<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   Form 10-QSB

(X)      Quarterly Report under Section 13 or 15(d) of the Securities Exchange
         Act of 1934 for the quarterly period ended June 30, 2006

                           Commission File No. 0-27857

                                  AcuNetx, Inc.
                               ------------------
        (Exact name of small business issuer as specified in its charter)

              Nevada                                           88-0249812
              ------                                           ----------
  (State or other jurisdiction                              (I.R.S. Employer
of incorporation or organization)                          Identification No.)

                 1000 S. McCaslin, Suite 300, Superior, CO 80027
                 -----------------------------------------------
                    (Address of principal executive offices)

                                  303-494-1681
                                  ------------
                           (Issuer's telephone number)

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

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

As of June 30, 2006 the issuer had 57,199,814 shares of common stock
outstanding.

   Transitional Small Business Disclosure Format (check one) [ ] Yes; [X] No


<PAGE>

             CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

     This Report on Form 10-QSB contains a number of forward-looking statements
that reflect management's current views and expectations with respect to our
business, strategies, products, future results and events and financial
performance. All statements made in this Report other than statements of
historical fact, including statements that address operating performance, events
or developments that management expects or anticipates will or may occur in the
future, including statements related to distributor channels, volume growth,
revenues, profitability, new products, acquisitions, adequacy of funds from
operations, statements expressing general optimism about future operating
results and non-historical information, are forward-looking statements. In
particular, the words "BELIEVE," "EXPECT," "INTEND," "ANTICIPATE," "ESTIMATE,"
"MAY," "WILL," variations of such words, and similar expressions identify
forward-looking statements, but are not the exclusive means of identifying such
statements and their absence does not mean that the statement is not
forward-looking. These forward-looking statements are subject to certain risks
and uncertainties, including those discussed below. Our actual results,
performance or achievements could differ materially from historical results as
well as those expressed in, anticipated or implied by these forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.

     Readers should not place undue reliance on these forward-looking
statements, which are based on management's current expectations and projections
about future events, are not guarantees of future performance, are subject to
risks, uncertainties and assumptions (including those described below) and apply
only as of the date of this Report. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below
"Management's Discussion and Analysis and Plan of Operation," as well as those
discussed elsewhere in this Report, and the risks discussed in our most recently
filed Annual Report on Form 10-KSB and in the press releases and other
communications to shareholders issued by us from time to time which attempt to
advise interested parties of the risks and factors that may affect our business.


                                        2

<PAGE>

<TABLE>
<S>     <C>

                           PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                     ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
                      CONSOLIDATED BALANCE SHEET (UNAUDITED)


                                                                     JUNE 30, 2006
                                                                     -------------
                                     ASSETS
Current Assets
  Cash                                                               $      99,491
  Accounts receivable, net                                                 124,408
  Inventory                                                                340,160
  Prepaid expenses                                                         129,721
                                                                     -------------
    Total Current Assets                                                   693,780

Property and equipment, net                                                 31,282

Goodwill                                                                 4,823,500
Other intangible assets                                                    117,133
Deferred tax assets                                                        220,635
Other investment                                                           158,595
Other assets                                                                 1,563

TOTAL ASSETS                                                         $   6,046,488
                                                                     =============


                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Accounts payable                                                   $     401,147
  Accrued liabilities                                                      126,119
  Notes payable, current portion                                           161,309
                                                                     -------------
    Total Current Liabilities                                              688,575

Long-Term Debt                                                              82,422
                                                                     -------------

Total Liabilities                                                          770,997
                                                                     -------------

Stockholders' Equity
  Common stock, $0.001 par value; 100,000,000 shares authorized;
    57,199,814 shares issued and outstanding                                57,200
  Paid-in capital                                                        9,911,859
  Accumulated deficit                                                   (4,693,568)
                                                                     -------------
    Total Stockholders' Equity                                           5,275,491
                                                                     -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                           $   6,046,488
                                                                     =============


         See Notes to Interim Unaudited Consolidated Financial Statements

                                        3

<PAGE>

                                        ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
                                   CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


                                                         FOR THREE MONTHS                        FOR SIX MONTHS
                                                           ENDED JUNE 30,                        ENDED JUNE 30,
                                                 ---------------------------------     ---------------------------------
                                                      2006               2005               2006               2005
------------------------------------------------------------------------------------------------------------------------

Sales - Products                                 $     371,730      $     402,785      $     655,305      $     719,694

Cost of Products                                       148,675            187,283            269,488            337,334
                                                 -----------------------------------------------------------------------

Gross profit                                           223,055            215,502            385,817            382,360
                                                 -----------------------------------------------------------------------

Operating Expenses:
  Selling, general and administrative
    expenses                                         1,141,583            174,581          1,969,262            415,355
  Stock option expenses                                136,846                 --            244,876                 --
  Research and development                             146,022                 --            191,578                 --
                                                 -----------------------------------------------------------------------
Total Operating Expenses                             1,424,451            174,581          2,405,716            415,355
                                                 -----------------------------------------------------------------------

Operating income (loss)                             (1,201,396)            40,921         (2,019,899)           (32,995)
                                                 -----------------------------------------------------------------------

Other income(expenses)
  Interest and other income                             11,021                128             16,848                278
  Loss on equity-method investments                    (10,804)                --            (28,690)                --
  Interest expense                                      (8,445)              (194)           (19,247)            (1,088)
                                                 -----------------------------------------------------------------------
    Total other income (expenses)                       (8,228)               (66)           (31,089)              (810)
                                                 -----------------------------------------------------------------------

Net income (loss) before taxes                      (1,209,624)            40,855         (2,050,988)           (33,805)

Provision for income taxes                                  --              1,276              1,166              2,076
                                                 -----------------------------------------------------------------------

Net income (loss)                                $  (1,209,624)     $      39,579      $  (2,052,154)     $     (35,881)
                                                 =======================================================================

Net income (loss) per share-basic                $       (0.02)     $        0.00      $       (0.04)     $       (0.00)
                                                 =======================================================================
Net income (loss) per share-diluted              $       (0.02)     $        0.00      $       (0.00)     $       (0.00)
                                                 =======================================================================

Shares used in per share calculation-basic          56,918,605         21,674,880         55,389,426         19,812,314
Shares used in per share calculation-diluted        56,918,605         22,179,707         55,389,426         19,812,314
                                                 =======================================================================

Shares used in per share calculation-basic          56,918,605         21,674,880         55,389,426         19,812,314
Shares used in per share calculation-diluted        56,918,605         22,179,707         55,389,426         19,812,314


                            See Notes to Interim Unaudited Consolidated Financial Statements

                                                           4

<PAGE>

                            ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
                        CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


FOR SIX MONTHS ENDED JUNE 30,                                         2006              2005
-------------------------------------------------------------------------------------------------

CASH FLOW FROM OPERATING ACTIVITIES:
  Net loss                                                      $  (2,052,154)     $     (35,881)
  Adjustments to reconcile net loss to net cash used in
   operating activities:
    Depreciation                                                        6,297                 80
    Issuance of stocks and stock equity awards for services           577,178             68,000
    Provision for bad debt                                              6,512                 --
    Provision for loan loss                                                --              9,116
    Deferred income tax                                                   366              1,276
    Loss on investment accounted for under equity method               28,690                 --
    (Increase) Decrease in:
     Accounts Receivable                                              (14,821)          (112,841)
     Inventory                                                        (18,900)           (83,292)
     Prepaid and Others                                               (40,318)            24,725
    Increase (Decrease) in:
     Accounts Payable and Accrued Liabilities                         162,562             19,150
                                                                ---------------------------------
NET CASH USED IN OPERATING ACTIVITIES                              (1,344,588)          (109,667)
                                                                ---------------------------------

CASH FLOW FROM INVESTING ACTIVITIES:
  Closing of Certificate of Deposits                                  305,274                 --
  Capitalize of patent costs                                          (20,945)                --
  Capitalize of trademark                                              (6,567)                --
  Purchase of Equipment                                                (5,283)                --
  Repayment from Notes Receivable                                          --              1,500
  Purchase of Certificate of Deposits                                      --           (400,000)
                                                                ---------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                   272,479           (398,500)
                                                                ---------------------------------

CASH FLOW FROM FINANCING ACTIVITIES:
  Net proceeds from sale of common stocks                           1,036,529                 --
  Net proceeds from exercising of stock warrants                       20,000                 --
  Repayments on notes payable                                         (56,269)                --
                                                                ---------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                           1,000,260                 --
                                                                ---------------------------------

NET DECREASE IN CASH                                                  (71,849)          (508,167)

CASH BALANCE AT BEGINNING OF PERIOD                                   171,340            847,235
                                                                ---------------------------------

CASH BALANCE AT END OF PERIOD                                   $      99,491      $     339,068
                                                                =================================

Supplemental Disclosures of Cash Flow Information:
  Interest Paid                                                 $      19,069      $          --
  Taxes Paid                                                    $         800      $         800

Schedule of noncash investing and financing activities:
  Issuance of common stocks for:
    Merger adjustment                                           $         362      $          --
    Notes Payable                                                          --             40,000
    Accrued Interest                                                       --              6,339
                                                                ---------------------------------
                                                                $         362      $      46,339
                                                                =================================


                See Notes to Interim Unaudited Consolidated Financial Statements

                                                5
</TABLE>

<PAGE>

NOTE 1 - NATURE OF BUSINESS

AcuNetx, Inc., a Nevada corporation, (the "Company" or "AcuNetx", formerly known
as Eye Dynamics, Inc. or "EDI") combines diagnostic, analytical and therapeutic
devices with proprietary software to permit: health providers to diagnose and
treat balance disorders and various bone deficiencies; to allow law enforcement
officers to evaluate roadside sobriety; and permits 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 Superior Colorado,
and has operating divisions in Torrance, California.

On December 23, 2005, the Company completed a merger with OrthoNetx, Inc.
("OrthoNetx" or "ONX"), a Colorado-based provider of medical devices for
osteoplastic surgery. The acquisition was completed as a stock transaction in
which ONX shareholders received shares of the merged company equal to the number
of EDI's outstanding shares at the closing date. Following the merger, the
Company changed its name to AcuNetx, Inc. and shifted its headquarters to
Superior, Colorado. The President and CEO of ONX assumed the position of
President and CEO of the merged company.

AcuNetx is organized around three separate divisions: (i) a division that
produces neurological diagnostic equipment, (ii) a division that produces
devices that create new bone, and (iii) a division that develops products for
occupational safety and law enforcement. For all its devices, AcuNetx is in the
process of 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. Its products include the following: (a)
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; (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, targeted toward 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-Connect(TM) ("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
the patient.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRESENTATION OF INTERIM INFORMATION: The financial information at June 30, 2006
and for the three and six months ended June 30, 2006 and 2005 is unaudited but
includes all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair presentation of the financial
information set forth herein, in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") for interim financial
information, and with the instructions to Form 10-QSB. Accordingly, such
information does not include all of the information and footnotes required by
U.S. GAAP for annual financial statements. For further information refer to the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2005.

The results for the three and six months ended June 30, 2006 may not be
indicative of results for the year ending December 31, 2006 or any future
periods.

PRINCIPLE OF CONSOLIDATION AND PRESENTATION: The accompanying financial
statements include the accounts of AcuNetx, Inc. and its divisions 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.

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 a patent application. 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 six months ended June 30, 2006. The Company had no other intangible assets
in 2005.


                                       6

<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

GOODWILL: Goodwill represents the excess of the purchase price in the merger
with OrthoNetx (see Note 10 below) over the fair value of net tangible and
intangible assets acquired in the merger. Goodwill amounts are not amortized,
but rather are tested for impairment at least annually. There was no impairment
of goodwill for six months ended June 30, 2006. The Company had no goodwill in
2005

INVESTMENT: The Company held 20% of the issued and outstanding common stock of a
Colorado privately-held company. The Company accounts for the investment using
the equity method of accounting. Under the equity method, the carrying amount of
the investment is increased for its proportionate share of the investee's
earning or decreased for its proportionate share of the investee's loss. During
the six month period ended June 30, 2006, the Company recorded losses of
$28,690, as its pro rata share of net losses in this privately-held company. The
Company had no equity method investment in 2005.

The Company monitors the investment for impairment and makes appropriate
reductions in carrying value if the Company determines that an impairment charge
is required based primarily on the financial condition and near-term prospects
of this company.

INCOME (LOSS) PER COMMON SHARE: Basic net income (loss) per share includes no
dilution and is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common stock outstanding for the
period. Diluted earnings per share is computed by dividing net income by the
weighted average number of shares outstanding and, when, diluted, potential
shares from options and warrants to purchase common stock using the treasury
stock method. Diluted net loss per common share does not differ from basic net
loss per common share since potential shares of common stock are anti-dilutive
for all periods presented.

STOCK-BASED COMPENSATION: Prior to January 1, 2006, the Company's stock option
plans were accounted for under the recognition and measurement provisions of APB
Opinion No. 25 (Opinion 25), "ACCOUNTING FOR STOCK ISSUED TO Employees," and
related Interpretations, as permitted by FASB Statement No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" (as amended by SFAS No. 148, "ACCOUNTING FOR
STOCK-BASED COMPENSATION TRANSITION AND DISCLOSURE") (collectively SFAS 123). No
stock-based employee compensation cost was recognized in the Company's
consolidated statements of operations through December 31, 2005, as all options
granted under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Effective January 1, 2006, the
Company adopted the fair value recognition provisions of FASB Statement No.
123(R), "SHARE-BASED PAYMENT" (SFAS 123R), using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized in 2006 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2006
based on the grant date fair value calculated in accordance with the original
provisions of SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to December 31, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R).

For the three and six months ended June 30, 2006, as a result of adopting SFAS
123(R) on January 1, 2006, the Company recognized pre-tax compensation expense
related to stock options of $136,846 and $244,876, respectively. The following
table illustrates the effect on net loss and net loss per share if the Company
had applied the fair value recognition provisions of SFAS 123 to options granted
under the Company's stock option plan for the three and six months ended June
30, 2005. For purposes of this pro forma disclosure, the value of the options is
estimated using the Black-Scholes option-pricing model and is being amortized to
expense over the options' vesting periods.

<TABLE>
                                                             Three Months       Six Months
                                                                ended             ended
                                                            June 30, 2005     June 30, 2005
                                                            -------------     -------------
<S>                                                         <C>               <C>
Net income (loss), as reported                              $      39,579     $     (35,881)
Deduct: Total stock-based employee compensation expense
  determined under the fair value of awards, net of tax
  related effects                                                      --            39,600
                                                            -------------     -------------

Pro forma net income (loss)                                 $      39,579     $     (75,481)
                                                            =============     =============

Reported net income (loss) per share-basic and diluted      $        0.00     $       (0.00)
                                                            =============     =============

Pro forma net income (loss) per share-basic and diluted     $        0.00     $       (0.01)
                                                            =============     =============
</TABLE>

                                           7

<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 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." SFAS No. 123 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).

NEW ACCOUNTING PRONOUNCEMENTS: In June 2006, the Financial Accounting Standards
Board (FASB) issued Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME
TAXES", ("FIN 48"). This Interpretation clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, "ACCOUNTING FOR INCOME TAXES." This Interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company does not expect the adoption of
FIN 48 to have a material impact on its consolidated financial statements.

The FASB has also issued Statements of Financial Accounting Standards (SFAS) No.
155, "ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS-AN AMENDMENT OF FASB
STATEMENTS NO. 133 AND 140" and SFAS No. 156, "ACCOUNTING FOR SERVICING OF
FINANCIAL ASSETS-AN AMENDMENT OF FASB STATEMENT NO. 140" but they will not have
a relationship to the operations of the Company. Therefore a description and its
impact for each on the Company's operations and financial position have not been
disclosed.

NOTE 3 - BALANCE SHEET DETAILS

The following tables provide details of selected balance sheet items:

                                   As of June 30, 2006
ACCOUNTS RECEIVABLE, NET
------------------------
Accounts Receivable                     $ 128,985
Other Receivable                               57
Allowance for Bad Debt                     (4,634)
                                        ---------
  Total Accounts Receivable, Net        $ 124,408
                                        =========

PREPAID EXPENSES AND OTHERS
---------------------------
Prepaid Insurance                       $  30,637
Prepaid rent and deposit                    7,210
Other Prepaid Expenses                     91,874
                                        ---------
  Total Prepaids and Others             $ 129,721
                                        =========

PROPERTY AND EQUIPMENT, NET
---------------------------
Furniture and Fixtures                  $   9,531
Equipment                                  48,945
Software                                    6,285
                                        ---------
                                           64,761
Accumulated Depreciation                  (33,479)
                                        ---------
  Total Property and Equipment, Net     $  31,282
                                        =========

ACCRUED LIABILITIES
                                        ---------
Accrued insurance                       $   5,723
Warranty reserve                            8,462
Accrued payroll and related taxes          59,375
Accrued consulting fees                    19,090
Accrued vacation                           27,602
Other accrued liabilities                   5,867
                                        ---------
  Total Accrued Liabilities             $ 126,119
                                        =========


                                       8

<PAGE>

NOTE 4 - LONG-TERM DEBT

The Company has a note payable to a related party which initially bears interest
at 0.75% above the Wall Street Journal Prime Rate (8.0% at December 31, 2005)
and matures on January 10, 2006. On January 17, 2006, the note agreement was
amended to reflect that the payment date of the loan be extended for two years,
that the interest rate be increased to 13% per annum and that the remaining
principal balance be amortized and payable over 2 years. The note is
collateralized by substantially all assets of the Company and personal guarantee
by the CEO and two shareholders. As of June 30, 2006, the balance of the note
payable is $243,731, including a current portion of $161,309. Total interest
expense for the six months ended June 30, 2006 was $19,065.

In April 2005, the Company converted notes payable of $40,000 and accrued
interest of $6,339 into 3,591,799 shares of common stock pursuant to the
conversion privileges stated in the original note agreements. As a result, the
Company did not recognize any gain or loss from these conversions.

NOTE 5 - INCOME TAXES

The components of the deferred net tax assets are as follows:

                  For Three Months ended              For Six Months ended
                          June 30,                          June 30,
                   2006             2005             2006              2005
--------------------------------------------------------------------------------
Federal:
   Current    $         --      $         --     $         --      $         --
   Deferred             --             1,276              377             1,276
--------------------------------------------------------------------------------
                        --             1,276              377             1,276
--------------------------------------------------------------------------------
State:
   Current              --                --              800               800
   Deferred             --                --              (11)               --
--------------------------------------------------------------------------------
                        --                --              789               800
--------------------------------------------------------------------------------
    Total     $         --      $      1,276     $      1,166      $      2,076
================================================================================

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, 2005, the Company has net operating loss carryforwards of
approximately $3,200,000 and $833,000 to reduce future federal and state taxable
income, respectively. To the extent not utilized, the federal net operating loss
carryforwards will begin to expire in fiscal 2009 and the state net operating
loss carryforwards will begin to expire in fiscal 2012.

NOTE 6 - STOCKHOLDERS' EQUITY

Private Placement Offering
--------------------------

In September 2005, OrthoNetx commenced a private placement offering ("Offering")
of equity securities to raise on a best efforts basis a maximum of $1,500,000 in
conjunction with the planned merger with Eye Dynamics discussed in Note 3. There
is no minimum amount required to be raised with the Offering. The Offering
consists of units priced at $50,000 per unit. Each unit consists of (a) shares
of the OrthoNetx's common stock at a price equal to the lesser of $.22 per share
or 90% of the average closing price of Eye Dynamics common stock over the 30
days prior to the closing of the merger with Eye Dynamics and (b) warrants to
purchase additional shares of the OrthoNetx's common stock equal to 50% of the
number of shares of common stock purchased in the Offering, exercisable for two
years at $.33 per share. Total proceeds from this offering were $650,000; the
Company received net proceeds of $602,779 after offering expenses. Additional
offering expenses of $81,250 were paid, of which $15,000 was paid in cash in
2005; $16,250 was paid in cash in 2006; and the balance of $50,000 was paid in
277,778 shares of AcuNetx's common stock. All cash proceeds were received in
January 2006 and total of 3,888,892 shares of AcuNetx's common stock, including
the 277,778 shares, were issued.


                                       9

<PAGE>

NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

In March 2006, a Subscription Agreement from the 2005 Private Placement
Memorandum was fulfilled in the amount of $500,000, resulting in $450,000 net
proceeds after offering expenses. Galen Capital Group, the former financial
advisor, is the investor and received 2,777,778 shares of common stock of the
Company for its investment.

Exercise of stock warrants
--------------------------

During the first six months of 2006, there were stock warrants exercised. The
Company received total proceeds of $20,000. No stock warrants were exercised in
2005.

Non-Executive Directors' Stock Plan
-----------------------------------

On February 27, 2006 the Board of Directors agreed to provide 300,000 shares of
restricted stock to each of the four nonemployee directors as compensation for
2006 services pursuant to the 2006 Non-Executive Stock Plan established on
January 1, 2006. The shares were ratified valuing at $0.18 per share which was
the closing market price on the effective date of the Plan, and were amortized
on a straight-line basis over a twelve month period. For the three and six
months ended June 30, 2006, the Company recognized directors' compensation of
$28,500 and $103,500. The Plan shall be in effect until December 31, 2006.

Increase of Authorized Shares
-----------------------------

In March 2006, the Board of Directors approved to increase the number of
authorized common stocks to 200 million. Increase in authorized common shares
requires shareholder approval, which will be sought at the next shareholder
meeting. If approved at that time, the Articles of Incorporation will be
amended.

NOTE 7 - STANDBY EQUITY DISTRIBUTION AGREEMENT

On January 31, 2006, the Company entered into a Standby Equity Distribution
Agreement (SEDA) with Cornell Capital Partners, LP ("Cornell"), to finance the
continued development of its products. Under the agreement, Cornell has
committed to provide up to $12 million of equity financing to be drawn down over
a 24-month period at the Company's discretion. The financing will become
available after the Company has filed a Registration Statement covering the
securities with the Securities and Exchange Commission (the "SEC"), and the SEC
has declared the Registration Statement effective. The maximum amount of each
drawdown is $500,000, and there must be at least five trading days between
drawdowns.

Under the Standby Equity Distribution Agreement, each drawdown is actually a
sale by the Company to Cornell of newly-issued shares of common stock, in the
amount necessary to equate to the desired cash proceeds. Cornell will pay the
Company 98% of, or a 2% discount to, the lowest closing bid price of the
Company's common stock during the five consecutive trading day period
immediately following the date the Company notifies Cornell that the Company
desires to access the Standby Equity Distribution Agreement. Under the
agreement, the Company may not issue Cornell a number of shares of common stock
such that it would beneficially own greater than 9.99% of the Company's
outstanding shares of common stock.

In addition, Cornell Capital Partners will retain 5% of each cash payment under
the Standby Equity Distribution Agreement as a commitment fee. The Company also
issued, as amended, 1,090,266 shares of common stock to Cornell Capital Partners
as a one-time commitment fee. The 2% discount, the 5% commitment fee and the
shares of common stock are considered to be underwriting discounts payable to
Cornell Capital Partners. The Company also paid $5,000 as a due diligence fee to
Cornell Capital Partners.

The Company also agreed to pay Yorkville Advisors, LLC, an affiliate of Cornell
Capital Partners, a structuring fee of $10,000 upon the earlier to occur of (i)
the first drawdown under the Standby Equity Distribution Agreement, or (ii)
April 21, 2006, as well as a fee of $500 per advance made.

Under the agreement, the Company has issued three warrants to purchase the
Company's common stock to Cornell. The first is a one-year warrant for 250,000
shares, with an exercise price of $0.50 per share. The second is a two-year
warrant for 250,000 shares, with an exercise price of $1.00 per share. The third
is a three year warrant for 500,000 shares, with an exercise price of $2.00 per
share. The warrants were valued at $83,802 using Black-Scholes option-pricing
model and were charged to operations.


                                       10

<PAGE>

NOTE 7 - STANDBY EQUITY DISTRIBUTION AGREEMENT (CONTINUED)

The Company agreed to register for resale, on Form SB-2, the shares of common
stock which the Company sell to Cornell Capital Partners under the Standby
Equity Distribution Agreement, as well as shares issuable upon exercise of the
warrants and the shares issued as a commitment fee.

The Company engaged Monitor Capital, Inc., a registered broker-dealer, to act as
placement agent in connection with the Standby Equity Distribution Agreement,
pursuant to a Placement Agent Agreement dated as of January 31, 2006. The
Company paid Monitor Capital, Inc. 57,143 shares of Common Stock as a fee under
the Placement Agent Agreement. The shares were valued at $0.175 per share. The
total of $10,000 was charged to operations.

NOTE 8 - 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 ten and three years, respectively, from the date of grant.
All options have an exercise price higher than the fair market value of the
Company's stock on the date the options were granted. 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 over three years. The
plan reserves 14 million shares of common stock under the Plan and shall be
effective through December 31, 2015.

On January 3, 2005, the Board of Directors approved to issue stock options to
directors in the amount of 20,000 shares for each of the years from 1999 through
2004. The total options for each of directors shall be 120,000 shares. The
options are vesting immediately and exercisable at $0.15 per share through
January 3, 2007.

A summary of the status of stock options issued by the Company as of June 30,
2006 and 2005 is presented in the following table.

<TABLE>
                                              2006                       2005
                                    ---------------------------------------------------
                                                    Weighted                    Weighted
                                       Number       Average      Number        Average
                                         of        Exercise        of         Exercise
                                       Shares        Price       Shares         Price
                                    ---------------------------------------------------
<S>                                  <C>           <C>            <C>         <C>
Outstanding at beginning of year       415,000     $   0.15            --     $     --
Granted                              6,894,102         0.21       360,000         0.15
Exercised/Expired/Cancelled                 --           --            --           --
                                    -----------                -----------
Outstanding at end of period         7,309,102     $   0.21       360,000     $   0.15
                                    ===========                ===========

Exercisable at end of period         1,301,602     $   0.19       360,000     $   0.15
                                    ===========                ===========

The fair value of each stock option granted is estimated on the date of grant
using the Binominal Lattice option valuation model for 2006 and the
Black-Scholes Merton option valuation model for 2005. Both models use the
assumptions 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.

                                                               2006         2005
                                                            -------------------------

         Weighted average fair value per option granted     $     0.17   $     0.11
         Risk-free interest rate                                  4.41%        3.18%
         Expected dividend yield                                  0.00%        0.00%
         Expected lives                                           9.80         2.00
         Expected volatility                                    155.69%      163.36%
</TABLE>

As of June 30, 2006 there was $896,097 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
various plans. That cost is expected to be recognized over a weighted average
period of 2.5 years.


                                       11

<PAGE>

NOTE 9 - NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income
(loss) per share:

<TABLE>
                                                         Three Months ended June 30,         Six Months ended June 30,
                                                            2006              2005             2006              2005
                                                        ------------      ------------     ------------      ------------
<S>                                                     <C>               <C>              <C>               <C>
Basic net income (loss) per share:
  Net income (loss)                                     $ (1,209,624)     $     39,579     $ (2,052,154)     $    (35,881)
                                                        ------------      ------------     ------------      ------------
  Weighted average number of common shares                56,918,605        21,674,880       55,389,426        19,812,314
                                                        ------------      ------------     ------------      ------------
  Basic net income (loss) per common share              $      (0.02)     $       0.00     $      (0.04)     $      (0.00)
                                                        ============      ============     ============      ============
Diluted net income (loss) per share:
  Net income (loss)                                     $ (1,209,624)     $     39,579     $ (2,052,154)     $    (35,881)
  Addback: Debenture interest                                     --                --               --                --
                                                        ------------      ------------     ------------      ------------
  Adjusted net income (loss)                            $ (1,209,624)     $     39,579     $ (2,052,154)     $    (35,881)
                                                        ------------      ------------     ------------      ------------
  Weighted average number of common shares                56,918,605        21,674,880       55,389,426        19,812,314

  Incremental shares from assumed conversion:
     Convertible debt                                             --                --               --                --
     Stock options and warrants                                   --           504,827               --                --
                                                        ------------      ------------     ------------      ------------
  Adjusted weighted average number of common shares       56,918,605        22,179,707       55,389,426        19,812,314
                                                        ------------      ------------     ------------      ------------
  Diluted net income (loss) per common share            $      (0.02)     $       0.00     $      (0.04)     $      (0.00)
                                                        ============      ============     ============      ============
</TABLE>

As the Company incurred net loss for the three and six months ended June 30,
2006, the effect of dilutive securities totaling 693,537 and 693,407 equivalent
shares, respectively, have been excluded from the calculation of diluted loss
per share because their effect was anti-dilutive.

As the Company incurred net loss for the six months ended June 30, 2005, the
effect of dilutive securities totaling 513,333 equivalent common shares have
been excluded from the calculation of diluted net loss per share because their
effect was anti-dilutive.

NOTE 10 - MERGERS AND ACQUISITIONS

Pursuant to the Agreement and Plan of Merger ("ONX Agreement") with OrthoNetx,
Inc., a privately-held company in Colorado, dated September 1, 2005, the Company
acquired 100% of the issued and outstanding common stock of OrthoNetx. The
acquisition was completed on December 23, 2005.

OrthoNetx, Inc., which was formed in 1996, develops, manufactures, markets and
supports proprietary medical devices for distraction osteogenesis (mechanically
induced growth of new bone and adjacent soft tissues) to treat human
bone-related tissue deficiencies and deformities, both congenital and acquired.
OrthoNetx has patented and developed its GENEROS(TM) family of distraction
osteogenesis devices for infants, children and adults with: (a) craniofacial
deformities and mandibular, maxillary and/or alveo (dental) bone loss, and (b)
deficiencies and malformations of the upper and lower limbs, and in the bones of
hands and feet.

Under the terms of the ONX Agreement, the shareholders of ONX received the
number of shares equal to the number of outstanding shares of EDI's common
stock, including stock options and stock warrants at the closing date. As a
result, each outstanding share of ONX's common stock was converted into
approximately 0.805 shares of AcuNetx's common stock. Immediately upon the
completion of the merger, ONX's CEO became the CEO of AcuNetx.


                                       12

<PAGE>

NOTE 10 - MERGERS AND ACQUISITIONS (CONTINUED)

The acquisition was accounted for as business combination, and accordingly, the
tangibles assets acquired were recorded at their fair value at December 23,
2005. The results of operations of OrthoNetx have been included in the Company's
consolidated financial statements subsequent to that date. The total purchase
price is $4,706,061, and is comprised of:

         Stocks issued to acquire the outstanding
           common stock of OrthoNetx (22,496,966
           shares at $0.18 per share)                          $4,049,454
         Acquisition related transaction costs
           (3,647,818 shares at $0.18 per share)                  656,607
             Total purchase price                              $4,706,061
                                                               ==========

The fair value of the purchase price was valued at $0.18 per share, which
represented the closing price of the Company's stock at December 23, 2005.
Acquisition related transaction costs include 3,647,818 shares issued to a
financial advisor of ONX. The allocation of the purchase price to assets
acquired and liabilities assumed is presented in the table that follows:

         Tangible assets acquired                              $   136,169
         Property and equipment                                     29,772
         Intangible assets                                          89,621
         Goodwill                                                4,823,500
         Other non-current assets                                  187,233
         Liabilities assumed                                      (560,234)
                                                               -----------
               Total purchase price                            $ 4,706,061
                                                               ===========

The following summary, prepared on an unaudited pro forma basis, reflects the
condensed consolidated results of operations for the three and six months ended
June 30, 2005 assuming OrthoNetx had been acquired at the beginning of the
periods presented:

                                           Three Months ended   Six Months ended
                                              June 30, 2005       June 30, 2005
                                              -------------       -------------

     Net revenue                              $     402,785       $     723,694
     Net loss                                 $    (208,624)      $    (529,419)
     Basic and diluted net loss per share     $       (0.00)      $       (0.01)


PrivaComp, Inc.
---------------

On May 27, 2005, OrthoNetx, Inc. entered into an Agreement and Plan of Merger
("PrivaComp Agreement") with PrivaComp, Inc., a Delaware corporation that is in
the business of developing technologies to provide patients with secure access
to their medical records and control over their medical privacy. PrivaComp is
considered a development stage company. The majority shareholder and CEO of
PrivaComp is also the CEO and a shareholder/director of OrthoNetx. Under the
terms of the PrivaComp Agreement, all of the issued and outstanding shares of
PrivaComp stock were cancelled and converted into 1,000,000 shares of
OrthoNetx's common stock.

OrthoNetx is the surviving corporation and assumed all assets and liabilities of
PrivaComp, consisting primarily of developed software, a pending patent
application and accounts payable. The merger was effective June 30, 2005.

PrivaComp and OrthoNetx are related through common ownership. Accordingly, the
assets and liabilities of PrivaComp have been recorded by OrthoNetx at
historical cost at June 30, 2005 as follows:

                  Assets:
                    Intellectual Property             $     54,567
                  Liabilities:
                    Accounts Payable                       (62,669)
                                                      ------------
                  Net liabilities assumed             $     (8,102)
                                                      ============

PrivaComp had no activity during the three and six months ended June 30, 2005,
therefore, no pro forma information has been presented.


                                       13

<PAGE>

NOTE 11 - MAJOR CUSTOMERS AND CREDIT CONCENTRATION

During the three months ended June 30, 2006, two customers accounted for
$342,235 or 94.2% of IntelliNetx division revenues. During the six months ended
June 30, 2006, three customers accounted for $609,590 or 94.3% of IntelliNetx
division revenues.

                  National distributor      $445,552 or 68.9%
                  Foreign distributor       $67,173 or 10.4%
                  SID distributor           $96,865 or 15.0%

During the three and six months ended June 30, 2005, the national distributor
accounted for $362,197 and $616,950 or 89.92% and 85.72% of total revenues,
respectively.

The Company maintains cash deposits with major banks, which from time to time
may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that the risk of any loss
is minimal.

NOTE 12 - SEGMENT INFORMATION

The Company evaluates its reporting segments in accordance with 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 SFAS No. 131. The Chief Executive Officer allocates resources to each
segment based on their business prospects, competitive factors, net sales and
operating results.

In 2006, the Company changed the structure of its internally organization to
develop three market-oriented operating divisions: (i) IntelliNetx (INX)
division, (ii) OrthoNetx (ONX) division, and (iii) VisioNetx (VNX) division. 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.
The Company also has other subsidiaries that do not meet the quantitative
thresholds of a reportable segment.

The Company reviews the operating companies' income to evaluate segment
performance and allocate resources. Operating companies' income for the
reportable segments excludes income taxes and amortization of goodwill.
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.


                                       14

<PAGE>

NOTE 12 - SEGMENT INFORMATION (CONTINUED)

Summarized financial information of the Company's results by operating segment
is as follows:

<TABLE>
                                                 For Three Months ended            For Six Months ended
                                                        June 30,                         June 30,
                                                 2006             2005             2006             2005
----------------------------------------    ------------------------------    ------------------------------
<S>                                         <C>              <C>              <C>              <C>
IntelliNetx Division:
  Net revenue to external customers         $    363,130     $    402,785     $    646,705     $    719,694
  Cost of revenue                                144,972          187,283          265,785          337,334
                                            ------------------------------    ------------------------------
  Margin                                    $    218,158     $    215,502     $    380,920     $    382,360

OrthoNetx Division:
  Net revenue to external customers         $      8,600     $         --     $      8,600     $         --
  Cost of revenue                                  3,703               --            3,703               --
                                            ------------------------------    ------------------------------
  Margin                                    $      4,897     $         --     $      4,897     $         --

VisioNetx Division:
  Net revenue to external customers         $         --     $         --     $         --     $         --
  Cost of revenue                                     --               --               --               --
                                            ------------------------------    ------------------------------
  Margin                                    $         --     $         --     $         --     $         --

Total Net Revenue to External Customers     $    371,730     $    402,785     $    655,305     $    719,694
Total Cost of Revenue                            148,675          187,283          269,488          337,334
                                            ------------------------------    ------------------------------
Total Margin                                     223,055          215,502          385,817          382,360
                                            ==============================    ==============================

Intersegment transactions are recorded at cost. The margins reported reflect
only the direct controllable expenses of each line of business and do no
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 Three Months ended                For Six Months ended
                                                                    June 30,                             June 30,
                                                            2006               2005               2006               2005
-------------------------------------------------     ---------------------------------     ---------------------------------

Total margin for reportable segments                  $     223,055      $     215,502      $     385,817      $     382,360
Corporate and general and administrative expenses        (1,141,583)          (174,581)        (1,969,262)          (415,355)
Stock option expenses                                      (136,846)                --           (244,876)                --
Research and development                                   (146,022)                --           (191,578)                --
Interest and Other Expense                                   (8,445)              (194)           (19,247)            (1,088)
Loss on equity-method investments                           (10,804)                --            (28,690)                --
Interest and Other Income                                    11,021                128             16,848                278
                                                      ---------------------------------     ---------------------------------
  Net loss before income taxes                        $  (1,209,624)     $      40,855      $  (2,050,988)     $     (33,805)
                                                      =================================     =================================
</TABLE>

                                       15

<PAGE>

NOTE 13 - COMMITMENTS

Sales Incentive Agreements
--------------------------

In April 2005, the Company entered into two individual agreements with the
national distributor and a special instrument dealer. The agreements provide
that the Company will issue restricted common stock to the distributor and
dealer as a sale incentive if certain conditions are reached pursuant to the
agreements. As of June 30, 2006, none of these conditions are reached and the
Company issued no shares.

The sales incentive agreement with the national distributor was replaced by the
Marketing and Distribution Agreement in May 2006.

Marketing and Distribution Agreement
------------------------------------

On May 25, 2006 the Company executed a new Marketing and Distribution Agreement
with the national distributor. The new agreement restructures the Company's
relationship with the national distributor into a nonexclusive one, so that the
Company will be in a position to manufacture and sell VNG products under its own
brand names, as well as through the national distributor. The agreement also
changes the relationship between the Company and the national distributor so
that, in general, the Company will ship the national distributor branded
products directly to the end-user, receive payment from the end-user, and pay
the national distributor a commission on sales. The new 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 a consultant associated
with the national distributor providing that the consultant agrees to 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.

In return, the Company agreed to issue its common stocks worth $100,000 on May
25, 2006 and an additional $100,000 worth of common shares on each of the seven
subsequent anniversaries of the signing date, which was May 25, 2006. The
Company also agreed to pay the consultant $1,500 per day with a minimum of 30
days per year. In July 2006, the Company had issued 444,445 shares of its common
stocks to the national distributor for the first $100,000 agreed payment.

NOTE 14 - 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 June 30, 2006.

In general, the Company offers a one-year warranty for most of the products it
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


                                       16

<PAGE>

NOTE 14 - GUARANTEES AND PRODUCT WARRANTIES (CONTINUED)

The following table presents the changes in the Company's warranty reserve
during the first six months of 2006 and 2005:

                                                       2006             2005
                                                   -----------      -----------

             Balance as of beginning of period     $     8,462      $     8,884
             Provision for warranty                      1,051            1,748
             Utilization of reserve                     (1,051)          (3,174)
                                                   -----------      -----------
             Balance as of end of period           $     8,462      $     7,458
                                                   ===========      ===========

NOTE 15 - DEPARTURE AND ELECTION OF CHAIRMAN OF THE BOARD OF DIRECTORS

On May 2, 2006, Stephen D. Moses resigned from the Board of Directors of
Registrant and as Chairman of the Board of Directors. The resignation arose out
of disagreements about the management and direction of the Company. The
remaining Directors of the Company disagree with the assertions of Mr. Moses.

On May 3, 2006, Charles Phillips, the Company's co-founder in 1988 and currently
a Director, was elected as the Chairman of the Board of Directors of the
Company.


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION BUSINESS
         OVERVIEW

AcuNetx is organized around three separate divisions: (i) a division
that produces neurological diagnostic equipment, (ii) a division that produces
devices that create new bone, and (iii) a division that develops 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. Our IT platform
is designed to gather data and connect the device-related data with users and
support persons. The Company's products include the following:

o        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.

o        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.

o        Orthopedic and craniomaxillofacial (skull and jaw) surgery products,
         which generate new bone through the process of distraction
         osteogenesis.

o        A proprietary information technology system called
         SmartDevice-Connect(TM) ("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 the patient.


                                       17

<PAGE>

RESULTS OF OPERATIONS

THREE MONTHS ENDING JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005

As described above, AcuNetx, Inc. is comprised of the former Eye Dynamics, Inc.
and the former OrthoNetx, Inc. This discussion compares the combined 2006 second
quarter and first half results with the corresponding periods of 2005, which
consists solely of the former Eye Dynamics, Inc.

In May of 2006, negotiations successfully concluded with our national
distributor for IntelliNetx (formerly Eye Dynamics) products. The revised
contract allows exclusivity for that distributor for the Company's products they
have traditionally sold, while allowing new IntelliNetx lines to be sold through
a broader range of channels and partners. One significant aspect of the new
contract is a shift in revenue recognition. Prior to the revised contract,
IntelliNetx products would be considered purchased by the distributor and
revenue would be credited at the previously agreed upon wholesale price. Under
the now revised contract, shipments and title to the equipment move directly
from IntelliNetx to the end customer, and IntelliNetx recognizes the revenue at
the retail price. This change will result in higher revenues for the same unit
volume of sales, along with higher gross profits, as costs will not change. An
offsetting increase in selling expenses occurs as the distributor is paid from
the retail proceeds. The functional implementation of the changes to our
distribution agreement occurred at the end of this quarter. Material results
associated with this change will be reflected from this point forward.

Revenues during the second quarter of 2006 were $371,730, compared to $402,785
for the corresponding period in 2005. Unit shipments were down modestly from the
prior year, which was slightly offset by 2 systems being booked at the retail
level as described above. Unit cost of sales stayed relatively static, while
gross profit, as a percentage of sales increased 6.5%, again due to the shift to
retail.

Total operating expenses increased by $1,249,870 from $174,581 in the second
quarter of 2005 to $1,424,451 in the second quarter of 2006. Increased selling,
general and administrative expenses resulted in a loss of $1,209,624 ($0.02 per
share) for the current period, compared to a profit of $39,579 ($0.00 per share)
for the same period in the previous year. Unit sales did not show the budgeted
growth hoped for in the second quarter as lengthy negotiations with our
distributor diverted sales efforts. As stated above, a satisfactory conclusion
to those discussions occurred near the end of the quarter and is expected to
bring sales through that channel back to prior year levels or better. We are
working with all of our marketing channels to formulate a consistent message to
highlight our product and company strengths. Sales for the OrthoNetx line of
products continue at a very slow pace while the correct distribution model is
sought. Most of the loss in the quarter was driven by the increase in operating
expenses discussed in the 6 month results below.

SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005

Revenues during the first six months of 2006 were $655,305, compared to $719,694
for the corresponding period in 2005. Unit shipments were down modestly from the
prior year, with a slight offset for 2 units sold at retail. Unit cost of sales
stayed relatively static, while gross profit, as a percentage of sales increased
4.3%, again due to the shift to retail revenue booking near the end of the
period.


                                       18

<PAGE>

Total operating expenses increased by $1,990,361, from $415,355 in the first
half of 2005 to $2,405,716 in the first half of 2006. Substantial new product
development expenses as well as increased selling, general and administrative
expenses resulted in a loss of $2,052,154 ($0.04 per share) for the current
period, compared to a loss of $35,881 ($0.00 per share) for the same period in
the previous year.

The company directed significant expenditures in the first six months of
combined operations for design work on the SafetyScan product which was
completed through phase I. The HawkEye product for law enforcement use was
further developed and brought to market, and is generating substantial interest.
Improvements of form and function in the current VNG product line were also
undertaken. We finalized the administrative, legal, and regulatory aspects of
the merger so to build the base for future growth. These changes included a new
accounting system, an I/T infrastructure compliant with regulatory requirements,
and able to expand in support of the future SmartDevice-Connect backbone, a
re-designed web site that meets current standards and will support e-commerce,
patent and trademark filings, and the rollout of an improved branding,
positioning, and market image for the company. Standard selling, general and
administrative expenses for both AcuNetx and OrthoNetx did not increase
significantly, but the OrthoNetx expenses make up a portion of the year to year
growth. The shift to recognizing revenue at the retail level for IntelliNetx
products mentioned earlier will result in an increase in selling expense which
offsets the higher gross profit for units sold through our national distributor,
and will return higher contributions to net income for units sold through new
channels. The effect of this change was minimal in this period.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents as of June 30, 2006 of $99,491 will not allow for
payment of all outstanding invoices on a current basis. All suppliers to the
revenue generating operations of IntelliNetx are current, and can remain so with
current cash and sales. Creditors have been kept informed of the financial
situation of the Company, and both work and payment plans are being established.
The Company is also in the process of repaying a loan from the founder of
OrthoNetx, and is current on interest as of June 30, but is a month behind on
principal payment.

Inventory as of June 30, 2006 was $340,160, compared to $264,000 as of June 30,
2005. Purchasing for all VNG products has been adjusted to a level consistent
with lower sales. OrthoNetx bone distraction products, both the GenerOs CF and
GenerOs SB, account for most of the overall increase year to year. Accounts
receivable as of June 30, 2006 were $124,408. A dedicated push in July reduced
this number substantially, and new programs have been instituted to prevent A/R
delinquencies reaching that level in the future.

Accounts payable as of June 30, 2006 were $401,147, compared to $39,898 as of
June 30, 2005. The change is primarily due to significant increases in activity
as reflected in the combined companies' selling, general and administrative
expense discussed above. OrthoNetx had previously acquired a private firm, and
has been carrying accounts payable at full value until a settlement, currently
under discussion, is resolved.

Sales prospects for the balance of 2006 continue to appear strong, as we operate
under a new contract with our current distributor and introduce new and
refreshed products through new channels and sales partners. We also expect that
sales of our HawkEye product to the law enforcement community will begin to be
reflected beginning in the third quarter this year. In early April we announced
that our VNG products have been approved by the U. S. Government Services
Administration to be listed on the Federal Supply Schedule, which permits access
to all military and VA hospitals around the world. We plan to continue to use
trade shows, print and electronic media, industry experts, and distributors to
carry our message to our expanding base of customers and support organizations.

Finally, the Company has embarked on an effort to raise additional capital
(approximately $4 million) to complete the development of its SafetyScan
product, to introduce it to the marketplace, and to fund marketing and sales
efforts aimed at increasing revenues associated with the Company's other product
lines.


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<PAGE>

ITEM 3.  CONTROLS AND PROCEDURES.

         At the end of the period covered by this Form 10-QSB, the Company's
management, including the Chief Executive and Chief Financial Officers,
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures. Based on this evaluation, the Chief Executive and Chief
Financial Officers have determined that such controls and procedures are
effective to ensure that information relating to the Company required to be
disclosed in reports that it files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
There have been no changes in the Company's internal controls over financial
reporting that were identified during the evaluation that occurred during the
Company's last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.


                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         The Company is not a party to any material pending legal proceedings.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

         None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

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

         None

ITEM 5.  OTHER INFORMATION

         None

ITEM 6.  EXHIBITS

         31.1     Certification of the Company's Chief Executive Officer
                  Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
                  Exchange Act of 1934

         31.2     Certification of the Company's Interim Chief Financial Officer
                  Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
                  Exchange Act of 1934

         32.1     Certification of the Company's Chief Executive Officer
                  Pursuant to 18 U.S.C. Section 1350

         32.2     Certification of the Company's Interim Chief Financial Officer
                  Pursuant to 18 U.S.C. Section 1350


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<PAGE>

                                   SIGNATURES

     In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Date: August 21, 2006
                                                      By: /s/ Terry Knapp
                                                          ----------------------
                                                          Terry Knapp, President


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