UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q





(Mark
One)


[X]           QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period ended September 30, 2008








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


THE
SECURITIES EXCHANGE ACT OF 1934





For the
transition period from _______ to _______





Commission
file number 000-27507





AUXILIO,
INC.


(Exact
name of registrant as specified in its charter)











Nevada                                                                                                           88-0350448


(State or
other jurisdiction
of                                                                                     (I.R.S.
Employer


incorporation
or
organization)                                                                                   Identification
No.)











27401
Los Altos, Suite 100


Mission
Viejo, California  92691


(Address
of principal executive offices, zip code)





(949)
614-0700


(Issuer’s
telephone number)





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





Yes X                      No
____





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
accelerated filer o                                                                                                           Accelerated
filer                   o


Non-accelerated
filer   o                                                                                                         
Smaller reporting company  þ





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





Yes
                      NoX





The
number of shares of the issuer's common stock, $0.001 par value, outstanding as
of November 14, 2008 was 17,623,734.





1




AUXILIO,
INC.


FORM
10-Q


TABLE
OF CONTENTS


PageItem
      1.
                Financial
      Statements (Unaudited):Condensed
      Consolidated Balance Sheetas
      of September 30, 2008 (unaudited) and December 31,
    2008
                3Condensed
      Consolidated Statements of Operationsfor
      the Three and Nine Months Ended September 30, 2008 and 2007
      (unaudited)
                4Condensed
      Consolidated Statement of Stockholders’ Equityfor
      the Nine Months Ended September 30, 2008
(unaudited)
                5Condensed
      Consolidated Statements of Cash Flowsfor
      the Nine Months Ended September 30, 2008 and 2007
      (unaudited)
                6Notes
      to Unaudited Condensed Consolidated Financial
    Statements
                8Item
      2.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                14Item
      4T.
                Controls
      and Procedures.
                18
 
 PART II - OTHER
INFORMATION
 
 
 Item
      1A
                Risk
      Factors
                19Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds.
                21Item
      6.
                Exhibits.
                22Signatures
                
                23









2





PART I – FINANCIAL
INFORMATION





ITEM
      1.                 FINANCIAL
      STATEMENTS.





AUXILIO,
      INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETSSEPTEMBER
      30, 2008 & DECEMBER 31, 2007SEPTEMBER
      30, 2008
                              DECEMBER
      31, 2007(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                              
                              
                              $                      948,650
                              
                              
                              
                              $                     
      666,428Accounts
      receivable, net
                              
                              
                              1,956,036
                              
                              
                              
                              2,405,528Prepaid
      and other current assets
                              
                              
                              34,111
                              
                              
                              
                              46,980Supplies
                              
                              
                              631,967
                              
                              
                              
                              729,604Total
      current assets
                              
                              
                              3,570,764
                              
                              
                              
                              3,848,540Property
      and equipment, net
                              
                              
                              156,670
                              
                              
                              
                              208,936Deposits
                              
                              
                              28,790
                              
                              
                              
                              28,790Loan
      acquisition costs, net
                              
                              
                              85,657
                              
                              
                              
                              209,332Intangible
      assets, net
                              
                              
                              47,743
                              
                              
                              
                              190,973Goodwill
                              
                              
                              1,517,017
                              
                              
                              
                              1,517,017$                  
      5,406,641
                              
                              
                              
                              $                  
      6,003,588LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                              
                              
                              $                  
      1,775,749
                              
                              
                              
                              $                   1,566,260Accrued
      compensation and benefits
                              
                              
                              323,830
                              
                              
                              
                              486,110Deferred
      revenue
                              
                              
                              385,696
                              
                              
                              
                              382,895Loan
      payable, net of discount of $197,083 at December 31, 2007
                              
                              
                              -
                              
                              
                              
                              547,917Current
      portion of note payable, net of discount of $45,136 at September 30,
      2008
                              
                              
                              1,310,864
                              
                              
                              
                              600,000Current
      portion of capital lease obligations
                              
                              
                              8,974
                              
                              
                              
                              26,361Total
      current liabilities
                              
                              
                              3,805,113
                              
                              
                              
                              3,609,543Note
      payable, less current portion, net of discount of $110,306 at December 31,
      2007
                              
                              
                              -
                              
                              
                              
                              1,221,694Commitments
      and contingencies
                              
                              
                              -
                              
                              
                              
                              -Stockholders'
      equity:Common
      stock, par value at $0.001, 33,333,333 shares authorized,
                                17,623,734 shares
      issued and outstanding at September 30, 2008and
                                16,235,309 shares
      issued and outstanding at December 31, 2007
                              
                              
                              17,625
                              
                              
                              
                              16,237Additional
      paid-in capital
                              
                              
                              18,391,778
                              
                              
                              
                              17,364,202Accumulated
      deficit
                              
                              
                              (16,807,875)
                              
                              
                              
                              (16,208,088)Total
      stockholders' equity
                              
                              
                              1,601,528
                              
                              
                              
                              1,172,351Total
      liabilities and stockholders’ equity
                              
                              
                              $                  
      5,406,641
                              
                              
                              
                              $                  
      6,003,588





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







3








AUXILIO, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)Three
      Months
                      
                      
                      Nine
      MonthsEnded
      September 30,
                      
                      
                      Ended
      September 30,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      2007Revenues
                      
                      
                      $          
      4,188,191
                      
                      
                      
                      $          
      5,003,721
                      
                      
                      
                      $          14,852,849
                      
                      
                      $          15,888,744Cost
      of revenues
                      
                      
                      3,215,936
                      
                      
                      
                      3,830,689
                      
                      
                      
                      11,486,211
                      
                      
                      12,101,759Gross
      profit
                      
                      
                      972,255
                      
                      
                      
                      1,173,032
                      
                      
                      
                      3,366,638
                      
                      
                      3,786,985Operating
      expenses:Sales
      and marketing
                      
                      
                      367,375
                      
                      
                      
                      308,379
                      
                      
                      
                      1,067,836
                      
                      
                      896,763General
      & administrative expenses
                      
                      
                      975,769
                      
                      
                      
                      549,902
                      
                      
                      
                      2,217,415
                      
                      
                      1,795,628Intangible
      asset amortization
                      
                      
                      47,743
                      
                      
                      
                      59,541
                      
                      
                      
                      143,230
                      
                      
                      178,624Total
      operating expenses
                      
                      
                      1,390,887
                      
                      
                      
                      917,822
                      
                      
                      
                      3,428,481
                      
                      
                      2,871,015Income
      (loss) from operations
                      
                      
                      (418,632)
                      
                      
                      
                      255,210
                      
                      
                      
                      (61,843)
                      
                      
                      915,970Other
      income (expense):Interest
      expense
                      
                      
                      (94,207)
                      
                      
                      
                      (294,755)
                      
                      
                      
                      (535,031)
                      
                      
                      (701,351)Interest
      income
                      
                      
                      1,376
                      
                      
                      
                      7,219
                      
                      
                      
                      4,990
                      
                      
                      14,188Gain
      on extinguishment of debt
                      
                      
                      -
                      
                      
                      
                      199,951
                      
                      
                      
                      -
                      
                      
                      199,951Total
      other income (expense)
                      
                      
                      (92,831)
                      
                      
                      
                      (87,585)
                      
                      
                      
                      (530,041)
                      
                      
                      (487,212)Income
      (loss) before provision for income taxes
                      
                      
                      (511,463)
                      
                      
                      
                      167,625
                      
                      
                      
                      (591,884)
                      
                      
                      428,758Income
      tax expense
                      
                      
                      (5,503)
                      
                      
                      
                      (5,600)
                      
                      
                      
                      (7,903)
                      
                      
                      (16,800)Net
      income (loss)
                      
                      
                      $  
               (516,966)
                      
                      
                      
                      $              162,025
                      
                      
                      
                      $           
      (599,787)
                      
                      
                      $              
      411,958Net
      income (loss) per share:Basic
                      
                      
                      $                    (.03)
                      
                      
                      
                      $                     
      .01
                      
                      
                      
                      $(.04)
                      
                      
                      $                      
      .03Diluted
                      
                      
                      $ 
                        (.03)
                      
                      
                      
                      $                   (.02)
                      
                      
                      
                      $(.04)
                      
                      
                      $                    (.01)Number
      of weighted average shares:Basic
                      
                      
                      17,230,259
                      
                      
                      
                      16,135,309
                      
                      
                      
                      16,569,380
                      
                      
                      16,130,043Diluted
                      
                      
                      18,015,666
                      
                      
                      
                      20,774,453
                      
                      
                      
                      16,569,380
                      
                      
                      20,947,758
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.





4








AUXILIO,
      INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITYNINE
      MONTHS ENDED SEPTEMBER 30, 2008(UNAUDITED)Additional
                  
                  
                  
                  
                  
                  TotalCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Stockholders'Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  EquityBalance
      at December 31, 2007
                  
                  
                  16,235,309
                  
                  
                  
                  $               
      16,237
                  
                  
                  
                  $        
      17,364,202
                  
                  
                  
                  $       (16,208,088
                  )
                  
                  
                  $          
      1,172,351Stock
      compensation expense for options and warrants grantedto employees and
      consultants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  297,789
                  
                  
                  
                  -
                  
                  
                  
                  297,789Conversion
      of loan payable and accrued interest to common stock
                  
                  
                  842,175
                  
                  
                  
                  842
                  
                  
                  
                  386,558
                  
                  
                  
                  -
                  
                  
                  
                  387,400Conversion
      of note payable to common stock
                  
                  
                  75,000
                  
                  
                  
                  75
                  
                  
                  
                  125,925
                  
                  
                  
                  -
                  
                  
                  
                  126,000Warrants
      exercised
                  
                  
                  471,250
                  
                  
                  
                  471
                  
                  
                  
                  217,304
                  
                  
                  
                  -
                  
                  
                  
                  217,775Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (599,787)
                  
                  
                  
                  (599,787)Balance
      at September 30, 2008
                  
                  
                  17,623,734
                  
                  
                  
                  $               
      17,625
                  
                  
                  
                  $         18,391,778
                  
                  
                  
                  $        (16,807,875)
                  
                  
                  
                  $          
      1,601,528




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


5








AUXILIO,
      INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)Nine
      Months Ended September 30,2008
              
              
              2007Cash
      flows provided by operating activities:Net
      (loss) income
              
              
              $          
      (599,787)
              
              
              
              $             
      411,958Adjustments
      to reconcile net (loss) income to net cashprovided
      by operating activities:Depreciation
              
              
              89,602
              
              
              
              100,662Amortization
      of intangible assets
              
              
              143,230
              
              
              
              178,624Gain
      on extinguishment of debt
              
              
              -
              
              
              
              (199,951)Bad
      debt recovery
              
              
              (28,510)
              
              
              
              -Stock
      compensation expense for warrants and options issued to employees and
      consultants
              
              
              297,789
              
              
              
              327,295Interest
      expense related to amortization of warrants issued for
    loans
              
              
              65,170
              
              
              
              105,286Interest
      expense related to amortization of loan acquisition costs
              
              
              123,675
              
              
              
              184,955Interest
      expense related to accretion of loan
              
              
              197,083
              
              
              
              147,812Changes
      in operating assets and liabilities:Accounts
      receivable and other receivables
              
              
              478,002
              
              
              
              (1,413,553)Supplies
              
              
              97,637
              
              
              
              49,600Prepaid
      and other current assets
              
              
              12,869
              
              
              
              16,154Accounts
      payable and accrued expenses
              
              
              224,389
              
              
              
              344,902Accrued
      compensation and benefits
              
              
              (162,280)
              
              
              
              198,223Deferred
      revenue
              
              
              2,801
              
              
              
              175,388Net
      cash provided by operating activities
              
              
              941,670
              
              
              
              627,355Cash
      flows (used for) investing activities:Purchases
      of property and equipment
              
              
              (37,336)
              
              
              
              (25,243)Net
      cash (used for) investing activities
              
              
              (37,336)
              
              
              
              (25,243)Cash
      flows (used for) financing activities:Payments
      on capital leases
              
              
              (17,387)
              
              
              
              (15,344)Payments
      on loan payable
              
              
              (372,500)
              
              
              
              -Payments
      on note payable
              
              
              (450,000)
              
              
              
              (450,000)Acquisition
      fees paid for loans
              
              
              -
              
              
              
              (22,350)Proceeds
      from exercise of options and warrants
              
              
              217,775
              
              
              
              5,875Net
      cash (used for) financing activities
              
              
              (622,112)
              
              
              
              (481,819)Net
      increase in cash and cash equivalents
              
              
              282,222
              
              
              
              120,293Cash
      and cash equivalents, beginning of period
              
              
              666,428
              
              
              
              319,437Cash
      and cash equivalents, end of period
              
              
              $             
      948,650
              
              
              
              $             
      439,730




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







6


AUXILIO,
      INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(UNAUDITED)Nine
      Months Ended September 30,2008
              
              
              2007Supplemental
      disclosure of cash flow information:Interest
      paid
              
              
              $             
      135,823
              
              
              
              $             
      263,298Income
      tax paid
              
              
              $               
      18,487
              
              
              
              $                 
      2,400Portion
      of loan payable converted to stock
              
              
              $             
      372,500
              
              
              
              $                         -Portion
      of accrued interest converted to stock
              
              
              $                14,900
              
              
              
              $                         -Portion
      of note payable converted to stock
              
              
              $             
      126,000
              
              
              
              $                         -





7








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


NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


NINE
      MONTHS ENDED SEPTEMBER 30, 2008 AND
2007


(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
(“GAAP”) for interim financial statements pursuant to the rules and regulations
of the Securities and Exchange Commission.  Accordingly, these
financial statements do not include all of the information and footnotes
required by GAAP for complete financial statements.  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, 2007, as filed with
the Securities and Exchange Commission (SEC) on March 27, 2008.





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 GAAP 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.





In
October 2006, the Company entered into a Loan and Security Agreement (“Loan
Agreement”) with Cambria Investment Fund, L.P. (“Cambria”). Michael D.
Vanderhoof, a director of the Company, is a principal in Cambria. Through June
30, 2008 the Company borrowed $745,000 of the available $1,500,000. Interest
accrues daily upon any unpaid principal balance at the rate of twelve percent
(12%) per annum and is payable quarterly. The outstanding principal balance was
due and payable in full on May 1, 2008, with any subsequent borrowings due and
payable on December 31, 2008. In April of 2008 the Company extended the maturity
date of the $745,000 to July 1, 2008 with no other changes in the terms of the
Loan Agreement. The Loan is secured by substantially all assets and is
subordinate to the Laurus Master Fund Fixed Price Convertible Note. For the nine
months ended September 30, 2008, the Company was able to generate sufficient
cash from revenues to cover its operating expenses. However, no assurances can
be given that the Company can continue to generate sufficient revenues. The
Company believes that the availability of funds from the Loan Agreement, the
growth of its customer base and cost containment efforts will enable the Company
to generate positive operating cash flows and to continue its
operations.





On July
1, 2008, $372,500 of the principal balance of the loan and $14,900 of the
interest due was converted to common stock with the remaining outstanding
principal balance of $372,500, along with $7,450 of interest due paid to Cambria
in cash.





The
continuing deterioration in the global credit markets, the financial services
industry and the U.S. economy as a whole have been experiencing a period of
substantial turmoil and uncertainty characterized by unprecedented intervention
by the United States federal government and the failure, bankruptcy, or sale of
various financial and other institutions. The impact of these events on our
business and the severity of the current economic crisis is uncertain. It is
possible that the current crisis in the global credit markets, the financial
services industry and the U.S. economy may adversely affect our business,
vendors and prospects as well as our liquidity and financial
condition.  As a resultno assurances can be
given as to the Company’s ability to increase its customer base and generate
positive cash flows.  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 that would be detrimental to
the Company’s business operations and business development activities. These
courses of action may be detrimental to the Company’s business prospects and
result in material charges 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.





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





The
accompanying financial statements do not include a statement of comprehensive
income because there were no items that would require adjustment of net income
to comprehensive income during the reporting periods.





8




2.           RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business
Combinations”, and is effective for the Company for business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS 141(R) requires
the new acquiring entity to recognize all assets acquired and liabilities
assumed in the transactions; establishes an acquisition-date fair value for
acquired assets and liabilities; and fully discloses to investors the financial
effect the acquisition will have.  The Company is evaluating the
impact of this pronouncement on the Company’s consolidated financial position,
results of operations and cash flows.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires all entities
to report minority interests in subsidiaries as equity in the consolidated
financial statements, and requires that transactions between entities and
noncontrolling interests be treated as equity.  SFAS 160 is effective
for the Company as of the beginning of fiscal 2009.  The Company is
evaluating the impact of this pronouncement on the Company’s consolidated
financial position, results of operations and cash flows.





In June
2008, the EITF reached a consensus on EITF Issue No. 08-4, Transition Guidance
for Conforming Changes to EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios (“EITF No. 08-4”). Subsequent to the issuance of EITF No.
98-5, certain portions of the guidance contained in EITF No. 98-5 were nullified
by EITF Issue No. 00-27, Application of EITF Issue No. 98-5, ‘Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios’ (“EITF No. 00-27”). However, the portions of EITF
No. 98-5 that were nullified by EITF No. 00-27 were not specifically identified
in EITF No. 98-5, nor were the illustrative examples in EITF No. 98-5 updated
for the effects of EITF No. 00-27. EITF No. 08-4 specifically addresses the
conforming changes to EITF Issue No. 98-5 and provides transition guidance for
the conforming changes. EITF No. 08-4 is effective for the Company for the
fiscal year ending after December 15, 2008. The Company is currently evaluating
the impact of adopting EITF No. 08-4 on the Company’s financial position,
results of operations and cash flows.





3.           OPTIONS
AND WARRANTS





Below is
a summary of Auxilio stock option and warrant activity during the nine-month
period ended September 30, 2008:





Options
            Shares
            
            Weighted
      Average Exercise Price
            
            Weighted
      Average Remaining Term in Years
            
            Aggregate
              Intrinsic
      ValueOutstanding
      at December 31, 2007
            4,257,648
            
            $                               
                   
      1.12Granted
            206,500
            
            1.82Exercised
            -
            
            -Cancelled
            (88,461)
            
            1.15Outstanding
      at September 30, 2008
            4,375,687
            
            $                              
                    
      1.16
            
            7.53
            
            $                         
      3,010,523Exercisable
      at September 30, 2008
            2,139,759
            
            $                                             
      1.23
            
            6.30
            
            $                         
      1,364,270





Warrants
            Shares
            
            Weighted
      Average Exercise Price
            
            Weighted
      Average Remaining Term in Years
            
            Aggregate
              Intrinsic
      ValueOutstanding
      at December 31, 2007
            3,063,021
            
            $                                             
      1.14Granted
            -
            
            -Exercised
            (471,250)
            
            .46Cancelled
            (377,500)
            
            .72Outstanding
      at September 30, 2008
            2,214,271
            
            $                                             
      1.36
            
            2.70
            
            $                         
      1,303,795Exercisable
      at September 30, 2008
            2,214,271
            
            $                                             
      1.36
            
            2.70
            
            $                         
      1,303,795





During
the nine months ended September 30, 2008, the Company granted a total of 206,500
options to its employees and directors to purchase shares of the Company’s
common stock at an exercise price range of $1.55 to $2.15 per share, which
exercise price equals the fair value of the Company’s stock on the grant
date.  The options have graded vesting annually over three years,
starting February 2008.  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 1.96 to 5.25%; (ii) estimated volatility of 75.48 to 79.38%; (iii)
dividend yield of 0.0%; and (iv) expected life of the options of three
years.






9







Three
      Months
            
            Nine
      monthsEnded
      September 30,
            
            Ended
      September 30,2008
            
            2007
            
            2008
            
            2007Cost
      of revenues
            $                                   27,413
            
            $                    
                    25,432
            
            $                             
           91,524
            
            $                               
         79,224Sales
      and marketing
            19,542
            
            15,941
            
            60,979
            
            74,813General
      and administrative expense
            48,849
            
            34,542
            
            145,286
            
            173,258Total
      stock based compensation expense
            $                                  
      95,804
            
            $                  
                      75,915
            
            $                        
              297,789
            
            $                    
                  327,295







4.           NET
INCOME (LOSS) PER SHARE





Basic net
income (loss) per share is calculated using 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. Diluted net income (loss) per share is calculated using the
weighted average number of common and potentially dilutive common shares
outstanding during the period, using the as-if converted method for secured
convertible notes, and the treasury stock method for options and
warrants.





The
following table sets forth the computation of basic and diluted net income
(loss) per share:





Three Months
      Ended September 30,
                
                Nine
      months Ended September 30,2008
                
                2007
                
                2008
                
                2007Numerator:Net
      income (loss)
                $                        
      (516,966)
                
                $                      162,025
                
                $                     
      (599,787)
                
                $                      411,958Effects
      of dilutive securities:Convertible
      notes payable
                (100,125)
                
                (646,049)
                
                -
                
                (533,122)(Loss)
      after effects of conversion of note payable
                $                        
      (617,091)
                
                $                  
      (484,024)
                
                $                     
      (599,787)
                
                $                  
      (121,164)Denominator:Denominator
      for basic calculation weighted average shares
                17,230,259
                
                16,135,309
                
                16,569,380
                
                16,130,043Dilutive
      common stock equivalents:Secured
      convertible notes
                785,407
                
                2,940,292
                
                -
                
                3,118,863Options
      and warrants
                -
                
                1,698,852
                
                -
                
                1,698,852Denominator
      for diluted calculation weighted average shares
                18,015,666
                
                20,774,453
                
                16,569,380
                
                20,947,758Net
      income (loss) per share:Basic
      net income (loss) per share
                $                                
      (.03)
                
                $                             
      .01
                
                $                             
      (.04)
                
                $                             
      .03Diluted
      net (loss) per share
                $                                
      (.03)
                
                $                          
      (.02)
                
                $                             
      (.04)
                
                $                            (.01)







5.           ACCOUNTS
RECEIVABLE





A summary
as of September 30, 2008 is as follows:




Trade
      receivable
              $                         
      1,956,036Allowance
      for doubtful accounts
              -Total
      accounts receivable
              $                         
      1,956,036




10




6.                      LOAN
PAYABLE





In
October 2006, the Company entered into a $1,500,000 Loan and Security Agreement
(the “Loan Agreement”) with Cambria Investment Fund L.P. (“Cambria”). Michael D.
Vanderhoof, a director of the Company is a principal in Cambria. Under the Loan
Agreement, (i) the Company could borrow up to $1,500,000, with the final
$500,000 available only after February 15, 2007 (ii) cash is advanced in $50,000
increments to the Company by Cambria Investment Fund L.P. upon request, (iii)
interest accrues daily upon any unpaid principal balance at the rate of twelve
percent (12%) per annum, (iv) accrued interest is payable in full on a quarterly
basis and (v) the outstanding principal balance is due and payable in full on
October 22, 2007. Cambria holds a second priority security interest (subject to
the first lien held by Laurus Master Fund, LTD) in 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.  The Loan
Agreement contains a provision whereby the conversion price to convert the Note
to equity was set at $.46. Upon entering into this Loan Agreement Cambria earned
the right to receive warrants to purchase up to 300,000 shares of the Company’s
common stock at $.46. Additionally Cambria will earn the right to receive
warrants to purchase up to additional 450,000 shares at $.46, with 30,000 shares
vesting for every multiple of $100,000 borrowed under the Loan Agreement.
Through March 2008, the Company borrowed $745,000 under the Loan Agreement. This
borrowing earned Cambria the right to receive warrants to purchase 210,000
shares. The fair value of the warrant for the 300,000 shares issued upon
execution was $92,558. Such amount was recorded as a loan acquisition cost and
will be amortized to interest expense over the life of the note using the
straight-line interest method.  The fair value of the warrant for the
210,000 shares issued in connection with the borrowing was $71,086. In
accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants,” the Company has allocated a value of $71,086 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 interest
method.  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 5.25%; (iii) expected
volatility range of 79.05% to 79.52%; and (iv) an expected life of the warrants
of five years.  In lieu of exercising the warrant, Cambria may convert
the warrant, in whole or in part, into a number of shares determined by dividing
(a) the aggregate fair market value of the shares or other securities otherwise
issuable upon exercise of the warrant minus the aggregate exercise price of such
shares by (b) the fair market value of one share.





Effective
July 2007, the Company restructured the Loan Agreement with Cambria Investment
Fund L.P. extending the maturity date of the $745,000 outstanding balance to May
1, 2008 and extending the maturity date of the remaining unborrowed amount of
$755,000 to December 31, 2008.  In return, the Company paid
administrative fees of $22,350, and agreed to immediately vest the remaining
240,000 unvested warrants under the original agreement and provide one
additional warrant share for every two dollars of new borrowings against the
$755,000.  The exercise price of the additional warrants of $0.72
represents a 10% discount to the closing price of the Company’s common stock on
the effective date of the restructuring. The conversion price for the amount
borrowed to date remains at $0.46 per share, and the conversion price for any
new borrowings and unpaid interest would be $0.72 per share.  In April
2008, the Company extended the maturity date of the $745,000 to July 1, 2008
with no other changes in the terms of the Loan Agreement.




In
accordance with EITF 96-19, the Company determined that the July 2007
restructuring was considered a substantial modification in the terms of the
existing debt and therefore should be accounted for in the same manner as an
extinguishment of the existing debt and the creation of new debt and as a result
the Company recorded a gain on extinguishment of debt of $199,951.  In
accordance with EITF 96-19, the new debt is initially recorded at fair value and
that amount is used to determine debt extinguishment gain or loss to be
recognized and the effective rate of the instrument.  The fees paid by
the Company including the warrants and the incremental change in the fair value
of the embedded conversion option are also included in determining the debt
extinguishment gain.





The
Company determined that the fair value of the new loan payable was
$252,293.  The difference between the fair value of the new loan
payable and the amount of the existing debt of $745,000, less unamortized loan
acquisition costs of $36,927, unamortized loan discount costs of $85,149 was
used in determining the gain on debt extinguishment. The Company determined the
fair value of the new loan payable by looking to the remaining unborrowed
$755,000 under the arrangement and allocating $363,622 to the fair value of the
embedded conversion option and $129,086 to the fair value of the warrants
issuable upon borrowing.  Such amounts were determined using the Black
Scholes option pricing model. The fair value of the loan payable will be
accreted to its stated value through periodic charges to interest expense using
the straight-line method, which approximates the effective interest
method.





The fees
that were paid by the Company and used to determine the debt extinguishment gain
included the fair value of the warrant for the 240,000 shares issued in
connection with the restructuring for $128,123 and the fair value of the
modification of the terms that affected the embedded conversion option,
calculated as the difference between the fair value of the embedded conversion
option immediately before and after the modification, was $80,208.





The fair
values were determined using the Black-Scholes option-pricing model, with the
following assumptions: (i) no expected dividends; (ii) a risk free interest rate
of 5.31%; (iii) expected volatility of 81.14%; and (iv) a term of 10 months for
the embedded conversion option and 5 years for the warrants.




11




Interest
charges associated with the Loan, including amortization of the discount, loan
acquisition costs and accreted interest costs totaled $242,280 and $269,978 for
the nine months ended September 30, 2008 and 2007, respectively.





On July
1, 2008, $372,500 of the principal balance of the loan and $14,900 of the
interest due was converted to common stock with the remaining outstanding
principal balance of $372,500, along with $7,450 of interest due, paid to
Cambria in cash.





7.           NOTE
PAYABLE




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 Note is secured by
all of the Company's cash, cash equivalents, accounts, accounts receivable,
deposit accounts, inventory, equipment, goods, fixtures, documents, instruments,
contract rights, general intangibles, chattel paper, supporting obligations,
investment property, letter of credit rights and all intellectual property now
existing or hereafter arising, and all proceeds thereof. The Note contains a
provision whereby the fixed conversion price to convert the Note to equity was
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.
The first third of the investment amount has a fixed conversion price of $1.68,
the next third has a fixed conversion price of $1.78, and the last third will
has 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 has provided 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 a warrant to purchase 478,527 shares
of the Company’s common stock (the “Warrant”). The exercise price of the warrant
is $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 warrant has a term of seven years. In addition, the Company paid loan
origination fees to LMF of $105,000.  The Company filed a Registration
Statement on Form SB-2 with the SEC for the purpose of registering for re-sale
all shares of common stock underlying the Note and the Warrant. On August 15,
2006, such registration statement was declared effective by the
SEC.




The
Company determined that the conversion feature embedded in the notes payable
satisfied the definition of a conventional convertible instrument under the
guidance provided in EITF 00-19 and EITF 05-02, as the conversion option’s value
may only be realized by the holder by exercising the option and receiving a
fixed number of shares. As such, the embedded conversion option in the notes
payable qualifies for equity classification under EITF 00-19, qualifies for the
scope exception of paragraph 11(a) of SAFS 133, and is not bifurcated from the
host contract. The Company also determined that the warrants issued to LMF
qualify for equity classification under the provisions of SFAS 133 and EITF
00-19. In accordance with the provisions of Accounting Principles Board Opinion
No. 14, the Company allocated the net proceeds received in this transaction to
each of the convertible debentures and common stock purchase warrants based on
their relative estimated fair values. As a result, the Company allocated
$2,739,320 to the convertible debentures and $260,680 to the common stock
purchase warrants, which was recorded in additional paid-in-capital. In
accordance with the consensus of EITF issues 98-5 and 00-27, management
determined that the convertible debentures did not contain a beneficial
conversion feature based on the effective conversion price after allocating
proceeds of the convertible debentures to the common stock purchase warrants.
The amounts recorded for the common stock purchase warrants are amortized as
interest expense over the term of the convertible debentures.




During
the nine months ended September 30, 2008 LMF converted $126,000 of the loan’s
principal balance into 75,000 shares of common stock.




Interest
charges associated with the convertible debentures, including amortization of
the discount and loan acquisition costs totaled $292,562 for the nine months
ended September 30, 2008.




8.
            EMPLOYMENT
      AGREEMENTS




In
November of 2007, the Company entered in to a new employment agreement with
Etienne Weidemann, to continue to serve as the Company’s President and Chief
Executive Officer effective January 1, 2008. The employment agreement has a term
of two years, and provides for a base annual salary of $175,000 in year one and
$190,000 in year two. Mr. Weidemann is also eligible to receive an annual bonus
and periodic commissions if certain earnings and revenue targets are satisfied
during the applicable fiscal year.  The Company may terminate Mr.
Weidemann’s employment under this agreement without cause at any time on thirty
days’ advance written notice, at which time Mr. Weidemann would receive
severance pay for six months and be fully vested in all options and warrants
granted to date.  The foregoing descriptions of Mr. Weidemann’s
employment agreement is qualified in its entirety by reference to the full text
of such agreement, which is filed as Exhibit 10.1 to Form 10-QSB filed with the
SEC on November 16, 2007.




Effective
January 1, 2006, the Company entered in to an employment agreement with Etienne
Weidemann, to serve as the




12




Company’s
President and Chief Operating Officer. The employment agreement has a term of
two years, and provides for a base annual salary of $175,000. Mr. Weidemann is
also eligible to receive an annual bonus if certain earnings and revenue targets
are satisfied during the applicable fiscal year.  Upon execution of
the Agreement, Mr. Weidemann received 80,000 options. The Company may terminate
Mr. Weidemann’s employment under this agreement without cause at any time on
thirty days’ advance written notice, at which time Mr. Weidemann would receive
severance pay for twelve months and be fully vested in all options and warrants
granted to date. Mr. Weidemann was appointed Chief Executive Officer of the
Company effective November 9, 2006.  The terms of Mr. Weidemann
employment are still governed by his current employment agreement. The foregoing
descriptions of Mr. Weidemann’s employment agreement is qualified in its
entirety by reference to the full text of such agreement, which was filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on
March 22, 2006.




In
November of 2007, the Company entered in to a new employment agreement with Paul
T. Anthony, to continue to serve as the Company’s Chief Financial Officer
effective January 1, 2008. The employment agreement has a term of two years, and
provides for a base annual salary of $170,000 in year one and $185,000 in year
two. Mr. Anthony is also eligible to receive an annual bonus and periodic
commissions if certain earnings and revenue targets are satisfied during the
applicable fiscal year.  The Company may terminate Mr. Anthony’s
employment under this agreement without cause at any time on thirty days’
advance written notice, at which time Mr. Anthony would receive severance pay
for six months and be fully vested in all options and warrants granted to
date.  The foregoing descriptions of Mr. Anthony’s employment
agreement is qualified in its entirety by reference to the full text of such
agreement, which is filed as Exhibit 10.2 to Form 10-QSB filed with the SEC on
November 16, 2007.




Effective
January 1, 2006, the Company entered into an employment agreement with Paul T.
Anthony, to serve as the Company’s Chief Financial Officer. The employment
agreement has a term of two years, and provides for a base annual salary of
$170,000. Mr. Anthony is also eligible to receive an annual bonus if certain
earnings and revenue targets are satisfied during the applicable fiscal
year.  Upon execution of the agreement, Mr. Anthony received 75,000
options. The Company may terminate Mr. Anthony’s employment under this agreement
without cause at any time on thirty days’ advance written notice, at which time
Mr. Anthony would receive severance pay for six months and be fully vested in
all options and warrants granted to date. The foregoing descriptions of Mr.
Anthony’s employment agreement is qualified in its entirety by reference to the
full text of such agreement, which was filed as Exhibit 10.3 to the Company’s
Current Report on Form 8-K, filed with the SEC on March 22, 2006.




In
November of 2007, the Company entered in to an employment agreement with Jacques
Terblanche, to serve as the Company’s Chief Operations Officer effective January
1, 2008. Mr. Terblanche has been serving in this capacity for the last year as a
consultant.  The employment agreement has a term of two years, and
provides for a base annual salary of $165,000 in year one and $180,000 in year
two. Mr. Terblanche is also eligible to receive an annual bonus and periodic
commissions if certain earnings and revenue targets are satisfied during the
applicable fiscal year.  The Company may terminate Mr. Terblanche’s
employment under this agreement without cause at any time on thirty days’
advance written notice, at which time Mr. Terblanche would receive severance pay
for six months and be fully vested in all options and warrants granted to
date.  The foregoing descriptions of Mr. Terblanche’s employment
agreement are qualified in their entirety by reference to the full text of such
agreement, which is filed as Exhibit 10.3 to Form 10-QSB filed with the SEC on
November 16, 2007.




9.           CONCENTRATIONS




Cash
Concentrations





At times,
cash balances held in financial institutions are in excess of federally insured
limits. Management performs periodic evaluations of the relative credit standing
of financial institutions and limits the amount of risk by selecting financial
institutions with a strong credit standing.





Major
Customers





The
Company's four largest customers accounted for approximately 77% of the
Company's revenues for the nine months ended September 30,
2008.  Accounts receivable for these customers totaled approximately
$1,957,000 as of September 30, 2008. The Company's two largest customers
accounted for approximately 66% of the Company's revenues for the nine months
ended September 30, 2007.





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 November 2008 the Company entered
into a five year joint marketing agreement with Sodexo Operations , LLC,
(“Sodexo”) to provide Auxilio’s document services to Sodexo‘s healthcare
customer base in the United States. Sodexo will invest in sales and marketing
resources and assist the Company with marketing their document services to
Sodexo’s US healthcare customer base of more than 1,600 hospitals. Under the
terms of the agreement the Company will provide Sodexo with warrants to purchase
up to two million shares of the Company’s common stock at a price of $1.50 per
share. The first one hundred and fifty thousand warrants will vest six months
after execution of the agreement. The balance of the warrants will vest after
that in increments of between 75,000 and 500,000 shares dependent on the size
and number of the new customer contracts that the Company enters into as a
direct result of this agreement. The Company anticipates finalizing the warrants
agreements before the first vesting date.




13




ITEM
2.                      MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OFOPERATIONS.





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-Q.  This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 21E of the Securities 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 previously able to raise additional working capital through private
placement offerings of our common stock, through our debt financing with Laurus
Master Fund, Ltd. and our Loan Agreement with Cambria Investment Fund L.P., 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 generate insufficient revenues from
our operations to cover our cash operating expenses.





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, 2007.  Our
filings with the Securities and Exchange Commission, including our Form 10-KSB,
Quarterly Reports on Form 10-Q, 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.





Auxilio
now provides total outsourced document and 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.






14




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
(GAAP).  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:





·
            revenue
      recognition


·
            accounts
      receivable valuation and related
reserves


·
            impairment
      of intangible assets


·
            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 customer’s
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 March 27, 2008 for a discussion of our critical
accounting policies.





RESULTS
OF OPERATIONS





For the Nine months Ended
September 30, 2008 Compared to the Nine months Ended September 30,
2007





Revenue





Revenue
decreased $1,035,895 to $14,852,849 for the nine months ended September 30,
2008, as compared to the same period in 2007.  Recurring service
revenue for the nine months ended September 30, 2008 totals approximately
$10,600,000 compared to approximately $9,700,000 for the same period in 2007.
This increase is primarily a result of growth in existing customer accounts.
Equipment revenue totals $4,200,000 for the nine months ended September 30, 2008
compared to approximately $6,200,000 for the same period in 2007. This decrease
is primarily a result of a lower volume of scheduled equipment placements
available at new and existing customers.





Cost
of Revenue





Cost of
revenue consists of document imaging equipment, parts, supplies and salaries and
expenses of field services personnel.  Cost of revenue decreased
$615,548 to $11,486,211 for the nine months ended September 30, 2008, as
compared to $12,101,759 for the same period in 2007.  This decrease is
consistent with the related decrease in revenue for the periods compared. The
slight increase in cost of revenue relative to total revenue is the expected
result of a lower mix of equipment revenue, which produces a higher gross profit
margin.








15





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 $1,067,836 for the nine
months ended September 30, 2008, as compared to $896,763 for the same period in
2007.  Sales and marketing expenses for the first nine months of 2008
are higher as a result of management’s decision to increase the Company’s sales
force in the third quarter of 2007.





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 $421,787 to $2,217,415 for the nine months
ended September 30, 2008, as compared to $1,795,628 for the same period in 2007.
This increase is primarily attributed to approximately $300,000 in legal fees
and approximately $90,000 in other consulting fees incurred in connection with
certain corporate strategic initiatives.  As a result of the current
economic crisis, these corporate strategic initiatives have been delayed
indefinitely and we can provide no reassurances that these initiatives will be
resumed.  These fees are non-recurring expenses that the Company does
not anticipate incurring to this extent in the future even when or if these
strategic initiatives resume.





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. Other intangible assets are
amortized over their estimated lives.





Amortization
expense was $143,230 for the nine months ended September 30, 2008 compared to
$178,624 for the same period in 2007. The slight reduction is a result of the
estimated declining value of the amortization of backlogged
business.





Other
Income (Expense)





Interest
expense for the nine months ended September 30, 2008 was $535,031, compared to
$701,351 for the same period in 2007.  The decrease is due to the
declining principal balance of the loan from Laurus Master Fund and the
satisfaction of the loan from Cambria Investment Fund L.P. The principal balance
of the Laurus loan has declined through regular scheduled principal repayments
as well as the conversion of a portion of the debt to common stock. Interest
income is primarily derived from short-term interest-bearing securities and
money market accounts.  Interest income for the nine months ended
September 30, 2008 was $4,990, as compared to $14,188 for the same period in
2007, primarily due to a decrease in earnings rates of invested
cash.





Income
Tax Expense





Income
tax expense for the nine months ended September 30, 2008 totaled $7,903. Income
tax expense for the nine months ended September 30, 2007 totaled $16,800. These
amounts represent a nine month estimate of the annual expense primarily as a
result of alternative minimum tax provisions.





For the Three Months Ended
September 30, 2008 Compared to the Three Months Ended September 30,
2007





Revenue





Revenue
decreased $815,530 to $4,188,191 for the three months ended September 30, 2008,
as compared to the same period in 2007.  The decrease in revenue is
primarily attributed to an approximate $1,300,000 decrease in equipment sales in
the third quarter of 2008. We have also experienced a modest increase in service
revenues for the three months ended September 30, 2008 as compared to the same
period in 2007.





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 $3,215,936
for the three months ended September 30, 2008, as compared to $3,830,689 for the
same period in 2007.  This decrease is the result of decreased
equipment sales in the third quarter of 2008.




16




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 $367,375 for the three
months ended September 30, 2008, as compared to $308,379 for the same period in
2007. The increase in sales and marketing expenses during the third quarter of
2008 is the result of management’s decision to increase the Company’s sales
force during the third quarter of 2007.





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 $425,867 to $975,769 for the three months
ended September 30, 2008, as compared to $549,902 for the same period in 2007.
This increase is primarily attributed to approximately $300,000 in legal fees
and approximately $90,000 in other consulting fees incurred in connection with
certain corporate strategic initiatives.  As a result of the current
economic crisis, these corporate strategic initiatives have been delayed
indefinitely and we can provide no reassurances that these initiatives will be
resumed.  These fees are non-recurring expenses that the Company does
not anticipate incurring to this extent in the future even when or if these
strategic initiatives resume.





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.  Other intangible
assets are amortized over their estimated lives.





Amortization
expense was $47,743 for the three months ended September 30, 2008 compared to
$59,541 for the same period in 2007. The slight reduction is a result of the
estimated declining value of the amortization of backlogged
business.





Other
Income (Expense)





Interest
expense for the three months ended September 30, 2008 was $94,207, compared to
$294,755 for the same period in 2007.   The reduction in expense
is a result of declining amounts borrowed for the two periods on the note from
Laurus Master Fund and the payoff of the loan from Cambria Investment Fund L.P.
on July 1, 2008. Interest income is primarily derived from short-term
interest-bearing securities and money market accounts.  Interest
income for the three months ended September 30, 2008 was $1,376, as compared to
$7,219 for the same period in 2007, primarily due to a decrease in earnings
rates of invested cash.





Income
Tax Expense





Income
tax expense for the three months ended September 30, 2008 was $5,503. Income tax
expense for the three months ended September 30, 2007 was $5,600. These amounts
represent the quarterly estimate of annual expense primarily as a result of
alternative minimum tax provisions.





LIQUIDITY
AND CAPITAL RESOURCES





At
September 30, 2008, our cash and cash equivalents were $948,650 and our working
capital deficit was $234,349.  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 are
revenues, the proceeds from a $3,000,000 loan from Laurus Master Fund in April
2006, the $1,500,000 revolving note payable from Cambria Investment Fund L.P.,
under which we have borrowed and repaid $745,000 to date and $217,775 in
warrants exercised during the third quarter of 2008.





During
the nine months ended September 30, 2008, our cash providedby operating
activities amounted to $941,670, as compared to $627,355 provided by for the
same period in 2007.  The increase in cash provided was primarily due
to improved collections of receivables in 2008.





In April
2006, we 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 prime, as quoted in the Wall Street Journal, plus 2.0%.
We shall reduce
the principal outstanding under the Note by 1/60th per month starting 90 days
after the closing, payable in cash or registered stock. For the nine months
ended September 30, 2008 we repaid $450,000 in principal of the
Note.




17




In
October 2006, we entered into a Loan and Security Agreement (the “Loan
Agreement”) with Cambria Investment Fund, L.P. One of our directors, Michael D.
Vanderhoof, is a principal in Cambria Investment Fund. As of December 31, 2006,
we had borrowed $745,000 of the available $1,500,000. There were no additional
borrowings under the Loan Agreement during the nine months ended September 30,
2008. Interest accrues daily upon any unpaid principal balance at the rate of
twelve percent (12%) per annum and is payable quarterly. The outstanding
principal balance was due and payable in full on October 22, 2007. However, in
August 2007, we agreed with Cambria Investment Fund, L.P to restructure the Loan
Agreement extending the maturity date of the $745,000 outstanding balance to May
1, 2008 and extending the maturity date of the remaining unborrowed amount of
$755,000 to December 31, 2008.  In return, we agreed to immediately
vest the remaining 240,000 unvested warrants under the original agreement and
provide one additional warrant share for every two dollars of new borrowings
against the $755,000.  The exercise price of the additional warrants
provides for a 10% discount to the closing price of the Company’s common stock
on the date of the restructuring. In April 2008, the Company extended the
maturity date of the $745,000 to July 1, 2008 with no other changes in the terms
of the Loan Agreement.  On July 1, 2008, $372,500 of the principal
balance of the loan and $14,900 of the interest due was converted to common
stock with the remaining outstanding principal balance of $372,500, along with
$7,450 of interest due, paid to Cambria in cash.





We have
executed three large equipment sales with existing customers in the first nine
months of 2008. We anticipate other equipment sales in 2008. We signed a
recurring revenue contract with a new customer effective August 2008. We expect
to close additional recurring revenue contracts to new customers throughout
2008. We have the short-term availability of $755,000 in additional funds
through our Loan with Cambria Investment Fund, L.P. We believe there are
adequate funds to sustain our business operations over the next twelve months.
If events or circumstances occur such that we do not meet our operating plan as
expected, we may be required to seek additional capital and/or reduce certain
discretionary spending, which could have a material adverse effect on our
ability to achieve our business objectives. We may seek additional financing,
which may include debt and/or equity financing or funding through third party
agreements. There can be no assurance that any additional financing will be
available on acceptable terms, if at all. Any equity financing may result in
dilution to existing stockholders and any debt financing may include restrictive
covenants.








ITEM
4T.                      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, any potential benefits of adding
employees or consultants to clearly segregate duties do not justify the expenses
associated with such increases at this time.






18




PART II - OTHER
INFORMATION








ITEM
1A.                      RISK
FACTORS.





This
Quarterly Report on Form 10-Q, 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:





CURRENT
WORLDWIDE ECONOMIC CONDITIONS MAY ADVERSELY AFFECT OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION, AS WELL AS FURTHER DECREASE OUR STOCK
PRICE.





The
continuing deterioration in the global credit markets, the financial services
industry and the U.S. economy as a whole have been experiencing a period of
substantial turmoil and uncertainty characterized by unprecedented intervention
by the United States federal government and the failure, bankruptcy, or sale of
various financial and other institutions. The impact of these events on our
business and the severity of the current economic crisis is uncertain. It is
possible that the current crisis in the global credit markets, the financial
services industry and the U.S. economy may adversely affect our business,
vendors and prospects as well as our liquidity and financial
condition.





WE
HAVE A LIMITED OPERATING HISTORY WITH RESPECT TO OUR CORE BUSINESS
STRATEGY.





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:




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




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




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




·
            successfully
      complete the development of our products and
  services;




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




·
            attract
      and retain highly skilled employees;
and




·
            respond
      to competitive influences.




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 AND SERVICES.





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:




·
            greater
      name recognition and larger marketing budgets and
    resources;




·
            established
      marketing relationships and access to larger customer
    bases;




·
            substantially
      greater financial, technical and other resources;
  and




·
            larger
      technical and support staffs.


19





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 $61,843 for the nine months ended September
30, 2008 and we have an accumulated deficit of $16,807,875 as of September 30,
2008.  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, 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.





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 77% of our revenues for the nine
months ended September 30, 2008.  Although we anticipate that major
customers will represent less than 67% of revenue for the 2008 fiscal year and
less than 42% of revenue for the 2009 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:




·
            develop
      or enhance our service offerings;




·
            take
      advantage of future opportunities;
or




·
            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.





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.





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:







·  fluctuations
in our quarterly revenues and earnings or those of our competitors;


·  shortfalls
in our operating results compared to levels expected by the investment
community;


·  announcements
concerning us or our competitors;


·  announcements
of technological innovations;


·  sale of
shares or short-selling efforts by traders or other investors;


·  market
conditions in the industry; and


·  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:




20




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




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





While we
are presently not subject to "penny stock" restrictions, there is no guarantee
that we will be able to meet any of the exceptions to our securities from being
deemed as "penny stock" in the future. If our securities were to become subject
to "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.





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





On July
1, 2008, $372,500 of the principal balance of the loan and $14,900 of the
interest due was converted to common stock with the remaining outstanding
principal balance of $372,500, along with $7,450 of interest due, paid to
Cambria in cash.  The conversion price was $0.46 per share and 842,175
shares of Auxilio Common Stock were issued to Cambria. The sales of the
securities listed above were deemed to be exempt from registration under the
Securities Act in reliance on Rule 506 or Section 4(2) of the Securities
Act.  The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the instruments representing such securities
issued in such transactions. All recipients had adequate access, through their
relationships with us, to information about Auxilio.




21





ITEM
6.                      EXHIBITS.





No.
            Item31.1
            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
    *.





* In
accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be
deemed “filed” for the purposes of Section 18 of the Securities and Exchange Act
of 1934 or otherwise subject to the liability of that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933
or the Securities Exchange Act of 1934.






22




SIGNATURES








In accordance with the requirements of
the Securities Exchange Act of 1934, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.








AUXILIO, INC.








Date:  November  14,
2008                                                                                     By:           /s/           Etienne
Weidemann


Etienne
Weidemann


Chief Executive
Officer


(Principal
Executive Officer)








Date:  November
14,
2008                                                                                               /s/Paul T.
Anthony


Paul T. Anthony


Chief Financial
Officer


(Principal Accounting Officer)





23