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 March 31, 2006


               [ ] 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 ____

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

                                  Yes ___ No X

The number of shares of the issuer's common stock, $0.001 par value, outstanding
as of May 11, 2006 was 16,076,948.

Transitional Small Business Disclosure Format:

                                  Yes ___ No X


<PAGE>

                                  AUXILIO, INC.
                                   FORM 10-QSB
                                TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION

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

               Condensed Consolidated Balance Sheet
                         as of March 31, 2006                                                  3

               Condensed Consolidated Statements of Operations
                         for the Three Months Ended  March 31, 2006 and 2005                   4

               Condensed Consolidated Statements of Comprehensive Loss
                         for the Three Months Ended March 31, 2006 and 2005                    5

               Condensed Consolidated Statement of Stockholders' Equity
                         for the Three Months Ended March 31, 2006                             6

               Condensed Consolidated Statements of Cash Flows
                         for the Three Months Ended March 31, 2006 and 2005                    7

               Notes to Condensed Consolidated Financial Statements                            9

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

Item 3.         Controls and Procedures.                                                      20

PART II - OTHER INFORMATION

Item 1.         Legal Proceedings.                                                            21

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

Item 3.         Defaults Upon Senior Securities.                                              21

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

Item 5.         Other Information.                                                            21

Item 6.         Exhibits.                                                                     21

Signatures                                                                                    22
</TABLE>


                                       2
<PAGE>

 PART I - FINANCIAL INFORMATION

ITEM 1.                 FINANCIAL STATEMENTS.

<TABLE>
<CAPTION>
                                                   AUXILIO, INC. AND SUBSIDIARIES
                                                CONDENSED CONSOLIDATED BALANCE SHEET
                                                           MARCH 31, 2006
                                                            (UNAUDITED)

                                                               ASSETS
<S>                                                                                                             <C>
        Current assets:
           Cash and cash equivalents                                                                            $    292,571
           Accounts receivable, net                                                                                  369,421
           Prepaid and other current assets                                                                          147,328
           Supplies                                                                                                  420,803
                                                                                                         --------------------
                  Total current assets                                                                             1,230,123

        Property and equipment, net                                                                                  281,582
        Deposits                                                                                                      41,355
        Intangible assets, net                                                                                       620,542
        Goodwill                                                                                                   1,517,017
                                                                                                         --------------------
                  Total assets                                                                                  $  3,690,619
                                                                                                         ====================

                                                LIABILITIES AND STOCKHOLDERS' EQUITY

        Current liabilities:
           Accounts payable and accrued expenses                                                                 $   733,564
           Accrued compensation and benefits                                                                         243,874
           Deferred revenue                                                                                          390,413
           Current portion of long-term debt                                                                          16,626
           Current portion of capital lease obligations                                                               34,211
           Revolving loan payable, net of discount of $79,605                                                        170,395
                                                                                                         --------------------
                  Total current liabilities                                                                        1,589,083

        Commitments and contingencies                                                                                      -

        Stockholders' equity:
           Common stock, par value at $0.001, 33,333,333 shares
             authorized,15,964,948 shares issued and outstanding                                                      15,966
           Additional paid-in capital                                                                             15,487,614
           Accumulated deficit                                                                                   (13,402,044)
                                                                                                         --------------------
                  Total stockholders' equity                                                                       2,101,536
                                                                                                         --------------------
                  Total liabilities and stockholders' equity                                                  $    3,690,619
                                                                                                         ====================
</TABLE>


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


                                       3
<PAGE>

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

                                                   Three Months Ended March 31,
                                                 -------------------------------
                                                    2006               2005
                                                 ------------      -------------
Revenues                                         $  2,035,193      $    784,077
Cost of revenues                                    1,971,374           774,174
                                                 ------------      -------------
Gross profit                                           63,819             9,903
Operating expenses:
 Sales and marketing                                  510,903           439,720
 General and administrative expenses                  657,164           483,876
 Intangible asset amortization                         63,802            93,368
                                                 ------------      -------------
    Total operating expenses                        1,231,869         1,016,964
                                                 ------------      -------------
Loss from operations                               (1,168,050)       (1,007,061)
                                                 ------------      -------------
Other income (expense):
 Interest expense                                      (9,850)          (20,957)
 Interest income                                        1,327             2,212
 Gain on sale of marketable securities                 10,448           403,795
                                                 ------------      -------------
    Total other income (expense)                        1,925           385,050
                                                 ------------      -------------
Loss before provision for income taxes             (1,166,125)         (622,011)
Income tax expense                                      2,400             3,200
                                                 ------------      -------------
Net loss                                         $ (1,168,525)     $   (625,211)
                                                 ============      ============

Net loss per share:
    Basic                                        $      (0.07)     $      (0.04)
                                                 ============      ============
    Diluted                                      $      (0.07)     $      (0.04)
                                                 ============      ============

Number of weighted average shares:
    Basic                                          15,961,724        14,563,651
                                                 ============      ============
    Diluted                                        15,961,724        14,563,651
                                                 ============      ============

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


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                Three Months Ended March 31,
                                                                --------------------------
                                                                   2006          2005
                                                                -----------    -----------
<S>                                                             <C>            <C>
Net loss                                                        $(1,168,525)   $  (625,211)
                                                                -----------    -----------
Other comprehensive loss:
  Unrealized gain on marketable securities                               --         52,500
  Reclassification of realized amounts included in net (loss)            --       (177,210)
                                                                -----------    -----------
  Total other comprehensive (loss)                                       --        124,710
                                                                -----------    -----------
Comprehensive (loss)                                            $(1,168,525)   $  (749,921)
                                                                ===========    ===========
</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
                        THREE MONTHS ENDED MARCH 31, 2006
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                Additional                        Total
                                                       Common Stock              Paid-in       Accumulated     Stockholders'
                                                   Shares        Amount          Capital         Deficit         Equity
                                                ------------   ------------    ------------    ------------    ------------
<S>                                               <C>          <C>            <C>             <C>             <C>
Balance at December 31, 2005                      15,961,410   $     15,963   $ 15,190,416    $(12,233,519)   $  2,972,860

Common stock issued for services                      3,538               3          4,950              --           4,953
Relative fair value of warrants issued
related to revolving loan payable                         --             --         85,079              --          85,079
Stock compensation expense for options and
warrants granted to employees and consultants             --             --        207,169              --         207,169
Net loss
                                                          --             --              --      (1,168,525)     (1,168,525)
                                                ------------   ------------    ------------    ------------    ------------
Balance at March 31, 2006                         15,964,948   $    15,966     $15,487,614    $(13,402,044)   $  2,101,536
                                                ============   ============    ============   ============    ============
</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>
                                                                                                Three Months Ended March 31,
                                                                                                ---------------------------
                                                                                                   2006           2005
                                                                                                -----------    -----------
<S>                                                                                             <C>            <C>
Cash flows used for operating activities:
                 Net loss                                                                       $(1,168,525)   $  (625,211)
Adjustments to reconcile net loss to net cash
                 used for operating activities:
                 Depreciation                                                                        26,387         19,639
                 Amortization of intangible assets                                                   63,802         93,368
                 Stock compensation expense for warrants and options issued
                 to employees and consultants                                                       207,169             --
                 Stock issued for services                                                            4,953             --
                 Interest expense related to amortization of warrants issued                          5,474         10,634
                 Interest expense                                                                     2,055             --
                 Gain on sale of marketable securities                                              (10,448)      (403,795)
Changes in operating assets and liabilities:
                 Accounts receivable                                                                119,403         51,559
                 Supplies                                                                            22,774         99,347
                 Prepaid and other current assets                                                   (55,963)        15,894
                 Accounts payable and accrued expenses                                              220,905       (796,796)
                 Accrued compensation and benefits                                                  (79,063)            --
                 Deferred revenue                                                                    91,551        (49,586)
                                                                                                -----------    -----------
                                  Net cash used for operating activities                           (549,526)    (1,584,947)
                                                                                                -----------    -----------
Cash flows provided by investing activities:
                 Purchases of property and equipment                                                (97,107)       (29,975)
                 Net proceeds from sale of marketable securities                                     26,698        896,045
                                                                                                -----------    -----------
                                  Net cash (used for) provided by investing activities              (70,409)       866,070
                                                                                                -----------    -----------
Cash flows provided by financing activities:
                 Proceeds from line of credit agreement                                             250,000        500,000
                 Borrowings on capital leases                                                            --         14,117
                 Payments on capital leases                                                          (2,435)          (353)
                 Payments on notes payable and long-term debt                                            --       (122,761)
                 Net proceeds from issuance of common stock                                              --      1,983,569
                 Proceeds from exercise of warrants                                                      --          2,250
                                                                                                -----------    -----------
                                  Net cash provided by financing activities                         247,565      2,376,822
                                                                                                -----------    -----------
Net (decrease) increase in cash and cash equivalents                                               (372,370)     1,657,945
Cash and cash equivalents, beginning of period                                                      664,941        951,090
                                                                                                -----------    -----------
Cash and cash equivalents, end of period                                                        $   292,571    $ 2,609,035
                                                                                                ===========    ===========
</TABLE>


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


                                       7
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                            Three Months Ended March 31,
                                                                                        -------------------------------------
                                                                                              2006               2005
                                                                                        -----------------  ------------------
<S>                                                                                             <C>               <C>
Supplemental disclosure of cash flow information:

     Interest paid                                                                              $  2,321          $   10,318
                                                                                        =================  ==================

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

Non-cash investing and financing activities:

     Relative fair value of warrants issued related to issuance of note payable                $  85,079     $        58,029
                                                                                        =================  ==================
     Warrants issued for expenses of private placement
                                                                                                       -          $  106,846
                                                                                        =================  ==================

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


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


                                       8
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                   THREE MONTHS ENDED MARCH 31, 2006 and 2005
                                   (UNAUDITED)

1.       BASIS OF PRESENTATION

      The accompanying unaudited condensed consolidated financial statements of
Auxilio, Inc. and its subsidiaries ("the Company") have been prepared in
accordance with generally accepted accounting principles of the United States of
America for interim financial statements pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with accounting principles have been omitted. These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2005, as
filed with the Securities and Exchange Commission on April 17, 2006.

      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 of the Company 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 $1,168,525 for the three months ended March 31, 2006
after a loss of $3,358,784 for the year ended December 31, 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
March 31, 2006, has an accumulated deficit of $13,402,044. 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.

      In April 2006 the Company raised additional working capital through a
$3,000,000 fixed price convertible note agreement with Laurus Master Fund. The
Company believes that such working capital will provide it with the ability to
continue as a going concern for at least the next twelve months. Through March
31, 2006, 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 convertible note agreement, 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.

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


                                       9
<PAGE>

2.       RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments. SFAS No. 155 replaces SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 155 permits fair value measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation.
It clarifies which interest-only strips and principal-only strips are not
subject to the requirements of SFAS No. 133. SFAS No. 155 also establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. It also
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on
a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. SFAS No. 155 shall be effective for all financial
instruments acquired or issued after the beginning of an entity's first year
that begins after September 2006 (January 1, 2007 for the Company). The Company
does not expect SFAS No. 155 to have a material impact on its results of
operations and financial position in future periods.

      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. The Company does not expect SFAS No.
154 to have a material impact on its results of operations and financial
position in future periods.

3.       OPTIONS AND WARRANTS.

Below is a summary of Auxilio stock option and warrant activity during the
three-month period ended March 31, 2006:

Options

<TABLE>
<CAPTION>
                                                    Weighted Average Exercise   Weighted Average Remaining
                                        Shares              Price                    Term in Years        Aggregate Intrinsic Value
                                  -----------------     ---------------         --------------------- -----------------------------
<S>                                        <C>          <C>                                      <C>   <C>
Outstanding at December 31, 2005         2,008,497      $        1.48
   Granted                                  499,000     $        1.40
   Exercised                                      -                -
   Cancelled                              (136,000)     $        1.61
                                  -----------------     -------------
Outstanding at March 31, 2006           2,371,497       $        1.46                            8.64  $                  692,406
                                  ===============       =============                            ----  ==========================
Exercisable at March 31, 2006              532,055      $        1.33                            7.64  $                  247,524
                                  ================      =============                            ====  ==========================

Warrants

                                     Shares         Weighted Average Exercise  Weighted Average Remaining  Aggregate Intrinsic Value
                                                            Price                   Term in Years
                                  --------------------- --------------          ------------------------- -------------------------
Outstanding at December 31, 2005         1,398,535      $       1.25
   Granted                                  87,500      $       1.80
   Exercised                                     -               -
   Cancelled                                     -               -
Outstanding at March 31, 2006            1,486,035      $        1.28                           3.37  $                  871,399
                                  ================      =============                           ====  ==========================
Exercisable at March 31, 2006               932,702     $        1.47                           3.42  $                  454,733
                                  =================     =============                           ====  ==========================
</TABLE>

      During the three months ended March 31, 2006, the Company granted 499,000
options to its employees and directors to purchase shares of the Company's
common stock at an exercise price of $1.40 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 February 2007. 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 4.51%; (ii) estimated volatility of 65.16%; (iii)
dividend yield of 0.0%; and (iv) expected life of the options of three years.


                                       10
<PAGE>

      In March 2006, the Company borrowed $250,000 from Cambria Investment Fund
L.P., a related party, under the Revolving Loan Agreement. This borrowing earned
Cambria the right to receive warrants to purchase 87,500 shares of the Company's
common stock at $1.80, with 17,500 shares vesting for every multiple of $50,000
borrowed under the Revolving Loan Agreement with the Company. The fair value of
the warrant for the 87,500 shares issued in connection with the borrowing was
$128,970. The fair value of the warrant was determined using the Black-Scholes
option-pricing model, with the following assumptions: (i) no expected dividends;
(ii) a risk free interest rate of 4.51%; (iii) expected volatility of 90.41%;
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 allocated a value of $85,079 to the warrants based on
their relative fair value. Such amount was recorded as a discount against the
carrying value of the note and will be amortized to interest expense over the
life of the note using the straight-line interest method. In April 2006, the
Company paid in full all outstanding principal balance under the Revolving Loan
Agreement.

      Beginning January 1, 2006, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payments" ("SFAS No.
123(R)") on a modified prospective transition method to account for its employee
stock options and warrants. Under the modified prospective transition method,
fair value of new and previously granted but unvested equity awards are
recognized as compensation expense in the income statement, and prior period
results are not restated. For the three months ended March 31, 2006, stock-based
compensation expense recognized in the statement of operations as follows

Cost of Revenues                                              $ 40,262
Sales and marketing                                             57,994
General and administrative expenses                            108,913
                                                           ------------
   Total stock based compensation expense                     $207,169
                                                           ============

      If the Company had accounted for stock-based compensation plans using the
fair value based accounting method described by SFAS No. 123 for the periods
prior to January 1, 2006, the Company's net income per common share-basic and
diluted for the three months ended March 31, 2005, would have been the
following:

                                                              Three Months Ended
                                                                March 31, 2005
                                                              ------------------
Net loss:
   As reported                                                $  (625,211)
   Add: APB 25 Expense                                                  -
   Deduct:  Total stock based employee compensation
   expense determined under SFAS 123 fair value based method      258,714
   Net loss, as adjusted                                      $  (883,925)

Basic loss per share:
   As reported                                                   $ (0.04)
   Pro forma                                                     $ (0.06)
Diluted loss per share:
   As reported                                                   $ (0.04)
   Pro forma                                                     $ (0.05)

4.       NET 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 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 3,857,532 and 3,095,732 equity instruments
at March 31, 2006 and 2005, respectively. None of the equity instruments
outstanding at March 31, 2006 and 2005 have been included in the computation of
diluted EPS for the three months ended March 31, 2006 and 2005 due to the net
loss for these periods, which causes these equity instruments to be
anti-dilutive.

5.       ACCOUNTS RECEIVABLE

As of March 31, 2006, the accounts receivable balance is as follows:

Trade receivable                                      $   415,471

Allowance for doubtful accounts                           (46,050)
                                                      --------------
   Total accounts receivable                          $    369,421
                                                      ==============

                                       11
<PAGE>

6.       INVESTMENTS IN MARKETABLE SECURITIES

      Investments in marketable securities consist of equity securities
classified as "available for sale" under SFAS No. 115 and reported at fair
value. Accordingly, unrealized gains and losses on the equity securities are
reflected in the statement of comprehensive income (loss).

7.       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.

8.       EMPLOYMENT AGREEMENTS

      The Company entered into an employment agreement with Joseph Flynn to
serve as its Chief Executive Officer, effective April 1, 2004. Mr. Flynn's
agreement had a term of two years and provided for a base annual salary of
$165,000. Mr. Flynn may have received an annual bonus if certain earnings and
revenue targets were accomplished. On March 14, 2006, the Company entered into a
new employment agreement with Mr. Flynn. This new agreement was effective
January 1, 2006, has a term of two years, and provides for a base annual salary
of $180,000. Mr. Flynn received 100,000 options and may receive an annual bonus
if certain earnings and revenue targets are accomplished.

      Effective April 1, 2004, the Company entered into an employment agreement
with Etienne Weidemann, to serve as President and Chief Operating Officer. Mr.
Weidemann's agreement had a term of two years, and provided for a base annual
salary of $160,000. Mr. Weidemann may have received an annual bonus if certain
earnings and revenue targets were accomplished. On March 15, 2006, the Company
entered into a new employment agreement with Mr. Weidemann. This new agreement
was effective January 1, 2006, has a term of two years, and provides for a base
annual salary of $175,000. Mr. Weidemann received 80,000 options and may receive
an annual bonus if certain earnings and revenue targets are accomplished

      On December 10, 2004, the Company entered into an employment agreement
with Paul T. Anthony, to serve as Chief Financial Officer and Corporate
Secretary, effective January 3, 2005. Mr. Anthony's agreement had a term of two
years, and provided for a base annual salary of $155,000. Mr. Anthony received
warrants and may have received an annual bonus if certain earnings and revenue
targets are accomplished. On March 15, 2006, the Company entered into a new
employment agreement with Mr. Anthony. This new agreement was effective January
1, 2006, has a term of two years, and provides for a base annual salary of
$170,000. Mr. Anthony received 75,000 options and may receive an annual bonus if
certain earnings and revenue targets are accomplished.

9.       CONCENTRATIONS

      The Company's four largest customers accounted for approximately 89% of
the Company's revenues for the three months ended March 31, 2006. Accounts
receivable for these four customers totaled approximately $222,000 as of March
31, 2006. The Company's two largest customers accounted for approximately 78% of
the Company's revenues for the three months ended March 31, 2005.

10.          SEGMENT REPORTING

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

11.          SUBSEQUENT EVENT

      In April 2006, the Company entered into a $3,000,000 Fixed Price
Convertible Note (the "Note") agreement with Laurus Master Fund (LMF). The term
of the Note is for three years at an interest rate of WSJ prime plus 2.0%. The
fixed conversion price to convert the Note to equity will be set at a premium to
the average closing price of the Company's common stock for the 10 days prior to
the closing of the transaction based on a tiered schedule whereby the first
third of the investment amount will have a fixed conversion price of $1.68, the
next third will have a fixed conversion price of $1.78, and the last third will
have a fixed conversion price of $1.92. The Company shall reduce the principal
Note by 1/60th per month starting 90 days after the closing, payable in cash or
registered stock.

      The Company will file a registration statement for the Company's common
stock underlying the note and all the underlying warrants with the SEC within 60
days of funding and will attempt to have the registration declared effective
within 180 days of funding. The Company shall provide a first lien on all assets
of the Company. The Company will have the option of redeeming any outstanding
principal of the Note by paying to the LMF 120% of such amount, together with
accrued but unpaid interest under this Note. LMF earned fees in the amount of
3.5% of the total investment amount at the time of closing. LMF also received
478,527 warrants to purchase shares of the Company's common stock. The exercise
price of the warrants was $1.96, representing a 120% premium to the average
closing price of the Company's common stock for the 10 days prior to the closing
of the transaction. The warrants have a term of seven years. In addition, the
Company paid loan origination fees to LMF of $105,000.



                                       12
<PAGE>

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

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

      Although we have been able to raise additional working capital through
private placement offerings of our common stock and through our recent debt
financing with Laurus Master Fund, Ltd., we may not be able to continue this
practice in the future nor may we be able to obtain additional working capital
through other debt or equity financings. In the event that sufficient capital
cannot be obtained, we may be forced to significantly reduce operating expenses
to a point which would be detrimental to business operations, curtail business
activities, sell business assets or discontinue some or all of our business
operations, or take other actions which could be detrimental to business
prospects and result in charges which could be material to our operations and
financial position. In the event that any future financing should take the form
of the sale of equity securities, the current equity holders may experience
dilution of their investments. In addition, we may continue to generate
insufficient revenues from our operations to cover our cash operating expenses.
As a result, we may not be able to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties

      Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements
contained in this Quarterly Report, which speak only as of the date of this
Quarterly Report, or to make predictions about future performance based solely
on historical financial performance. We disclaim any obligation to update
forward-looking statements contained in this Quarterly 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, 2005. 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

      Prior to March 2004, Auxilio, then operating under the name PeopleView,
Inc., 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. In March, 2004, Auxilio decided
to change its business strategy and sold the PeopleView business to Workstream,
Inc ("Workstream"). Following completion of the sale of PeopleView, Inc. to
Workstream, the Company focused its business strategy on providing outsourced
image management services to healthcare facilities.

      To facilitate this strategy, Auxilio in April 2004 acquired Alan Mayo &
Associates, dba The Mayo Group ("The Mayo Group" or "TMG"), a provider of
integration strategies and outsourced services for document image management in
healthcare facilities. It was this acquisition that formed the basis of the
Auxilio's current operations.


                                       13
<PAGE>

      Auxilio now provides total outsourced document image management services
and related financial and business processes for major healthcare facilities.
Our proprietary technologies and unique processes assist hospitals, health plans
and health systems with strategic direction and services that reduce document
image expenses, increase operational efficiencies and improve the productivity
of their staff. Auxilio's analysts, consultants and resident hospital teams work
with senior hospital financial management and department heads to determine the
best possible long term strategy for managing the millions of document images
produced by their facilities on an annual basis. Auxilio's document image
management programs help our clients achieve measurable savings and a fully
outsourced document image management process. Auxilio's target market includes
medium to large hospitals, health plans and healthcare systems.

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

      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        accounting for income taxes
o        impairment of intangible assets
o        deferred revenue

      Revenues from equipment sales transactions are deemed earned when the
equipment is 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 actually placed. Service and supply revenue is earned monthly
during the term of the various contracts, 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 in the contract.

      We enter into arrangements that include multiple deliverables, which
typically consist of the sale of equipment and a support services contract.
Pursuant to EITF 00-21, we account 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 17,
2006 for a discussion of our critical accounting policies.


                                       14
<PAGE>

RESULTS OF OPERATIONS

For the Three Months Ended March 31, 2006 Compared to the Three Months Ended
March 31, 2005

Revenue

      Revenue increased $1,251,116 to $2,035,193 for the three months ended
March 31, 2006, as compared to the same period in 2005. The current period's
revenue is higher due substantially to a single March 2006 equipment sale
totaling approximately $690,000 compared to a total of $49,586 during the first
quarter of 2005. The increase in revenue is also attributed to an increase in
recurring revenue contracts.

Cost of Revenue

      Cost of revenue consists of document imaging equipment, parts, supplies
and salaries and expenses of field services personnel. Cost of revenue was
$1,971,734 for the three months ended March 31, 2006, as compared to $774,174
for the same period in 2005. The increase in the cost of revenue for the first
quarter of 2006 is consistent in relation to the increase in revenues. A
substantial component of these costs was the cost of a March 2006 equipment sale
as well as the costs to implement and maintain an increased number of recurring
revenue contracts. Also contributing to the increase is a stock based
compensation charge for approximately $40,000 in 2006. The stock based
compensation charge is a new requirement in 2006 in accordance with SFAS 123(R).

Sales and Marketing

      Sales and marketing expenses include salaries, commissions and expenses
for sales and marketing personnel, travel and entertainment, and other selling
and marketing costs. Sales and marketing expenses were $510,903 for the three
months ended March 31, 2006, as compared to $439,720 for the same period in
2005. Sales and marketing expenses for the first quarter of 2006 are higher as a
result of the increase in sales staff and travel expenses incurred in an
intensified effort to procure new business, and a stock based compensation
charge for approximately $58,000 in 2006. The stock based compensation charge is
a new requirement in 2006 in accordance with SFAS 123(R).

General and Administrative

      General and administrative expenses include personnel costs for finance,
administration, information systems, and general management, as well as
facilities expenses, professional fees, legal expenses and other administrative
costs. General and administrative expenses increased by $173,288 to $657,164 for
the three months ended March 31, 2006, as compared to $483,876 for the same
period in 2005. The increase is due to higher legal and accounting fees, an
increase in administrative staff in 2006, and a stock based compensation charge
for approximately $109,000 in 2006. The stock based compensation charge is a new
requirement in 2006 in accordance with SFAS 123(R).

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
evaluate the goodwill for impairment at least annually. We examine the carrying
value of our other intangible assets as current events and circumstances warrant
a determination of whether there are any impairment losses. If indicators of
impairment arise with respect to our other intangible assets and our future cash
flows are not expected to be sufficient to recover the assets' carrying amounts,
an impairment loss will be charged as an expense in the period identified. To
date, we have not identified any event that would indicate an impairment of the
value of our goodwill recorded in our condensed consolidated financial
statements. However in December 2005, the remaining value of intangible assets
related to non-compete agreements was charged to expense as management
determined they no longer held value. Other intangible assets are amortized over
their estimated lives.

      Amortization expense was $63,802 for the three months ended March 31, 2006
compared to $93,368 for the same period in 2005. The reduction is due to the
fact that we charged the remaining book value of certain non-compete agreements
to expense in December 2005, as management determined they had no future value.

Other Income (Expense)

      Interest expense for the three months ended March 31, 2006 was $9,850,
compared to $20,957 for the same period in 2005. We borrowed less on our
revolving note payable and for a shorter period of time in 2006. Interest income
is primarily derived from short-term interest-bearing securities and money
market accounts. Interest income for the three months ended March 31, 2006 was
$1,327, as compared to $2,212 for the same period in 2005, primarily due to a
decrease in the average balance of invested cash and short-term investments.


                                       15
<PAGE>

      Gain on marketable equity securities for the three months ended March 31,
2006 was $10,448, compared to $403,795 for the same period in 2005. The 2006
gain was from our sale of 32,500 shares in General Environmental Management Inc
(GEVM.OB). The 2005 gain was from our sale of 196,900 shares in Workstream Inc.
(WSTM).

Income Tax Expense

Income tax expense for the three months ended March 31, 2006 and 2005 of $2,400
and $3,200 respectively, represents the minimum amounts due for state filing
purposes.

LIQUIDITY AND CAPITAL RESOURCES

      At March 31, 2006, our cash and cash equivalents were equal to $292,571.
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 2005 private placement
offering of our common stock.

      During the three months ended March 31, 2006, we used $549,526 for
operating activities, as compared to using $1,584,947 for the same period in
2005. The decrease in cash use was primarily due to paying down approximately
$800,000 of accounts payable and accrued expenses in the first quarter of 2005.

      In November 2005, we entered into a Loan and Security Agreement (the Loan)
with Cambria Investment Fund, L.P. One of our directors, Michael D. Vanderhoof,
is a principal in Cambria Investment Fund. Under the agreement, we can borrow up
to $500,000. Interest accrues daily upon any unpaid principal balance at the
rate of twelve percent (12%) per annum and is payable in full on a quarterly
basis. The outstanding principal balance is due and payable in full on March 15,
2007. The Loan is secured by substantially all of our assets. In the event that
we complete any future public or private placement offering which results in net
proceeds in excess of $3,000,000, Cambria Investment Fund L.P. may demand
repayment of the Loan. As of December 31, 2005, there were no borrowings from
this Loan. In March 2006, we borrowed $250,000 on this Loan. In April 2006, the
Loan was paid off with funds received from Laurus Master Fund Fixed Price
Convertible Note.

      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. We
completed the offering on July 31, 2005 and sold 1,619,750 shares of our common
stock as part of this offering, receiving net proceeds of $2,967,327.

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, such as
ours, that are operating in new and rapidly evolving markets.

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

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

      o     the market's acceptance of our products and services.


                                       16
<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.

      WE HAVE A HISTORY OF LOSSES AND MAY NEED ADDITIONAL FINANCING TO CONTINUE
OUR OPERATIONS AND SUCH FINANCING MAY NOT BE AVAILABLE UPON FAVORABLE TERMS, IF
AT ALL.

      We experienced a net operating loss of approximately $1,168,525 for the
three months ended March 31, 2006 and an accumulated deficit of $13,402,044 as
of March 31, 2006. There can be no assurance that we will be able to operate
profitably in the future. In the event that we are not successful in
implementing our business plan, we will require additional financing in order to
succeed. There can be no assurance that additional financing will be available
now or in the future on terms that are acceptable to us. If adequate funds are
not available or are not available on acceptable terms, we may be unable to
develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures, all of which could have a
material adverse effect on our business, financial condition or operating
results. If sufficient capital cannot be obtained, we may be forced to
significantly reduce operating expenses to a point which would be detrimental to
business operations, curtail research and development activities, sell business
assets or discontinue some or all of our business operations, or take other
actions which could be detrimental to business prospects and result in charges
which could be material to our operations and financial position. In the event
that any future financing should take the form of the sale of equity securities,
the current equity holders may experience dilution of their investments.

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

      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.


                                       17
<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. Our four
largest customers represent approximately 89% of our revenues for the three
months ended March 31, 2006. Although we anticipate that these customers will
represent less than 43% of revenue for the 2006 fiscal year and less than 24% of
revenue for the 2007 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 OUR 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.


                                       18
<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 3,900,068 shares of common stock, all of which
became 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.

      OUR COMMON STOCK IS LISTED ON THE OTC BULLETIN BOARD, AND AS SUCH, IT MAY
BE DIFFICULT TO RESELL YOUR SHARES OF STOCK AT OR ABOVE THE PRICE YOU PAID FOR
THEM OR AT ALL.

      Our common stock is currently trading on the OTC Bulletin Board. As such,
the average daily trading volume of our common stock may not be significant, and
it may be more difficult for you to sell your shares in the future at or above
the price you paid for them, if at all. In addition, our securities may become
subject to "penny stock" restrictions, including Rule 15g-9 under the Securities
Exchange Act of 1934, as amended, which imposes additional sales practice
requirements on broker-dealers, such as requirements pertaining to the
suitability of the investment for the purchaser and the delivery of specific
disclosure materials and monthly statements. The Securities and Exchange
Commission has adopted regulations that generally define a "penny stock" to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. The exceptions include exchange-listed equity
securities and any equity security issued by an issuer that has:

      o     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

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

      We are presently subject to penny stock restrictions, and there is no
guarantee that we will be able to meet any of the exceptions to the "penny
stock" classification in the future. As a result of the "penny stock"
restrictions, broker-dealers may be less willing or able to sell and/or make a
market in our common stock. In addition, the liquidity of our securities may be
impaired, not only in the number of securities that can be bought and sold, but
also through delays in the timing of the transactions, reduction in securities
analysts' and the news media's coverage of us, adverse effects on the ability of
broker-dealers to sell our securities, and lower prices for our securities than
might otherwise be obtained.


                                       19
<PAGE>

ITEM 3.  CONTROLS AND PROCEDURES.

      As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Accounting Officer, of the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e)) pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934 as
amended. Based upon their evaluation, our Chief Executive Officer and Chief
Accounting Officer have concluded that our disclosure controls and procedures
are effective.

      No change in our internal control over financial reporting occurred during
our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

      Management is aware that there is a lack of segregation of duties due to
the small number of employees and consultants addressing our general
administrative and financial matters. However, management has determined that,
considering the employees involved and the control procedures in place, risks
associated with such lack of segregation are not significant and any potential
benefits of adding employees or consultants to clearly segregate duties do not
justify the expenses associated with such increases at this time.


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<PAGE>

PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS.

         None.

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

         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

         None.

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

         None.

ITEM 5.            OTHER INFORMATION.

         None

ITEM 6.  EXHIBITS.

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.



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<PAGE>

                                   SIGNATURES


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


                                        AUXILIO, INC.


Date:  May 12, 2006                     By:   /s/ Joseph Flynn
                                            ------------------------------------
                                                  Joseph Flynn
                                                  Chief Executive Officer
                                                  (Principal Executive Officer)


Date:  May 12, 2006                         /s/   Paul T. Anthony
                                            ------------------------------------
                                                  Paul T. Anthony
                                                  Chief Financial Officer
                                                  (Principal Accounting Officer)



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