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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

For the fiscal year ended December 31, 2007

Commission file No. 0-26206

Orthometrix, Inc.

(Exact name of small business issuer as specified in its charter)


Delaware 06-1387931
(State or other jurisdiction of
incorporation or organization) 		(I.R.S. Employer
Identification No.)
106 Corporate Park Drive, Suite 102,
White Plains, NY 		10604
(Address of principal executive office) (Zip Code)

(914) 694-2285
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0005 per share

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. Yes    [X]     No    [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB    [ ]

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

Registrant’s revenues for its most recent year were $2,409,589.

The aggregate market value of the registrant’s Common Stock, par value $0.0005 per share, held by non-affiliates of the registrant as of March 5, 2008 was $626,874 based on the price of the last reported sale on the OTC Pink Sheets.

As of March 5, 2008 there were 45,908,618 shares of the registrant’s Common Stock, par value $0.0005 per share, outstanding.

Documents Incorporated By Reference

None

Transitional Small Business Disclosure Format (Check one): Yes    [ ]     No [X]




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INTRODUCTION

The statements included in this Report regarding future financial performance and results and other statements that are not historical facts constitute forward-looking statements. The words ‘‘believes,’’ ‘‘intends,’’ ‘‘expects,’’ ‘‘anticipates,’’ ‘‘projects,’’ ‘‘estimates,’’ ‘‘predicts,’’ and similar expressions are also intended to identify forward-looking statements. These forward-looking statements are based on current expectations and are subject to risks and uncertainties. In connection with the ‘‘safe harbor’’ provisions of the Private Securities Litigation Reform Act of 1995, Orthometrix, Inc., (‘‘Orthometrix’’ or the ‘‘Company’’ or ‘‘OMRX’’), cautions the reader that actual results or events could differ materially from those set forth or implied by such forward-looking statements and related assumptions due to certain important factors, including, without limitation, the following: (i) the effect of product diversification efforts on future financial results; (ii) the availability of new products and product enhancements that can be marketed by the Company; (iii) the importance to the Company’s sales growth and that regulatory approval of products be granted, particularly in the United States; (iv) the acceptance and adoption by primary care providers of new products and the Company’s ability to expand sales of its products to these physicians; (v) adverse affect resulting from changes in the reimbursement policies of governmental programs (e.g., Medicare and Medicaid) and private third party payors, including private insurance plans and managed care plans; (vi) the high level of competition in the rehabilitation and physical therapy markets; (vii) the high level of competition in the pain management market; (viii) changes in technology; (ix) the Company’s ability to continue to maintain and expand acceptable relationships with third party dealers and distributors; (x) the Company’s ability to provide attractive financing options to its customers and to provide customers with fast and efficient service for the Company’s products; (xi) changes that may result from health care reform in the United States may adversely affect the Company; (xii) the Company’s cash flow and the results of its ongoing financing efforts; (xiii) the effect of regulation by the United States Food and Drug Administration (‘‘FDA’’) and other government agencies; (xiv) the Company’s ability to secure FDA approval to market its products; (xv) the effect of the Company’s accounting policies; (xvi) the outcome of potential litigation; and (xvii) other risks described elsewhere in this Report and in other documents filed by the Company with the Securities and Exchange Commission. The Company is also subject to general business risks, including adverse state, federal or foreign legislation and regulation, adverse publicity or news coverage, changes in general economic factors and the Company’s ability to retain and attract key employees. Any forward-looking statements included in this Report are made as of the date hereof, based on information available to the Company as of the date hereof, and, subject to applicable law, the Company assumes no obligation to update any forward-looking statements.

PART I

ITEM 1.    BUSINESS

Orthometrix, Inc. markets, sells and services several musculoskeletal product lines used in pharmaceutical research, diagnosis and monitoring of bone and muscle disorders, sports medicine, rehabilitative medicine, physical therapy and pain management. Prior to April 11, 2002, the Company also developed, manufactured, sold and serviced a broad line of traditional bone densitometers used to assess bone mineral content and density, one of several factors used by physicians to aid in the diagnosis and monitoring of bone disorders, particularly osteoporosis. This line of products, which was the Company’s primary business, was sold on April 11, 2002 to CooperSurgical Acquisition Corp. (‘‘Cooper’’), a wholly-owned subsidiary of the Cooper Companies, Inc. (NYSE:COO) (the ‘‘Asset Sale’’). As of April 11, 2002, the Company changed its name from Norland Medical Systems, Inc. to Orthometrix, Inc. As a result of the Asset Sale, the Company’s subsidiaries became inactive and were subsequently dissolved in 2003.

During the past two years, the Company has experienced aggregate losses from operations of $3,056,246 and has incurred a total negative cash flow from operations of $1,390,003 for the same two-year period. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continued existence is dependent upon several factors, including obtaining substantial additional financing, increasing sales volume, achieving profitability on the sale of some products and

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developing new products. The Company is pursuing initiatives to increase liquidity, including external investments and obtaining additional lines of credit. In order to increase its cash flow, the Company is continuing its efforts to stimulate sales. The Company has also implemented high credit standards for its customers and is emphasizing the receipt of down payments from customers at the time their purchase orders are received and attempting to more closely coordinate the timing of purchases with the timing of orders of products.

The Company currently offers five product lines comprised of a total of 15 models. Its principal products are the pQCT ® (or XCT™) series for research applications, the pQCT ® (or XCT™) series for clinical applications, the Leonardo™, the VibraFlex ® series and the Orbasone™. During 2007 and 2006, respectively, 58.2% and 61.8% of total sales were derived from nine customers. These customers are primarily universities and hospitals. The Company markets, sells and services its products primarily in the United States and Canada.

The Company markets, sells and services its products and devices through two divisions – the Healthcare Division and the Sports & Fitness Division:

•   The Healthcare Division markets, sells and services:
1.   pQCT ® (peripheral Quantitative Computed Tomography) bone and muscle measurement systems for use in musculoskeletal research applications, including for bone disorders and human performance (also called the XCT™ research product line);
2.   pQCT ® bone and muscle measurement systems for use in musculoskeletal clinical applications, including for bone disorders and human performance (also called the XCT™ clinical product line);
3.   the pDEXA ® SABRE system, a DXA-based (Dual Energy X-Ray Absoptiometry) system used to measure bone mass and determine body composition of small laboratory animals; during 2007, this line of products has been discontinued for sale;
4.   patented exercise systems used in physical therapy, sports medicine and rehabilitative medicine – the VibraFlex ®  550 and the Mini VibraFlex ® (three years ago, the Company started selling in the physical therapy, sports medicine and rehabilitative markets the Galileo™ 2000 model that the Company imported from Germany while it was redesigning a United States-made version, which the Company named VibraFlex ®  Rx; the Company began marketing the VibraFlex ®  Rx in the second quarter of 2005 in such markets; by the end of 2006, the entire production of VibraFlex ®  Rx models had been sold and the Company introduced the VibraFlex ®  550, now imported from Germany);
5.   the Leonardo™, a human performance measurement device used to quantify the progress made by individuals using the Company’s VibraFlex ® exercise systems; and
6.   the Orbasone™ Extracorporal Shock Wave Therapy pain management system (‘‘Orbasone™ ESWT’’), used to treat chronic plantar fasciitis (foot pain), was added to the Company’s product line following the successful completion of pre-market approval of the system by the FDA in the third quarter of 2005 (in the first quarter of 2005, the Company received approval from Health Canada to market and sell the Orbasone™ in Canada to treat chronic plantar fasciitis). The Company also established Orbasone Mobile, LLC (‘‘Orbasone Mobile’’), a regional mobile service to help promote its Orbasone™ ESWT system by bringing ESWT treatment to the doctor’s office for a fee.
•   The Sports & Fitness Division markets, sells and services the following patented exercise systems:
1.   the Mini VibraFlex ® ;
2.   the Mini VibraFlex ® Plus;
3.   the VibraFlex ®  550 (see above)

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4.   the VibraFlex ®  600 (three years ago, the Company started designing a more powerful version of the Galileo™ 2000 that we began marketing under the name VibraFlex ®  500 in the fourth quarter of 2004 in the sports and fitness market. By the end of 2006, the entire production of VibraFlex ®  500 models had been sold and the Company introduced the VibraFlex ®  600, now imported from Germany).

The VibraFlex ® products are based on the same patented technology as the Galileo™ products and offer an improved approach to muscle strength development through the short and intense stimulation of the muscles. The Sports & Fitness Division markets, sells and services these systems to fitness centers, gyms, sports clubs and associations and to the general public.

Recent Developments

On February 18, 2007, Kathy Smith, a leader in the health and fitness market, and her representatives on behalf of Kathy Smith Lifestyles (‘‘KSL’’) entered into a sales agreement with the Company. KSL agreed to promote the VibraFlex Home Edition through educational seminars, media appearances and its website, kathysmith.com, with emphasis on the female segment of the market. The agreement ends on December 31, 2007 and can be renewed for successive one year terms thereafter. Currently, this agreement is being discussed between the parties for further participation.

Markets and Products

The Company currently offers five product types comprised of a total of 15 models: 5 models of pQCT ® systems for bone & muscle research application (XCT Research SA, XCT Research SA+, XCT Research M, XCT Research M+, and XCT 3000 Research); 2 models of pQCT ® systems for clinical application related to bone & muscle disorders (XCT 2000L and XCT 3000); 2 models of patented powered exercise systems for rehabilitation and physical therapy (Mini VibraFlex ® and VibraFlex ® 550); 1 model of human performance measurement system (Leonardo™); 3 models of VibraFlex ® for sports and fitness (Mini VibraFlex ®   Plus , Mini VibraFlex ® , and VibraFlex ® 600); 1 model of VibraFlex ® for the home wellness/fitness market (VibraFlex ® Home Edition) and 1 model of pain relief system (Orbasone™ ESWT).

The following is a description of each of the Company’s product types and primary models.

1.    The pQCT™ Systems for Bone and Muscle Research Applications

The Company believes that over the past decade, peripheral Quantitative Computed Tomography (pQCT ® ) has replaced Dual Energy Bone Absorptiometry (DEXA or DXA) as the technology of choice for pharmaceutical research laboratories specializing in bone disorders such as osteoporosis. Unlike DXA, pQCT ® allows true volumetric measurement of both bones and muscles. The Company believes that it allows not only faster assessment of new therapeutic agents but it also has a stronger impact on the entire musculoskeletal system.

The Company directly markets, sells and services in the US and Canada the following pQCT ® systems for in vivo and in vitro research:

XCT Research SA/SA+ (bone/muscle measurement for small laboratory animals such as rats);
XCT Research M/M+ (bone/muscle measurement for transgenic mice);
XCT 3000 Research − (bone/muscle measurement for large laboratory animals such as primates).

Stratec Medizintechnik GmbH (‘‘Stratec’’), a worldwide leader in pQCT ® technology, manufactures these systems in Germany and markets them in the rest of the world (other than the United States and Canada where the Company directly markets, sells and services its products). North America accounts for about 80% of the worldwide research market.

2.    The pQCT ® Systems for Clinical Application Related to Bone and Muscle Disorders

The clinical market is usually lagging several years behind the research market. Therefore, DXA still is the ‘‘gold standard’’ in the diagnostic and monitoring of bone disorders, in spite of its shortcomings.

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However, the two-dimensional nature of DXA technology makes it of little value in situations when parameters such as bone thickness or bone cross section area need to be measured (orthopedics) or when long bones continue to grow (pediatrics).

The Company directly markets, sells and services in the US and Canada the following pQCT ® systems for clinical assessment and monitoring of bone density and architecture:

XCT2000L (bone and muscle measurement at the forearm, foot and tibia);
XCT 3000 (bone and muscle measurement at the tibia and femur).

All systems are principally marketed to the pediatrics and orthopedics specialties. Stratec, a worldwide leader in pQCT ® technology, manufactures these systems in Germany and markets them in the rest of the world (other than the United States and Canada where the Company directly markets, sells and services its products).

Sales, rental, and service of all pQCT ® systems for in vivo and in vitro research, clinical assessment and monitoring of bone density and architecture represented approximately 61.0% of the Company systems sales from operations during fiscal year 2007.

3.    Patients with Incontinence that Benefit from Exercise

One target for the Galileo™/VibraFlex ® product line is the large incontinence market. It is well recognized that exercise of the perineal muscles can improve their strength and reduce incontinence. The VibraFlex ®  550 is a patented powered exercise system that allows patients with incontinence to stimulate such muscles at a rapid (25/30 Hz) rate, providing them with the exercise that can reduce incontinence. The VibraFlex ®  550 replaced the VibraFlex ®  Rx for this application in the fourth quarter of 2006. The VibraFlex ®  550 is manufactured in Germany by Novotec Medical GmbH (‘‘Novotec’’).

4.    Patients with Diabetes that Benefit from Exercise

It is well known that individuals with diabetes benefit from exercise. In particular, exercise can improve blood circulation in the legs of diabetics. Unfortunately, diabetics usually are not capable of long exercise sessions, and their exercise efforts must be predictable so that proper insulin levels can be maintained. The VibraFlex ®  550 rapid (25/30 Hz) stimulation rate, which does not tax the cardiopulmonary system, is well suited to the needs of these individuals. The VibraFlex ®  550 allows people with diabetes to enjoy the benefits of exercise. The VibraFlex ®  550 replaced the VibraFlex ® Rx for this application in the fourth quarter of 2006. The VibraFlex ®  550 is manufactured in Germany by Novotec.

5.    Rehabilitation / Physical Therapy

The patented Galileo™ powered exercise systems have already penetrated the European and Japanese rehabilitation and physical therapy market. They have been redesigned in cooperation with the Company and are marketed by the Company in the US and Canada under the name of VibraFlex ® They are used to rehabilitate muscle, tendons and ligaments, and to improve muscle strength and coordination. The Company’s VibraFlex ®  550 (whole body vibration) and Mini VibraFlex ® (upper body vibration) exercise systems are specifically used to:

•   exercise postural muscles and joints;
•   improve muscle strength, reflexes and joint motions;
•   redevelop postural muscles, joints and reflexes after injury or disease;
•   reduce the pain and disability associated with osteoarthritis; and
•   allow patients with Parkinson’s disease to benefit from exercise that can slow the progress of the disease.

The new VibraFlex ®  550 model is also equipped with a Chip Card option that allows physical therapists to program a specific program for each of their patients.

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6.    The Human Performance Measurement System

The Leonardo™ measures various key parameters of human performance, such as force and power. It has been designed to help the rehabilitation specialist and the physical therapist measure the progress made by his/her patients. The Leonardo™ system is made by Novotec. Leonardo™ sales were not significant for 2007.

7.    Sports and Fitness

The VibraFlex ® is a revolutionary exercise system based on the same new and patented concept as the Galileo™ systems. Many European athletes and professional teams (ski, soccer, basketball, volleyball, tennis, etc.) already use the Galileo™ as an inherent part of their training to increase muscle power. One of the first United States athletes to use the Galileo™ system was Lance Armstrong, several times winner of the Tour de France bicycle competition. The Chicago White Sox baseball team was the first United States professional team to use the Galileo™ technology and the VibraFlex ® 500 has since been incorporated in their routine training and conditioning. The list of United States professional and collegiate teams using the VibraFlex ® product line is growing and now includes the New York Giants, the Miami Dolphins, the Orlando Magic, the Miami Heat, the L.A. Clippers, the Boston Celtics, the Philadelphia 76’ers, the Toronto Raptors, the New England Patriots, the Phoenix Suns, the Pittsburgh Pirates, the Texas Rangers , the Phoenix Coyotes, the New Jersey Nets, Duke University, Pennsylvania University and Ohio State University.

The VibraFlex ® system was designed so that the powerful Galileo™ technology would be affordable to the sports and fitness industry and to the home exercise market. In the fourth quarter of 2006, the VibraFlex ®  550 replaced the VibraFlex ®  Rx for the spa/fitness applications and the VibraFlex ®  600 replaced the VibraFlex ®  500 for the sports application. The new VibraFlex ®  550 and VibraFlex ®  600 models are also equipped with a Chip Card option that allows spa/fitness clubs to sell usage and personal/team trainers to program their training protocols.

In the fourth quarter of 2006, the Company introduced the VibraFlex ®  Home Edition in order to make its powerful vibration technology accessible to the public.

The VibraFlex ®  600, the VibraFlex ® 550, the VibraFlex ®  Home Edition, the Mini VibraFlex ® and the Mini VibraFlex ® Plus models are manufactured for the Company by Novotec.

8.    Pain Management

In the United States, the Company only received approval from the FDA to market the Orbasone™ for the treatment of chronic plantar fasciitis (foot pain). ESWT has typically been used to treat minor pain in soft tissues, such as the feet, ankles, elbows, shoulders and knees. The Orbasone™ ESWT is designed to deliver energy waves to patients in treatment sessions of less than 30 minutes under the supervision and care of a physician such as an orthopedic surgeon or podiatrist.

Despite the release in January 2006 of a new Category III Current Procedural Terminology (CPT) Code extending the reimbursement of ESWT procedures to Medicare, United Healthcare, a leading private insurance carrier decided to discontinue reimbursing for ESWT procedures, thereby putting on hold the development of this industry. As a result, sales of Orbasone units were insignificant in 2007 and 2006.

9.    Products and Applications under Development

•   Orbasone™ ESWT diversification: the Company is investigating additional applications of its Orbasone™ ESWT system beyond the treatment of soft tissue pain. Preliminary studies have shown that ESWT may be used in areas of skin regeneration (healing wounds) due to its potential ability to improve skin regeneration following severe burns, accelerate healing of chronic skin lesions and enhance skin flap survival in connection with grafts. ESWT enhances tissue vascularisation and neoangiogenesis. There have already been some very promising studies conducted on animals, but limited clinical data have been available on humans. The skin regeneration market is large and the Company intends to position the Orbasone™ in that market.

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Sales, Marketing and Customer Service

The Company currently employs one Marketing Manager, one Regional Sales Manager for Pain Management, one Sales Manager for Rehabilitation/Physical Therapy, one full time Sales Consultant for Sports/Fitness, one part-time pQCT ® Sales Applications Consultant, one Sales Administration Manager and one Service Engineer.

The Company sells pQCT ® Research systems and pQCT Clinical systems directly to its customers, whether they are research or clinical institutions. For Galileo™, VibraFlex ® and Leonardo™ sales, the Company typically uses an exclusive independent sales representative to cover one or more states. The Company also sells directly to its customers in those markets where the Company does not have third party sales representatives. The Company’s sales staff is responsible for the support and supervision of independent sales representatives within their geographic region. Support includes participation in trade shows, symposiums, customer visits, product demonstrations, ongoing distribution of literature and publications, sales training and presentations of financing programs. The Company is in the process of expanding its network of independent sales representatives to make use of the country’s large market of rehabilitation centers, physical therapists and fitness facilities. The Company has also started an effort to contract with specialty catalogs and third party websites to promote its new VibraFlex ®  Home Edition to the public.

The Company markets the Orbasone™ ESWT directly to podiatrists, orthopedic surgeons and mobile services providing ESWT services to such podiatrists and orthopedic surgeons. In the third quarter of 2006, the Company set up Orbasone Mobile, LLC, a regional mobile service to help promote its Orbasone™ ESWT system by bringing ESWT treatment to the doctor’s office for a fee. Orbasone Mobile, LLC’s sales were insignificant for 2007 and 2006.

Marketing efforts are focused primarily on supporting the Sales Manager for Rehabilitation/Physical Therapy and the Sales Consultant for Sports/Fitness in their respective management of independent sales representatives, the pQCT ® Sales Applications Consultant and the Marketing Manager. The Marketing Manager focuses on managing sales requests received on the Company’s websites, managing sales lead generation programs, managing product introductions and new product financing programs, designing and maintaining media support such as brochures, manuals, and trade show material, and developing and maintaining the Company Web sites.

In the United States and Canada, the Company offers one-year warranties covering parts and labor on both the hardware and software included in its systems (except for computer systems, if any, which are covered under their respective manufacturers’ warranty), as well as extended warranty contracts. Outside of the United States and Canada, the Company only offers one-year warranties on parts; the labor warranty is provided by the Company’s distributors. The Company provides warranty services to its customers in the United States and Canada. Any costs incurred by the Company in connection with a warranty of a system not manufactured by the Company are borne by such manufacturer pursuant to the applicable distribution agreement.

The Company has no obligation to provide any other services to its third party independent sales representatives or other customers. However, the Company does offer non-warranty services and a range of other product support services in cooperation with its third-party independent sales representatives. The Company also offers training at customer locations and the Company’s facilities to end-user customers, independent sales representatives and service technicians.

Manufacturing

Following the sale of its bone measurement business, the Company relied exclusively on third parties for the manufacturing of its products. Some components are produced in accordance with specifications of the specific product the Company sells and requires substantial lead times. Until production quantities increase to a level that permits the Company to realize economies of scale and dual sourcing of components, each component is generally purchased from a limited number of sources and is subject to the risk that its availability could become delayed.

Manufacturing processes for the products marketed by the Company are subject to stringent federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and

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disposal of certain materials and wastes. In the United States, such laws and regulations include the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, and the Resource Conservation and Recovery Act. The Company believes that it has complied in all material respects with such laws and regulations. There can be no assurance that the Company will not be required to incur significant costs in the future with respect to compliance with such laws and regulations.

Musculoskeletal Development Products

The Leonardo™, VibraFlex ® 550, VibraFlex ® 600, and the Mini VibraFlex ® products marketed by the Company were developed and are manufactured by Novotec at its facilities located in Pforzheim, Germany. Manufacturing consists primarily of testing components, forming and painting of covers, final assembly and quality assurance testing. The Company is dependent on Novotec to manufacture the Leonardo™, VibraFlex ® 550, VibraFlex ® 600 and Mini VibraFlex ® products that the Company and others market in amounts and at levels of quality necessary to meet demand. The Company has no ownership interest in Novotec.

The Company believes that Novotec has sufficient capacity to supply the Company’s need for VibraFlex ® , Leonardo™ and Mini VibraFlex ® products for at least the next 12 months.

The VibraFlex ® 500, VibraFlex ® RX and VibraFlex ® 500S products marketed by the Company were developed by the Company and were manufactured for the Company by Kimchuk, Inc. at its facilities located in Connecticut. Manufacturing consisted primarily of testing components, forming and painting of covers, final assembly and quality assurance testing. The Company is no longer using Kimchuk to manufacture VibraFlex products.

Pain Management Systems

In 2002, the Company acquired rights to manufacture the Orbasone™ under a license from MIP and has since retained Kimchuk to manufacture the Orbasone™ in the U.S. for the U.S. and Canadian markets. The manufacturing of the Orbasone™ consists primarily of procuring and testing components, final assembly and quality assurance testing. The Company is dependent on several component manufacturers to supply sufficient components for the Orbasone™ systems, and on Kimchuk to assemble such components, in amounts and at levels of quality necessary to meet demand and be competitive. The Company has no ownership interest in MIP or Kimchuk.

Some components are produced in accordance with specifications that are specific to the Orbasone™ and require substantial lead times. Until such time as production quantities increase to a level that provides for opportunities to realize economies of scale and dual sourcing of components, each component is generally purchased from a limited number of sources and is subject to the risk that its availability could become delayed if there was a demand for the product.

Distribution Agreements

Following the sale of its bone measurement business, the Company focused exclusively on its musculoskeletal products. The following parties have provided to the Company rights to market, sell and service certain products:

Stratec

Under a Distribution Agreement, dated as of October 1, 1999, Stratec gave Bionix L.L.C., a company of which Reynald Bonmati is president, the exclusive right to distribute all Stratec products in the United States, Canada, Mexico, Central and South America and the Caribbean. The Company entered into an Assignment and Assumption Agreement, dated as of April 12, 2002, with Bionix, L.L.C. whereby Bionix assigned to the Company all of its right, title and interest in, to and under this Distribution Agreement.

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Under the Distribution Agreement, Stratec grants the Company a license, with the right to sublicense, to market, sell and service the pQCT-based systems in the United States, Canada, Mexico, Central and South America and the Caribbean. Under the terms of the four-year Distribution Agreement, the Company may purchase these systems from Stratec at a fixed price to be adjusted from time to time by mutual consent. On October 1, 2007, the Distribution Agreement with Stratec was renewed for one year, and will be renewed on every October 1st for a one-year term provided that the Company or Stratec provide the other party thereto with proper and timely written notice of the election to renew the term of the Distribution Agreement.

Novotec

Under a Distribution Agreement, dated as of October 1, 1999, Novotec gave Bionix the exclusive right to distribute the Galileo™ and Leonardo™ product lines in the United States, Canada, Mexico, Central and South America and the Caribbean. The Company entered into an Assignment and Assumption Agreement, dated as of April 12, 2002, with Bionix, whereby Bionix assigned to the Company all of its right, title and interest in, to and under this Distribution Agreement.

Under the Distribution Agreement, Novotec also grants the license, including a right to sublicense, to market, sell and service the Galileo™ and Leonardo™ systems in the United States, Canada, Mexico, Central and South America and the Caribbean. Under the terms of the four-year Distribution Agreement, the Company may purchase the Galileo™ and Leonardo™ systems from Novotec at a fixed price to be adjusted from time to time by mutual consent. On October 1, 2007, the Distribution Agreement with Novotec was renewed for one year, and may be renewed by either party upon prior notice to the other on every October 1st for consecutive one-year terms provided that the Company or Novotec provide the other party thereto with proper and timely written notice of the election to renew the term of the Distribution Agreement.

Competition

Musculoskeletal Development Products

The Galileo™ and VibraFlex ® products offer a novel approach to muscle strength development. The owner of Novotec has applied for patents regarding the Galileo™ products and has already received certain patents, namely in Germany and in the U.S. Despite the absence of directly similar products, there are a number of competing approaches and products that develop muscle strength. Many of the Company’s existing competitors and potential competitors have substantially greater financial, marketing and technological resources, as well as established reputations for success in developing, selling and servicing products. The Company expects existing and new competitors will continue to introduce products that are directly or indirectly competitive with the Galileo™ and VibraFlex ® products. Such competitors may be more successful in marketing such products. There can be no assurance that the Company will be able to compete successfully in this market.

The Company’s primary competitors for the sale of musculoskeletal development products are marketers of exercise equipment such as OMNI Fitness and Stairmaster. These companies have products that compete directly with the products marketed by the Company in certain segments of the market. Other companies, such as Power Plate, are marketing products that compete directly with VibraFlex ® products. There can be no assurance that the Company’s competitors will fail to develop and market products that make use of the Galileo™’s and VibraFlex ® ’s novel approach or that are lower priced or better performing as compared to the Galileo™ or VibraFlex ® products.

The Company believes that the products it markets compete primarily on the basis of price/performance characteristics, perceived efficacy of results, ease, convenience and safeness of use, quality of service and price.

Pain Management Systems

The pain management systems market was highly competitive until reimbursement became disappointing. Several companies have developed devices that compete or will compete with the

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Orbasone™ ESWT. The Company’s primary competitors were Donier MedTech, SanuWave, Inc., Siemens AG and Medispec Ltd., which had products that had already obtained premarket approval (in some cases, for the treatment of plantar fasciitis and in some cases, for the treatment of tennis elbow), as well as Storz Medical, MTS Medical Technologies & Services GmbH, EMS Dolorclast. However, the Company believes that, except for the two latter competitors, most other companies have abandoned the market following the decrease in reimbursement rates. Subject to improvement is reimbursement rates the Company intends to seek PMA approval for additional applications of the Orbasone™ ESWT, such as for the treatment of golf shoulder, tennis elbow and knee pain, when and if it has the financial capability. The Company competes on the basis of size (compactness), performance, price and availability as the Orbasone™ ESWT is the only product of its category that is manufactured in the United States.

Third Party Reimbursement

Pain Management Systems

Pain management is reimbursed only under limited circumstances. Although a Current Procedural Terminology (CPT ® ) code for the Orbasone™ covering chronic plantar fasciitis was published in October 2005 and made effective as of January 1, 2006, there can be no assurance that CMS or other third party payers will reimburse or continue to reimburse patients for pain management systems and pain treatment sessions involving the Orbasone™ system or that the reimbursement levels will be sufficient to make the purchase of the Orbasone™ attractive to health care providers. Presently reimbursements have been disappointing.

Musculoskeletal Development Products

As with general exercise equipment which requires no professional supervision, the Galileo™ and VibraFlex ® series of musculoskeletal development products are not covered under federal or state health care insurance programs or by third party health insurance payers. However, as with other exercise equipment used during an exercise session provided by a licensed physical therapy provider, sessions using the Galileo™ and VibraFlex ® series may be reimbursed under various reimbursement codes for which CMS establishes recommended reimbursement rates effective January 1 of each calendar year. On several occasions, CMS has affected increases and decreases in its recommended reimbursement rates and has made changes in the types of sessions eligible for reimbursement. There can be no assurance that CMS will not continue to make changes from time to time. The Company could be materially and adversely affected by such changes.

Government Regulation

The development, testing, manufacturing and marketing of the bone densitometry and pain management products marketed by the Company are regulated by the FDA in the United States and by various foreign regulatory agencies. The testing for, preparation of, and subsequent FDA review of required applications is expensive, lengthy and uncertain. Moreover, regulatory approval or clearance, if granted, can include significant limitations on the indicated uses for which a product may be marketed. Failure to comply with applicable regulations can result in warning letters, civil penalties, refusal to approve or clear new applications or notifications, withdrawal of existing product approvals or clearances, product seizures, injunctions, recalls, operating restrictions, and criminal prosecutions. Delays in receipt of or failure to receive clearances or approvals for new products would adversely affect the marketing of such products and the results of future operations.

Medical devices are classified as either Class I, II, or III based on the risk presented by the device. Class I devices generally do not require review and approval or clearance by the FDA prior to marketing in the U.S. Class II devices generally require premarket clearance through the Section 510(k) premarket notification process, and Class III devices generally require premarket approval through the lengthier premarket approval application (‘‘PMA’’) process. Orthometrix markets Class I, II, and III devices. Section 510(k) submissions may be filed only for those devices that are ‘‘substantially equivalent’’ to a legally marketed Class I or Class II device or to a Class III device for which the FDA has not called for

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PMAs. A Section 510(k) submission generally requires less data than a PMA. The FDA must determine whether or not to clear a Section 510(k) submission within 90 days of its receipt. The FDA may extend this time period, however, if additional data or information is needed to demonstrate substantial equivalence. If a device is not ‘‘substantially equivalent’’ to a legally marketed Class I or Class II device or to a Class III device for which the FDA has not previously called for PMAs, a PMA is required. The premarket approval procedure involves a more complex and lengthy testing and FDA review process than the Section 510(k) premarket notification process. There can be no assurances that clearances or approvals will be obtained on a timely basis, if at all. Modifications or enhancements to products that are either cleared through the Section 510(k) process or approved through the PMA process that could affect a major change in the intended use, or affect the safety or effectiveness, of the device may require further FDA review and clearance or approval through new Section 510(k) or PMA submissions.

The Company has received Section 510(k) clearance for all its bone densitometers marketed in the U.S. for use in humans. The pain management devices (Orbasone™) marketed by the Company in the U.S. were classified by the FDA in August 1998 as Class I devices exempt from Section 510(k) premarket notification requirements. On June 21, 2000, the FDA informed MIP that it erred in its classification of the Orbasone™ and the Company suspended marketing of the Orbasone™. The FDA determined that the Orbasone™ is a Class III device requiring premarket approval. Following such determination MIP granted the Company the exclusive and perpetual authority, right and license in North America to seek PMA for the Orbasone™, and to manufacture, market, sell and service the Orbasone™. The Company has received PMA approval for the Orbasone™. The Galileo™ and VibraFlex ® musculoskeletal development products are not medical devices subject to FDA regulation but are consumer products subject to regulation under the Consumer Product Safety Act. However, the Company requested and received on July 25, 2002 a written opinion from the FDA regarding the classification of the Galileo™ for uses in connection with certain medical conditions as a Class I device exempt from Section 510(k) premarket notification requirements.

The FDA continues to regulate medical device products even after they have received initial approval or clearance. Manufacturers of medical devices for marketing in the United States are required to adhere to applicable FDA regulations, which include testing, control and documentation requirements. In addition, all establishments, whether foreign or domestic, manufacturing medical devices for sale in the United States are subject to periodic inspections by or under authority of the FDA to determine whether the manufacturing establishment is operating in compliance with QSR requirements. Manufacturers must continue to expend time, money and effort to ensure compliance with QSR requirements. The FDA also requires that medical device manufacturers undertake post-market reporting for serious injuries, deaths, or malfunctions associated with their products. If safety or efficacy problems occur after the product reaches the market, the FDA may take steps to prevent or limit further marketing of the product. Additionally, the FDA actively enforces regulations concerning marketing of devices for indications or uses that have not been cleared or approved by the FDA.

The Company’s promotional materials must be consistent with its current market clearances and approvals and in compliance with other applicable regulations. The determination of whether the Company is making unapproved, ‘‘off-label,’’ or new claims or false, misleading, or unsubstantiated claims can be subjective and the FDA may disagree with the Company’s determination. If the FDA determines that the Company’s promotional materials constitute promotion of an unapproved use or makes false or misleading claims, or claims unsupported by adequate scientific data, the agency could subject the Company to serious enforcement sanctions and/or limit the promotional claims that the Company can make for its devices.

Manufacturing processes for the products marketed by the Company are also subject to stringent federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of certain materials and wastes. In the United States, such laws and regulations include the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, and the Resource Conservation and Recovery Act. Suppliers of components of, and products used to manufacture, the Company’s products must also comply with FDA and other foreign regulatory requirements, which often require significant time, money and record-keeping and quality assurance

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efforts and subject the Company and its suppliers to potential inspections and stoppages. The Company’s suppliers may not satisfy these requirements.

All entities, whether foreign or domestic, manufacturing medical devices for sale in the United States are subject to periodic inspections by or under authority of the FDA to determine whether the manufacturing establishment is operating in compliance with QSR requirements. Manufacturers must continue to expend time, money and effort to ensure compliance with QSR requirements. The FDA also requires that medical device manufacturers undertake post-market reporting for serious injuries, deaths, or malfunctions associated with their products. If safety or efficacy problems occur after the product reaches the market, the FDA may take steps to prevent or limit further marketing of the product. Additionally, the FDA actively enforces regulations concerning marketing of devices for indications or uses that have not been cleared or approved by the FDA.

The Company’s products also are subject to regulatory requirements for electronic products under the Radiation Control for Health and Safety Act of 1968. The FDA requires that manufacturers of diagnostic x-ray systems comply with certain performance standards, and record keeping, reporting, and labeling requirements.

The Company may export a medical device not approved in the United States to any country without obtaining FDA approval, provided that the device (i) complies with the laws of that country and (ii) has valid marketing authorization or the equivalent from the appropriate authority in a ‘‘listed country.’’ The listed countries are Australia, Canada, Israel, Japan, New Zealand, Switzerland, South Africa and countries in the European Union and the European Economic Area. Export of unapproved devices that would be subject to PMA requirements if marketed in the United States and that do not have marketing authorization in a listed country generally continue to require prior FDA export approval.

Proprietary Rights

The Company believes that its sales are dependent in part on certain proprietary features of the products it manufactures and/or markets. The Company relies primarily on know-how, trade secrets and trademarks to protect those intellectual property rights. Other than the application by the licensor of the Galileo™ products, it has not sought patent protection for such products. The VibraFlex ® product is a registered trademark held by the Company. There can be no assurance that these measures will be adequate to protect the rights of the Company. To the extent that intellectual property rights are not adequately protected, the Company may be vulnerable to competitors who attempt to copy the Company’s products or gain access to the trade secrets and know-how related to such products. Further, there can be no assurance that the Company’s competitors will not independently develop substantially equivalent or superior technology. The Company is not the subject of any litigation regarding proprietary rights, and the Company believes that the technologies used in its products were developed independently. In addition, the Company’s business depends on proprietary information regarding customers and marketing, and there can be no assurance that the Company will be able to protect such information.

Backlog

Backlog consists of signed purchase orders received by the Company from its customers. As of December 31, 2007, the Company had no backlog of orders. The Company’s ability to ship products depends on manufacturers whose products are distributed by the Company. Purchase orders are generally cancelable. The Company believes that its backlog as of any date is not a meaningful indicator of future operations or net revenues for any future period.

Product Liability Insurance

The Company’s business involves the inherent risk of product liability claims. If such claims arise in the future they could have a material adverse impact on the Company. The Company maintains product liability insurance on a ‘‘claims made’’ basis with respect to its products in the aggregate amount of $1 million, subject to certain deductibles and exclusions. The Company’s agreements with the manufacturers of other products distributed by the Company require that such manufacturers maintain product liability

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insurance that covers the Company as an additional named insured. There is no assurance that existing coverage will be sufficient to protect the Company from risks to which it may be subject, including product liability claims, or that product liability insurance will be available to the Company at a reasonable cost, if at all, in the future or that insurance maintained by the other manufacturers will cover the Company.

Employees

At December 31, 2007, the Company had 7 employees and 3 consultants, of whom 3 were engaged in direct sales and marketing activities. The remaining employees and consultants are in finance, administration, product development and customer service. No employees of the Company are covered by any collective bargaining agreements, and management considers its employee relations generally to be good.

ITEM 2.    PROPERTIES

The Company leases its principal executive offices, which are located at 106 Corporate Park Drive, Suite 102, White Plains, New York 10604. Effective August 1, 2003, the Company amended its lease for office space expiring on July 31, 2008. Minimum future rental commitments with regard to the original and amended lease are payable as follows:


2008 $ 18,424

ITEM 3.    LEGAL PROCEEDINGS

In the normal course of business, the Company is named as defendant in lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities if any, which may ultimately result from such lawsuits, are not expected to have a material adverse effect on the financial position, results of operations or cash flows of the Company. No claims are currently outstanding.

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

No matters were submitted to a vote to the Company’s security holders during the fourth quarter of the fiscal year ended December 31, 2007.

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PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Beginning April 1, 2007 the Company’s Common Stock is traded on the Over-The-Counter Pink Sheets under the symbol ‘‘OMRX.PK’’. Prior to September 23, 1998, the Company’s Common Stock was traded on the NASDAQ National Market. The following table sets forth, for the periods indicated, the high and low sales prices per share of Common Stock, as reported by the Over-The-Counter Pink Sheets for the respective periods. The following prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

PERIOD FROM JANUARY 1, 2006 THROUGH DECEMBER 31, 2006:


  High Low
First Quarter $ 0.28 $ 0.11
Second Quarter 0.27 0.13
Third Quarter 0.30 0.10
Fourth Quarter 0.25 0.07

PERIOD FROM JANUARY 1, 2007 THROUGH DECEMBER 31, 2007:


  High Low
First Quarter $ 0.08 $ 0.06
Second Quarter 0.04 0.02
Third Quarter 0.06 0.02
Fourth Quarter 0.06 0.02

As of March 5, 2008, the sales price per share of Common Stock, as reported by the Over-The-Counter Pink Sheets, was $0.04.

As of March 5, 2008, there were approximately 93 outstanding stockholders of record of the Company’s Common Stock. This number excludes persons whose shares were held of record by a bank, broker or clearing agency.

The Company has not paid any cash dividends on its shares of Common Stock and does not expect to pay any cash dividends in the foreseeable future.

ITEM 6.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Financial Statements and the related Notes thereto included in Item 7 of this Report. The following discussion contains forward-looking statements which involve risks and uncertainties, some of which are described in the Introduction to this Report. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in the Introduction.

Critical Accounting Policies And Estimates

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements as well as the reported amount of revenues and expenses during the periods presented. Estimates are used when accounting for the allowance for uncollectible receivables, potentially excess and obsolete inventory, depreciation and amortization, warranty reserves, income tax valuation allowances and contingencies, among others. Actual results could differ significantly from those estimates. The Company believes that the estimates, judgments and assumptions upon which the Company rely are reasonable based upon information available at the time they are made.

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The Company believes the following accounting policies involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset and liability amounts. The Company sells its products directly to customers and through third-party dealers and distributors. Revenue is recognized at the time products are shipped and title passes to the customer. The Company estimates and records provisions for product installation and user training in the period that the sale is recorded.

In the United States and Canada, the Company offers one-year warranties on both the hardware and software included in its systems (except for computer systems, if any, which are covered under their respective manufacturers’ warranty), as well as extended warranty contracts. Outside of the United States and Canada, the Company only offers one-year warranties on parts; the labor warranty is provided by the Company’s distributors. The Company also offers six-month warranties on replacement parts worldwide. The Company provides warranty services to its customers in the United States and Canada. Any costs incurred by the Company in connection with a warranty of a system are borne by the manufacturer pursuant to the applicable distribution agreement. Therefore, no warranty reserve is required by products sold by the Company.

The Company has no obligations to provide any other services to any of its third party dealers or distributors or their customers.

The Company provides estimated inventory allowances for slow-moving and obsolete inventory based on current assessments about future demands, market conditions and related management initiatives. If market conditions are less favorable than those projected by management, additional inventory allowances may be required.

The Company provides allowances for uncollectible receivable amounts based on current assessment of collectibility. If collectibility is less favorable than those projected by management, additional allowances for uncollectibility may be required.

The Company accounts for deferred income taxes by recognizing the tax consequences of ‘‘temporary differences’’ by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. The Company realizes an income tax benefit from the exercise of certain stock options or the early disposition of stock acquired upon exercise of certain options. This benefit results in an increase in additional paid in capital.

Liquidity and Capital Resources

The Company has financed operations for the past four years through the sale of equity securities and the issuance of debt. For the two years ending December 31, 2007 and 2006, the Company incurred aggregate net losses of $3,056,246 and negative cash flow from operations of $1,390,003. During 2007, the Company incurred a net loss of $1,075,932 and negative cash flow from operations of $201,804. As of December 31, 2007, the Company had $27,077 in cash available for working capital purposes. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

The Company’s continued existence is dependent upon several factors including obtaining substantial additional financing, increasing sales volume, achieving profitability on the sale of some products and developing new products. In order to increase cash flow, the Company is continuing its efforts to stimulate sales. However, in order to manage credit risk, the Company has begun to implement higher credit standards for customers and to emphasize the receipt of down payments from customers at the time their purchase orders are received. The Company has also begun to request more prepayments from customers and attempt to more closely coordinate the timing of purchases with the timing of orders for products. The Company cannot predict whether or to what extent these risk management functions may slow its ability to grow revenues.

The level of the Company’s cash and cash equivalents increased to $23,066 at December 31, 2007 from $4,011 at December 31, 2006. The Company had net cash used in operating activities of $201,804 for the year ended December 31, 2007 which was more than offset by $224,483 in net cash provided by

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financing activities. Financing activities primarily consisted of $1,559,054 in loans from officers and directors, which were partially offset by the repayment of equipment loan payable of $26,464, repayment of borrowings of $944,054 from related parties and repayment of the line of credit of $350,000.

On February 1, 2007, the Company refinanced $1,623,000 of related party borrowings. Original notes and advances of the Company were all replaced by a new note that bears interest at 12% and matures one year from the date of issuance. Of the refinanced borrowings, $225,000 originated from 2005, $838,000 from 2006, and $560,000 from the first quarter of 2007. In addition to the refinancing, the Company borrowed $636,054 from certain officers and directors in 2007. During 2007, the Company repaid $944,054 of related party borrowings. During the year ended December 31, 2006, the Company borrowed $1,358,000 from related and unaffiliated parties, $633,000 of the borrowings were short term, interest bearing loans, of which $210,000 were repaid in 2006. The remaining $725,000 of notes were refinanced on February 1, 2007 except for $250,000 which matured during June of 2007. The $250,000 note has not been extended.

Of the total note proceeds received or refinanced during the year ended December 31, 2007, $333,689 of the remaining proceeds received or refinanced were allocated to the warrants based on the application of the Black-Scholes option pricing model, with the remaining proceeds of $1,289,311 allocated to the notes payable. The value allocated to the warrants is being amortized to interest expense over the term of the notes. At December 31, 2007, the unamortized discount on the notes payable is $29,483. During the year ended December 31, 2007, amortization of discounts of $416,284 was recorded as interest expense.

During the year ended December 31, 2007, the Company’s board of directors approved a grant of stock options to employees, directors and independent consultants to purchase an aggregate of 890,000 shares of its common stock with exercise prices equal to or greater than the market price of stock on the date of grant. The options are 10-year options (with the exception of Mr. Bonmati, a 10% shareholder, whose options expire in 5 years) and vest over 4 years. The fair value of these issuances was estimated using the application of the Black-Scholes option pricing model. During the year ended December 31, 2007, $147,687 of non-cash compensation cost was recognized. Of that amount, $116,137 of options were recorded as non-cash compensation expense and additional paid-in capital. The remaining balance of $31,550 was recorded against Mr. Bonmati’s 2006 salary accrual and additional paid-in capital. In addition, Mr. Koenig received 600,000 shares of common stock as compensation for the year ended December 31, 2007.

The Company had no backlog of orders as of December 31, 2007 and there are no material commitments for capital expenditures as of that date. The Company believes that they will need to raise substantial additional capital within the next twelve months in order to support the planned growth of the business. The Company may seek additional funding through collaborative arrangements and public or private financings. Additional funding may not be available on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. For example, if the Company raises additional funds by issuing equity securities, further dilution to existing stockholders may result. If the Company is unable to obtain funding on a timely basis, they may be required to significantly curtail one or more of the Company’s research or development programs. The Company also could be required to seek funds through arrangements with collaborators or others that may require the Company to relinquish rights to some of their technologies, product candidates or products which they would otherwise pursue on their own.

Results of Operations

The Company had a net loss of $1,075,932 ($0.02 per share based on 45,232,919 weighted average shares) for the year ended December 31, 2007 compared to a net loss of $1,980,314 ($0.04 per share based on 44,534,340 weighted average shares) for the year ended December 31, 2006.

Revenue for the year ended December 31, 2007 increased $47,162 (or 2.0%) to $2,409,589 from $2,362,427 in 2006. The increase in revenue was primarily due to an increase in XCT and VibraFlex ® sales during 2007.

Cost of revenue as a percentage of revenue was 55.6% and 36.6% for the year ended December 31, 2007 and 2006, respectively, resulting in a gross profit of 44.4% for the year ended December 31, 2007 compared

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to 63.4% for the comparable period of 2006. The drop in gross profit percentage was due to a write down of Orbasone™ inventory of approximately $240,000 and the loss of Orbasone™ sales which had maintained a higher gross profit.

Sales and marketing expense for the year ended December 31, 2007 decreased $1,010,800 (or 55.7%) to $804,239 from $1,815,039 for the year ended December 31, 2006. The decrease is due to the Company’s decrease in sales staff.

General and administrative expense for the year ended December 31, 2007 decreased $538,788 (or 44.4%) to $675,561 from $1,214,349 for the year ended December 31, 2006. The decrease is primarily the waiving by Mr. Bonmati of his salary which was $400,000 in the prior year with also a reduction in professional fees which had been incurred in the prior year as a result of changes in the Company’s capital structure.

Research and development expense for the year ended December 31, 2007 decreased $105,372 (or 94.2%) to $6,464 from $111,836 for the year ended December 31, 2006. The decrease was primarily due to decreased expenses incurred in connection with the PMA process and not having available funds for new research.

Interest expense increased $314,360 (or 92.5%) to $654,120 for the year ended December 31, 2007 from $339,760 for the year ended December 31, 2006. Interest expense increased due to the increased number of interest bearing loans as compared to 2006 and amortization associated with warrants.

Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.’’ This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No.109, ‘‘Accounting for Income Taxes.’’ This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for the Company beginning in fiscal year 2007. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial statements.

In September 2006, the FASB issued SFAS No. 157 ‘‘Fair Value Measures’’ (‘‘SFAS 157’’). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, however it does not apply to SFAS 123R. This Statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not believe that SFAS 157 will have a material impact on its financial position, results of operations or cash flows.

Quantitative and Qualitative Disclosures of Market Risk

The Company does not have any financial instruments that would expose it to market risk associated with the risk of loss arising from adverse changes in market rates and prices.

All of the Company’s loans payable outstanding at December 31, 2007 have variable interest rates and therefore are subject to interest rate risk. A one percent change in the variable interest rate would result in a $20,362 change in annual interest expense.

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ITEM 7.    FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

INDEX


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Orthometrix, Inc.
White Plains, NY

We have audited the accompanying balance sheet of Orthometrix, Inc. as of December 31, 2007 and the related statements of operations, changes in stockholders’ deficit, and cash flows for each of the two 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 auditing 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 financial statements referred to above present fairly, in all material respects, the financial position of Orthometrix, Inc. at December 31, 2007 and the results of its operations and its cash flows for each of the two years then ended, in conformity with accounting principles generally accepted in the United States.

The accompanying financial statements for the year ended December 31, 2007 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring operating losses and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


  /s/ Radin Glass & Co., LLP
  Certified Public Accountants
  New York, NY

February 25, 2008

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ORTHOMETRIX, INC.
BALANCE SHEET
AS OF DECEMBER 31, 2007


Assets  
Current assets:  
Cash $ 27,077
Accounts receivable – trade 144,972
Inventories 548,047
Prepaid expenses 7,792
Total current assets 727,888
Property and equipment, net 53,202
Deferred financing costs, net 1,388
Other 11,658
Total Assets $ 794,136
Liabilities and Stockholders’ Deficit  
Current liabilities:  
Accounts payable $ 1,351,830
Accrued expenses 167,986
Customer deposits 64,747
Loans payable – related party 115,000
Notes payable related party – net of discount 1,843,517
Unearned service revenue 68,649
Loan payable – equipment 13,971
Total current liabilities 3,625,700
Long term loan payable – equipment 14,147
Long term notes payable – related party 20,000
Stockholders’ deficit:  
Common stock – par value $.0005 per share, 75,000,000 shares authorized, and 45,908,618 shares issued and outstanding 22,953
Preferred stock – par value $.0005 per share, 1,000,000 shares authorized —
Additional paid-in capital 44,029,964
Accumulated deficit (46,918,628 )  
Total stockholders’ deficit (2,865,711 )  
Total Liabilities and Stockholders’ Deficit $ 794,136

See notes to the financial statements.

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ORTHOMETRIX, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006


  2007 2006
Revenue $ 2,409,589 $ 2,362,427
Cost of revenue 1,339,363 864,196
Gross profit 1,070,226 1,498,231
Sales and marketing expense 804,239 1,815,039
General and administrative expense 675,561 1,214,349
Research and development expense 6,464 111,836
Operating loss (416,038 )   (1,642,993 )  
Interest expense (654,120 )   (339,760 )  
Interest income 459 2,208
Other (expense) income (6,233 )   231
Net loss $ (1,075,932 )   $ (1,980,314 )  
Basic and diluted weighted average shares 45,232,919 44,534,340
Basic and diluted loss per share $ (0.02 )   $ (0.04 )  

See notes to the financial statements.

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ORTHOMETRIX, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006


  Shares Total Common
Stock 		Additional
Paid-In
Capital 		Accumulated
Deficit
Balance as of December 31, 2005 44,207,368 $ (798,795 )   $ 22,103 $ 43,041,484 $ (43,862,382 )  
Warrants issued to non-employees in connection with notes payable — 290,270 — 290,270 —
Stock options and warrants issued as compensation — 111,652 — 111,652 —
Stock options exercised 236,250 23,432 117 23,315 —
Stock purchased 125,000 25,000 63 24,938 —
Stock issued as compensation 610,000 43,000 305 42,695 —
Net Loss — (1,980,314 )   — — (1,980,314 )  
Balance as of December 31, 2006 45,178,618 (2,285,755 )   22,588 43,534,353 (45,842,696 )  
Warrants issued to non-employees in connection with notes payable — 333,689 — 333,689 —
Stock options and warrants issued as compensation — 147,687 — 147,687 —
Stock options exercised 45,000 900 22 878 —
Stock issued as compensation 685,000 13,700 343 13,357 —
Net Loss — (1,075,932 )   — — (1,075,932 )  
Balance as of December 31, 2007 45,908,618 $ (2,865,711 )   $ 22,953 $ 44,029,964 $ (46,918,628 )  

See notes to the financial statements.

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ORTHOMETRIX, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006


  2007 2006
Cash Flows From Operating Activities:    
Net loss $ (1,075,932 )   $ (1,980,314 )  
Adjustments to reconcile net loss to net cash used in operating activities:    
Stock issued as compensation 13,700 43,000
Stock options and warrants issued as compensation 147,687 136,649
Loss on sale of equipment 6,723 —
Amortization expense of note payable discounts 416,284 215,122
Amortization expense of deferred financing costs 15,265 —
Depreciation expense 20,270 21,298
Changes in assets and liabilities:    
Decrease (increase) in accounts receivable 94,159 (203,591 )  
Decrease (increase) in inventories 268,756 (554,307 )  
Decrease in prepaid expenses and other assets 13,730 134,609
(Decrease) increase in accounts payable (35,494 )   704,282
(Decrease) increase in accrued expenses (122,040 )   236,390
(Decrease) increase in unearned service revenue (11,616 )   42,320
Increase in customer deposits and other liabilities 48,404 16,343
Net cash used in operating activities (200,104 )   (1,188,199 )  
Cash Flows From Investing Activities:    
Net proceeds from sale of equipment 9,500 —
Purchases of property and equipment (9,113 )   (7,646 )  
Cash provided by (used in) investing activities 387 (7,646 )  
Cash Flows From Financing Activities:    
Payment of deferred financing costs (16,653 )   —
Proceeds of borrowings from related parties 1,559,054 1,358,000
Repayment of borrowings from related parties (944,054 )   (210,000 )  
Exercise of stock options 900 23,436
(Repayment) proceeds of line of credit (350,000 )   20,000
Repayment of loan payable – equipment (26,464 )   (14,441 )  
Net cash provided by financing activities 222,783 1,176,995
Net increase (decrease) in cash 23,066 (18,850 )  
Cash at beginning of year 4,011 22,861
Cash at end of year $ 27,077 $ 4,011
Supplemental disclosure of cash flow information:    
Cash paid for interest $ 48,015 $ 79,704
Cash paid for income taxes $ 1,294 $ 1,164
Supplemental disclosure of non-cash investing and financing activities:    
Purchase of property and equipment $ — $ 59,843
Less: Amount financed — (52,197 )  
  $ — $ 7,646

See notes to the financial statements.

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Table of Contents

ORTHOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006

1.   The Company and Going Concern Consideration:

Orthometrix, Inc. (‘‘OMRX’’ or the ‘‘Company’’) markets, sells, and services several musculoskeletal product lines used in pharmaceutical research, diagnostic and monitoring of bone and muscle disorders, sports medicine, rehabilitative medicine, physical therapy and pain management. Prior to April 11, 2002 the Company also developed, manufactured, sold and serviced a wide range of traditional bone densitometers used to assess bone mineral content and density, one of several factors used by physicians to aid in the diagnosis and monitoring of bone disorders, particularly osteoporosis.

During the past two years, the Company has experienced aggregate net losses of $3,056,246 and has incurred a total negative cash flow from operations of $1,390,003 for the same two-year period. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continued existence is dependent upon several factors, including obtaining substantial additional financing, increasing sales volume, achieving profitability on the sale of some products and developing new products. The Company is pursuing initiatives to increase liquidity, including external investments and obtaining additional lines of credit. In order to increase its cash flow, the Company is continuing its efforts to stimulate sales. The Company has also implemented high credit standards for its customers and is emphasizing the receipt of down payments from customers at the time their purchase orders are received and attempting to more closely coordinate the timing of purchases with the timing of orders of products.

2.   Summary of Significant Accounting Policies:

Basis of Presentation

The accompanying financial statements and related footnotes are presented in accordance with accounting principles generally accepted in the United States of America.

Revenue and Cost Recognition

The Company primarily sells its products directly to customers and through third party dealers and distributors. Product revenue is recognized at the time products are shipped and title passes to the customer. The Company estimates and records provisions for product installation and user training in the period that the sale is recorded. Service revenue is recognized over the period it is earned.

In the United States and Canada, the Company offers one-year warranties on both the hardware and software included in its systems (except for computer systems, if any, which are covered under their respective manufacturers’ warranty), as well as extended warranty contracts. Outside of the United States and Canada, the Company only offers one-year warranties on parts; the labor warranty is provided by the Company’s distributors. The Company also offers six-month warranties on replacement parts worldwide. The Company provides warranty services to its customers in the United States and Canada. Any costs incurred by the Company in connection with a warranty of a system are borne by the manufacturer pursuant to the applicable distribution agreement. Therefore, no warranty reserve is required by products sold by the Company.

The Company has no obligations to provide any other services to any of its third party dealers or distributors or their customers.

Stock-based Compensation

Stock-based compensation related to employees, directors, and consultants is accounted for at the estimated fair value of the stock-based compensation at the time of issuance.

Receivables

The Company records trade accounts receivable at net realized value. This value includes an allowance for estimated uncollectible accounts, if necessary, to reflect any loss anticipated on the

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ORTHOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006

2.   Summary of Significant Accounting Policies:  (Continued)

trade accounts receivable balance. At December 31, 2007, the Company has determined that an allowance for estimated uncollectible accounts is not necessary.

Inventories

Inventories are stated at the lower of cost or market; cost is determined principally by the first-in, first-out method.

Property and Equipment

Furniture and fixtures are recorded at cost and are depreciated using the straight-line method over three to seven years.

The Company’s demonstration systems used for marketing and customer service purposes are carried at the lower of cost or net realizable value until the time of sale. From time to time, the Company may judge it desirable for marketing purposes to provide a device to an appropriate entity. In such cases, the Company will carry the device at cost less amortization, with amortization calculated on a straight-line basis over thirty-six months or expense the device if appropriate.

Long-lived Assets

Management evaluates on an ongoing basis whether events or changes in circumstances exist that would indicate that the carrying value of the Company’s long-lived assets may not be recoverable. Should there be an indication of impairment in the value of its long-lived assets, management would estimate the future cash flows expected to result from the use of the assets and their eventual disposition and recognize a specific provision against such assets if the aggregate nominal estimated future undiscounted cash flows are less than the carrying value of the assets. In considering whether events or changes in circumstances exist, management assesses several factors, including a significant change in the extent or manner in which the assets are used, a significant adverse change in legal factors or in the business climate that could affect the value of the assets, an adverse action or assessment of a regulator, and a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with such assets.

Income Taxes

The Company accounts for deferred income taxes by recognizing the tax consequences of ‘‘temporary differences’’ by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. The Company realizes an income tax benefit from the exercise of certain stock options or the early disposition of stock acquired upon exercise of certain options. This benefit results in an increase in additional paid in capital.

Fair Value of Financial Instruments

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair values are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

Management of the Company estimates that all financial instruments of OMRX, due to their short-term nature, have a fair value equal to their carrying value.

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ORTHOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006

2.   Summary of Significant Accounting Policies:  (Continued)

Advertising

The Company expenses the cost of advertising as incurred. Advertising expenses of approximately $10,717 and $19,238 were incurred for the years 2007 and 2006, respectively, and are included in sales and marketing expense.

Research and Development

Research and development costs are charged to operations as incurred.

Loss per Share

Basic per share amounts are computed using the weighted average number of common shares outstanding. Diluted per share amounts are computed using the weighted average number of common shares outstanding, after giving effect to dilutive options, using the treasury stock method.

Options to purchase 4,956,250 and 4,236,250 shares of common stock were outstanding at December 31, 2007 and 2006, respectively, but were not included in the computation of diluted loss per share because their effect was anti-dilutive.

Warrants to purchase 11,777,000 and 5,560,000 shares of common stock were outstanding at December 31, 2007 and 2006, respectively, but were not included in the computation of diluted loss per share because their effect was anti-dilutive.

Concentration of Credit Risk

During 2007 and 2006, respectively, 58.2% and 61.8% of total sales were derived from the Company’s nine largest customers. The Company generally sells on credit terms ranging from thirty to ninety days or against irrevocable letters of credit. Any financing of the end user is the decision of, and dependent on, the distributor in each territory. The Company sells to customers in various geographic territories worldwide.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted 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. Estimates are used when accounting for the allowance for uncollectible receivables, potentially excess and obsolete inventory, depreciation and amortization, warranty reserves, income tax valuation allowances and contingencies, among others. Actual results could differ significantly from those estimates.

Foreign Exchange Exposure

The Company’s purchases and sales of products and services are made primarily in U.S. dollars. As a result, the Company has minimal exposure to foreign exchange risk in the short-term. However, a portion of the Company’s products are supplied by Stratec and Novotec and sold along with the Company’s products into foreign markets. Any significant and lasting change in the exchange rates between the U.S. dollar and the currencies of those countries could have a material effect on both the costs and sales of those products and services.

Segment Reporting

The Company operates one reportable segment and evaluates performance based on operations before interest and non-operating items.

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ORTHOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006

2.   Summary of Significant Accounting Policies:  (Continued)

Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.’’ This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No.109, ‘‘Accounting for Income Taxes.’’ This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation was effective for the Company beginning in fiscal year 2007. The adoption of this pronouncement did not have a material impact on the financial statements.

In September 2006, the FASB issued SFAS No. 157 ‘‘Fair Value Measurements’’ (‘‘SFAS 157’’). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The FASB has deferred the implementation of the provisions of SFAS 157 relating to certain nonfinancial assets and liabilities until January 1, 2009. This standard is not expected to materially affect how the Company determines fair value, but may result in certain additional disclosures.

3.   Distribution Agreements:

Stratec

Stratec Medizintechnik GmbH manufactures pQCT-based systems for the Company. Under a Distribution Agreement, dated as of October 1, 1999, Stratec Medizintechnik GmbH gave Bionix L.L.C., a company of which Reynald Bonmati, Chief Executive Officer of the Company, is president, the exclusive right to distribute all Stratec products in the United States, Canada, Mexico, Central and South America and the Caribbean. The Company entered into an Assignment and Assumption Agreement, dated as of April 12, 2002, with Bionix, L.L.C. whereby Bionix assigned to the Company all of its right, title and interest in, to and under this Distribution Agreement.

Under the Distribution Agreement, Stratec grants the Company a license, with the right to sublicense, to market, sell and service the pQCT-based systems in the United States, Canada, Mexico, Central and South America and the Caribbean. Under the terms of the four-year Distribution Agreement, the Company may purchase these systems from Stratec at a fixed price to be adjusted from time to time by mutual consent. On October 1, 2007, the Distribution Agreement with Stratec was renewed for one year, and will be renewed on every October 1st for a one-year term provided that the Company or Stratec provide the other party thereto with proper and timely written notice of the election to renew the term of the Distribution Agreement.

Novotec

Novotec Medical GmbH manufactures Galileo and Leonardo Systems for the Company. Under a Distribution Agreement, dated as of October 1, 1999, Novotec Medical GmbH gave Bionix the exclusive right to distribute the Galileo™ and Leonardo™ product lines in the United States, Canada, Mexico, Central and South America and the Caribbean. The Company entered into an Assignment and Assumption Agreement, dated as of April 12, 2002, with Bionix, whereby Bionix assigned to the Company all of its right, title and interest in, to and under this Distribution Agreement.

Under the Distribution Agreement, Novotec also grants the license, including a right to sublicense, to market, sell and service the Galileo™ and Leonardo™ systems in the United States, Canada,

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ORTHOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006

3.   Distribution Agreements:  (Continued)

Mexico, Central and South America and the Caribbean. Under the terms of the four-year Distribution Agreement, the Company may purchase the Galileo™ and Leonardo™ systems from Novotec at a fixed price to be adjusted from time to time by mutual consent. On October 1, 2007, the Distribution Agreement with Novotec was renewed for one year, and may be renewed by either party upon prior notice to the other on every October 1st for consecutive one-year terms provided that the Company or Novotec provide the other party thereto with proper and timely written notice of the election to renew the term of the Distribution Agreement.

4.   Inventories:

As of December 31, 2007, inventories consisted of $548,047 of sub-assemblies, parts, spare parts and finished goods. During the year ended December 31, 2007, the Company wrote down the value of its slow moving Orbasone inventory systems by $240,466, increasing the cost of goods sold.

5.   Property and Equipment:

Property and equipment consisted of the following as of December 31, 2007:


Furniture and fixtures $ 212,268
Accumulated depreciation (159,066 )  
  $ 53,202
6.   Stockholders’ Deficit:

Effective with stockholder approval received on June 14, 2005, the Company amended its Certificate of Incorporation increasing the number of authorized shares of Common Stock from 45,000,000 to 75,000,000. The Company has authorized 1,000,000 shares of preferred stock, par value $0.0005 per share, issuable in series with such rights, powers and preferences as may be fixed by the Board of Directors. At December 31, 2007 and 2006, there was no preferred stock outstanding.

On December 2, 2005, the Company registered 10,926,429 shares of Common Stock with the filing of Form SB-2. 6,721,429 of the shares registered are currently outstanding and 4,205,000 shares are issuable upon the exercise of warrants held by certain officers, directors and unaffiliated individuals.

The Company has a stock-based compensation plan whereby stock options may be granted to officers, employees and non-employee consultants to purchase a specified number of shares of Common Stock. All outstanding options granted have an exercise price not less than 100% of the market value of the Company’s Common Stock at the date of grant, are for a term not to exceed 10 years, and vest over a four year period at 25% per year.

7.   Compensation Programs:

Stock Option Plan

The Amended and Restated 1994 Stock Option and Incentive Plan for Employees includes 5,000,000 shares of Common Stock reserved for issuance. Options are issued to employees at the discretion of the Board of Directors. During 2007 and 2006, respectively, 790,000 and 655,000 options were issued as compensation to employees. The Company determines the compensation cost of stock options granted to employees based on the fair value of the options at the time of issuance. Non-cash compensation cost is recognized over the service or vesting period.

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Table of Contents

ORTHOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006

7.   Compensation Programs:  (Continued)

Under the Amended and Restated 2000 Stock Option Plan for Non-Employee Directors and Consultants (the ‘‘Board Plan’’), which has 1,500,000 shares of common stock reserved for issuance, each non-employee director receives options to acquire shares of Common Stock, vesting in four equal annual installments, commencing on the first anniversary of the date of grant, at an exercise price per share not lower than the market value on the date of grant. A grant to acquire 50,000 shares is effective on the date of the director’s first election to the Board of Directors and a grant to acquire 5,000 shares is effective on the date of the director’s reelection to the Board of Directors. Options are issued to consultants at the discretion of the Board of Directors. During 2007 and 2006, respectively, 100,000 and 310,000 options were issued to non-employee directors and consultants. The Company determines the compensation cost of stock options granted to non-employee directors and consultants based on the fair value of the options at the time of issuance. Non-cash compensation cost is recognized over the service or vesting period.

On October 6, 1998 and December 14, 1998, the Board of Directors approved the repricing of certain employee stock options. Approximately 673,750 shares were repriced to $0.67 per share on October 6, 1998 and December 14, 1998, representing a price that was not less than the market value at such dates. On December 14, 2000 the Board of Directors approved the repricing of certain options and accordingly, 1,524,500 shares were repriced to $0.15 per share. Subsequent to the option repricing on December 14, 2000, the company measured compensation expense using variable plan accounting. Compensation cost continues to be adjusted for increases or decreases in the intrinsic value over the term of the options or until they are exercised or forfeited, or expire. The effect of this change was not material in fiscal year 2007 or 2006.

The following is a summary of options related to the Amended and Restated 1994 Stock Option and
Incentive Plan for Employees and the Board Plan as of December 31:


  2007 Range of
Option Prices
Per Share 		2006 Range of
Option Prices
Per Share
Options outstanding at beginning of year 4,236,250 $0.02 – 0.67 3,792,500 $0.02 – 0.67
Cancellations (125,000 )   $0.19 – 0.20 (285,000 )   $0.15 – 0.28
Granted 890,000 $0.02 – 0.09 965,000 $0.07 – 0.30
Exercised (45,000 )   $0.02 – 0.02 (236,250 )   $0.06 – 0.30
Options outstanding at end of year 4,956,250   4,236,250  
Options exercisable at end of year 2,995,000   2,452,000  
Options available for grant at end of year 380,000   1,145,000  

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Table of Contents

ORTHOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006

7.   Compensation Programs:  (Continued)

The following table summarizes information about significant groups of stock options outstanding at December 31, 2007:


  Options Outstanding Options Exercisable
Exercisable Prices Weighted
Average Options
Outstanding 		Exercise
Price 		Weighted
Average
Remaining
Contractual
Life in Years 		Weighted
Average
Options
Exercisable 		Exercise
Price 		Weighted
Average
Remaining
Contractual
Life in Years
$.02 – .05 1,166,250 $ .047 5 1,076,250 $ .049 5
.055       495,000 .055 1 495,000 .055 1
  .06 – .13 1,395,000 .085 6 382,500 .079 4
.14         45,000 .14   4 11,250 .14   4
.15         261,250 .15   5 216,250 .15   5
.17         175,000 .17   6 131,250 .17   6
.18         45,000 .18   3 11,250 .18   3
.19         95,000 .19   6 47,500 .19   5
.20         235,000 .20   8 88,750 .20   7
.22         160,000 .22   6 80,000 .22   6
.23         70,000 .23   8 23,750 .23   8
.27         10,000 .27   7 5,000 .27   7
.28         65,000 .28   8 32,500 .28   8
.30         123,750 .30   6 56,250 .30   6
.33         510,000 .33   7 255,000 .33   7
.44         45,000 .44   7 22,500 .44   7
.531       10,000 .53   2 10,000 .53   2
.67         50,000 .67   4 50,000 .67   4

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during each of the years ended December 31, 2007 and 2006: dividend yield of 0%, risk-free weighted average interest rate of 4.60% and 4.29%, expected volatility factor of 148% and 150% and an expected option term of 10 years (or 5 years for 10% shareholders). The weighted average fair value at date of grant for options granted during 2007 and 2006 was $0.06 and $0.17 per option, respectively.

401(k) Plan

Pursuant to the Orthometrix, Inc. Retirement Savings Plan, eligible employees may elect to contribute a portion of their salary on a pre-tax basis. With respect to employee contributions of up to 7% of salary, the Company makes a contribution at the rate of 25 cents on the dollar. Contributions are subject to applicable limitations contained in the Internal Revenue Code. Employees are at all times vested in their own contributions; Company matching contributions vest gradually over six years of service. The Company’s policy is to fund plan contributions as they accrue. Contribution expense was $4,567 and $6,402 for the years ended December 31, 2007 and 2006, respectively.

8.   Income Taxes:

The Company did not record a provision for income tax expense for the years ended December 31, 2007 and 2006 since any provision would be offset by the Company’s NOL carryforwards.

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ORTHOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006

8.   Income Taxes:  (Continued)

401(k) Plan  (continued)

Income tax expense (benefit) differs from the statutory federal income tax rate of 34% for the years ended December 31 as follows:


  2007 2006
Statutory income tax rate (34.0 %)   (34.0 %)  
Valuation allowance 42.0 42.0
State income taxes, net of Federal benefit (8.0 )   (8.0 )  
  0.0 %   0.0 %  

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes and net operating loss carryforwards. Significant components of the Company’s deferred tax assets and liabilities as of December 31 are summarized below:


  2007
Deferred tax assets and liabilities:  
Accrued liabilities $ 22,464
Valuation allowance (22,464 )  
Net current deferred tax assets —
Net operating loss carryforwards (8,736,477 )  
Valuation allowance (8,736,477 )  
Net noncurrent deferred tax assets —
Total deferred tax assets $ —

Realization of the deferred tax asset is dependent on the Company’s ability to generate sufficient taxable income in future periods. Based on the historical operating, losses and the Company’s existing financial condition, in 2007 and 2006, the Company determined that it was more likely than not that the deferred tax assets would not be realized. Accordingly, the Company recorded a valuation allowance to reduce the deferred tax assets.

The Company has utilizable federal and state net operating loss carryforwards of approximately $20,801,135 at December 31, 2007 for income tax purposes, which expire in 2008 through 2024.

9.   Commitments and Contingencies:

Legal Proceedings

In the normal course of business, the Company is named as defendant in lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities if any, which may ultimately result from such lawsuits, are not expected to have a material adverse effect on the financial position, results of operations or cash flows of the Company.

Leases

Effective August 1, 2003, the Company amended its lease for office space expiring on July 31, 2008. Minimum future rental commitments with regard to the original and amended lease are payable as follows:


2008 $ 18,424

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ORTHOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006

10.   Related Party Transactions:

  2007 2006
    Interest Rate   Interest Rate
Loans payable $ 115,000 8.25 – 9.25% $ 423,000 8.0 – 9.25%
Notes payable, net of discount 1,863,517 12% 637,921 9.25 – 12%
Subtotal 1,978,517   1,060,921  
Less: Long term notes payable (20,000 )     (25,000 )    
Total related party transactions $ 1,958,517   $ 1,035,921  

The following is a summary of scheduled principal maturities, by year, securing the related party transactions.


2008 $ 1,958,517
2009 20,000
  $ 1,978,517

For all of the notes, the Company is obligated to prepay the principal amount within 10 days upon the occurrence of either of two events; if it (i) receives at least $5,000,000 from an equity financing or (ii) sells substantially all of its assets.

During 2007, the Company refinanced $1,623,000 of its notes payable from related parties. During 2006, the Company issued notes payable from related parties of $725,000. In conjunction with the refinancings during 2007 and 2006, 6,492,000 and 1,475,000 of warrants were issued, respectively. The warrants issued in 2007 were valued at $333,689 and the warrants issued in 2006 were valued at $290,270. These warrants were valued using the Black-Scholes option pricing model, and recorded as a discount to the notes payable and a credit to additional paid in capital. At December 31, 2007, the unamortized discount on the notes payable is $29,483. During the years ended December 31, 2007 and 2006, amortization of the notes payable discounts of $416,284 and $215,121 was recorded as interest expense, respectively.

Interest expense for the years ended December 31, 2007 and 2006 in relation to related party loans and notes payable amounted to $229,940 and $124,639, respectively.

During the years ended December 31, 2007 and 2006, the Company’s board of directors approved a grant of stock options to Mr. Reynald Bonmati to purchase an aggregate of 590,000 and 180,000 shares, respectively, of its common stock with exercise prices equal to or greater than the market price of stock on the date of grant. The options are 5-year options (Mr. Bonmati is a 10% shareholder) and vested over four years. The fair value of these issuances was estimated using the application of the Black-Scholes option pricing model. During the year ended December 31, 2007, $31,550 of non-cash compensation was recorded against Mr. Bonmati’s accrued salary and additional paid-in capital. During the year ended December 31, 2006, non-cash compensation was not recorded because the options were not yet vested. Mr. Bonmati’s salary was waived for the year ended December 31, 2007.

11.   Supplemental Sales and Customer Information:

During 2007, approximately 58% of total sales were derived from the Company’s three largest customers. During 2006, approximately 62% of total sales were derived from the Company’s nine largest customers. The Company’s largest customers are primarily universities and hospitals.

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ORTHOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006

11.   Supplemental Sales and Customer Information:  (Continued)

401(k) Plan  (continued)

The Company’s sales consisted of domestic sales to customers and export sales to customers in the following geographic territories:


  2007 2006
Pacific Rim $ 2,163 .09 %   $ (4,625 )   (0.20 )%  
Europe/Middle East 1,352 .06 570 0.03
Latin America 105,423 4.38 — —
Canada 643,741 26.71 79,925 3.38
Domestic Sales 1,656,910 68.76 2,286,557 96.79
  $ 2,409,589 100.00 %   $ 2,362,427 100.00 %  
12.   Quarterly Financial Data (Unaudited):

  2007 Quarters
  First Second Third Fourth Total
Revenue $ 580,493 $ 365,973 $ 726,417 $ 736,706 $ 2,409,589
Gross Profit 245,195 144,056 341,586 339,389 1,070,226
Operating (loss) income (188,522 )   (237,437 )   (9,708 )   19,629 (416,038 )  
Net loss (364,202 )   (422,654 )   (145,999 )   (143,077 )   (1,075,932 )  
Weighted average shares:      
Basic and diluted 45,178,618 45,178,618 45,257,531 45,315,140 45,232,919
Basic and diluted per share $ (0.01 )   (0.01 )   (0.00 )   (0.00 )   (0.02 )  

  2006 Quarters
  First Second Third Fourth Total
Revenue $ 748,066 $ 711,956 $ 507,368 $ 395,037 $ 2,362,427
Gross Profit 524,268 426,707 326,461 220,795 1,498,231
Operating loss (296,820 )   (353,524 )   (291,560 )   (701,089 )   (1,642,993 )  
Net loss (253,167 )   (396,077 )   (393,335 )   (937,735 )   (1,980,314 )  
Weighted average shares:          
Basic and diluted 44,288,618 44,353,618 44,455,303 44,541,444 44,534,340
Basic and diluted per share $ (0.01 )   (0.01 )   (0.01 )   (0.01 )   (0.04 )  
ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

NONE

ITEM 8A:    CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Office and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

There has been no change in the Company’s internal controls over financial reporting during the Company’s fourth quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART III

ITEMS 9, 10, 11, AND 12

NONE

ITEM 13.    EXHIBITS


2 .1 Asset Purchase Agreement with Cooper Surgical Acquisition Corp. and Orthometrix, Inc. (E)
3 .1 Restated Certificate of Incorporation of Orthometrix, Inc. (C)
3 .2 Certificate of Amendment of Restated Certificate of Incorporation (F)
3 .3 By-laws of Orthometrix, Inc. as amended (D)
4 .1 Form of warrant to purchase shares of common stock of Orthometrix, Inc. (G)
+10 .1 Assignment and Assumption Agreement, dated as of April 12, 2002 by and between Bionix, L.L.C. and Orthometrix, Inc. (A)
+10 .2 Product Approval and Licensing Agreement, dated February 12, 2002, by and between M.I.P. GmbH and Bionix L.L.C. (A)
+10 .3 Assignment and Assumption Agreement, dated as of April 12, 2002 by and between Bionix, L.L.C. and Orthometrix, Inc. (A)
+10 .4 Distribution Agreement, dated as of October 1, 1999, by and between Stratec Medizintechnik, GmbH and Bionix, L.L.C. (A)
+10 .5 Assignment and Assumption Agreement, dated as of April 12, 2002 by and between Bionix, L.L.C. and Orthometrix, Inc. (A)
+10 .6 Distribution Agreement, dated as of October 1, 1999 by and between Novotec Maschinen GmbH and Bionix, L.L.C. (A)
10 .7 $50,000 Promissory Note, dated October 4, 2005, between Orthometrix, Inc. and Huber (G)
10 .8 $20,000 Promissory Note, dated October 11, 2005, between Orthometrix, Inc. and John Utzinger (G)
10 .9 $100,000 Promissory Note, dated November 18, 2005, between Orthometrix, Inc. and Reynald Bonmati (G)
10 .10 $50,000 Promissory Note, dated December 12, 2005, between Orthometrix, Inc. and The Chrystele Bonmati Trust (H)
10 .11 $25,000 Promissory Note, dated January 17, 2006, between Orthometrix, Inc. and The Chrystele Bonmati Trust (I)
10 .12 $150,000 Promissory Note, dated February 28, 2006, between Orthometrix, Inc. and Reynald Bonmati (I)
10 .13 $100,000 Promissory Note, dated March 15, 2006, between Orthometrix, Inc. and The Chrystele Bonmati Trust (I)
10 .14 Securities Purchase Agreement, dated February 25, 2005, between Orthometrix, Inc. and Rock Creek Investment Partners, L.P. (B)
10 .15 Securities Purchase Agreement, dated March 3, 2005, between Orthometrix, Inc. and Psilos Group Partners II SBIC, L.P. (B)
10 .16 Amended and Restated 1994 Stock Option and Incentive Plan for Employees (F)

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ITEM 13.    EXHIBITS  (Continued)


10 .17 Amended and Restated 2000 Stock Option and Incentive Plan for Non Employee Directors and Consultants (F)
10 .18 Small Business Grid Note, dated October 3, 2005, between HSBC Bank USA, N.A. and Orthometrix, Inc. (G)
10 .19 General Security Agreement, dated October 3, 2005, between HSBC Bank USA, N.A. and Orthometrix, Inc. (G)
10 .20 $100,000 Promissory Note, dated April 7, 2006, between Orthometrix, Inc. and Michael Huber. (J)
10 .21 $50,000 Promissory Note, dated April 7, 2006, between Orthometrix, Inc. and Reynald Bonmati. (J)
10 .22 $50,000 Promissory Note, dated April 17, 2006, between Orthometrix, Inc. and Reynald Bonmati. (J)
10 .23 $250,000 Promissory Note, dated June 23, 2006 between Orthometrix, Inc. and Psilos Group Partners II-S, L.P. (J)
23 .1 Consent of Radin, Glass & Co., LLP (G)
23 .2 Consent of Kirkpatrick & Lockhart Nicholson Graham LLP (G)
24 Power of Attorney (G)

Exhibits required by Item 601 of Regulation S-B are filed herewith:


31 .1 Chief Executive Officer’s Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31 .2 Chief Financial Officer’s Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Confidentiality requested as to certain provisions.


(A )   This Exhibit was previously filed as an Exhibit to the Company’s Report on Form 10-QSB dated May 15, 2003 and is incorporated herein by reference.
(B )   This Exhibit was previously filed as an Exhibit to the Company’s Report on Form 10-KSB dated March 24, 2005 and is incorporated herein by reference.
(C )   This Exhibit was previously filed as an Exhibit to the Company’s Report on Form 10-Q dated November 13, 1997, and is incorporated herein by reference.
(D )   This Exhibit was previously filed as an Exhibit to the Company’s Registration Statement on Form S-I (Registration No. 33-93220), effective August 1, 1995, and is incorporated herein by reference.
(E )   This Exhibit was previously filed as an Exhibit to the Company’s Report on Form 8-K dated April 15, 2002, as incorporated herein by reference.
(F )   This Exhibit was previously filed as an Exhibit to the Company’s Report on Form 10-QSB dated August 2, 2005, as incorporated herein by reference.

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ITEM 13.    EXHIBITS  (Continued)


(G )   This Exhibit was previously filed as an Exhibit to the Company’s Registration Statement on Form SB-2 (Registration No. 333-130095), effective December 14, 2005, and is incorporated herein by reference.
(H )   This Exhibit was previously filed as an Exhibit to the Company’s Report on Form 10-KSB dated February 22, 2006, as incorporated herein by reference.
(I )   This Exhibit was previously filed as an Exhibit to the Company’s Report on Form 10-QSB dated May 10, 2006 as incorporated herein by reference.
(J )   This Exhibit was previously filed as an Exhibit to the Company’s Report on Form 10-QSB dated August 4, 2006 as incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

1.       Audit Fees — The aggregate fees for the years ended December 31, 2007 and 2006 for professional services rendered by Radin, Glass & Co., LLP for the audit of annual financial statements and review of financial statements included in any Form 10-QSB or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements are approximately $34,500 and $31,000, respectively.
2.       Audit-Related Fees — The registrant did not pay any audit-related fees during the years ended December 31, 2007 and 2006 that are not reported under paragraph 1 above.
3.   Tax Fees — The registrant did not pay any fees during the years ended December 31, 2007 and 2006 for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.
4.   All Other Fees — The registrant did not pay any other fees during the years ended December 31, 2007 and 2006 other than those reported in paragraphs 1 through 3 above.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of White Plains, New York, on the 20 th day of March, 2008.


  ORTHOMETRIX, INC.
  By: /s/ Reynald Bonmati
    Name: Reynald G. Bonmati
    Title:    President

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints Reynald G. Bonmati as true and lawful attorney-in-fact and agent of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities, to sign any and all amendments to this Annual Report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission, and hereby grants to such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or desirable to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant, Orthometrix, Inc., in the capacities and on the dates indicated.

Signature Capacity In Which Signed Date
/s/ Reynald G. Bonmati      Chairman of the Board and President (Principal Executive Officer); and Director March 20, 2008
Reynald G. Bonmati
/s/ Neil H. Koenig         Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer) 		March 20, 2008
Neil H. Koenig
/s/ Michael W. Huber Director March 20, 2008
Michael W. Huber
/s/ André-Jacques Neusy Director March 20, 2008
André-Jacques Neusy
/s/ William Orr Director March 20, 2008
William Orr
/s/ Albert S. Waxman Director March 20, 2008
Albert S. Waxman


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