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

                                   FORM 10-QSB

                                   (Mark One)
                       [X] QUARTERLY REPORT UNDER SECTION
                          13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 2005

               [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                                THE EXCHANGE ACT

                For the transition period from _______ to _______

                        Commission file number 000-27507

                                  AUXILIO, INC.
        (Exact name of small business issuer as specified in its charter)



              Nevada                                             88-0350448
(State or other jurisdiction                                 (I.R.S. Employer
of incorporation or organization)                            Identification No.)


                           27401 Los Altos, Suite 100
                         Mission Viejo, California 92691
                    (Address of principal executive offices)

                                 (949) 614-0700
                           (Issuer's telephone number)

Check whether the issuer (1) 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 |_|

Indicate by check mark whether the registrant is a shell company (as defined by
Section 12b-2 of the Exchange Act)

                                                           Yes |_| No |X|


The number of shares of the issuer's common stock, $0.001 par value, outstanding
as of November 11, 2005 was 16,061,412.

Transitional Small Business Disclosure Format:
                                                           Yes |_| No |X|

<PAGE>

                                  AUXILIO, INC.
                                   FORM 10-QSB
                                TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
------------------------------

<TABLE>
<CAPTION>
                                                                                                          Page
                                                                                                          ----
<S>                                                                                                      <C>
 Item 1.         Financial Statements (Unaudited):

                 Condensed Consolidated Balance Sheet
                   as of September 30, 2005                                                               3

                 Condensed Consolidated Statements of Operations
                   for the Three and Nine Months Ended September 30, 2005 and 2004                        4

                 Condensed Consolidated Statements of Comprehensive Income (Loss)
                   for the Three and Nine Months Ended September 30, 2005 and 2004                        5

                 Condensed Consolidated Statement of Stockholders' Equity
                   for the Nine Months Ended September 30, 2005                                           6

                 Condensed Consolidated Statements of Cash Flows
                   for the Nine Months Ended September 30, 2005 and 2004                                  7

                 Notes to Condensed Consolidated Financial Statements                                     9

 Item 2.         Management's Discussion and Analysis or Plan
                   of Operation.                                                                         13

 Item 3.         Controls and Procedures.                                                                20

PART II - OTHER INFORMATION

 Item 1.         Legal Proceedings.                                                                      21

 Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds.                            21

 Item 3.         Defaults Upon Senior Securities.                                                        21

 Item 4.         Submission of Matters to a Vote of Security Holders.                                    21

 Item 5.         Other Information.                                                                      21

 Item 6.         Exhibits.                                                                               21

 Signatures                                                                                              22
</TABLE>

                                       2
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS.

                         AUXILIO, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
                               SEPTEMBER 30, 2005
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                     ASSETS

Current assets:
<S>                                                                            <C>
   Cash and cash equivalents                                                   $  1,975,028
   Accounts receivable, net                                                         247,010
   Prepaid and other current assets                                                  88,864
   Inventories                                                                      361,920
   Investment in marketable securities                                               39,000
                                                                               ------------
          Total current assets                                                    2,711,822

Property and equipment, net                                                         185,050
Deposits                                                                             41,355
Intangible assets, net                                                              886,803
Goodwill                                                                          1,547,017
                                                                               ------------
          Total assets                                                            5,372,047
                                                                               ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses                                       $    748,189
   Accrued compensation and benefits                                                490,063
   Deferred revenue                                                                 372,944
   Current portion of long-term debt                                                 17,228
   Current portion of capital lease obligations                                      23,788
   Note payable, related party                                                       15,750
                                                                               ------------
          Total current liabilities                                               1,667,962

Commitments and contingencies                                                            --

Stockholders' equity:
   Common stock, par value at $0.001, 33,333,333 shares
     authorized, 16,061,412 shares issued and outstanding                            16,063
   Additional paid-in capital                                                    14,880,425
   Accumulated deficit                                                          (11,198,903)
   Accumulated Comprehensive Income                                                   6,500
                                                                               ------------
          Total stockholders' equity                                              3,704,085
                                                                               ------------
          Total liabilities and stockholders' equity                           $  5,372,047
                                                                               ============
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                       3
<PAGE>
                         AUXILIO, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                   Three Months                          Nine Months
                                                                Ended September 30,                   Ended September 30,
                                                        --------------------------------        --------------------------------
                                                            2005                2004                2005                2004
                                                        ------------        ------------        ------------        ------------
<S>                                                     <C>                 <C>                 <C>                 <C>
Revenues                                                $    999,005        $    975,363        $  3,020,932        $  5,565,142

Cost of revenues                                             693,594             178,585           2,357,233           2,912,942
                                                        ------------        ------------        ------------        ------------

Gross profit                                                 305,411             796,778             663,699           2,652,200

Operating expenses:
   Sales and marketing                                       452,110             357,805           1,360,285           1,003,403
   General and administrative expenses                       586,949             353,524           1,597,041             992,561
   Intangible asset amortization                              93,368                  --             280,105                  --
                                                        ------------        ------------        ------------        ------------

Income (loss) from operations                               (827,016)             85,449          (2,573,732)            656,236
                                                        ------------        ------------        ------------        ------------

Other income (expense):
   Interest expense                                           (1,164)               (931)            (73,720)             (9,364)
   Interest income                                            11,865               3,597              25,376               5,732
   Gain (loss) on sale of marketable securities                   --                  --             362,061                  --
   Impairment of marketable securitues                       (52,728)                                (52,728)
   Loss on disposal of fixed assets                           (8,225)                 --              (8,225)                 --
                                                        ------------        ------------        ------------        ------------

          Total other income (expense)                       (50,252)              2,666             252,764              (3,632)
                                                        ------------        ------------        ------------        ------------

Income (loss) before provision for income taxes             (877,268)             88,115          (2,320,968)            652,604

Provision for income taxes                                        --                  --              (3,200)             (2,400)
                                                        ------------        ------------        ------------        ------------

Net income (loss) from continuing operations                (877,268)             88,115          (2,324,168)            650,204

Income (loss) from discontinued operations,
  (including gain (loss) on disposal of ($93,750)
   and $674,942, for the three and nine months
   ended September 30, 2004, respectively) net of
   tax benefit                                                    --             (39,000)                 --             501,895
                                                        ------------        ------------        ------------        ------------

Net income (loss)                                       $   (877,268)       $     49,115        $ (2,324,168)       $  1,152,099
                                                        ============        ============        ============        ============

Net income (loss) per share - basic:
  Income (loss) per share-continuing operations         ($      0.05)       $       0.00        ($      0.15)       $       0.05
  Income (loss) per share-discontinued operations       $       0.00        ($      0.00)       $       0.00        $       0.04
                                                        ------------        ------------        ------------        ------------

Net income (loss) per share - basic                     ($      0.05)       $       0.00        ($      0.15)       $       0.09
                                                        ============        ============        ============        ============

Net income (loss) per share - diluted:
  Income (loss) per share-continuing operations         ($      0.05)       $       0.00        ($      0.15)       $       0.05
  Income (loss) per share-discontinued operations       $       0.00        ($      0.00)       $       0.00        $       0.04
                                                        ------------        ------------        ------------        ------------

Net income (loss) per share - diluted                   ($      0.05)       $       0.00        ($      0.15)       $       0.09
                                                        ============        ============        ============        ============

Number of weighted average shares -
    basic                                                 16,059,010          14,119,669          15,498,157          12,230,113
                                                        ============        ============        ============        ============

    diluted                                               16,059,010          14,388,769          15,498,157          12,499,212
                                                        ============        ============        ============        ============

</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       4
<PAGE>

                         AUXILIO, INC. AND SUBSIDIARIES
        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        Three Months                        Nine Months
                                                     Ended September 30,                 Ended September 30,
                                               ------------------------------       ------------------------------
                                                  2005               2004              2005               2004
                                               -----------        -----------       -----------        -----------
<S>                                            <C>                <C>               <C>                <C>
Net income (loss)                              $  (877,268)       $    49,115       $(2,324,168)       $ 1,152,099

Unrealized gain on marketable securities             6,500             23,103             6,500             91,353
                                               -----------        -----------       -----------        -----------

Comprehensive income (loss)                    $  (870,768)       $    72,218       $(2,317,668)       $ 1,243,452
                                               ===========        ===========       ===========        ===========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                       5
<PAGE>

                         AUXILIO, INC. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                      NINE MONTHS ENDED SEPTEMBER 30, 2005
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     Additional                                     Total
                                            Common Stock              Paid-in     Accumulated    Comprehensive  Stockholders'
                                       Shares           Amount        Capital       Deficit          Income         Equity
                                   ------------   ------------   ------------   ------------    ------------    ------------
<S>                                 <C>          <C>            <C>            <C>             <C>             <C>
Balance at December 31, 2004         14,438,662   $     14,440   $ 11,836,242   $ (8,874,735)   $    222,210    $  3,198,157
Common stock issued in private
placement, net of offering costs
of $431,618 - unaudited               1,619,750          1,620      2,965,707             --              --       2,967,327
Common stock issued upon
exercise of warrants - unaudited          3,000              3          2,247             --              --           2,250
Relative fair value of warrants
issued related to revolving loan
payable - unaudited                          --             --         58,029             --              --          58,029
Relative fair value of options
issued related to professional
services rendered - unaudited                                          18,200                                         18,200
Reclassification of realized
amount included in net income -
unaudited                                    --             --             --             --        (222,210)       (222,210)
Unrealized gain on marketable
securities - unaudited                                                                                 6,500           6,500
Net loss - unaudited                         --             --             --     (2,324,168)             --      (2,324,168)
                                   ------------   ------------   ------------   ------------    ------------    ------------
Balance at September 30, 2005 -      16,061,412   $     16,063   $ 14,880,425   $(11,198,903)          6,500    $  3,704,085
unaudited                          ============   ============   ============   ============    ============    ============
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                       6
<PAGE>

                         AUXILIO, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                   Nine Months Ended September 30,
                                                                                   ------------------------------
                                                                                      2005               2004
                                                                                   ------------------------------
<S>                                                                                <C>                <C>
Cash flows provided by (used for) operating activities:
            Net income (loss)                                                      $(2,324,168)       $ 1,152,099
Adjustments to reconcile net income (loss) to net cash
 provided by (used for) operating activities:
            Depreciation                                                                61,255             27,825
            Bad debt                                                                        --             18,603
            Amortization of intangible assets                                          280,105                 --
            Gain on sale of certain assets                                                  --           (635,941)
            Gain on sale of marketable securities                                     (362,061)                --
            Impairment of marketable securities                                         52,728                 --
            Loss on disposition of property and equipment                                8,225                 --
            Interest expense related to warrants issued                                 58,029              3,137
            Options issued for professional services                                    18,200                 --
Changes in operating assets and liabilities:
            Accounts receivable and other receivables                                   (5,812)          (502,201)
            Inventories                                                                 47,866           (135,161)
            Prepaid and other current assets                                           (12,606)            52,118
            Deposits                                                                    15,040               (250)
            Accounts payable and accrued expenses                                     (449,638)          (438,052)
            Accrued compensation and benefits                                         (165,455)           626,563
            Lease buyout provision                                                     (32,196)           260,733
            Deferred revenue                                                            74,421            127,133
                                                                                   ------------------------------
                        Net cash provided by (used for) operating activities         2,736,067            556,606
                                                                                   ------------------------------
  Cash flows provided by (used for) investing activities:
            Purchases of property and equipment                                        (25,639)          (136,793)
            Purchase of Mayo Group, net of cash acquired                                    --           (550,613)
            Proceeds from sale of certain assets                                            --            250,000
            Net proceeds from sale of marketable securities                            979,311                 --
                                                                                   ------------------------------
                        Net cash provided by (used for) investing activities           953,672           (437,406)
                                                                                   ------------------------------
Cash flows provided by financing activities:
            Proceeds from line of credit                                               500,000                 --
            Repayments on line of credit                                              (500,000)                --
            Payments on capital leases                                                  (3,626)                --
            Payments on notes payable and long-term debt                              (159,618)          (220,766)
            Net proceeds from issuance of common stock                               2,967,327            520,150
            Proceeds from exercise of warrants                                           2,250                 --
                                                                                   ------------------------------
                        Net cash provided by financing activities                    2,806,333            299,384
                                                                                   ------------------------------
Net increase in cash and cash equivalents                                            1,023,938            418,584
Cash and cash equivalents, beginning of period                                         951,090            226,398
                                                                                   ------------------------------
Cash and cash equivalents, end of period                                           $ 1,975,028        $   644,982
                                                                                   ==============================
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements

                                       7
<PAGE>

                         AUXILIO, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                          Nine Months Ended September 30,
                                                                                          -------------------------------
                                                                                               2005              2004
                                                                                           -----------       -----------
Supplemental disclosure of cash flow information:
<S>                                                                                         <C>               <C>
     Interest paid                                                                         $    15,691       $    12,376
                                                                                           ===========       ===========

      Income tax paid                                                                      $     3,200       $       800
                                                                                           ===========       ===========

Non-cash investing and financing activities:

     Stock issued for payables                                                                      --       $    30,000
                                                                                           ===========       ===========

     Net assets acquired (liabilities assumed), net of bank overdraft, through
     acquisition of Mayo Group                                                                      --       $  (181,254)
                                                                                           ===========       ===========

     Stock and note payable issued in conjunction with acquisition                                  --       $ 2,015,150
                                                                                           ===========       ===========

     Warrants issued for expenses of private placement                                     $   159,445                --
                                                                                           ===========       ===========

     Relative fair value of warrants issued related to issuance of note payable            $    58,029                --
                                                                                           ===========       ===========

     Relative fair value of options issued related to professional services rendered       $    18,200                --
                                                                                           ===========       ===========

     Property and equipment acquired by capital lease                                      $    19,097                --
                                                                                           ===========       ===========
</TABLE>

      The accompanying notes are an integral part of these condensed
consolidated financial statements.

                                       8
<PAGE>


              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004
                                   (UNAUDITED)

1.    BASIS OF PRESENTATION

      The accompanying unaudited condensed consolidated financial statements of
Auxilio, Inc. and its subsidiaries ("the Company") have been prepared in
accordance with generally accepted accounting principles of the United States of
America for interim financial statements pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with accounting principles have been omitted. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2004, as filed with
the Securities and Exchange Commission on April 19, 2005.

      The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the financial
position and results of operations as of and for the periods presented. The
results for such periods are not necessarily indicative of the results to be
expected for the full year.

      The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. As a result, actual results could differ
from those estimates.

      The accompanying financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate the continuation of the Company as a going concern. The Company
reported a net loss of $2,324,168 for the nine months ended September 30, 2005.
Although the Company reported net income of $993,726 for the year ended December
31, 2004, it reported a net loss of $3,405,020 for the year ended December 31,
2003 and, at September 30, 2005, has an accumulated deficit of $11,198,903. This
raises substantial doubt about the Company's ability to continue as a going
concern. The unaudited condensed consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

      During the period ended September 30, 2005, the Company raised additional
working capital through a private placement offering of the Company's common
stock, and the Company believes that such working capital will provide it with
the ability to continue as a going concern. Through September 30, 2005, the
Company has not been able to generate sufficient revenues from its operations to
cover its costs and operating expenses. However, the Company anticipates that
its revenues will increase through the sale of additional product offerings and
the growth of the Company's customer base. The Company believes that the private
placement offering, the sale of new product offerings and the growth of its
customer base will enable the Company to generate positive operating cash flows
and to continue its operations.

      The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances and transactions
have been eliminated. In addition, certain prior year amounts have been
reclassified to conform to the current year presentation. The reclassification
had no impact on the results of operations or on changes in stockholders'
equity.

      Due to the Company's acquisition of Alan Mayo & Associates, Inc., dba The
Mayo Group ("The Mayo Group"), on April 1, 2004 and the disposal of the
Company's previous product offering to Workstream, Inc. ("Workstream") in March
2004, the financial statements for the nine months ended September 30, 2005 are
not comparable, from a business activity viewpoint, to the financial statements
for the nine months ended September 30, 2004

2.    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and
Error Corrections. This new standard replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and represents another step in the FASB's goal to converge
its standards with those issued by the IASB. Among other changes, Statement 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented on the new
accounting principle, unless it is impracticable to do so. Statement 154 also
provides that (1) a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting principle, and (2) correction of errors
in previously issued financial statements should be termed a "restatement." The
new standard is effective for accounting changes and correction of errors made
in fiscal years beginning after December 15, 2005. Early adoption of this
standard is permitted for accounting changes and correction of errors made in
fiscal years beginning after June 1, 2005. Management believes that changes
resulting from adoption of the FASB will not have a material effect on the
financial statements taken as a whole.

                                       9
<PAGE>

      In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides interpretive guidance related
to the interaction between SFAS 123(R) and certain SEC rules and regulations. It
also provides the SEC staff's views regarding valuation of share-based payment
arrangements. In April 2005, the SEC amended the compliance dates for SFAS
123(R), to allow companies to implement the standard at the beginning of their
next fiscal year, instead of the next reporting period beginning after June 15,
2005. Management is currently evaluating the impact SAB 107 will have on our
consolidated financial statements.

      In June 2005, the EITF reached a consensus on Issue 05-6, "Determining the
Amortization Period for Leasehold Improvements," which requires that leasehold
improvements acquired in a business combination or purchased subsequent to the
inception of a lease be amortized over the lesser of the useful life of the
assets or a term that includes renewals that are reasonably assured at the date
of the business combination or purchase. EITF 05-6 is effective for periods
beginning after June 29, 2005. Earlier application is permitted in periods for
which financial statements have not been issued. The adoption of this Issue did
not have an impact on the Company's financial statements.

3.    OPTIONS AND WARRANTS.

      During the three and nine months ended September 30, 2005, the Company
granted 30,000 and 783,917 options, respectively, to its employees and directors
to purchase shares of the Company's common stock at an exercise price range of
$1.91 to $2.00 per share, which exercise price equals the fair value of such
options on the grant date. The options have graded vesting annually over three
years, starting March 2006. The Company accounts for the options granted to its
employees and directors under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." If the Company accounted for
such options under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company would recognize an
expense totaling $1,023,254 over the next three years. The fair value of the
options was determined using the Black-Scholes option-pricing model. The
assumptions used to calculate the fair market value are as follows: (i)
risk-free interest rate range of 3.00% to 3.48%; (ii) estimated volatility of
71.87% to 80.47%; (iii) dividend yield of 0.0%; and (iv) expected life of the
options of four years.

      Had the Company accounted for options and warrants under SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have
increased/decreased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                     Three Months Ended               Nine Months Ended
                                                                        September 30,                    September 30,
                                                               ----------------------------    ------------------------------
                                                                    2005           2004             2005             2004
                                                               -------------    -----------    -------------    -------------
<S>                                                           <C>               <C>            <C>              <C>
Net income (loss):
   As reported                                                $     (877,268)   $    49,115    $  (2,324,168)   $   1,152,099
   Add: APB 25 Expense                                                    --             --               --               --
   Deduct:  Total stock based employee compensation
   expense determined under SFAS 123 fair value based method         261,767        101,451          750,397          243,124
                                                               -------------    -----------    -------------    -------------
   Net income (loss), as adjusted                              $  (1,139,035)   $   (52,336)   $  (3,074,565)   $     908,975
                                                               =============    ===========    =============    =============

Basic income (loss) per share:
   As reported                                                 $       (0.06)   $     0.00     $       (0.15)   $        0.09
   Pro forma                                                   $       (0.07)   $     0.00     $       (0.20)   $        0.07

Diluted income (loss) per share:
   As reported                                                 $       (0.06)   $     0.00     $       (0.15)   $        0.09
   Pro forma                                                   $       (0.07)   $     0.00     $       (0.20)   $        0.07
</TABLE>


      In August 2005, in payment to an individual for professional services
rendered, the Company granted 23,250 options to purchase shares of the Company's
common stock at an exercise price of $1.91 per share, which exercise price
equals the fair value of the stock issued on the grant date.The options have
immediate vesting. The fair value of the options of $18,200 was recorded as
expense in August 2005. The fair value was determined using the Black-Scholes
option-pricing model. The assumptions used to calculate the fair market value
are as follows: (i) risk-free interest rate of 3.48%; (ii) estimated volatility
of 71.87% (iii) dividend yield of 0.0%; and (iv) expected life of the options of
two years.

                                       10
<PAGE>

      During the three and nine months ended September 30, 2005, the Company
issued 1,000 and 129,580 warrants, respectively, to purchase shares of the
Company's common stock at an exercise price of $2.50 per share. The warrants
have a fair value of $1,130 and $159,445, respectively for the three and nine
months ended September 30, 2005. The fair value of the warrants was determined
using the Black-Scholes option-pricing model, with the following assumptions:
(i) no expected dividends; (ii) a risk free interest rate range of 2.75% to
3.26%; (iii) expected volatility range of 71.85% to 80.47%; and (iv) an expected
life of the warrants of five years. The fair value of the warrants was directly
related to the private placement offering of the Company's common stock during
the three and nine months ended September 30, 2005 and, therefore, was
classified as a reduction of additional paid-in capital.

      On December 28, 2004, the Company entered into a Revolving Loan and
Security Agreement (the "Revolving Loan") with Michael D. Vanderhoof, a director
of the Company. Under the agreement, (i) the Company can borrow up to $500,000,
(ii) cash is advanced to the Company by Mr. Vanderhoof upon six (6) business
days advance written notice, (iii) interest accrues daily upon any unpaid
principal balance at the rate of eight percent (8%) per annum, (iv) accrued
interest is payable in full on a monthly basis and (v) the outstanding principal
balance is due and payable in full on December 10, 2005. The Revolving Loan is
secured by all of the Company's inventory, accounts receivable, equipment, cash,
deposit accounts, securities, intellectual property, chattel paper, general
intangibles and instruments, now existing or hereafter arising, and all proceeds
thereof. In consideration for entering into the Revolving Loan, Mr. Vanderhoof
also received warrants to purchase 50,000 shares of the Company's common stock
equal to 10% of the highest amount outstanding at an exercise price of $2.00 per
share. As of March 31, 2005, the Company had borrowed $500,000 under the
Revolving Loan. During the three months ended March 31, 2005, the Company issued
50,000 warrants to Mr. Vanderhoof, with a fair value of $65,648. The fair value
of the warrants was determined using the Black-Scholes option-pricing model,
with the following assumptions: (i) no expected dividends; (ii) a risk free
interest rate of 2.75%; (iii) expected volatility of 80.47%; and (iv) an
expected life of the warrants of five years. In accordance with APB 14,
"Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,"
the Company has compared the relative fair value of the warrants and the face
value of the note and has allocated a value of $58,029. Such amount was recorded
as a discount against the carrying value of the note and was amortized over the
life of the note using the straight-line interest method. . In April 2005, the
Company paid in full all outstanding principal balance under the Revolving Loan,
and all remaining unamortized discount was immediately expensed.

      In February 2005, a member of the Company's Board of Directors exercised
warrants for 3,000 shares of the Company's common stock at an exercise price of
$0.75.

4.    NET EARNINGS (LOSS) PER SHARE

      Basic net income (loss) per share is based on the weighted average number
of shares of the Company's common stock issued and outstanding during a certain
period, and is calculated by dividing net income (loss) by the weighted average
number of shares of the Company's common stock issued and outstanding during
such period. Common stock equivalents consist of 3,332,282 and 2,299,038 equity
instruments at September 30, 2005 and 2004, respectively. None of the 3,332,282
equity instruments outstanding at September 30, 2005 have been included in the
computation of diluted EPS for the nine months ended September 30, 2005, due to
the net loss for this period, which causes these equity instruments to be
anti-dilutive. Of the equity instruments outstanding at September 30, 2004,
500,838 were included in the computation of diluted EPS for the nine months
ended September 30, 2004. The other 1,798,200 equity instruments were not
included as their exercise price was greater than the average market value of
the common shares thus being anti-dilutive.

5.    ACCOUNTS RECEIVABLE

      As of September 30, 2005, the accounts receivable balance includes an
      unapplied prepayment of $101,010. A summary at September 30, 2005 is as
      follows:

                           Trade receivable                         $252,509
                           Allowance for doubtful accounts            (5,499)
                                                                    --------
                                                                    $247,010
                                                                    ========

6.    INVESTMENTS IN MARKETABLE SECURITIES

      Investments in marketable securities consist of equity securities
classified as "available for sale" under SFAS No. 115 and reported at fair value
and warrants accounted for under APB 18. Accordingly, unrealized gains and
losses on the equity securities are reflected in the statement of comprehensive
income (loss). The warrants are accounted for under the cost method. The
investments in marketable securities are summarized as follows:

                                       11
<PAGE>

<TABLE>
<CAPTION>
                                               Amortized        Unrealized          Unrealized              Fair
                                                  Cost         Holding Gain       Holding Losses            Value
                                            ----------------- ---------------- ---------------------- ------------------
<S>                                             <C>                <C>                                     <C>
         Available-for-sale                     $32,500            6,500                 -                 $39,000
</TABLE>

7.    PRIVATE PLACEMENT

      In February 2005, the Company commenced a private placement offering of up
to 2,500,000 shares of its common stock at a purchase price of $2.00 per share.
As of September 30, 2005, the Company had sold 1,619,750 shares, receiving net
proceeds of $2,967,327. Total costs through September 30, 2005 relating to the
private placement offering were $431,618, which amount includes an expense of
$159,445 relating to the fair value of the warrants issued to the selling group.
The fair value of the warrants was determined using the Black Scholes
option-pricing model. The assumptions used to calculate the fair market value
are as follows: (i) risk-free interest rate range of 2.75% to 3.26%; (ii)
estimated volatility range of 71.85% to 80.47% (iii) dividend yield of 0.0%; and
(iv) expected life of the options of five years.

8.    DISCONTINUED OPERATIONS

      In March 2004, the Company entered into an agreement with Workstream
whereby the Company sold to Workstream the following: (i) accounts receivable;
(ii) certain computer equipment; (iii) customer lists; (iv) existing customer
contracts; (v) the PeopleView trade name; and (vi) the technology and product
offerings that the Company had recently revised and improved, including
ClimateSight(TM), SkillSight(TM), PerformanceSight(TM), ComplianceSight(TM) and
HCM TOOLS(TM).

      The original agreement called for the Company to receive cash
consideration of $300,000, of which $50,000 was subject to certain "hold back"
conditions. Additionally, the Company was to receive 350,000 shares of
Workstream common stock, of which 50,000 shares were subject to certain "hold
back" conditions, and a warrant to purchase an additional 50,000 shares of
Workstream common stock at an exercise price of $3.00 per share. Pursuant to an
addendum to the original agreement, the Company received final consideration of
$250,000 in cash, 246,900 shares of Workstream common stock, and a warrant to
purchase an additional 50,000 shares of Workstream common stock at an exercise
price of $3.00 per share. The Company sold all of these 246,900 shares ,
realizing a gain of $326,061 and wrote off the value of the warrants to purchase
50,000 shares, for a loss of $ 52,728 during the nine months period ended
September 30, 2005.

9.    EMPLOYMENT AGREEMENTS

      In September 2004, the Company presented to two of the original founders
(owners) of The Mayo Group, Charles Nickell and Craig Davis, an Amendment to
Employment Agreement and Modification of Merger Agreement, whereby contingent
securities representing 461,009 shares of the Company's common stock and a
contingent cash consideration of $82,979 due and payable to Mr. Nickell and Mr.
Davis under such agreements would be released and paid upon the Company meeting
certain financial performance targets. Because the Company did not meet these
financial performance targets, the Company, in June 2005, initiated steps to
recoup the shares of common stock but will not seek a return of the cash
consideration.

10.   COMMITMENTS

      In July 2004, the Company entered into a Severance Agreement and Mutual
Release of All Claims with Alan Mayo, one of the original founders of The Mayo
Group. Pursuant to the agreement, the Company arranged for the private sale of
the shares of the Company's common stock which Mr. Mayo received through the
Company's acquisition of The Mayo Group on April 1, 2004, including the
contingent shares released to him as part of this agreement. In addition, the
Company agreed to pay, in incremental amounts, the salary, bonus, and contingent
consideration due to Mr. Mayo under an employment agreement with the Company.
Such amounts have been accounted for in the accompanying financial statements.
The Company has made an accrual of $465,000 for the compensation due to Mr. Mayo
under the employment agreement and has included this amount as part of the cost
of the acquisition. The acquisition costs included a total cash contingency of
$45,000 and a note payable in the amount of $315,000, which was also being held
in contingency. Of these contingency amounts, the Company owed Mr. Mayo
$277,020, or 76.95%, which amount was equivalent to his percentage ownership of
The Mayo Group. In consideration for Mr. Mayo's entering into the Severance
Agreement and Mutual Release of All Claims, the Company and Mr. Mayo agreed that
the Company would release all contingent amounts (cash, stock and note) due and
payable to Mr. Mayo. As a result, the Company agreed and paid Mr. Mayo $138,510
upon execution of the agreement and paid the remaining balance of $138,510 in
March 2005.

                                       12
<PAGE>

11.   CONCENTRATIONS

      The Company's two largest customers accounted for approximately 79% of the
Company's revenues for both the three and nine months ended September 30, 2005.
Accounts receivable for these two customers totaled approximately $142,294 as of
September 30, 2005.

12.   SEGMENT REPORTING

The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Since the Company operates in one business
segment based on the Company's integration and management strategies, segment
disclosure has not been presented

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

      The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and the related notes thereto included elsewhere in this
Quarterly Report on Form 10-QSB. This Quarterly Report on Form 10-QSB contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 21E of the Securities and Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and
is subject to the safe harbors created by those sections. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
"may," "will" and variations of these words or similar expressions are intended
to identify forward-looking statements. In addition, any statements that refer
to expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions that are difficult to predict.
Therefore, our actual results could differ materially and adversely from those
expressed in any forward-looking statements as a result of various factors. We
undertake no obligation to revise or publicly release the results of any
revisions to these forward-looking statements.

No assurances can be given as to the success of these plans. Although the
Company has been able to raise additional working capital through private
placement offerings of its common stock, the Company may not be able to continue
this practice in the future nor may the Company be able to obtain additional
working capital through other debt or equity financings. In the event that
sufficient capital cannot be obtained, the Company may be forced to
significantly reduce operating expenses to a point which would be detrimental to
business operations, curtail research and development activities, sell business
assets or discontinue some or all of its business operations, or take other
actions which could be detrimental to business prospects and result in charges
which could be material to its operations and financial position. In the event
that any future financing should take the form of the sale of equity securities,
the current equity holders may experience dilution of their investments. In
addition, the Company may not generate sufficient revenues from its operations
to cover its cash operating expenses. As a result, the Company may not be able
to continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of these
uncertainties

      Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements
contained in this Quarterly Report, which speak only as of the date of this
Quarterly Report, or to make predictions about future performance based solely
on historical financial performance. We also disclaim any obligation to update
forward-looking statements contained in this Report.

      Readers should carefully review the risk factors described below under the
heading "Risk Factors That May Affect Future Results" and in other documents we
file from time to time with the Securities and Exchange Commission, including
our Form 10-KSB for the fiscal year ended December 31, 2004. Our filings with
the Securities and Exchange Commission, including our Form 10-KSB, Quarterly
Reports on Form 10-QSB, Current Reports on Form 8-K and amendments to those
filings, pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, are available free of charge at www.auxilioinc.com, when such reports are
available at the Securities and Exchange Commission web site.

OVERVIEW

      Our common stock currently trades on the OTC Bulletin Board under the
stock symbol AUXO.

                                       13
<PAGE>

      Through March 2004, we developed, marketed and supported web based
assessment and reporting tools, and provided consulting services, that enabled
companies to manage their Human Capital Management (HCM) needs in real-time.
Companies ranging in size from small firms to Fortune 500(C) companies
implemented our solutions in order to create a deep insight into their human
capital assets.

      In March 2004, we entered into an agreement with Workstream, Inc.
("Workstream") whereby we sold to Workstream the following: (i) accounts
receivable; (ii) certain computer equipment; (iii) customer lists; (iv) existing
customer contracts; (v) the PeopleView trade name; and (vi) certain technology
and product offerings, including ClimateSight(TM), SkillSight(TM),
PerformanceSight(TM), ComplianceSight(TM) and HCM TOOLS(TM). Since the
completion of this transaction, we have focused our efforts on providing
outsourced image management services to healthcare facilities.

      In April 2004, PPVW Acquisition Company, one of our wholly-owned
subsidiaries, completed an acquisition of Alan Mayo & Associates, Inc., dba The
Mayo Group ("The Mayo Group"). Upon completion of the acquisition, PPVW
Acquisition Company changed its name to The Mayo Group and, subsequently, to
Auxilio Solutions, Inc. ("ASI"). Our operations from April 1, 2004 include the
operations of ASI.

      We provide integration strategies and outsourced services for document
image management to healthcare facilities. We help hospitals and health systems
reduce their expenses and create manageable, dependable document image
management programs by managing their back-office processes. This process is
initiated through a detailed proprietary TeqTrak(TM) analysis. TeqTrak(TM) is a
financial analysis that is performed at the customer's premises using a
combination of proprietary processes and innovative web based technology for
data collection and report generation. After a TeqTrak(TM) analysis and upon our
engagement, we capitate the cost of the entire document image management process
for the customer and place a highly trained resident team on site to manage the
process. We are focused solely on the healthcare industry.

      Where appropriate, references to "Auxilio," the "Company," "we," "us" or
"our" include Auxilio, Inc. and Auxilio Solutions, Inc.

Application of Critical Accounting Policies

      Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and the related disclosure of contingent assets and
liabilities. We evaluate these estimates on an on-going basis, including those
estimates related to customer programs and incentives, product returns, bad
debts, inventories, investments, intangible assets, income taxes, contingencies
and litigation. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. The
results of these estimates form the basis for our judgments about the carrying
values of assets and liabilities which are not readily apparent from other
sources. As a result, actual results may differ from these estimates under
different assumptions or conditions.

      We consider the following accounting policies to be most important to the
portrayal of our financial condition and those that require the most subjective
judgment:

      o     revenue recognition
      o     accounts receivable valuation and related reserves
      o     valuation of fixed assets
      o     accounting for income taxes
      o     impairment of intangible assets
      o     deferred revenue

      Revenues from equipment sales transactions are earned upon equipment being
delivered and accepted by the customer. For equipment that is to be placed at
the customers location at a future date revenue is deferred until that equipment
is placed. Service and supply revenue is earned monthly during the term of the
contract, as services and supplies are provided. Overages as defined in the cost
per copy contracts are billed to customers monthly and are earned during the
period when the number of images in any period exceeds the number allowed for in
the contract.

      The Company enters into arrangements that include multiple deliverables,
which typically consist of the sale of equipment reserve for replacement of
future equipment and a support services contract. Pursuant to EITF 00-21, the
Company accounts for each element within an arrangement with multiple
deliverables as separate units of accounting. Revenue is allocated to each unit
of accounting using the residual method, which allocates revenue to each unit of
accounting based on the fair value of the undelivered items.

      You should refer to our Annual Report on Form 10-KSB filed on April 19,
2005 for a discussion of our critical accounting policies.

                                       14
<PAGE>

RESULTS OF OPERATIONS

For the Nine Months Ended September 30, 2005 Compared to the Nine Months Ended
September 30, 2004

Net Revenue

      Net revenue decreased $2,544,210 to $3,020,932 for the nine months ended
September 30, 2005, as compared to the same period in 2004. Revenues for the
first quarter of 2004 related to the disposed business and are included in
discontinued operations. However, the prior year's revenue was higher due to a
large second quarter sale to a major customer totaling approximately $4,300,000.
This is partially offset by a current year increase in recurring revenue
contracts.

Cost of Revenue

      Cost of revenue consists of document imaging equipment, parts, supplies
and salaries and expenses of field services personnel. Cost of revenue was
$2,357,233 for the nine months ended September 30, 2005, as compared to
$2,912,942 for the same period in 2004. Cost of revenue for the first quarter of
2004 related to the disposed business and is included in discontinued
operations. However, the prior year's cost of revenue was higher due to a large
second quarter sale to a major customer. This is partially offset by the current
year cost to maintain an increased number of recurring revenue contracts.

Sales and Marketing

      Sales and marketing expenses include salaries, commissions and expenses of
sales and marketing personnel, travel and entertainment, and other selling and
marketing costs. Sales and marketing expenses were $1,360,285 for the nine
months ended September 30, 2005, as compared to $1,003,403 for the same period
in 2004. Sales and marketing expenses for the first quarter of 2004 related to
the disposed business and are included in discontinued operations. While
expenses for the second quarter of 2004 included sales commissions paid on a
large sale to a major customer, the current year's expense reflects increased
sales staff and travel expenses incurred in an intensified effort to procure new
business.

General and Administrative

      General and administrative expenses, which include personnel costs for
finance, administration, information systems, and general management, as well as
facilities expenses, professional fees, legal expenses, and other administrative
costs, increased by $604,480 to $1,597,041 for the nine months ended September
30, 2005, as compared to $992,561 for the same period in 2004. Certain general
and administrative expenses for the first quarter of 2004 which are related to
the disposed business are included in discontinued operations. This, in addition
to higher legal and accounting fees, increased office space rent, and an
increase in administrative staff accounts for the bulk of the increase in 2005.
The increase is largely due to the administration of an increased number of
recurring revenue contracts.

Intangible Asset Amortization

      As a result of our acquisition activity, we have recorded a substantial
amount of goodwill, which is the excess of the cost of our acquired business
over the fair value of the acquired net assets, and other intangible assets. The
Company evaluates the goodwill for impairment annually. We examine the carrying
value of our other intangible assets as current events and other circumstances
warrant a determination of whether there are any impairment losses. If
indicators of impairment arise with respect to our other intangible assets and
our future cash flows are not expected to be sufficient to recover the assets'
carrying amounts, an impairment loss will be charged as an expense in the period
identified. To date, we have not identified any event that would indicate an
impairment of the value of our goodwill or other intangible assets recorded in
our condensed consolidated financial statements. Other intangible assets are
amortized over their estimated lives.

      Amortization expense of $280,105 for the nine months ended September 30,
2005 was related to intangible assets acquired through the acquisition of The
Mayo Group in April 2004.

Other Income (Expense)

      Interest expense for the nine months ended September 30, 2005 was $73,720,
as compared to $9,364 for the same period in 2004. The increase in interest
expense is due to discount charges and periodic interest costs incurred during
the first four months of 2005 under the Revolving Loan and Security Agreement
between the Company and Michael D. Vanderhoof (the "Revolving Loan"). The
Revolving Loan was repaid in April 2005 and the remaining unamortized discount
costs were charged to expense. Interest income is primarily derived from
short-term interest-bearing securities and money market accounts. Interest
income for the nine months ended September 30, 2005 was $25,376, as compared to
$5,732 for the same period in 2004, primarily due to an increase in the average
balance of invested cash and short-term investments.

                                       15
<PAGE>

      Gain on sale of marketable securities of $362,061 related to the excess of
sales price over the cost of investment in Workstream's common stock in 2005.
Impairment of marketable securities of $52,728 is due to a write off of
Workstream warrants as a result of a permanent decline in the stock price below
the exercise price. No such activities took place in 2004.

      Loss on disposal of fixed assets of $8,225 in 2005 was due to the write
off of capitalized software no longer being utilized. No such activities took
place in 2004.

Income from Discontinued Operations

      We sold the assets from our discontinued business to Workstream in the
first quarter of 2004. All of the operating results and gains related to the
sale were classified as discontinued operations in the accompanying condensed
consolidated statements of operations for 2004. No such activities took place in
2005.

For the Three Months Ended September 30, 2005 Compared to the Three Months Ended
September 30, 2004

Net Revenue

      Net revenue increased $23,642 to $999,005 for the three months ended
September 30, 2005, as compared to the same period in 2004. The current year's
revenue is marginally higher due to an increase in recurring revenue contracts.

Cost of Revenue

      Cost of revenue consists of document imaging equipment, parts, supplies
and salaries and expenses of field services personnel. Cost of revenue was
$693,594 for the three months ended September 30, 2005, as compared to $178,585
for the same period in 2004. Cost of revenue for the third quarter of 2004 was
lower due to a $339,000 reduction in the lease buyout provision and a $125,000
reduction in other accrued expenses related to a large equipment sale to a major
customer in the second quarter. This is partially offset by the increase in the
current year cost to maintain an increased number of recurring revenue
contracts.

Sales and Marketing

      Sales and marketing expenses include salaries, commissions and expenses of
sales and marketing personnel, travel and entertainment, and other selling and
marketing costs. Sales and marketing expenses were $452,110 for the three months
ended September 30, 2005, as compared to $357,805 for the same period in 2004.
Sales and marketing expenses for the third quarter of 2005 are higher as a
result of the increase in sales staff and travel expenses incurred in an
intensified effort to procure new business.

General and Administrative

      General and administrative expenses, which include personnel costs for
finance, administration, information systems, and general management, as well as
facilities expenses, professional fees, legal expenses, and other administrative
costs, increased by $233,425 to $586,949 for the three months ended September
30, 2005, as compared to $353,524 for the same period in 2004. The increase is
due to higher legal and accounting fees, increased office space rent, and an
increase in administrative staff in 2005

Intangible Asset Amortization

      As a result of our acquisition activity, we have recorded a substantial
amount of goodwill, which is the excess of the cost of our acquired business
over the fair value of the acquired net assets, and other intangible assets. The
Company evaluates the goodwill for impairment annually .We examine the carrying
value of our other intangible assets as current events and circumstances warrant
a determination of whether there are any impairment losses. If indicators of
impairment arise with respect to our other intangible assets and our future cash
flows are not expected to be sufficient to recover the assets' carrying amounts,
an impairment loss will be charged as an expense in the period identified. To
date, we have not identified any event that would indicate an impairment of the
value of our goodwill or other intangible assets recorded in our condensed
consolidated financial statements. Other intangible assets are amortized over
their estimated lives.

      Amortization expense of $93,368 for the three months ended September 30,
2005 was related to intangible assets acquired through the acquisition of The
Mayo Group in April 2004.

                                       16
<PAGE>

Other Income (Expense)

      Interest expense for the three months ended September 30, 2005 was $1,164,
which is comparable to the $931 for the same period in 2004. Interest income is
primarily derived from short-term interest-bearing securities and money market
accounts. Interest income for the three months ended September 30, 2005 was
$11,865, as compared to $3,597 for the same period in 2004, primarily due to an
increase in the average balance of invested cash and short-term investments.

      Impairment of marketable securities of $52,728 in the third quarter of
2005 is due to a write off of Workstream warrants as a result of a permanent
decline in the stock price below the exercise price. No such activities took
place in 2004.

      Loss on disposal of fixed assets of $8,225 in the third quarter of 2005 is
due to the write off of capitalized software no longer being utilized. No such
activities took place in 2004.

Income from Discontinued Operations

      We sold the assets from our discontinued business to Workstream in the
first quarter of 2004. All of the operating results and gains related to the
sale were classified as discontinued operations in the accompanying condensed
consolidated statements of operations for 2004. No such activities took place in
2005.

LIQUIDITY AND CAPITAL RESOURCES

      At September 30, 2005, our cash and cash equivalents were equal to
$1,975,028. Our principal cash requirements are for operating expenses,
including equipment, supplies, employee costs, capital expenditures and funding
of the operations. Our primary sources of cash were from revenues and a recently
completed private placement offering of our common stock.

      During the nine months ended September 30, 2005, we used $2,736,067 for
operating activities, as compared to receiving $556,606 for the same period in
2004. The increase in cash use was primarily due to the net loss sustained in
2005, which is largely the result of an intensified effort to develop our
business model to procure new business. In 2004, we showed a profit as a result
of a large sale to a major customer.

      On December 28, 2004, we entered into a Revolving Loan and Security
Agreement (the "Revolving Loan") with Mr. Michael D. Vanderhoof, a director of
the Company. Under the agreement, (i) we can borrow up to $500,000, (ii) cash is
advanced to us by Mr. Vanderhoof upon six (6) business days advance written
notice, (iii) interest accrues daily upon any unpaid principal balance at the
rate of eight percent (8%) per annum, (iv) accrued interest is payable in full
on a monthly basis and (v) the outstanding principal is due and payable in full
on December 10, 2005. The Revolving Loan is secured by all of our inventory,
accounts receivable, equipment, cash, deposit accounts, securities, intellectual
property, chattel paper, general intangibles and instruments, now existing or
hereafter arising, and all proceeds thereof. In consideration for entering into
the Revolving Loan, Mr. Vanderhoof also received warrants to purchase a number
of shares of our common stock equal to 10% of the highest amount outstanding.
The exercise price is equal to $2.00 per share. We borrowed $500,000 and issued
50,000 warrants under the Revolving Loan. We paid the Revolving Loan in full on
April 27, 2005.

      In February 2005, we commenced a private placement offering of up to
2,500,000 shares of our common stock at a purchase price of $2.00 per share. As
of July 31, 2005, we had sold 1,619,750 shares of our common stock as part of
this offering, receiving net proceeds of $2,967,327. We completed the offering
on July 31, 2005. Our need for such additional financing depends in part on our
future performance, which, in turn, is subject to general economic conditions
and business and other factors beyond our control. We anticipate that the
proceeds from the private placement offering and the funds made available under
the Revolving Loan are sufficient to sustain our business operations over the
next twelve months.

FACTORS THAT MAY AFFECT FUTURE RESULTS

      This Quarterly Report on Form 10-QSB, including the discussion and
analysis of our financial condition and results of operations set forth above,
contains certain forward-looking statements. Forward-looking statements set
forth estimates of, or our expectations or beliefs regarding, our future
financial performance. Those estimates, expectations and beliefs are based on
current information and are subject to a number of risks and uncertainties that
could cause our actual operating results and financial performance in the future
to differ, possibly significantly, from those set forth in the forward-looking
statements contained in this Quarterly Report and, for that reason, you should
not place undue reliance on those forward-looking statements. Those risks and
uncertainties include, although they are not limited to, the following:

                                       17
<PAGE>

WE ARE A NEW COMPANY WITH A LIMITED OPERATING HISTORY.

      Our business was incorporated in March 2000. During March and April of
2004, we entered into two transactions which changed our business operations and
revenue model. In March 2004, we sold our survey and assessment software to
Workstream. In April 2004, we completed an acquisition of The Mayo Group and, as
a result of such acquisition, entered the Image Management industry. This future
revenue opportunity is focused on providing outsourced financial and business
processes for image management in healthcare. We have limited operating history
in this industry on which to base an evaluation of our business and prospects
and any investment decision must be considered in light of the risks and
uncertainties encountered by companies in the early stages of development. Such
risks and uncertainties are frequently more severe for those companies, such as
ours, that are operating in new and rapidly evolving markets.

         Some of the factors upon which our success will depend include (but are
not limited to) the following:

      o     the emergence of competitors in our target market, and the quality
            and development of their products and services; and
      o     the market's acceptance of our products and services.

      In order to address these risks, we must (among other things) be able to:

      o     successfully complete the development of our products and services;
      o     modify our products and services as necessary to meet the demands of
            our market;
      o     attract and retain highly skilled employees; and
      o     respond to competitive influences.

      On an ongoing basis, we cannot be certain that we will be able to
successfully address any of these risks.

WE FACE SUBSTANTIAL COMPETITION FROM BETTER ESTABLISHED COMPANIES THAT MAY HAVE
SIGNIFICANTLY GREATER RESOURCES WHICH COULD LEAD TO REDUCED SALES OF OUR
PRODUCTS.

      The market for our products and services is competitive and is likely to
become even more competitive in the future. Increased competition could result
in pricing pressures, reduced sales, reduced margins or the failure of our
products and services to achieve or maintain market acceptance, any of which
would have a material adverse effect on our business, results of operations and
financial condition. Many of our current and potential competitors enjoy
substantial competitive advantages, such as:

      o     greater name recognition and larger marketing budgets and resources;
      o     established marketing relationships and access to larger customer
            bases;
      o     substantially greater financial, technical and other resources; and
      o     larger technical and support staffs.

      As a result, our competitors may be able to respond more quickly than us
to new or changing opportunities, technologies, standards or customer
requirements. For all of the foregoing reasons, we may not be able to compete
successfully against our current and future competitors.

THE COMPANY HAS A HISTORY OF LOSSES AND MAY NEED ADDITIONAL FINANCING TO
CONTINUE ITS OPERATIONS AND SUCH FINANCING MAY NOT BE AVAILABLE UPON FAVORABLE
TERMS, IF AT ALL.

      We experienced a net operating loss of approximately $2,324,168 for the
nine months ended September 30, 2005 and an accumulated deficit of $11,198,093
as of September 30, 2005. There can be no assurance that we will be able to
operate profitably in the future. In the event that we are not successful in
implementing our business plan, we will require additional financing in order to
succeed. There can be no assurance that additional financing will be available
now or in the future on terms that are acceptable to us. If adequate funds are
not available or are not available on acceptable terms, we may be unable to
develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures, all of which could have a
material adverse effect on our business, financial condition or operating
results. If sufficient capital cannot be obtained, the Company may be forced to
significantly reduce operating expenses to a point which would be detrimental to
business operations, curtail research and development activities, sell business
assets or discontinue some or all of its business operations, or take other
actions which could be detrimental to business prospects and result in charges
which could be material to its operations and financial position. In the event
that any future financing should take the form of the sale of equity securities,
the current equity holders may experience dilution of their investments.

WE ARE DEPENDENT UPON OUR VENDORS TO CONTINUE SUPPLYING US WITH EQUIPMENT,
PARTS, SUPPLIES, AND SERVICES AT COMPARABLE TERMS AND PRICE LEVELS AS OUR
BUSINESS GROWS.

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<PAGE>

      Our access to equipment, parts, supplies, and services depends upon our
relationships with, and our ability to purchase these items on competitive terms
from, our principal vendors. We do not enter into long-term supply contracts
with these vendors and we have no current plans to do so in the future. These
vendors are not required to use us to distribute their equipment and are free to
change the prices and other terms at which they sell to us. In addition, we
compete with the selling efforts of some of these vendors. Significant
deterioration in relationships with, or in the financial condition of, these
significant vendors could have an adverse impact on our ability to sell and
lease equipment as well as our ability to provide effective service and
technical support. If one of these vendors terminates or significantly curtails
its relationship with us, or if one of these vendors ceases operations, we would
be forced to expand our relationships with our existing vendors or seek out new
relationships with previously-unused vendors.

WE ARE DEPENDENT UPON OUR LARGEST CUSTOMERS.

      The loss of any key customer could have a material adverse effect upon our
financial condition, business, prospects and results of operation. The Company's
two largest customers represent approximately 79% of our revenues for the nine
months ended September 30, 2005. Although we anticipate that these customers
will represent less than 45% of revenue for the 2005 fiscal year and less than
18% of revenue for the 2006 fiscal year, the loss of these customers may
contribute to our inability to operate as a going concern and may require us to
obtain additional equity funding or debt financing (beyond the amounts described
above) to continue our operations. We cannot be certain that we will be able to
obtain such additional financing on commercially reasonable terms, or at all.

WE ARE DEPENDENT UPON OUR MANAGEMENT TEAM AND THE UNEXPECTED LOSS OF ANY KEY
MEMBER OF THIS TEAM MAY PREVENT US FROM IMPLEMENTING OUR BUSINESS PLAN IN A
TIMELY MANNER OR AT ALL.

      Our future success depends upon the continued services and performance of
our management team and our key employees and their ability to work together
effectively. If our management team fails to work together effectively, our
business could be harmed. Although we believe that we will be able to retain
these key employees, and continue hiring qualified personnel, our inability to
do so could materially adversely affect our ability to market, sell, and enhance
our services. The loss of key employees or our inability to hire and retain
other qualified employees could have a material adverse effect on our business,
prospects, financial condition and results of operations.

THE MARKET MAY NOT ACCEPT OUR PRODUCTS AND SERVICES AND OUR PRODUCTS AND
SERVICES MAY NOT ADDRESS THE MARKET'S REQUIREMENTS.

      Our products and services are targeted to the healthcare market, a market
in which there are many competing service providers. Accordingly, the demand for
our products and services is very uncertain. The market may not accept our
products and services. Even if our products and services achieve market
acceptance, our products and services may fail to address the market's
requirements adequately.

IF WE FAIL TO PROVIDE SERVICES TO OUR CUSTOMERS, OUR REVENUES AND PROFITABILITY
MAY BE HARMED.

      Our services are integral to the successful deployment of our solutions.
If our services organization does not effectively implement and support our
customers, our revenues and operating results may be harmed.

IF WE NEED ADDITIONAL FINANCING TO MAINTAIN AND EXPAND OUR BUSINESS, FINANCING
MAY NOT BE AVAILABLE ON FAVORABLE TERMS, IF AT ALL.

      We may need additional funds to expand or meet all of our operating needs.
If we need additional financing, we cannot be certain that it will be available
on favorable terms, if at all. Further, if we issue equity securities,
stockholders will experience additional dilution and the equity securities may
have seniority over our common stock. If we need funds and cannot raise them on
acceptable terms, we may not be able to:

      o     develop or enhance our service offerings;
      o     take advantage of future opportunities; or
      o     respond to customers and competition.

WE MUST MANAGE GROWTH TO ACHIEVE PROFITABILITY.

      To be successful, we will need to implement additional management
information systems, further develop our operating, administrative, financial
and accounting systems and controls and maintain close coordination among our
executive, finance, marketing, sales and operations organizations. Any failure
to manage growth effectively could materially harm our business.

                                       19
<PAGE>

SHAREHOLDERS WILL EXPERIENCE DILUTION AS A RESULT OF THE COMPANY'S STOCK OPTION
PLANS.

      We have granted stock options to our employees and anticipate granting
additional stock options to our employees in the future in order to remain
competitive with the market demand for such qualified employees. As a result,
investors could experience dilution.

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR SHAREHOLDERS.

      Some provisions of our Articles of Incorporation, as amended, and Bylaws,
as well as some provisions of Nevada or California law, may discourage, delay or
prevent third parties from acquiring us, even if doing so would be beneficial to
our shareholders.

WE DO NOT INTEND TO PAY DIVIDENDS.

      We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund growth and, therefore, do
not expect to pay any dividends in the foreseeable future.

FUTURE SALES OF RESTRICTED SHARES COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON
STOCK AND LIMIT OUR ABILITY TO COMPLETE ADDITIONAL FINANCINGS.

      Although our shares are currently trading on the OTC Bulletin Board, the
volume of trading of our common stock and the number of shares in the public
float are small. Sales of a substantial number of shares of our common stock
into the public market in the future could materially adversely affect the
prevailing market price for our common stock. In connection with our acquisition
of The Mayo Group, we issued 4,000,070 shares of common stock, all of which will
become eligible for resale pursuant to Rule 144 of the Securities Act of 1933,
as amended, in the second and third calendar quarters of 2005. Such a large
"over-hang" of stock eligible for sale in the public market may have the effect
of depressing the price of our common stock and may make it difficult or
impossible for us to obtain additional debt or equity financing.

OUR STOCK PRICE HAS FLUCTUATED AND COULD CONTINUE TO FLUCTUATE SIGNIFICANTLY.

      The market price for our common stock has been, and will likely to
continue to be, volatile. The following factors may cause significant
fluctuations in the market price of our ordinary shares:

      o     fluctuations in our quarterly revenues and earnings or those of our
            competitors;
      o     shortfalls in our operating results compared to levels expected by
            the investment community;
      o     announcements concerning us or our competitors;
      o     announcements of technological innovations;
      o     sale of shares or short-selling efforts by traders or other
            investors;
      o     market conditions in the industry; and
      o     the conditions of the securities markets.

      The factors discussed above may depress or cause volatility of our share
price, regardless of our actual operating results.

ITEM 3.  CONTROLS AND PROCEDURES.

      (a) Our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) are designed to provide reasonable assurance that information
required to be disclosed in our reports filed under the Exchange Act, such as
this quarterly report on Form 10-QSB, is recorded, processed, summarized and
reported within the time periods specified in the rules of the Securities and
Exchange Commission. Our disclosure controls and procedures also are designed to
ensure that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosures. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, as ours are
designed to do, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.


      During the fourth quarter of fiscal year 2004, we determined that
deficiencies existed in our internal controls with respect to the timely
reconciliation of income taxes in accordance with SFAS No. 109. The unrecorded
transactions and disclosure deficiencies were detected during the audit process
for our 2004 fiscal year end, and were appropriately recorded and disclosed in
our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004.
The fact that our internal controls did not identify this deficiency prior to
that time is considered to represent a material weakness as defined under
standards established by the Public Company Accounting Oversight Board.

                                       20
<PAGE>

      We believe that we have taken the steps necessary to strengthen our
internal controls to address this situation. We have completed extensive
analyses and have instituted improved supervision and training for our
accounting staff. As of the date of this report, we believe the actions
implemented have corrected the material weakness in the internal controls
discussed in the preceding paragraph.

      Our management, under the supervision and with the participation of the
Chief Executive Officer and the Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
in effect as of September 30, 2005. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of September
30, 2005, our disclosure controls and procedures were adequate and effective and
designed to ensure that material information relating to us, including our
consolidated subsidiaries, is made known to them, on a timely basis, by others
within these entities.

      (b) With the exception of the changes described above, there were no
changes in our internal control over financial reporting that occurred during
the nine months ended September 30, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

      None.

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

      In February 2005, the Company commenced a private placement offering of up
to 2,500,000 shares of its common stock at a purchase price of $2.00 per share.
As of September 30, 2005, the Company had sold 1,619,750 shares, receiving net
proceeds of $2,967,327. During the quarter ended September 30, 2005, the Company
sold 12,500 shares of our common stock as part of the private placement to
certain "accredited investors", as such term is defined in Rule 501(a)
promulgated under the Securities Act of 1933 (the "Securities Act"), as amended,
at a purchase price of $2.00 per share. Total costs through September 30, 2005
relating to the private placement offering were $431,618, which amount includes
an expense of $159,445 relating to the fair value of the warrants issued to the
selling group. The shares of our common stock sold through this private
placement offering are exempt from registration under Section 5, pursuant to
Section 4(2) of the Securities Act, and pursuant to Rule 506 promulgated under
Regulation D.

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.

No.        Item
31.1  Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
      and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2  Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
      and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1  Certification of the CEO and CFO pursuant to Rule 13a-14(b) and Rule
      15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section
      1350.

                                       21
<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.

                                  AUXILIO, INC.

Date:  November 18, 2005       By:           /s/ Joseph Flynn
                                      -------------------------------------
                                                 Joseph Flynn
                                                 Chief Executive Officer
                                                 (Principal Executive Officer)

Date:  November 18, 2005                     /s/ Paul T. Anthony
                                            -----------------------------------
                                                 Paul T. Anthony
                                                 Chief Financial Officer
                                                 (Principal Accounting Officer)


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