**UNITED        STATES**

**SECURITIES        AND EXCHANGE COMMISSION**

**Washington,        D.C. 20549**

**FORM        10-QSB**

**Commission        file number 000-27507**

**AUXILIO,        INC.**

**Nevada**
**88-0350448**

**27401        Los Altos, Suite 100**

**Mission        Viejo, California 92691**

**(949)        614-0700**

----

**AUXILIO,        INC.**

**FORM        10-QSB**

**TABLE        OF CONTENTS**

**PART        I - FINANCIAL INFORMATION**

**PART        II - OTHER INFORMATION**

----

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

**ITEM        1. FINANCIAL STATEMENTS.**

| **AUXILIO,                  INC. AND SUBSIDIARIES**                                                                                       |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONDENSED                  CONSOLIDATED BALANCE SHEET**                                                                                 |   |
| **JUNE                  30, 2006**                                                                                                        |   |
| **(UNAUDITED)**                                                                                                                           |   |
|                                                                                                                                      |   |   |   |
| **ASSETS**                                                                                                                                |   |
| **Current                  assets:**                                                                                                      |   |   |   |
|     Cash                  and cash equivalents                                                                        |   | $ | 1,697,908 |   |
|     Accounts                  receivable, net                                                                         |   |   | 713,909 |   |
|     Prepaid                  and other current assets                                                                 |   |   | 105,159 |   |
|     Supplies                                                                                                          |   |   | 373,111 |   |
|         Total                  current assets                                                     |   |   | 2,890,087 |   |
|                                                                                                                                      |   |   |   |   |
| **Property                  and equipment, net**                                                                                          |   |   | 305,132 |   |
| **Deposits**                                                                                                                              |   |   | 28,790 |   |
| **Loan                  acquisition costs, net**                                                                                          |   |   | 456,684 |   |
| **Intangible                  assets, net**                                                                                               |   |   | 556,741 |   |
| **Goodwill**                                                                                                                              |   |   | 1,517,017 |   |
|         Total                  assets                                                             |   | $ | 5,754,451 |   |
|                                                                                                                                      |   |   |   |   |
| **LIABILITIES                  AND STOCKHOLDERS' EQUITY**                                                                                 |
|                                                                                                                                      |   |   |   |   |
| **Current                  liabilities:**                                                                                                 |   |   |   |   |
|     Accounts                  payable and accrued expenses                                                            |   | $ | 848,580 |   |
|     Accrued                  compensation and benefits                                                                |   |   | 290,942 |   |
|     Deferred                  revenue                                                                                 |   |   | 354,629 |   |
|     Current                  portion of long-term debt                                                                |   |   | 616,626 |   |
|     Current                  portion of capital lease obligations                                                     |   |   | 56,364 |   |
|         Total                  current liabilities                                                |   |   | 2,167,142 |   |
|                                                                                                                                      |   |   |   |   |
| **Note                  payable, less current portion, net of discount of                  $240,646**                                     |   |   | 2,159,354 |   |
|                                                                                                                                      |   |   |   |   |
| **Commitments                  and contingencies**                                                                                        |   |   | **-** |   |
|                                                                                                                                      |   |   |   |   |
| **Stockholders'                  equity:**                                                                                                |   |   |   |   |
|     Common                  stock, par value at $0.001, 33,333,333 shares                                             |   |   |   |   |
|         authorized,                  16,122,809 shares issued and outstanding                     |   |   | 16,124 |   |
|     Additional                  paid-in capital                                                                       |   |   | 15,978,960 |   |
|     Accumulated                  deficit                                                                              |   |                                           (14,567,128) |
|             Total                  stockholders' equity                       |   |   | 1,427,956 |   |
|             Total                  liabilities and stockholders’ equity |   | $ | 5,754,451 |   |

----

| **AUXILIO,                  INC. AND SUBSIDIARIES**                                             |   |
|-------------------------------------------------------------------------------------------------|--------|
| **CONDENSED                  CONSOLIDATED STATEMENTS OF OPERATIONS**                            |   |
| **(UNAUDITED)**                                                                                 |   |
|                                                                                            |   |
|                                                                                            |   | **Three                  Months** |   | **Six                  Months** |   |
|                                                                                            |   | **Ended                  June 30,** |   | **Ended                  June 30,** |   |
|                                                                                            |   | **2006** |   | **2005** |   | **2006** |   | **2005** |   |
| **Revenues**                                                                                    |   | $ | 2,481,139 |   | $ | 1,237,850 |   | $ | 4,516,332 |   | $ | 2,021,927 |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cost                  of revenues**                                                           |   |   | 2,362,995 |   |   | 889,466 |   |   | 4,334,369 |   |   | 1,663,640 |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Gross                  profit**                                                               |   |   | 118,144 |   |   | 348,384 |   |   | 181,963 |   |   | 358,287 |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating                  expenses:**                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                       Sales and marketing                                   |   |   | 490,981 |   |   | 468,920 |   |   | 1,001,884 |   |   | 908,175 |   |
|                       General and administrative expenses                   |   |   | 536,707 |   |   | 525,752 |   |   | 1,193,872 |   |   | 1,010,093 |   |
|                       Intangible asset amortization                         |   |   | 63,802 |   |   | 93,368 |   |   | 127,603 |   |   | 186,736 |   |
| **    Total                  operating expenses**                           |   |   | 1,091,490 |   |   | 1,088,040 |   |   | 2,323,359 |   |   | 2,105,004 |   |
| **                      Loss from operations**                              |   |   | (973,346 | ) |   | (739,656 | ) |   | (2,141,396 | ) |   | (1,746,717 | ) |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other                  income (expense):**                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                        Interest expense                                |   |   | (209,155 | ) |   | (51,598 | ) |   | (219,005 | ) |   | (72,555 | ) |
|                        Interest income                                 |   |   | 17,417 |   |   | 11,300 |   |   | 18,744 |   |   | 13,511 |   |
|                        Gain on sale of marketable securities           |   |   | - |   |   | (41,734 | ) |   | 10,448 |   |   | 362,061 |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Total                  other income (expense)                           |   |   | (191,738 | ) |   | (82,032 | ) |   | (189,813 | ) |   | 303,017 |   |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **      Loss                  before provision for income taxes** |   |   | (1,165,084 | ) |   | (821,688 | ) |   | (2,331,209 | ) |   | (1,443,700 | ) |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income                  tax expense**                                                         |   |   | - |   |   | - |   |   | (2,400 | ) |   | (3,200 | ) |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net                  loss**                                                                   |   | $ | (1,165,084 | ) | $ | (821,688 | ) | $ | (2,333,609 | ) | $ | (1,446,900 | ) |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net                  loss per share:**                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **                      Basic**                                             |   | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.15 | ) | $ | (0.10 | ) |
| **                      Diluted**                                           |   | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.15 | ) | $ | (0.10 | ) |
|                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Number                  of weighted average shares:**                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **     Basic**                                                         |   |   | 16,095,615 |   |   | 15,854,874 |   |   | 16,029,040 |   |   | 15,212,829 |   |
| **                      Diluted**                                           |   |   | 16,095,615 |   |   | 15,854,874 |   |   | 16,029,040 |   |   | 15,212,829 |   |

----

| **AUXILIO,                  INC. AND SUBSIDIARIES**                            |
|--------------------------------------------------------------------------------|
| **CONDENSED                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS**   |
| **(UNAUDITED)**                                                                |
|                                                                           |   |   |   |   |   |   |   |
|                                                                           | **Three                  Months** |   | **Six                  Months** |
|                                                                           | **Ended                  June 30,** |   | **Ended                  June 30,** |
|                                                                           | **2006** |   | **2005** |   | **2006** |   | **2005** |
|                                                                           |   |   |   |   |   |   |   |
| **Net                  loss**                                                  | $                  (1,165,084) |   | $                  (821,688) |   | $                  (2,333,609) |   | $                  (1,446,900) |
|                                                                           |   |   |   |   |   |   |   |
| **Reclassification                  of realized amounts included in net loss** | - |   | (97,500) |   | - |   | (222,210) |
|                                                                           |   |   |   |   |   |   |   |
| **Comprehensive                  loss**                                        | $                  (1,165,084) |   | $                  (919,188) |   | $                  (2,333,609) |   | $                  (1,669,110) |

----

| **AUXILIO,                  INC. AND SUBSIDIARIES**                                                                                         |
|---------------------------------------------------------------------------------------------------------------------------------------------|
| **CONDENSED                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY**                                                               |
| **SIX                  MONTHS ENDED JUNE 30, 2006**                                                                                         |
| **(UNAUDITED)**                                                                                                                             |
|                                                                                                                                        |
|                                                                                                                                        |   |   |   |   |   |   |   |   |
|                                                                                                                                        |   |   |   |   | **Additional** |   |   | **Total** |
|                                                                                                                                        | **Common                  Stock** |   | **Paid-in** |   | **Accumulated** | **Stockholders'** |
|                                                                                                                                        | **Shares** |   | **Amount** |   | **Capital** |   | **Deficit** | **Equity** |
| Balance                  at December 31, 2005                                                                                               | 15,961,410 |   | $                  15,963 |   | $                  15,190,416 |   | $                  (12,233,519) | $                  2,972,860 |
| Common                  stock issued for services                                                                                           | 3,538 |   | 3 |   | 4,950 |   | - | 4,953 |
| Relative                  fair value of warrants issued related to revolving loan                  payable                                  | - |   | - |   | 85,079 |   | - | 85,079 |
| Stock                  issued for services rendered in connection with procurement of                  note                  payable        | 45,861 |   | 46 |   | 69,954 |   | - | 70,000 |
| Relative                  fair value of warrants issued related to convertible loan                  payable                                | - |   | - |   | 340,188 |   | - | 340,188 |
| Cashless                  exercise of warrants to stock                                                                                     | 112,000 |   | 112 |   | (112) |   | - | - |
| Stock                  compensation expense for options and warrants granted to employees                  and                  consultants | - |   | - |   | 288,485 |   | - | 288,485 |
| Net                  loss                                                                                                                   | - |   | - |   | - |   | (2,333,609) | (2,333,609) |
| Balance                  at June 30, 2006                                                                                                   | 16,122,809 |   | $16,124 |   | $15,978,960 |   | $(14,567,128) | $1,427,956 |

----

| **AUXILIO,                  INC. AND SUBSIDIARIES**                                           |
|-----------------------------------------------------------------------------------------------|
| **CONDENSED                  CONSOLIDATED STATEMENTS OF CASH FLOWS**                          |
| **(UNAUDITED)**                                                                               |
|                                                                                          |   |   |   |   |   |
|                                                                                          |   |   |   |   | **Six                  Months Ended June 30,** |
|                                                                                          |   |   |   |   | **2006** |   | **2005** |
| **Cash                  flows used for operating activities:**                                |   |   |   |   |
|                                                                                          | Net                  loss |   | $                  (2,333,609) |   | $                  (1,446,900) |
| **Adjustments                  to reconcile net loss to net cash**                            |   |   |   |   |
| **used                  for operating activities:**                                           |   |   |   |   |
|                                                                                          | Depreciation |   | 56,657 |   | 40,570 |
|                                                                                          | Amortization                  of intangible assets |   | 127,603 |   | 186,736 |
|                                                                                          | Stock                  compensation expense for warrants and options issued to employees                  and                  consultants |   | 288,485 |   | - |
|                                                                                          | Stock                  issued for services |   | 4,953 |   | - |
|                                                                                          | Gain                  on sale of marketable securities |   | (10,448) |   | (362,061) |
|                                                                                          | Interest                  expense related to amortization of warrants issued for                  loans |   | 105,113 |   | 58,029 |
|                                                                                          | Interest                  expense related to amortization of loan acquisition costs |   | 38,019 |   | - |
| **Changes                  in operating assets and liabilities:**                             |   |   |   |   |
|                                                                                          | Accounts                  receivable and other receivables |   | (225,085) |   | (1,002,165) |
|                                                                                          | Supplies |   | 70,466 |   | (36,011) |
|                                                                                          | Prepaid                  and other current assets |   | (13,794) |   | 37,713 |
|                                                                                          | Deposits |   | 12,565 |   | 6,751 |
|                                                                                          | Accounts                  payable and accrued expenses |   | 337,976 |   | (269,092) |
|                                                                                          | Accrued                  compensation and benefits |   | (31,995) |   | (169,799) |
|                                                                                          | Lease                  buyout provision |   | - |   | 133,811 |
|                                                                                          | Deferred                  revenue |   | 55,767 |  | 161,721 |
|                                                                                          |   | Net                  cash used for operating activities |   | (1,517,327) |   | (2,660,697) |
| **Cash                  flows provided by (used for) investing                  activities:** |   |   |   |   |
|                                                                                          | Purchases                  of property and equipment |   | (124,536) |   | (15,858) |
|                                                                                          | Net                  proceeds from sale of marketable securities |   | 26,698 |   | 979,311 |
|                                                                                          |   | Net                  cash (used for) provided by investing activities |   | (97,838) |   | 963,453 |
| **Cash                  flows provided by financing activities:**                             |   |   |   |   |
|                                                                                          | Proceeds                  from line of credit |   | 250,000 |   | 500,000 |
|                                                                                          | Repayments                  on line of credit |   | (250,000) |   | (500,000) |
|                                                                                          | Proceeds                  from convertible note payable |   | 3,000,000 |   | - |
|                                                                                          | Acquisition                  fees paid for convertible note payable |   | (345,195) |   | - |
|                                                                                          | Payments                  on capital leases |   | (6,673) |   | (2,277) |
|                                                                                          | Payments                  on notes payable and long-term debt |   | - |   | (159,618) |
|                                                                                          | Net                  proceeds from issuance of common stock |   | - |   | 2,944,969 |
|                                                                                          | Proceeds                  from exercise of warrants |   | - |   | 2,250 |
|                                                                                          |   | Net                  cash provided by financing activities |   | 2,648,132 |   | 2,785,324 |
| **Net                  increase in cash and cash equivalents**                                |   | 1,032,967 |   | 1,088,080 |
| **Cash                  and cash equivalents, beginning of period**                           |   | 664,941 |   | 951,090 |
| **Cash                  and cash equivalents, end of period**                                 |   | $                  1,697,908 |   | $                  2,039,170 |

----

|  **AUXILIO,                  INC. AND SUBSIDIARIES**                                         |
|---------------------------------------------------------------------------------------------------|
| **CONDENSED                  CONSOLIDATED STATEMENTS OF CASH FLOWS                  (CONTINUED)** |
| **(UNAUDITED)**                                                                                   |
|                                                                                              |   |   |   |   |   |   |   |
|                                                                                              |   |   |   |   | **Six                  Months Ended June 30,** |
|                                                                                              |   |   |   |   | **2006** |   | **2005** |
| **Supplemental                  disclosure of cash flow information:**                            |   |   |   |   |
|                                                                                              |   |   |   |   |   |   |   |
|                                                                                              | Interest                  paid |   | $                  66,023 |   | $                  14,736 |
|                                                                                              |   |   |   |   |   |   |   |
|                                                                                              | Income                  tax paid |   | $                  2,400 |   | $                  3,200 |
|                                                                                              |   |   |   |   |   |   |   |
| **Non-cash                  investing and financing activities:**                                 |   |   |   |   |
|                                                                                              |   |   |   |   |   |   |   |
|                                                                                              | Warrants                  issued for expenses of private placement |   | - |   | $                  158,315 |
|                                                                                              |   |   |   |   |   |   |   |
|                                                                                              | Relative                  fair value of warrants issued related to issuance of note                  payable |   | $                  425,267 |   | $                  58,029 |
|                                                                                              |   |   |   |   |   |
|                                                                                              | Property                  and equipment acquired by capital lease |   | $                  26,391 |   | $                  19,097 |
|                                                                                              |   |   |   |   |   |
|                                                                                              | Stocks                  issued for acquisition fees for convertible note payable |   | $                  70,000 |   | - |

----

**NOTES        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SIX        MONTHS ENDED JUNE 30, 2006 and 2005**

**(UNAUDITED)**

**1.**
**BASIS        OF PRESENTATION **

** **
** **

**2**
**RECENTLY        ISSUED ACCOUNTING PRONOUNCEMENTS**

----

**3.**
**OPTIONS        AND WARRANTS.**

| **Options**                                       |       |                                                 |
|---------------------------------------------------|------------|------------------------------------------------------|
|                                              | **Shares** | **Weighted                  Average Exercise Price** | **Weighted                  Average Remaining Term in Years** | **Aggregate                  Intrinsic Value** |
| Outstanding                  at December 31, 2005 | 2,008,497  | $                  1.48                              |   |   |
|     Granted                   | 571,500    | $                  1.38                              |   |   |
|     Exercised                 | -          | -                                                    |   |   |
|     Cancelled                 | (160,500)  | $                  1.63                              |   |   |
| Outstanding                  at June 30, 2006     | 2,419,497  | $                  1.45                              | 8.43 | $                  158,390 |
| Exercisable                  at June 30, 2006     | 862,221    | $                  1.33                              | 7.63 | $                  103,190 |

| **Warrants**                                      |       |                                                 |
|---------------------------------------------------|------------|------------------------------------------------------|
|                                              | **Shares** | **Weighted                  Average Exercise Price** | **Weighted                  Average Remaining Term in Years** | **Aggregate                  Intrinsic Value** |
| Outstanding                  at December 31, 2005 | 1,398,535  | $                  1.25                              |   |   |
|     Granted                   | 698,541    | $                  1.94                              |   |   |
|     Exercised                 | (112,000)  | .30                                                  |   |   |
|     Cancelled                 | (28,000)   | .30                                                  |   |   |
| Outstanding                  at June 30, 2006     | 1,957,076  | $                  1.56                              | 4.28 | $                  375,498 |
| Exercisable                  at June 30, 2006     | 1,899,961  | $                  1.55                              | 4.31 | $                  375,498 |

----

|                                                    | **Three                  Months Ended June 30, 2006** |   | **Six                  Months Ended June 30, 2006** |
|---------------------------------------------------------|-------------------------------------------------------|--------|-----------------------------------------------------|
| Cost                  of revenues                       | $                  31,672                             |   | $                  71,935                           |
| Sales                  and marketing                    | 3,522                                                 |   | 61,516                                              |
| General                  and administrative expenses    | 73,333                                                |   | 155,034                                             |
| Total                  stock based compensation expense | $                  108,527                            |   | $                  288,485                          |

|                                                                                                                                       | **Three                  Months Ended**                                        |   | **Six                  Months Ended** |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|--------|---------------------------------------|
|                                                                                                                                       | **June                  30, 2005**                                             |   | **June                  30, 2005**    |
| Net                  loss:                                                                                                                 |                                                                           |   |                                  |
| As                  reported                                                                                                               | $                  (821,688)                                                   |   | $                  (1,446,900)        |
| Add:                  APB 25 Expense                                                                                                       | -                                                                              |   | -                                     |
| Deduct:                  Total stock based employee compensationexpense                  determined under SFAS 123 fair value based method |  239,414                                                                  |   |  474,332                         |
| Net                  loss, as adjusted                                                                                                     |                       $                   (1,061,102) |   |                    $ (1,921,232) |
|                                                                                                                                       |                                                                           |   |                                  |
| Basic                  loss per share:                                                                                                     |                                                                           |   |                                  |
| As                  reported                                                                                                               | $                  (0.05)                                                      |   | $                  (0.10)             |
| Pro                  forma                                                                                                                 | $                  (0.07)                                                      |   | $                  (0.13)             |
| Diluted                  loss per share:                                                                                                   |                                                                           |   |                                  |
|  As                  reported                                                                                                         | $                  (0.05)                                                      |   | $                  (0.10)             |
| Pro                  forma                                                                                                                 | $                  (0.07)                                                      |   | $                  (0.13)             |

**4.**
**NET        LOSS PER SHARE **

**5.**
**ACCOUNTS        RECEIVABLE**

| Trade                    receivable                |   | $715,919 |     |
|----------------------------------------------------|--------|----------|----------|
| Allowance                    for doubtful accounts |   |     | (2,010)  |   |
| Total                    accounts receivable       |   |     | $713,909 |   |

----

**FINANCIAL        INSTRUMENTS**

**7.**
**EMPLOYMENT        AGREEMENTS**

**8.**
**CONCENTRATIONS**

**9.        NOTE PAYABLE**

----

**10.        SEGMENT REPORTING**

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

----

**OVERVIEW**

**Application        of Critical Accounting Policies**

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

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

| ·   | accounting                  for income taxes |
|--------------------|----------------------------------------------|

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

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

----

**RESULTS        OF OPERATIONS**

**For        the Six Months Ended June 30, 2006 Compared to the Six Months Ended June        30,        2005**

**Revenue        **

**Cost        of Revenue **

**Sales        and Marketing **

**General        and Administrative **

**Intangible        Asset Amortization **

**Other        Income (Expense) **

----

**Income        Tax Expense **

**For        the Three Months Ended June 30, 2006 Compared to the Three Months Ended June        30,        2005**

**Revenue        **

**Cost        of Revenue **

**Sales        and Marketing **

**General        and Administrative **

**Intangible        Asset Amortization **

----

**Other        Income (Expense) **

**LIQUIDITY        AND CAPITAL RESOURCES**

**FACTORS        THAT MAY AFFECT FUTURE RESULTS **

----

**WE        ARE A NEW COMPANY WITH A LIMITED OPERATING HISTORY. **

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

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

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

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

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

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

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

| ·   | 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. |
|--------------------|-------------------------------------------------------|

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

----

**WE        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.**

**WE        ARE DEPENDENT UPON OUR LARGEST CUSTOMERS.**

**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.        **

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

**IF        WE FAIL TO PROVIDE SERVICES TO OUR CUSTOMERS, OUR REVENUES AND PROFITABILITY        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.**

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

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

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

**WE        MUST MANAGE GROWTH TO ACHIEVE PROFITABILITY.**

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**SHAREHOLDERS        WILL EXPERIENCE DILUTION AS A RESULT OF OUR STOCK OPTION        PLANS.**

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

**WE        DO NOT INTEND TO PAY DIVIDENDS.**

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

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

**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. **

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

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

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**ITEM        3.**
**CONTROLS        AND PROCEDURES.**

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**PART        II - OTHER INFORMATION**

**ITEM        1.**
**LEGAL        PROCEEDINGS.**

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

**ITEM        3. **
**DEFAULTS        UPON SENIOR SECURITIES.**

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

| Name                                  |   | Votes                  For |   | Votes                  Withheld |
|---------------------------------------|--------|----------------------------|--------|---------------------------------|
| Joseph                  J. Flynn      |   | 9,756,715                  |   | 6,208,233                       |
| Edward                  B. Case       |   | 9,756,715                  |   | 6,208,233                       |
| Robert                  L. Krakoff    |   | 9,756,715                  |   | 6,208,233                       |
| John                  D. Pace         |   | 9,756,715                  |   | 6,208,233                       |
| Max                  Poll             |   | 9,756,715                  |   | 6,208,233                       |
| Michael                  Vanderhoof   |   | 9,756,715                  |   | 6,208,233                       |
| Etienne                  L. Weidemann |   | 9,756,715                  |   | 6,208,233                       |

**ITEM        5.**
**OTHER        INFORMATION.**

**ITEM        6.**
**EXHIBITS.**

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

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**SIGNATURES**