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


                                   FORM 10-QSB

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

                  For the quarterly period ended June 30, 2005


               |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                                THE EXCHANGE ACT

                For the transition period from _______ to _______

                        Commission file number 000-27507

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



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



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

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



Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

                                 Yes |X| No |_|


The number of shares of the issuer's common stock, $0.001 par value, outstanding
as of August 15, 2005 was 16,048,912.

Transitional small business disclosure format:

                                 Yes |X| No |_|

<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 June 30, 2005                                            3

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

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

             Condensed Consolidated Statement of Stockholders'
                Equity for the Six Months Ended June 30, 2005                  6

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

             Notes to Condensed Consolidated Financial Statements              9

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

  Item 3.    Controls and Procedures.                                         20

PART II - OTHER INFORMATION
---------------------------

  Item 1.    Legal Proceedings.                                               21

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

  Item 3.    Defaults Upon Senior Securities.                                 21

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

  Item 5.    Other Information.                                               21

  Item 6.    Exhibits.                                                        21


  Signatures                                                                  22

                                       2

<PAGE>



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

ITEM 1.      FINANCIAL STATEMENTS.

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

                                     ASSETS
Current assets:
   Cash and cash equivalents                                       $  2,039,170
   Accounts and other receivables, net                                1,243,363
   Prepaid and other current assets                                      38,545
   Supplies                                                             445,797
   Investment in marketable securities                                   32,500
   Other investment                                                      52,728
                                                                   ------------
          Total current assets                                        3,852,103

Property and equipment, net                                             204,179
Deposits                                                                 49,644
Intangible assets, net                                                  980,172
Goodwill                                                              1,547,017
                                                                   ------------
          Total assets                                             $  6,633,115
                                                                   ============

              LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses                           $  1,094,742
   Accrued compensation and benefits                                    485,719
   Deferred revenue                                                     460,244
   Current portion of long-term debt                                     17,228
   Current portion of capital lease obligations                          25,137
   Note payable, related party                                           15,750
                                                                   ------------
          Total current liabilities                                   2,098,820

Commitments and contingencies                                                --

Stockholders' equity:
   Common stock, par value at $0.001, 33,333,333 shares
     authorized, 16,048,912 shares issued and outstanding                16,050
   Additional paid-in capital                                        14,839,880
   Accumulated deficit                                              (10,321,635)
                                                                   ------------
          Total stockholders' equity                                  4,534,295
                                                                   ------------
          Total liabilities and stockholders' equity               $  6,633,115
                                                                   ============

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


                                       3
<PAGE>


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

<TABLE>
<CAPTION>
                                                           Three Months                  Six Months
                                                          Ended June 30,                Ended June 30,
                                                  ---------------------------   ---------------------------
                                                      2005          2004            2005            2004
                                                  ------------   ------------   ------------   ------------
<S>                                                <C>           <C>            <C>            <C>
Revenue                                            $ 1,237,850   $  4,589,779   $  2,021,927   $  4,589,779
Cost of revenue                                        889,466      2,734,357      1,663,640      2,734,357
                                                  ------------   ------------   ------------   ------------
Gross profit                                           348,384      1,855,422        358,287      1,855,422
Operating expenses:
 Sales and marketing                                   468,920        642,271        908,175        642,271
 General and administrative                            525,752        592,293      1,010,093        642,364
 Intangible asset amortization                          93,368             --        186,736             --
                                                  ------------   ------------   ------------   ------------
  Total operating expenses                           1,088,040      1,234,564      2,105,004      1,284,635
                                                  ------------   ------------   ------------   ------------
Income (loss) from operations                         (739,656)       620,858     (1,746,717)       570,787
Other income (expense):
 Interest expense                                      (51,598)        (6,501)       (72,555)        (8,433)
 Interest income                                        11,300          1,689         13,511          2,136
 Gain (loss) on sale of marketable
   securities                                          (41,734)            --        362,061             --
                                                  ------------   ------------   ------------   ------------
  Total other income (expense)                         (82,032)        (4,812)       303,017         (6,297)
                                                  ------------   ------------   ------------   ------------
Income (loss) before provision for income
   taxes                                              (821,688)       616,046     (1,443,700)       564,490
Provision for income taxes                                  --             --         (3,200)        (2,400)
                                                  ------------   ------------   ------------   ------------
Net income (loss) from continuing
operations                                            (821,688)       616,046     (1,446,900)       562,090
Income (loss) from discontinued operations,
   (including gain (loss) on disposal
   of ($93,750) and $674,942
   for the three and six months ended
   June 30, 2004, respectively, net of
   tax benefit)                                             --        (62,365)            --        540,895
                                                  ------------   ------------   ------------   ------------
Net income (loss)                                 $  (821,688)  $     553,681   $ (1,446,900)  $  1,102,985
                                                  ============   ============   ============   ============
Net income (loss) per share - basic:
 Income (loss) per share continuing
   operations                                     ($      0.05)  $       0.04   ($      0.10)  $       0.05
 Income (loss) per share discontinued
   operations                                               --          (0.00)            --           0.05
                                                  ------------   ------------   ------------   ------------
Net income (loss) per share - basic               ($      0.05)  $       0.04   ($      0.10)  $       0.10
                                                  ------------   ------------   ------------   ------------
Net income (loss) per share - diluted:
 Income (loss) per share continuing
   operations                                     ($      0.05)  $       0.04   ($      0.10)  $       0.05
 Income (loss) per share discontinued
   operations                                               --          (0.00)            --           0.05
                                                  ------------   ------------   ------------   ------------
Net income (loss) per share - diluted             ($      0.05)  $       0.04   ($      0.10)  $       0.10
                                                  ------------   ------------   ------------   ------------
Number of weighted average shares -
 Basic                                              15,854,874     13,986,866     15,212,829     11,275,045
                                                  ------------   ------------   ------------   ------------
 Diluted                                            15,854,874     14,110,059     15,212,829     11,398,239
                                                  ------------   ------------   ------------   ------------
</TABLE>


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

                                       4

<PAGE>


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

<TABLE>
<CAPTION>
                                                             Three Months                  Six Months
                                                            Ended June 30,               Ended June 30,
                                                    ---------------------------    --------------------------
                                                        2005            2004          2005           2004
                                                     -----------    -----------    -----------    -----------
<S>                                                  <C>            <C>            <C>            <C>
Net income (loss)                                    $  (821,688)   $   553,681    $(1,446,900)   $ 1,102,985

Unrealized gain (loss) on marketable securities                         (30,750)                       68,250
Reclassification of realized amounts included
  in net income                                          (97,500)            --       (222,210)            --
                                                     -----------    -----------    -----------    -----------

Total other comprehensive income (loss)                  (97,500)       (30,750)      (222,210)        68,250
                                                     -----------    -----------    -----------    -----------

Comprehensive income (loss)                          $  (919,188)   $   522,931    $(1,669,110)   $ 1,171,235
                                                     ===========    ===========    ===========    ===========
</TABLE>

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


                                       5
<PAGE>


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

<TABLE>
<CAPTION>
                                                                          Additional                                      Total
                                                      Common Stock         Paid-in      Accumulated    Comprehensive   Stockholders'
                                                 Shares        Amount      Capital        Deficit         Income         Equity
                                             ------------  ------------  ------------   ------------   ------------   ------------
<S>                                            <C>         <C>           <C>            <C>            <C>            <C>
Balance at December 31, 2004                   14,438,662  $     14,440  $ 11,836,242   $ (8,874,735)  $    222,210   $  3,198,157
Common stock issued in private
placement, net of offering
  costs of $427,846 - unaudited                 1,607,250         1,607     2,943,362             --             --      2,944,969
Common stock issued upon
  exercise of warrants - unaudited                  3,000             3         2,247             --             --          2,250
Relative fair value of warrants
  issued related to revolving loan
  payable - unaudited                                  --            --        58,029             --             --         58,029
Reclassification of realized
  amount included in net income
  - unaudited                                          --            --            --             --       (222,210)      (222,210)
Net loss - unaudited                                   --            --            --     (1,446,900)            --     (1,446,900)
                                             ------------  ------------  ------------   ------------   ------------   ------------
Balance at June 30, 2005 - unaudited           16,048,912  $     16,050  $ 14,839,880  $(10,321,635)            --   $  4,534,295
                                             ------------  ------------  ------------   ------------   ------------   ------------
</TABLE>


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


                                       6
<PAGE>


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


<TABLE>
<CAPTION>
                                                                               Six Months Ended June 30,
                                                                              ---------------------------
                                                                                   2005          2004
                                                                              ------------   ------------
<S>                                                                           <C>            <C>
Cash flows used for operating activities:
            Net income (loss)                                                 $ (1,446,900)  $  1,102,985
Adjustments to reconcile net income (loss) to net cash
  used for operating activities:
            Depreciation                                                            40,570         13,141
            Amortization of intangible assets                                      186,736             --
            Gain on sale of certain assets                                              --       (674,942)
            Gain on sale of marketable securities                                 (362,061)            --
            Interest expense                                                        58,029          3,789
Changes in operating assets and liabilities:
            Accounts receivable and other receivables                           (1,002,165)       (13,474)
            Supplies                                                               (36,011)       (46,621)
            Prepaid and other current assets                                        37,713        (27,223)
            Deposits                                                                 6,751             --
            Accounts payable and accrued expenses                                 (269,092)      (116,417)
            Accrued compensation and benefits                                     (169,799)       411,291
            Lease buyout provision                                                 133,811        600,000
            Deferred revenue                                                       161,721        335,890
                                                                              ------------   ------------
                     Net cash provided by (used for) operating activities       (2,660,697)     1,588,419
                                                                              ------------   ------------
  Cash flows provided by investing activities:
            Purchases of property and equipment                                    (15,858)       (34,305)
            Purchase of Mayo Group, net of cash acquired                                --       (435,107)
            Proceeds from sale of certain assets                                        --        250,000
            Net proceeds from sale of marketable securities                        979,311             --
                                                                              ------------   ------------
                     Net cash provided by (used for) investing activities          963,453       (133,522)
                                                                              ------------   ------------

Cash flows provided by financing activities:
            Proceeds from line of credit                                           500,000             --
            Repayments on line of credit                                          (500,000)            --
            Payments on capital leases                                              (2,277)            --
            Payments on notes payable and long-term debt                          (159,618)           112
            Net proceeds from issuance of common stock                           2,944,969        520,150
            Proceeds from exercise of warrants                                       2,250             --
                                                                              ------------   ------------
                     Net cash provided by financing activities                   2,785,324
                                                                              ------------   ------------
Net increase in cash and cash equivalents                                        1,088,080      1,889,269
Cash and cash equivalents, beginning of period                                     951,090        226,398
                                                                              ------------   ------------
Cash and cash equivalents, end of period                                      $  2,039,170   $  2,115,667
                                                                              ============   ============
</TABLE>

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


                                       7
<PAGE>


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

<TABLE>
<CAPTION>
                                                                  Six Months Ended June 30,
                                                                ----------------------------
                                                                    2005            2004
                                                                ------------    ------------
<S>                                                             <C>             <C>
Supplemental disclosure of cash flow information:

     Interest paid                                              $     14,736    $      8,587
                                                                ============    ============

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

Non-cash investing and financing activities:

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

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

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

     Warrants issued for expenses of private placement          $    158,315              --
                                                                ============    ============

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

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

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


                                       8
<PAGE>

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



1.    BASIS OF PRESENTATION

      The accompanying unaudited condensed consolidated financial statements of
Auxilio, Inc. and its subsidiaries ("the Company") have been prepared in
accordance with 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 condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the financial
position and results of operations as of and for the periods presented. The
results for such periods are not necessarily indicative of the results to be
expected for the full year.

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


The accompanying financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate the continuation of the Company as a going concern. The Company
reported a net loss of $1,446,900 for the six months ended June 30, 2005.
Although the Company reported net income of $993,726 for the year ended December
31, 2004, it reported a net loss of $3,405,020 for the year ended December 31,
2003 and, at June 30, 2005, has an accumulated deficit of $10,321,635. This
raises substantial doubt about the Company's ability to continue as a going
concern. The unaudited condensed consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.


      During the quarter ended June 30, 2005, the Company raised additional
working capital through a private placement offering of the Company's common
stock, and the Company believes that such working capital will provide it with
the ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relative to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result from the outcome of this uncertainty. Through June
30, 2005, the Company has not been able to generate sufficient revenues from its
operations to cover its costs and operating expenses. However, the Company
anticipates that its revenues will increase through the sale of additional
product offerings and the growth of the Company's customer base. The Company
believes that the private placement offering, the sale of new product offerings
and the growth of its customer base will enable the Company to generate positive
operating cash flows and to continue its operations. However, no assurances can
be given as to the success of these plans. Although the Company has been able to
raise additional working capital through private placement offerings of its
common stock, the Company may not be able to continue this practice in the
future nor may the Company be able to obtain additional working capital through
other debt or equity financings. In addition, the Company may not generate
sufficient revenues from its operations to cover its cash operating expenses. As
a result, the Company may not be able to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.

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

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



                                       9
<PAGE>

2.    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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


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


3.    OPTIONS AND WARRANTS

      During the three and six months ended June 30, 2005, the Company granted
390,500 and 753,917 options, respectively, to its employees and directors to
purchase shares of the Company's common stock at an exercise price of $2.00 per
share, which exercise price equals the fair value of such options on the grant
date. The options have graded vesting annually over three years, starting March
2006. The Company accounts for the options granted to its employees and
directors under Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." If the Company accounted for such options under
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," the Company would recognize an expense totaling
$988,062 over the next three years. The fair value of the options was determined
using the Black-Scholes option-pricing model. The assumptions used to calculate
the fair market value are as follows: (i) risk-free interest rate of 3.00%; (ii)
estimated volatility of 80.47%; (iii) dividend yield of 0.0%; and (iv) expected
life of the options of four years.

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

<TABLE>
<CAPTION>
                                                Three Months Ended                Six Months Ended
                                                    June 30,                         June 30,
                                         ------------------------------   ------------------------------
                                             2005             2004            2005              2004
                                         -------------    -------------   -------------    -------------
<S>                                      <C>              <C>             <C>              <C>
Net income (loss):
   As reported                           $    (821,688)   $     553,681   $  (1,446,900)   $   1,102,985
   Add: APB 25 Expense                                                               --
   Deduct:  Total stock based
     employee compensation expense
     determined under SFAS 123 fair
     value based method                        229,917           81,239         488,631          141,672
                                         -------------    -------------   -------------    -------------
   Net income (loss), as adjusted        $  (1,051,605)   $     472,442   $  (1,935,531)   $     961,313
                                         =============    =============   =============    =============

Basic income (loss) per share:
   As reported                           $       (0.05)   $        0.05   $       (0.10)   $        0.10
   Pro forma                             $       (0.07)   $        0.04   $       (0.13)   $        0.09

Diluted income (loss) per share:
   As reported                           $       (0.05)   $        0.05   $       (0.10)   $        0.10
   Pro forma                             $       (0.07)   $        0.04   $       (0.13)   $        0.08
</TABLE>



                                       10
<PAGE>

      During the three and six months ended June 30, 2005, the Company issued
41,800 and 128,580 warrants, respectively, to purchase shares of the Company's
common stock at an exercise price of $2.50 per share. The warrants have a fair
value of $51,468 and $158,315, respectively for the three and six months ended
June 30, 2005. The fair value of the warrants was determined using the
Black-Scholes option-pricing model, with the following assumptions: (i) no
expected dividends; (ii) a risk free interest rate of 2.75%; (iii) expected
volatility of 80.47%; and (iv) an expected life of the warrants of five years.
The fair value of the warrants was directly related to the private placement
offering of the Company's common stock during the three and six months ended
June 30, 2005 and, therefore, was classified as a reduction of additional
paid-in capital.

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

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


4.    NET EARNINGS (LOSS) PER SHARE

      Basic net income (loss) per share is based on the weighted average number
of shares of the Company's common stock issued and outstanding during a certain
period, and is calculated by dividing net income (loss) by the weighted average
number of shares of the Company's common stock issued and outstanding during
such period. Common stock equivalents consist of 3,305,532 and 478,560 equity
instruments at June 30, 2005 and 2004, respectively, which were excluded from
the calculation as the effects of including these common stock equivalents is
anti-dilutive.


      5.    INVESTMENTS IN MARKETABLE SECURITIES

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

                          Amortized      Unrealized     Unrealized       Fair
                            Cost        Holding Gain  Holding Losses    Value
                         ------------   ------------  --------------  ---------

Available-for-sale       $     32,500             --              --  $  32,500



6.    FINANCIAL INSTRUMENTS

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

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



                                       11
<PAGE>

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


7.    PRIVATE PLACEMENT

      In February 2005, the Company commenced a private placement offering of up
to 2,500,000 shares of its common stock at a purchase price of $2.00 per share.
As of June 30, 2005, the Company had sold 1,607,250 shares, receiving net
proceeds of $2,944,969. Total costs through June 30, 2005 relating to the
private placement offering were $427,846, which amount includes an expense of
$158,315 relating to the fair value of the warrants issued to the selling group.
The fair value of the warrants was determined using the Black Scholes
option-pricing model. The assumptions used to calculate the fair value are as
follows: (i) risk-free interest rate of 2.75%; (ii) estimated volatility of
80.47%; (iii) dividend yield of 0.0%; and (iv) expected life of the warrants of
five years.


8.    DISCONTINUED OPERATIONS

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

      The original agreement called for the Company to receive cash
consideration of $300,000, of which $50,000 was subject to certain "hold back"
conditions. Additionally, the Company was to receive 350,000 shares of
Workstream common stock, of which 50,000 shares were subject to certain "hold
back" conditions, and a warrant to purchase an additional 50,000 shares of
Workstream common stock at an exercise price of $3.00 per share. Pursuant to an
addendum to the original agreement, the Company received final consideration of
$250,000 in cash, 246,900 shares of Workstream common stock, and a warrant to
purchase an additional 50,000 shares of Workstream common stock at an exercise
price of $3.00 per share.


9.    EMPLOYMENT AGREEMENTS

      In December 2004, the Company entered into an employment agreement with
Paul T. Anthony, effective January 3, 2005, pursuant to which Mr. Anthony serves
as the Company's Chief Financial Officer and Corporate Secretary. Mr. Anthony's
employment agreement has a term of two years and provides for an annual base
salary of $155,000. In addition, Mr. Anthony received warrants to purchase
shares of the Company's common stock and may receive an annual bonus if the
Company meets certain earnings and revenue targets.

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

      In May 2004, the Company entered into employment agreements with certain
key members of its management. These employment agreements called for the
Company to issue warrants to purchase shares of its common stock to these
individuals upon the Company meeting certain earnings and revenue targets. The
Company entered into an employment agreement with Joseph Flynn, effective April
1, 2004, pursuant to which Mr. Flynn serves as its Chief Executive Officer. Mr.
Flynn's employment agreement has a term of two years and provides for an annual
base salary of $165,000. In addition, Mr. Flynn may receive an annual bonus if
the Company meets certain earnings and revenue targets. Effective April 1, 2004,
the Company entered into an employment agreement with Etienne Weidemann,
pursuant to which Mr. Weidemann serves as the Company's President and Chief
Operating Officer. Mr. Weidemann's employment agreement has a term of two years
and provides for a base annual salary of $160,000. In addition, Mr. Weidemann
may receive an annual bonus if the Company meets certain earnings and revenue
targets. Effective April 1, 2004, the Company entered into an employment
agreement with James P. Stapleton, pursuant to which Mr. Stapleton served as the
Company's Chief Financial Officer. Mr. Stapleton's employment agreement had a
term of two years and provided for an annual base salary of $145,000. Mr.
Stapleton resigned as the Company's Chief Financial Officer in December 2004.




                                       12
<PAGE>

10.   COMMITMENTS

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


11.   CONCENTRATIONS

      The Company's two largest customers accounted for approximately 81% and
80% of the Company's revenues for the three and six months ended June 30, 2005,
respectively. Accounts receivable for these two customers totaled approximately
$1,051,000 as of June 30, 2005.


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

      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.

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

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


OVERVIEW

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

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



                                       13
<PAGE>

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

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

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

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

Application of Critical Accounting Policies

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

         We consider the following accounting policies to be most important to
the portrayal of our financial condition and those that require the most
subjective judgment:
      o     revenue recognition
      o     accounts receivable valuation and related reserves
      o     valuation of fixed assets
      o     accounting for income taxes
      o     impairment of intangible assets

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

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

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


RESULTS OF OPERATIONS

For the Six Months Ended June 30, 2005 Compared to the Six Months Ended June 30,
2004

Net Revenue

      Net revenue decreased $2,567,852 to $2,021,927 for the six months ended
June 30, 2005, as compared to the same period in 2004. Revenues for the first
quarter of 2004 related to the disposed business and are included in
discontinued operations. However, the prior year's revenue was higher due to a
large second quarter sale to a major customer totaling approximately $4,300,000.
This is partially offset by a current year increase in recurring revenue
contracts.



                                       14
<PAGE>

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
$1,663,640 for the six months ended June 30, 2005, as compared to $2,734,357 for
the same period in 2004. Cost of revenue for the first quarter of 2004 related
to the disposed business and is included in discontinued operations. However,
the prior year's cost of revenue was higher due to a large second quarter sale
to a major customer. This is partially offset by the current year cost to
maintain an increased number of recurring revenue contracts.

Sales and Marketing

      Sales and marketing expenses include salaries, commissions and expenses of
sales and marketing personnel, travel and entertainment, and other selling and
marketing costs. Sales and marketing expenses were $908,175 for the six months
ended June 30, 2005, as compared to $642,271 for the same period in 2004. Sales
and marketing expenses for the first quarter of 2004 related to the disposed
business and are included in discontinued operations. While expenses for the
second quarter of 2004 included sales commissions paid on a large sale to a
major customer, the current year's expense reflects increased sales staff and
travel expenses incurred in an intensified effort to procure new business.

General and Administrative

      General and administrative expenses, which include personnel costs for
finance, administration, information systems, and general management, as well as
facilities expenses, professional fees, legal expenses, and other administrative
costs, increased by $367,729 to $1,010,093 for the six months ended June 30,
2005, as compared to $642,364 for the same period in 2004. Certain general and
administrative expenses for the first quarter of 2004 which are related to the
disposed business are included in discontinued operations. This, in addition to
higher legal and accounting fees, accounts for the bulk of the increase in 2005
and is offset by a current year reduction in salaries and benefits stemming from
the change in our business model.

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
other circumstances warrant a determination of whether there are any impairment
losses. If indicators of impairment arise with respect to our other intangible
assets and our future cash flows are not expected to be sufficient to recover
the assets' carrying amounts, an impairment loss will be charged as an expense
in the period identified. To date, we have not identified any event that would
indicate an impairment of the value of our goodwill or other intangible assets
recorded in our condensed consolidated financial statements. Other intangible
assets are amortized over their estimated lives.

      Amortization expense of $186,736 was related to intangible assets acquired
through the acquisition of The Mayo Group in April 2004.

Other Income (Expense)

      Interest income is primarily derived from short-term interest-bearing
securities and money market accounts. Interest expense for the six months ended
June 30, 2005 was $72,555, as compared to $8,433 for the same period in 2004.
The increase in interest expense is due to discount charges and periodic
interest costs incurred during the first four months of 2005 under the Revolving
Loan and Security Agreement between the Company and Michael D. Vanderhoof (the
"Revolving Loan"). The Revolving Loan was repaid in April 2005 and the remaining
unamortized discount costs were charged to expense. Interest income for the six
months ended June 30, 2005 was $13,511, as compared to $2,136 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 of $362,061 related to the excess of
sales price over the cost of investment in Workstream's common stock in 2005. No
such activities took place in 2004.

Income from Discontinued Operations

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



                                       15
<PAGE>

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

Net Revenue

      Net revenue decreased $3,351,929 to $1,237,850 for the three months ended
June 30, 2005, as compared to the same period in 2004. The prior year's revenue
was higher due to a large sale to a major customer totaling approximately
$4,300,000. This is partially offset by a current year increase in recurring
revenue contracts.

Cost of Revenue

      Cost of revenue consists of document imaging equipment, parts, supplies
and salaries and expenses of field services personnel. Cost of revenue was
$889,466 for the three months ended June 30, 2005, as compared to $2,734,357 for
the same period in 2004. Cost of revenue for the second quarter of 2004 was
higher due to a large sale to a major customer. This is partially offset by the
increase in the current year cost to maintain an increased number of recurring
revenue contracts.

Sales and Marketing

      Sales and marketing expenses include salaries, commissions and expenses of
sales and marketing personnel, travel and entertainment, and other selling and
marketing costs. Sales and marketing expenses were $468,920 for the three months
ended June 30, 2005, as compared to $642,271 for the same period in 2004. Sales
and marketing expenses for the second quarter of 2004 were higher as a result of
sales commissions paid on a large sale to a major customer. This is partially
offset by a current year increase in sales staff and travel expenses incurred in
an intensified effort to procure new business.

General and Administrative

      General and administrative expenses, which include personnel costs for
finance, administration, information systems, and general management, as well as
facilities expenses, professional fees, legal expenses, and other administrative
costs, decreased by $66,541 to $525,752 for the three months ended June 30,
2005, as compared to $592,293 for the same period in 2004. The decrease is due
to the reduction in salaries and benefits stemming from the change in our
business model. This is partially offset by an increase in legal and accounting
fees in 2005.

Intangible Asset Amortization

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

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

Other Income (Expense)

      Interest income is primarily derived from short-term interest-bearing
securities and money market accounts. Interest expense for the three months
ended June 30, 2005 was $51,598, as compared to $6,501 for the same period in
2004. The increase in interest expense is due to discount charges and periodic
interest costs from the use of the Revolving Loan. The Revolving Loan was repaid
in April 2005, and the remaining unamortized discount costs were charged to
expense. Interest income for the three months ended June 30, 2005 was $11,300,
as compared to $1,689 for the same period in 2004, primarily due to an increase
in the average balance of invested cash and short-term investments.

      Loss on sale of marketable securities of 41,734 related to the excess of
the cost over the sales price of 50,000 shares of Workstream's common stock in
June 2005. No such activities took place in 2004.

Income from Discontinued Operations

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




                                       16
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      At June 30, 2005, our cash and cash equivalents were equal to $2,039,170.
Our principal cash requirements are for operating expenses, including equipment,
supplies, employee costs, capital expenditures and funding of the operations.
Our primary sources of cash were from revenues and a recently completed private
placement offering of our common stock.

      During the six months ended June 30, 2005, we used $2,660,697 for
operating activities, as compared to we received $1,588,419 for the same period
in 2004. The increase in cash use was primarily due to the net loss sustained in
2005, which is largely the result of an intensified effort to develop our
business model to procure new business. In 2004, we showed a profit largely as a
result of a large sale to a major customer.

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

      In February 2005, we commenced a private placement offering of up to
2,500,000 shares of our common stock at a purchase price of $2.00 per share. As
of June 30, 2005, we had sold 1,607,250 shares of our common stock, receiving
net proceeds of $2,944,969. We completed the offering on July 31, 2005. Our need
for such additional financing depends in part on our future performance, which,
in turn, is subject to general economic conditions and business and other
factors beyond our control. We anticipate that the proceeds from the private
placement offering and the funds made available under the Revolving Loan are
sufficient to sustain our business operations over the next twelve months.


FACTORS THAT MAY AFFECT FUTURE RESULTS

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

WE ARE A NEW COMPANY WITH A LIMITED OPERATING HISTORY.

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

      Some of the factors upon which our success will depend include (but are
not limited to) the following:
      o     the emergence of competitors in our target market, and the quality
            and development of their products and services; and
      o     the market's acceptance of our products and services.



                                       17
<PAGE>

      In order to address these risks, we must (among other things) be able to:
      o     successfully complete the development of our products and services;
      o     modify our products and services as necessary to meet the demands of
            our market;
      o     attract and retain highly skilled employees; and
      o     respond to competitive influences.

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

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

      The market for our products and services is competitive and is likely to
become even more competitive in the future. Increased competition could result
in pricing pressures, reduced sales, reduced margins or the failure of our
products and services to achieve or maintain market acceptance, any of which
would have a material adverse effect on our business, results of operations and
financial condition. Many of our current and potential competitors enjoy
substantial competitive advantages, such as:
      o     greater name recognition and larger marketing budgets and resources;
      o     established marketing relationships and access to larger customer
            bases;
      o     substantially greater financial, technical and other resources; and
      o     larger technical and support staffs.

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

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

      We experienced a net operating loss of approximately $1,446,900 for the
six months ended June 30, 2005 and an accumulated deficit of $10,321,635 as of
June 30, 2005. There can be no assurance that we will be able to operate
profitably in the future. In the event that we are not successful in
implementing our business plan, we will require additional financing in order to
succeed. There can be no assurance that additional financing will be available
now or in the future on terms that are acceptable to us. If adequate funds are
not available or are not available on acceptable terms, we may be unable to
develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures, all of which could have a
material adverse effect on our business, financial condition or operating
results.

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

      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.



                                       18
<PAGE>

WE ARE DEPENDENT UPON OUR LARGEST CUSTOMERS.

      The loss of any key customer could have a material adverse effect upon our
financial condition, business, prospects and results of operation. The Company's
two largest customers represent approximately 80% of our revenues for the six
months ended June 30, 2005. Although we anticipate that these customers will
represent less than 24% of revenue for the 2005 fiscal year and less than 16% of
revenue for the 2006 fiscal year, the loss of these customers may contribute to
our inability to operate as a going concern and may require us to obtain
additional equity funding or debt financing (beyond the amounts described above)
to continue our operations. We cannot be certain that we will be able to obtain
such additional financing on commercially reasonable terms, or at all.

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

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

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

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

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

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

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

      We may need additional funds to expand or meet all of our operating needs.
If we need additional financing, we cannot be certain that it will be available
on favorable terms, if at all. Further, if we issue equity securities,
stockholders will experience additional dilution and the equity securities may
have seniority over our common stock. If we need funds and cannot raise them on
acceptable terms, we may not be able to:
      o     develop or enhance our service offerings;
      o     take advantage of future opportunities; or
      o     respond to customers and competition.

WE MUST MANAGE GROWTH TO ACHIEVE PROFITABILITY.

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

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

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



                                       19
<PAGE>

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

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

WE DO NOT INTEND TO PAY DIVIDENDS.

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

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

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

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

      The market price for our common stock has been, and will likely to
continue to be, volatile. The following factors may cause significant
fluctuations in the market price of our ordinary shares:
      o     fluctuations in our quarterly revenues and earnings or those of our
            competitors;
      o     shortfalls in our operating results compared to levels expected by
            the investment community;
      o     announcements concerning us or our competitors;
      o     announcements of technological innovations;
      o     sale of shares or short-selling efforts by traders or other
            investors;
      o     market conditions in the industry; and
      o     the conditions of the securities markets.

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


ITEM 3. CONTROLS AND PROCEDURES.

      (a) Our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) are designed to provide reasonable assurance that information
required to be disclosed in our reports filed under the Exchange Act, such as
this quarterly report on Form 10-QSB, is recorded, processed, summarized and
reported within the time periods specified in the rules of the Securities and
Exchange Commission. Our disclosure controls and procedures also are designed to
ensure that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosures.

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

      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.



                                       20
<PAGE>

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

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


PART II - OTHER INFORMATION
---------------------------


ITEM 1. LEGAL PROCEEDINGS.

      None.

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

      During the quarter ended June 30, 2005, we sold 522,500 shares of our
common stock to accredited investors, at a purchase price of $2.00 per share, in
a private placement offering. The shares of our common stock sold through this
private placement offering are exempt from registration under Section 5 of the
Securities Act of 1933, as amended, and pursuant to Rule 506 promulgated under
Regulation D.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

      None.

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

      None.

ITEM 5. OTHER INFORMATION.

      None


ITEM 6. EXHIBITS.


--------------------------------------------------------------------------------
No.   Item
--------------------------------------------------------------------------------
31.1  Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
      and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
--------------------------------------------------------------------------------
31.2  Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
      and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
--------------------------------------------------------------------------------
32.1  Certification of the CEO and CFO pursuant to Rule 13a-14(b) and Rule
      15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section
      1350.
--------------------------------------------------------------------------------


                                       21
<PAGE>

                                   SIGNATURES


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


                                        AUXILIO, INC.


Date:  September 2, 2005                By: /s/   Joseph Flynn
                                           ------------------------------------
                                                  Joseph Flynn
                                                  Chief Executive Officer
                                                  (Principal Executive Officer)


Date:  September 2, 2005                   /s/    Paul T. Anthony
                                           ------------------------------------
                                                  Paul T. Anthony
                                                  Chief Financial Officer
                                                  (Principal Accounting Officer)



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