|                                                          |                                |
|---------------------------------------------------------------|-------------------------------------|
| Nevada                                                        | 88-0350448                          |
| (State or other jurisdiction ofincorporation or organization) | (I.R.S. EmployerIdentification No.) |

----

| PART I FINANCIAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item 1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | Financial Statements                                                                                                                                                                 |   | 3 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 3 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 4 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2009 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 5 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 6 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Notes to Condensed Consolidated Financial Statements                                                                                                                                 |   | 8 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item 2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 13 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item 4T                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | Controls and Procedures                                                                                                                                                              |   | 18 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| PART II OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item 1A                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | Risk Factors                                                                                                                                                                         |   | 19 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| Item 6                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | Exhibits                                                                                                                                                                             |   | 23 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| SIGNATURES                                                                                                                                                   |   | 24                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

----

| ITEM 1. | FINANCIAL STATEMENTS. |
|---------|-----------------------|

| AUXILIO, INC. AND SUBSIDIARIES                                                                                                                                                |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| CONDENSED CONSOLIDATED BALANCE SHEETS                                                                                                                                         |   |
|                                                                                                                                                                          |   |
|                                                                                                                                                                          |   |
|                                                                                                                                                                          |   | JUNE 30, 2009 |   |   | DECEMBER 31, 2008 |   |
|                                                                                                                                                                          |   | (unaudited) |   |   |   |   |
|                                                                                                                                                                          |   |
| ASSETS                                                                                                                                                                        |   |
| Current assets:                                                                                                                                                               |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                     |   | $ | 2,011,777 |   |   | $ | 1,198,126 |   |
| Accounts receivable, net                                                                                                                                                      |   |   | 1,000,363 |   |   |   | 4,201,689 |   |
| Supplies                                                                                                                                                                      |   |   | 666,250 |   |   |   | 745,207 |   |
| Prepaid and other current assets                                                                                                                                              |   |   | 127,013 |   |   |   | 33,642 |   |
| Loan acquisition costs, net                                                                                                                                                   |   |   | - |   |   |   | 44,431 |   |
| Total current assets                                                                                                                                                          |   |   | 3,805,403 |   |   |   | 6,223,095 |   |
|                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                                                                                                                   |   |   | 168,695 |   |   |   | 129,614 |   |
| Deposits                                                                                                                                                                      |   |   | 28,790 |   |   |   | 28,790 |   |
| Goodwill                                                                                                                                                                      |   |   | 1,517,017 |   |   |   | 1,517,017 |   |
|                                                                                                                                                                          |   | $ | 5,519,905 |   |   | $ | 7,898,516 |   |
|                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                          |   |
|                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Accounts payable and accrued expenses                                                                                                                                         |   | $ | 1,579,804 |   |   | $ | 3,236,008 |   |
| Accrued compensation and benefits                                                                                                                                             |   |   | 543,161 |   |   |   | 662,663 |   |
| Deferred revenue                                                                                                                                                              |   |   | 405,498 |   |   |   | 489,563 |   |
| Current portion of note payable, net of discount of $23,413 at December 31, 2008                                                                                              |   |   | - |   |   |   | 1,308,587 |   |
| Current portion of capital lease obligations                                                                                                                                  |   |   | - |   |   |   | 3,913 |   |
| Total current liabilities                                                                                                                                                     |   |   | 2,528,463 |   |   |   | 5,700,734 |   |
|                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Capital lease obligations, noncurrent                                                                                                                                         |   |   | 23,253 |   |   |   | - |   |
|                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Commitments and contingencies                                                                                                                                                 |   |   | - |   |   |   | - |   |
|                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Stockholders' equity:                                                                                                                                                         |   |   |   |   |   |   |   |   |
| Common stock, par value at $0.001, 33,333,333 shares authorized, 19,040,401 and 17,623,734 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively |   |   | 19,042 |   |   |   | 17,625 |   |
| Additional paid-in capital                                                                                                                                                    |   |   | 19,489,082 |   |   |   | 18,490,632 |   |
| Accumulated deficit                                                                                                                                                           |   |   | (16,539,935 | ) |   |   | (16,310,475 | ) |
| Total stockholders' equity                                                                                                                                                    |   |   | 2,968,189 |   |   |   | 2,197,782 |   |
| Total liabilities and stockholders’ equity                                                                                                                              |   | $ | 5,519,905 |   |   | $ | 7,898,516 |   |

----

| AUXILIO, INC. AND SUBSIDIARIES                  |
|-------------------------------------------------|
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
| (UNAUDITED)                                     |
|                                            |   |   |
|                                            |   | Three Months |   |   | Six Months |
|                                            |   | Ended June 30, |   |   | Ended June 30, |
|                                            |   | 2009 |   |   | 2008 |   |   | 2009 |   |   | 2008 |
| Revenues                                        |   | $ | 3,853,901 |   |   | $ | 6,891,341 |   |   | $ | 7,581,511 |   |   | $ | 10,664,657 |   |
| Cost of revenues                                |   |   | 3,036,734 |   |   |   | 5,151,747 |   |   |   | 5,901,631 |   |   |   | 8,270,275 |   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                    |   |   | 817,167 |   |   |   | 1,739,594 |   |   |   | 1,679,880 |   |   |   | 2,394,382 |   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                             |   |   | 364,567 |   |   |   | 378,313 |   |   |   | 626,381 |   |   |   | 700,461 |   |
| General and administrative expenses             |   |   | 571,434 |   |   |   | 632,069 |   |   |   | 1,188,128 |   |   |   | 1,241,644 |   |
| Intangible asset amortization                   |   |   | - |   |   |   | 47,743 |   |   |   | - |   |   |   | 95,487 |   |
| Total operating expenses                        |   |   | 936,001 |   |   |   | 1,058,125 |   |   |   | 1,814,509 |   |   |   | 2,037,592 |   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from operations                   |   |   | (118,834 | ) |   |   | 681,469 |   |   |   | (134,629 | ) |   |   | 356,790 |   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income (expense):                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                |   |   | (7,258 | ) |   |   | (167,686 | ) |   |   | (95,845 | ) |   |   | (440,824 | ) |
| Interest income                                 |   |   | 96 |   |   |   | 741 |   |   |   | 1,554 |   |   |   | 3,614 |   |
| Gain on sale of fixed assets                    |   |   | 1,860 |   |   |   | - |   |   |   | 1,860 |   |   |   | - |   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total other income (expense)                    |   |   | (5,302 | ) |   |   | (166,945 | ) |   |   | (92,431 | ) |   |   | (437,210 | ) |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Loss) income before provision for income taxes |   |   | (124,136 | ) |   |   | 514,524 |   |   |   | (227,060 | ) |   |   | (80,420 | ) |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expense                              |   |   | - |   |   |   | - |   |   |   | (2,400 | ) |   |   | (2,400 | ) |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income                               |   | $ | (124,136 | ) |   | $ | 514,524 |   |   | $ | (229,460 | ) |   | $ | (82,820 | ) |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income per share:                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                           |   | $ | (.01 | ) |   | $ | .03 |   |   | $ | (.01 | ) |   | $ | (.01 | ) |
| Diluted                                         |   | $ | (.01 | ) |   | $ | .02 |   |   | $ | (.01 | ) |   | $ | (.01 | ) |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of weighted average shares:              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                           |   |   | 18,573,697 |   |   |   | 16,235,309 |   |   |   | 18,096,091 |   |   |   | 16,235,309 |   |
| Diluted                                         |   |   | 18,573,697 |   |   |   | 21,845,983 |   |   |   | 18,096,091 |   |   |   | 17,344,428 |   |

----

| AUXILIO, INC. AND SUBSIDIARIES                                                                   |   |
|--------------------------------------------------------------------------------------------------|--------|
| CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY                                         |   |
| SIX MONTHS ENDED JUNE 30, 2009                                                                   |   |
| (UNAUDITED)                                                                                      |   |
|                                                                                             |   |
|                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                             |   |   |   |   |   |   |   | Additional |   |   |   |   |   | Total |   |
|                                                                                             |   | Common Stock |   |   | Paid-in |   |   | Accumulated |   |   | Stockholders' |   |
|                                                                                             |   | Shares |   |   | Amount |   |   | Capital |   |   | Deficit |   |   | Equity |   |
| Balance at December 31, 2008                                                                     |   |   | 17,623,734 |   |   | $ | 17,625 |   |   | $ | 18,490,632 |   |   | $ | (16,310,475 | ) |   | $ | 2,197,782 |   |
| Stock compensation expense for options and warrants granted to employees and directors           |   |   | - |   |   |   | - |   |   |   | 158,059 |   |   |   | - |   |   |   | 158,059 |   |
| Fair value of warrants issued for marketing services                                             |   |   | - |   |   |   | - |   |   |   | 76,807 |   |   |   | - |   |   |   | 76,807 |   |
| Common stock issued in private  placement, net of offering  costs of $85,000 |   |   | 1,416,667 |   |   |   | 1,417 |   |   |   | 763,584 |   |   |   | - |   |   |   | 765,001 |   |
| Net loss                                                                                         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (229,460 | ) |   |   | (229,460 | ) |
| Balance at June 30, 2009                                                                         |   |   | 19,040,401 |   |   | $ | 19,042 |   |   | $ | 19,489,082 |   |   | $ | (16,539,935 | ) |   | $ | 2,968,189 |   |

----

| AUXILIO, INC. AND SUBSIDIARIES                                                          |   |
|-----------------------------------------------------------------------------------------|--------|
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                         |   |
| (UNAUDITED)                                                                             |   |
|                                                                                    |   |   |   |
|                                                                                    |   | Six Months Ended June 30, |   |
|                                                                                    |   | 2009 |   |   | 2008 |   |
| Cash flows provided by operating activities:                                            |   |   |   |   |   |   |
| Net loss                                                                                |   | $ | (229,460 | ) |   | $ | (82,820 | ) |
| Adjustments to reconcile net loss to net cash                                           |
| provided by operating activities:                                                       |   |   |   |   |   |   |   |   |
| Depreciation                                                                            |   |   | 58,357 |   |   |   | 58,844 |   |
| Amortization of intangible assets                                                       |   |   | - |   |   |   | 95,487 |   |
| Stock compensation expense for warrants and options issued to employees and consultants |   |   | 158,059 |   |   |   | 201,985 |   |
| Fair value of warrants issued for marketing services                                    |   |   | 76,807 |   |   |   | - |   |
| Interest expense related to amortization of warrants issued with loans                  |   |   | 23,412 |   |   |   | 43,446 |   |
| Interest expense related to amortization of loan acquisition costs                      |   |   | 44,431 |   |   |   | 82,450 |   |
| Interest expense related to accretion of loan discount                                  |   |   | - |   |   |   | 197,083 |   |
| Changes in operating assets and liabilities:                                            |
| Accounts receivable                                                                     |   |   | 3,201,326 |   |   |   | (2,010,512 | ) |
| Recovery of bad debts                                                                   |   |   | - |   |   |   | (28,510 | ) |
| Supplies                                                                                |   |   | 78,957 |   |   |   | 115,991 |   |
| Prepaid and other current assets                                                        |   |   | (93,371 | ) |   |   | 506 |   |
| Accounts payable and accrued expenses                                                   |   |   | (1,656,204 | ) |   |   | 1,534,445 |   |
| Accrued compensation and benefits                                                       |   |   | (119,502 | ) |   |   | 99,976 |   |
| Deferred revenue                                                                        |   |   | (84,065 | ) |   |   | 35,043 |   |
| Net cash provided by operating activities                                               |   |   | 1,458,747 |   |   |   | 343,414 |   |
| Cash flows (used for) investing activities:                                             |   |   |   |   |   |   |   |   |
| Purchases of property and equipment                                                     |   |   | (72,342 | ) |   |   | (8,710 | ) |
| Net cash (used for) investing activities                                                |   |   | (72,342 | ) |   |   | (8,710 | ) |
| Cash flows (used for) financing activities:                                             |   |   |   |   |   |   |   |   |
| Net proceeds from issuance of common stock                                              |   |   | 765,001 |   |   |   | - |   |
| Payments on capital leases                                                              |   |   | (5,755 | ) |   |   | (12,026 | ) |
| Payments on notes payable and long-term debt                                            |   |   | (1,332,000 | ) |   |   | (300,000 | ) |
| Net cash (used for) financing activities                                                |   |   | (572,754 | ) |   |   | (312,026 | ) |
| Net increase in cash and cash equivalents                                               |   |   | 813,651 |   |   |   | 22,678 |   |
| Cash and cash equivalents, beginning of period                                          |   |   | 1,198,126 |   |   |   | 666,428 |   |
| Cash and cash equivalents, end of period                                                |   | $ | 2,011,777 |   |   | $ | 689,106 |   |

----

| AUXILIO, INC. AND SUBSIDIARIES                                         |
|------------------------------------------------------------------------|
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (CONTINUED) |
| (UNAUDITED)                                                            |
|                                                                   |   |   |   |   |   |   |   |
|                                                                   |   |   |   |   | Six Months Ended June 30, |
|                                                                   |   |   |   |   | 2009 |   | 2008 |
| Supplemental disclosure of cash flow information:                      |   |   |   |   |
|                                                                   |   |   |   |   |   |   |   |
|                                                                   | Interest paid |   | $       27,683 |   | $      119,486 |
|                                                                   |   |   |   |   |   |   |   |
|                                                                   | Income taxes paid |   | $       62,000 |   | $       11,500 |

----

----

| Options                          |   | Shares |      |   | Weighted Average Exercise Price |   |   | Weighted Average Remaining Term in Years |   |   | AggregateIntrinsic Value |   |
|----------------------------------|--------|--------|-----------|--------|---------------------------------|--------|--------|------------------------------------------|--------|--------|--------------------------|--------|
| Outstanding at December 31, 2008 |   |   | 4,385,186 |   |                            | $      | 1.15   |                                     |   |   |                     |   |   |   |
| Granted                          |   |   | 1,099,000 |   |                            |   | 0.61   |                                     |   |   |                     |   |   |   |
| Exercised                        |   |   | -         |   |                            |   | -      |                                     |   |   |                     |   |   |   |
| Cancelled                        |   |   | (36,189   | )      |                            |   | 1.15   |                                     |   |   |                     |   |   |   |
| Outstanding at June 30, 2009     |   |   | 5,447,997 |   |                            | $      | 1.04   |                                     |   |   | 7.39                     |   |   | $ | 234,245 |   |
| Exercisable at June 30, 2009     |   |   | 3,059,597 |   |                            | $      | 1.17   |                                     |   |   | 6.20                     |   |   | $ | 93,900 |   |

| Warrants                         |   | Shares |      |   | Weighted Average Exercise Price |   |   | Weighted Average Remaining Term in Years |   |   | AggregateIntrinsic Value |   |
|----------------------------------|--------|--------|-----------|--------|---------------------------------|--------|--------|------------------------------------------|--------|--------|--------------------------|--------|
| Outstanding at December 31, 2008 |   |   | 2,170,204 |   |                            | $      | 1.37   |                                     |   |   |                     |   |   |   |
| Granted                          |   |   | 2,141,667 |   |                            |   | 1.44   |                                     |   |   |                     |   |   |   |
| Exercised                        |   |   | -         |   |                            |   | -      |                                     |   |   |                     |   |   |   |
| Cancelled                        |   |   | -         |   |                            |   | -      |                                     |   |   |                     |   |   |   |
| Outstanding at June 30, 2009     |   |   | 4,311,871 |   |                            | $      | 1.44   |                                     |   |   | 2.87                     |   |   | $ | 129,046 |   |
| Exercisable at June 30, 2009     |   |   | 2,461,871 |   |                            | $      | 1.39   |                                     |   |   | 2.87                     |   |   | $ | 129,046 |   |

----

|                                                     |   | Three Months   |   |   | Six months     |   |
|----------------------------------------------------------|--------|----------------|--------|--------|----------------|--------|
|                                                     |   | Ended June 30, |   |   | Ended June 30, |   |
|                                                     |   | 2009           |   |   | 2008           |   |   | 2009 |   |   | 2008 |   |
| Cost of revenues                                         |   | $              | 27,921 |   |           | $      | 26,875 |   |   | $ | 50,731 |   |   | $ | 64,111 |   |
| Sales and marketing                                      |   |           | 17,097 |   |           |   | 19,405 |   |   |   | 34,242 |   |   |   | 41,437 |   |
| General and administrative expense                       |   |           | 36,997 |   |           |   | 46,888 |   |   |   | 73,086 |   |   |   | 96,437 |   |
|    Total stock based compensation expense |   | $              | 82,015 |   |           | $      | 93,168 |   |   | $ | 158,059 |   |   | $ | 201,985 |   |

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|                                                        |   | Three Months Ended June 30, |       |   | Six Months Ended June 30, |
|-------------------------------------------------------------|--------|-----------------------------|------------|--------|---------------------------|
|                                                        |   | 2009                        |       |   | 2008                      |   |   | 2009 |   |   | 2008 |   |
| Numerator:                                                  |   |                        |       |   |                      |   |   |   |   |   |   |   |
| Net income (loss)                                           |   | $                           | (124,136   | )      |                      | $ | 514,524 |   |   | $ | (229,460 | ) |   | $ | (82,820 | ) |
| Effects of dilutive securities:                             |   |                        |       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Convertible notes payable                                   |   |                        | -          |   |                      |   | (137,234 | ) |   |   | - |   |   |   | (120,693 | ) |
| Income (loss) after effects of conversion of note payable   |   | $                           | (124,136   | )      |                      | $ | 377,290 |   |   | $ | (229,460 | ) |   | $ | (203,513 | ) |
|                                                        |   |                        |       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Denominator:                                                |   |                        |       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Denominator for basic calculation weighted average shares   |   |                        | 18,573,697 |   |                      |   | 16,235,309 |   |   |   | 18,096,091 |   |   |   | 16,235,309 |   |
|                                                        |   |                        |       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Dilutive common stock equivalents:                          |   |                        |       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Secured convertible notes                                   |   |                        | -          |   |                      |   | 2,648,511 |   |   |   | - |   |   |   | 1,109,119 |   |
| Options and warrants                                        |   |                        | -          |   |                      |   | 2,962,163 |   |   |   | - |   |   |   | - |   |
|                                                        |   |                        |       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Denominator for diluted calculation weighted average shares |   |                        | 18,573,697 |   |                      |   | 21,845,983 |   |   |   | 18,096,091 |   |   |   | 17,344,428 |   |
|                                                        |   |                        |       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share:                                |   |                        |       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Basic net income (loss) per share                           |   | $                           | (.01       | )      |                      | $ | .03 |   |   | $ | (.01 | ) |   | $ | (.01 | ) |
|                                                        |   |                        |       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Diluted net income (loss) per share                         |   | $                           | (.01       | )      |                      | $ | .02 |   |   | $ | (.01 | ) |   | $ | (.01 | ) |

| Trade receivable                | $1,000,363                |
|---------------------------------|---------------------------|
| Allowance for doubtful accounts | -                         |
|                            | Total accounts receivable | $1,000,363 |

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| 7. | EMPLOYMENT AGREEMENTS |
|----|-----------------------|

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| ·   | revenue recognition |
|--------------------|---------------------|

| ·   | accounts receivable valuation and related reserves |
|--------------------|----------------------------------------------------|

| ·   | impairment of intangible assets |
|--------------------|---------------------------------|

| ·   | deferred revenue |
|--------------------|------------------|

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|             |   | Payments Due by Period |    |
|------------------|--------|------------------------|---------|
|             |   | Total                  |    |   | Less than 1 year |   |   | 1-3 years |   |   | 3-5 years |   |   | More than 5 years |   |
| Capital leases   |   | $                      | 23,253  |   |   |   | - |   |   |   | 23,253 |   |   |   | - |   |   |   | - |   |
| Operating leases |   |                   | 114,758 |   |   |   | 114,758 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Total            |   | $                      | 138,011 |   |   | $ | 114,758 |   |   | $ | 23,253 |   |   | $ | - |   |   | $ | - |   |

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| ·   | the emergence of competitors in our target market, and the quality and development of their products and services; and |
|--------------------|------------------------------------------------------------------------------------------------------------------------|

| ·   | the market’s acceptance of our products and services. |
|--------------------|-------------------------------------------------------------|

| ·   | successfully complete the development of our products and services; |
|--------------------|---------------------------------------------------------------------|

| ·   | modify our products and services as necessary to meet the demands of our market; |
|--------------------|----------------------------------------------------------------------------------|

| ·   | attract and retain highly skilled employees; and |
|--------------------|--------------------------------------------------|

| ·   | respond to competitive influences. |
|--------------------|------------------------------------|

| ·   | greater name recognition and larger marketing budgets and resources; |
|--------------------|----------------------------------------------------------------------|

| ·   | established marketing relationships and access to larger customer bases; |
|--------------------|--------------------------------------------------------------------------|

| ·   | substantially greater financial, technical and other resources; and |
|--------------------|---------------------------------------------------------------------|

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| ·   | larger technical and support staffs. |
|--------------------|--------------------------------------|

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| ·   | develop or enhance our service offerings; |
|--------------------|-------------------------------------------|

| ·   | take advantage of future opportunities; or |
|--------------------|--------------------------------------------|

| ·   | respond to customers and competition. |
|--------------------|---------------------------------------|

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| ·   | net tangible assets of at least $2,000,000, if the issuer has been in continuous operation for at least three years, or net tangible assets of at least $5,000,000, if the issuer has been in continuous operation for less than three years; or |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | average annual revenue of at least $6,000,000 for the last three years. |
|--------------------|-------------------------------------------------------------------------|

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| No.  | Item                                                                                                                                                                                        |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 | Certification of the Chief Executive Officer and 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 Chief Executive Officer and Chief Financial Officer 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 *. |

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