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

                                   FORM 10-QSB

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

                  For the quarterly period ended March 31, 2005

                                       OR

            [ ] TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                        COMMISSION FILE NUMBER 000-27507

                                  AUXILIO, INC.
             (Exact name of registrant as specified in its charter)

                   NEVADA                              88-0350448
      (State or other jurisdiction of               (I.R.S. Employer
       incorporation or organization)             Identification Number)

                           27401 LOS ALTOS, SUITE 100
                         MISSION VIEJO, CALIFORNIA 92691
          (Address, including zip code, of principal executive offices)

                                 (949) 614-0700
              (Registrant's telephone number, including area code)

Indicate  by check  mark  whether  the  Registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                            Yes X             No ____

The  number  of shares of the  Registrant's  Common  Stock,  $0.001  par  value,
outstanding as of May 4, 2005 was 16,016,412.
<PAGE>

                                  AUXILIO, INC.
                                   FORM 10-QSB

                                TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

                                                                            Page
 Item 1.  Financial Statements (unaudited):

         Condensed Consolidated Balance Sheet
            as of March 31, 2005                                           3

         Condensed Consolidated Statements of Operations
            for the Three Months Ended March 31, 2005 and 2004             4

         Condensed Consolidated Statements of Comprehensive Income (loss)
            for the Three Months Ended March 31, 2005 and 2004             5

         Condensed Consolidated Statement of Stockholders' Equity
            for the Three Months Ended March 31, 2005                      6

         Condensed Consolidated Statements of Cash Flows
            for the Three Months Ended March 31, 2005 and 2004             7-8

         Notes to Condensed Consolidated Financial Statements              9-12

 Item 2.  Management's Discussion and Analysis and Plan
            of Operations                                                  12-18

 Item 3.  Controls and Procedures                                          18-19

PART II - OTHER INFORMATION

 Item 1. Legal Proceedings                                                 19

 Item 2. Changes in Securities and Use of Proceeds                         19

 Item 3. Defaults upon Senior Securities                                   19

 Item 4. Submission of Matters to Vote of Security Holders                 19

 Item 5. Other Information                                                 19

 Item 6. Exhibits and Report on Form 8-K                                   20

 Signatures                                                                21


                                       2
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                         AUXILIO, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                 MARCH 31, 2005
                                   (UNAUDITED)

<TABLE>
<CAPTION>
<S>                                                                     <C>
                                     ASSETS
CURRENT ASSETS:
   Cash                                                                 $  2,609,035
   Accounts and other receivables, net                                       189,639
   Prepaid and other current assets                                           60,364
   Supplies                                                                  310,439
   Investment in marketable securities                                       255,000
  Other investment                                                            52,728
                                                                        ------------
          Total current assets                                             3,477,205

PROPERTY AND EQUIPMENT, net                                                  220,130
DEPOSITS                                                                      56,395
INTANGIBLE ASSETS, net                                                     1,073,540
GOODWILL                                                                   1,547,017
                                                                        ------------
          Total assets                                                  $  6,374,287
                                                                        ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable and accrued expenses                                $    585,194
   Accrued compensation and benefits                                         503,551
   Deferred revenue                                                          248,937
   Current portion of long-term debt                                          16,626
   Current portion of capital lease obligation                                22,683
   Revolving loan payable-related party, net of discount of $47,395          452,605
   Note payable, related party                                                52,607
                                                                        ------------
          Total current liabilities                                        1,882,203

COMMITMENTS AND CONTINGENCIES                                                     --

STOCKHOLDERS' EQUITY:
   Common stock, par value at $0.001, 33,333,333 shares
     authorized, 15,526,412 shares issued and outstanding                     15,528
   Additional paid-in capital                                             13,879,002
   Accumulated deficit                                                    (9,499,946)
   Accumulated comprehensive income                                           97,500
                                                                        ------------
          Total stockholders' equity                                       4,492,084
                                                                        ------------
          Total liabilities and stockholders' equity                    $  6,374,287
                                                                        ============
</TABLE>

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


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                    THREE MONTHS ENDED MARCH 31,
                                                                   ------------------------------
                                                                        2005              2004
                                                                   ------------      ------------
<S>                                                                <C>               <C>
NET REVENUES                                                       $    784,077      $         --
COST OF REVENUES                                                        774,174                --
                                                                   ------------      ------------
GROSS PROFIT                                                              9,903                --
OPERATING EXPENSES:
 Sales and marketing                                                    439,720                --
 General and administrative expenses                                    483,876            50,071
 Intangible asset amortization                                           93,368                --
                                                                   ------------      ------------
  Total operating expenses                                            1,016,964            50,071
                                                                   ------------      ------------
LOSS FROM OPERATIONS                                                 (1,007,061)          (50,071)
                                                                   ------------      ------------
OTHER INCOME (EXPENSE):
 Interest expense                                                       (20,957)           (1,932)
 Interest income                                                          2,212               447
 Gain on sale of marketable securities                                  403,795                --
                                                                   ------------      ------------
  Total other income (expense)                                          385,050            (1,485)
                                                                   ------------      ------------

LOSS BEFORE PROVISION FOR INCOME TAXES                                 (622,011)          (51,556)
INCOME TAX EXPENSE                                                        3,200             2,400
                                                                   ------------      ------------
NET LOSS FROM CONTINUING OPERATIONS                                    (625,211)          (53,956)
INCOME FROM DISCONTINUED OPERATIONS, net of tax benefit of $0                --           603,260
                                                                   ------------      ------------
NET INCOME (LOSS)                                                  $   (625,211)     $    549,304
                                                                   ============      ============

NET INCOME (LOSS) PER SHARE - BASIC:
  Loss per share - continuing operations                           $      (0.04)     $      (0.01)
  Income per share - discontinued operations                                 --              0.07
                                                                   ------------      ------------
NET INCOME (LOSS) PER SHARE - BASIC                                $      (0.04)     $       0.06
                                                                   ============      ============
NET INCOME (LOSS) PER SHARE - DILUTED:
  Loss per share - continuing operations                           $      (0.04)     $      (0.01)
  Income per share - discontinued operations                                 --              0.07
                                                                   ------------      ------------
NET INCOME (LOSS) PER SHARE - DILUTED                              $      (0.04)     $       0.06
                                                                   ============      ============

NUMBER OF WEIGHTED AVERAGE SHARES -
 BASIC                                                               14,563,651         8,575,972
                                                                   ============      ============
 DILUTED                                                             14,563,651         8,575,972
                                                                   ============      ============
</TABLE>

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


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED MARCH 31,
                                                                       ----------------------------
                                                                           2005             2004
                                                                       -----------      -----------
<S>                                                                    <C>              <C>
NET INCOME (LOSS)                                                      $  (625,211)     $   549,304
UNREALIZED GAIN ON MARKETABLE SECURITIES                                    52,500           99,000
RECLASSIFICATION OF REALIZED AMOUNTS INCLUDED IN NET INCOME (LOSS)        (177,210)              --
                                                                       -----------      -----------
  TOTAL OTHER COMPREHENSIVE INCOME (LOSS)                                 (124,710)          99,000
                                                                       -----------      -----------
COMPREHENSIVE INCOME (LOSS)                                            $  (749,921)     $   648,304
                                                                       ===========      ===========
</TABLE>

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


                                       5
<PAGE>

                         AUXILIO, INC. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)
                        THREE MONTHS ENDED MARCH 31, 2005

<TABLE>
<CAPTION>
                                                              ADDITIONAL                                       TOTAL
                                      COMMON STOCK             PAID-IN      ACCUMULATED    COMPREHENSIVE    STOCKHOLDERS'
                                  SHARES         AMOUNT        CAPITAL        DEFICIT          INCOME      EQUITY(DEFICIT)
                               ------------   ------------   ------------   ------------    ------------    ------------
<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 $272,711        1,084,750          1,085      1,982,484             --              --       1,983,569

Common stock issued upon
exercise of warrants                  3,000              3          2,247             --              --           2,250

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

Unrealized loss on
marketable securities                    --             --             --             --        (124,710)       (124,710)

Net loss                                 --             --             --       (625,211)             --        (625,211)
                               ------------   ------------   ------------   ------------    ------------    ------------
Balance at March 31, 2005        15,526,412   $     15,528   $ 13,879,002   $ (9,499,946)   $     97,500    $  4,492,084
                               ============   ============   ============   ============    ============    ============
</TABLE>

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


                                       6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED MARCH 31,
                                                                      ----------------------------
                                                                          2005             2004
                                                                      -----------      -----------
<S>                                                                   <C>              <C>
CASH FLOWS USED FOR OPERATING ACTIVITIES:
            Net income (loss)                                         $  (625,211)     $   549,304
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
            USED FOR OPERATING ACTIVITIES:
            Depreciation                                                   19,639            3,003
            Amortization of intangible assets                              93,368               --
            Recovery of bad debt                                               --          (25,000)
            Gain on sale of certain assets                                     --         (768,692)
            Gain on sale of marketable securities                        (403,795)              --
            Interest expense                                               10,634            1,839
CHANGES IN OPERATING ASSETS AND LIABILITIES:
            Accounts receivable                                            51,559          (94,067)
            Supplies                                                       99,347               --
            Prepaid and other current assets                               15,894           41,021
            Accounts payable and accrued expenses                        (796,796)         (36,775)
            Deferred revenue                                              (49,586)              --
                                                                      -----------      -----------
                        Net cash used for operating activities         (1,584,947)        (329,367)
                                                                      -----------      -----------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
            Purchases of property and equipment                           (29,975)              --
            Proceeds from sale of certain assets                               --          250,000
            Net proceeds from sale of marketable securities               896,045               --
                                                                      -----------      -----------
                        Net cash provided by investing activities         866,070          250,000
                                                                      -----------      -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
            Proceeds from line of credit agreement                        500,000               --
            Borrowings on capital leases                                   14,117               --
            Payments on capital leases                                       (353)              --
            Payments on notes payable and long-term debt                 (122,761)            (341)
            Net proceeds from issuance of common stock                  1,983,569          366,650
            Proceeds from exercise of warrants                              2,250               --
                                                                      -----------      -----------
                        Net cash provided by financing activities       2,376,822          366,309
                                                                      -----------      -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS                               1,657,945          286,942
CASH AND CASH EQUIVALENTS, beginning of period                            951,090          226,398
                                                                      -----------      -----------
CASH AND CASH EQUIVALENTS, end of period                              $ 2,609,035      $   513,340
                                                                      ===========      ===========
</TABLE>

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


                                       7
<PAGE>

                         AUXILIO, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (UNAUDITED)
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                                                                    THREE MONTHS ENDED MARCH 31,
                                                                                    ---------------------------
                                                                                        2005           2004
                                                                                    -----------     -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S>                                                                                 <C>             <C>
     Interest paid                                                                  $    10,318     $     1,932
                                                                                    ===========     ===========

     Income tax paid                                                                $     3,200     $     2,400
                                                                                    ===========     ===========

NON-CASH INVESTING AND FINANCING ACTIVITIES:

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

     Stock and warrants received for sale of assets                                 $        --     $   802,728
                                                                                    ===========     ===========

     Warrants issued for expenses of private placement                              $   106,846     $        --
                                                                                    ===========     ===========

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

     Accrued private placement cost                                                 $    16,280     $        --
                                                                                    ===========     ===========
</TABLE>

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


                                       8
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                   THREE MONTHS ENDED MARCH 31, 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 accounting principles generally accepted in the United States of
America for interim financial  statements  pursuant to the rules and regulations
of the  Securities  and Exchange  Commission.  Accordingly,  they do not include
certain information and footnote  disclosures  normally included in consolidated
financial statements prepared in accordance with accounting principles generally
accepted  in  the  United  States  of  America.   These  consolidated  financial
statements  should  be read  in  conjunction  with  the  consolidated  financial
statements  and related notes  included in the  Company's  Annual Report on Form
10-KSB for the year ended December 31, 2004.

      The unaudited  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  and 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.  Actual  results could differ from those
estimates.

      The  accompanying  financial  statements  have been prepared in conformity
with accounting  principles  generally accepted in the United States of America,
which  contemplate  continuation of the Company as a going concern.  The Company
has reported a net loss of $625,211 through March 31, 2005. Although the Company
has reported net income of $993,726 for the year ended December 31, 2004, it has
reported a net loss of $3,405,020  for the year ended December 31, 2003, and has
an accumulated deficit of $9,499,946 at March 31, 2005.

      Management  has raised  funds  through  the sale of its stock in a private
placement  that it believes  will be  sufficient to provide the Company with the
ability to continue in existence.  The accompanying  financial statements do not
include any adjustments  relative to the  recoverability  and  classification of
assets carrying  amounts or the amount and  classification  of liabilities  that
might result from the outcome of this  uncertainty.  Through March 31, 2005, the
Company has not been able to generate  sufficient  sales from its  operations to
cover its costs and operating expenses.  Management anticipates sales to grow as
a result of additional  products offered to its customers and an increase of its
customer  base.  Management  believes  that the private  equity  financing,  new
product  offerings and continuing  increase of customers will enable the Company
to generate positive operating cash flows and continue its operations.  However,
no  assurances  can be given as to the  success  of these  plans.  Although  the
Company has been able to issue its common stock  through  private  placements to
raise  capital  in order to fund its  operations,  it is not known  whether  the
Company will be able to continue this practice, or be able to obtain other types
of financing or if its sales will increase to be able to meet its cash operating
expenses. This, in turn, raises substantial doubt about the Company's ability to
continue  as a going  concern.  The  financial  statements  do not  include  any
adjustments that might result from the outcome of these uncertainties.

      The consolidated  financial statements include the accounts of the Company
and its wholly owned  subsidiaries.  All intercompany  balances and transactions
have been eliminated.

      As a result  of the  acquisition  of The Mayo  Group on April 1,  2004 and
disposal of the Company's previous product offering to Workstream, the financial
statements for the three months ended March 31, 2005, are not comparable, from a
business activity  viewpoint,  to the financial  statements for the three months
ended March 31, 2004.

2. OPTIONS AND WARRANTS

      On March 3, 2005,  the Company  granted  363,417  options to employees and
directors  to purchase  common  stock at an  exercise  price of $2.00 per share,
which was equal to the fair market value on the date of grant.  The options have
graded  vesting  annually  over three years,  starting  March 2006.  The Company
accounts for options granted to employees under APB 25. If the Company accounted
for the options under Statement of Financial  Accounting  Standards ("SFAS") No.
123 an expense  totaling  $447,448 would be recognized over the next three years
of service. The fair market value was determined using the Black Scholes pricing
model.  The assumptions  used to calculate the fair market value are as follows:
risk-free interest rate of 2.75%; estimated volatility of 80.47%; dividend yield
of 0.0%; and expected life of the options of four years.


                                       9
<PAGE>

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

<TABLE>
<CAPTION>
                                                                            THREE MONTHS ENDED
                                                                                 MARCH 31,
                                                                       ----------------------------
                                                                           2005             2004
                                                                       ----------------------------
<S>                                                                    <C>              <C>
      Net income (loss):
         As reported                                                   $  (625,211)     $   549,304
         Add: APB 25 Expense                                                    --               --
         Deduct:  Total stock based employee compensation
         expense determined under SFAS 123 fair value based method         258,714           60,433
                                                                       -----------      -----------
         Net income (loss), as adjusted                                $  (883,925)     $   488,871
                                                                       ===========      ===========

      Basic income (loss) per share:
         As reported                                                   $     (0.04)     $      0.06
         Pro forma                                                     $     (0.06)     $      0.06

      Diluted income (loss) per share:
         As reported                                                   $     (0.04)     $      0.06
         Pro forma                                                     $     (0.05)     $      0.06
</TABLE>

      During the three months ended March 31, 2005,  the Company  issued  86,780
warrants  related to the Private  Placement  at an  exercise  price of $2.50 per
share, with a fair market value of $106,846.  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 five years.
The fair value of the warrants was directly related to the private placement and
therefore was classified as a reduction of additional paid in capital.

      On December 28, 2004,  Auxilio  entered into a Revolving Loan and Security
Agreement (the "Revolving Loan") with Mr. Michael D. Vanderhoof.  Mr. Vanderhoof
is a director of the Company. Under the agreement,  the Company can borrow up to
$500,000.  Interest will accrue daily upon any unpaid  principal  balance at the
rate of eight  percent  (8%) per  annum.  Accrued  interest  is  payable in full
monthly.  All  outstanding  principal 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 the making of
the  Revolving  Loan,  Mr.  Vanderhoof  will also  receive a warrant to purchase
common  shares of the  Company in a number  equal to 10% of the  highest  amount
outstanding.  The  exercise  price is equal to $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 market 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 five years.
The  Revolving  Loan  was paid off in April  2005.  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, which was recorded as a
discount  against the carrying value of the note. The $58,029 that was allocated
to the note is  considered a discount on the note,  and  therefore was amortized
over the life of the note using the straight line method. The amortization under
the  straight  line  method is not  materially  different  from  that  under the
effective interest method.

      In February 2005, a board member exercised warrants for 3,000 shares at an
exercise price of $0.75.

3. NET EARNINGS (LOSS) PER SHARE

      Basic  net  earnings  (loss)  per share is based on the  weighted  average
number of all  common  shares  issued  and  outstanding,  and is  calculated  by
dividing net  earnings  (loss) by the  weighted  average  shares of common stock
outstanding during the period. Common stock equivalents consist of 3,095,732 and
618,136 equity instruments at March 31, 2005 and 2004,  respectively,  which was
excluded  from the  calculation  as the effects of including  these common stock
equivalents is anti-dilutive.


                                       10
<PAGE>

4. 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 being 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:

<TABLE>
<CAPTION>
                                         AMORTIZED        UNREALIZED       UNREALIZED         FAIR
                                            COST         HOLDING GAIN    HOLDING LOSSES       VALUE
                                        ------------     ------------     ------------     ------------
<S>                                     <C>              <C>              <C>              <C>
      Available-for-sale                $    157,500     $     97,500     $         --     $    255,000
</TABLE>

5. FINANCIAL INSTRUMENTS

      The  carrying   amount  of  the  Company's  cash   equivalents,   accounts
receivable, prepaid expenses, other current assets, accounts payable and accrued
expenses, accrued compensation and benefits,  deferred revenue approximates fair
values due to the short-term maturities of those financial instruments.

      Rates  currently  available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.

      For all  available-for-sale  investment  securities,  the carrying  values
represents  fair value of the securities  and unrealized  gain (losses) that are
other than temporary are recognized as other  comprehensive  income (loss).  The
Company does not hold these securities for speculative or trading purposes.

6. PRIVATE PLACEMENT

      In February  2005,  the Company  commenced a private  placement  ("Private
Placement")  of up to  2,500,000  shares of its common stock at a price of $2.00
per  share.  As of March  31,  2005,  the  Company  had sold  1,084,750  shares,
receiving net proceeds of $1,983,569. Total costs through March 31, 2005 related
to the placement were  $292,777.  Included in this amount is $106,846 of expense
related to the fair market  value of the warrants  issued to the selling  group.
The fair market  value of the warrants was  determined  using the Black  Scholes
pricing model.  The  assumptions  used to calculate the fair market value are as
follows:  risk-free  interest  rate of 2.75%;  estimated  volatility  of 80.47%;
dividend yield of 0.0%; and expected life of the warrants of five years.

7. DISCONTINUED OPERATIONS

      In March 2004, the Company entered into an agreement with Workstream, Inc.
whereby the Company  sold to  Workstream  the  following:  accounts  receivable,
certain computer  equipment,  customer list,  existing customer  contracts,  the
PeopleView name, and the technology and product offerings that had been recently
revised    and    improved,    including    ClimateSight(TM),    SkillSight(TM),
PerformanceSight(TM),  ComplianceSight(TM)  and HCM TOOLS(TM),  essentially  the
operations of e-Perception Technologies, Inc.

      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 at an
exercise  price of $3.00 per share.  Pursuant  to an  Addendum  to the  original
Agreement,  the final  consideration  the Company received was cash of $250,000,
246,900  shares of  Workstream  common  stock,  and a  warrant  to  purchase  an
additional 50,000 shares at an exercise price of $3.00 per share.

8. EMPLOYMENT AGREEMENTS

      On December 10, 2004,  the Company  entered into an  employment  agreement
with  Paul T.  Anthony,  to serve  as  Chief  Financial  Officer  and  Corporate
Secretary,  effective January 3, 2005. Mr. Anthony's agreement has a term of two
years,  and provides for a base annual salary of $155,000.  Mr. Anthony received
warrants and may receive an annual bonus if certain earnings and revenue targets
are accomplished.


                                       11
<PAGE>

      On September  14, 2004,  the Company  presented to the two other  original
founders  (owners) of The Mayo Group, Mr. Nickell and Mr. Davis, an Amendment to
Employment   Agreement  and  Modification  of  Merger  Agreement,   whereby  the
Contingent   Securities   representing   461,009  shares,  and  Contingent  Cash
Consideration of $82,979 due and payable to both would be released and paid.

      In May 2004,  the Company  entered  into  employment  agreements  with key
members of management.  The agreements called for the issuing of warrants to the
individuals pursuant to certain earnings and revenue targets being accomplished.
The Company  entered into an employment  agreement with Joseph Flynn to serve as
its Chief Executive Officer,  effective April 1, 2004. Mr. Flynn's agreement has
a term of two years and provides for a base annual salary of $165,000. Mr. Flynn
may  receive  an annual  bonus if  certain  earnings  and  revenue  targets  are
accomplished.  Effective  April 1, 2004, the Company  entered into an employment
agreement  with Etienne  Weidemann,  to serve as President  and Chief  Operating
Officer.  Mr. Weidemann's  agreement has a term of two years, and provides for a
base annual  salary of $160,000.  Mr.  Weidemann  may receive an annual bonus if
certain earnings and revenue targets are accomplished.  Effective April 1, 2004,
the Company  entered into an employment  agreement with James P.  Stapleton,  to
serve as Chief Operating Officer.  Mr.  Stapleton's  agreement has a term of two
years,  and provides for a base annual  salary of $145,000.  Mr.  Stapleton  may
receive  an  annual  bonus  if  certain   earnings   and  revenue   targets  are
accomplished. Mr. Stapleton resigned his position in December 2004.

9. COMMITMENTS

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

10. CONCENTRATIONS

      The Company's two largest customers accounted for approximately 78% of the
Company's  revenues  for  the  three  months  ended  March  31,  2005.  Accounts
receivable totaled approximately $137,000 as of March 31, 2005.

11. SUBSEQUENT EVENTS

      In April 2005,  the Company sold an  additional  490,000  shares under the
private  placement  for net  proceeds of  $901,600.  Total costs  related to the
placement  of these  share was  $126,664.  Included in this amount is $48,264 of
expense  related to the fair market value of the 39,200  warrants  issued to the
selling  group.  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 five years.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS

      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.


                                       12
<PAGE>

      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 Report,  which speak only as of the date of this 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

      Auxilio, Inc. ("Auxilio") currently trades on the OTC Bulletin Board under
the stock symbol AUXO.

      For the three months ended March 31, 2004, Auxilio 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 50 person firms to Fortune
500 companies implemented our solutions in order to have deep insight into their
human capital assets.

      In March,  2004, the Company  entered into an agreement  with  Workstream,
Inc. whereby the Company sold to Workstream the following:  Accounts receivable,
certain computer  equipment,  customer list,  existing customer  contracts,  the
PeopleView name, and the technology and product offerings that had been recently
revised    and    improved,    including    ClimateSight(TM),    SkillSight(TM),
PerformanceSight(TM),  ComplianceSight(TM)  and HCM TOOLS(TM).  Pursuant to this
transaction,  the Company is focusing its efforts in providing  outsourced image
management services to healthcare facilities.

      In  April  2004,  one  of the  Company's  subsidiaries,  PPVW  Acquisition
Company,  completed an acquisition of Alan Mayo & Associates, dba The Mayo Group
("The Mayo Group" or "TMG").  Effective with the  acquisition,  PPVW Acquisition
Company changed its name to The Mayo Group, and subsequently changed its name to
Auxilio  Solutions,   Inc.  ("ASI").  ASI  provides  outsourced  document  image
management  services for healthcare  facilities.  Operations  from April 1, 2004
will include the  operations  of ASI. An 8-K was filed with the  Securities  and
Exchange  Commission on April 16, 2004 reporting this  transaction.  The audited
financial statements of The Mayo Group were filed on September 27, 2004.

      ASI provides  integration  strategies and outsourced services for document
image  management in  healthcare  facilities.  The Company  helps  hospitals and
health systems reduce expenses and create manageable,  dependable document image
management  programs by managing  their  back-office  processes.  The process is
initiated through a detailed proprietary TeqTrak(TM) analysis.  TeqTrak(TM) is a
financial   analysis  that  is  performed  at  the  customer  premises  using  a
combination  of proprietary  processes and  innovative web based  technology for
data collection and report  generation.  After  TeqTrak(TM) and upon engagement,
ASI capitates the cost of the entire document image  management  process for the
customer  and  places a  highly  trained  resident  team on site to  manage  the
process. ASI is focused solely on the healthcare industry.

      As a  result  of the  acquisition  of TMG and  disposal  of the  Company's
previous product offering to Workstream,  the financial statements for the three
months ended March 31, 2005, are not comparable to the financial  statements for
the three months ended March 31, 2004.

      Where appropriate,  references to "Auxilio",  the "Company," "we" or "our"
include Auxilio, Inc., Auxilio Solutions, Inc., e-Perception Technologies,  Inc.
and PeopleView, 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  related  disclosure  of  contingent  assets  and
liabilities. On an on-going basis, we evaluate these estimates,  including those
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 are believed to be  reasonable  under the  circumstances,  the
results of which form the basis for making  judgments  about the carrying values
of assets and  liabilities  that are not readily  apparent  from other  sources.
Actual results may differ from these estimates  under  different  assumptions or
conditions.


                                       13
<PAGE>

      We  consider  the  following  accounting  policies  to be both  those 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

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

RESULTS OF OPERATIONS

FOR THE THREE  MONTHS  ENDED MARCH 31, 2005  COMPARED TO THE THREE  MONTHS ENDED
MARCH 31, 2004

NET REVENUE

      Net revenue  increased  $784,077 to $784,077  for the three  months  ended
March 31, 2005, as compared to the same period in 2004. This increase was due to
the  acquisition  of The  Mayo  Group.  100% of the  Company's  net  revenue  as
presented  on the  consolidated  statement of  operations,  for the three months
ended  2005,  were  derived  from the sales and  services  of  outsourced  image
management  and document  imaging  equipment,  and 0% was derived from solutions
related to its  previous  business  operations.  Revenues  related to the former
business were included in discontinued operations.

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
$774,174 for the three  months  ended March 31, 2005,  as compared to $0 for the
same period in 2004 as the  Company  discontinued  the former  business in March
2004.  Cost of revenues  for the first  quarter of 2004  related to the disposed
business  is  included  in  discontinued  operations.  The  increase  in cost of
revenues  was due to the  increase  in  revenues  associated  with the change in
business  operations  comprised  of  sales  and  services  of  outsourced  image
management  and document  imaging  equipment and increased  costs related to the
Company's efforts to expand its field services operations outside of California.

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 $439,720 for the three months
ended March 31, 2005,  as compared to $0 for the same period in 2004.  Sales and
marketing  expenses  for the  first  quarter  of 2004  related  to the  disposed
business are included in  discontinued  operations.  This increase was primarily
due to  lower  costs in 2004 as the  Company  was  exiting  the  business  of HR
software and moving to outsourced image management services (see Note 7).

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 $433,805 to $483,876  for the three months ended March 31,
2005,  as compared to $50,071 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.  The increase was
primarily  due to the change in the  business  activities  to  outsourced  image
management services. The decrease in the general and administrative  expenses as
a percent of sales is a result of the increase in revenue.

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. We
examine the carrying value of our other intangible  assets as current events and
circumstances  warrant  determining  whether there are any impairment losses. If
indicators of impairment were present  relating to our other  intangible  assets
and future cash flows were not expected to be  sufficient to recover the assets'
carrying  amount,  an impairment  loss would be charged to expense in the period
identified.  To date, we have not  identified  any event that would  indicate an
impairment of the value of goodwill or other  intangible  assets recorded in our
consolidated  financial  statements.  Other intangible assets are amortized over
their estimated lives.


                                       14
<PAGE>

      Amortization  expense of $93,368 was related to intangible assets acquired
through the acquisition of The Mayo Group in March 31, 2004.

OTHER INCOME (EXPENSE)

      Other income and expense includes interest income net of interest expense.
Interest income is primarily derived from short-term interest-bearing securities
and money market accounts. Interest expense for the three months ended March 31,
2005 was $20,957 compared to $1,932 for the same period in 2004. The increase in
interest  expense is a result of the increased debt at March 31, 2005.  Interest
income for the three months ended March 31, 2005 was $2,212 compared to $447 for
the same period in 2004,  primarily due to an increase in the average balance of
invested cash and short-term investments.

GAIN ON SALE OF MARKETABLE SECURITIES

      Gain on sale of  marketable  securities  related  to the  excess  of sales
prices over the cost of the  investments  in  Workstream  Inc.'s common stock in
2005. No such activities took place in 2004.

INCOME FROM DISCONTINUED OPERATIONS

      The Company sold its assets to  Workstream,  Inc. in the first  quarter of
2004. All of the operating  results and gain related to the sale were classified
as discontinued  operations in accompanying condensed consolidated statements of
operations for 2004. No such activities took place in 2005.

LIQUIDITY AND CAPITAL RESOURCES

      At March 31, 2005, our cash and cash equivalents were equal to $2,609,035.
The Company's principal cash requirements are for operating expenses,  including
equipment,  supplies,  employee costs,  capital  expenditures and funding of the
operations.  The  Company's  primary  sources of cash were from revenues and the
Company's current private placement of the Company's common stock.

      During the three months ended March 31, 2005, the Company used  $1,584,947
for operating  activities,  as compared to $329,367 for the same period in 2004.
The  increase  in cash  use was  primarily  due to the  change  in the  business
activities to outsourced image management services.

      On December 28, 2004,  Auxilio  entered into a Revolving Loan and Security
Agreement (the "Revolving Loan") with Mr. Michael D. Vanderhoof.  Mr. Vanderhoof
is a director of the Company. Under the agreement,  the Company can borrow up to
$500,000.  Money  will be  advanced  to Auxilio by Mr.  Vanderhoof  against  the
$500,000  limit upon six business  days advance  written  notice by the Company.
Interest  will  accrue  daily upon any unpaid  principal  balance at the rate of
eight percent (8%) per annum.  Accrued interest is payable in full monthly.  All
outstanding  principal  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 the making of
the  Revolving  Loan,  Mr.  Vanderhoof  will also  receive a warrant to purchase
common  shares of the  Company in a number  equal to 10% of the  highest  amount
outstanding. For example, if the full amount of $500,000 is borrowed, the holder
will have the right to purchase  50,000 shares of stock.  The exercise  price is
equal to $2.00 per  share.  As of March  30,  2005,  the  Company  has  borrowed
$500,000 and issued 50,000 warrants.  The Company paid off the Revolving Loan on
April 27, 2005.

      In February, 2005, the Company initiated a private placement of its common
stock,  at $2.00 per share.  As of May 14, 2005,  $2,885,169 of net proceeds has
been collected,  resulting in an additional  1,574,750 shares being issued.  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. The Company anticipates that the cash from the
private placement and the moneys available under the Revolving Loan from Michael
D.  Vanderhoof are sufficient to sustain the business  operations  over the next
twelve months.

SUBSEQUENT EVENTS

      In April 2005,  the Company sold an  additional  490,000  shares under the
private  placement  for net  proceeds of  $901,600.  Total costs  related to the
placement  of these  share was  $126,664.  Included in this amount is $48,264 of
expense  related to the fair market value of the 39,200  warrants  issued to the
selling  group.  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 five years.


                                       15
<PAGE>

FACTORS THAT MAY AFFECT FUTURE RESULTS

      This  Report,  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  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:

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 the  Company's  business
operations  and revenue  model.  In March 2004,  the Company sold its survey and
assessment software to Workstream,  Inc. In April 2004, the Company completed an
acquisition  of TMG and as a  result  of such  acquisition,  entered  the  Image
Management  industry.  The 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 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;

            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 we
can  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.


                                       16
<PAGE>

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.

      The Company experienced a net operating loss of approximately $625,211 for
the three months ended March 31, 2005 and  accumulated  deficit of $9,499,946 as
of March 31, 2005.  There can be no assurances  that the Company will be able to
operate  profitably  in the  future.  In  the  event  that  the  Company  is not
successful  in  implementing   its  business  plan,  the  Company  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 the  Company.  If  adequate  funds are not  available  or are not
available on acceptable  terms,  the Company may be unable to develop or enhance
its products and services,  take advantage of future opportunities or respond to
competitive pressures,  all of which could have a material adverse effect on the
Company's business, financial condition or operating results.

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

      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 CUSTOMER.

      The loss of any key customer could have a material adverse effect upon the
Company's financial condition, business, prospects and results of operation. The
Company's   largest   customer,   Huntington   Memorial   Hospital,   represents
approximately 40% of the Company's revenues for the three months ended March 31,
2005.  Although the Company  anticipates  that this customer will represent less
than 15% of revenue  for full year 2005 and less than 10% for 2006,  the loss of
this customer 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  ON 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 on 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 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, OUR REVENUES AND PROFITABILITY WOULD 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 would 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:


                                       17
<PAGE>

      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,  develop further 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.

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

      The Company has granted stock  options to its  employees  and  anticipates
granting   additional  stock  options  to  its  employees  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 FINANCING.

      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 TMG, 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 in the second
calendar quarter of 2005. Such a large "over-hang" of stock eligible for sale in
the public  market,  including  shares of common stock offered  pursuant to this
Memorandum  which may become  eligible  for resale in the  future,  may have the
effect of  depressing  the price of our common  stock,  and 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 is 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)  are
designed  to  provide  reasonable  assurance  that  information  required  to be
disclosed in our reports filed under that Act (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.


                                       18
<PAGE>

      During the fourth quarter of fiscal 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 the Company's
2004 fiscal year end,  and were  appropriately  recorded  and  disclosed  in the
Company's  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.

      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  Securities
Exchange Act of 1934, as amended) in effect as of March 31, 2005.  Based on this
evaluation,  our Chief Executive  Officer and Chief Financial  Officer concluded
that, as of March 31, 2005,  the Company's  disclosure  controls and  procedures
were adequate and  effective  and designed to ensure that  material  information
relating to the Company, including its 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 quarter ended March 31, 2005 that has materially affected,  or is reasonably
likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

      During the quarter  covered by this report,  the registrant sold 1,084,750
shares of its common stock at the sales price of $2.00 per share. The sales were
part of a private  placement  of the  registrant's  common  shares,  exempt from
registration  under Section 5 of the Securities Act of 1933 pursuant to Rule 506
promulgated under Regulation D.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

      None.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

      None.

ITEM 5. OTHER INFORMATION

      None


                                       19
<PAGE>

ITEM 6.  EXHIBITS AND REPORT ON FORM 8-K

(a) Exhibits

--------------------------------------------------------------------------------
NO.       ITEM
--------------------------------------------------------------------------------
2.1       Agreement and Plan of Reorganization dated as of November 20, 2001, by
          and  between  the  Company and  e-Perception,  Inc.  (incorporated  by
          reference to Exhibit 1.1 to the Registrant's Form 8-K filed on January
          24, 2002).
--------------------------------------------------------------------------------
2.2       Agreement  and Plan of Merger,  dated  April 1, 2004,  by and  between
          Auxilio,  Inc.,  PPVW  Acquisition   Corporation,   and  Alan  Mayo  &
          Associates,  Inc.  (incorporated  by  reference  to Exhibit 2.1 to the
          Registrant's Form 8-K filed on April 16, 2004).
--------------------------------------------------------------------------------
3.1       Certificate of Incorporation (incorporated by reference to Exhibit 3.1
          to the Registrant's Form 10-KSB filed on April 19, 2005).
--------------------------------------------------------------------------------
3.2       Bylaws  (incorporated  by reference  to Exhibit 2 to the  Registrant's
          Form 10-SB filed on October 1, 1999).
--------------------------------------------------------------------------------
4.1       Subscription  Agreement  dated as of January 9, 2002, by and among the
          Company  and  each  of  the   stockholders   of   e-Perception,   Inc.
          (incorporated by reference to Exhibit 1.1 to the Registrant's Form 8-K
          filed on January 24, 2002).
--------------------------------------------------------------------------------
10.1      2000 Stock Option Plan  (incorporated  by reference to Exhibit 10.1 to
          the Registrant's Form 10-KSB filed on April 19, 2005).
--------------------------------------------------------------------------------
10.2      2001 Stock Option Plan  (incorporated  by reference to Exhibit 10.2 to
          the Registrant's Form 10-KSB filed on April 19, 2005).
--------------------------------------------------------------------------------
10.3      2003 Stock Option Plan  (incorporated  by reference to Exhibit 10.3 to
          the Registrant's Form 10-KSB filed on April 19, 2005).
--------------------------------------------------------------------------------
10.4      2004 Stock Option Plan  (incorporated  by reference to Exhibit 10.4 to
          the Registrant's Form 10-KSB filed on April 19, 2005).
--------------------------------------------------------------------------------
10.5      Standard Office Lease by and between Arden Realty Limited  Partnership
          and  e-Perception  Technologies,  Inc.  (incorporated  by reference to
          Exhibit 10.1 to the Registrant's Form 10-QSB filed on May 15, 2002).
--------------------------------------------------------------------------------
10.6      Asset Purchase  Agreement  between  Workstream USA, Inc.,  Workstream,
          Inc.  and  PeopleView,  Inc.  dated  March 8,  2004  (incorporated  by
          reference to Exhibit 2.1 to the  Registrant's  Form 8-K filed on April
          2, 2004).
--------------------------------------------------------------------------------
10.7      Addendum  dated as of May 27, 2004 to Asset Purchase  Agreement  dated
          March 17th,  2004 between  Workstream  Inc.  Workstream  USA, Inc. and
          PeopleView,  Inc.  (incorporated  by  reference  to Exhibit 2.1 to the
          Registrant's Form 8-K/A filed on August 3, 2004).
--------------------------------------------------------------------------------
10.8      Revolving  Loan and  Security  Agreement  between  Auxilio,  Inc.  and
          Michael D.  Vanderhoof  (incorporated  by reference to Exhibit 10.1 to
          the Registrant's Form 8-K filed on December 29, 2004).
--------------------------------------------------------------------------------
10.9      Executive   Employment   Agreement  between   Registrant  and  Etienne
          Weidemann,  President and Chief Operating  Officer dated April 1, 2004
          (incorporated  by reference to Exhibit 10.9 to the  Registrant's  Form
          10-KSB filed on April 19, 2005).
--------------------------------------------------------------------------------
10.10     Executive  Employment Agreement between Registrant and Joseph J Flynn,
          Chief  Executive  Officer and Chairman of the Board of Directors dated
          April 1, 2004  (incorporated  by  reference  to  Exhibit  10.10 to the
          Registrant's Form 10-KSB filed on April 19, 2005).
--------------------------------------------------------------------------------
10.11     Executive Employment Agreement between Registrant and James Stapleton,
          Chief  Financial  Officer and Corporate  Secretary dated April 1, 2004
          (incorporated by reference to Exhibit 10.11 to the  Registrant's  Form
          10-KSB filed on April 19, 2005).
--------------------------------------------------------------------------------
10.12     Executive Employment Agreement between Registrant and Paul T. Anthony,
          Chief  Financial  Officer and Corporate  Secretary  dated December 10,
          2004  (incorporated  by reference to Exhibit 10.12 to the Registrant's
          Form 10-KSB filed on April 19, 2005).
--------------------------------------------------------------------------------
10.13     Standard  Office  Lease  agreement  by and  between  Auxilio,  Inc and
          McMorgan Institutional Real Estate Fund I, LLC. dated October 13, 2004
          (incorporated by reference to Exhibit 10.13 to the  Registrant's  Form
          10-KSB filed on April 19, 2005).
--------------------------------------------------------------------------------
14        Registrants Code of Ethics  (incorporated by reference to Exhibit 14.1
          to the Registrant's Form 10-KSB filed on April 14, 2004).
--------------------------------------------------------------------------------
16        Letter regarding change in certifying  accountants  dated February 14,
          2002 (incorporated by reference to Exhibit 16 to the Registrant's Form
          8-K filed on February 15, 2002).
--------------------------------------------------------------------------------
21.1      Subsidiaries  (incorporated  by  reference  to  Exhibit  21.1  to  the
          Registrant's Form 10-KSB filed on April 19, 2005).
--------------------------------------------------------------------------------
31.1      Certification  of  the  Chief  Executive   Officer  pursuant  to  Rule
          13a-14(a) and rule 15d-14(a).
--------------------------------------------------------------------------------
31.2      Certification  of  the  Chief  Financial   Officer  pursuant  to  Rule
          13a-14(a) and rule 15d-14(a).
--------------------------------------------------------------------------------
32.1      Certification of the CEO and CFO pursuant to 18 U.S.C. Section 1350 as
          adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
--------------------------------------------------------------------------------

(b) Report on Form 8-K

A  Current  Report  on Form 8-K  dated  January  3,  2005,  was  filed  with the
Securities  and Exchange  Commission  reporting  the  departure of the Company's
current Chief  Financial  Officer,  Jim  Stapleton,  and the  appointment of the
Company's new Chief Financial Officer, Paul T. Anthony.

                                       20
<PAGE>

SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                        AUXILIO, INC.


Date:  May 17, 2005                     By: /s/ Joseph Flynn
                                            ------------------------------------
                                            Joseph Flynn
                                            Chief Executive Officer
                                            (Principal Executive Officer)


                                            /s/ Paul T. Anthony
                                            ------------------------------------
                                            Paul T. Anthony
                                            Chief Financial Officer
                                            (Principal Financial Officer)


                                       21