**U.S.      Securities and Exchange Commission**

**Washington,      D.C. 20549**

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**FORM      10-KSB**

| [X] |                  Annual report under Section 13 or 14(d) of the Securities Exchange                Act of                1934 for the fiscal year ended December 31,                2006. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**AUXILIO,      INC.**

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

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**DOCUMENTS      INCORPORATED BY REFERENCE**

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**AUXILIO,      INC.**

**FORM      10-KSB ANNUAL REPORT**

**TABLE      OF CONTENTS**

**PART      **

**PART      II**

**PART      III**

|   |             Item                  9. |             Directors,                  Executive Officers, Promoters and Control                  Persons: |
|--------|--------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |                         Compliance                  with Section 16(a) of the Exchange                  Act.........................................................................................................19 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |                             Item                11.   |         Security                Ownership of Certain Beneficial Owners and Management and |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|

|   |   |                     Related                Stockholder                Matters…………................................................................................................................................20 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**PART      I**

*Statements      contained in this Report that are not historical facts or that discuss our      expectations or beliefs regarding our future operations or future financial      performance, or financial or other trends in our business, constitute“forward-looking statements” within the meaning of Section 27A of the Securities      Act of 1933, as amended (the 1933 Act) and Section 21E of the Securities      Exchange Act of 1934, as amended (the 1934 Act). Forward-looking statements      can      be identified by the fact that they do not relate strictly to historical or      current facts. Often, they include the words “believe,” “expect,” “anticipate,”“intend,” “plan,” “estimate,” “project,” or words of similar meaning, or future      or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” The      achievement or realization of the expectations or beliefs set forth in      forward-looking statements are subject to a number of risks and uncertainties      that could cause our financial condition or operating results in the future      to      differ significantly from those expected at the current time. Those risks and      uncertainties are described in this Item 1 “Business,” in Item 6 “Management’s      Discussion and Analysis of Plan of Operation—Factors That May Affect Our Future      Results” as well as those discussed in any documents incorporated by reference      herein or therein. Due to these uncertainties and risks, readers are cautioned      not to place undue reliance on forward-looking statements contained in the      Report, which speak only as of the date of this Annual Report. We undertake      no      obligation to update or revise any forward-looking statements, whether as a      result of new information, future events or otherwise.*

**Item      1. **
**Description      of**
**Business**

**Introduction**

**Background**

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**Principal      Products or Services**

| ·   | Vendor                monitoring, management and contract                negotiation |
|--------------------|--------------------------------------------------------------------------------------|

| ·   | Change                management and end-user training                programs |
|--------------------|--------------------------------------------------------------------------------|

| ·   | Utilization                management |
|--------------------|---------------------------------------|

| ·   | Financial                reporting |
|--------------------|------------------------------------|

| ·   | Workflow                efficiency management |
|--------------------|-----------------------------------------------|

| ·   | Information                systems integration, connectivity and image migration                strategies |
|--------------------|------------------------------------------------------------------------------------------------------------|

| ·   | Strategy                execution working with the customer to execute a long-term Image                Management strategy |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------|

**Competition**

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| ·   | Auxilio                is unique in its 100% focus on healthcare. No other vendor/service                provider has its entire business dedicated to solving issues inside                of                healthcare with the expertise and knowledge base unmatched in the                market. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Auxilio                is unique in its approach to providing fully outsourced Image Management                programs. Auxilio’s program is completely outsourced and hospitals need                only pay a single invoice. Auxilio operates the Image Management                process                as a department in the hospital with full-time staff on-site. The                vendors                and dealers in the vast majority of instances have multiple small                and                large customers in a geographic area to whom they are providing services                and this causes major delays in service and supplies to the hospitals.                In                addition, by focusing solely on the hospital campus, Auxilio enjoys                much                lower turn-around times for service, greater up sell opportunities                and a                much deeper service relationship with the                customer. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Auxilio                is not restricted to any single equipment vendor. Auxilio is committed                to                bringing the best hardware and software solutions to our customers.                Our                approach is to use the best technology to solve the solution in the                best                manner possible without any prejudice as to                equipment. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Auxilio                maintains a daily connection with the hospital providing a detailed                strategy and plan on equipment acquisition saving the hospitals a                great                deal of time, effort and money in this cumbersome and confusing process. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Customers**

**Intellectual      Property**

**Government      Regulation**

**Research      and Development**

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**Employees**

**Item      2.   **
**Description      of**
**Properties**

**Item      3. **
**Legal      Proceedings**

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

**PART      II**

**Item        5.   Market for Registrant’s Common Equity, Related Stockholder        Matters and Small Business Issuer Purchases of Equity        Securities**

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| **Quarter**                                               | **Low** |   | **High** |
|-----------------------------------------------------------|---------|--------|----------|
| January                  1, 2005—March 31, 2005.    | $       | 1.95   |     | $ | 3.10 |
| April                  1, 2005—June 30, 2005.       | $       | 1.90   |     | $ | 2.40 |
| July                  1, 2005—September 30, 2005.   | $       | 1.65   |     | $ | 2.20 |
| October                  1, 2005—December 31, 2005. | $       | 1.50   |     | $ | 2.25 |
| January                  1, 2006—March 31, 2006.    | $       | 1.40   |     | $ | 2.00 |
| April                  1, 2006—June 30, 2006.       | $       | 1.00   |     | $ | 1.65 |
| July                  1, 2006—September 30, 2006.   | $       | 0.45   |     | $ | 1.10 |
| October                  1, 2006—December 31, 2006. | $       | 0.33   |     | $ | 0.57 |

**Equity      Compensation Plan Information**

| Plan                                                                           | **Number                of Securities to be Issued Upon Exercise of Outstanding Options,                Warrants**** and Rights**  | **Weighted                Average Exercise Price of Outstanding Options,****Warrants****and Rights** | **Number                of Securities Remaining Available for Future Issuances****Under Plan** |
|--------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
| Equity                compensation plans approved by security holders (1):     | 2,182,648                                                                                                                                    | $1.39                                                                                                | 1,284,019                                                                                      |
| Equity                compensation plans not approved by security holders (2): | 2,467,077                                                                                                                                    | $1.34                                                                                                | -                                                                                              |
| ** **Total                                                                | 4,649,725                                                                                                                                    |                                                                                                 | 1,284,019                                                                                      |

| (1)   | These                plans consist of the 2000 Stock Option Plan, 2001 Stock Option Plan,                the                2003 Stock Option Plan and the 2004 Stock Option                Plan. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | From                time to time and at the discretion of the Board of Directors the                Company                may issue warrants to key individuals or officers of the Company                as                performance based compensation. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Unregistered      Sales of Equity Securities**

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**Item      6.**
**Management’s      Discussion and Analysis of Plan of Operations**

**Introduction**

*Forward      Looking Statements*

**Overview**

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**Application      of Critical Accounting Policies**

| ·   | Revenue                recognition; |
|--------------------|-------------------------------------|

| ·   | Stock-based                compensation; |
|--------------------|------------------------------------------|

| ·   | Accounting                for income taxes; and |
|--------------------|-------------------------------------------------|

| ·   | Impairment                of intangible assets. |
|--------------------|-------------------------------------------------|

**Results      of Operations**

**Year      Ended December 31, 2006 Compared to the Year Ended December 31,      2005**

**Net      Revenue **

**Cost      of Revenue **

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**Sales      and Marketing **

**General      and Administrative **

**Intangible      Asset Amortization**

**Other      Income (Expense) **

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**Liquidity      and Capital Resources**

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**Contractual      Obligations and Contingent Liabilities and Commitments**

|                           | **Total**        | **2007**       | **2008**         | **2009**                                                                                                     | **2010**                                                                                   |
|-------------------------------------|------------------|----------------|------------------|--------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|
| Long-term                debt       | $2,400,000       | $600,000       | $1,800,000       | $                               - | $                            - |
| Capital                leases       | 57,433           | 28,074         | 25,315           | 4,044                                                                                                        | -                                                                                          |
| Operating                leases     | 531,091          | 163,464        | 167,467          | 171,470                                                                                                      | 28,690                                                                                     |
| Purchase                obligations | -                | -              | -                | -                                                                                                            | -                                                                                          |
| Total                               | $2,988,524  | $791,538  | $1,992,782  | $175,514                                                                                                | $28,690                                                                               |

**Factors      That May Affect Our Future Results **

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

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

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

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

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

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

**WE      ARE DEPENDENT ON 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.**

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

**SHAREHOLDERS      WILL EXPERIENCE DILUTION AS A RESULT OF THE COMPANY’S 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.**

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

**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      7.**
**Consolidated      Financial Statements**

**Item      8.**
**Changes      in and Disagreements with Accountants on Accounting and Financial      Disclosure**

**Item      8A.**
**Controls      and Procedures**

**Item      8B.**
**Other      Information**

**PART      III**

**Item      9.**
** **
**Directors,      Executive Officers, Promoters and Control Persons: Compliance With Section      16(a)      of the Exchange Act**

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**Item      10.**
**Executive      Compensation**

**Item      11.**
**Security      Ownership of Certain Beneficial Owners and Management and Related      Stockholders**

**Item      12.**
**Certain      Relationships and Transactions**

**Item      13.**
**Exhibits      **

**Exhibits**

| **No.** | **Item**                                                                                                                                                                                                                                                                                                                                                  |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1     | Agreement                and Plan of Reorganization dated as of November 20, 2001, by and                between                the Company and e-Perception, Inc. (incorporated by reference to                Exhibit                1.1 to the Registrant’s Form 8-K filed on January 24,                2002).                                  |
| 2.2     | Agreement                and Plan of Merger, dated April 1, 2004, by and between Auxilio,                Inc.,                PPVW Acquisition Corporation, and Alan Mayo & Associates, Inc. (filed                as Exhibit 2.1 to the Registrant’s Form 8-K filed on April 16,                2004).                                         |
| 3.1     | Certificate                of Incorporation (incorporated by reference to Exhibit 3.1 to the                Registrant’s Form 10-KSB filed on April 19, 2005).                                                                                                                                                                                      |
| 3.2     | Bylaws                (incorporated by reference to Exhibit 2 to the Registrant’s Form 10-SB                filed on October 1, 1999).                                                                                                                                                                                                              |
| 4.1     | Subscription                Agreement, dated as of January 9, 2002, by and among the Company                and each                of the stockholders of e-Perception, Inc. (incorporated by reference                to                Exhibit 1.1 to the Registrant’s Form 8-K filed on January 24,                2002).                       |
| 10.1    | 2000                Stock Option Plan (incorporated by reference to Exhibit 10.1 to the                Registrant’s Form 10-KSB filed on April 19, 2005).                                                                                                                                                                                           |
| 10.2    | 2001                Stock Option Plan (incorporated by reference to Exhibit 10.2 to the                Registrant’s Form 10-KSB filed on April 19, 2005).                                                                                                                                                                                           |
| 10.3    | 2003                Stock Option Plan (incorporated by reference to Exhibit 10.3 to the                Registrant’s Form 10-KSB filed on April 19, 2005).                                                                                                                                                                                           |
| 10.4    | 2004                Stock Option Plan (incorporated by reference to Exhibit 10.4 to the                Registrant’s Form 10-KSB filed on April 19, 2005).                                                                                                                                                                                           |
| 10.5    | Standard                Office Lease by and between Arden Realty Limited Partnership and                e-Perception Technologies, Inc. (incorporated by reference to Exhibit                10.1                to the Registrant’s Form 10-QSB filed on May 15, 2002).                                                                            |
| 10.6    | Asset                Purchase Agreement between Workstream USA, Inc., Workstream, Inc.                and                PeopleView, Inc. dated March 8,.                2004                (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K                filed on April 2, 2004).                                         |
| 10.7    | Addendum                dated as of May 27, 2004 to Asset Purchase Agreement dated March                17th,                2004 between Workstream Inc. Workstream USA, Inc. and PeopleView,                Inc.                (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K/A                filed on August 3, 2004). |
| 10.8    | Revolving                Loan and Security Agreement between Auxilio, Inc. and Michael D.                Vanderhoof (filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on                December 29, 2004).                                                                                                                                 |
| 10.9    | Executive                Employment Agreement between Registrant and Etienne Weidemann, President                and Chief Operating Officer dated April 1, 2004 (incorporated by                reference                to Exhibit 10.9 to the Registrant’s Form 10-KSB filed on April 19, 2005)..                                                |
| 10.10   | Executive                Employment Agreement between Registrant and Joseph J Flynn, Chief                Executive Officer and Chairman of the Board of Directors dated April                1,                2004 (incorporated by reference to Exhibit 10.10 to the Registrant’s Form                10-KSB filed on April 19, 2005)..          |
| 10.11   | Executive                Employment Agreement between Registrant and James Stapleton, Chief                Financial Officer and Corporate Secretary dated April 1, 2004                (incorporated by reference to Exhibit 10.11 to the Registrant’s Form                10-KSB filed on April 19, 2005)..                                       |
| 10.12   | Executive                Employment Agreement between Registrant and Paul T. Anthony, Chief                Financial Officer and Corporate Secretary dated December 10, 2004                (incorporated by reference to Exhibit 10.12 to the Registrant’s Form                10-KSB filed on April 19, 2005)..                                   |
| 10.13   | Standard                Office Lease agreement by and between Auxilio, Inc and McMorgan                Institutional Real Estate Fund I, LLC. dated October 13, 2004                (incorporated by reference to Exhibit 10.13 to the Registrant’s Form                10-KSB filed on April 19, 2005)..                                           |
| 10.14   | Loan                and Security Agreement between Auxilio, Inc. and Cambria Investment                Fund,                L.P. (filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on November                28, 2005).                                                                                                                    |
| 10.15   | Executive                Employment Agreement between Registrant and Joseph J Flynn, Chief                Executive Officer dated March 14, 2006 (filed as Exhibit 10.1 to                the                Registrant’s Form 8-K filed on March 22, 2006).                                                                                        |
| 10.16   | Executive                Employment Agreement between Registrant and Etienne Weidemann, President                and Chief Operating Officer dated March 15, 2006 (filed as Exhibit                10.2 to                the Registrant’s Form 8-K filed on March 22, 2006).                                                                       |
| 10.17   | Executive                Employment Agreement between Registrant and Paul T. Anthony, Chief                Financial Officer and Corporate Secretary dated March 15, 2006 (filed                as                Exhibit 10.3 to the Registrant’s Form 8-K filed on March 22,                2006).                                                |
| 10.18   | Securities                Purchase Agreement dated as of April 7, 2006, between Auxilio, Inc.                and                Laurus Master Fund, Ltd. (filed as Exhibit 10.1 to the Registrant’s Form                8-K filed on April 13, 2006).                                                                                               |
| 10.19   | Secured                Convertible Term Note dated as of April 7, 2006 issued by Auxilio,                Inc. to                Laurus Master Fund, Ltd. (filed as Exhibit 10.2 to the Registrant’s Form                8-K filed on April 13, 2006).                                                                                               |
| 10.20   | Loan                and Security Agreement dated as of October 25, 2006, between Auxilio,                Inc.                and Cambria Investment Fund, L.P. (filed as Exhibit 10.1 to the                Registrant’s Form 8-K filed on October 27, 2006).                                                                                       |
| 14      | Registrants                Code of Ethics (incorporated by reference to Exhibit 14.1 to the                Registrant’s Form 10-KSB filed on April 14, 2004).                                                                                                                                                                                       |
| 16.1    | Letter                regarding change in certifying accountants dated February 14, 2002                (incorporated by reference to Exhibit 16 to the Registrant’s Form 8-K                filed on February 15, 2002).                                                                                                                           |
| 16.2    | Letter                regarding change in certifying accountants dated December 22, 2005                (incorporated by reference to Exhibit 16.1 to the Registrant’s Form 8-K/A                filed on January 24, 2006).                                                                                                                        |
| 21.1    | Subsidiaries                                                                                                                                                                                                                                                                                                                                              |
| 31.1    | Certification                of the Chief Executive Officer pursuant to Rule 13a-14(a) and rule                15d-14(a).                                                                                                                                                                                                                                 |
| 31.2    | Certification                of the Chief Financial Officer pursuant to Rule 13a-14(a) and rule                15d-14(a).                                                                                                                                                                                                                                 |
| 32.1    | Certification                of the CEO and CFO pursuant to 18 U.S.C. Section 1350 as adopted                pursuant                to Section 906 of The Sarbanes-Oxley Act of                2002.                                                                                                                                                     |

**Item      14.**
**Principal      Accountant Fees and Services**

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**Signatures**

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**AUXILIO,      INC. AND SUBSIDIARIES**

**CONSOLIDATED      FINANCIAL STATEMENTS**

**YEARS      ENDED DECEMBER 31, 2006 AND 2005**

**WITH      REPORT OF INDEPENDENT REGISTERED**

**PUBLIC      ACCOUNTING FIRM**

**                                          **

**  CONTENTS**

|                                                                                                                                                                                                 | Page                                                                |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------|
| **Report                          of Independent Registered Public Accounting                          Firm**...........................................................                             | F-1                                                                 |
|   **Financial                          Statements:**                                                                                                                                       |                                                                |
|  Consolidated                          Balance                          Sheet.................................................................................................................. |  F-2                                                           |
|  Consolidated                          Statements of                          Operations..............................................................................................          |  F-3                                                           |
|  Consolidated                          Statements of Comprehensive                          (Loss)..........................................................................                    |  F-4                                                           |
|  Consolidated                          Statements of Stockholders’ Equity                          (Deficit).............................................................                 |  F-5                                                           |
|  Consolidated                          Statements of Cash                          Flows.............................................................................................           |  F-6,                          F-7                             |
|  Notes                          to Consolidated Financial                          Statements......................................................................................             |  F-8                          to                          F-23 |

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**REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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| **AUXILIO,                  INC. AND SUBSIDIARIES**                                                         |   |
|-------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  BALANCE SHEET**                                                             |
| **DECEMBER                  31, 2006**                                                                      |
|                                                                                                        |   |   |   |   |
| **ASSETS**                                                                                                  |
| **Current                  assets:**                                                                        |   |   |   |   |
| Cash                  and cash equivalents                                                                  |   | $ | 319,437 |   |
| Accounts                  receivable, net                                                                   |   |   | 1,724,258 |   |
| Prepaid                  and other current assets                                                           |   |   | 30,673 |   |
| Supplies                                                                                                    |   |   | 690,478 |   |
|  Total                  current assets                                                                 |   |   | 2,764,846 |   |
|                                                                                                        |   |   |   |   |
| **Property                  and equipment,**                  net                                           |   |   | 303,769 |   |
| **Deposits**                                                                                                |   |   | 28,790 |   |
| **Loan                  acquisition costs**                                                                 |   |   | 472,440 |   |
| **Intangible                  assets**,                  net                                                |   |   | 429,138 |   |
| **Goodwill**                                                                                                |   |   | 1,517,017 |   |
|  Total                  assets                                                                         |   | $ | 5,516,000 |   |
|                                                                                                        |   |   |   |   |
| **LIABILITIES                  AND STOCKHOLDERS' EQUITY**                                                   |
| **Current                  liabilities:**                                                                   |   |   |   |   |
| Accounts                  payable and accrued expenses                                                      |   | $ | 1,320,103 |   |
| Accrued                  compensation and benefits                                                          |   |   | 366,795 |   |
| Deferred                  revenue                                                                           |   |   | 289,314 |   |
| Revolving                  loan payable, net of discount of $65,264                                         |   |   | 679,736 |   |
| Current                  portion of long-term debt                                                          |   |   | 600,000 |   |
| Current                  portion of capital lease obligations                                               |   |   | 47,315 |   |
|  Total                  current liabilities                                                            |   |   | 3,303,263 |   |
|                                                                                                        |   |   |   |   |
|  **Note                  payable, less current portion, net of discount of                  $197,200** |   |   | 1,902,800 |   |
|                                                                                                        |   |   |   |   |
| **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                                                                 |   |   | 16,430,094 |   |
| Accumulated                  deficit                                                                        |   |   | (16,136,281 | ) |
|      Total                  stockholders' equity                                   |   |   | 309,937 |   |
|  Total                  liabilities and stockholders’ equity                                     |   | $ | 5,516,000 |   |

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| **AUXILIO,                INC. AND SUBSIDIARIES**                  |
|--------------------------------------------------------------------|
| **CONSOLIDATED                STATEMENTS OF OPERATIONS**           |
|                                                               |   |   |   |   |   |   |   |
|                                                               |   | **Year                Ended December 31,**  |
|                                                               |   |   | **2006** |   |   | **2005** |   |
| **Net                revenues**                                    |   | $ | 10,248,270 |   | $ | 4,290,962 |   |
| **Cost                of revenues**                                |   |   | 9,270,539 |   |   | 3,225,155 |   |
| **Gross                profit**                                    |   |   | 977,731 |   |   | 1,065,807 |   |
| **Operating                expenses:**                             |   |   |   |   |   |   |   |
| Sales                and marketing                                 |   |   | 1,972,743 |   |   | 1,783,196 |   |
| General                and administrative expenses                 |   |   | 2,152,400 |   |   | 2,327,497 |   |
| Intangible                asset amortization                       |   |   | 255,206 |   |   | 482,564 |   |
|  Total                operating expenses                      |   |   | 4,380,349 |   |   | 4,593,257 |   |
| **(Loss)                from operations**                          |   |   | (3,402,618 | ) |   | (3,527,450 | ) |
| **Other                income (expense):**                         |   |   |   |   |   |   |   |
| Interest                expense                                    |   |   | (537,018 | ) |   | (148,365 | ) |
| Interest                income                                     |   |   | 28,826 |   |   | 35,373 |   |
| Gain                on sale of marketable securities               |   |   | 10,447 |   |   | 293,083 |   |
| Loss                on disposal of property and equipment          |   |   | - |   |   | (8,225 | ) |
|  Total                other income (expense)                  |   |   | (497,744 | ) |   | 171,866 |   |
|                                                               |   |   |   |   |   |   |   |
| **(Loss)                before provision for income taxes**        |   |   | (3,900,362 | ) |   | (3,355,584 | ) |
| **Income                tax expense**                              |   |   | 2,400 |   |   | 3,200 |   |
| **Net                (loss)**                                      |   |  $ | (3,902,762 | ) | $ | (3,358,784 | ) |
|                                                               |   |   |   |   |   |   |   |
| **Net                (loss) per share:**                           |   |   |   |   |   |  |   |
| ** Basic**                                                    |   | $ | (0.24 | ) | $ | (0.21 | ) |
|  **Diluted**                                                  |   | $ | (0.24 | ) | $ | (0.21 | ) |
|                                                               |   |   |   |   |   |   |   |
| **Number                of weighted average shares outstanding -** |   |   |   |   |   |   |   |
| **Basic**                                                          |   |   | 16,076,310 |   |   | 15,623,690 |   |
| **Diluted**                                                        |   |   | 16,076,310 |   |   | 15,623,690 |   |

----

| **AUXILIO,                INC. AND SUBSIDIARIES**                  |   |
|--------------------------------------------------------------------|--------|
| **CONSOLIDATED                STATEMENTS OF COMPREHENSIVE (LOSS)** |   |
|                                                               |   |   |   |   |   |   |   |
|                                                               |   | **Year                Ended December 31,**  |
|                                                               |   |   | **2006** |   |   | **2005** |   |
| **Net                (loss)**                                      |   | $ | (3,902,762 | ) | $ | (3,358,784 | ) |
|                                                               |   |   |   |   |   |   |   |
| **Holding                gain on marketable securities**           |   |   | - |   |   | 70,873 |   |
|                                                               |   |   |   |   |   |   |   |
| **Reclassification                adjustment, net of tax**         |   |   | - |   |   | (293,083 | ) |
|                                                               |   |   |   |   |   |   |   |
| **Comprehensive                (loss)**                            |   | $ | (3,902,762 | ) | $ | (3,580,994 | ) |

----

| **AUXILIO,                INC. AND SUBSIDIARIES**                                                                                     |
|---------------------------------------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED                STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)**                                                          |
| **YEARS                ENDED DECEMBER 31, 2006 AND 2005**                                                                             |
|                                                                                                                                  |   |   |   |   |   |   |   |   | **Additional**  |   |   |   |   |   | **Accumulated** |   |   | **Total** |   |
|                                                                                                                                  |   | **Common                Stock**  |   | **Paid-in** |   |   | **Accumulated** |   |   | **Comprehensive** |   |   | **Stockholders'** |   |
|                                                                                                                                  |   |   | **Shares**  |   |   | **Amount** |   |   | **Capital** |   |   | **Deficit** |   |   | **Income** |   |   | **Equity(Deficit)** |   |
| Balance                at January 1, 2005                                                                                             |   |   | 14,438,662 |   | $ | 14,440 |   | $ | 11,836,242 |   | $ | (8,874,735) |   | $ | 222,210 |   | $ | 3,198,157 |   |
| Common                stock issued in private placement, net of offering costs of                $272,173                             |   |   | 1,619,750 |   |   | 1,620 |   |   | 2,965,707 |   |   | - |   |   | - |   |   | 2,967,327 |   |
| Common                stock issued upon exercise of warrants                                                                          |   |   | 3,000 |   |   | 3 |   |   | 2,247 |   |   | - |   |   | - |   |   | 2,250 |   |
| Return                of shares issued for acquisition but unearned                                                                   |   |   | (100,002) |   |   | (100) |   |   | (29,900) |   |   | - |   |   | - |   |   | (30,000) |   |
| Relative                fair value of warrants issued related to revolving loans                payable                               |   |   | - |   |   | - |   |   | 127,587 |   |   | - |   |   | - |   |   | 127,587 |   |
| Stock                compensation expense for options and warrants granted to employees                and                consultants |   |   | - |   |   | - |   |   | 288,533 |   |   | - |   |   | - |   |   | 288,533 |   |
| Holding                gain on marketable securities                                                                                  |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 70,873 |   |   | 70,873 |   |
| Reclassification                of realized amount included in net loss                                                               |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (293,083) |   |   | (293,083) |   |
| Net                loss                                                                                                               |   |   | - |   |   | - |   |   | - |   |   | (3,358,784) |   |   | - |   |   | (3,358,784) |   |
| 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 |   |
| Fair                value of warrants issued related to revolving loan payable                                                        |   |   | - |   |   | - |   |   | 92,558 |   |   | - |   |   | - |   |   | 92,558 |   |
| Relative                fair value of warrants issued related to revolving loan                payable                                |   |   | - |   |   | - |   |   | 156,166 |   |   | - |   |   | - |   |   | 156,166 |   |
| 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 |   |
| Common                stock issued for cashless exercise of warrants                                                                  |   |   | 112,000 |   |   | 112 |   |   | (112) |   |   | - |   |   | - |   |   | - |   |
| Stock                compensation expense for options and warrants granted to employees                and                consultants |   |   | - |   |   | - |   |   | 575,974 |   |   | - |   |   | - |   |   | 575,974 |   |
| Net                loss                                                                                                               |   |   | - |   |   | - |   |   | - |   |   | (3,902,762) |   |   | - |   |   | (3,902,762) |   |
| Balance                at December 31, 2006                                                                                           |   |   | 16,122,809 |   | $ | 16,124 |   | $ | 16,430,094 |   | $ | (16,136,281) |   | $ | - |   | $ | 309,937 |   |

----

| **AUXILIO,                INC. AND SUBSIDIARIES**                                                                                     |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                STATEMENTS OF CASH FLOWS**                                                                              |   |
|                                                                                                                                  |   |   |   |   |   |   |   |
|                                                                                                                                  |   |   |   | **Year                Ended December 31,** |   |
|                                                                                                                                  |   |   |   | **2006** |   | **2005** |   |
| **Cash                flows (used for) provided by operating                activities:**                                             |   |   |   |   |   |
|    Net                (loss)                                                                                           |   |   |   | $                                 (3,902,762) |   | $                (3,358,784) |   |
| **Adjustments                to reconcile net (loss) to net cash (used for)**                                                         |   |   |   |   |   |
|   **operating                activities:**                                                                                  |   |   |   |   |   |   |   |
| Depreciation                                                                                                                          |   |   |   |   |   | 122,806 |   |   | 84,423 |   |
| Amortization                of intangible assets                                                                                      |   |   |   |   |   | 255,206 |   |   | 482,564 |   |
| Bad                debt expense (recoveries)                                                                                          |   |   |   |   |   | 26,500 |   |   | (4,449) |   |   |   |   |
| Gain                on sale of marketable securities                                                                                  |   |   |   |   |   | (10,448) |   |   | (293,083) |   |
| Loss                on disposal of property and equipment                                                                             |   |   |   |   |   | - |   |   | 8,225 |   |
| Interest                expense related to amortization of warrants issued with                loans                                  |   |   |   |   |   | 154,381 |   |   | 127,587 |   |
| Interest                expense related to amortization of loan acquisition costs                                                     |   |   |   |   |   | 144,821 |   |   | - |   |
| Stock                compensation expense for options and warrants granted to employees                and                consultants |   |   |   |   |   | 575,974 |   |   | - |   |
| Stock                issued for services                                                                                              |   |   |   |   |   | 4,953 |   |   | - |   |
| Options                issued for professional services                                                                               |   |   |   |   |   | - |   |   | 288,533 |   |
| **Changes                in operating assets and liabilities:**                                                                       |   |   |   |   |   |   |
| Accounts                receivable                                                                                                    |   |   |   |   |   | (1,261,934) |   |   | (243,177) |   |
| Prepaid                and other current assets                                                                                       |   |   |   |   |   | 60,692 |   |   | (30,857) |   |
| Supplies                                                                                                                              |   |   |   |   |   | (246,900) |   |   | (33,791) |   |
| Deposits                                                                                                                              |   |   |   |   |   | 12,565 |   |   | 15,040 |   |
| Accounts                payable and accrued expenses                                                                                  |   |   |   |   |   | 792,873 |   |   | (687,223) |   |
| Accrued                compensation and benefits                                                                                      |   |   |   |   |   | 43,858 |   |   | (332,581) |   |
| Lease                buy-out provision                                                                                                |   |   |   |   |   | - |   |   | (32,196) |   |
| Deferred                revenue                                                                                                       |   |   |   |   |   | (9,548) |   |   | 339 |   |
| Net                cash (used for) operating activities                                                                               |   |   |   |   |   | (3,236,963) |   |   | (4,009,430) |   |
| **Cash                flows (used for) provided by investing                activities:**                                             |   |   |   |   |   |   |
| Purchases                of property and equipment                                                                                    |   |   |   |   |   | (189,322) |   |   | (60,042) |   |
| Net                proceeds from sale of marketable securities                                                                        |   |  |   |   |   | 26,698 |   |   | 979,311 |   |
| Net                cash (used for) provided by investing activities                                                                   |   |   |   |   |   | (162,624) |   |   | 919,269 |   |
| **Cash                flows provided by financing activities:**                                                                       |   |   |   |   |   |   |
| Proceeds                from line of credit                                                                                           |   |   |   |   |   | 995,000 |   |   | 500,000 |   |
| Repayments                on line of credit                                                                                           |   |   |   |   |   | (250,000) |   |   | (500,000) |   |
| Proceeds                from convertible note payable                                                                                 |   |   |   |   |   | 3,000,000 |   |   | - |   |
| Repayments                on convertible note payable                                                                                 |   |   |   |   |   | (300,000) |   |   | - |   |
| Acquisition                fees paid for convertible note payable                                                                     |   |   |   |   |   | (375,195) |   |   | - |   |
| Payments                on capital leases                                                                                             |   |   |   |   |   | (15,722) |   |   | (5,947) |   |
| Payments                on notes payable and long-term debt                                                                           |   |   |   |   |   | - |   |   | (159,618) |   |
| Net                proceeds from issuance of common stock                                                                             |   |   |   |   |   | - |   |   | 2,967,327 |   |
| Proceeds                from exercise of warrants                                                                                     |   |   |   |   |   | - |   |   | 2,250 |   |
| Net                cash provided by financing activities                                                                              |   |   |   |   |   | 3,054,083 |   |   | 2,804,012 |   |
| **Net                (decrease) in cash and cash equivalents**                                                                        |   | (345,504) |   |   | (286,149) |   |
| **Cash                and cash equivalents,**                beginning of year                                                        |   | 664,941 |   |   | 951,090 |   |
| **Cash                and cash equivalents,**end                of year                                                               | $      | 319,437 |   | $ | 664,941 |   |

----

| **AUXILIO,                INC. AND SUBSIDIARIES**                                                             |   |
|---------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                STATEMENTS OF CASH FLOWS (CONTINUED)**                                          |
|                                                                                                          |
|                                                                                                          |   |   | Year                Ended December 31, |   |
|                                                                                                          |   |   | **2006** |   |   | **2005** |   |
| **Supplemental                disclosure of cash flow information:**                                          |   |   |   |   |   |   |   |
|                                                                                                          |   |   |   |   |   |   |   |
| Interest                paid                                                                                  |   | $ | 234,075 |   | $ | 20,778 |   |
|                                                                                                          |   |   |   |   |   |   |   |
| Income                tax paid                                                                                |   | $ | 2,400 |   | $ | 70,373 |   |
|                                                                                                          |   |   |   |   |   |   |   |
| **Non-cash                investing and financing activities:**                                               |   |   |   |   |   |   |   |
|                                                                                                          |   |   |   |   |   |   |   |
| Warrants                issued for expenses of private placement                                              |   | $ | - |   | $ | (159,445 | ) |
|                                                                                                          |   |   |   |   |   |   |   |
| Relative                fair value of warrants issued related to issuance of note                payable      |   | $ | 588,912 |   | $ | 127,587 |   |
|                                                                                                          |   |   |   |   |   |   |   |
| Return                of stock issued in conjunction with acquisition but                unearned             |   | $ | - |   | $ | (30,000 | ) |
|                                                                                                          |   |   |   |   |   |   |   |
| Stocks                issued for acquisition fees for convertible note payable                                |   | $ | 70,000 |   | $ | - |   |
|                                                                                                          |   |   |   |   |   |   |   |
| Relative                fair value of options issued related to professional services                rendered |   | $ | - |   | $ | 18,200 |   |
|                                                                                                          |   |   |   |   |   |   |   |
| Property                and equipment acquired by capital lease                                               |   | $ | 26,391 |   | $ | 33,674 |   |

----

**AUXILIO,      INC. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR      THE YEARS ENDED DECEMBER 31, 2006 AND 2005**

**(1)**
**Summary      of Significant Accounting Policies**

**Business      Activity**

**Basis      of Presentation**

**Liquidity      **

----

**Use      of Estimates**

**Revenue      Recognition**

**Deferred      Revenue**

**Cash      and Cash Equivalents**

**Accounts      Receivable**

----

**Supplies**

**Property      and Equipment**

**Intangible      Assets**

**Long-Lived      Assets**

**Advertising**

**Income      Taxes**

----

**Fair      Value of Financial Instruments**

**Stock-Based      Compensation**

| Cost                of revenues                       | $                108,099 |
|-------------------------------------------------------|--------------------------|
| Sales                and marketing                    | 229,057                  |
| General                and administrative expenses    | 238,818                  |
| Total                stock based compensation expense | $                575,974 |

----

|                                                                                                                                                             | **2005**                                                                                          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|
| Net                (loss):                                                                                                                                       |                                                                                              |
|                   As reported                                                                                                                          |                        $(3,358,784)                            |
|                   Deduct: Total stock based employee compensation                  expense determined under SFAS 123 fair value based method |                669,913 |
|                   Pro forma                                                                                                                            |        $(4,028,697)                                            |
|                                                                                                                                                             |                                                                                              |
| Basic                (loss)                per share:                                                                                                            |                                                                                              |   |
|                   As reported                                                                                                                          | $                                                                                                 |                   (0.21) |
|                   Pro forma                                                                                                                            | $                                                                                                 |                   (0.26) |
|                                                                                                                                                             |                                                                                              |   |
| Diluted                (loss)                per share:                                                                                                          |                                                                                              |   |
|                   As reported                                                                                                                          | $                                                                                                 |                   (0.21) |
|                   Pro forma                                                                                                                            | $                                                                                                 |                   (0.26) |

|                                               | **2006**                        | **2005**                        |
|----------------------------------------------------|---------------------------------|---------------------------------|
|                                               |                            |                            |
| Risk-free                interest rate             | 4.51%                to 5.24%   | 2.75%                to 4.00%   |
| Expected                volatility of common stock | 65.16%                to 92.47% | 58.13%                to 80.47% |
| Dividend                yield                      | 0%                              | 0%                              |
| Expected                life of options            | 3                years          | 5                years          |

**Basic      and Diluted Loss Per Share**

**Segment      Reporting**

**New      Accounting Pronouncements**

----

**Reclassifications**

** **
**(2)**
**Accounts      Receivable**

| Trade                                          |   | $                       1,723,262 |      |
|------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
| Earned                and uninvoiced revenue   |   |                                                                                                                                                 | 29,505    |   |
| Allowance                for doubtful accounts |   |                                                                                                                                                 | (28,509)  |   |
|                                           |   | $                                                                                                                                                    | 1,724,258 |   |

----

**(3)**
**Property      and Equipment**

| Furniture                and fixtures                         |   | $      |                    53,972 |   |
|---------------------------------------------------------------|--------|--------|----------------------------------------------------|--------|
| Computers              and office equipment                   |   |   | 367,739                                            |   |
| Fleet                equipment                                |   |   | 165,813                                            |   |
| Leasehold                improvements                         |   |   | 25,202                                             |   |
|                                                          |   |   | 612,726                                            |   |
| Less                accumulated depreciation and amortization |   |   | (308,957)                                          |   |
|                                                          |   | $      | 303,769                                            |   |

**(4)**
**Intangible      Assets and Goodwill**

| Customer                relationships                           |   | $      | 850,000   |   |
|-----------------------------------------------------------------|--------|--------|-----------|--------|
| Backlog                                                         |   |   | 350,000   |   |
|                                                            |   |   | 1,200,000 |   |
|                    Less accumulated amortization |   |   | (770,862) |   |
|                                                            |   | $      | 429,138   |   |

| **                        December 31** |   |   |    |
|-----------------------------------------------------------------------|--------|--------|---------|
| 2007                                                                  |   | $      | 238,165 |   |
| 2008                                                                  |   | $      | 190,973 |   |

| Customer                  relationships |   | $      | 510,000 |   |
|-----------------------------------------|--------|--------|---------|--------|
| Backlog                                 |   |   | 260,862 |   |
| Total                                   |   | $      | 770,862 |   |

----

**(5)**
**Revolving      Loan Payable**

----

**(6)**
**Notes      Payable**

----

**(7)**
**Equity      Transactions**

**(8)**
**Warrants**

|                                                                          |   |   | **Number****                    of Shares**  |   |   | **Weighted                Average****Exercise                Price** |   |   | **Weighted                Average Remaining Term in Years** |   |   | **Aggregate                Intrinsic Value** |   |
|-------------------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------|--------|--------|-------------------------------------------------------------|--------|--------|----------------------------------------------|--------|
| Outstanding                at January 1, 2005                                 |   |   | 1,236,955                                                             |   | $      | 1.04                                                                 |   |   |                                                        |   |   |                                         |   |
|      Granted                in                2005   |   |   | 254,580                                                               |   | $      | 2.28                                                                 |   |   |                                                        |   |   |                                         |   |
|      Exercised                in                2005 |   |   | (3,000)                                                               |   | $      | 0.75                                                                 |   |   |                                                        |   |   |                                         |   |
|      Cancelled                in                2005 |   |   | (90,000)                                                              |   | $      | 1.30                                                                 |   |   |                                                        |   |   |                                         |   |
| Outstanding                at December 31, 2005                               |   |   | 1,398,535                                                             |   | $      | 1.25                                                                 |   |   | 3.39                                                        |   |   | 832,675                                      |   |
|    Granted                in                2006               |   |   | 1,208,541                                                             |   | $      | 1.32                                                                 |   |   |                                                        |   |   |                                         |   |
|    Exercised                in                2006             |   |   | (112,000)                                                             |   | $      | 0.30                                                                 |   |   |                                                        |   |   |                                         |   |
|    Cancelled                in                2006             |   |   | (28,000)                                                              |   | $      | 0.30                                                                 |   |   |                                                        |   |   |                                         |   |
| Outstanding                at December 31, 2006                               |   |   | 2,467,076                                                             |   | $      | 1.34                                                                 |   |   | 4.44                                                        |   | $      | 65,650                                       |   |
|                                                                          |   |   |                                                                  |   |   |                                                                 |   |   |                                                        |   |   |                                         |   |
| Warrants                exercisable at December 31, 2005                      |   |   | 1,288,535                                                             |   | $      | 1.19                                                                 |   |   | 3.39                                                        |   |   | 832,675                                      |   |
|                                                                          |   |   |                                                                  |   |   |                                                                 |   |   |                                                        |   |   |                                         |   |
| Warrants                exercisable at December 31, 2006                      |   |   | 2,467,076                                                             |   | $      | 1.34                                                                 |   |   | 4.44                                                        |   | $      | 65,650                                       |   |

----

| **Range                of****Exercise****Prices** | **Number                of Shares Outstanding**         | **Weighted                Average Remaining in****Contractual                Life****in                Years** | **Outstanding****Warrants                Weighted Average Exercise Price** | **Number                of Warrants Exercisable** | **Exercisable****Warrants****Weighted                Average****Exercise                Price** |
|---------------------------------------------------|---------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------|---------------------------------------------------|-------------------------------------------------------------------------------------------------|
| $0.30                to $0.75                     |                      1,059,066 | 4.44                                                                                                           | $                0.40                                                      |     1,059,066                 | $                0.40                                                                           |
| $1.02                to $1.90                     | 247,917                                                 | 3.31                                                                                                           | $                1.58                                                      | 247,917                                           | $                1.58                                                                           |
| $1.90                to $2.00                     | 941,041                                                 | 5.10                                                                                                           | $                1.96                                                      | 941,041                                           | $                1.96                                                                           |
| $2.00                to $2.75                     | 179,580                                                 | 3.21                                                                                                           | $                2.50                                                      | 179,580                                           | $                2.50                                                                           |
| $3.00                to $12.00                    |                  39,472                            | 1.49                                                                                                           | $                4.90                                                      |                  39,472                      | $                4.90                                                                           |
| $0.30                to $12.00                    |                      2,467,076 | 4.44                                                                                                           | $                1.34                                                      |     2,467,076                 | $                1.34                                                                           |

**(9)**
**Stock      Option Plans:**

----

|                                                    |   |   | **Number****                     of Shares**  |   |   | **Weighted                Average****Exercise                Price** |   |   | **Weighted                Average Remaining Term in Years** |   |   | **Aggregate                Intrinsic Value** |   |
|---------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------|--------|--------|-------------------------------------------------------------|--------|--------|----------------------------------------------|--------|
| Outstanding                at January 1, 2005           |   |   | 1,361,580                                                                   |   | $      | 1.07                                                                 |   |   |                                                        |   |   |                                         |   |
| Granted                in 2005                          |   |   | 939,667                                                                     |   | $      | 1.96                                                                 |   |   |                                                        |   |   |                                         |   |
| Exercised                in 2005                        |   |   | -                                                                           |   | $      | -                                                                    |   |   |                                                        |   |   |                                         |   |
| Cancelled                in 2005                        |   |   | (292,750)                                                                   |   | $      | 1.23                                                                 |   |   |                                                        |   |   |                                         |   |
| Outstanding                at December 31, 2005         |   |   | 2,008,497                                                                   |   | $      | 1.48                                                                 |   |   | 8.59                                                        |   | $      | 592,148                                      |   |
| Granted                in 2006                          |   |   | 600,500                                                                     |   | $      | 1.34                                                                 |   |   |                                                        |   |   |                                         |   |
| Exercised                in 2006                        |   |   | -                                                                           |   | $      | -                                                                    |   |   |                                                        |   |   |                                         |   |
| Cancelled                in 2006                        |   |   | (426,349)                                                                   |   | $      | 1.77                                                                 |   |   |                                                        |   |   |                                         |   |
| Outstanding                at December 31, 2006         |   |   | 2,182,648                                                                   |   | $      | 1.39                                                                 |   |   | 7.88                                                        |   | $      | -                                            |   |
|                                                    |   |   |                                                                        |   |   |                                                                 |   |   |                                                        |   |   |                                         |   |
| Options                exercisable at December 31, 2005 |   |   | 486,555                                                                     |   | $      | 1.19                                                                 |   |   | 7.69                                                        |   | $      | 249,008                                      |   |
|                                                    |   |   |                                                                        |   |   |                                                                 |   |   |                                                        |   |   |                                         |   |
| Options                exercisable at December 31, 2006 |   |   | 1,020,816                                                                   |   | $      | 1.36                                                                 |   |   | 7.23                                                        |   | $      | -                                            |   |

| **Range                of****Exercise****Prices** | **Number                of Shares Outstanding** | **Weighted                Average Remaining in****Contractual                Life****in                Years** | **Outstanding****Options                Weighted Average Exercise Price** | **Number                of Options Exercisable** | **Exercisable****Options****Weighted                Average****Exercise                Price** |
|---------------------------------------------------|-------------------------------------------------|----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------|--------------------------------------------------|------------------------------------------------------------------------------------------------|
| $0.30                to $0.75                     | 29,000                                          | 9.52                                                                                                           | $                0.57                                                     | -                                                | $                 -                                                                       |
| $0.75                to $0.90                     | 841,996                                         | 6.95                                                                                                           | $                0.83                                                     | 592,942                                          | $ 0.83                                                                                    |
| $1.02                to $1.84                     | 775,167                                         | 8.80                                                                                                           | $                1.49                                                     | 127,917                                          | $ 1.66                                                                                    |
| $1.90                to $2.00                     | 490,818                                         | 8.10                                                                                                           | $                2.00                                                     | 255,207                                          | $ 1.99                                                                                    |
| $3.00                to$6.75                      | 45,667                                          | 5.85                                                                                                           | $                3.82                                                     | 44,750                                           | $ 3.84                                                                                    |
| $0.30                to $6.75                     | 2,182,648                                       | 7.88                                                                                                           | $                1.39                                                     | 1,020,816                                        | $ 1.36                                                                                    |

**(10)**
**Income      Taxes**

|                              |   |   | **2006** |   |   | **2005** |   |
|-----------------------------------|--------|--------|----------|--------|--------|----------|--------|
| Current                provision: |   |   |     |   |   |     |   |
| Federal                           |   | $      | -        |   | $      | -        |   |
| State                             |   |   | 2,400    |   |   | 3,200    |   |
|                              |   |   | 2,400    |   |   | 3,200    |   |
| Deferred                benefit:  |   |   |     |   |   |     |   |
| Federal                           |   |   | -        |   |   | -        |   |
| State                             |   |   | -        |   |   | -        |   |
|                              |   |   |  -  |   |   | -        |   |
| Income                tax expense |   | $      | 2,400    |   | $      | 3,200    |   |

----

|                                                         |   |   | **2006**    |   |   | **2005**    |   |
|--------------------------------------------------------------|--------|--------|-------------|--------|--------|-------------|--------|
| Computed                tax at federal statutory rate of 34% |   | $      | (1,326,100) |   | $      | (1,140,900) |   |
| State                taxes, net of federal benefit           |   |   | 1,600       |   |   | 2,000       |   |
| Non                deductible items                          |   |   | 21,000      |   |   | 20,800      |   |
| Other                                                        |   |   | (172,400)   |   |   | (47,700)    |   |
| Change                in valuation allowance                 |   |   | 1,478,300   |   |   | 1,169,000   |   |
|                                                         |   | $      | 2,400       |   | $      | 3,200       |   |

|                                                                   |   |   | **2006**    |   |   | **2005**    |   |
|------------------------------------------------------------------------|--------|--------|-------------|--------|--------|-------------|--------|
| Deferred                tax assets:                                    |   |   |        |   |   |        |   |
| Allowance                for doubtful accounts                         |   | $      | 12,200      |   | $      | 11,600      |   |
| Accrued                salaries/vacation                               |   |   | 113,700     |   |   | 92,800      |   |
|    Accrued                equipment pool                |   |   | 58,200      |   |   | 44,900      |   |
| State                taxes                                             |   |   | 1,100       |   |   | 1,100       |   |
| Stock                options                                           |   |   | 370,400     |   |   | 123,600     |   |
| Net                operating loss carryforwards                        |   |   | 5,217,600   |   |   | 3,985,700   |   |
|      Total                deferred tax assets |   |   | 5,773,200   |   |   | 4,259,700   |   |
|                                                                   |   |   |        |   |   |        |   |
| Deferred                tax liabilities:                               |   |   |        |   |   |        |   |
| Depreciation                                                           |   |   | 41,600      |   |   | 59,500      |   |
| Amortization                of intangibles                             |   |   | 185,400     |   |   | 293,200     |   |
| Other                                                                  |   |   | 284,400     |   |   | 128,900     |   |
|                     Total deferred tax liabilities |   |   | 511,400     |   |   | 481,600     |   |
|                                                                   |   |   |        |   |   |        |   |
| Net                deferred assets before valuation allowance          |   |   | 5,261,800   |   |   | 3,778,100   |   |
| Valuation                allowance                                     |   |   | (5,261,800) |   |   | (3,778,100) |   |
| Net                deferred tax assets                                 |   | $      | -           |   | $      | -           |   |

----

**(11)**
**Retirement      Plan**

**(12)**
**Commitments**

**Leases**

| **                    December 31** | **Payments** |
|---------------------------------------------------------|--------------|
|                                                    | 2007         | $ | 163,464 |
|                                                    | 2008         |   | 167,467 |
|                                                    | 2009         |   | 171,470 |
|                                                    | 2010         |   | 28,690 |
|                                                    | Total        | $ | 531,091 |

**Employment      Agreements**

----

**(13)**
**Concentrations**

**Cash      Concentrations**

**Major      Customers**

**(14)**
**      Related Party Transactions**

----

**(15)**
**      Subsequent Event**

----