UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 2O549
  FORM
10-K
 
 x Annual Report
Pursuant to Section 13 or 15 (d) of the Securities and Exchange Act of
1934
 
 For the
fiscal year ended December 31, 2009
 
 o Transition report
pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934
 
 For the
transition period from ________________ to _______________
 
 Commission
File No. 2-95626-D
 
 ACUNETX,
INC.
  Nevada
              
              88-0249812(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)
 
 2301 W.
205TH STREET, SUITE 102, TORRANCE, CA 90501
 (Address
of principal executive offices)
 
 Registrant’s
telephone number, including area code: (310) 328-0477
 
 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 $.001 Per Share
 
 Indicate
by check mark if registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No x
 
 Indicate
by check mark if the issuer is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act.  Yes o No x
 
 Indicate
by check mark whether the issuer (l) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
 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-K or any amendment to this
Form 10-K. x
 
 Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
  Large
      accelerated filer o
              Non-accelerated
      filer oAccelerated
      filer o
              Smaller reporting
      company x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
 
 The
aggregate market value of the voting common equity held by nonaffiliates of the
registrant, computed by reference to the closing sale price of such stock, was
approximately $936,129 as of June 30, 2009, the last business day of the
registrant’s most recently completed second fiscal quarter. The registrant has
no non-voting common equity.
 
 As of
March 19, 2010, there were 65,429,309 shares of Common Stock of the issuer
outstanding.
  Certain
statements contained in this discussion or elsewhere in this report may be
deemed "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Words and phrases such as
"expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates",
"designed to achieve", variations of such words and similar expressions are
intended to identify such forward-looking statements, which generally are not
historical in nature. All statements that address operating performance, events
or developments that we expect or anticipate will occur in the future -
including statements relating to rent and occupancy growth, general conditions
in the geographic areas where we operate – are forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict.
 
 Although
we believe the expectations reflected in any forward-looking statements are
based on reasonable assumptions, we can give no assurance that our expectations
will be attained and therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Many of the factors that may affect outcomes and results are beyond
our ability to control.
 
 
 
 PART
I
  ITEM
1.DESCRIPTION OF
BUSINESS
 
 BACKGROUND
 
 AcuNetx,
Inc. was formed by the merger of Eye Dynamics, Inc., incorporated in 1988, and
OrthoNetx, Inc., in December of 2005.  AcuNetx is now organized around
a dedicated medical division and two separate subsidiaries, as follows: (i)
IntelliNetx, a medical division with neurological diagnostic equipment, (ii)
OrthoNetx, Inc., a wholly-owned medical subsidiary company with devices that
create new bone, and (iii) VisioNetx, Inc., an AcuNetx-controlled subsidiary
company, formed January 3, 2007, with products for occupational safety and law
enforcement.  Our products offer a technology platform that allows the
devices to capture data about physiological conditions and connect the
device-related data to computers operated by users and support
persons.
 
 Our
products include the following:
 
 · Neurological
diagnostic equipment that measures, tracks and records human eye movements,
utilizing our proprietary technology and computer software, as a method to
diagnose problems of the vestibular (balance) system and other balance
disorders.
 
 · Devices
designed to test individuals for impaired performance resulting from the
influences of alcohol, drugs, illness, fatigue and other factors that affect eye
and pupil performance.  These products target the occupational safety
and law enforcement markets.
 
 · Orthopedic
and cranio-maxillofacial (skull and jaw) surgery products, which generate new
bone through the process of distraction osteogenesis.
 
 Supplementing
some of these products is a proprietary information technology system that is
designed to establish product registry to individual patients and track device
behavior for post-market surveillance, adverse event and outcomes
reporting.
 
 INTRODUCTION
TO EYE-TRACKING DEVICES
 
 Abnormal human eye
movements and pupil reactions are excellent indicators of the presence of
disease, drugs or other conditions that can alter the normal response of the
human oculo-motor system.  Our medical eye-tracking technology
addresses the central nervous system condition of nystagmus, a rapid,
involuntary back-and-forth or up-and-down oscillation of the
eyeball.  Nystagmus occurs in different forms and has a number of
causes, ranging from the serious, e.g., a tumor in the brain or ear, to the
“benign” or non-life threatening, such as positional dizziness.  The
consumption of certain drugs and alcohol also causes nystagmus, and there is a
direct and quantifiable correlation between blood alcohol concentration in the
body and the onset of nystagmus.  Medical research conducted over the
past fifty years has furnished evidence demonstrating a relationship between
irregular eye movement and abnormal central nervous system
physiology.  The numerous causes of these conditions include the
influences of alcohol, drugs, illness, stress, extreme fatigue and other
neurological conditions.  The underlying technology used in all of our
eye-tracking products and use.  The products utilize infrared
sensitive video cameras to monitor, record, and analyze eye performance and
movement.  All of the products share in a modular concept to promote
efficiency in manufacturing.  The products are PC-computer based, with
specialized and proprietary hardware and embedded firmware.  A common
element of the products is the Ocular Motor Module, which involves the subject
donning goggles and looking at moving lights within a dark
environment.  The products include an infrared sensitive Charge
Coupled Device video camera, which provides a bright video image, with the
person being tested seeing only a small stimulus or tracking light amid complete
darkness.  All of our Video-Nystagmography (VNG) devices are designed
to enable doctors to diagnose balance problems, including patients, especially
the elderly, who are in danger of falling.
  2
 EYE-TRACKING
PRODUCTS
 
 MEDICAL PRODUCTS (IntelliNetx
division): Video-nystagmography assesses eye movements using
infrared video cameras, and it has largely replaced the prior technology,
Electronystagmographic (ENG) testing.  ENG utilizes electrodes
to assess eye movement, and a pen recorder to display the results, in order to
assess problems in the balance
systems of patients.
  AcuNetx
brought the use of infrared illumination of the eyes into clinical use in 1994,
when the U.S. Food and Drug Administration (“FDA”) approved marketing of our
House Infrared/VNG System.  Our device was the first to replace the
electrodes with infrared sensitive video cameras and with computer digital
processing that follows the movement of the eyes and graphically portrays the
movements.  The test subject wears a lightweight goggle assembly,
which contains miniature infrared video cameras.  The goggles comprise
an essential component, because certain of the VNG tests require the patient to
move his or her head and often to recline on an examining table.  The
accuracy and display of the Infrared/VNG System has proved to be a significant
improvement over other existing testing methods, including ENG.  In
addition, the use of video by the Infrared/VNG System allows the test
administrator or medical practitioner to observe the eye movements directly, and
it can provide a digital video recording of the test for later playback and
additional analysis.  Since 1994, when we received FDA clearance to
market this product, most competitors have embraced video data acquisition as a
superior technology.  Results elicited from the tests are used by
physicians and clinicians.
  We
developed the AcuNetx system in conjunction with the world-renowned House Ear
Clinic and House Ear Institute, in Los Angeles, California.  The
“House” name is used with the permission of the House Ear
Institute.
 
 IMPAIRMENT DETECTION PRODUCTS
(VisioNetx, Inc. subsidiary). Our impairment detection products
include:
 
 · SafetyScanTM,
to screen workers in safety-sensitive jobs for physiological signs of
impairment.  The system evaluates involuntary changes in eye movements
and/or pupil reactions, which may result from drug or alcohol abuse, reactions
to medication, medical conditions, stress or fatigue.  Occupations in
the medical, aviation, emergency response, construction, manufacturing and
transportation businesses are key markets for this technology.  Unlike
most drug and alcohol test methods, SafetyScanTM functions without the need for
extraction and testing of bodily fluids, such as urine.  SafetyScanTM
determines whether or not a person is impaired at the time of the test and is
not a test for past use of consciousness-altering substances.  Unlike
blood, urine and saliva tests, which only measure the presence of a substance in
the body, SafetyScanTM takes into account the physiological effects of the
substance or “stressor”  While substance abuse receives more
attention, worker impairment caused by other stressors, such as prescription and
over-the-counter medications, extreme fatigue, and illness, all result in
significant expense to employers.  Workers suffering from such
impairments are characterized by low productivity, more accidents, higher
workers’ compensation and insurance costs, and equipment and merchandise
damage.
 
 SafetyScanTM
is based on methods developed by the federal government and used by law
enforcement over the past 30 years.  SafetyScanTM is a simple computer
system that evaluates the ability of an individual’s eyes to follow a moving
light, and the ability of the pupil of the eye to react to dim and bright light
stimuli.
 
 SafetyScanTM
is non-diagnostic and non-judgmental; it evaluates performance of the individual
solely for safety and productivity purposes.  It takes only 90 seconds
for SafetyScanTM to test the human eye by measuring twenty parameters of eye
movement and pupil change, assessing parameters of position and reaction time of
the eye itself and the size of pupil.  SafetyScanTM reports the result
of the test instantly with a “Pass” or “Fail” result.
 
 Unlike
SafetyScanTM, traditional drug tests do not determine on-the-job impairment in
real time.  Companies and government agencies around the world are
beginning to evaluate our cost-effective technology as a replacement for
traditional drug tests that require body fluids and are much more expensive to
conduct.  We believe that SafetyScanTM will be especially useful where
fatigue in the workplace has an impairing effect on workers.  To this
end, we have contracted with a major human alertness technology consulting and
research organization to optimize SafetyScanTM for fatigue testing.  We
believe SafetyScanTM will appeal to employers with round-the-clock workforces who
desire to reduce industrial accidents caused by employee fatigue and to improve
worker alertness and safety.
 
 · HawkEyeTM
is an evidence-capture device for use by state and federal DREs, or Drug
Recognition Experts, in evaluating
DUI suspects, in the field and in training mode.  In most states, law
enforcement agencies use a six point evaluation of people thought to be
intoxicated, known as the Standardized Field Sobriety Test
(“SFST”).  The SFST includes three tests for balance, and three tests
involving eye performance.  We believe there is a need for a product
that can be utilized not only in the jail or precinct house, but in the field by
law enforcement personnel in traffic patrol cars.  Our HawkEye TM
product will soon be offered as an advanced prototype in a ‘handheld’ or highly
portable configuration.
  Current
police practices nationwide involve training of officers in the SFST, and some
advanced officers in Drug Recognition Expert (DRE) are trained in protocols to
evaluate individuals suspected of DUI or other drug impairment.  Both
methods evaluate eye signs extensively, and this evidence has met the exacting
Frye standard for scientific validity in courts.  Until the invention
of HawkEyeTM, there existed no means for the officer to capture irrefutable
objective evidence.
 
 Our
HawkEyeTM product allows direct capture and digital recording of eye motions and
pupil responses on video, exactly as observed by the police
officer.
 
 3
  DISTRACTION
OSTEOGENESIS DEVICES FOR OSTEOPLASTIC SURGERY
 
 Osteoplastic
surgery, which involves formation or molding of bone, addresses the art and
science of correcting deformities and deficiencies of the skeleton caused by
errors of birth, trauma, infections and tumors.  Osteoplastic surgery
is applicable to all areas of the skeleton, including the skull and face, jaws,
long bones of the upper and lower extremities, hands, wrists, feet, ankles and
the spine.
  Our
OrthoNetx subsidiary holds patents and FDA approvals for a family of
osteoplastic surgery products that generate new bone through the process of
Distraction Osteogenesis, the growing of new of elongated
bone.  Together, these products address an estimated $730 million
potential worldwide market.  The first of these products, the GenerOsTM
CF craniofacial bone generator, has been available for commercial sale since
December 2004.
  Our
GenerOsTM CF craniofacial bone generator, assists surgeons in treating conditions
such as birth deformities of the skull, facial bones and jaws.  It is
a small, proprietary device that enables distraction of the bones of the face
and skull to correct developmental, congenital, and acquired defects and
deficiencies.  The device is made of surgical grade stainless steel
with an internal gear system that allows for activation to take place even
though the device is buried below the skin and soft tissues.  The
device is often implanted through incisions inside the mouth, thus minimizing
external surgical scars.  The GenerOsTM CF device utilizes two blocks
that are fixed to the bone on either side of a surgically created bone, cut with
miniscrews.  A small transcutaneous activation pin is turned, which
drives a mechanism to separate the two blocks.  As the two blocks are
separated, the bone gap is increased, to a recommended distance of 1mm per
day.  After the desired separation is achieved (usually 10mm - 20mm in
most cases), the pin is removed and the device is left in position on the bone
until the bone is completely calcified.  The device is then removed in
a small outpatient procedure.  GenerOs CF will distract up to 20
millimeters, which is adequate for approximately 95% of cases.
  Our
GenerOs TM SB small bone generator has the same form factor and specifications as
GenerOs CF.  The difference is an extension of approved indications
for small bones of the extremities.  We have received FDA clearance
for commercialization of this device.
  In 2007,
AcuNetx reached an agreement in principal with Robinson MedSurg of Lone Tree,
Colorado (“RMS”), that would permit RMS to market and sell our proprietary line
of bone distraction devices.  RMS is a distributor of medical devices
for maxillofacial, craniofacial, and orthopedic use.  RMS has special
marketing and product supporting relationships with independent resellers
throughout the world.  The company is owned by Dr. Randolph Robinson,
M.D. DDS, the inventor of the OrthoNetx line of distraction devices, and the
largest shareholder of AcuNetx, Inc.
  MARKETING
  VIDEONYSTAGMOGRAPHY (VNG) PRODUCTS.Marketing of the Infrared/VNG System is conducted by AcuNetx through
independent distributors.  One major distributor, MedTrak
Technologies, Inc, operates through a network of independently owned
sub-distributors, known as special instrument dealers.  These
independently owned businesses are distributors of not only our VNG System, but
a variety of allied and related products for the audiometric and otolaryngology
(“ENT”) markets.  These distributors work across the United States and
operate in assigned territories.  In addition, there are several
foreign distributors that market the product in Latin America, Canada, and the
Middle East.  We plan to obtain the “CE” mark of approval to offer the
product in the European Community.
  The
market for the VNG products is relatively mature and represents an estimated
annual growth rate of 5%. Because of the advancement of technology spurred by
our introduction of video data acquisition methods in 1994, the market for
replacement products has been strong. We intend to expand efforts to open new
markets for our products, including the neurology market, through our
distributors.
  IMPAIRMENT DETECTION
PRODUCTS.  We have test-marketed an early version of
SafetyScanTM and have sold a few units in the prison system for inmate testing in
drug rehabilitation programs.  In general, government drug testing
regulations are based on urine testing, so testing of employees by governmental
agencies, quasi-governmental agencies and certain regulated industries must
comply with these regulations.  Accordingly, some modification of
these regulations may be necessary in order for the SafetyScanTM to gain broad
acceptance in sectors subject to federal drug test regulations, such as those
regulated by the Department of Transportation and certain others.  We
have conducted discussions with various government agencies regarding
modification of applicable regulations and procedures so that they will
encompass testing based on eye movement and performance.  While
certain governmental agencies have expressed an interest in the VisioNetx
products, we believe that modifying governmental testing regulations may be a
lengthy process, and success is not assured.
  4
  For these
and other reasons, the Company is developing marketing plans that focus on
nongovernmental private sector companies that are not regulated by the federal
government with respect to testing employees for substance abuse.  In
general, these are companies with major safety issues related to their
operations.  These companies tend to have employees in close proximity
to, and often in charge of operating, very expensive and dangerous capital
equipment in often vulnerable or hostile environments; and some of these
companies may have encountered recent “cataclysmic” events that have resulted in
high-level corrective activities within their enterprises.  There are
many companies in various industries that meet these criteria, and the marketing
plan will focus on those portions of the industry that are not subject to
governmental regulation.
  Recently,
we have entered a distribution agreement for SafetyScanTM products with Circadian
Technologies, Inc., a research and consulting firm to industry, concerning shift
work and worker safety issues.
  Over the
last several months, VisioNetx has been negotiating a Joint Venture agreement
which will focus on the completion of SafetyScan’s “proof of concept” along with
the accumulation of significant test-bed data. At very little cost to AcuNetx,
the intention is to provide the Joint Venture with a number of SafetyScans and
Hawkeyes in order to conduct impairment testings in the workplace. We believe
this development will allow a smooth transition to the funding and development
of SafetyScan II.  VisioNetx expects to conclude the operating terms
and conditions of the Joint Venture in the near future. In addition, Dr. Terry
Knapp resigned as VisioNetx Chairman on May 4, 2010.
  HawkEyeTM.  In 2007,
We successfully completed a licensing agreement with our majority-owned
subsidiary, VisioNetx, Inc.  The agreement permits us to manufacture,
market and distribute the HawkEyeTM video system to law enforcement agencies
throughout the world.  AcuNetx uses a direct-to-customer marketing
strategy based on the Internet, E-marketing and a focused approach to
conferences and seminars.  Sales of this product commenced in
2007.
  COMPETITION
  VIDEONYSTAGMOGRAPHY (VNG)
PRODUCTS.  The principal competitors in the medical market
producing VNG testing equipment are MicroMedical Technologies, Inc., ICS Medical
Corporation and Interacoustics.  Since our VNG product was introduced
in 1994, these competitors have developed similar video-based VNG goggle
products.  As a result, the market has become very competitive and
subject to pricing pressures.  To combat this competitive pressure,
AcuNetx has reduced manufacturing costs to increase its gross profit
margins.
  IMPAIRMENT DETECTION PRODUCTS.
Competition for SafetyScanTM will come from companies that have developed tests
and devices that evaluate motor and cognitive skills. These take the form of
hand-eye coordination tests, divided attention tests, and other behavioral tests
or series of tests administered either in series or selectively. We have
identified three such competitors that have marketed these products in the past,
including Performance Factors, Inc., Essex Corporation, and Pulse Medical
Instruments.
  We
believe that only Pulse Medical Instruments has developed a product that could
be directly competitive with our products.  The product differs from
the others manufactured by our competitors in that it does not use the law
enforcement testing paradigm which forms the basis for SafetyScan; its results
are displayed in graphic form on a computer monitor for the qualified expert to
interpret.  Based on information available to us, we anticipate that
such a product will be more expensive than SafetyScanTM.  Also, we
believe it is not versatile enough to determine impairment regardless of the
case of the impairment: one model is for fatigue, another for alcohol and drugs,
etc.  As a result, we are not aware of whether that product has been
validated as a useful device. SafetyScanTM
differs from its competitors’ approach, because the SafetyScanTM test evaluates
changes in eye performance, which are involuntary responses and not under the
control of the individual.  For this reason, these responses cannot be
faked, changed, improved upon or learned.  All of the competitive
forms of performance tests known to us can be learned, and over time the
individual being tested can improve his skills in responding to those tests and
therefore potentially deceive the tester or alter the test results
improperly.  We believe that this differs from our product gives our
products an additional important competitive advantage over other forms of
performance testing. SafetyScanTM
also competes with drug and alcohol abuse test kits and devices, which rely
principally on collection and testing of urine or breath samples.  In
addition, certain drug and alcohol abuse tests now being developed will test
saliva and/or hair for evidence of the presence of certain drugs or
alcohol.  Additional advantages of SafetyScanTM over other tests,
include the immediacy of result feedback, and the non-invasive nature of the
test procedure.  We believe that the potential for occupational safety
improvement that SafetyScanTM will provide for life-risk professions, such as
airline pilots, bus drivers and train engineers, will make the system a very
important breakthrough for public safety in these fields.
  There are
no currently known competitors for the HawkEyeTM line of products.
 
 5
 
 DISTRACTION
OSTEOGENESIS DEVICES.
 
 Several
companies offer devices which compete with our GenerOsTM devices, including
Stryker Leibinger GmbH & Co (bone distraction systems), KLS Martin, L.P.
(distraction osteogenesis products), Walter Lorenz Surgical, Inc., a subsidiary
of Biomet, Inc. (distraction osteogenesis devices), Ace Surgical Supply Co.
(external mandible and dental distraction devices), Osteomed, Inc. (internal
mandibular distraction device) and Wells Johnson Company (mandibular distraction
device).  We believe our distraction osteogenesis devices offer
features that differentiate them from competitive devices currently
available.  Our devices are generally smaller and more adaptable to
the bone, making it easy for the surgeon to use on patients of all ages and
varying osteoplastic surgery needs.  Also, our craniofacial device can
be inserted through the mouth for lower jaw applications and can be positioned
for virtually any distraction vector required, and it features break-off plates,
which make it fast and simple for the surgeon to insert.  Finally, its
removable, low profile activation pin is unobtrusive and leaves a minimal
scar.
 
 MANUFACTURING
 
 We have
internally performed all design and engineering of our VNG, SafetyScanTM and
HawkEyeTM products, and have developed all software and validation of software
algorithms that are used in the analysis portion of the proprietary
software.
 
 All of
our products boast a modular concept for efficiency in
manufacturing.  Manufacturing of components of both the VNG products
and SafetyScanTM is outsourced.
  We
attempt not to rely on a single supplier for the manufacturing of
components.  Our GenerOs distraction osteogenesis devices are
manufactured under contract by High Precision Devices, Inc.
 
 GOVERNMENT
REGULATION
 
 Our VNG
products have been cleared for marketing by the U.S. Food and Drug
Administration (FDA), and we are licensed by the State of California as a
Medical Device Manufacturer.  SafetyScanTM and HawkEyeTM are not subject
to FDA regulation, as they are not considered medical
devices.  However, as discussed above under “Marketing,” government
regulations on substance abuse testing for government employees and certain
private companies impact our ability to market the SafetyScanTM in these
areas
 
 Our
distraction osteogenesis products are medical devices, subject to regulation by
the FDA and corresponding state agencies.  In order for us to market
these products for clinical use in the United States, we must obtain clearance
from the FDA via 510(k) pre-market notification or approval by a more extensive
submission known as a pre-market approval application (“PMAA”).  In
addition, certain material changes to medical devices are subject to FDA review
and clearance or approval.  The FDA currently has cleared three of our
products for sale under 510(k); the GenerOs CF, the GenerOs SB and the GenerOs
EX. Sales of
medical devices outside of the United States are subject to regulatory
requirements that vary from country to country.  The time required to
obtain approval or sales internationally may be longer or shorter than that
required for FDA clearance, and the requirements may differ.
  6
  PATENTS
& PROPRIETARY PROTECTION
  We
license the technology used in our performance evaluation products from Ronald
A. Waldorf, former CEO and director of AcuNetx, who holds a patent covering
claims relating to tracking eye movements in the dark, utilizing infrared
illumination and infrared sensitive video cameras, as well as the related
analysis methodology.  The patent was issued in 1989.  The
license is for the term of the underlying patent, and calls for nominal
royalties of $100 per year.
  VisioNetx
is the owner of a patent issued in August 1992, covering certain technology
underlying the SafetyScanTM equipment, principally relating to the apparatus for
testing for impairment by tracking eye movements and pupil reactions to
presented stimuli.  VisioNetx has two patents pending for SafetyScanTM,
while two patents have been approved for issue for the HawkEyeTM devices and
technology.  Additionally, our OrthoNetx subsidiary is the owner of
two patents and a patent pending covering our devices for distraction
osteogenesis.
  The
existence of patents may be important to our future operations, but there is no
assurance that additional patents will be issued.  We also rely on
unpatented technology, know-how and trade secrets covering a number of items,
particularly the methods of obtaining data regarding eye performance; and we
rely on confidentiality agreements and internal procedures to protect
information.
  EMPLOYEES
  AcuNetx
employs two full time employees, one in an executive and administrative
position, and one in operations, engineering and research.  We also
employ two part-time employees and retain several consultants in the areas of
sales & marketing and finance.  Our employees are not parties to
any collective bargaining agreement, and we believe that our employee relations
are satisfactory.
  ITEM
1A.RISK
FACTORS
 
 As a
“smaller reporting company,” no response is required.
 
 ITEM
1B.UNRESOLVED STAFF
COMMENTS
 
 As a
“smaller reporting company,” no response is required.
 
 ITEM
2.PROPERTIES
 
 The
principal offices of AcuNetx are located at 2301 West 205th
Street, Suite 102, Torrance, California 90501.  The offices, with an
adjacent manufacturing floor, occupy 1,620 square feet, and the lease expires on
January 31, 2011.  The current monthly lease payment is
$2,106.  These offices are considered satisfactory for conducting both
corporate business and the production and shipment of our
products.  We believe that suitable additional space will be available
to accommodate planned expansion.
 
 ITEM
3.LEGAL
PROCEEDINGS
 
 AcuNetx
is not a party to any material legal proceedings.
 
 ITEM
4.(REMOVED AND
RESERVED)
 
 PART
II
 
 ITEM
5.MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
 
 The
Company’s Common stock is Traded on the OTC Bulletin Board under the symbol
“ANTX”.  The following table sets forth the quarterly high and low
closing prices for the Company’s Common Stock, as reported on the OTC Bulletin
Board, during the 2008 and 2009 calendar years.
   LOW
              
              
              HIGH2009First
      Quarter
              
              
              0.002
              
              
              
              0.015Second
      Quarter
              
              
              0.009
              
              
              
              0.04Third
      Quarter
              
              
              0.01
              
              
              
              0.02Fourth
      Quarter
              
              
              0.01
              
              
              
              0.0112008First
      Quarter
              
              
              0.03
              
              
              
              0.18Second
      Quarter
              
              
              0.07
              
              
              
              0.12Third
      Quarter
              
              
              0.03
              
              
              
              0.08Fourth
      Quarter
              
              
              0.03
              
              
              
              0.08
  These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
 
 7
 
 HOLDERS
 
 As of
December 31, 2009, AcuNetx Common Stock was held of record by approximately 259
holders.  Registered ownership includes nominees who may hold
securities on behalf of multiple beneficial owners.
 
 DIVIDENDS
 
 The
Company has not paid cash dividends on its Common Stock, and the Company has no
present intention of paying cash dividends in the foreseeable
future.
 
 EQUITY
COMPENSATION PLAN INFORMATION
 
 The
following table sets forth information about the Company’s common stock that may
be issued upon the exercise of options, warrants or rights under the Company’s
existing equity compensation plans.  The information in this table is
as of December 31, 2009.
 Number
      of securitiesissuable
      uponexercise
      of
                  
                  
                  Weighted
      averageoutstanding
                  
                  
                  exercise
      price ofoptions,
                  
                  
                  outstanding
      options,
                  
                  
                  Number
      of securitiesPLAN
      CATEGORY
                  
                  
                  warrants
      and rights
                  
                  
                  warrants,
      and rights
                  
                  
                  remaining
      availableEquity
      compensationplans approved by security
holders
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  N/AEquity
      compensationplans not approved by security
      holders
                  
                  
                  
                  5,424,066
                  
                  
                  $
                  0.11
                  
                  
                  
                  8,615,934Total
                  
                  
                  
                  5,424,066
                  
                  
                  $
                  0.11
                  
                  
                  
                  8,615,934
  On March
27, 2006, the Board of Directors adopted the 2006 Stock Incentive Plan to
provide for the issuance of incentive stock options and/or nonstatutory options
to all employees and nonstatutory options to consultants and other service
providers.  Generally, all options granted to employees and
consultants expire in five and three years, respectively, from the date of
grant.  All options have an exercise price equal to or higher than the
fair market value of the Company’s stock on the date the options were
granted.  Options generally vest over three years.  The plan
reserves 14 million shares of common stock under the Plan and is effective
through December 31, 2015.
 
 ITEM
6.SELECTED
FINANCIAL DATA.
 
 As a
“smaller reporting company,” no response is required.
  8
 ITEM
7.MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
 
 The
following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and Notes thereto, included elsewhere in this
Annual Report on Form 10-K.  Except for the historical information
contained in this report, the following discussion contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions.  The
cautionary statements made in this Annual Report on Form 10-K should be read as
being applicable to all related forward-looking statements wherever they appear
in this Annual Report on Form 10-K.  Our actual results may differ
materially from the results discussed in the forward-looking statements, as a
result of certain factors including, but not limited to, those discussed
elsewhere in this Annual Report on Form 10-K.
 
 AcuNetx
has invested substantial funds in the last several years, developing and
validating its products.  We produce and market the Infrared/Video VNG
System, both as a branded product for our major distributor and under the
IntelliNetx brand internationally and through independent
distributors.  In 2009, the VNG line of medical products, and Hawkeye
traffic sobriety testing devices, together accounted for virtually all of our
revenue.  While the VNG products are being sold into a relatively
mature market, the Hawkeye market is in the beginning of its product life
cycle.
 
 Recent
research has indicated that additional markets may be suitable for our VNG
lines, and we will continue to explore those opportunities with our distributors
and partners. Several
ongoing initiatives are important to our future success.  In 2009, we
made several important changes to realign our resources.
 
 First, we
have accelerated marketing and sales of the HawkEyeTM eye observation and
recording system, now leased from VisioNetx, and this should allow AcuNetx
management to address this market and generate revenues from the
product.  We believe that we have approximately half of the current,
limited market for non-portable devices, and that our planned minor
technological advancements to the Hawkeye line, rendering the devices fully
portable, will open up to us a multi-billion dollar market in which we currently
have established penetration.
 
 Second,
we continue to pursue sales and marketing activities for our IntelliNetx
division, to take advantage of the growing global opportunity for balance
assessment and fall prevention in the elderly, which we believe has the
potential to develop into a substantial new market.  For example, we
have for the first time established an in-house sales group to sell to the
recently untouched California market in our home state.
 
 We
believe that the OrthoNetx product line still has significant potential value in
the marketplace, either for development or acquisition.
 
 Additionally,
the company is exploring the sale of OrthoNetx to one of several potential
buyers who have expressed interest.
 
 RESULTS
OF OPERATIONS
 YEAR
ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008.
 
 Revenues
from sales of products declined by $121,132, or 11.5%, from $1,054,330 in 2008,
to $933,198 in 2009. 2009 was a difficult year for the physicians who purchase
our VNG systems. Given this economy’s tight credit markets in 2009, a
significant problem for our physician customers was the inability to qualify for
leases, given the much higher standards directed by the lessors. We are finding
that the credit markets for our doctors are easing slightly so far this year.
Additionally, we have heard from many physicians that the uncertainty of changes
in Medicare reimbursements represented by the then-pending Healthcare
Legislation was of enough concern to delay the purchase of a VNG system. In
2009, 66 IntelliNetx and private label medical systems were sold, compared to 66
of the same systems sold in 2008.
 
 Two major
distributors accounted for approximately 54% of our sales revenues in 2009, and
in 2008 accounted for 45%.  HawkEyeTM eye observation and recording law
enforcement system sales provided an additional $47,251 revenue (7
units)  in 2009 compared with an additional $90,000 of revenue (15
systems) in 2008. For several months, the Company was unable to take purchase
orders due to a software engineering redesign requested by significant customer
feedback.
 
 Gross
profit declined from $684,079 (65%) in 2008 to $666,812 (72%) in
2009.  That decline was due to lower sales revenues but offset by
higher gross profit margins.  The 2008 net loss of $715,696 decreased
by $398,934, or 55.7%, to $316,762 in 2009.  The decrease was due
primarily to the renegotiation of a marketing agreement with a major
distributor, lower stock option expenses and a decrease in selling, general and
administrative expenses, which decreased $124,171, or 10.6%, from $1,174,663 in
2008 to $1,050,492 in 2009.
 
 Inventory
turnover ratio in 2009 was approximately 3.2:1, compared to 3:1 in
2008.  Inventory was down $32,807, or 33.1%, from $99,020 at December
31, 2008 to $66,213 on December 31, 2009.  Year end net accounts
receivable totaled $12,165 on December 31, 2009, a decrease of $67,002, or
84.6%, from $79,167 on December 31, 2008.
  9
 LIQUIDITY
AND CAPITAL RESOURCES
 
 As of
December 31, 2009, the Company had $7,698 in cash and cash equivalents, $12,165
in net accounts receivable, and $66,213 in inventory.  Conversely, the
Company had $1,689,145 of current liabilities, which included accounts payable
of $458,524.  The Company also had accrued liabilities of $1,001,525,
and notes payable of $379,096, with an accumulated deficit of
$12,774,800. AcuNetx
has no plans for significant capital equipment expenditures for the foreseeable
future.
 
 GOING
CONCERN
 
 The
Company’s independent auditors have included an explanatory paragraph in their
report on the December 31, 2009 consolidated financial statements discussing
issues which raise substantial doubt about the Company’s ability to continue as
a “going concern.”  The going concern qualification is attributable to
the Company’s operating losses during the year and the amount of capital which
the Company projects it needs to satisfy existing liabilities and achieve
profitable operations.
 
 Management
understands the comments in the auditor’s report relative to the Company as a
going concern.  We have taken a number of actions, described above and
in the footnotes, to obtain financing, significantly reduce expenses and
conserve cash.  We have also hired an internal sales force, to
complement the occasionally inconsistent, and in some cases non-existent, sales
by the company’s network of representatives.  All activities well as
the HawkEye TM product for law enforcement applications, which continue to serve
as our source of revenue.  These activities will include maintaining
the excellent relationships already formed with our suppliers, distributors, and
customers.  Any future expenses not related to this core business will
be examined in the light of our current liquidity position before
approval.  Management believes that the plan that has been implemented
will allow continuing operations and improvements over time.
 
 EFFECT
OF INFLATION
 
 We do not
believe that inflation has had a material effect on our net sales or
profitability in recent years.
 
 ITEM
7A.QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
 As a
“smaller reporting company,” no response is required.
 
 ITEM
8.FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
 
 The
financial statements of AcuNetx are attached as a separate section of this
Annual Report on Form 10-K, commencing with page F-1.
  ITEM
9.CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
  None.
 ITEM
9A.CONTROLS AND
PROCEDURES.
 
 MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
  Management
and the Board of Directors have agreed that the following plan will be used to
implement management’s responsibility for establishing and maintaining adequate
internal controls over financial reporting (ICOFR).
 
 RISK
EVALUATION & METHOD OF ASSESSMENT.
  Management’s
evaluation of ICOFR effectiveness was conducted using the financial control
elements provided by the Committee of Sponsoring Organizations (COSO)
framework.  The assessment of risks and internal controls was
conducted by all appropriate service providers and member employees of the
Company with moderator of the assessment done by the Chairman of our Audit
Committee.  A log of this assessment is available for detailed
study.
  The
result of this assessment indicates that there are no material weaknesses in
internal controls as of December 31, 2009 that would impact the 2009 financial
statements.  While management concluded that ICOFR were effective, the
assessment did highlight areas that could be improved as described
below:
 
 AcuNetx,
with a small number of employees, minimizes risk factors in financial controls
and reporting by assigning major tasks to individuals within their specialty
skills, such as inventory controls and buying process, accounting documentation
and disbursal of funds to payables.
  10
  Control
and evaluation of finances for our partially owned subsidiary out of state may
be at risk, but close communication with the financial and operating principals
of the subsidiary is maintained in order to assure clarity and accuracy of
data.
 
 With a
small number of employees, the risk for fraud and/or inaccurate financial
reporting is minimized because we do not duplicate functions and spread
responsibilities to multiple parties.
 
 EFFECTIVENESS
OF INTERNAL CONTROLS.
 
 The
primary judge of the effectiveness of controls is the quarterly and annual
audits that have been done over the past several years and the recent assessment
that confirms that there are no material deficiencies that impact the 2009
financial statements.
 
 This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only a
management’s report in this annual report.
 
 CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 There
were no changes to the Company’s ICFOR during the quarter ended December 31,
2009 that has materially affected, or is reasonably likely to materially affect,
the Company’s internal control over financial reporting.
 
 ITEM
9B.Other
Information.
  None.
 
 PART
III
 
 ITEM
9.DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
 
 The
following table sets forth information on the officers and directors of the
Company:
 
 11
  NAME
                
                AGE
                
                POSITIONRobert
      S. Corrigan
                
                56
                
                President,
      CEO, Acting CFO and Chairman of the Board of DirectorsRonald
      A. Waldorf
                
                62
                
                DirectorPeter
      Miterko
                
                56
                
                DirectorSteven
      Butler
                
                49
                
                Director
  Directors
hold office for a period of one year from their election at the annual meeting
of shareholders or until their successors are duly elected and
qualified.
 
 Mr.
Corrigan is the Chairman, President and CEO and CFO of AcuNetx.  He
has been a director of VisioNetx since its inception in 2007 and has been a
director of AcuNetx since 2005.  He has been Chairman and Chief
Executive Officer of Centennial Capital Group, Inc. for the past twelve
years.  CCGI is an investment banking enterprise which assists
developmental stage and other companies in corporate finance, mergers and
acquisitions and business development.  Prior to founding CCGI, Mr.
Corrigan was employed by the major financial services companies of Merrill
Lynch, Pierce Fenner & Smith, Inc. and Paine Webber, Inc. Mr. Corrigan is a
Director of AcuNetx, Inc, and VisioNetx, Inc. Mr. Corrigan holds a B.S. degree
from Castleton State College, Castleton, Vermont and an M.S. from Youngstown
State University, Youngstown, Ohio.
  Mr.
Waldorf was President and CFO of AcuNetx, Inc. until his retirement in
2008.  He is currently a director of the company and has been for many
years.  He acted as Chairman of the Board of Directors of Eye Dynamics
between 1991 and 2005.  He is the co-inventor of the IR/Video ENG
System, SafetyScan and HawkEye products.  Since 1969 Waldorf has been
active in the field of otolaryngology, primarily in an academic research
environment at the University of Florida, College of Medicine and at the
University of California (Irvine), Department of Surgery.  He has
published numerous articles on vestibular and optokinetic research in
international scientific and medical journals and was the principal investigator
in a research grant funded by the National Institute of Health/National
Institute on Alcohol Abuse and Alcoholism (NIH/NIAAA).  Mr. Waldorf
earned an M.S. from the Department of Physiology of the College of Medicine,
University of Florida, in 1972.
  Mr.
Miterko is a partner and Executive Vice President of Denver Management Advisors,
Inc.  Previously, he was Chairman of HR Source, the largest
compensation, consulting and human resources outsourcing firm in the Rocky
Mountain area.  As a partner at Ernst & Young, Peter founded and
ran the Human Resources Consulting Division of the firm, and served on the
firm’s U.S. Operating Committee.  Peter practiced law in New York
City, where he also served as senior associate in compensation and benefits at
Carter, Ledyard & Milburn, a Wall Street law firm.  He has also
served on the Board of the Association of Private Pension and Welfare Plans, a
Washington, D.C. based lobbying group and has taught compensation and benefits
law at the University Of Denver School Of Law.
  Mr.
Butler, age 49, has been President and CEO of Denver Management Advisors, a
compensation and benefits consulting firm, since 2007.  Between 2005
and 2007, he was CEO of Startek, Inc., an NYSE-listed business process
outsourcing firm.  Between 2002 and 2004, he was President and CEO of
S.D. Butler Financial Consulting Services, LLC, which provided consulting
services to startup businesses.  Mr. Butler has also served as CEO and
CFO of Verado, Inc., a NASDAQ-listed data center company, and as managing
Director of Finance and Treasurer of United Pan-Europe Communications, a
Netherlands-based cable TV service provider.
  
  12
  ITEM
11.EXECUTIVE
COMPENSATION
  SUMMARY
COMPENSATION TABLE
 
 The
following table sets forth compensation awarded or paid by the Company to its
Executive Officers during the fiscal years ended December 31, 2009 and
2008.
  Summary
Compensation Table
  Name
      and principal position
                  Year
                  Salary
                  Option
      awards
                  Total($)
                  ($)
                  ($)Robert
      S. Corrigan - CEO/CFO
                  2009
                  150,000.00
                  0.00
                  150,000.00Robert
      S. Corrigan - CEO
                  2008
                  58,333.00
                  30,000.00
                  88,333.00Ronald
      A. Waldorf - CEO
                  2009
                  12,000.00
                  0.00
                  12,000.002008
                  75,000.00
                  0.00
                  75,000.00Dennis
      G. Geselowitz - CFO
                  2009
                  37,500.00
                  0.00
                  37,500.002008
                  25,000.00
                  25,268.00
                  50,268.00
 
 (A)  Options
vested and valued using assumptions as described in Note 11 of Notes to
Financial Statements-- Stock Options And Warrants.
 
 (B)  Award amended per
Narrative Disclosure to the Summary CompensationTable.
 
 Narrative
Disclosure to the Summary Compensation Table
 
 In July
2008, former CEO Ron Waldorf resigned, and the Board approved Robert Corrigan’s
appointment as CEO, under which he was to receive a salary of $150,000 per year,
and a stock grant of 1 million shares.  In September, 2008, the Board
approved the employment agreement of CFO Dennis Geselowitz, under which he
receives an annual salary of $90,000, and options to purchase 1 million shares
of the company’s common stock, vesting over a 2-year period.
 
 Effective
June 1, 2009, Dennis Geselowitz, Chief Financial Officer of the Company, was no
longer employed by the Company.  Robert S. Corrigan, President of the
Company, will serve as Acting Chief Financial Officer until a permanent Chief
Financial Officer can be hired.
  13
 COMPENSATION
OF DIRECTORS
 
 The
following table provides information concerning the compensation of all
directors for the year ended December 31, 2009.
 
 Director
Compensation
  Name
                Option
                All
      other
                Totalawards
                compensation($)
                ($)
                ($)Robert
      S. Corrigan
                0.00(A)
                0.00
                0.00
                0.00Peter
      Miterko
                0.00(B)
                0.00
                0.00
                0.00Steven
      Butler
                0.00(C)
                0.00
                0.00
                0.00
  (A)850,000 Options outstanding as of
12/31/2009.
 (B)630,000 Options outstanding as of
12/31/2009.
 (C)377,400 Options outstanding as of
12/31/2009.
 
 Narrative
Disclosure to the Director Compensation Table
 
 During
2009, the Board of Directors agreed to waive compensation for 2009 services,
awarding no additional stock pursuant to the 2006 Stock Option Plan established
on March 27, 2006.
  ITEM
12.SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 
 The
following table sets forth information regarding the beneficial ownership of the
Common Stock of the Company as of December 31 2009, by (i) each person known by
the Company to beneficially own 5% or more of the outstanding Common Stock of
the Company; (ii) each of the Company’s directors; (iii) the Named Executive
Officers identified in the Summary Compensation Table; and (iv) all directors
and Named Executive Officers of the Company as a group.
  Name
                Address
                
                Shares
      Owned
                %
      OwnedRandolph
      Robinson
                7144
      S Chapparal Cir E Centennial, CO 80016
                
                8,834,760.00
                12.5%Winchester
      Financial Services Limited
                295
      Madison Ave 5th Floor NY, NY 10017
                
                3,571,429.00
                5.0%Robert
      Corrigan
                2301
      W. 205th St, Suite 102, Torrance, CA 90501
                1
                1,650,000.00
                2.3%Peter
      Miterko
                2301
      W. 205th St, Suite 102, Torrance, CA 90501
                2
                687,143.00
                1.0%Ronald
      Waldorf
                2301
      W. 205th St, Suite 102, Torrance, CA 90501
                
                502,100.00
                0.7%Steven
      Butler
                2301
      W. 205th St, Suite 102, Torrance, CA 90501
                3
                377,400.00
                0.5%
  1 - Total
includes 1,350,000 options
 2 - Total
includes 630,000 options
 3 - Total
includes 377,400 options
  Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities.  Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.  Shares of common stock
subject to securities currently convertible or convertible within 60 days after
March 24, 2010, are deemed to be outstanding in calculating the percentage
ownership of a person or group but are not deemed to be outstanding as to any
other person or group.
  14
 SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
 Section
16(a) of the Exchange Act requires the Company’s officers and directors, and
persons who own more than 10% of a registered class of the Company’s equity
securities (the “10% Stockholders”), to file reports of ownership and changes of
ownership with the Securities and Exchange Commission.  Officers,
directors and 10% Stockholders of the Company are required by Commission
regulation to furnish the Company with copies of all Section 16(a) forms so
filed.
 
 Based
upon a review of filings made and other information available to it, the Company
believes that each of the Company’s present Section 16 reporting persons filed
all forms required of them by Section 16(a) during the year 2009.
 
 ITEM
13.CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
 None.
 
 ITEM
14.PRINCIPAL
ACCOUNTING FEES AND SERVICES.
 
 The
following is a summary of the fees billed to the Company by Spector, Wong &
Davidian, LLP for professional services rendered for the fiscal years ended
December 31, 2009 and 2008:
 Fee
      Category
                  
                  Fiscal
      2009 Fees
                  
                  
                  Fiscal
      2008 FeesAudit
      Fees
                  
                  $
                  65,000.00
                  
                  
                  $
                  65,000.00Audit-Related
      FeesTax
      FeesAll
      Other FeesTotal
      Fees
                  
                  $
                  65,000.00
                  
                  
                  $
                  65,000.00
 Audit
Fees.  Consists of fees billed for professional services rendered for
the audit of the Company’s consolidated financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that are generally provided by Spector, Wong & Davidian, LLP in
connection with statutory and regulatory filings or engagements.
 
 Audit-Related
Fees.  Consists of fees billed for assurance and related services that
are reasonably related to the performance of the audit or review of the
Company’s consolidated financial statements and are not reported under “Audit
Fees.”  There were no Audit-Related services provided in fiscal 2009
or 2008.
 
 Tax Fees.
Consists of fees billed for professional services for tax compliance, tax advice
and tax planning. There were no tax fees provided in fiscal 2009 or
2008
 
 All Other
Fees. Consists of fees for products and services other than the services
reported above.  There were no management consulting services provided
in fiscal 2009 or 2008.
 
 Policy On
Audit Committee Pre-Approval Of Audit And Permissible Non-Audit Services Of
Independent Auditors
 
 The
Company’s Audit Committee, subject to Board of Directors consent, pre-approves
all audit and permissible non-audit services provided by the independent
auditors. These services may include audit services, audit-related services, tax
services and other services. Pre-approval would generally be provided for up to
one year and any pre-approval would be detailed as to the particular service or
category of services, and would be subject to a specific budget. The independent
auditors and management are required to periodically report to the Audit
Committee and Board of Directors regarding the extent of services provided by
the independent auditors in accordance with this pre-approval, and the fees for
the services performed to date. The Board of Directors may also pre-approve
particular services on a case-by-case basis.
  15
 PART
IV
 
 ITEM
14.EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
 
 The
following exhibits are included herein or incorporated by
reference:
   2.1
              Agreement and Plan
      of Merger, dated September 1, 2005, among Eye Dynamics, Inc., OrthoNetx,
      Inc., and Eye Dynamics Acquisition Corp. (1)3.1
              Amended and Restated
      Articles of Incorporation (2)3.2
              Amended and Restated
      Bylaws (2)10.1
              Employment
      Agreement, dated December 23, 2005 between the Company and Ronald A.
      Waldorf (2)10.2
              Exclusive Licensing
      Agreement, dated November 1, 1989 between the Company and Ronald A.
      Waldorf (3)10.3
              Licensing Agreement,
      dated November 15, 2004 between the Company and Terry Knapp
  (2)10.4
              Exclusive
      Manufacturing, Sales, Licensing and Software Ownership Agreement, dated
      May 18, 2006 between the Company and Medtrak, Inc. (3)10.5
              Industrial Lease,
      dated  January 22, 2010, between the Company and Koll/Per
      Torrance Commerce Center, LLC10.6
              AcuNetx, Inc. 2006
      Non-Executive Directors’ Stock Plan (2)31.1
              Certification of
      Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
      of 200231.2
              Certification of
      Acting Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
              Certification of
      Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
      of 200232.2
              Certification of
      Acting Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 
 (1)
Incorporated by reference from Report on Form 8-K dated September 1,
2005.
  (2)Incorporated by
reference from Report on Form 10-KSB for the fiscal yearended December
30, 2005, filed on March 31, 2006.
  (3)Incorporated by
reference from Report on Form 10-KSB for the fiscal yearended December
30, 2006, filed on April 13, 2007.
  (4)Incorporated by
reference from Report on Form 10-SB filed on December 13,
1999.
 
 16
 
 SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
   AcuNetx,
      Inc.Date:April   12,
      2010
                By:
                /s/ Robert S.
      CorriganRobert
      S. Corrigan,
                  President
      andChief
      Executive Officer
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
 
 (1) Principal
Executive Officer and Principal Financial and Accounting Officer
  /s/ Robert S.
      Corrigan
              Chief Executive
      Officer and  Acting Chief Financial Officer
              April 12,
    2010Robert S.
      Corrigan
  (3) Directors
   /s/
      Robert S.
      Corrigan
              Director
              April 12,
    2010Robert
      S. Corrigan/s/
      Peter Miterko
              Director
              April 12,
    2010Peter
      Miterko/s/
      Steven Butler
              Director
              April 12,
    2010Steven
      Butler/s/ Ronald A.
      Waldorf
              Director
              April 12,
    2010Ronald A.
      Waldorf
   17
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   HAROLD Y. SPECTOR,
      CPA
                  SPECTOR & ASSOCIATES,
      LLP
                  70 SOUTH LAKE
      AVENUESTEVEN M. SPECTOR,
      CPA
                  Certified
      Public Accountants
                  SUITE  630(888)
    584-5577
                  PASADENA, CA
      91101FAX  (626)
      584-6447admin@swdcpa.com
  To the
Board of Directors and
 Stockholders
of AcuNetx, Inc.
 
 We have
audited the accompanying consolidated balance sheets of AcuNetx, Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of
operations, changes in stockholders’ equity (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of AcuNetx, Inc. as of December
31, 2009 and 2008, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
  The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2, the
Company's ability to continue in the normal course of business is dependent upon
the success of future operations. The Company has recurring losses, substantial
working capital deficiency, stockholders' deficit and negative cash flows from
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding these matters are
also described in Note 2. These consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
    /s/
      Spector & Associates, LLPPasadena,
      CAMarch
      12, 2010
   F-1




ACUNETX,
INC.


CONSOLIDATED
BALANCE SHEETS


DECEMBER
31, 2009 AND 2008







December
      31, 2009
            
            
            December
      31, 2008ASSETSCurrent
      AssetsCash
            
            $
            7,698
            
            
            $
            12,715Restricted
      Cash
            
            
            -
            
            
            
            15,636Accounts
      receivable, net
            
            
            12,165
            
            
            
            79,167Inventory
            
            
            66,213
            
            
            
            99,020Prepaid
      expenses and other current assets
            
            
            8,499
            
            
            
            51,816Total
      Current Assets
            
            
            94,575
            
            
            
            258,354Property
      and equipment, net
            
            
            1,600
            
            
            
            10,355Goodwill
            
            
            -
            
            
            
            -Other
      intangible assets
            
            
            113,716
            
            
            
            114,996Deferred
      tax assets
            
            
            220,635
            
            
            
            220,635Other
      investments
            
            
            1,500
            
            
            
            15,000Other
      assets
            
            
            2,020
            
            
            
            2,020TOTAL
      ASSETS
            
            $
            434,046
            
            
            $
            621,360LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesAccounts
      payable
            
            $
            458,524
            
            
            $
            429,766Accrued
      liabilities
            
            
            1,001,525
            
            
            
            909,508Current
      portion of convertible debt
            
            
            24,876
            
            
            
            -Current
      portion of long-term debt
            
            
            204,220
            
            
            
            211,768Total
      Current Liabilities
            
            
            1,689,145
            
            
            
            1,551,042Convertible
      debt, net of debt discount of $124 and $3,124 for 2009 and 2008,
      respectively
            
            
            -
            
            
            
            36,876Long-Term
      Debt
            
            
            150,000
            
            
            
            150,000Total
      Liabilities
            
            
            1,839,145
            
            
            
            1,737,918Stockholders'
      DeficitCommon
      stock, $0.001 par value; 100,000,000 shares authorized;65,429,309
      shares issued and outstanding
            
            
            65,429
            
            
            
            65,429Common
      stock to be issued
            
            
            -
            
            
            
            -Paid-in
      capital
            
            
            11,338,699
            
            
            
            11,288,208Accumulated
      deficit
            
            
            (12,774,041
            )
            
            
            (12,457,279
            )Total
      AcuNetx Inc. Stockholders' Deficit
            
            
            (1,369,913
            )
            
            
            (1,103,642
            )Noncontrolling
      deficit in subsidiary
            
            
            (35,186
            )
            
            
            (12,916
            )Total
      Stockholders' Deficit
            
            
            (1,405,099
            )
            
            
            (1,116,558
            )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
            
            $
            434,046
            
            
            $
            621,360




F-2




ACUNETX,
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR
YEARS ENDED DECEMBER 31, 2009 AND 2008







For
      the years ended December 31,2009
              
              
              2008Sales
      - Products
              
              $
              933,198
              
              
              $
              1,054,330Cost
      of sales - products
              
              
              266,386
              
              
              
              370,251Gross
      profit
              
              
              666,812
              
              
              
              684,079Operating
      Expenses:Selling,
      general and administrative expenses
              
              
              1,050,492
              
              
              
              1,174,663Stock
      option expense
              
              
              16,521
              
              
              
              167,404Total
      Operating Expenses
              
              
              1,067,013
              
              
              
              1,342,067Operating
      loss
              
              
              (400,201
              )
              
              
              (657,988
              )Other
      income(expenses)Interest
      and other income
              
              
              196,879
              
              
              
              17,978Interest
      and other expenses
              
              
              (138,691
              )
              
              
              (70,599
              )Total
      other income (expenses)
              
              
              58,188
              
              
              
              (52,621
              )Net
      loss before income taxes and minority interest
              
              
              (342,013
              )
              
              
              (710,609
              )Provision
      for income taxes
              
              
              800
              
              
              
              (800
              )Net
      loss before noncontrolling interest
              
              
              (342,813
              )
              
              
              (711,409
              )Noncontrolling
      interest in losses of subsidiary
              
              
              (26,051
              )
              
              
              4,287Net
      loss
              
              $
              (316,762
              )
              
              $
              (715,696
              )Net
      Loss per share-Basic and Diluted
              
              $
              (0.005
              )
              
              $
              (0.011
              )Weighted
      average number of common shares
              
              
              65,429,309
              
              
              
              65,387,583
  F-3


ACUNETX,
INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


Common
      Stock
            
            
            Paid-in
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalance
      at December 31, 2007
            
            
            65,142,880
            
            
            $
            65,143
            
            
            $
            11,125,546
            
            
            $
            (11,741,583
            )
            
            $
            (550,894
            )Stocks
      to be issued for services
            
            
            
            
            
            
            
            
            
            
            30,000
            
            
            
            
            
            
            
            30,000Issuance
      of stock for cash
            
            
            286,429
            
            
            
            286
            
            
            
            19,764
            
            
            
            
            
            
            
            20,050Stock
      option and warrant expenses
            
            
            
            
            
            
            
            
            
            
            159,143
            
            
            
            
            
            
            
            159,143Equity
      adjustments related to subsidiary stock transactions
            
            
            
            
            
            
            
            
            
            
            (46,245
            )
            
            
            
            
            
            
            (46,245
            )Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (715,696
            )
            
            
            (715,696
            )Balance
      at December 31, 2008
            
            
            65,429,309
            
            
            $
            65,429
            
            
            $
            11,288,208
            
            
            $
            (12,457,279
            )
            
            $
            (1,103,642
            )Stock
      option and warrant expenses
            
            
            
            
            
            
            
            
            
            
            51,055
            
            
            
            
            
            
            
            51,055Equity
      adjustments related to subsidiary stock transactions
            
            
            
            
            
            
            
            
            
            
            (565
            )
            
            
            
            
            
            
            (565
            )Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (316,762
            )
            
            
            (316,762
            )Balance
      at December 31, 2009
            
            
            65,429,309
            
            
            $
            65,429
            
            
            $
            11,338,699
            
            
            $
            (12,774,041
            )
            
            $
            (1,369,913
            )




F-4





ACUNETX,
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
YEARS ENDED DECEMBER 31, 2009 AND 2008





For
      Year ended Dec 31,
              
              2009
              
              
              2008CASH
      FLOW FROM OPERATING ACTIVITIES:Net
      loss
              
              
              (316,762
              )
              
              $
              (715,696
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Minority
      interest
              
              
              (26,051
              )
              
              
              4,287Depreciation
      and amortization
              
              
              7,631
              
              
              
              8,807Issuance
      of stock and stock equity awards for services
              
              
              54,272
              
              
              
              133,053Provision
      for bad debt
              
              
              60,305
              
              
              
              (3,692
              )Amortization
      of debt discount
              
              
              3,000
              
              
              
              3,000Intellectual
      property write-down
              
              
              -
              
              
              
              47,249Unrealized
      (gain) loss on marketable securities
              
              
              13,500
              
              
              
              (14,100
              )Gain
      on recovery from loan loss
              
              
              -
              
              
              
              (900
              )Loss
      on sale of property
              
              
              1,204
              
              
              
              -(Increase)
      Decrease in:Accounts
      receivable
              
              
              6,697
              
              
              
              (30,441
              )Inventory
              
              
              32,807
              
              
              
              105,259Prepaid
      and other assets
              
              
              43,317
              
              
              
              21,869Increase
      (Decrease) in:Accounts
      payable and accrued expenses
              
              
              120,775
              
              
              
              150,396Net
      cash provided by (used in) operating activities
              
              
              695
              
              
              
              (290,909
              )CASH
      FLOW FROM INVESTING ACTIVITIES:Decrease
      in restricted cash
              
              
              15,636
              
              
              
              59,364Proceeds
      from sales of property
              
              
              1,200
              
              
              
              -Capitalized
      Intellectual property
              
              
              -
              
              
              
              (12,871
              )Net
      cash provided by investing activities
              
              
              16,836
              
              
              
              46,493CASH
      FLOW FROM FINANCING ACTIVITIES:Net
      proceeds from sales of common stocks
              
              
              -
              
              
              
              20,050Proceeds
      from issuance of long-term debt
              
              
              -
              
              
              
              150,000Net
      proceeds from convertible debt
              
              
              -
              
              
              
              15,000Repayments
      on convertible debt
              
              
              (15,000
              )
              
              
              (75,000
              )Repayments
      on notes payable
              
              
              (7,548
              )
              
              
              (58,081
              )Net
      cash provided by (used in) financing activities
              
              
              (22,548
              )
              
              
              51,969NET
      DECREASE IN CASH
              
              
              (5,017
              )
              
              
              (192,447
              )CASH
      BALANCE AT BEGINNING OF PERIOD
              
              
              12,715
              
              
              
              205,162CASH
      BALANCE AT END OF PERIOD
              
              $
              7,698
              
              
              $
              12,715Supplemental
      Disclosures of Cash Flow Information:Taxes
      Paid
              
              $
              0
              
              
              $
              0Interest
      paid
              
              $
              27,135
              
              
              $
              38,884Schedule
      of Noncash Investing and Financing Activities:Issuance
      of stock options for accrued expenses
              
              $
              0
              
              
              $
              1,036




F-5
  ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES
 
 AcuNetx,
Inc., a Nevada corporation, (the “Company” or “AcuNetx”, formerly known as Eye
Dynamics, Inc. or “EDI”) and its subsidiaries OrthoNetx Inc. and VisioNetx Inc.,
combine diagnostic, analytical and therapeutic devices with proprietary software
to permit health providers to diagnose and treat balance disorders and various
bone deficiencies; law enforcement officers to evaluate roadside sobriety; and
employers in high-risk industries to determine, in real-time, the mental fitness
of their employees to perform mission-critical tasks.  AcuNetx is
headquartered in Torrance, California.
 
 AcuNetx
is organized around a dedicated medical division (i) IntelliNetx, a medical
division with neurological diagnostic equipment, and two separate subsidiary
companies: (ii) OrthoNetx, Inc., a wholly-owned medical subsidiary company with
devices that create new bone, and (iii) VisioNetx, Inc., a majority-owned
subsidiary company with products for occupational safety and law
enforcement.  For all its devices, AcuNetx is integrating an
information technology (IT) platform that allows the device to capture data
about the physiological condition of a human being.  The company’s IT
platform is designed to gather data and connect the device-related data with
users and support personnel.
 
 AcuNetx
products include the followings: (a) Neurological diagnostic equipment that
measures, tracks and records human eye movements, utilizing the company’s
proprietary technology and computer software, as a method to diagnose problems
of the vestibular (balance) system and other balance disorders; (b) Devices
designed to test individuals for impaired performance resulting from the
influences of alcohol, drugs, illness, stress and other factors that affect eye
and pupil performance.  These products target the occupational safety
and law enforcement markets; (c) Orthopedic and craniomaxillofacial (skull and
jaw) surgery products, which generate new bone through the process of
distraction osteogenesis; and (d) A proprietary information technology system
called SmartDevice-ConnectTM (“SDC”) that establishes product registry to
individual patients and tracks device behavior for post-market surveillance,
adverse event and outcomes reporting, and creates “smart devices” that gather
and transmit physiological data concerning the device and its interaction with
patients.
 
 Principle Of Consolidation
And Presentation: The accompanying consolidated financial statements
include the accounts of AcuNetx, Inc. and its subsidiaries after elimination of
all intercompany accounts and transactions.  Certain prior period
balances have been reclassified to conform to the current period
presentation.
 
 Use Of Estimates: The
preparation of the accompanying consolidated financial statements in conformity
with accounting principles generally accepted in the United States (U.S. GAAP)
requires management to make certain estimates and assumptions that directly
affect the results of reported assets, liabilities, revenue, and
expenses.  Actual results may differ from these
estimates.
 
 
 
 
 F-6
 
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 1 - NATURE OF BUSINESS AND
CRITICAL ACCOUNTING POLICIES (CONTINUED)
 
 Revenue Recognition:
The Company recognizes revenue from the sale of products, and related costs of
products sold, where persuasive evidence of an arrangement exists, shipment has
occurred, the seller’s price is fixed or determinable and collectibility is
reasonably assured.
 
 For its
domestic customers, the Company supplies systems through several distribution
channels; though its IntelliNetx sales group of manufacturer representatives and
international dealers, its private label distributor, MedTrak Technologies, Inc.
(Scottsdale, AZ) and its direct sales, commission-based, HawkEyeTM
team.
 
 Revenue
is recognized when products are shipped.  Based on the Company’s
historical experience with returns, no provisions are established for estimated
product returns and allowances.  Price discounts and other sales
incentives are charged to sales when sales are recognized.
 
 The
Company provides repair and maintenance, consulting and education services to
its customers.  Revenue from such services is generally recognized
over the period during which the service is performed or on a service-performed
basis.
 
 The
Company evaluated FASB ASC 985-605 (formerly Statement of Position No. 97-2),
“Software Revenue
Recognition” , but does not expect that ASC 985-605 will have a material
impact on the Company’s financial position, results of operations, or cash flows
since the Company did not sell, license, lease or market any individual computer
software.  The Company’s computer software is included with equipment
sales and is not sold separately.
 
 Accounts Receivable:
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts.  On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful accounts, based on
the history of past write-offs and collections and current credit
conditions.  An allowance for doubtful accounts of $18,334 and $5,164
has been established for the years ended December 31, 2009 and 2008,
respectively.
 
 Stock-Based
Compensation: The Company accounts for its stock options in accordance
with FASB ASC 718-10 (formerly Statement No.123(R)), “Share-Based Payment”. ASC
718-10 requires the recognition of the cost of services received in exchange for
an award of equity instruments in the financial statements and is measured based
on the grant date fair value of the award.  ASC 718-10 also requires
the stock optioncompensation expense to be
recognized over the period during which the recipientis required to provide
service in exchange for the award (the vesting period).
 
 Stock-based
employee compensation incurred for the years ended December 31, 2009 and 2008,
was $16,521 and $167,404, respectively.
 
 The
Company accounts for stock issued to non-employees in accordance with the
provisions of ASC 505-50 and the EITF Issue No. 00-18, “Accounting For Equity Instruments
That Are Issued To Other Than Employees For Acquiring, Or In Conjunction With
Selling, Goods Or Services.” ASC 505-50 states that equity instruments
that are issued in exchange for the receipt of goods or services should be
measured at the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably
measurable.  Under the guidance in Issue 00-18, the measurement date
occurs as of the earlier of (a) the date at which a performance commitment is
reached or (b) absent a performance commitment, the date at which the
performance necessary to earn the equity instruments is complete (that is, the
vesting date).
   F-7
  ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
 
 Convertible Promissory Notes
And Warrants: The Company has evaluated all freestanding instruments and
embedded features embodied in the Convertible Promissory Notes financing
arrangement in accordance with current accounting standards for complex
financing transactions.  The following points illustrate the key
considerations in the Company’s evaluation:
 
 ●
                The
      terms and features of the Convertible Promissory Notes resulted in the
      Company’s conclusion that the instrument was more akin to a debt security
      than an equity security.  Therefore, embedded features that met
      the definition of derivative financial features were evaluated for their
      clear and close relationship with a debt
      instrument.  Significant features included conversion features;
      redemption features and interest features.  While conversion
      features, such as those included in the Convertible Promissory Notes, are
      generally not clearly and closely related to debt instruments, the Company
      was afforded the “Conventional Convertible” exemption from derivative
      accounting.  While redemption features and interest features are
      generally considered clearly and closely related to debt instruments, the
      Company was also afforded the “Conventional Convertible” exemption from
      derivative accounting.
 ●
                The
      terms and features of the freestanding warrants were evaluated under the
      guidance for equity classification set forth in ASC 815-40 (formerly EITF
      00-19), “Accounting For
      Derivative Financial Instruments Indexed To A Company’s Own Stock”
      and EITF 05-04, “The
      Effect Of A Liquidating Damages Clause On A Freestanding Financial
      Instrument Subject To EITF 00-19.” As a result, the Company
      concluded that the warrants did not rise to an uneconomic
      settlement.  In addition, all other indicators of equity
      provided in ASC 815-40 were present.  Therefore, the warrants
      were afforded equity
classification.
 
 Net Income Per Share:
Basic net income per share includes no dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common
stock outstanding for the period. Diluted net income per share is computed by
dividing net income by the weighted average number of common shares and the
dilutive potential common shares outstanding during the
period.  Diluted net loss per common share is computed by dividing net
loss by the weighted average number of common shares and excludes dilutive
potential common shares outstanding, as their effective is
anti-dilutive.  Dilutive potential common shares consist primarily of
employee stock options, stock warrants and shares issuable under convertible
debt.
 
 Fair Value
Measurements:On January 1, 2008, the
Company adopted the provision of ASC 820-10 (formerly SFAS No. 157), "Fair Value Measurements,"
except as it applies to those nonfinancial assets and nonfinancial liabilities
for which the effective date ahs been delayed by one year.  The
Company measures at fair value certain financial assets and liabilities,
including its marketable securities trading
 
 ASC
820-10 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value.  The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements).  The three levels of the
fair value hierarchy under ASC 820-10 are described below:
     F-8
  ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
 
 ●
                Level
      1   Unadjusted quoted prices in active markets that are
      accessible at the measurement date for identical, unrestricted assets or
      liabilities;
 
 ●
                Level
      2   Quoted prices in markets that are not active, or inputs
      that are observable, either directly or indirectly, for substantially the
      full term of the asset or
liability;
 
 ●
                Level
      3   Prices or valuation techniques that require inputs that
      are both significant to the fair value measurement and unobservable
      (supported by little or no market
activity).
  Fair
      Value Measurements as of December 31, 2009Total
                  
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3Marketable
      securitiesTrading
                  
                  $
                  1,500
                  
                  
                  $
                  1,500
                  
                  
                  $
                  0
                  
                  
                  $
                  0
  The
adoption of ASC 820-10 did not have a material effect on the Company’s financial
position or results of operations.
 
 OTHER
SIGNIFICANT ACCOUNTING POLICIES:
 
 Cash Equivalents: For
purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with an original maturity of three months or less to be
cash equivalents.
 
 Concentrations Of Credit
Risk: Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments.  The Company places its cash with high quality financial
institutions and limits its credit exposure with any one financial
institution.  At times, the Company’s bank account balances may exceed
federally insured limits.
 
 Fair Value Of Financial
Instruments: The carrying amounts of the financial instruments have been
estimated by management to approximate fair value.
 
 Inventories: Costs
incurred for materials, technology and shipping are capitalized as inventories
and charged to cost of sales when revenue is recognized.  Inventories
consist of finished goods and are stated at the lower of cost or market, using
the first-in, first-out method.  A provision is provided for
slow-moving facial bone devices and demo units.
 
 Property And
Equipment: Property and Equipment are valued at
cost.  Maintenance and repair costs are charged to expenses as
incurred.  Depreciation is computed on the straight-line method based
on the following estimated useful lives of the assets: 3 years for computer
software, 5 to 7 years for computer and office equipment, and 7 years for
furniture and fixtures.  Depreciation expense was $6,351 and $7,709
for 2009 and 2008, respectively.
 
 
 
 F-9
 
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
 
 Other Intangible
Assets: Other intangible assets consist primarily of intellectual
property and trademarks.  The Company capitalizes intellectual
property costs as incurred, excluding costs associated with Company personnel,
relating to patenting its technology.  The majority of capitalized
costs represent legal fees related to patent applications.  If the
Company elects to stop pursuing a particular patent application or determines
that a patent application is not likely to be awarded or elects to discontinue
payment of required maintenance fees for a particular patent, the Company, at
that time, records as expense the capitalized amount of such patent application
or patent.  Awarded patents will be amortized over the shorter of the
economic or legal life of the patent.  Trademarks are not amortized,
but rather are tested for impairment at least annually.
 
 There was
no impairment of other intangible assets for the year ended December 31, 2009 or
2008.
 
 Goodwill: The Company
accounts for Goodwill and Intangible Assets in accordance with ASC 805-10
(formerly SFAS No. 141), “Business Combinations” and
ASC 350-10 (formerly SFAS No. 142), “Goodwill And Other Intangible
Assets.” Under ASC 350-10, goodwill and intangibles that are deemed to
have indefinite lives are no longer amortized but, instead, are to be reviewed
at least annually for impairment.  Application of the goodwill
impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill
to reporting units, and determining the fair value.  Significant
judgments required to estimate the fair value of reporting units include
estimating future cash flows, determining appropriate discount rates and other
assumptions.  Changes in these estimates and assumptions could
materially affect the determination of the fair value and/or goodwill impairment
for each reporting unit.
 
 Income Taxes: Income
tax expense is based on pretax financial accounting income.  Deferred
tax assets and liabilities are recognized for the expected tax consequences of
temporary differences between the tax bases of assets and liabilities and their
reported amounts.  Valuation allowances are recorded to reduce
deferred tax assets to the amount that will more likely than not be
realized.
 
 Advertising Costs:
The Company uses advertising and marketing to promote its product
lines.  These costs are expensed when time the advertising or
marketing takes place.  There were no advertising expensesfor 2009 and
2008.
 
 Shipping And Handling
Costs: The Company historically has included inbound shipping charges in
cost of sales and classified outbound shipping charges as operating
expenses.  For the years ended December 31, 2009 and 2008, the
outbound shipping charges included in operating expenses were $18,932 and
$22,271, respectively.
 
 
 
 
 F-10
 
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
 
 Research and Development
Costs: Research and development costs are expensed as incurred and
consist primarily of product development costs.  Financial accounting
standards require the capitalization of certain development costs after
technological feasibility of the product is established.  In the
development of the Company’s new products and enhancements to existing products,
technological feasibility is not established until substantially all product
development is complete.  As a result, product development costs that
are eligible for capitalization are considered insignificant and are charged to
research and development expense.  During the years ended December 31,
2009 and 2008, the corporation incurred no research and development
costs.
 
 Noncontrolling Interest
(Deficit): Noncontrolling interest (deficit) represents other
stockholders’ proportionate share in the equity (deficit) of VisioNetx,
Inc.  At December 31, 2009, the Company owned approximately 74% of the
issued and outstanding common stocks in VisioNetx, Inc.
 
 New Accounting
Pronouncements: On January 1, 2009, the Company adopted ASC 810-10
(formerly SFAS No. 160), "NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL
STATEMENTS, AN AMENDMENT TO ARB NO. 51." ASC 810-10 changed the Company's
classification and reporting for its noncontrolling interests in its variable
interest entity to a component of stockholders' equity and other changes to the
format of its financial statements.  Except for these changes in
classification, the adoption of ASC 810-10 did not have a material impact on the
Company's financial condition or results of operations.
 
 In April
2009, the FASB issued ASC 825-10-65 (formerly FSP No. FAS 107-1 and APB 28-1),
"INTERIM DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS."  This
FSP essentially expands the disclosure about fair value of financial instruments
that were previously required only annually to also be required for interim
period reporting.  In addition, the FSP requires certain additional
disclosures regarding the methods and significant assumptions used to estimate
the fair value of financial instruments.  These additional disclosures
will be required beginning with the quarter ending September 30,
2009.  The adoption of this statement did not have a material impact
on the Company's consolidated financial position or results of operations.
 
 In May
2009, the FASB issued ASC 855-10 (formerly SFAS No. 165), "Subsequent Events."
The statement establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. This new standard is effective for
fiscal years or interim periods after June 15, 2009. The adoption of this
statement did not have a material impact on the Company's consolidated financial
position or results of operations.
 
 In June
2009, the FASB issued ASC 860-10 (formerly SFAS No. 166), "ACCOUNTING FOR
TRANSFERS OF FINANCIAL ASSETS, AN AMENDMENT OF FASB STATEMENT NO. 140." The
statement improves the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor's continuing involvement, if any, in transferred financial assets.
This new standard is effective for fiscal years beginning after November 15,
2009. The adoption of this statement did not have a material impact on the
Company's consolidated financial position or results of operations.
 
 In June
2009, the FASB issued ASC 810-10 (formerly SFAS No 167), "AMENDMENTS TO FASB
INTERPRETATION NO. 46(R)." The statement changes the approach to determining the
primary beneficiary of a variable interest entity (VIE) and requires companies
to more frequently assess whether they must consolidate VIEs. This new standard
is effective for fiscal years beginning after November 15, 2009. The adoption of
this statement did not have a material impact on the Company's consolidated
financial position or results of operations.
   F-11
  ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
  In June
2009, the FASB issued ASC 105-10 (formerly SFAS No. 168), "The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statements No. 162". The statement
establishes the Accounting Standards Codification TM (Codification) as the
source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. Under the Codification, all of its content will carry
the same level of authority. This statement is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of this statement did not have a material impact on the
Company's consolidated financial position or results of operations.
 
 Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company's present or future
consolidated financial statements.
 
 NOTE
2 - GOING CONCERN
  The
Company’s consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business.
 
 As
indicated in the accompanying consolidated financial statements, the Company
incurred operating losses totaling $316,762 and $715,696 for the years ended
December 31, 2009 and 2008, respectively.  In addition, the Company
has a working capital deficit of $1,594,570 and an accumulated deficit of
$12,774,041 as of December 31, 2009.  Total liabilities exceeded total
assets by $1,405,099.  In the near term, the Company expects the
operating cash flows will not be sufficient to cover all the old debt and
payables.
 
 Management
of the Company plans to cover current operating costs and to reduce the working
capital deficit through sales growth, cost reduction and equity
financing.  In addition, VisioNetx, Inc. is recruiting senior
management and is seeking funding that will allow it to move forward with its
marketing and sales efforts.
 
 The
ability of the Company to continue as a going concern is dependent on its
ability to meet its financing requirements and the success of its future
operations.  The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
      F-12
  ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
3 - BALANCE SHEET DETAILS
 
 The
following tables provide details of selected balance sheet items:
  Accounts Receivable,
      Net
                    
                    December
      31, 2009
                    
                    
                    December
      31, 2008Accounts
      Receivable
                    
                    $
                    30,499
                    
                    
                    $
                    84,331Allowance
      for Bad Debt
                    
                    
                    (18,334
                    )
                    
                    
                    (5,164
                    )Total
      Accounts Receivable, Net
                    
                    $
                    12,165
                    
                    
                    $
                    79,167InventoryFinished
      Goods
                    
                    $
                    66,213
                    
                    
                    $
                    46,316Demo
      units
                    
                    
                    46,682
                    
                    
                    
                    72,754Allowance
      for loss in inventory
                    
                    
                    (46,682
                    )
                    
                    
                    (20,050
                    )Total
      Inventory
                    
                    $
                    66,213
                    
                    
                    $
                    99,020Prepaid Expenses and
      Other Current AssetsPrepaid
      Insurance
                    
                    $
                    8,099
                    
                    
                    $
                    4,042Employee
      Advance
                    
                    
                    400
                    
                    
                    
                    6,058Other
      Prepaid Expenses
                    
                    
                    -
                    
                    
                    
                    41,716Total
      Prepaids and Others
                    
                    $
                    8,499
                    
                    
                    $
                    51,816Property and
      Equipment, NetFurniture
      and Fixtures
                    
                    $
                    1,114
                    
                    
                    $
                    9,531Equipment
                    
                    
                    40,530
                    
                    
                    
                    40,530Software
                    
                    
                    5,757
                    
                    
                    
                    5,75747,401
                    
                    
                    
                    55,818Accumulated
      Depreciation
                    
                    
                    (45,801
                    )
                    
                    
                    (45,463
                    )Total
      Property and Equipment, Net
                    
                    $
                    1,600
                    
                    
                    $
                    10,355Accrued
      LiabilitiesWarranty
      reserve
                    
                    $
                    2,664
                    
                    
                    $
                    3,045Accrued
      payroll and related taxes
                    
                    
                    221,211
                    
                    
                    
                    67,081Accrued
      consulting fees
                    
                    
                    279,483
                    
                    
                    
                    259,692Commissions
      payable
                    
                    
                    19,264
                    
                    
                    
                    7,596Deferred
      Revenues
                    
                    
                    50,190
                    
                    
                    
                    14,016Accrued
      vacation
                    
                    
                    41,022
                    
                    
                    
                    58,502Accrued
      professional fees
                    
                    
                    209,547
                    
                    
                    
                    171,136Related
      party payable
                    
                    
                    -
                    
                    
                    
                    (10
                    )Accrued
      Interest
                    
                    
                    27,701
                    
                    
                    
                    4,758Other
      accrued liabilities
                    
                    
                    150,444
                    
                    
                    
                    323,693Total
      Accrued Liabilities
                    
                    $
                    1,001,525
                    
                    
                    $
                    909,508
   F-13
 
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
4 - OTHER INTANGIBLE ASSETS
 
 The
Company capitalizes intellectual property costs as incurred, excluding costs
associated with Company personnel, relating to patenting its
technology.  The majority of capitalized costs represent legal fees
related to patent applications.  Awarded patents will be amortized
over the shorter of the economic or legal life of the patent.
 
 One
patent was awarded in November 2009 and two patents were awarded in December
2007.  These patents are being amortized using the straight-line
method over a life of 20 years from the date of each respective
award.
 
 The
Company’s intangible assets consisted of the following at December 31, 2009 and
2008:
 
 2009
                  
                  
                  2008Pending
      Intellectual Property
                  
                  $
                  88,622
                  
                  
                  $
                  94,140Awarded
      patents
                  
                  
                  27,472
                  
                  
                  
                  21,954Accumulated
      amortization
                  
                  
                  (2,378
                  )
                  
                  
                  (1,098
                  )Other
      Intangible Assets, Net
                  
                  $
                  113,716
                  
                  
                  $
                  114,996
  Future
amortization expense as of December 31, 2009 was as follows:
  Years
      ended December 31,2010
                  
                  $
                  1,3742011
                  
                  
                  1,3742012
                  
                  
                  1,3742013
                  
                  
                  1,3742014
      and over
                  
                  
                  19,598Total
                  
                  $
                  25,094
 NOTE
5 - OTHER INVESTMENTS
 
 The
Company's other investment consisted of 1,000,000 shares of preferred stock in a
public-traded company with carrying values of $1,500 and $15,000 as of December
31, 2009 and December 31, 2008, respectively. The shares are classified as
trading securities, of which the shares were reported in the balance sheet at
fair value with realized and unrealized gains and losses included in current
period operations. An unrealized loss of $13,500 and an unrealized gain of
$14,100 were recorded at December 31, 2009 and 2008, respectively.
 
   F-14
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
6 - BORROWINGS
 
 Long-Term
Debt
  At
      December 31,
                  
                  2009
                  
                  
                  2008Installment
      note payable secured by computer equipment. Monthly payments total $81,
      including interest at 18.99%. The original note amount was $2,062. Matures
      July 21, 2009.
                  
                  $
                  -
                  
                  
                  $
                  783Reconstructed
      note payable to related party. Monthly interest payment only at 13%
      through January 31. 2008. Effective February 1, 2008, principal and
      interest payment based on a 36-month amortization. Matures August 1, 2009.
      (a)
                  
                  
                  204,220
                  
                  
                  
                  210,985Secured
      note payable to a customer. Monthly interest payment only at 10%. A
      balloon payment due on April 1, 2011. (b)
                  
                  
                  150,000
                  
                  
                  
                  150,000354,220
                  
                  
                  
                  361,768Less:
      Current Maturities
                  
                  
                  (204,220
                  )
                  
                  
                  (211,768
                  )Long-term
      debt
                  
                  $
                  150,000
                  
                  
                  $
                  150,000
 (a) On
June 30, 2008, the Company entered into an Agreement for Extension and Amendment
of a Note ("Agreement") with a related party. Under the Agreement, the Company's
subsidiary, OrthoNetx, Inc. executed an Amended and Extended Promissory Note in
favor of a related party, in the principal amount of $268,551. The new note
replaces a promissory note issued by OrthoNetx, Inc. on January 30, 2005 in the
original amount of $300,000. The new note bears interest at 13% per annum, and
provides for payments of interest that commenced on August 1, 2007. Payments of
principal and interest commenced on February 1, 2008, based on a 36-month
amortization schedule. All principal and interest is due on August 1, 2009. On
July 14, 2009, the Company entered into an Agreement for Extension and Amendment
of a Note ("Agreement") with the related party. Under the Agreement, the related
party agrees to apply $21,346 of interest in arrears to principal and convert
the note into an interest only note commencing in August 2009.
 
 (b) The
Note provides that if, on the second anniversary of the date of the Note,
AcuNetx has not set aside at least $100,000 for repayment of the Note upon
maturity, the payee has the right to compel AcuNetx to conduct a private
offering to raise the funds necessary to repay the Note. The Note also provides
that if AcuNetx is unable to pay the balance at maturity, the payee is entitled
to a penalty equal to 10% of the principal balance of the Note, payable monthly
until fully paid.  As of December 31, 2009, no funds were set aside.
 
 The
following is a schedule of the maturities of long-term debt:
 
 Years
      ended December 31,2010
                
                
                204,2202011
                
                
                150,000$
                354,220
     F-15
 
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
  NOTE
6 - BORROWINGS (CONTINUED)
 
 Series A Convertible
Promissory Note
 
 On May
21, 2007, VisioNetx Inc. conducted a private placement offering to sell and
issue convertible notes and detachable warrants.  Each unit consisting
of a convertible debenture and a detachable warrant to purchase shares of
VisioNetx common stock. The note beared interest payable annually at 10% per
annum, and is due the earlier of (i) December 31, 2010 or (ii) two years from
the closing date of a minimum of $300,000 of units were sold. In the event that
VisioNetx (i) issues and sells its common stock for aggregate consideration of
at least $3.5 million (“Qualified Financing”) and (ii) the note has not been
paid in full, then the entire outstanding principal and all unpaid accrued
interest of the note shall automatically convert into shares of VisioNetx under
the same terms and conditions as those for investors in the Qualified Financing.
Subscribers to this offering will receive a warrant to purchase VisioNetx shares
equal to a 150% of the common stock to be issued to investors in the Qualified
Financing. The warrants expire in seven years after the date of
issuance.
 
 The
offering closed on September 14, 2007. Through that date, VisioNetx had sold one
half of a unit and received $25,000 in proceeds.  The Company
allocated the proceeds between the convertible note ($17,500) and the warrants
($7,500) based on the management’s subjective judgment as the exercise price of
the warrants and the conversion feature of the note were not determinable. The
warrants were classified as a component of equity and charged against the note
as a debt discount which will be amortized over the life of the note using the
effective interest method.
 
 Convertible Promissory
Notes
  On
November 9, 2007, VisioNetx Inc. initiated a private placement offering to sell
and issue convertible notes for up to $750,000. The offering price is $50,000
per unit consisting of a convertible debenture in the amount of $50,000 which
has underlying warrants. The notes bear interest payable annually at 8% per
annum, and are due the earlier of (i) eighteen months from the date of issue or
(ii) upon completion of a financing of New Securities, as defined, of at least
$2.0 million (“Qualified Financing”). Upon completion of a Qualified Financing
the note holder shall convert the principal and interest of this note into the
New Securities. Also upon conversion of the note, the note holder shall received
warrants to purchase up to 100% of the number of New Securities to be issued.
The warrants are exercisable for five (5) years.
 
 Upon
completion of a Qualified Offering, the Company may redeem the notes for a cash
payment equal to the note amount plus any accrued, but unpaid interest. However,
upon completion of a Qualified Offering and election to redeem the notes, the
note holder will be given 30 days notice to elect to either receive the proceeds
of the redemption (and receive the underlying warrants) or convert the notes
into New Securities subject to the terms of the Qualified Offering.
 
 Through
September 2008, the Company had received $90,000 in proceeds from this offering
and had deposited these funds in a restricted cash account. Under the terms of
this offering, proceeds from the offering would have been available for use by
the Company upon receipt of at least $300,000. In October 2008, VisioNetx
decided to close the offering and returned $75,000 plus interest to two of the
investors. In 2009, VisioNetx returned the remaining $15,000 plus interest to
the investor.
 
   F-16
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
  NOTE
6 - BORROWINGS (CONTINUED)
 
 December
      31, 2009
                  
                  
                  December
      31, 200810%
      Series A Convertible Promissory Note, matures on December 31,
      2010
                  
                  $
                  25,000
                  
                  
                  $
                  25,0008%
      Convertible Promissory Notes, matures commencing May 18,
      2009
                  
                  
                  -
                  
                  
                  
                  15,00025,000
                  
                  
                  
                  40,000Less:
      Unamortized debt
      discount
                  
                  
                  (124
                  )
                  
                  
                  (3,124
                  )Convertible
      debt,
      net
                  
                  $
                  24,876
                  
                  
                  $
                  36,876
 
 NOTE
7 - INCOME TAXES
 
 Provision
for income taxes consisted of a minimum state franchise tax of $800 for years
ended December 31, 2009 and 2008.
 
 The
provision for income taxes differs from the amount computed by applying the
federal statutory rate to the income tax expense (benefit) at the effective rate
is as follows:
 
 For
      years ended December 31,
                  
                  2009
                  
                  
                  2008Income
      tax expense (benefit) at statutory rate
                  
                  $
                  (107,699
                  )
                  
                  $
                  (241,607
                  )State
      tax expense, net of federal benefit
                  
                  
                  (272
                  )
                  
                  
                  (272
                  )Nondeductible
      deferred stock services
                  
                  
                  18,452
                  
                  
                  
                  45,238Others
                  
                  
                  -
                  
                  
                  
                  818Valuation
      Allowance
                  
                  
                  90,319
                  
                  
                  
                  196,623Provision
      of income tax (benefit)
                  
                  $
                  800
                  
                  
                  $
                  800
  The
components of the deferred net tax assets are as follows:
 
 At
      December 31,
                  
                  2009
                  
                  
                  2008Net
      Operating Loss Carryforwards
                  
                  $
                  4,402,502
                  
                  
                  $
                  3,019,283Property
      and equipment
                  
                  
                  (1,704
                  )
                  
                  
                  (1,130
                  )Accruals
      and reserves
                  
                  
                  2,365,014
                  
                  
                  
                  2,272,997Other
                  
                  
                  -
                  
                  
                  
                  239Valuation
      Allowance
                  
                  
                  (6,545,177
                  )
                  
                  
                  (5,070,754
                  )Net
      deferred tax assets
                  
                  $
                  220,635
                  
                  
                  $
                  220,635
  The
Company had removed the valuation allowance as of December 31, 2003 because it
believed it was more likely than not that all deferred tax assets would be
realized in the foreseeable future and was reflected as a credit to
operations.  However, as of December 31, 2005, the Company’s ability
to utilize its federal net operating loss carryforwards is uncertain due to the
net loss of the year and the merger with OrthoNetx which has net operating loss
carryforwards approximately of $1.7 million, as of that date, and thus a
valuation reserve has been provided against the Company’s net deferred tax
assets.
 
 As of
December 31, 2009, the Company has net operating loss carryforwards of
approximately, $4,719,264 and $3,780,895 to reduce future federal and state
taxable income, respectively.  To the extent not utilized, the federal
net operating loss carryforwards began to expire in fiscal 2009 and the state
net operating loss carryforwards will begin to expire in fiscal
2012.
  F-17
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
8 - STOCKHOLDERS’ EQUITY
 
 Stock
Compensation
 
 On July
17, 2008, the Compensation Committee approved the issuance of 1,000,000 shares
of common stock to the interim Chief Executive Officer as a signing
bonus.  The shares are vested ratably over the remaining periods in
2008.  The shares were valued at quoted market price on the grant date
and are amortized over the vesting period.  The stocks will be issued
in 2010.
 
 Sales Of Common
Stocks
 
 In May,
2008, the Company sold 71,429 equity units, consisting of 71,429 shares of
common stock and warrants, and received $5,000 in gross proceeds under the April
2008 self-underwritten offering.
 
 In
February, 2008, the Company sold 215,000 equity units, consisting of 215,000
shares of common stock and warrants, and received $15,050 in gross proceeds
under the May 2007 self-underwritten offering.
 
 Subsidiary Stock
Transactions
 
 In 2007,
VisioNetx agreed to issue 650,000 shares at a fair value of $0.10 per share to
certain executives.  The shares were not to be issued until the first
equity financing was obtained.  The aggregate amount of $65,000 was
accrued and classified as an equity component.  In December 2008, the
VisioNetx’s Board of Directors agreed to modify the terms and issued the shares;
as a result, the aggregate fair value of these shares was reduced to
$650.  VisioNetx recorded a credit of $92,556, including the accrued
payroll taxes of $28,206 against the compensation expense.
 
 The
Company complies with the requirement of SEC Staff Accounting Bulletin No. 51,
“Accounting for Sales of Stock by a Subsidiary,” which requires that the
difference between the carrying amount of parent’s investment in a subsidiary
and the underlying net book value of the subsidiary after the issuance of stock
by the subsidiary be reflected as either a gain or loss in the statement of
operations or reflected as an equity transaction.  The Company has
elected to record gains or losses resulting from the issuance of subsidiary’s
stock as equity transactions.
     F-18
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
9 - STOCK OPTIONS AND WARRANTS
 
 Stock
Options
 
 On March
27, 2006, the Board of Directors approved and adopted the 2006 Stock Incentive
Plan to provide for the issuance of incentive stock options and/or nonstatutory
options to all employees and nonstatutory options to consultants and other
service providers.  Generally, all options granted to employees and
consultants expire in three to ten years from the date of grant.  All
options have an exercise price equal to or higher than the fair market value of
the Company’s stock on the date the options are issued.  It is the
policy of the Company to issue new shares for stock option exercised and
restricted stock, rather than issue treasury shares.  Options
generally vest immediately or over a three year period.  The plan
reserves 14 million shares of common stock under the Plan and shall be effective
through December 31, 2015.
 
 A summary
of the status of stock options issued by the Company as of December 31, 2009 and
2008 is presented in the following table.
 
 2009
                  
                  
                  2008Weighted
                  
                  
                  
                  
                  
                  WeightedNumber
                  
                  
                  Average
                  
                  
                  Number
                  
                  
                  Averageof
                  
                  
                  Exercise
                  
                  
                  of
                  
                  
                  ExerciseShares
                  
                  
                  Price
                  
                  
                  Shares
                  
                  
                  PriceOutstanding
      at beginning of year
                  
                  
                  9,818,168
                  
                  
                  $
                  0.11
                  
                  
                  
                  5,525,768
                  
                  
                  $
                  0.15Granted
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,082,400
                  
                  
                  $
                  0.05Expired/Cancelled
                  
                  
                  (4,394,102
                  )
                  
                  $
                  0.10
                  
                  
                  
                  (1,790,000
                  )
                  
                  $
                  0.06Outstanding
      at end of period
                  
                  
                  5,424,066
                  
                  
                  $
                  0.11
                  
                  
                  
                  9,818,168
                  
                  
                  $
                  0.11Exercisable
      at end of year
                  
                  
                  5,424,066
                  
                  
                  $
                  0.11
                  
                  
                  
                  8,526,501
                  
                  
                  $
                  0.12
  The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes Merton option valuation model. The assumptions are listed in the
table below. Expected volatilities are based on the historical volatility of the
Company’s stock. The risk-free rate for periods within the expected life of the
option is based on the U.S. Treasury yield curve in effect at the time of
grant.
 
 2009
                  
                  
                  2008Weighted
      average fair value per option granted
                  
                  
                  N/A
                  
                  
                  $
                  0.05Risk-free
      interest rate
                  
                  
                  N/A
                  
                  
                  
                  3.25%Expected
      dividend yield
                  
                  
                  N/A
                  
                  
                  
                  0.00%Expected
      lives
                  
                  
                  N/A
                  
                  
                  
                  5.00Expected
      volatility
                  
                  
                  N/A
                  
                  
                  
                  130.19%
 
 
  F-19
 
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
9 - STOCKS OPTIONS AND WARRANTS (CONTINUED)
 
 For the
years ended December 31, 2009 and 2008, the Company recognized pre-tax stock
option compensation expense of $13,305 and $159,143, respectively.
 
 The
following table sets forth additional information about stock options
outstanding at December 31, 2009:
 
 Stock
Warrants
 
 As of
December 31, 2009 and 2008, the Company had 4,414,451 and 8,720,001 outstanding
warrants, respectively.  The warrants allow for the purchase of common
stock at pricing ranging from $0.001 to $0.10 per share.
 
 VisioNetx,
Inc.
 
 On August
16, 2007, the shareholders of VisioNetx, Inc. approved the adoption of the 2007
Stock Incentive Plan to provide for the issuance of incentive stock options
and/or non-statutory options to officers, directors, employees, and consultants
who provide services to VisioNetx.  All options have an exercise price
equal to or higher than the fair market value of VisioNetx common stock on the
date the options were granted.  Options generally vest over three
years and exercisable for ten years from the date of grant.  The plan
reserves 1 million shares of common stock.
 
 A summary
of the status of stock options issued by VisioNetx as of December 31, 2009 and
2008 is presented in the following table.
 
 2009
                  
                  
                  2008Weighted
                  
                  
                  
                  
                  
                  WeightedNumber
                  
                  
                  Average
                  
                  
                  Number
                  
                  
                  Averageof
                  
                  
                  Exercise
                  
                  
                  of
                  
                  
                  ExerciseShares
                  
                  
                  Price
                  
                  
                  Shares
                  
                  
                  PriceOutstanding
      at beginning of year
                  
                  
                  425,500
                  
                  
                  $
                  0.10
                  
                  
                  
                  479,500
                  
                  
                  $
                  0.00Granted
                  
                  
                  -
                  
                  
                  $
                  0.10
                  
                  
                  
                  96,000
                  
                  
                  $
                  0.10Expired/Cancelled
                  
                  
                  (112,500
                  )
                  
                  $
                  0.10
                  
                  
                  
                  (150,000
                  )
                  
                  $
                  0.10Outstanding
      at end of period
                  
                  
                  313,000
                  
                  
                  $
                  0.10
                  
                  
                  
                  425,500
                  
                  
                  $
                  0.10Exercisable
      at end of period
                  
                  
                  293,370
                  
                  
                  $
                  0.10
                  
                  
                  
                  311,970
                  
                  
                  $
                  0.10
  
  F-20
  ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
9 - STOCKS OPTIONS AND WARRANTS (CONTINUED)
 
 The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes Merton option valuation model.  The assumptions are
listed in the table below. Expected volatilities are based on the
historical volatility of the AcuNetx’s stock.  The risk-free rate for
periods within the expected life of the option is based on the U.S. Treasury
yield curve in effect at the time of grant.
  2009
                  
                  
                  2008Weighted
      average fair value per option granted
                  
                  
                  N/A
                  
                  
                  $
                  0.04Risk-free
      interest rate
                  
                  
                  N/A
                  
                  
                  
                  3.45%Expected
      dividend yield
                  
                  
                  N/A
                  
                  
                  
                  0.00%Expected
      lives
                  
                  
                  N/A
                  
                  
                  
                  5.00Expected
      volatility
                  
                  
                  N/A
                  
                  
                  
                  134.64%
  As of
December 31, 2009 there was $1,218 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
plans.  That cost is expected to be recognized over a weighted average
period of 9 months.
 
 For the
years ended December 31, 2009 and 2008, VisioNetx, Inc. recognized pre-tax stock
option compensation expense of $3,216 and $8,259, respectively.
 
 The
following table sets forth additional information about stock options
outstanding at December 31, 2009:
 NOTE
10 - OFFERING
 
 On
September 1, 2009, the Company began an offering to issue up to $500,000 in 8%
convertible notes. As of December 31, 2009, no sales were made.
 
 NOTE
11 - NET LOSS PER SHARE
 
 The
following table sets forth the computation of basic and diluted net loss per
share:
  For
      the Years EndedDecember
      31,2009
                    
                    
                    2008Numerator:Net
      loss
                    
                    $
                    (316,762
                    )
                    
                    $
                    (715,696
                    )Denominator:Weighted
      average of common shares
                    
                    
                    65,429,309
                    
                    
                    
                    65,387,583Net
      loss per share-basic and diluted
                    
                    $
                    (0.005
                    )
                    
                    $
                    (0.01
                    )
 As a
result of our net loss for the years ended December 31, 2009 and 2008, all
common share equivalents would have been anti-dilutive and therefore, have been
excluded from the diluted net loss per share calculation.  The
weighted average securities, consisting of stock options and warrants, that were
either out of the money or anti-dilutive from our calculation of diluted net
loss per share were approximately 13,772,418 and 15,663,870 for years ended
December 31, 2009 and 2008, respectively.
   F-21
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
12 - MAJOR CUSTOMERS
 During
the years ended December 31, 2009 and 2008, major distributors accounted for
$478,240 and $535,108 or 54% and 52% of IntelliNetx division revenues,
respectively.
 
 2009
                  
                  
                  
                  
                  
                  2008National
      Distributor
                  
                  $
                  327,300
                  
                  
                  
                  37
                  %
                  
                  $
                  278,877
                  
                  
                  
                  27
                  %SID
      Distributors
                  
                  
                  150,940
                  
                  
                  
                  17
                  %
                  
                  
                  256,231
                  
                  
                  
                  25
                  %$
                  478,240
                  
                  
                  
                  54
                  %
                  
                  $
                  535,108
                  
                  
                  
                  52
                  %
 
 NOTE
13 - SEGMENT INFORMATION
  The
Company evaluates its reporting segments in accordance with ASC 280-10 (formerly
SFAS No. 131), “Disclosures about Segments of an Enterprise and Related
Information.”  The Chief Executive Officer has been identified as the
Chief Operating Decision Maker as defined by ASC 280-10. The Chief Executive
Officer allocates resources to each segment based on their business prospects,
competitive factors, net sales and operating results.
 
 In
December 2006, the Company changed the structure of its internal organization to
develop three market-oriented operations: (i) IntelliNetx (INX) division, (ii)
OrthoNetx (ONX) Inc., a wholly-owned subsidiary, and (iii) VisioNetx (VNX) Inc,
a majority-owned subsidiary.  The IntelliNetx division markets
patented medical devices that assist in the diagnosis of dizziness and vertigo,
and rehabilitate those in danger of falling as a result of balance disorders The
OrthoNetx division markets patented medical devices that mechanically induce new
bone formation in patients with skeletal deformities o the face, skull, jaws,
extremities and dentition.  The VisioNetx division markets patented
products that track and analyze human eye movements for worker impairment
screening.  In addition, the Company licensed from its VisioNetx
subsidiary the manufacturing and sales rights to VisioNetx’s law enforcement
systems.
 
 The
Company reviews the operating companies’ to evaluate segment performance and
allocate resources.  Operating companies’ income for the reportable
segments excludes income taxes and amortization of goodwill.  The
provision for income taxes is centrally managed at the corporate level and,
accordingly, such items are not presented by segment.  The segments’
accounting policies are the same as those described in the summary of
significant accounting policies.
 
 The
Company does not track its assets by operating
segments.  Consequently, it is not practical to show assets by
operating segments.
 
     F-22
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
13 - SEGMENT INFORMATION (CONTINUED)
 
 Summarized
financial information of the Company’s results by operating segment is as
follows:
 
 For
      years ended December 31,2009
                  
                  
                  2008Net
      Revenue to external customers:INX
                  
                  $
                  933,198
                  
                  
                  $
                  1,035,564ONX
                  
                  
                  -
                  
                  
                  
                  18,766VNX
                  
                  
                  -
                  
                  
                  
                  -Consolidated
      Net Revenue to external customers
                  
                  $
                  933,198
                  
                  
                  $
                  1,054,330Cost
      of Revenue:INX
                  
                  $
                  266,386
                  
                  
                  $
                  327,971ONX
                  
                  
                  -
                  
                  
                  
                  42,280VNX
                  
                  
                  -
                  
                  
                  
                  -Consolidated
      Cost of Revenue
                  
                  $
                  266,386
                  
                  
                  $
                  370,251Gross
      Margin:INX
                  
                  $
                  666,812
                  
                  
                  $
                  707,593ONX
                  
                  
                  -
                  
                  
                  
                  (23,514
                  )VNX
                  
                  
                  -
                  
                  
                  
                  -Consolidated
      Gross Margin
                  
                  $
                  666,812
                  
                  
                  $
                  684,079
  Inter-segment
transactions are recorded at cost.  The margins reported reflect only
the direct controllable expenses of each line of business and do not represent
the actual margins for each operating segment because they do not contain an
allocation of product development, information technology, marketing and
promotion, stock-based compensation, and corporate and general and
administrative expenses incurred in support of the lines of
business.
 
 For
      years ended December 31,2009
                  
                  
                  2008Total
      margin for reportable segments
                  
                  $
                  666,812
                  
                  
                  $
                  684,079Corporate
      and general and administrative expenses
                  
                  
                  (1,050,492
                  )
                  
                  
                  (1,174,663
                  )Stock
      option expenses
                  
                  
                  (16,521
                  )
                  
                  
                  (167,404
                  )Impairment
      of goodwill
                  
                  
                  0
                  
                  
                  
                  0Interest
      and Other Expense
                  
                  
                  (138,691
                  )
                  
                  
                  (70,599
                  )Interest
      and Other Income
                  
                  
                  196,879
                  
                  
                  
                  17,978Net
      loss before income taxes and minority interest
                  
                  $
                  (342,013
                  )
                  
                  $
                  (710,609
                  )
    F-23
  ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE
14 - COMMITMENTS AND CONTINGENCIES
 
 Lease
Commitments
 
 The
Company leases facilities and a copier under operating leases.  As of
December 31, 2009, the minimum annual operating lease payments were as
follows:
 
 Year
      Ended December 31,
                  
                  Amount2010
                  
                  
                  30,3672011
                  
                  
                  2,519$
                  32,886
 Rent
expense totaled $21,651 and $23,833 for 2009 and 2008,
respectively.  Certain lease agreements contain renewal options
providing for an extension of the lease term at market rates.  The
monthly lease payment for the copier does not include additional maintenance,
insurance and per copy charges.
 
 During
2009, the Company replaced some of its insurance policies, and there may have
been a temporary intervening lapse.  Any exposure from this is
considered extremely remote, with any theoretical liability
negligible.
 
 Marketing And Distribution
Agreement
 
 On May
25, 2006, the Company executed a Marketing and Distribution Agreement with a
national distributor.  The agreement restructures the Company’s
relationship with the national distributor into a nonexclusive one, so that the
Company is in a position to manufacture and sell VNG products under its own
brand names, as well as through the national distributor.  The
Agreement is for a period of eight years, provides for successive three year
options, and supersedes and replaces the previous Manufacturing, Sales,
Licensing, and Software Agreement and the Sales Incentive
Agreement.
 
 The
Company also executed a Consulting Agreement with the owner of the national
distributor whereby the owner will provide advisory and consulting services to
the Company for the purposes of improving the Company’s VNG products and other
balance-related product lines.  The agreement is for a period of three
years, and renews for an additional one year term.
 
 The
Consulting Agreement required payments of $100,000 per year payable in the
Company’s common stock for eight consecutive years and cash payments of $45,000
per year for three consecutive years.  The parties agreed to setup an
accrued liability in the amount of $100,000 per year rather than issue $100,000
per year in the Company’s common stock.
 
 In April
2009, the Company amended its May 2006 agreement with the distributor to
exchange an obligation to issue 4,194,451 of the Company's common stock to the
distributor with the obligation to issue 4,194,451 warrants to purchase the
Company's common stock for $0.001 per share. In addition, the distributor agreed
to waive future obligations to issue $500,000 in stock and $225,000 in
consulting work over the next five years. The Company remains liable to the
distributor for past consulting fees in the amount of $132,000. Interest is
being accrued at 4% on the balance until paid. The parties agreed on an early
payment provision to reduce the payable to $105,600 if paid on or before
December 31, 2009. In addition, there is an extension of the distribution
agreement of 10 years from the date of amendment.
 
 As a
result, the Company recognized other income of $162,250 on these amendments.
   F-24
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
15 - RELATED PARTY TRANSACTIONS
 
 Licensing
Agreement
 
 The
Company has a licensing agreement with a former CEO of the Company for the
licensing of a patent.  The licensing agreement provides for
contingent payments, to be determined at a later date, in the event the Company
receives a benefit from the patent.
 
 Intellectual Property
Assignment
 
 In June
of 2008, the Company decided to discontinue maintenance fee payments related to
its Limb Lengthener intellectual property petition.  At that time, the
Company entered into an assignment agreement with a related party.  In
exchange for consideration of $1, the party agreed to maintain the patent at its
discretion, without obligation, and at its expense.  It further agreed
that, upon patent approval, it would give AcuNetx Inc. first right of refusal to
repurchase the assignment by reimbursing its expenses plus ten percent (10%) for
a period of 90 days from the date of issuance.
 
 Employment
Agreements
 
 In July
2008, the Board approved an agreement with the Company’s interim Chief Executive
Officer (CEO) providing that the CEO will receive an annual salary of $150,000
and 1 million shares of the Company’s common stock, to be issued in
2010.  The stock is fully vested.
 
 NOTE
16 - DEPARTURE AND ELECTION OF NEW CHIEF EXECUTIVE OFFICER
 
 As of
June 1, 2009, Dennis Geselowitz, Chief Financial Officer of the Company, was no
longer employed by the Company.  Robert S. Corrigan, President of the
Company, will serve as Acting Chief Financial Officer until a permanent Chief
Financial Officer can be hired.
 On
November 13, 2009 Collis Woodward resigned as CFO of VisioNetx, Inc.
(VisioNetx).  At the time of his departure, VisioNetx owed Mr.
Woodward an accrued salary of $35,165.
    
 F-25
 
 ACUNETX,
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
  NOTE
17 - GUARANTEES AND PRODUCT WARRANTIES
 
 The
Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims.  These contracts primarily relate to: (i) divestiture
agreements, under which the Company may provide customary indemnifications to
purchasers of the Company’s businesses or assets; (ii) certain real estate
leases, under which the Company may be required to indemnify property owners for
environmental and other liabilities, and other claims arising from the Company’s
use of the applicable premises; and (iii) certain agreements with the Company’s
officers, directors and employees, under which the Company may be required to
indemnify such persons for liabilities arising out of their employment
relationship.
 
 The terms
of such obligations vary.  Generally, a maximum obligation is not
explicitly stated.  Because the obligated amounts of these types of
agreements often are not explicitly stated, the overall maximum amount of the
obligations cannot be reasonably estimated.  Historically, the Company
has not been obligated to make significant payments for these obligations, and
no liabilities have been recorded for these obligations on its balance sheet as
of December 31, 2009.
 
 In
general, the Company offers a one-year warranty for most of the products
sold.  To date, the Company has not incurred any material costs
associated with these warranties.  The Company provides reserves for
the estimated costs of product warranties based on its historical experience of
known product failure rates, use of materials to repair or replace defective
products and service delivery costs incurred in correcting product
failures.  In addition, from time to time, specific warranty accruals
may be made if unforeseen technical problems arise with specific
products.  The Company periodically assesses the adequacy of its
recorded warranty liabilities and adjusts the amounts as necessary.
 
 The
following table presents the changes in the Company’s warranty reserve in the
fiscal years ended December 31, 2009 and 2008:
 
 For
      years ended December 31,
                  
                  2009
                  
                  
                  2008Beginning
      balance
                  
                  $
                  3,045
                  
                  
                  $
                  11,339Provision
      for warranty
                  
                  
                  (381
                  )
                  
                  
                  (8,294
                  )Utilization
      of reserve
                  
                  
                  
                  
                  
                  
                  -Ending
      balance
                  
                  $
                  2,664
                  
                  
                  $
                  3,045
  
 F-26