000 available as of September 30, 2009, remaining availability of $1,189,897). The balance on the line of credit at September 30, 2009 was $1,099,103. At November 13, 2009, there was no balance on the line.

For the nine months ended September 30, 2009, the Company's cash receipts have exceeded operating plans. However, there is no assurance that our operations and available borrowings will provide enough cash for operating requirements or for the additional purchases of equipment. 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. In September 2009, the Company made payments of $275,000 for estimated income taxes for 2009.

Cash provided by operating activities was $1,761,624 for the nine months ended September 30, 2009 compared to $65,239 of cash provided by operating activities for the nine months ended September 30, 2008. The primary reasons for the increase in cash flow from operating activities was a reduction in inventory purchases in 2009 compared to 2008 and larger net income in 2009.

Cash used in investing activities for the nine months ended September 30, 2009 was $817,674 compared to cash used in investing activities of $832,188 for the nine months ended September 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 $704,554 for the nine months ended September 30, 2009 compared with cash provided by financing activities of $766,949 for the nine months ended September 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 and net borrowings on notes payable.

See the discussion above under "Selling, General and Administrative Expenses" for information regarding a new lease of facilities into which the Company entered in November, 2009.

Recently issued accounting pronouncements:

In June 2009, the Financial Accounting Standards Board ("FASB") approved the FASB Accounting Standards Codification (the "Codification") as the single source of authoritative non-governmental generally accepted accounting principles (GAAP). All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission ("SEC"), have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the Company's consolidated financial statements, as all future references to authoritative accounting literature will be referenced in accordance with the Codification. As a result of the Company's implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable.

On January 1, 2009, the Company adopted new guidance issued by the FASB related to the accounting for business combinations and related disclosures. This new guidance addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. The guidance also establishes expanded disclosure requirements for business combinations. The guidance was effective for the Company on January 1, 2009, and the Company will apply this new guidance prospectively to all business combinations subsequent to January 1, 2009.

On January 1, 2009, the Company adopted new guidance issued by the FASB related to the accounting for noncontrolling interests in consolidated financial statements. This guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance requires that noncontrolling interests in subsidiaries be reported in the equity section of the controlling company's balance sheet. It also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company's income statement. Because the Company's subsidiary is wholly-owned by the Company, there are no noncontrolling interests, and as a result, the adoption of this guidance had no impact on the Company's condensed consolidated financial statements.

In April 2009, the FASB issued new accounting guidance related to interim disclosures about the fair values of financial instruments. This guidance requires disclosures about the fair value of financial instruments whenever a public company issues financial information for interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009. The Company adopted this guidance upon its issuance, and it had no material impact on the Company's condensed consolidated financial statements.

In June 2009, the FASB issued new accounting guidance related to the accounting and disclosures of subsequent events. This guidance incorporates the subsequent events guidance contained in the auditing standards literature into authoritative accounting literature. It also requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. This guidance is effective for all interim and annual periods ending after June 15, 2009. The Company adopted this guidance upon its issuance and it had no material impact on the Company's condensed consolidated financial statements.

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, and Note 2 to the Condensed Consolidated Financial Statements in this Report for further discussion of our "Critical Accounting Policies".

On January 1, 2009, the Company adopted the guidance found in the Derivative and . . .