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

----

| PART I      FINANCIAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| Item      1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Financial      Statements                                                                                                                                                                      |   | 3 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Condensed      Consolidated Balance Sheets as of September 30, 2009 (unaudited) and      December 31, 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 3 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Condensed      Consolidated Statements of Operations for the Three and Nine Months Ended      September 30, 2009 and 2008 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 4 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Condensed      Consolidated Statement of Stockholders’ Equity for the Nine Months Ended      September 30, 2009 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 5 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Condensed      Consolidated Statements of Cash Flows for the Nine Months Ended September      30, 2009 and 2008 (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 6 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Notes      to Condensed Consolidated Financial      Statements                                                                                                                                 |   | 8 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| Item      2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Management’s      Discussion and Analysis of Financial Condition and Results of      Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 14 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| Item      4T                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | Controls      and      Procedures                                                                                                                                                              |   | 18 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| PART II      OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| Item      1A                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | Risk      Factors                                                                                                                                                                              |   | 19 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| Item      6                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Exhibits                                                                                                                                                                                       |   | 23 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| SIGNATURES                                                                                                                                                   |   | 24                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

----

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

| AUXILIO,      INC. AND SUBSIDIARIES                                                                                                                                                               |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| CONDENSED      CONSOLIDATED BALANCE SHEETS                                                                                                                                                        |   |
|                                                                                                                                                                                              |   |
|                                                                                                                                                                                              |   |
|                                                                                                                                                                                              |   | SEPTEMBER      30, 2009 |   |   | DECEMBER      31, 2008 |   |
|                                                                                                                                                                                              |   | (unaudited) |   |   |   |   |
|                                                                                                                                                                                              |   |
| ASSETS                                                                                                                                                                                            |   |
| Current      assets:                                                                                                                                                                              |   |   |   |   |   |   |
| Cash      and cash equivalents                                                                                                                                                                    |   | $ | 1,674,592 |   |   | $ | 1,198,126 |   |
| Accounts      receivable, net                                                                                                                                                                     |   |   | 1,676,004 |   |   |   | 4,201,689 |   |
| Supplies                                                                                                                                                                                          |   |   | 657,049 |   |   |   | 745,207 |   |
| Prepaid      and other current assets                                                                                                                                                             |   |   | 27,942 |   |   |   | 33,642 |   |
| Loan      acquisition costs, net                                                                                                                                                                  |   |   | - |   |   |   | 44,431 |   |
| Total      current assets                                                                                                                                                                         |   |   | 4,035,587 |   |   |   | 6,223,095 |   |
|                                                                                                                                                                                              |   |   |   |   |   |   |   |   |
| Property      and equipment, net                                                                                                                                                                  |   |   | 350,271 |   |   |   | 129,614 |   |
| Deposits                                                                                                                                                                                          |   |   | 28,790 |   |   |   | 28,790 |   |
| Goodwill                                                                                                                                                                                          |   |   | 1,517,017 |   |   |   | 1,517,017 |   |
| Total      assets                                                                                                                                                                                 |   | $ | 5,931,665 |   |   | $ | 7,898,516 |   |
|                                                                                                                                                                                              |   |   |   |   |   |   |   |   |
| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                                                                                                                         |   |
|                                                                                                                                                                                              |   |   |   |   |   |   |   |   |
| Current      liabilities:                                                                                                                                                                         |   |   |   |   |   |   |   |   |
| Accounts      payable and accrued expenses                                                                                                                                                        |   | $ | 1,522,477 |   |   | $ | 3,236,008 |   |
| Accrued      compensation and benefits                                                                                                                                                            |   |   | 540,515 |   |   |   | 662,663 |   |
| Deferred      revenue                                                                                                                                                                             |   |   | 380,711 |   |   |   | 489,563 |   |
| Current      portion of note payable, net of discount of $23,413 at December 31,      2008                                                                                                        |   |   | - |   |   |   | 1,308,587 |   |
| Current      portion of capital lease obligations                                                                                                                                                 |   |   | - |   |   |   | 3,913 |   |
| Total      current liabilities                                                                                                                                                                    |   |   | 2,443,703 |   |   |   | 5,700,734 |   |
|                                                                                                                                                                                              |   |   |   |   |   |   |   |   |
| Capital      lease obligations, noncurrent                                                                                                                                                        |   |   | 22,287 |   |   |   | - |   |
|                                                                                                                                                                                              |   |   |   |   |   |   |   |   |
| Total      liabilities                                                                                                                                                                            |   |   | 2,465,990 |   |   |   | 5,700,734 |   |
|                                                                                                                                                                                              |   |   |   |   |   |   |   |   |
| Commitments      and contingencies                                                                                                                                                                |   |   | - |   |   |   | - |   |
|                                                                                                                                                                                              |   |   |   |   |   |   |   |   |
| Stockholders'      equity:                                                                                                                                                                        |   |   |   |   |   |   |   |   |
| Common      stock, par value at $0.001, 33,333,333 shares authorized, 19,040,401 and      17,623,734 shares issued and outstanding at September 30, 2009 and      December 31, 2008, respectively |   |   | 19,042 |   |   |   | 17,625 |   |
| Additional      paid-in capital                                                                                                                                                                   |   |   | 19,719,759 |   |   |   | 18,490,632 |   |
| Accumulated      deficit                                                                                                                                                                          |   |   | (16,273,126 | ) |   |   | (16,310,475 | ) |
| Total      stockholders' equity                                                                                                                                                                   |   |   | 3,465,675 |   |   |   | 2,197,782 |   |
| Total      liabilities and stockholders’ equity                                                                                                                                             |   | $ | 5,931,665 |   |   | $ | 7,898,516 |   |

----

| AUXILIO, INC. AND SUBSIDIARIES                       |   |
|------------------------------------------------------|--------|
| CONDENSED      CONSOLIDATED STATEMENTS OF OPERATIONS |   |
| (UNAUDITED)                                          |   |
|                                                 |   |
|                                                 |   | Three      Months |   |   | Nine      Months |
|                                                 |   | Ended      September 30, |   |   | Ended      September 30, |
|                                                 |   | 2009 |   |   | 2008 |   |   | 2009 |   |   | 2008 |
| Revenues                                             |   | $ | 4,600,021 |   |   | $ | 4,188,191 |   |   | $ | 12,181,532 |   |   | $ | 14,852,849 |   |
| Cost      of revenues                                |   |   | 3,060,229 |   |   |   | 3,215,936 |   |   |   | 8,961,860 |   |   |   |  11,486,211 |   |
|                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross      profit                                    |   |   | 1,539,792 |   |   |   | 972,255 |   |   |   | 3,219,672 |   |   |   | 3,366,638 |   |
|                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating      expenses:                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales      and marketing                             |   |   | 385,959 |   |   |   | 367,375 |   |   |   | 1,012,340 |   |   |   | 1,067,836 |   |
| General      and administrative expenses             |   |   | 886,649 |   |   |   | 975,769 |   |   |   | 2,074,776 |   |   |   | 2,217,415 |   |
| Intangible      asset amortization                   |   |   | - |   |   |   | 47,743 |   |   |   | - |   |   |   | 143,230 |   |
| Total      operating expenses                        |   |   | 1,272,608 |   |   |   | 1,390,887 |   |   |   | 3,087,116 |   |   |   | 3,428,481 |   |
|                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income      (loss) from operations                   |   |   | 267,184 |   |   |   | (418,632 | ) |   |   | 132,556 |   |   |   | (61,843 | ) |
|                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other      income (expense):                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest      expense                                |   |   | (425 | ) |   |   | (94,207 | ) |   |   | (96,271 | ) |   |   | (535,031 | ) |
| Interest      income                                 |   |   | 50 |   |   |   | 1,376 |   |   |   | 1,604 |   |   |   | 4,990 |   |
| Gain      on sale of fixed assets                    |   |   | - |   |   |   | - |   |   |   | 1,860 |   |   |   | - |   |
|                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total      other income (expense)                    |   |   | (375 | ) |   |   |  (92,831 | ) |   |   | (92,807 | ) |   |   | (530,041 | ) |
|                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income      (loss) before provision for income taxes |   |   | 266,809 |   |   |   |  (511,463 | ) |   |   | 39,749 |   |   |   | (591,884 | ) |
|                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income      tax expense                              |   |   | - |   |   |   |   (5,503 | ) |   |   | (2,400 | ) |   |   | (7,903 | ) |
|                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income  (loss)                    |   | $ | 266,809 |   |   | $ |  (516,966 | ) |   | $ | 37,349 |   |   | $ | (599,787 | ) |
|                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      (loss) income per share:                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |   | $ | .01 |   |   | $ |   (.03 | ) |   | $ | .00 |   |   | $ | (.04 | ) |
| Diluted                                              |   | $ | .01 |   |   | $ |  (.03 | ) |   | $ | .00 |   |   | $ | (.04 | ) |
|                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number      of weighted average shares:              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |   |   | 19,040,401 |   |   |   |  17,230,259 |   |   |   | 18,414,320 |   |   |   | 16,569,380 |   |
| Diluted                                              |   |   | 19,040,401 |   |   |   |  18,015,666 |   |   |   | 18,414,320 |   |   |   | 16,569,380 |   |

----

| AUXILIO,      INC. AND SUBSIDIARIES                                                                             |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
| CONDENSED      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY                                                   |   |
| NINE      MONTHS ENDED SEPTEMBER 30, 2009                                                                       |   |
| (UNAUDITED)                                                                                                     |   |
|                                                                                                            |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   | Additional |   |   |   |   |   | Total |   |
|                                                                                                            |   | Common      Stock |   |   | Paid-in |   |   | Accumulated |   |   | Stockholders' |   |
|                                                                                                            |   | Shares |   |   | Amount |   |   | Capital |   |   | Deficit |   |   | Equity |   |
| Balance      at December 31, 2008                                                                               |   |   | 17,623,734 |   |   | $ | 17,625 |   |   | $ | 18,490,632 |   |   | $ | (16,310,475 | ) |   | $ | 2,197,782 |   |
| Stock      compensation expense for options and warrants granted to employees and      directors                |   |   | - |   |   |   | - |   |   |   | 388,736 |   |   |   | - |   |   |   | 388,736 |   |
| Fair      value of warrants issued for marketing services                                                       |   |   | - |   |   |   | - |   |   |   | 76,807 |   |   |   | - |   |   |   | 76,807 |   |
| Common      stock issued in private  placement,      net of offering  costs      of $85,000 |   |   | 1,416,667 |   |   |   | 1,417 |   |   |   | 763,584 |   |   |   | - |   |   |   | 765,001 |   |
| Net      income                                                                                                 |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 37,349 |   |   |   | 37,349 |   |
| Balance      at September 30, 2009                                                                              |   |   | 19,040,401 |   |   | $ | 19,042 |   |   | $ | 19,719,759 |   |   | $ | (16,273,126 | ) |   | $ | 3,465,675 |   |

----

| AUXILIO,      INC. AND SUBSIDIARIES                                                                            |   |
|----------------------------------------------------------------------------------------------------------------|--------|
| CONDENSED      CONSOLIDATED STATEMENTS OF CASH FLOWS                                                           |   |
| (UNAUDITED)                                                                                                    |   |
|                                                                                                           |   |   |   |
|                                                                                                           |   | Nine      Months Ended September 30, |   |
|                                                                                                           |   | 2009 |   |   |   | 2008 |   |
| Cash      flows provided by operating activities:                                                              |   |   |   |   |   |   |   |
|         Net income (loss)                                                                            |   | $ | 37,349 |   |   |   | $ | (599,787 | ) |
| Adjustments      to reconcile net income (loss) to net cash                                                    |   |   |   |   |   |   |   |   |   |
| provided      by operating activities:                                                                         |   |   |   |   |   |   |   |   |   |
|         Depreciation                                                                                 |   |   | 97,254 |   |   |   |   | 89,602 |   |
|         Amortization of intangible assets                                                            |   |   | - |   |   |   |   | 143,230 |   |
|         Obsolete inventory                                                                           |   |   | 15,956 |   |   |   |   | - |   |
|         Stock compensation expense for warrants and options issued to employees      and consultants |   |   | 388,736 |   |   |   |   | 297,789 |   |
|         Fair value of warrants issued for marketing services                                         |   |   | 76,807 |   |   |   |   | - |   |
|         Interest expense related to amortization of warrants issued with      loans                  |   |   | 23,412 |   |   |   |   | 65,170 |   |
|         Interest expense related to amortization of loan acquisition      costs                      |   |   | 44,431 |   |   |   |   | 123,675 |   |
|         Interest expense related to accretion of loan discount                                       |   |   | - |   |   |   |   | 197,083 |   |
| Changes      in operating assets and liabilities:                                                              |   |   |   |   |   |   |   |   |   |
|         Accounts receivable                                                                          |   |   | 2,525,685 |   |   |   |   | 478,002 |   |
|         Recovery of bad debts                                                                        |   |   | - |   |   |   |   | (28,510 | ) |
|         Supplies                                                                                     |   |   | 72,202 |   |   |   |   | 97,637 |   |
|         Prepaid and other current assets                                                             |   |   | 5,701 |   |   |   |   | 12,869 |   |
|         Accounts payable and accrued expenses                                                        |   |   | (1,713,531 | ) |   |   |   | 224,389 |   |
|         Accrued compensation and benefits                                                            |   |   | (122,148 | ) |   |   |   | (162,280 | ) |
|         Deferred revenue                                                                             |   |   | (108,852 | ) |   |   |   | 2,801 |   |
|               Net cash provided by operating activities                |   |   | 1,343,002 |   |   |   |   | 941,670 |   |
| Cash      flows (used for) investing activities:                                                               |   |   |   |   |   |   |   |   |   |
|         Purchases of property and equipment                                                          |   |   | (292,816 | ) |   |   |   | (37,336 | ) |
|               Net cash (used for) investing activities                 |   |   | (292,816 | ) |   |   |   | (37,336 | ) |
| Cash      flows (used for) financing activities:                                                               |   |   |   |   |   |   |   |   |   |
|         Net proceeds from issuance of common stock                                                   |   |   | 765,001 |   |   |   |   | - |   |
|         Payments on capital leases                                                                   |   |   | (6,721 | ) |   |   |   | (17,387 | ) |
|         Payments on notes payable and long-term debt                                                 |   |   | (1,332,000 | ) |   |   |   | (822,500 | ) |
|         Proceeds from exercise of options and warrants                                               |   |   | - |   |   |   |   | 217,775 |   |
|               Net cash (used for) financing activities                 |   |   | (573,720 | ) |   |   |   | (622,112 | ) |
| Net      increase in cash and cash equivalents                                                                 |   |   | 476,466 |   |   |   |   | 282,222 |   |
| Cash and cash      equivalents, beginning of period                                                            |   |   | 1,198,126 |   |   |   |   | 666,428 |   |
| Cash and cash equivalents,      end of period                                                                  |   | $ | 1,674,592 |   |   |   | $ | 948,650 |   |

----

|   |   |
|--------|--------|

| AUXILIO,      INC. AND SUBSIDIARIES                                   |   |
|-----------------------------------------------------------------------|--------|
| CONDENSED      CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) |   |
| (UNAUDITED)                                                           |   |
|                                                                  |   |   |   |   |   |   |
|                                                                  |   | Nine      Months Ended September 30, |   |
|                                                                  |   | 2009 |   |   | 2008 |   |
| Supplemental      disclosure of cash flow information:                |   |   |   |   |   |   |
|                                                                  |   |   |   |   |   |   |
| Interest      paid                                                    |   | $ | 28,102 |   |   | $ | 135,823 |   |
|                                                                  |   |   |   |   |   |   |   |   |
| Income      taxes paid                                                |   | $ | 62,750 |   |   |   | 18,487 |   |
|                                                                  |   |   |   |   |   |   |   |   |
| Portion      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 |   |
|                                                                  |   |   |   |   |   |   |   |   |

----

|   | NOTES      TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS |
|--------|----------------------------------------------------------|

|   | NINE      MONTHS ENDED SEPTEMBER 30, 2009 AND2008 |
|--------|---------------------------------------------------|

|   | (UNAUDITED) |
|--------|-------------|

----

| Options                                |   | Shares |      |   | Weighted      Average Exercise Price |   |   | Weighted      Average Remaining Term in Years |   |   | AggregateIntrinsic      Value |   |
|----------------------------------------|--------|--------|-----------|--------|--------------------------------------|--------|--------|-----------------------------------------------|--------|--------|-------------------------------|--------|
| Outstanding      at December 31, 2008  |   |   | 4,385,186 |   |                                 | $      | 1.15   |                                          |   |   |                          |   |   |   |
| Granted                                |   |   | 1,402,500 |   |                                 |   | 0.61   |                                          |   |   |                          |   |   |   |
| Exercised                              |   |   | -         |   |                                 |   | -      |                                          |   |   |                          |   |   |   |
| Cancelled                              |   |   | (36,189   | )      |                                 |   | 1.15   |                                          |   |   |                          |   |   |   |
| Outstanding      at September 30, 2009 |   |   | 5,751,497 |   |                                 | $      | 1.02   |                                          |   |   | 7.28                          |   |   | $ | 234,245 |   |
| Exercisable      at September 30, 2009 |   |   | 3,831,597 |   |                                 | $      | 1.08   |                                          |   |   | 6.59                          |   |   | $ | - |   |

| Warrants                               |   | Shares |      |   | Weighted      Average Exercise Price |   |   | Weighted      Average Remaining Term in Years |   |   | AggregateIntrinsic      Value |   |
|----------------------------------------|--------|--------|-----------|--------|--------------------------------------|--------|--------|-----------------------------------------------|--------|--------|-------------------------------|--------|
| Outstanding      at December 31, 2008  |   |   | 2,170,204 |   |                                 | $      | 1.37   |                                          |   |   |                          |   |   |   |
| Granted                                |   |   | 2,141,667 |   |                                 |   | 1.50   |                                          |   |   |                          |   |   |   |
| Exercised                              |   |   | -         |   |                                 |   | -      |                                          |   |   |                          |   |   |   |
| Cancelled                              |   |   | -         |   |                                 |   | -      |                                          |   |   |                          |   |   |   |
| Outstanding      at September 30, 2009 |   |   | 4,311,871 |   |                                 | $      | 1.44   |                                          |   |   | 2.61                          |   |   | $ | - |   |
| Exercisable      at September 30, 2009 |   |   | 2,461,871 |   |                                 | $      | 1.39   |                                          |   |   | 2.61                          |   |   | $ | - |   |

----

|                                                          |   | Three      Months        |    |   | Nine      Months         |   |
|---------------------------------------------------------------|--------|--------------------------|---------|--------|--------------------------|--------|
|                                                          |   | Ended      September 30, |    |   | Ended      September 30, |   |
|                                                          |   | 2009                     |    |   | 2008                     |   |   | 2009 |   |   | 2008 |   |
| Cost      of revenues                                         |   | $                        | 23,042  |   |                     | $      | 27,413 |   |   | $ | 73,773 |   |   | $ | 91,524 |   |
| Sales      and marketing                                      |   |                     | 17,097  |   |                     |   | 19,542 |   |   |   | 51,339 |   |   |   | 60,979 |   |
| General      and administrative expense                       |   |                     | 190,539 |   |                     |   | 48,849 |   |   |   | 263,624 |   |   |   | 145,286 |   |
|    Total      stock based compensation expense |   | $                        | 230,678 |   |                     | $      | 95,804 |   |   | $ | 388,736 |   |   | $ | 297,789 |   |

----

|                                                                        |   | Three      Months Ended September 30, |       |   | Nine      Months Ended September 30, |
|-----------------------------------------------------------------------------|--------|---------------------------------------|------------|--------|--------------------------------------|
|                                                                        |   | 2009                                  |       |   | 2008                                 |   |   | 2009 |   |   | 2008 |   |
| Numerator:                                                                  |   |                                  |       |   |                                 |   |   |   |   |   |   |   |
|         Net      income (loss)                                    |   | $                                     | 266,809    |   |                                 | $ | (516,966 | ) |   | $ | 37,349 |   |   | $ | (599,787 | ) |
|  Effects      of dilutive securities:                                  |   |                                  |       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|         Convertible      notes payable                            |   |                                  | -          |   |                                 |   | (100,125 | ) |   |   | - |   |   |   | - |   |
|  Income      (loss) after effects of conversion of note payable        |   | $                                     | 266,809    |   |                                 | $ | (617,091 | ) |   | $ | 37,349 |   |   | $ | (599,787 | ) |
|                                                                        |   |                                  |       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|  Denominator:                                                          |   |                                  |       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|         Denominator for basic calculation weighted average shares |   |                                  | 19,040,401 |   |                                 |   | 17,230,259 |   |   |   | 18,414,320 |   |   |   | 16,569,380 |   |
|                                                                        |   |                                  |       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Dilutive      common stock equivalents:                                     |   |                                  |       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|         Secured convertible notes                                 |   |                                  | -          |   |                                 |   | 785,407 |   |   |   | - |   |   |   | - |   |
|         Options and warrants                                      |   |                                  | -          |   |                                 |   | - |   |   |   | - |   |   |   | - |   |
|                                                                        |   |                                  |       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Denominator      for diluted calculation weighted average shares            |   |                                  | 19,040,401 |   |                                 |   | 18,015,666 |   |   |   | 18,414,320 |   |   |   | 16,569,380 |   |
|                                                                        |   |                                  |       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Net      income (loss) per share:                                           |   |                                  |       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|         Basic net income (loss) per share                         |   | $                                     | .01        |   |                                 | $ | (.03 | ) |   | $ | .00 |   |   | $ | (.04 | ) |
|                                                                        |   |                                  |       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|         Diluted net income (loss) per share                       |   | $                                     | .01        |   |                                 | $ | (.03 | ) |   | $ | .00 |   |   | $ | (.04 | ) |

| Trade      receivable                |   | $      | 1,676,004 |   |
|--------------------------------------|--------|--------|-----------|--------|
| Allowance      for doubtful accounts |   |   | -         |   |
| Total      accounts receivable       |   | $      | 1,676,004 |   |

----

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

----

----

----

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

| ·   | accounts      receivable valuation and relatedreserves |
|--------------------|--------------------------------------------------------|

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

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

----

----

----

|                  |   | Payments      Due by Period |   |
|-----------------------|--------|-----------------------------|--------|
|                  |   | Total                       |   |   | Less      than 1 year |   |   | 1-3      years |   |   | 3-5      years |   |   | More      than 5 years |   |
| Capital      leases   |   | $                           | 22,287 |   |   |   | - |   |   |   | 22,287 |   |   |   | - |   |   |   | - |   |
| Operating      leases |   |                        | 71,724 |   |   |   | 71,724 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Total                 |   | $                           | 94,011 |   |   | $ | 71,724 |   |   | $ | 22,287 |   |   | $ | - |   |   | $ | - |   |

----

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

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

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

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

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

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

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

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

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

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

----

----

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

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

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

----

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

----

| 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 Chief Executive Officer and Chief Financial Officer pursuant to      Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934      and 18 U.S.C. Section 1350 *. |

----

|   |                                                                                                                                                                          |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| By:    | /s/ Joseph J.      Flynn                                                                                                                                                      |
|   |            Joseph Flynn,           Chief Executive Officer      (Principal      Executive Officer) |

|   |                                                                                                                                                                           |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| By:    | /s/ Paul T.      Anthony                                                                                                                                                       |
|   |            Paul Anthony,           Chief Financial Officer      (Principal      Accounting Officer) |

----