10KSB

U.S. Securities and Exchange Commission

Washington, D.C. 20549

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, 2007.

[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

Commission File Number: 000-27507

AUXILIO, INC.

(Name of Small Business Issuer in its Charter)

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

27401 Los Altos, Suite 100, Mission Viejo, California  92691

(Address of principal executive offices)

(949) 614-0700

(Issuer’s telephone number)

Securities registered under Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Act:

Common Stock, $.001 par value

(Title of Class)

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  [  ]

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

Yes [X]                       No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]No [X]

Issuer’s revenues for the year ended December 31, 2007 were $19,592,946.

The aggregate market value for the Issuer’s voting stock held by non-affiliates of the Issuer based upon the $1.70 per share closing sale price of the Common Stock on March 26, 2008 as reported on the Over-the-Counter Bulletin Board, was approximately $25,281,222.  Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 26, 2008, Registrant had 16,235,309 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

Transitional Small Business Disclosure Format (check one):

Yes            [ ]                       No            [X]

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AUXILIO, INC.

FORM 10-KSB ANNUAL REPORT

TABLE OF CONTENTS

            Page

PART I

Item 1.	Description of Business	4
Item 2.	Description of Properties	7
Item 3.	Legal Proceedings	7
Item 4.	Submission of Matters to a Vote of Security Holders	7

PART II

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities	7
Item 6.	Management’s Discussion and Analysis of Plan of Operations	10
Item 7.	Consolidated Financial Statements	F-2 - F-24
Item 8.	Changes in and Disagreements with Accountants
	on Accounting and Financial Disclosure	18
Item 8A.	Controls and Procedures	18
Item 8B.	Other Information	19

PART III

Item 9.	Directors, Executive Officers, Promoters and Control Persons:
	Compliance with Section 16(a) of the Exchange Act	19
Item 10.	Executive Compensation	19
Item 11.	Security Ownership of Certain Beneficial Owners and Management and
	Related Stockholder Matters	19
Item 12.	Certain Relationships and Related Transactions	19
Item 13.	Exhibits	20
Item 14.	Principal Accountant Fees and Services	21

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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

Auxilio, Inc. (the Company or Auxilio) was originally incorporated under the laws of the State of Nevada on August 29, 1995, under the nameCorporate Development Centers, Inc.  As a result of a series of transactions, which are more fully described in the section entitled “Background” below, the Company, in April 2004, changed its name to Auxilio, Inc. The Company is currently headquartered in Orange County, California, with its principal executive offices located at 27401 Los Altos, Suite 100, Mission Viejo, 92691.  The Company is engaged in the business of providing fully outsourced document image management services to the healthcare industry.  For more information on the Company and its products and services see the section entitled “Principal Products or Services” below or visit our website at www.auxilioinc.com.

Where appropriate, references to “Auxilio”, the “Company,” “we” or “our” include Auxilio, Inc. and/or our wholly owned subsidiaries, Auxilio Solutions, Inc. and e-Perception Technologies, Inc.

Background

Auxilio, Inc. was incorporated in the State of Nevada on August 29, 1995. From its incorporation in August 1995 until January 2002, the Company had no significant operations.  In January of 2002, the Company’s predecessor, e-Perception Technologies, Inc. (e-Perception), a Human Resources software concern, completed a tender offer with Corporate Development Centers, Inc. (CDC).  CDC’s common stock traded on the OTC Bulletin Board.  In connection with the tender offer, the stockholders of e-Perception received one (1) share of CDC for every four (4) shares of e-Perception common stock they owned prior to the tender offer.  As a result, e-Perception became a wholly owned subsidiary of CDC.  CDC subsequently changed its name to e-Perception, Inc.  Approximately eighteen months later e-Perception changed its name to PeopleView, Inc. (PeopleView) and traded under the symbol PPVW.

For the fiscal year ended December 31, 2003, and including the period from January 1, to March 31, 2004, PeopleView developed, marketed and supported web based assessment and reporting tools and provided consulting services that enabled companies to manage their Human Capital Management (HCM) needs in real-time.

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In March 2004, PeopleView entered into an asset purchase and sale agreement with Workstream, Inc. (Workstream) whereby the Company sold to Workstream substantially all of its assets, including its software products and related intellectual property, its accounts receivable, certain computer equipment, customer lists, and the PeopleView name, among other things.  Pursuant to an addendum to the original agreement, the final consideration the Company received was cash equal to $250,000, 246,900 shares of Workstream common stock, and a warrant to purchase an additional 50,000 shares at an exercise price of $3.00 per share.  The business operations of PeopleView were discontinued in March 2004.

On April 1, 2004, PeopleView completed the acquisition of Alan Mayo and Associates, Inc. dba The Mayo Group (and referred to herein as TMG). TMG offered outsourced image management services to healthcare facilities throughout California, and this acquisition forms the basis for Auxilio’s current operations.  Subsequent to the acquisition of TMG, PeopleView changed its name to Auxilio, Inc. and changed TMG’s subsidiary name to Auxilio Solutions, Inc.  Our stock now trades on the Over-the Counter Bulletin Board under the symbol AUXO.OB.

Principal Products or Services

Auxilio is a services and technology firm that provides fully outsourced document image management (Image Management) services to the healthcare industry.  Auxilio provides full-time on-site management teams to perform a customized Image Management program that includes the following 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

Auxilio’s products and services also include the sales, integration and services of automated office equipment including digital and color copiers, printers, facsimile machines, scanners and multi-function equipment.

Competition

We operate in a highly competitive market.  The majority of the competition in the healthcare industry market for Image Management services comes primarily from the large photocopy/multi-functional digital device manufacturers such as Xerox, Canon, Konica Minolta, Ricoh and Sharp.  In addition to the manufacturers, the competitive landscape contains large equipment dealer/distributors such as Ikon, Lanier, and Global Imaging Systems as well as a number of regional and local equipment dealers and distributors that exist in the communities which the hospitals serve.  Our analysis of the competitive landscape shows a very strong opportunity for fully outsourced Image Management services to the healthcare industry.

While this competition does present a significant competitive threat, Auxilio believes that it has a strong competitive position in the marketplace due to a number of important reasons:

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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

Most of the Company’s customers are hospitals and Integrated Health Delivery Networks (IDN). The loss of any key customer could have a material adverse effect upon the Company’s financial condition, business, prospects and results of operation.  The Company's three largest customers represent approximately 73% of the Company's revenues for the year ended December 31, 2007.

Intellectual Property

The Company has not applied for or been granted any patents with respect to its technology, or processes, as related to document and image management, in addition to document and image processing. We do have rights to several trademarks in respect of process documents and related marketing documents. The most valuable of these is the Image Management Maturity Model (IM3™) which is a unique approach to document management that details processes and enables Auxilio to offer a service that is duplicable in distributed regions.

Government Regulation

We are subject to federal, state and local regulations concerning the environment and occupational safety and health standards. We have not experienced significant difficulty in complying with such regulations and compliance has not had a material effect on our business or our financial results.

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Research and Development

As a result of our acquisition of TMG on April 1, 2004, and our subsequent decision to concentrate our focus on document and image management services, as well as document and image processing, it is no longer required that we make material expenditures on research and development.  Prior to our acquisition of TMG, we had a research and development organization that was responsible for product architecture, development of core technology, product testing, quality assurance and ensuring the compatibility of the products with leading hardware platforms, operating systems and database systems for the Company’s human resources software, which was sold to Workstream in March 2004.

Employees

As of December 31, 2007, we had seventy full-time employees.  Of these employees, fifty six were engaged in providing services, seven were engaged in sales and marketing, and seven were engaged in general and administrative.  None of our employees are represented by a labor union or a collective bargaining agreement. We have not experienced any work stoppages and consider our relations with our employees to be good.

Item 2.                       Description of Properties

We currently lease approximately 6,672 square feet of office space in one building located in Mission Viejo, California.  The lease terminates on December 31, 2009.

The Company expects that the current leased premises will be satisfactory until the future growth of its business operations necessitates an increase in office space.  There is an ample supply of office space in the Orange County, California area and we do not anticipate any problem in securing additional space if, and when, necessary.

Item 3.                       Legal Proceedings

From time to time, we may become involved in litigation relating to claims arising from our ordinary course of business. We are aware of no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on our business or our financial results.

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

No matters were submitted to a vote of the Company’s security holders during the fourth quarter of its fiscal year ended December 31, 2007.

PART II

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

The Company’s common stock currently trades on the Over-the-Counter Bulletin Board (OTC), under the trading symbol of “AUXO.OB”.  Because we are listed on the OTC, our securities may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if they were listed on another exchange.

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The following table sets forth for each quarter during fiscal years 2007 and 2006 the high and low bid quotations for shares of Auxilio Common Stock as reported on the OTC.

Quarter		Low		High
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
January 1, 2007—March 31, 2007.	$	0.42	$	1.04
April 1, 2007—June 30, 2007.	$	0.71	$	0.90
July 1, 2007—September 30, 2007.	$	0.62	$	1.15
October 1, 2007—December 31, 2007.	$	1.06	$	1.95

   On March 28, 2008, we had approximately 297 stockholders of record.

We have not paid any dividends on our Common Stock and do not expect to do so in the foreseeable future.  We intend to apply our earnings, if any, to expanding our operations and related activities.  The payment of cash dividends in the future will be at the discretion of the Board of Directors and will depend upon such factors as earnings levels, capital requirements, our financial condition and other factors deemed relevant by the Board of Directors.  In addition, our ability to pay dividends is limited under current loan agreements, which restrict or prohibit the payment of dividends.

Equity Compensation Plan Information

The following table provides certain information as of December 31, 2007 with respect to Auxilio’s equity compensation plans under which equity securities of Auxilio are authorized for issuance.

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):	4,295,148	$1.12	174,852
Equity compensation plans not approved by security holders (2):	3,063,021	$1.15	-
Total	7,320,669		174,852

(1)   These plans consist of the 2000 Stock Option Plan, 2001 Stock Option Plan, the 2003 Stock Option Plan, the 2004 Stock Option Plan and the 2007 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

On October 26, 2006, we entered into a Loan and Security Agreement (the Loan) with Cambria Investment Fund, L.P. (Cambria). Michael D. Vanderhoof, a director of Auxilio, is a principal in Cambria. Under the agreement, we can borrow up to $1,500,000.  In consideration for entering into the Loan, Cambria received warrants to purchase up to 750,000 shares of Auxilio common stock exercisable at $.46, the market price upon execution, with 300,000 shares vesting upon the execution of the warrant agreement and 30,000 shares vesting for every multiple of $100,000 borrowed under the Loan with the Company. The warrants issued to Cambria in connection with this transaction are exempt from registration under Section 5 of the Securities Act of 1933, as amended (Securities Act), pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated under Regulation D.  Through December 2006, we had borrowed $745,000 on the Loan.

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The Loan Agreement contains a provision whereby the conversion price to convert the Note to equity was set at $.46. This borrowing earned Cambria the right to receive warrants to purchase 210,000 shares. The fair value of the warrant for the 300,000 shares issued upon execution was $92,558. Such amount was recorded as a loan acquisition cost and was to be amortized to interest expense over the life of the note.  The fair value of the warrant for the 210,000 shares issued in connection with the borrowing was $71,086. In accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” we have allocated a value of $71,086 to the warrants based on their relative fair value. Such amount was recorded as a discount against the carrying value of the note and will be amortized to interest expense over the life of the note.

The fair value of the warrants was determined using the Black-Scholes option-pricing model. (See Note 5 of the Notes to the Consolidated Financial Statements for the fair value assumptions used.)

Effective July 1, 2007, the Company restructured the Loan Agreement with Cambria Investment Fund L.P. extending the maturity date of the $745,000 outstanding balance to May 1, 2008 and extending the maturity date of the remaining unborrowed amount of $755,000 to December 31, 2008.  In return, the Company agreed to immediately vest the remaining 240,000 unvested warrants under the original agreement and provide one additional warrant share for every two dollars of new borrowings against the unborrowed amount of $755,000.  The exercise price of the additional warrants of $0.72 represents a 10% discount to the closing price of the Company’s common stock on the effective date of the restructuring.

The fair value of the warrant for the 240,000 shares issued in connection with the restructuring was $128,124 (see Note 5 of the Notes to the Consolidated Financial Statements for the accounting related to this debt modification). The fair value of the warrant was determined using the Black-Scholes option-pricing model. (See Note 5 of the Notes to the Consolidated Financial Statements for the fair value assumptions used.)

In April 2006, we borrowed $3,000,000 under a fixed price convertible note agreement with Laurus Master Fund, Ltd. (LMF). LMF received 478,527 warrants to purchase shares of Auxilio common stock. The exercise price of the warrants is $1.96, representing a 120% premium to the average closing price of Auxilio’s common stock for the 10 days prior to the closing of the transaction. The warrants have a term of seven years. The warrants issued to LMF in connection with this transaction are exempt from registration under Section 5 of the Securities Act, pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated under Regulation D.  The fair value of the warrants for the shares issued in connection with the borrowing was $285,487.  The fair value of the warrant was determined using the Black-Scholes option-pricing model.  In accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” we have allocated a value of $260,680 to the warrants based on their relative fair value.  Such amount was recorded as a discount against the carrying value of the note and will be amortized to interest expense over the life of the note. We also issued 132,514 warrants as finder’s fee compensation to two brokers in connection with this borrowing. The warrants have a term of seven years. The warrants issued to the two brokers in connection with this transaction are exempt from registration under Section 5 of the Securities Act, pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated under Regulation D.  The fair value of the warrants for the shares issued in connection with the borrowing was $79,508. The fair value of the warrant was determined using the Black-Scholes option-pricing model.  Such amount was recorded as a loan acquisition cost and will be amortized to interest expense over the life of the note.  (See Note 6 of the Notes to the Consolidated Financial Statements for the fair value assumptions used.)

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

Introduction

The following discussion presents information about our consolidated results of operations, financial condition, liquidity and capital resources and should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Report.

Forward Looking Statements. This discussion contains statements regarding operating trends and our beliefs and expectations regarding our future financial performance and future financial condition (which are referred to as “forward looking statements”). The consequences of those operating trends on our business and the realization of our expected future financial results, which are discussed in those statements, are subject to the uncertainties and risks described below in thisSection under the caption “Factors That May Affect Future Results.” Due to those uncertainties and risks, the duration and effects of those operating trends on our business and our future financial performance may differ, possibly significantly, from those that are currently expected as set forth in the forward looking statements. As a result, you should not place undue reliance on those forward looking statements.

Overview

Auxilio, Inc. and its wholly owned subsidiary, Auxilio Solutions, Inc., (Auxilio) provide integration strategies and outsourced services for document image management in healthcare facilities. The Company helps hospitals and health systems reduce expenses and create manageable, dependable document image management programs by managing their back-office processes. The process is initiated through a detailed proprietary Image Management Assessment (IMA). The IMA is a strategic, operational and financial analysis that is performed at the customer’s premises using a combination of proprietary processes and innovative web based technology for data collection and report generation. After the IMA and upon engagement, Auxilio capitates the cost of the entire document image management process for the customer and places a highly trained resident team on site to manage the entire process in accordance with our Image Management Maturity Model (IM3™).  Auxilio is focused solely on the healthcare industry.

Application of Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to stock-based compensation, customer programs and incentives, bad debts, inventories, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:

·   Revenue recognition;

·   Stock-based compensation;

·   Accounting for income taxes; and

·   Impairment of intangible assets.

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Please also see disclosures in Note 1 of the financial statements for the Company’s accounting policies and procedures.

Results of Operations

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

Net Revenue

Revenues consist of equipment sales and ongoing service and supplies. Net revenue increased $9,344,676 to $19,592,946 for the year ended December 31, 2007, as compared to the same period in 2006. The increase in revenue is partially attributed to an approximate $5,575,000 increase in equipment sales in 2007. Since March 2006, Auxilio added four new customers, including our largest customer to date which resulted in an increase in recurring revenues of approximately $3,800,000 in 2007 as compared to the same period in 2006.

Cost of Revenue

Cost of revenue consists of salaries and expenses of field services personnel, document imaging equipment, and parts and supplies.  Cost of revenue was $15,149,055 for the year ended December 31, 2007, as compared to $9,270,539 for the same period in 2006. The increase of $5,878,516 is the result of the costs our higher equipment sales and the costs associated with maintaining the recurring revenue contracts for the four recently added customers.

Sales and Marketing

Sales and marketing expenses include salaries, commissions and expenses of sales and marketing personnel, travel and entertainment, and other selling and marketing costs.  Sales and marketing expenses were $1,215,685 for the year ended December 31, 2007, as compared to $1,972,743 for the same period in 2006. Sales and marketing expenses for 2007 are lower as a result of management’s decision to reduce the Company’s sales force in late fiscal 2006.

General and Administrative

General and administrative expenses, which include personnel costs for finance, administration, information systems, and general management, as well as facilities expenses, professional fees, legal expenses, and other administrative costs, increased by $138,033 to $2,290,433 for the year ended December 31, 2007, as compared to $2,152,400 for the same period in 2006. The increase is a result of increased performance based bonuses of approximately $300,000 earned by executives and approximately $30,000 more earned by general and administrative employees during 2007.This was partially offset by the reduction of one member of the executive team which occurred at the end of 2006 and an approximately $40,000 decrease in stock-based compensation charges.

Intangible Asset Amortization

As a result of our acquisition activity, we have recorded a substantial amount of goodwill, which is the excess of the cost of our acquired business over the fair value of the acquired net assets, and other intangible assets.  We evaluate the goodwill for impairment at least annually.  We also evaluate the carrying value of our other intangible assets at least annually, or more frequently, as current events and circumstances warrant a determination of whether there are any impairment losses.  If indicators of impairment arise with respect to our other intangible assets and our future cash flows are not expected to be sufficient to recover the assets’ carrying amounts, an impairment loss will be charged as an expense in the period identified.

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Amortization expense was $238,165 for the year ended December 31, 2007 compared to $255,206 for the same period in 2006. The slight reduction is a result of the estimated declining contract value of backlogged business initially acquired in July 2004.

Other Income (Expense)

Interest expense for the year ended December 31, 2007 was $1,026,592 as compared to $537,018 for the same period in 2006. The increase is due to interest incurred on loans from Laurus Master Fund and Cambria Investment Fund L.P., including amortization of debt issue costs and debt discounts associated with both of these loans, and accreted costs as a result of the restructuring of the Cambria loan.

Interest income is primarily derived from short-term interest-bearing securities and money market accounts.  Interest income for the year ended December 31, 2007 was $19,269, as compared to $28,826 for the same period in 2006, primarily due to a decrease in the average balance of invested cash and short-term investments.

Gain on sale of marketable securities of $10,447 in 2006 related to the sale of our investment in General Environmental Management, Inc. We held no investment securities in 2007.

Gain on extinguishment of debt of $241,305 in 2007 is comprised of a $139,951 gain from the restructuring of the loan payable to Cambria Investment Fund L.P., and a $101,354 adjustment to remove a liability originally recorded in connection with the initial allocation of the purchase price of the Mayo Group. The liability was based on future revenue generating activities that did not occur as projected.

Income Tax Expense

Income tax expense for the year ended December 31, 2007 of $5,397 and $2,400 for the year ended December 31, 2006 primarily represents the minimum amount due for state filing purposes.

Liquidity and Capital Resources

At December 31, 2007, our cash and cash equivalents were $666,428 and our working capital was $238,997.  Our principal cash requirements are for repayment of $745,000 due to Cambria Investment Fund L.P. on May 1, 2008, repayment of $600,000 due to Laurus Master Fund over the next twelve months, and operating expenses, including equipment, supplies, employee costs, capital expenditures and funding of the operations. Our primary sources of cash are revenues, the proceeds from a $3,000,000 note from Laurus Master Fund in April 2006, and the $1,500,000 loan payable from Cambria Investment Fund L.P., under which we have borrowed $745,000 to date.

During the year ended December 31, 2007, cash provided by operating activities was $1,020,904 as compared to cash used in operating activities of $3,236,963 for the same period in 2006.  The increase in cash provided by operations was primarily due to higher revenue and improved operating profit margins in 2007, partially offset by the increase in trade receivables.

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In April 2006, we entered into a $3,000,000 Fixed Price Convertible Note (the “Note”) agreement with Laurus Master Fund (LMF). The term of the Note is for three years at an interest rate of WSJ prime plus 2.0%. We shall reduce the principal Note by 1/60th per month starting 90 days after the closing, payable in cash or registered stock. For the year ended December 31, 2007, we repaid $600,000 in principal of the Note.

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

The Company continues to see improvement in its operations through the addition of new customers in the first quarter of 2007 and additional equipment sales to existing customers. We expect to close additional recurring revenue contracts to new customers in 2008 as well as additional equipment sales to existing customers.  We have the short-term availability of additional funds through our Loan with Cambria Investment Fund, L.P. Management believes that present cash on hand, cash generated from 2008 operations and the cash available under the Cambria facility will be sufficient to satisfy required principal debt payments to Laurus and Cambria in 2008 and to sustain our business operations over the next twelve months. If events or circumstances occur such that we do not meet our operating plan as expected, we may be required to seek additional capital and/or reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. We may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

Contractual Obligations and Contingent Liabilities and Commitments

Our long-term contractual obligations as of December 31, 2007 are as follows:

	Total		2008		2009		2010
Loan payable	$	745,000	$	745,000	$	---	$	-
Long-term debt		1,932,000		600,000		1,332,000		-
Capital leases		29,359		25,315		4,044		-
Operating leases		367,627		167,467		171,470		28,690
Total	$	3,073,986	$	1,537,782	$	1,507,514	$	28,690

Factors That May Affect Our Future Results

This Report, including the discussion and analysis of our financial condition and results of operations set forth above, contains certain forward-looking statements. Forward-looking statements set forth estimates of, or our expectations or beliefs regarding, our future financial performance. Those estimates, expectations and beliefs are based on current information and are subject to a number of risks and uncertainties that could cause our actual operating results and financial performance in the future to differ, possibly significantly, from those set forth in the forward-looking statements contained in this Report and, for that reason, you should not place undue reliance on those forward-looking statements. Those risks and uncertainties include, although they are not limited to, the following:

13

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

Our business was incorporated in March 2000.  During March and April of 2004, we entered into two transactions which changed the Company’s business operations and revenue model.  In March 2004, the Company sold its survey and assessment software to Workstream, Inc.  In April 2004, the Company completed an acquisition of The Mayo Group and as a result of such acquisition, entered the Image Management industry.  The future revenue opportunity is focused on providing outsourced financial and business processes for image management in healthcare.  We have limited operating history in this industry on which to base an evaluation of our business and prospects, and any investment decision must be considered in light of the risks and uncertainties encountered by companies in the early stages of development. Such risks and uncertainties are frequently more severe for those companies operating in new and rapidly evolving markets.

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

·   the 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

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

·   successfully complete the development of our products and services;

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

·   attract and retain highly skilled employees; and

·   respond to competitive influences.

On an ongoing basis, we cannot be certain that we will be able to successfully address any of these risks.

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

The market for our products and services is competitive and is likely to become even more competitive in the future.  Increased competition could result in pricing pressures, reduced sales, reduced margins or the failure of our products and services to achieve or maintain market acceptance, any of which would have a material adverse effect on our business, results of operations and financial condition.  Many of our current and potential competitors enjoy substantial competitive advantages, such as:

·   greater name recognition and larger marketing budgets and resources;

·   established marketing relationships and access to larger customer bases;

·   substantially greater financial, technical and other resources; and

·   larger technical and support staffs.

14

As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements.  For all of the foregoing reasons, we may not be able to compete successfully against our current and future competitors.

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.

Though the Company experienced net operating income of $699,608 for the fiscal year ended December 31, 2007, we experienced a net operating loss of $3,402,618 for the fiscal year ended December 31, 2006, and a net operating loss of $3,527,450 for the fiscal year ended December 31, 2005. In addition, the Company must repay $745,000 due to Cambria Investment Fund L.P. on May 1, 2008 and $600,000 due to Laurus Master Fund over the next twelve months. There can be no assurances that the Company will be able to operate profitably in the future including generating sufficient cash to repay its existing debt obligations.  In the event that the Company is not successful in implementing its business plan, the Company will require additional financing in order to succeed.  There can be no assurance that additional financing will be available now or in the future on terms that are acceptable to the Company. If adequate funds are not available or are not available on acceptable terms, the Company may be unable to develop or enhance its products and services, take advantage of future opportunities or respond to competitive pressures, all of which could have a material adverse effect on the Company's business, financial condition or operating results.

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.

Our access to equipment, parts, supplies, and services depends upon our relationships with, and our ability to purchase these items on competitive terms from our principal vendors.  We do not enter into long-term supply contracts with these vendors and we have no current plans to do so in the future.  These vendors are not required to use us to distribute their equipment and are free to change the prices and other terms at which they sell to us.  In addition, we compete with the selling efforts of some of these vendors.  Significant deterioration in relationships with, or in the financial condition of, these significant vendors could have an adverse impact on our ability to sell and lease equipment as well as our ability to provide effective service and technical support.  If one of these vendors terminates or significantly curtails its relationship with us, or if one of these vendors ceases operations, we would be forced to expand our relationships with our existing vendors or seek out new relationships with previously-unused vendors.

WE ARE DEPENDENT UPON OUR LARGEST CUSTOMERS.

The loss of any key customer could have a material adverse effect upon the Company’s financial condition, business, prospects and results of operation.  The Company's three largest customers represent approximately 73% of the Company's revenues for the year ended December 31, 2007.  Although the Company anticipates that these customers will represent less than 48% of revenue for 2008 and 47% for 2009, the loss of these customers may contribute to our inability to operate as a going concern and may require us to obtain additional equity funding or debt financing (beyond the amounts described above) to continue our operations.  We cannot be certain that we will be able to obtain such additional financing on commercially reasonable terms, or at all.

FURTHER TIGHTENING OF CREDIT MARKETS COULD ADVERSELY AFFECT THE COMPANY BY LIMITING OUR CUSTOMERS’ ABILITY TO BORROW OR OTHERWISE OBTAIN EQUIPMENT FINANCING.

15

The Company’s growth plans are dependent on, among other things, the ability of its customers to obtain equipment financing to pay the company for equipment provided. The tightening of credit markets could make it more difficult for the Company’s customers to borrow or otherwise obtain the financing required to pay the company for such equipment.

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.

Our future success depends on the continued services and performance of our management team and our key employees and their ability to work together effectively.  If our management team fails to work together effectively, our business could be harmed.  Although we believe we will be able to retain these key employees, and continue hiring qualified personnel, our inability to do so could materially adversely affect our ability to market, sell, and enhance our services.  The loss of key employees or our inability to hire and retain other qualified employees could have a material adverse effect on our business, prospects, financial condition and results of operations.

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

Our products and services are targeted to the healthcare market, a market in which there are many competing service providers.  Accordingly, the demand for our products and services is very uncertain.   The market may not accept our products and services.  Even if our products and services achieve market acceptance, our products and services may fail to address the market's requirements adequately.

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

Our services are integral to the successful deployment of our solutions. If our services organization does not effectively implement and support our customers, our revenues and operating results 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.

We may need additional funds to expand or meet all of our operating needs. If we need additional financing, we cannot be certain that it will be available on favorable terms, if at all. Further, if we issue equity securities, stockholders will experience additional dilution and the equity securities may have seniority over our common stock.  If we need funds and cannot raise them on acceptable terms, we may not be able to:

·   Develop or enhance our service offerings;

·   Take advantage of future opportunities; or

·   Respond to customers and competition.

WE MUST MANAGE GROWTH TO ACHIEVE PROFITABILITY.

To be successful, we will need to implement additional management information systems, develop further our operating, administrative, financial and accounting systems and controls and maintain close coordination among our executive, finance, marketing, sales and operations organizations.  Any failure to manage growth effectively could materially harm our business.

16

SHAREHOLDERS WILL EXPERIENCE DILUTION AS A RESULT OF THE COMPANY’S STOCK OPTION PLANS.

The Company has granted stock options to its employees and anticipates granting additional stock options to its employees in order to remain competitive with the market demand for such qualified employees.  As a result, investors could experience dilution.

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

Some provisions of our Articles of Incorporation, as amended, and Bylaws, as well as some provisions of Nevada or California law, may discourage, delay or prevent third parties from acquiring us, even if doing so would be beneficial to our shareholders.

WE DO NOT INTEND TO PAY DIVIDENDS.

We have never declared or paid any cash dividends on our common stock.  We currently intend to retain any future earnings to fund growth and, therefore, do not expect to pay any dividends in the foreseeable future.

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

Although our shares are currently trading on the OTC Bulletin Board, the volume of trading of our common stock and the number of shares in the public float are small.  Sales of a substantial number of shares of our common stock into the public market in the future could materially adversely affect the prevailing market price for our common stock.  In connection with our acquisition of TMG, we issued approximately 4,000,000 shares of common stock, all of which became eligible for resale pursuant to Rule 144 of the Securities Act in 2005.  Such a large "over-hang" of stock eligible for sale in the public market may have the effect of depressing the price of our common stock, and make it difficult or impossible for us to obtain additional debt or equity financing.

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

The market price for our common stock has been, and is likely to continue to be, volatile. The following factors may cause significant fluctuations in the market price of our ordinary shares:

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

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

·Announcements concerning us or our competitors;

·Announcements of technological innovations;

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

·Market conditions in the industry; and

·The conditions of the securities markets.

The factors discussed above may depress or cause volatility of our share price, regardless of our actual operating results.

17

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

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

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

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

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

Item 7.      Consolidated Financial Statements

See the consolidated financial statements attached to and made a part of this report.

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

None.

Item 8A.    Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.

18

Our management, including the chief executive officer and the chief financial officer, carried out an assessment of the effectiveness of our internal control over financial reporting as of the end of the period covered by this report. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this assessment, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by this report, our internal control over financial reporting is effective.

This report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting.  Management's  report was not subject to attestation by the Company's registered  public  accounting  firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this report.

No changes in our internal control over financial reporting occurred during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 8B. Other Information

  All requisite reports on Form 8-K were filed in the fourth quarter ended December 31, 2007.

PART III

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

      Information with respect to our executive officers and directors will be contained in the Definitive Proxy Statement relating to our 2008 Annual          Meeting of Stockholders; said information is incorporated herein by reference.

      The Company has adopted a code of ethics, which applies to all members of management.

Item 10.          Executive Compensation

 A description of the compensation of our executive officers will be contained in the Definitive Proxy Statement relating to our 2008 Annual Meeting of Stockholders; said information is incorporated herein by reference.

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

 A description of the security ownership of certain beneficial owners and management will be contained in the Definitive Proxy Statement relating to our 2008 Annual Meeting of Stockholders; said information is incorporated herein by reference.

Item 12.          Certain Relationships and Transactions

 Description of certain relationships and related transactions with management will be contained in the Definitive Proxy Statement relating to our 2008 Annual Meeting of Stockholders; said information is incorporated herein by reference.

19

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	2007 Stock Option Plan.
10.6	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).
10.7	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).
10.8	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).
10.9	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)..
10.10	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).
10.11	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).
10.12	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).
10.13	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).
10.14	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).
10.15	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).
10.16	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).

20

10.17	Amended and Restated Loan and Security Agreement effective as of July 1, 2007 and dated August 13, 2007, between Auxilio, Inc. and Cambria Investment Fund, L.P. (filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on September 4, 2007).
10.18	Executive Employment Agreement between Registrant and Etienne Weidemann, President and Chief Executive Officer dated November 13, 2007 (filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed on November 16, 2007).
10.19	Executive Employment Agreement between Registrant and Paul T. Anthony, Chief Financial Officer and Corporate Secretary dated November 13, 2007 (filed as Exhibit 10.2 to the Registrant’s Form 10-Q filed on November 16, 2007).
10.20	Executive Employment Agreement between Registrant and Jacques Terblanche, Chief Operating Officer dated November 13, 2007 (filed as Exhibit 10.3 to the Registrant’s Form 10-Q filed on November 16, 2007).
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

A description of the principal accounting fees and services will be contained in the Definitive Proxy Statement relating to our 2008 Annual Meeting of Stockholders; said information is incorporated herein by reference.

21

Signatures

In accordance with section 13 or 15(d) with the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of March, 2008.

AUXILIO, Inc.

By: /s/ Etienne Weidemann

Etienne Weidemann

Chief Executive Officer

Principal Executive Officer

By: /s/ Paul T. Anthony

Paul T. Anthony

Chief Financial Officer

Principal Financial Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

Signature                                                  Title                                            0;                            Date

/s/ Etienne Weidemann                                                 Etienne Weidemann	Chief Executive Officer (Principal Executive Officer and Director)	March 27, 2008
/s/ Paul T. Anthony Paul T. Anthony	Chief Financial Officer (Principal Financial and Accounting Officer)	March 27, 2008
/s/Edward Case Edward Case	Director	March 27, 2008
/s/Joseph Flynn Joseph Flynn	Director	March 27, 2008
/s/Michael Joyce Michael Joyce	Director	March 27, 2008
/s/John D. Pace John D. Pace	Director	March 27, 2008
/s/ Max Poll Max Poll	Director	March 27, 2008
/s/Mark St. Clare Mark St. Clare	Director	March 27, 2008
/s/Michael Vanderhoof Michael Vanderhoof	Director	March 27, 2008

22

AUXILIO, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2007 AND 2006

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 Stockholders’ Equity (Deficit)	F-4
Consolidated Statements of Cash Flows	F-5, F-6
Notes to Consolidated Financial Statements	F-7 to F-24

F

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Auxilio, Inc.

We have audited the accompanying consolidated balance sheet of Auxilio, Inc. (the “Company”) as of December 31, 2007, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years ended December 31, 2007 and 2006.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Auxilio, Inc. as of December 31, 2007, and the consolidated results of its operations and its cash flows for each of the years ended December 31, 2007 and 2006, in conformity with accounting principles generally accepted in the United States of America.

/s/ HASKELL & WHITE LLP

Irvine, California

March 27, 2008

   F- 1

AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	666,428
Accounts receivable, net		2,405,528
Prepaid and other current assets		46,980
Supplies		729,604
Total current assets		3,848,540
Property and equipment, net		208,936
Deposits		28,790
Loan acquisition costs		209,332
Intangible assets, net		190,973
Goodwill		1,517,017
Total assets	$	6,003,588
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	1,566,260
Accrued compensation and benefits		486,110
Deferred revenue		382,895
Loan payable, net of discount of $197,083		547,917
Current portion of long-term debt		600,000
Current portion of capital lease obligations		26,361
Total current liabilities		3,609,543
Note payable, less current portion, net of discount of $110,306		1,221,694
Commitments and contingencies		-
Stockholders' equity:
Common stock, par value at $0.001, 33,333,333 shares
authorized, 16,235,309 shares issued and outstanding		16,237
Additional paid-in capital		17,364,202
Accumulated deficit		(16,208,088	)
Total stockholders' equity		1,172,351
Total liabilities and stockholders’ equity	$	6,003,588

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

    F- 2

AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
	Year Ended December 31,
	2007			2006
Net revenues	$	19,592,946		$	10,248,270
Cost of revenues		15,149,055			9,270,539
Gross profit		4,443,891			977,731
Operating expenses:
Sales and marketing		1,215,685			1,972,743
General and administrative expenses		2,290,433			2,152,400
Intangible asset amortization		238,165			255,206
Total operating expenses		3,744,283			4,380,349
Income (loss) from operations		699,608			(3,402,618	)
Other income (expense):
Interest expense		(1,026,592	)		(537,018	)
Interest income		19,269			28,827
Gain on sale of marketable securities		-			10,447
Gain on debt extinguishment		241,305			-
Total other income (expense)		(766,018	)		(497,744	)
Loss before provision for income taxes		(66,410	)		(3,900,362	)
Income tax expense		5,397			2,400
Net Loss	$	(71,807)		$	(3,902,762	)
Net Loss per share:
Basic	$	0.00		$	(0.24	)
Diluted	$	(0.01	)	$	(0.24	)
Number of weighted average shares outstanding –
Basic		16,142,604			16,076,310
Diluted		21,885,453			16,076,310

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

    F- 3

AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2007 AND 2006
					Additional						Total
	Common Stock				Paid-in			Accumulated			Stockholders'
	Shares		Amount		Capital			Deficit			Equity(Deficit)
Balance at January 1, 2006		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 loan payable		-		-		92,558			-			92,558
Relative fair value of warrants issued related to 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
Stock compensation expense for options and warrants granted to employees and consultants		-		-		452,014			-			452,014
Beneficial conversion feature associated with loan payable		-		-		100,000			-			100,000
Warrants vesting in connection with restructuring of loan payable		-		-		128,124			-			128,124
Incremental fair value of conversion feature on loan payable		-		-		80,208			-			80,208
Stock options exercised		12,500		13		5,862			-			5,875
Common stock issued for conversion of note payable		100,000		100		167,900			-			168,000
Net loss		-		-		-			(71,807)			(71,807)
Balance at December 31, 2007		16,235,309	$	16,237	$	17,364,202		$	(16,208,088	)	$	1,172,351

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

    F- 4

AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
	Year Ended December 31,
	2007			2006
Cash flows provided by (used for) operating activities:
Net loss	$	(71,807	)	$	(3,902,762	)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation		131,317			122,806
Amortization of intangible assets		238,165			255,206
Bad debt expense		-			26,500
Gain on sale of marketable securities		-			(10,448	)
Gain on debt extinguishment		(139,951	)		-
Gain on extinguishment of accrued acquisition costs unearned		(101,354	)		-
Interest expense related to amortization of warrants issued with loans		127,010			154,381
Interest expense related to amortization of loan acquisition costs		226,181			144,821
Interest expenses related to amortization of beneficial conversion feature		40,000			-
Stock compensation expense for options and warrants granted to employees and consultants		452,014			575,974
Interest expense related to accretion of loan		295,625			-
Stock issued for services		-			4,953
Changes in operating assets and liabilities:
Accounts receivable		(681,270	)		(1,261,934	)
Prepaid and other current assets		(16,307	)		60,692
Supplies		(39,126	)		(246,900	)
Deposits		-			12,565
Accounts payable and accrued expenses		246,157			792,873
Accrued compensation and benefits		220,669			43,858
Deferred revenue		93,581			(9,548	)
Net cash provided by (used for) operating activities		1,020,904			(3,236,963	)
Cash flows (used for) investing activities:
Purchases of property and equipment		(36,484	)		(189,322	)
Net proceeds from sale of marketable securities		-			26,698
Net cash (used for) investing activities		(36,484	)		(162,624	)
Cash flows provided by financing activities:
Proceeds from loan payable		-			995,000
Repayments on loan payable		-			(250,000	)
Fees paid for restructuring  loan payable		(22,350	)		-
Proceeds from convertible note payable		-			3,000,000
Repayments on convertible note payable		(600,000	)		(300,000	)
Acquisition fees paid for convertible note payable		-			(375,195	)
Payments on capital leases		(20,954	)		(15,722	)
Proceeds from exercise of options		5,875			-
Net cash (used for) provided by financing activities		(637,429	)		3,054,083
Net increase (decrease) in cash and cash equivalents		346,991			(345,504	)
Cash and cash equivalents, beginning of year		319,437			664,941
Cash and cash equivalents, end of year	$	666,428		$	319,437

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

    F- 5

AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
	Year Ended December 31,
	2007		2006
Supplemental disclosure of cash flow information:
Interest paid	$	337,776	$	234,075
Income tax paid	$	2,400	$	2,400
Non-cash investing and financing activities:
Beneficial conversion feature associated with loans payable	$	100,000	$	-
Relative fair value of warrants issued related to restructuring of loan payable	$	128,124	$	-
Incremental fair value of conversion feature on loan payable	$	80,208	$	-
Debt converted to stock	$	168,000	$	-
Relative fair value of warrants issued related to issuance of note payable	$	-	$	588,912
Stocks issued for acquisition fees for convertible note payable	$	-	$	70,000
Property and equipment acquired by capital lease	$	-	$	26,391

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

    F- 6

AUXILIO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

(1)            Summary of Significant Accounting Policies

Business Activity

The origins of the Company date back to January of 2002, when the Company’s predecessor  e-Perception Technologies, Inc. (e-Perception), a Human Resources software concern, completed a tender offer with Corporate Development Centers, Inc. (CDC).  CDC’s common stock traded on the OTC Bulletin Board.  In connection with the tender offer, the stockholders of e-Perception received one (1) share of CDC for each four (4) shares of e-Perception common stock they owned prior to the tender offer.  As a result, e-Perception became a wholly owned subsidiary of CDC.  CDC subsequently changed its name to e-Perception, Inc.  Approximately eighteen months later e-Perception changed its name to PeopleView, Inc. (PeopleView) and traded under the symbol PPVW.  Subsequent to that name change, PeopleView, Inc. changed its name to Auxilio, Inc. (Auxilio).  The stock now trades under the symbol AUXO.OB.

In March 2004, PeopleView entered into an asset purchase and sale agreement with Workstream, Inc. (NASDQ:WSTM) (Workstream) whereby the Company sold to Workstream essentially all of its assets, including its software products and related intellectual property, its accounts receivable, certain computer equipment, customer lists, and the PeopleView name, among other things.  Pursuant to an addendum to the original agreement, the final consideration the Company received was cash equal to $250,000, 246,900 shares of Workstream common stock, and a warrant to purchase an additional 50,000 shares at an exercise price of $3.00 per share.  The business operations of PeopleView were discontinued as of March 2004.

On April, 1, 2004, PPVW Acquisition Company (PPVW), a wholly owned subsidiary of PeopleView, completed the acquisition of Alan Mayo and Associates, Inc. dba The Mayo Group (and referred to herein as TMG).  TMG offered outsourced Image Management services to healthcare facilities throughout California, and this acquisition forms the basis for Auxilio’s current operations.  Subsequent to the acquisition of TMG, PeopleView changed its name to Auxilio, Inc. and changed PPVW’s name to Auxilio Solutions, Inc.

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.  The Company has reported a net loss of $71,807 for the year ended December 31, 2007 and has an accumulated deficit of $16,208,088 as of December 31, 2007. The Company reported a net loss of $3,902,762 for the year ended December 31, 2006.  The Company has working capital of $238,997 as of December 31, 2007.

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

Liquidity

During the year ended December 31, 2007, cash provided by operating activities was $1,020,904 as compared to cash used in operating activities of $3,236,963 for the same period in 2006.  The increase in cash provided by operations was primarily due to improved operating profit margins in 2007, partially offset by the increase in trade receivables.

Historically the Company has incurred significant operating losses and cash outflows from operations.  Significant steps were taken in 2006 to reach profitability in 2007 including the reduction in sales and operations staff in an effort to lower operating costs and the addition of four new customers including its largest customer contract to date. The Company closed large equipment sales with existing clients in 2007 and anticipates additional equipment sales in 2008.  There is also the expectation of signing additional recurring revenue customer contracts throughout 2008.

F-7

In October 2006, the Company entered into a Loan and Security Agreement with Cambria Investment Fund, L.P. Under the agreement, the Company can borrow up to $1,500,000, of which $755,000 is still available to borrow as of December 31, 2007. It is anticipated by Management that these measures will allow the Company to continue to maintain positive cash flow for 2008 and satisfy all required 2008 debt payments to both Laurus (Note 6) and Cambria (Note 5).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Revenue Recognition

Revenue is recognized pursuant to applicable accounting standards including Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101 (SAB 101), “Revenue Recognition in Financial Statements”, and SAB 104, “Revenue Recognition”.  SAB 101 as amended and SAB 104 summarize certain points of the SEC staff’s views in applying generally accepted accounting principles to revenue recognition in financial statements and provide guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry.  The Company’s revenue recognition policy complies with the requirements of SAB 101 and SAB 104.  Revenues from equipment sales transactions are earned upon equipment being accepted by the customer.  For equipment that is to be placed at the customer’s location at a future date, revenue is deferred until that equipment is placed.  Monthly service and supply revenue is earned monthly during the term of the contract, as services and supplies are provided monthly.  Overages, as defined in the contract, are billed to customers monthly and are earned when the number of images in any period exceeds the number allowed for in the contract.

When the Company enters into arrangements that include multiple deliverables, they typically consist of the sale of equipment, reserve for replacement of future equipment and a support services contract. Pursuant to Emerging Issues Task Force EITF 00-21: “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), the Company accounts for each element within an arrangement with multiple deliverables as separate units of accounting. Revenue is allocated to each unit of accounting using the residual method, which allocates revenue to each unit of accounting based on the fair value of the undelivered items, provided that the Company can establish vendor - specific objective evidence of fair value.

Deferred Revenue

Deferred revenue is an estimate of revenue expected to be earned in the future under the equipment contracts for additional equipment (printers and faxes) to be placed at the customer’s location that has been included in the original contract amount.  This additional equipment is identified by the Company at the start of a contract. Deferred revenue also includes proceeds received in excess of the residual value assigned to equipment from multiple deliverable sales, which is amortized over the expected term of the related service contract in accordance with EITF 00-21.

Cash and Cash Equivalents

For purposes of the statement of cash flows, cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.

F-8

Accounts Receivable

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts.  The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable.  It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change.  Accounts receivable are presented net of an allowance for doubtful accounts of $28,509 at December 31, 2007.

Supplies

Supplies consist of parts and supplies for the automated office equipment, including copiers, facsimile machines and printers.  Supplies are valued at the lower of cost or market value on a first-in, first-out basis.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation.  Depreciation of the property and equipment is provided using the straight-line method over the assets’ estimated economic lives, which range from 2 to 7 years.  Expenditures for maintenance and repairs are charged to expense as incurred.

Intangible Assets

Under Statement of Financial Accounting Standard (SFAS) No. 142 (SFAS 142), “Goodwill and Other Intangible Assets”, goodwill and intangible assets with indefinite lives are no longer amortized, but the remaining useful lives are reviewed at least annually for impairment.  In order to measure any impairment, the Company evaluates whether there were any events or circumstances that have occurred that may affect the carrying amount of the intangible.  This testing includes the determination of the fair value of the reporting unit.  If the value of the asset exceeds the fair value of the reporting unit, then the Company would estimate the undiscounted cash flows from continuing to use the asset and compare that amount to the assets carrying amount.  If the carrying amount of the asset is greater than the expected future cash flows then an impairment loss would be recognized. The result of this testing indicated that a goodwill impairment charge was not necessary.  Separately identified intangibles that are deemed to have definite lives will continue to be amortized over their estimated useful life, with no maximum life.

Long-Lived Assets

In accordance with SFAS Nos. 142 and 144, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  SFAS No. 142 relates to assets with an indefinite life whereas SFAS 144 relates to assets that can be amortized and the life determinable.  The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.  If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable.  In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value.  Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value of asset less the cost to sell.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting requirements and those imposed under federal and state tax laws.  Deferred taxes are provided for timing differences in the recognition of revenue and expenses for income tax and financial reporting purposes and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities.  The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.  Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

F-9

Fair Value of Financial Instruments

The carrying amount of the Company’s cash and cash equivalents, accounts receivable, notes payable, deferred revenue, accounts payable, and accrued expenses approximates their estimated fair values due to the short-term maturities of those financial instruments.

Stock-Based Compensation

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

For the years ended December 31, 2007 and 2006, stock-based compensation expense recognized in the statement of operations is as follows:

	Year EndedDecember 31
	2007		2006
Cost of revenues	$	119,267	$	108,099
Sales and marketing		111,527		229,057
General and administrative expenses		221,220		238,818
Total stock based compensation expense	$	452,014	$	575,974

The Company recognizes stock-based compensation as an expense in accordance with SFAS 123(R) and values the equity securities based on the fair value of the security on the date of grant.  Stock option awards are valued using the Black-Scholes option-pricing model.

The weighted average estimated fair value of stock options granted during 2007 and 2006 was $0.90 and $1.34 per share, respectively.  These amounts were determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the option.  The assumptions used in the Black-Scholes model were as follows for stock options granted in 2007 and 2006:

	2007	2006
Risk-free interest rate	4.33% to 5.31%	4.51% to 5.24%
Expected volatility of common stock	79.74% to 82.99%	65.16% to 92.47%
Dividend yield	0%	0%
Expected life of options	3 years	3 years

The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options.  The Company’s options do not have the characteristics of traded options; therefore, the option valuation models do not necessarily provide a reliable measure of the fair value of its options.

F-10

Basic and Diluted Loss Per Share

In accordance with SFAS No. 128, “Earnings Per Share,” basic net income (loss) per share is calculated using the weighted average number of shares of the Company’s common stock issued and outstanding during a certain period, and is calculated by dividing net income (loss) by the weighted average number of shares of the Company’s common stock issued and outstanding during such period. Diluted net income (loss) per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the as-if converted method for secured convertible notes, and the treasury stock method for options and warrants.

As of December 31, 2007, potentially dilutive securities consist of options and warrants to purchase 7,320,669 shares of common stock at prices ranging from $0.30 to $12.00 per share, and convertible notes that could convert into 3,041,184 shares of common stock. Of these potentially dilutive securities, 4,619,004 shares to purchase common stock from the options and warrants have not been included in the computation of diluted earnings per share as their effect would be anti-dilutive.

As of December 31, 2006, potentially dilutive securities consist of options and warrants to purchase 4,649,724 shares of common stock at prices ranging from $0.30 to $12.00 per share, and convertible notes that could convert into 3,297,434 shares of common stock. None of the potentially dilutive options and warrants outstanding has been included in the computation of diluted earnings per share due to the net loss for these periods, which causes these equity instruments to be anti-dilutive. None of the potential shares from convertible notes have been included in the computation of diluted earnings per share as their effect would be anti-dilutive.

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

	Year Ended December 31
	2007			2006
Numerator:
Net loss	$	(71,807	)	$	(3,902,762	)
Effects of dilutive securities:
Convertible notes payable		(248,249	)		-
(Loss) after effects of conversion of notes payable	$	(320,056	)	$	(3,902,762	)
Denominator:
Denominator for basic calculation weighted averages		16,142,604			16,076,310
Dilutive common stock equivalents:
Secured convertible notes		3,041,184			-
Options and warrants		2,701,665			-
Denominator for diluted calculation weighted average		21,885,453			16,076,310
Net loss per share:
Basic net loss per share	$	.00		$	(.24	)
Diluted net loss per share	$	(.01	)	$	(.24	)

F-11

Segment Reporting

Based on the Company’s integration and management strategies, the Company operated in a single business segment.  For the years ended December 31, 2007 and 2006, all revenues have been derived from domestic operations.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (hereinafter “SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. Where applicable, SFAS No. 157 simplifies and codifies related guidance within GAAP and does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier adoption is encouraged. The Company does not expect the adoption of SFAS No. 157 to have a significant effect on its consolidated financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value.  The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings.  SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS 157 and SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.” SFAS 159 is effective for the Company as of the beginning of fiscal year 2009. The Company has not yet determined the impact SFAS 159 may have on its consolidated financial position, results of operations, or cash flows.

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

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

(2)            Accounts Receivable

A summary as of December 31, 2007 is as follows:

Trade	$                       2,434,037
Allowance for doubtful accounts	(28,509)
	$                       2,405,528

F-12

(3)            Property and Equipment

A summary as of December 31, 2007 is as follows:

Furniture and fixtures	$	53,972
Computers and office equipment		391,464
Fleet equipment		178,278
Leasehold improvements		25,202
		648,916
Less accumulated depreciation and amortization		(439,980	)
	$	208,936

Depreciation and amortization expense for property, equipment, and improvements amounted to $131,317 and $122,806 for the years ended December 31, 2007 and 2006, respectively.

(4)            Intangible Assets and Goodwill

During 2004, as a result of the acquisition of TMG, intangible assets of $3,047,017 were acquired. This amount was reduced by $30,000 in 2005 for the return of stock issued in conjunction with acquisition that was subsequently determined to be unearned.  A third party valuation was obtained to assist management in determining how much, if any, of the excess of purchase price over assets acquired and liabilities assumed should be allocated to identifiable intangible assets versus goodwill. As of December 31, 2007, goodwill totaled $1,517,017.

As of December 31, 2007, the following intangible assets with definite lives were identified and are being amortized:

Customer relationships	$	850,000
Backlog		350,000
		1,200,000
Less accumulated amortization		(1,009,027	)
	$	190,973

Amortization expense for intangible assets amounted to $238,165 and $255,206 for the years ended December 31, 2007 and 2006, respectively.  The estimated aggregate amortization expense for future years is $190,973 which will be amortized in its entirety in the year ending December 31, 2008.

Accumulated amortization as of December 31, 2007 is as follows:

Customer relationships	$	680,000
Backlog		329,027
Total	$	1,009,027

During the year ended December 31, 2007, management determined that $101,354 of purchase price consideration originally recorded in July 2004 in connection with the TMG acquisition was not payable by the Company, as the performance-related conditions upon which payments were contingent were never satisfied.  Accordingly, the Company extinguished the related liability of $101,354 and such amount is presented in the accompanying 2007 statement of operations as gain on debt extinguishment.

F-13

(5)        Loan Payable

In November 2005, the Company entered into a Loan and Security Agreement (the Loan) with Cambria Investment Fund, L.P. Michael D. Vanderhoof, a director of the Company is a principal in Cambria Investment Fund. Under the agreement, (i) the Company could borrow up to $500,000, (ii) cash was advanced in $50,000 increments to the Company by Cambria Investment Fund L.P. upon request, (iii) interest accrued daily upon any unpaid principal balance at the rate of twelve percent (12%) per annum, (iv) accrued interest was payable in full on a quarterly basis and (v) the outstanding principal balance was due and payable in full on March 15, 2007.  The Loan was secured by all of the Company's inventory, accounts receivable, equipment, cash, deposit accounts, securities, intellectual property, chattel paper, general intangibles and instruments, now existing or hereafter arising, and all proceeds thereof. In the event that the Company completed any future public or private placement offering which results in net proceeds in excess of $3,000,000, Cambria Investment Fund L.P. may demand repayment of the Loan. In consideration for entering into the Loan, Cambria Investment Fund L.P. also receives warrants to purchase up to 250,000 shares of the Company’s common stock at the market price upon execution, with 75,000 shares vesting upon the execution of the warrant agreement and 17,500 shares vesting for every multiple of $50,000 borrowed under the Loan Agreement with the Company. The fair value of the warrant for the 75,000 shares issued in connection with the execution of the warrant agreement was $69,551.  The fair value of the warrant was determined using the Black-Scholes option-pricing model, with the following assumptions: (i) no expected dividends; (ii) a risk free interest rate of 3.98%; (iii) expected volatility of 56.93%; and (iv) an expected life of the warrants of five years. Such amount was recorded as interest expense.  As of December 31, 2005, there were no borrowings from this loan and Security Agreement. In March 2006, the Company borrowed $250,000 from Cambria. This borrowing earned Cambria the right to receive warrants to purchase 87,500 shares of the Company’s common stock at $1.80, with 17,500 shares vesting for every multiple of $50,000 borrowed under the  Loan Agreement with the Company. The fair value of the warrant for the 87,500 shares issued in connection with the borrowing was $128,970.  The fair value of the warrant was determined using the Black-Scholes option-pricing model, with the following assumptions: (i) no expected dividends; (ii) a risk free interest rate of 4.51%; (iii) expected volatility of 90.41%; and (iv) an expected life of the warrants of five years.  In accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” the Company allocated a value of $85,079 to the warrants based on their relative fair value.  Such amount was recorded as a discount against the carrying value of the note and was amortized to interest expense over the life of the note. In April 2006, the Company paid in full all outstanding principal balance under the Loan Agreement.

In October 2006, the Company entered into a $1,500,000 Loan and Security Agreement (the “Loan Agreement”) with Cambria Investment Fund L.P. (“Cambria”). Michael D. Vanderhoof, a director of the Company is a principal in Cambria. Under the Loan Agreement, (i) the Company could borrow up to $1,500,000, with the final $500,000 available only after February 15, 2007 (ii) cash is advanced in $50,000 increments to the Company by Cambria Investment Fund L.P. upon request, (iii) interest accrues daily upon any unpaid principal balance at the rate of twelve percent (12%) per annum, (iv) accrued interest is payable in full on a quarterly basis and (v) the outstanding principal balance is due and payable in full on October 22, 2007. Cambria holds a second priority security interest (subject to the first lien held by Laurus Master Fund, LTD) in all of the Company’s inventory, accounts receivable, equipment, cash, deposit accounts, securities, intellectual property, chattel paper, general intangibles and instruments, now existing or hereafter arising, and all proceeds thereof.  The Loan Agreement contains a provision whereby the conversion price to convert the Note to equity was set at $.46. Upon entering into this Loan Agreement Cambria earned the right to receive warrants to purchase up to 300,000 shares of the Company’s common stock at $.46. Additionally Cambria will earn the right to receive warrants to purchase up to additional 450,000 shares at $.46, with 30,000 shares vesting for every multiple of $100,000 borrowed under the Loan Agreement. Through December 2006, the Company borrowed $745,000 under the Loan Agreement. This borrowing earned Cambria the right to receive warrants to purchase 210,000 shares. The fair value of the warrant for the 300,000 shares issued upon execution was $92,558. Such amount was recorded as a loan acquisition cost and will be amortized to interest expense over the life of the note using the straight-line interest method.  The fair value of the warrant for the 210,000 shares issued in connection with the borrowing was $71,086. In accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” the Company has allocated a value of $71,086 to the warrants based on their relative fair value. Such amount was recorded as a discount against the carrying value of the note and will be amortized to interest expense over the life of the note using the straight-line interest method.  The fair value of the warrant was determined using the Black-Scholes option-pricing model, with the following assumptions: (i) no expected dividends; (ii) a risk free interest rate of 5.25%; (iii) expected volatility range of 79.05% to 79.52%; and (iv) an expected life of the warrants of five years.  In lieu of exercising the warrant, Cambria may convert the warrant, in whole or in part, into a number of shares determined by dividing (a) the aggregate fair market value of the shares or other securities otherwise issuable upon exercise of the warrant minus the aggregate exercise price of such shares by (b) the fair market value of one share.

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Effective July 2007, the Company restructured the Loan Agreement with Cambria Investment Fund L.P. extending the maturity date of the $745,000 outstanding balance to May 1, 2008 and extending the maturity date of the remaining unborrowed amount of $755,000 to December 31, 2008.  In return, the Company paid administrative fees of $22,350, and agreed to immediately vest the remaining 240,000 unvested warrants under the original agreement and provide one additional warrant share for every two dollars of new borrowings against the $755,000.  The exercise price of the additional warrants of $0.72 represents a 10% discount to the closing price of the Company’s common stock on the effective date of the restructuring. The conversion price for the amount borrowed to date remains at $0.46 per share, and the conversion price for any new borrowings and unpaid interest would be $0.72 per share.

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

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

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

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

Interest charges associated with the Loan, including amortization of the discount, loan acquisition costs and accreted interest costs totaled $480,637 and $19,722 for the years ended December 31, 2007 and 2006, respectively.

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(6)        Note Payable

In April 2006, the Company entered into a $3,000,000 Fixed Price Convertible Note (the “Note”) agreement with Laurus Master Fund (LMF). The term of the Note is for three years at an interest rate of WSJ prime plus 2.0%. The Note is secured by all of the Company's cash, cash equivalents, accounts, accounts receivable, deposit accounts, inventory, equipment, goods, fixtures, documents, instruments, contract rights, general intangibles, chattel paper, supporting obligations, investment property, letter of credit rights and all intellectual property now existing or hereafter arising, and all proceeds thereof. The Note contains a provision whereby the fixed conversion price to convert the Note to equity was set at a premium to the average closing price of the Company’s common stock for the 10 days prior to the closing of the transaction based on a tiered schedule. The first third of the investment amount has a fixed conversion price of $1.68, the next third has a fixed conversion price of $1.78, and the last third will has a fixed conversion price of $1.92. The Company shall reduce the principal Note by 1/60th per month starting 90 days after the closing, payable in cash or registered stock.

The Company filed a registration statement for the Company’s common stock underlying the note and all the underlying warrants with the SEC. On August 15, 2006, such registration statement was declared effective by the SEC. The Company has provided a first lien on all assets of the Company. The Company will have the option of redeeming any outstanding principal of the Note by paying to the LMF 120% of such amount, together with accrued but unpaid interest under this Note. LMF earned fees in the amount of 3.5% of the total investment amount at the time of closing. LMF also received 478,527 warrants to purchase shares of the Company’s common stock. The exercise price of the warrants was $1.96, representing a 120% premium to the average closing price of the Company’s common stock for the 10 days prior to the closing of the transaction. The warrants have a term of seven years. In addition, the Company paid loan origination fees to LMF of $105,000.

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

In November 2007, Laurus Master Fund converted $168,000 of the amount due on the Note into 100,000 shares of common stock.

Interest charges associated with the convertible debentures, including amortization of the discount and loan acquisition costs totaled $492,944 and $400,046 for the years ended December 31, 2007and 2006, respectively.

(7) Equity Transactions

In April 2006, the former Chief Financial Officer of the Company received 112,000 shares of Company stock in exchange for 140,000 warrants in a cashless exercise transaction.

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(8)            Warrants

Below is a summary of warrant activity during the yearsended December 31, 2006 and 2007:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at January 1, 2006		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
Granted in 2007		717,500		$	0.60
Exercised in 2007		-			-
Cancelled in 2007		(121,555	)	$	1.62
Outstanding at December 31, 2007		3,063,021		$	1.15
Warrants exercisable at December 31, 2006		2,467,076		$	1.34		4.21	$	1,987,657
Warrants exercisable at December 31, 2007		2,685,521		$	1.21		3.96	$	1,655,457

The following tables summarize information about warrants outstanding and exercisable at December 31, 2007:

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	1,771,567	4.48	$  0.40	1,394,067	$  0.41
$1.02 to $1.90	162,500	4.13	$  1.78	162,500	$  1.78
$1.90 to $2.00	941,041	4.10	$  1.96	941,041	$  1.96
$2.00 to $2.75	179,580	2.21	$  2.50	179,580	$  2.50
$3.00 to $12.00	8,333	2.33	$  4.90	8,333	$  4.90
$0.30 to $12.00	3,063,021	4.21	$  1.15	2,685,521	$  1.21

(9)        Stock Option Plans:

Effective June 15, 2000, the Company adopted the 2000 Stock Option Plan under which all employees may be granted options to purchase shares of the Company’s authorized but unissued common stock.  The maximum number of shares of the Company’s common stock available for issuance under the Plan was 183,333 shares. Under the Plan, the option exercise price was equal to the fair market value of the Company’s common stock at the date of grant.  Options expire no later than 10 years from the grant date and generally vest within five years.  In 2001, the Company elected to fully vest all outstanding options.

In October 2001, the Company approved the 2001 Stock Option Plan under which all employees may be granted options to purchase shares of the Company’s authorized but unissued common stock.  The maximum number of shares of the Company’s common stock available for issuance under the Plan was 450,000 shares. Under the Plan, the option exercise price was equal to the fair market value of the Company’s common stock at the date of grant.  Options expire no later than 10 years from the grant date and generally vest within five years.

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In May 2003, the shareholders approved the PeopleView, Inc. 2003 Stock Option Plan (the 2003 Plan).  The 2003 Plan was the successor to the Company’s existing 2000 Stock Option Plan and 2001 Stock Option Plan (together, the Predecessor Plans).  The 2003 Plan became effective immediately upon stockholder approval at the Annual Meeting on May 15, 2003, and all outstanding options under the Predecessor Plans were incorporated into the 2003 Plan at that time.  On May 15, 2003, 567,167 shares had been granted pursuant to the Predecessor Plans, with 66,166 shares available to grant.  On May 15, 2003, shareholders approved 833,333 shares for the 2003 plan. Together with the Predecessor Plans, 899,500 shares were available to grant, and 567,167 had been granted.  The Predecessor Plans terminated, and no further option grants will be made under the Predecessor Plans.  However, all outstanding options under the Predecessor Plans continue to be governed by the terms and conditions of the existing option agreements for those grants except to the extent the Board or Compensation Committee elects to extend one or more features of the 2003 Plan to those options. As of December 31, 2003, the remaining number of shares available for future grants under the 2003 Plan was 751,916 shares.  Under the Plan, the option exercise price was equal to the fair market value of the Company’s common stock at the date of grant.  Options expire no later than 10 years from the grant date and generally vest within five years.

In May 2004, the shareholders approved the Auxilio, Inc. 2004 Stock Incentive Plan (the 2004 Plan).  The 2004 Plan is the successor to the Company’s existing 2000 Stock Option Plan, 2001 Stock Option Plan, and the 2003 Stock Option Plan (together, the Predecessor Plans).  The 2004 Plan became effective immediately upon stockholder approval at the Annual Meeting on May 12, 2004, and all outstanding options under the Predecessor Plans were incorporated into the 2004 Plan at that time. On May 12, 2004, 714,750 shares had been granted pursuant to the Predecessor Plans, with 751,987 shares available to grant. On May 12, 2004, shareholders approved 2,000,000 shares for the 2004 plan. Together with the Predecessor Plans, 3,466,667 shares were available to grant, and 714,750 had been granted.  The Predecessor Plans terminated, and no further option grants will be made under the Predecessor Plans.  However, all outstanding options under the Predecessor Plans continue to be governed by the terms and conditions of the existing option agreements for those grants except to the extent the Board or Compensation Committee elects to extend one or more features of the 2004 Plan to those options. As of December 31, 2006, the remaining number of shares available for future grants under the 2004 Plan was 1,284,019 shares.  Under the Plan, the option exercise price is equal to the fair market value of the Company’s common stock at the date of grant.  Options expire no later than 10 years from the grant date and generally vest within five years.

In May 2007, the shareholders approved the Auxilio, Inc. 2007 Stock Option Plan (the 2007 Plan).  The 2007 Plan is the successor to the Company’s existing 2000 Stock Option Plan, 2001 Stock Option Plan, the 2003 Stock Option Plan, and the 2004 Stock Incentive Plan (together, the Predecessor Plans).  The 2007 Plan became effective immediately upon stockholder approval at the Annual Meeting on May 16, 2007, and all outstanding options under the Predecessor Plans were incorporated into the 2007 Plan at that time. On May 16, 2007, 2,890,147 shares had been granted pursuant to the Predecessor Plans, with 576,519 shares available to grant. On May 16, 2007, shareholders approved 1,003,334 shares for the 2007 plan. Together with the Predecessor Plans, 4,470,000 shares were available to grant, and 2,890,147 had been granted.  The Predecessor Plans terminated, and no further option grants will be made under the Predecessor Plans.  However, all outstanding options under the Predecessor Plans continue to be governed by the terms and conditions of the existing option agreements for those grants except to the extent the Board or Compensation Committee elects to extend one or more features of the 2007 Plan to those options. As of December 31, 2007, the remaining number of shares available for future grants under the 2007 Plan was 174,852 shares.  Under the Plan, the option exercise price is equal to the fair market value of the Company’s common stock at the date of grant.  Options expire no later than 10 years from the grant date and generally vest within three years.

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Additional information with respect to these Plans’ stock option activity is as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at January 1, 2006		2,008,497		$	1.48
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	$	-
Granted in 2007		2,293,000		$	0.90
Exercised in 2007		(12,500	)	$	0.47
Cancelled in 2007		(205,500	)	$	1.49
Outstanding at December 31, 2007		4,257,648		$	1.12		8.20	$	2,335,007
Options exercisable at December 31, 2006		1,020,816		$	1.36		7.23	$	-
Options exercisable at December 31, 2007		1,518,675		$	1.32		6.48	$	679,922

The following table summarizes information about stock options outstanding and exercisable at December 31, 2007:

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	1,029,000	8.88	$            0.52	5,833	$       0.61
$0.75 to $0.90	927,830	6.32	$            0.83	825,496	$       0.83
$1.02 to $1.84	1,819,166	9.12	$            1.34	312,083	$       1.56
$1.90 to $2.00	437,318	7.07	$            2.00	331,846	$       1.99
$3.00 to$6.75	44,334	4.85	$            3.85	43,417	$       3.86
$0.30 to $6.75	4,257,648	8.20	$            1.12	1,518,675	$       1.32

(10) Income Taxes

For the years ended December 31, 2007 and 2006, the components of income tax expense are as follows:

	2007		2006
Current provision:
Federal	$	2,997	$	-
State		2,400		2,400
		5,397		2,400
Deferred benefit:
Federal		-		-
State		-		-
		-		-
Income tax expense	$	5,397	$	2,400

Income tax provision amounted to $5,397 and $2,400 for the years ended December 31, 2007 and 2006, respectively (an effective rate of 16.1% for 2007 and (0.1%) for 2006).  A reconciliation of the provision for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows:

F-19

	2007			2006
Computed tax at federal statutory rate of 34%	$	11,400		$	(1,326,100	)
State taxes, net of federal benefit		1,600			1,600
Non deductible items		50,978			21,000
Other		(79,341	)		(172,400	)
Change in valuation allowance		20,760			1,478,300
	$	5,397		$	2,400

Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which is uncertain.  Accordingly, a valuation allowance, in an amount equal to the net deferred tax asset as of December 31, 2007 and 2006 has been established to reflect these uncertainties.  As of December 31, 2007 and 2006, the deferred tax asset before valuation allowances is approximately $4,451,000 and $4,419,000, respectively, for federal income tax purposes, and $831,000 and $843,000, respectively for state income tax purposes.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of the Company’s deferred tax assets and liabilities are as follows:

	2007			2006
Deferred tax assets:
Allowance for doubtful accounts	$	12,200		$	12,200
Accrued salaries/vacation		38,100			113,700
Accrued equipment pool		19,400			58,200
State taxes		1,100			1,100
Stock options		535,400			370,400
Net operating loss carryforwards		5,003,600			5,217,600
Total deferred tax assets		5,609,800			5,773,200
Deferred tax liabilities:
Depreciation		33,000			41,600
Amortization of intangibles		83,300			185,400
Other		211,000			284,400
Total deferred tax liabilities		327,300			511,400
Net deferred assets before valuation allowance		5,282,500			5,261,800
Valuation allowance		(5,282,500	)		(5,261,800	)
Net deferred tax assets	$	-		$	-

At December 31, 2007, the Company has available unused net operating loss carryforwards of approximately $12,594,000 for federal and $8,164,000 for state that may be applied against future taxable income and that, if unused, expire beginning in 2013 through 2026.

Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the

Internal Revenue Code of 1986.  The annual limitation may result in the expiration of net operating loss carryforwards before utilization.    

Effective January 1, 2007, the Company adopted Financial Accounting Standards Interpretation, ("FIN No. 48"), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement

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recognition and measurement of uncertain tax positions taken or expected to be taken in a company's income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"). Step one, Recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, Measurement, is based on the largest amount of benefit, which is more likely than not to be realized upon ultimate settlement.

The Company’s adoption of FIN No. 48, resulted in no adjustments to its financial statements for the year ended December 31, 2007.

The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of its provision for income taxes. As of January 1, 2007, the Company had no accrual for payment of interest and penalties related to unrecognized tax benefits, nor were any amounts for interest or penalties recognized during the year ended December 31, 2007.

(11)     Retirement Plan

The Company sponsors a 401(k) plan (the Plan) for the benefits of employees who are at least 21 years of age.  The Company’s management determines, at its discretion, the annual and matching contribution.  The Company elected not to contribute to the Plan for the years ended December 31, 2007 and 2006.

(12)     Commitments

Leases

The Company leases its Mission Viejo, California facility under a noncancellable operating lease.  The lease expires in December 2009.  Rent expense for the years ended December 31, 2007 and 2006 totaled $177,780 and $183,365, respectively.  Future minimum lease payments under non-cancelable operating leases during subsequent years are as follows:

December 31	Payments
2008	$	167,467
2009		171,470
Total	$	338,937

Employment Agreements

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

Effective January 1, 2006, the Company entered in to an employment agreement with Etienne Weidemann, to serve as the Company’s President and Chief Operating Officer. The employment agreement has a term of two years, and provides for a base annual salary of $175,000. Mr. Weidemann is also eligible to

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

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

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

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

Effective January 1, 2006, the Company entered in to an employment agreement with Mr. Flynn. This agreement has a term of two years, and provides for a base annual salary of $180,000. Mr. Flynn received 100,000 options and may receive an annual bonus if certain earnings and revenue targets are accomplished. Mr. Flynn resigned his position as Chief Executive Officer effective November 9, 2006, and resigned from employment of the Company effective December 31, 2006.

F-22

(13)Concentrations

Cash Concentrations

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

Major Customers

For the year ended December 31, 2007, three customers represented a total of 73% of revenues.  As of December 31, 2007, gross accounts receivable due from these customers total approximately $1,078,000.

For the year ended December 31, 2006, five customers represented a total of 91% of revenues.  As of December 31, 2006, accounts receivable due from these customers total approximately $1,753,000.

 (14)    Related Party Transactions

On October 26, 2006, the Company entered into a Loan and Security Agreement (the Loan) with Cambria Investment Fund, L.P. Michael D. Vanderhoof, a director of the Company, is a principal in Cambria Investment Fund L.P. Under the agreement, the Company can borrow up to $1,500,000. In consideration for entering into the Loan, Cambria Investment Fund L.P. received warrants to purchase up to 750,000 shares of the Company’s common stock at $.46, the market price upon execution, with 300,000 shares vesting upon the execution of the warrant agreement and 30,000 shares vesting for every multiple of $100,000 borrowed under the Loan Agreement with the Company. Through December 2006, the Company borrowed $745,000 on the Loan. This borrowing earned Cambria the right to receive warrants to purchase 210,000 shares. The fair value of the warrant for the 300,000 shares issued upon execution was $92,558. Such amount was recorded as a loan acquisition cost and will be amortized to interest expense over the life of the note using the straight-line interest method.  The fair value of the warrant for the 210,000 shares issued in connection with the borrowing was $71,086. In accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” the Company has allocated a value of $71,086 to the warrants based on their relative fair value. Such amount was recorded as a discount against the carrying value of the note and will be amortized to interest expense over the life of the note using the straight-line interest method. The fair value of the warrants was determined using the Black-Scholes option-pricing model. (See note 5 of the Notes to the Consolidated Financial Statements for the fair value assumptions used.)

Effective July 2007, the Company restructured the Loan Agreement with Cambria Investment Fund L.P. extending the maturity date of the $745,000 outstanding balance to May 1, 2008 and extending the maturity date of the remaining unborrowed amount of $755,000 to December 31, 2008.  In return, the Company paid administrative fees of $22,350, and agreed to immediately vest the remaining 240,000 unvested warrants under the original agreement and provide one additional warrant share for every two dollars of new borrowings against the $755,000.  The exercise price of the additional warrants of $0.72 represents a 10% discount to the closing price of the Company’s common stock on the effective date of the restructuring. The conversion price for the amount borrowed to date remains at $0.46 per share, and the conversion price for any new borrowings and unpaid interest would be $0.72 per share. See note 5 of the Notes to the Consolidated Financial Statements for the accounting treatment of the restructuring as an extinguishment of the existing debt and the creation of new debt and as a result the Company recorded a gain on extinguishment of debt of $139,951.

Interest charges associated with the Loan, including amortization of the discount, loan acquisition costs and accreted interest costs totaled $480,637 and $19,722 for the years ended December 31, 2007 and 2006, respectively.

On November 23, 2005, the Company entered into a Loan and Security Agreement (the Loan) with Cambria Investment Fund, L.P.  Michael D. Vanderhoof, a director of the Company, is a principal in Cambria Investment Fund L.P. Under the agreement, the Company could borrow up to $500,000.  In consideration for entering into the Loan, Cambria Investment Fund L.P. received warrants to purchase up to 250,000 shares of the Company’s common stock at $1.80, the market price upon execution, with 75,000 shares vesting upon the execution of the warrant agreement and 17,500 shares vesting for every multiple of $50,000 borrowed under the Loan Agreement with the Company. The fair value of the vested warrant to purchase 75,000 shares issued upon execution was $69,557. In

F-23

March 2006, the Company borrowed $250,000 on the Loan. This borrowing earned Cambria the right to receive warrants to purchase 87,500 shares. The fair value of the warrant for the 87,500 shares issued in connection with the borrowing was $128,970. In accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” the Company allocated a value of $85,079 to the warrants based on their relative fair value.  Such amount was recorded as a discount against the carrying value of the note and was to be amortized to interest expense over the life of the note using the straight-line interest method. In April 2006, the Company paid in full the outstanding principal balance under the Loan Agreement and charged the remaining unamortized balance of the discount to interest expense. The fair value of the warrants was determined using the Black-Scholes option-pricing model. (See note 5 of the Notes to the Consolidated Financial Statements for the fair value assumptions used.)

In June 2004, the Company entered in to a consulting agreement with John D. Pace, a director, to provide support in the Company’s sales efforts with major healthcare facilities as well as consulting services related to the Company’s operations. Mr. Pace received $1,000 per day for his services not to exceed three days per month and $1,500 per day for each additional day worked during a given month.  In addition, Mr. Pace received commission at a rate of 5% of the gross profit for any business closed through introductions made by Mr. Pace.

In September 2006, the Company entered in to a revised consulting agreement with Mr. Pace to provide support in the Company’s sales efforts with major healthcare facilities as well as consulting services related to the Company’s operations.  The agreement terminates December 31, 2008.  Mr. Pace receives $5,000 per month through December 2006, and $6,000 per month through December 2007 for his services not to exceed twenty hours per month.  In addition, Mr. Pace receives cash commission at a rate of 1% of the gross proceeds of a sale for any business closed through introductions made by Mr. Pace and 0.5% of the gross proceeds of a sale for any business closed through introductions made by Auxilio.  Total cash compensation to Mr. Pace for the years ended December 31, 2007 and 2006 was $76,670 and $57,455, respectively. Mr. Pace also received 3,538 shares of Company stock as payment for commissions earned in 2006.

F-24

EX-31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14 AND 15d-14 OF THE EXCHANGE ACT

I, Etienne Weidemann, certify that:

1.            I have reviewed this Annual Report on Form 10-KSB of Auxilio, Inc. (the "Registrant");

2.            Based on my knowledge, this Annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual

Report;

3.            Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.               The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Paragraph omitted in accordance with SEC transition instructions contained in SEC Release No. 33-8238;

(c)  Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting;

5.            I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls.

Dated: March 27, 2008

/s/ Etienne Weidemann                                                                

Etienne Weidemann,

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14 AND 15d-14 OF THE EXCHANGE ACT

I, Paul Anthony, certify that:

1.            I have reviewed this Annual Report on Form 10-KSB of Auxilio, Inc. (the "Registrant");

2.            Based on my knowledge, this Annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual

Report;

3.            Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.            The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Paragraph omitted in accordance with SEC transition instructions contained in SEC Release No. 33-8238;

(c)  Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting;

5.            I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls.

Dated: March 27, 2008

/s/ Paul Anthony                                                      

Paul Anthony,

Chief Financial Officer

(Principal Financial Officer)

EX-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

In connection with the Annual Report of Auxilio, Inc. and Subsidiary (the “Company”) on Form 10-KSB for the year ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Etienne Weidemann, Chief Executive Officer and Paul T. Anthony Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects the financial condition and results of the Company.

Date:  March 27, 2008

 By:               /s/Etienne Weidemann

   Etienne Weidemann, Chief Executive Officer

                

By:       /s/Paul T. Anthony

  Pau;l T. Anthony, Principal Financial Officer