###### ** **

###### Exhibit 99.1

### VILLAGEEDOCS

###  

** **

** **

Financial StatementsForthe Years Ended December 31, 2006 and 2005Togetherwith Report of Independent Registered Public Accounting Firm

** **

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **To the Boardof Directors of VillageEDOCS

We haveaudited the accompanying consolidated balance sheet of VillageEDOCS andsubsidiaries (the"Company") as of December 31, 2006,and the related consolidated statements of operations, stockholders' equity (deficit)and cash flows for each of the years in the two-year period then ended. Theseconsolidated financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits. 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany's internal control over financial reporting. Accordingly, we express nosuch opinion.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of VillageEDOCS andsubsidiaries at December 31, 2006, and the results of their operations andtheir cash flows for each of the years in the two-year period then ended inconformity with accounting principles generally accepted in the United Statesof America.

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern.  As discussed in Note 2 to the consolidatedfinancial statements, the Company has incurred recurring losses and has aworking capital deficit of $3,135,727.  These factors, among others, raise substantialdoubt about the Company's ability to continue as a going concern.  Management'splans in regard to these matters are also described in Note 2.  Theconsolidated financial statements do not include any adjustments relating tothe recoverability and classification of asset carrying amounts or the amountand classification of liabilities that might result should the Company beunable to continue as a going concern.

As describedin Note 3 to the consolidated financial statements, effective January 1, 2006,the Company changed its method of accounting for share-based compensation toadopt Statement of Financial Accounting Standards No. 123(R), "*Share-BasedPayment.*"

/s/ KMJ Corbin& Company, LLPIrvine, CaliforniaMarch 29, 2007

----

| **VillageEDOCS and subsidiaries**                                                             |  |                                                                                                                            |
|-----------------------------------------------------------------------------------------------|--|----------------------------------------------------------------------------------------------------------------------------|
| **Consolidated Balance Sheet**                                                                |  |                                                                                                                            |
|                                                                                               |  | **December 31,**                                                                                                           |
|                                                                                               |  | **2006**                                                                                                                   |
| ** **                                                                                    |  |                                                                                                                            |
| **ASSETS**                                                                                    |  |                                                                                                                            |
| Current assets:                                                                               |  |                                                                                                                            |
| Cash                                                                                          |  | $                  568,819  |
| Accounts receivable,  net of allowance for doubtful                                           |  |                                                                                                                            |
| accounts of  approximately $70,000                                                            |  |  962,977                                                                                                         |
| Inventories, net                                                                              |  |  190,448                                                                                                         |
| Prepaid expenses and  other current assets                                                    |  |  167,722                                                                                                         |
| Total current assets                                                                          |  | 1,889,966                                                                                                             |
|                                                                                               |  |                                                                                                                       |
| Property and equipment, net                                                                   |  |  473,657                                                                                                         |
| Other assets                                                                                  |  | 37,542                                                                                                           |
| Goodwill                                                                                      |  | 8,692,483                                                                                                        |
| Other intangibles, net                                                                        |  | 4,061,153                                                                                                        |
|                                                                                               |  | $           15,154,801                                    |
|                                                                                               |  |                                                                                                                            |
|                                                                                               |  |                                                                                                                            |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                      |  |                                                                                                                            |
| Current liabilities:                                                                          |  |                                                                                                                            |
| Accounts payable                                                                              |  | $                657,399         |
| Accrued expenses                                                                              |  | 2,060,099                                                                                                        |
| Deferred revenue                                                                              |  | 1,076,908                                                                                                        |
| Capital lease  obligation                                                                     |  | 8,150                                                                                                            |
| Line of credit                                                                                |  | 840,000                                                                                                          |
| Notes payable to related parties                                                              |  | 30,000                                                                                                           |
| Convertible notes and accrued interest payable  to                                            |  |                                                                                                                            |
| related parties, net of  unamortized debt discount of $12,233                                 |  |  353,137                                                                                                    |
|         Total current liabilities                          |  | 5,025,693                                                                                                        |
|                                                                                               |  |                                                                                                                            |
| Long term liability                                                                           |  | 180,000                                                                                                          |
|         Total liabilities                                  |  | 5,205,693                                                                                                             |
|                                                                                               |  |                                                                                                                            |
| Commitments and contingencies                                                                 |  |                                                                                                                            |
|                                                                                               |  |                                                                                                                            |
| Stockholders' equity:                                                                         |  |                                                                                                                            |
| Series A Preferred  stock, par value $0.001 per share:                                        |  |                                                                                                                            |
| Authorized  --  48,000,000 shares                                                        |  |                                                                                                                            |
|         Issued and outstanding --  33,500,000  shares |  | 33,500                                                                                                           |
| (liquidation preference  of $1,675,000)                                                       |  |                                                                                                                            |
| Common stock, no par  value:                                                                  |  |                                                                                                                            |
| Authorized --  400,000,000 shares                                                             |  |                                                                                                                            |
|         Issued and outstanding -- 147,368,127  shares      |  | 17,910,133                                                                                                       |
| Additional paid-in capital                                                                    |  | 13,774,698                                                                                                       |
| Accumulated deficit                                                                           |  |  (21,769,223)                                                                                                         |
| Total stockholders'  equity                                                                   |  | 9,949,108                                                                                                        |
|                                                                                               |  | $            15,154,801                              |
| See accompanying notes to consolidated  financial statements.                                 |  |                                                                                                                            |

----

 

 

| **VillageEDOCS and subsidiaries**                             | ** ** | ** ** |                                                                           |            |                                                                           |
|---------------------------------------------------------------|------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|
| **Consolidated Statements of Operations**                     | ** ** |            |                                                                           |            |
| ** **                                                    | ** ** | ** ** |                                                                           |            |                                                                           |
| ** **                                                    | ** ** | ** ** | **Years Ended December  31,**                                             |
|                                                               |            |            | **2006**                                                                  | ** ** | **2005**                                                                  |
| Net sales                                                     |            |            | $  12,912,173                                         |            | $    8,768,446                              |
| Cost of sales                                                 |            |            | 5,107,402                                                       |            | 3,059,316                                                       |
| Gross profit                                                  |            |            | 7,804,771                                                       |            | 5,709,130                                                       |
| Operating expenses:                                           |            |            |                                                                           |            |                                                                           |
| Product and technology                                        |            |            |                                                                           |            |                                                                           |
| development                                                   |            |            | 1,605,865                                                       |            | 1,066,923                                                       |
| Sales and marketing                                           |            |            | 1,490,656                                                       |            | 1,137,166                                                       |
| General and  administrative                                   |            |            | 4,765,739                                                       |            | 3,086,788                                                       |
| Depreciation and  amortization                                |            |            |  738,504                                                   |            |  293,067                                                   |
| Total operating  expenses                                     |            |            | 8,600,764                                                       |            | 5,583,944                                                       |
| Income (loss) from  operations                                |            |            |  (795,993)                                                           |            |  125,186                                                   |
|                                                               |            |            |                                                                           |            |                                                                           |
| Change in fair value of derivative liability                  |            |            |  -                                                              |            |  130,903                                                   |
| Interest expense, net of interest income                      |            |            |  (112,233)                                                           |            |  (8,074,489)                                                         |
| Other income (expense), net                                   |            |            |  40,099                                                    |            |  (282,474)                                                           |
| Loss before provision  for                                    |            |            |                                                                           |            |                                                                           |
| income taxes                                                  |            |            |  (868,127)                                                           |            |  (8,100,874)                                                         |
|                                                               |            |            |                                                                           |            |                                                                           |
| Provision for income taxes                                    |            |            |  14,005                                                    |            |  44,054                                                    |
| Net loss                                                      |            |            | $     (882,132)                                  |            | $   8,144,928)                                             |
|                                                               |            |            |                                                                           |            |                                                                           |
| Basic and diluted loss available to                           |            |            |                                                                           |            |                                                                           |
| common stockholders per  common                               |            |            |                                                                           |            |                                                                           |
| share                                                         |            |            | $           (0.01) |            | $           (0.10) |
|                                                               |            |            |                                                                           |            |                                                                           |
| Weighted average shares outstanding -                         |            |            |                                                                           |            |                                                                           |
|  basic and diluted                                       |            |            | 131,185,095                                                     |            | 82,728,108                                                      |
|                                                               |            |            |                                                                           |            |                                                                           |
|                                                               |            |            |                                                                           |            |                                                                           |
| See accompanying notes to consolidated financial  statements. |            |            |

----

| **VillageEDOCS and subsidiaries**                             |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
|---------------------------------------------------------------|--|-------------------|--|----------------------------------------------------------------------------|--|-----------------|--|------------------------------------------------------|--|------------------------------------------------------------|--|---------------------------------------|--|--------------------------------------------|
| **Statements of Stockholders' Equity (Deficit)**              |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
| **For the Years Ended December 31, 2006 and 2005**            |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
|                                                               |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
|                                                               |  | Series A          |  |                                                                            |  |                 |  |                                                      |  |                                                            |
|                                                               |  | Preferred Stock   |  | Common Stock                                                               |  | Additional      |  | Accumulated                                          |  |                                                            |
|                                                               |  | Shares            |  | Amount                                                                     |  | Shares          |  | Amount                                               |  | Paid-in Capital                                            |  | Deficit                               |  | Total                                      |
| Balances, January 1, 2005                                     |  |  -           |  | $           -  |  | 36,036,544      |  | $       7,464,373 |  | $       2,244,451  |  | $    (12,742,163) |  | $     (3,033,339) |
|                                                               |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
| Estimated fair value of common stock issued to                |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
| employees as  compensation                                    |  |  -           |  | -                                                                     |  | 142,606         |  |  21,497                                         |  |  -                                               |  |  -                          |  | 21,497                                |
| Estimated fair value of common stock                          |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
| issued as acquisition  cost                                   |  |  -           |  | -                                                                     |  |  2,200,000 |  |  308,000                                        |  |  -                                               |  |  -                          |  | 308,000                               |
| Estimated fair value of common stock issued in                |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
| connection with  acquisition                                  |  |  -           |  | -                                                                     |  | 110,000         |  |  15,400                                         |  |  -                                               |  |  -                          |  | 15,400                                |
| Estimated fair value of common stock issued  for              |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  | -                                          |
| conversion of note  payable principal and interest            |  |  -           |  | -                                                                     |  | 57,480,030      |  |  5,397,345                                      |  |  -                                               |  |  -                          |  | 5,397,345                             |
| Estimated fair value of common stock issued                   |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
|    in connection with consulting fees for  services |  |  -           |  | -                                                                     |  | 50,000          |  |  7,500                                          |  |  -                                               |  |  -                          |  | 7,500                                 |
| Estimated fair value of common stock issued                   |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
|    as finders fees for debt conversion              |  |  -           |  | -                                                                     |  | 648,346         |  |  95,769                                         |  |  -                                               |  |  -                          |  | 95,769                                |
| Estimated fair value of warrants issued in                    |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
|  connection with the acquisition of PFI                  |  |  -           |  | -                                                                     |  | -               |  |  -                                              |  |  2,100,000                                       |  |  -                          |  | 2,100,000                             |
| Estimated fair value of additional beneficial  conversion     |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
|  feature on repriced convertible notes  payable          |  |  -           |  | -                                                                     |  | -               |  |  -                                              |  |  374,165                                         |  |  -                          |  | 374,165                               |
| Estimated fair value of induced conversion                    |  |  -           |  | -                                                                     |  | -               |  |  -                                              |  |  434,572                                         |  |  -                          |  | 434,572                               |
| Conversion of notes payable to preferred stock                |  | 16,000,000   |  | 16,000                                                                |  | -               |  |  -                                              |  |  784,000                                         |  |  -                          |  | 800,000                               |
| Conversion of preferred stock to common stock                 |  |  (2,500,000) |  | (2,500)                                                                    |  |  2,500,000 |  |  2,500                                          |  |  -                                                    |  |  -                          |  | -                                     |
| Reclassification of warrant liability                         |  |  -           |  | -                                                                          |  | -               |  |  -                                              |  |  7,302,899                                       |  |  -                          |  | 7,302,899                                  |
| Net loss                                                      |  |                   |  |                                                                            |  | -               |  |  -                                              |  |  -                                               |  |  (8,144,928)                     |  | (8,144,928)                                |
|                                                               |  |                   |  |                                                                            |  |                 |  |                                                      |  |                                                            |  |                                       |  |                                            |
| Balances, December 31, 2005                                   |  | 13,500,000        |  | 13,500                                                                |  | 99,167,526      |  |  13,312,384                                     |  |  13,240,087                                      |  |  (20,887,091)                    |  | 5,678,880                             |

|                                                               |  | Series A          |  |                     |  |                 |  |                               |  |                                     |
|---------------------------------------------------------------|--|-------------------|--|---------------------|--|-----------------|--|-------------------------------|--|-------------------------------------|
|                                                               |  | Preferred Stock   |  | Common Stock        |  | Additional      |  | Accumulated                   |  |                                     |
|                                                               |  | Shares            |  | Amount              |  | Shares          |  | Amount                        |  | Paid-in Capital                     |  | Deficit |  | Total |
| Estimated fair value of common stock issued to                |  |                   |  |                     |  |                 |  |                               |  |                                     |  |  |  |  |
| employees as  compensation                                    |  |  -      |  | -              |  | 66,000          |  |  7,260                   |  |  -                        |  |  - |  | 7,260  |
| Estimated fair value of common stock                          |  |                   |  |                     |  |                 |  |                               |  |                                     |  |  |  |  |
| issued as acquisition  cost of TBS                            |  |  -      |  | -              |  |  2,200,000 |  |  242,000                 |  |  -                        |  |  - |  | 242,000  |
| Estimated fair value of common stock issued as                |  |                   |  |                     |  |                 |  |                               |  |                                     |  |  |  |  |
| acquisition cost of TBS                                       |  |  -      |  | -              |  | 110,000         |  |  12,100                  |  |  -                        |  |  - |  | 12,100  |
| Estimated fair value of common stock                          |  |                   |  |                     |  |                 |  |                               |  |                                     |  |  |  |  |
| issued as acquisition  cost of GSI                            |  |  -      |  | -              |  | 42,663,879      |  | 4,266,388                     |  |  -                        |  |  - |  | 4,266,388  |
| Estimated fair value of common stock issued                   |  |                   |  |                     |  |                 |  |                               |  |                                     |  |  |  |  |
|    in connection with consulting services           |  |  -      |  | -              |  | 660,722         |  |  67,501                  |  |  -                        |  |  - |  | 67,501  |
| Issuance of preferred stock in consideration                  |  |                   |  |                     |  |                 |  |                               |  |                                     |  |  |  |  |
|  for cancellation of common stock warrants               |  | 22,500,000   |  | 22,500         |  | -               |  |  -                       |  |  (22,500)                      |  |  - |  | -  |
| Conversion of preferred stock to common stock                 |  |  (2,500,000) |  | (2,500)             |  |  2,500,000 |  |  2,500                   |  |  -                             |  |  - |  | -  |
| Estimated fair value of vested stock options                  |  |  -      |  | -                   |  | -               |  |  -                       |  |  557,111                  |  |  - |  | 557,111   |
| Net loss                                                      |  |                   |  |                     |  | -               |  |  -                       |  |  -                             |  |  (882,132) |  | (882,132) |
| Balances, December 31, 2006                                   |  | 33,500,000   |  | $ 33,500  |  | 147,368,127     |  | $   17,910,133 |  | $   13,774,698  |  | $   (21,769,223) |  | $        9,949,108   |
|                                                               |  |                   |  |                     |  |                 |  |                               |  |                                     |  |  |  |  |
|                                                               |  |                   |  |                     |  |                 |  |                               |  |                                     |  |  |  |  |
| See accompanying notes to consolidated  financial statements. |  |                   |  |                     |  |                 |  |                               |  |                                     |  |  |  |  |

----

 

| **VillageEDOCS and subsidiaries**                                  |  |                                                      |            |                                                                                |
|--------------------------------------------------------------------|--|------------------------------------------------------|------------|--------------------------------------------------------------------------------|
| **Consolidated Statements of Cash Flows**                          |  |                                                      |            |                                                                                |
| ** **                                                         |  | **Years Ended December  31, **                  |
|                                                                    |  | **2006**                                             | ** ** | **2005**                                                                       |
| Cash Flows from Operating Activities:                              |  |                                                      |            |                                                                                |
| Net loss                                                           |  | $       (882,132) |            | $           (8,144,928) |
| Adjustments to  reconcile net loss to net cash                     |  |                                                      |            |                                                                                |
| provided by operating  activities:                                 |  |                                                      |            |                                                                                |
| Depreciation and  amortization                                     |  |  738,504                                   |            |  293,067                                                        |
| Provision for doubtful  accounts receivable                        |  |  37,901                               |            |  4,550                                                          |
| Estimated fair value of  stock options issued to                   |  |                                                      |            |                                                                                |
| employees for services  rendered                                   |  |  557,111                              |            |  -                                                              |
| Common stock issued to  employees and non-employees                |  |                                                      |            |                                                                                |
| for services rendered                                              |  |  74,761                               |            |  124,766                                                        |
| Interest expense in  connection with induced conversion of debt    |  |  -                                    |            |  434,572                                                        |
| Amortization of debt  issue costs                                  |  |  -                                    |            |  85,000                                                         |
| Amortization of debt  discount                                     |  |  14,676                               |            |  7,444,770                                                      |
| Change in fair value of  derivative liability                      |  |  -                                    |            | (130,903)                                                                      |
| Accrued interest on  convertible notes                             |  |  5,961                                |            |  91,870                                                         |
| Gain on sale of assets                                             |  |  1,700                                |            |  -                                                              |
| Changes in operating  assets and liabilities, net of               |  |                                                      |            |                                                                                |
| effects of acquisition:                                            |  |                                                      |            |                                                                                |
| Accounts receivable                                                |  |  352,818                              |            |  (20,558)                                                                 |
| Inventories                                                        |  | (423)                                                |            |  44,129                                                         |
| Prepaid expenses and  other current assets                         |  |  (76,774)                                       |            |  (45,148)                                                                 |
| Other assets                                                       |  |  31,300                                    |            |  (9,360)                                                                  |
| Accounts payable                                                   |  | (152,285)                                            |            | (147,635)                                                                      |
| Accrued expenses                                                   |  | (148,905)                                            |            |  245,924                                                        |
| Deferred revenue                                                   |  | (177,589)                                            |            |  89,173                                                         |
| Net cash provided by  operating activities                         |  |  376,624                              |            |  359,289                                                        |
| Cash Flows from Investing Activities:                              |  |                                                      |            |                                                                                |
| Purchases of property  and equipment                               |  | (132,511)                                            |            |  (23,159)                                                                 |
| Additions to  capitalized software development costs               |  |  (1,189)                                        |            |  (32,981)                                                                 |
| Cash acquired in  acquisition of GSI, net of cash paid             |  |  234,535                              |            |  -                                                                        |
| Cash paid for  acquisition of PFI                                  |  |  -                                    |            | (378,189)                                                                      |
| Costs incurred for  purchase of GSI                                |  | (130,054)                                            |            |  -                                                                        |
| Costs incurred for  purchase of PFI                                |  |  -                                    |            |  (47,500)                                                                 |
| Net cash used in  investing activities                             |  |  (29,219)                                       |            | (481,829)                                                                      |
| Cash Flows from Financing Activities:                              |  |                                                      |            |                                                                                |
| Proceeds from notes  payable to related parties                    |  |  10,000                               |            |  80,000                                                         |
| Proceeds from notes  payable                                       |  |  -                                         |            |  715,000                                                        |
| Payments on capital  lease obligations                             |  |  (4,075)                                        |            |  (4,963)                                                                  |
| Principal and interest payments on notes payable to related partie |  | (346,562)                                            |            | (163,455)                                                                      |
| Principal payments on  convertible notes to related parties        |  | (200,000)                                            |            | (200,000)                                                                      |
| Net cash (used in)  provided by financing activities               |  | (540,637)                                            |            |  426,582                                                        |
| Net change in cash                                                 |  | (193,232)                                            |            |  304,042                                                        |
| continued.                                                         |  |                                                      |            |                                                                                |

 

| Cash, beginning of  period                          |  |  762,051                                                                                           |  | 458,009                                                                                      |
|-----------------------------------------------------|--|--------------------------------------------------------------------------------------------------------------|--|---------------------------------------------------------------------------------------------------|
| Cash, end of period                                 |  | $            568,819                        |  | $             762,051       |
| Supplemental disclosure of cash flow  information - |  |                                                                                                              |  |                                                                                                   |
| Cash paid during the  period for:                   |  |                                                                                                              |  |                                                                                                   |
| Interest                                            |  | $              99,320             |  | $              42,768  |
| Income taxes                                        |  | $                4,000  |  | $              34,254  |

 

| Supplemental Schedule of Noncash Investing                     |   |                 |              |           |
|----------------------------------------------------------------|---|-----------------|--------------|-----------|
|  and Financing Activities:                                |   | **2006**        | ** **   | **2005**  |
|                                                                |   |                 |              |           |
|                                                                |   |                 |              |           |
| Issuance of common  stock as acquisition cost                  | $ | 254,100    | $            | 323,400   |
| Issuance of notes  payable in acquisition                      | $ | -          | $            | 200,000   |
| Issuance of common  stock as finder's fees                     | $ | -          | $            | 95,769    |
| Issuance of preferred  stock on conversion of debt             | $ | -          | $            | 800,000   |
| Issuance of common  stock on conversion of preferred stock     | $ | 2,500      | $            | 2,500     |
| Issuance of common  stock on conversion of debt                |   |                 |              |           |
| and accrued interest                                           | $ | -          | $            | 5,397,345 |
| Estimated fair value of  common stock issued in connection     |   |                 |              |           |
| with acquisition                                               | $ | 4,266,388  | $            | -         |
| Estimated fair value of  warrants issued in connection         |   |                 |              |           |
| with acquisition                                               | $ | -          | $            | 2,205,000 |
| Estimated fair value of  debt discount in connection with      |   |                 |              |           |
| issuance of convertible  note payable                          | $ | -          | $            | 374,165   |
| Reclassification of  warrant liability                         | $ | -          | $            | 7,302,899 |
| Accrual for patent  license                                    | $ | 250,000    | $            | -         |
| Equipment financed  through capital lease                      | $ | 12,225     | $            | -         |
| Issuance of preferred  stock in consideration for cancellation |   |                 |              |           |
| of warrants                                                    | $ | 22,500     | $            | -         |
|                                                                |   |                 |              |           |
| See accompanying notes to consolidated  financial statements.  |   | *** ***    | *** *** |           |

----

**VillageEDOCSand subsidiaries**

Notesto Consolidated Financial StatementsFor the Years Ended December 31, 2006 and 2005

1.              Background,Organization and Basis of Presentation

VillageEDOCS(the "Company" or "VillageEDOCS") was incorporated in 1995 in Delaware andreincorporated in California in 1997. The Company has historically operated anelectronic document delivery service marketed to organizations throughout the United States and internationally.  On February 17, 2004, the Company acquired TailoredBusiness Systems, Inc. ("TBS").  TBS provides various programming,processing and printing services to governmental entities, including installingsoftware, hardware, printing and mailing of property tax forms.  On June 16,2004, the holders of a majority of the voting capital stock of the Companyvoted to approve a Plan of Restructuring that included the reorganization ofthe Company's electronic document delivery business into a wholly ownedsubsidiary of the Company.  In connection with the reorganization, the Companyformed MessageVision, Inc. ("MVI") on October 25, 2004.  EffectiveApril 1, 2005, the Company acquired Phoenix Forms, Inc. dba Resolutions("PFI" or "Resolutions").  Resolutions provides productsfor document management, document archiving, document imaging, documentscanning, e-mail archiving, and electronic forms.  Effective May 1, 2006, theCompany acquired GoSolutions, Inc. ("GSI").  GSI provides enhancedvoice and data communications services including speech-driven messaging,unified communications, and audio conferencing applications. The consolidatedfinancial statements include the accounts of the Company and those of MVI, TBS,Resolutions, and GSI, its wholly owned subsidiaries, since October 25, 2004,February 17, 2004, April 1, 2005, and May 1, 2006, respectively.   Allsignificant inter-company transactions and balances have been eliminated inconsolidation.

2.              GoingConcern

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. The Company has incurredsignificant losses since inception, and has a working capital deficit of $3,135,727. The Company's losses are continuing and are expected to continue until suchtime as the Company is able to sufficiently expand its existing businesses oris able to consummate business combination transactions with other businesseswhose profits are sufficient to offset any ongoing losses from operating theholding company that owns GSI, Resolutions, TBS and MVI.

TheCompany's success is dependent upon numerous items, certain of which are thesuccessful growth of revenues from its products and services, its ability toobtain new customers in order to achieve levels of revenues adequate to supportthe Company's current and future cost structure, and its success in obtainingfinancing for equipment and operations, for which there is no assurance.Unanticipated problems, expenses, and delays are frequently encountered inestablishing and maintaining profitable operations.  These include, but are notlimited to, competition, the need to develop customer support capabilities andmarket expertise, setbacks in product development, technical difficulties,market acceptance and sales and marketing.  The failure of the Company to meetany of these conditions could have a materially adverse effect on the Companyand may force the Company to reduce or curtail operations. No assurance can begiven that the Company can achieve or maintain profitable operations.

TheCompany believes it will have adequate cash to sustain operations until itachieves sustained profitability.  However, until the Company has a history ofmaintaining revenue levels sufficient to support its operations and repay itsworking capital deficit, the Company may require additional financing. Sourcesof financing could include capital infusions, additional equity financing ordebt offerings.  Although cash flows from operations have recently improved toa level sufficient to support operating expenses, should such cash flowsdecrease for any reason, management plans to obtain debt and equity financingfrom new and existing stockholders.    There can be no assurance that fundingwill be available on acceptable terms, if at all, or that such funds, if raised,would enable the Company to achieve or sustain profitable operations.

Thesefactors, among others, raise substantial doubt about the Company's ability tocontinue as a going concern.  The consolidated financial statements do notinclude any adjustments to reflect the possible future effects on therecoverability and classification of assets or the classification ofliabilities that might result from the outcome of these uncertainties.

3.              Summaryof Significant Accounting Policies

a.      Segmentsof an Enterprise and Related Information

The Company has adopted Statement of FinancialAccounting Standards ("SFAS") No. 131, *"Disclosures about Segments ofan Enterprise and Related Information."* SFAS No. 131 requires theCompany to report information about segments of its business in annualfinancial statements and requires it to report selected segment information inits quarterly reports issued to stockholders. SFAS No. 131 also requiresentity-wide disclosures about the products and services an entity provides, thematerial countries in which it holds assets and reports revenues and its majorcustomers. The Company's five reportable segments are managed separately basedon fundamental differences in their operations. At December 31, 2006, theCompany operated in the following five reportable segments (see Note 12): 

(a)  Electronic document delivery services,(b)  Government accounting solutions,(c)  Electronic forms,(d)  Integrated communications, and(e)  Corporate. 

The Company evaluates performance and allocatesresources based upon operating income. The accounting policies of thereportable segments are the same as those described in this summary ofsignificant accounting policies.

b.     Concentrationof Credit Risk

The Company extends credit to its customers andperforms ongoing credit evaluations of such customers.  The Company does notobtain collateral to secure its accounts receivable.  MVI and GSI generallyrequire a valid credit card or ACH debit account to collateralize creditextended to non-corporate clients. The Company evaluates its accountsreceivable on a regular basis for collectibility and provides for an allowancefor potential credit losses as deemed necessary.  At December 31, 2006, theCompany has recorded an allowance for doubtful accounts of approximately $70,000. 

For the year ended December 31, 2006,independent representatives of one enterprise accounted for approximately 23%of total revenues.  There were no such concentrations for the year ended December31, 2005. 

No single customer accounted for more than 10%of accounts receivable at December 31, 2006.  

c.      Useof Estimates in the Preparation of Financial Statements

The preparation of financial statements inconformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Significantestimates made by management are, among others, the realizability of accountsreceivable, inventories, recoverability of long-lived assets, valuation ofstock options, warrants, derivative liabilities, and deferred taxes.   Actualresults could differ from those estimates.

d.     Propertyand Equipment

Property and equipment arestated at cost and are depreciated using the straight-line method over theestimated useful lives of the assets, ranging from three to seven years. Equipment under capital lease obligations is depreciated over the shorter ofthe estimated useful life or the term of the lease.  Major betterments andrenewals are capitalized, while routine repairs and maintenance are charged toexpense when incurred.

e.      RevenueRecognition

The Company recognizesrevenue in accordance with Staff Accounting Bulletin ("SAB") No. 101, *"RevenueRecognition in Financial Statements,"* as revised by SAB No. 104.  Assuch, the Company recognizes revenue when persuasive evidence of an arrangementexists, title transfer has occurred, or services have been performed, the priceis fixed or readily determinable and collectibility is probable.  Sales arerecorded net of sales discounts.

The Company has adoptedStatement of Position ("SOP") 97-2, "*Software Revenue Recognition,"*as well as SOP 98-9, *"Modification of SOP 97-2, Software RevenueRecognition with Respect to Certain Transactions."*  The SOPs generallyrequire revenue earned on software arrangements involving multiple elements tobe allocated to each element based on the relative fair market values of eachof the elements. The fair value of an element must be based on vendor-specificobjective evidence ("VSOE") of fair value. Software license revenue generatedby TBS and Resolutions, allocated to a software product is recognized upondelivery of the product, or deferred and recognized in future periods to theextent that an arrangement includes one or more elements that are to bedelivered at a future date and for which VSOE has not been established. Maintenance and support revenue is recognized ratably over the maintenanceterm.  First-year maintenance typically is sold with the related softwarelicense and renewed on an annual basis thereafter. Estimated fair values ofongoing maintenance and support obligations are based on separate sales ofrenewals to other customers or upon renewal rates quoted in the contracts. Forsuch arrangements with multiple obligations, the Company allocates revenue toeach component of the arrangement based on the estimated fair value of theundelivered elements. Fair value of services, such as consulting or training,is based upon separate sales of these services. The Company at times may enterinto multiple-customer contracts in which the Company allocates revenue basedon the number of specified users at each customer, and recognizes revenue uponcustomer acceptance and satisfying the other applicable conditions of the abovedescribed accounting policy. 

Services revenue isrecognized as the service is performed assuming that sufficient evidence existsto estimate the fair value of the services.  Consulting and training servicesare billed based on contractual hourly rates and revenues are recognized as theservices are performed. Consulting services primarily consist of implementationservices related to the installation of the Company's products which do notrequire significant customization to or modification of the underlying softwarecode. 

Revenue from subscriptionagreements consists of fixed monthly fees and usage charges, generally based onper minute rates.  Subscription agreement revenue related to MVI and GSI usageservice charges are billed monthly in arrears and the associated revenues arerecognized in the month of service. Recurring charges for the GoSoloTM platformare billed in advance on a monthly basis and recorded as deferred revenues. TheCompany recognizes subscription agreement revenue ratably over the serviceperiod, which management believes approximates the actual provision ofservices. Professional service fee revenue consists of consulting fees chargedto enterprise clients for GoSoloTM platform enhancements. The Company recognizesprofessional service fee revenue on a time and materials basis over the serviceperiod, which management believes approximates the actual provision ofservices.  Wholesale enhanced voicemail services consists of fees charged totelecommunications providers for use of the GoSoloTM platform to provide theircustomers with hosted electronic voicemail, billed monthly in arrears and theassociated revenues are recognized in the month of service.

Significant managementjudgments and estimates must be made in connection with determination of therevenue to be recognized in any accounting period. If the Company madedifferent judgments or utilized different estimates for any period, materialdifferences in the amount and timing of revenue recognized could result.

f.      Product and TechnologyDevelopment

Product and technology development expense includespersonnel costs relating to developing the features, content and functionalityof MVI's internet-enabled fax services and web site, TBS's governmentaccounting software, Resolution's electronic form software, and GSI'scommunications services.  Product and technology development costs are expensedas incurred.

g.     Advertising

The Company expenses all advertising costs asincurred.  Advertising costs were $99,236 and $100,055 for the years endedDecember 31, 2006 and 2005, respectively. 

h.   Risks and Uncertainties

The Company operates in industries that aresubject to intense competition, government regulation and rapid technologicalchange.  The Company's operations are subject to significant risks anduncertainties including financial, operational, technological, regulatory andother risks associated with an operating business, including the potential riskof business failure.

i.    Fair Value of Financial Instruments

The carrying amount of certain of the Company'sfinancial instruments as of December 31, 2006 approximate their respective fairvalues because of the short-term nature of these instruments. Such instrumentsconsist of cash, accounts receivable, accounts payable, accrued expenses,capital lease obligations, and notes payable. The fair value of convertiblenotes payable to related parties is not determinable as the borrowings are withrelated parties.

j.  Loss per Share

Basic loss per share iscomputed by dividing loss available to common stockholders by the weightedaverage number of common shares assumed to be outstanding during the period ofcomputation. Diluted loss per share is computed similar to basic loss per shareexcept that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if the potential shares had beenissued and if the additional common shares were dilutive.  All potentiallydilutive shares, approximately 4,149,548 and 17,741,983 as of December 31, 2006and 2005, respectively, have been excluded from diluted loss per share, astheir effect would be anti-dilutive for the periods then ended.

k.   Comprehensive Income

The Company has no other items of comprehensiveincome.

l.       WebSite Development Costs

During the years ended December 31, 2006 and 2005,the Company did not capitalize any additional amounts related to its web sitein accordance with the Emerging Issues Task Force ("EITF") Issue No.00-2, "*Accounting for Web Site Development Costs."*  Web sitedevelopment costs were amortized using the straight-line method over theestimated useful life of three years.  During the years ended December 31, 2006and 2005, the Company recorded amortization of web site development costs of $0and $7,319, respectively.

m.            SoftwareDevelopment Costs

The Company capitalizes software developmentcosts pursuant to SFAS No. 86, "*Accounting for the Costs of ComputerSoftware to be Sold, Leased or Otherwise Marketed,*" aftertechnological feasibility of the software is established, which is generallythe completion of a working prototype and ends upon general release of theproduct to the Company's customers. All costs incurred in the research anddevelopment of new software and costs incurred prior to the establishment oftechnological feasibility are expensed as incurred. Capitalized costs consistof direct costs and allocated overhead associated with the development of thesoftware products.  Amortization of software development costs commences whenthe product becomes available for general release to customers and is computedbased on the straight-line method over the software's estimated economic lifeof approximately three years.  The Company reviews the unamortized softwaredevelopment costs at each balance sheet date and, if necessary, will write downthe balance to net realizable value if the unamortized costs exceed the netrealizable value of the asset.  At December 31, 2006, management determinedthat no impairment existed.

n.     IncomeTaxes

The Company accounts for income taxes inaccordance with the asset and liability method for financial accounting andreporting purposes.  Under this method, deferred tax assets and liabilities aredetermined based on differences between the financial reporting and the taxbasis of assets and liabilities and are measured using the enacted tax rates andlaws that will be in effect when the differences are expected to reverse.  Avaluation allowance is provided for certain deferred tax assets if it is morelikely than not that the Company will not realize tax assets through futureoperations.

o.     Stock-Based Compensation

At December 31, 2006, the Company had twostock-based compensation plans.

On January 1, 2006,the Company adopted SFAS No. 123 (revised 2004), "*Share-Based Payment*,"("SFAS 123(R)") which establishes standards for the accounting of transactionsin which an entity exchanges its equity instruments for goods or services,primarily focusing on accounting for transactions where an entity obtainsemployee services in share-based payment transactions. SFAS 123(R) requires apublic entity to measure the cost of employee services received in exchange foran award of equity instruments, including stock options, based on thegrant-date fair value of the award and to recognize it as compensation expenseover the period the employee is required to provide service in exchange for theaward, usually the vesting period. SFAS 123(R) supersedes the Company'sprevious accounting under Accounting Principles Board Opinion No. 25, "*Accountingfor Stock Issued to Employees,"*("APB 25") for periods beginning in fiscal2006. In March 2005, the Securities and Exchange Commission issued StaffAccounting Bulletin ("SAB") No. 107, "*Valuation of Share-Based PaymentArrangements for Public Companies"*("SAB No. 107") relating to SFAS 123(R).The Company has applied the provisions of SAB No. 107 in its adoption of SFAS123(R).

The Company adopted SFAS123(R) using the modified prospective transition method, which requires theapplication of the accounting standard as of January 1, 2006, the firstday of the Company's fiscal year 2006. The Company's consolidated financialstatements as of and for the year ended December 31, 2006 reflect the impact ofSFAS 123(R). In accordance with the modified prospective transition method, theCompany's consolidated financial statements for prior periods have not beenrestated to reflect, and do not include, the impact of SFAS 123(R).

SFAS 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice periods in the Company's consolidated statement of operations. Prior tothe adoption of SFAS 123(R), the Company accounted for stock-based awards to employeesand directors using the intrinsic value method in accordance with APB 25 asallowed under SFAS No. 123, "*Accounting for Stock-Based Compensation"*("SFAS 123"). Under the intrinsic value method, stock-based compensationexpense was recognized in the Company's consolidated statements of operations,other than for option grants to employees below the fair market value of theunderlying stock at the date of grant.  No option-based employee compensationcost was recognized in the consolidated statement of operations for the yearended December 31, 2005, as all options granted under these plans had anexercise price equal to or greater than the fair market value of the underlyingcommon stock on the date of grant.

Stock-based compensationexpense recognized during the period is based on the value of the portion ofshare-based payment awards that is ultimately expected to vest during theperiod. Stock-based compensation expense recognized in the Company'sconsolidated statement of operations for the year ended December 31, 2006included compensation expense for share-based payment awards granted prior to,but not yet vested as of December 31, 2005 based on the grant date fairvalue estimated in accordance with the pro forma provisions of SFAS 123 andcompensation expense for the share-based payment awards granted subsequent toDecember 31, 2005 based on the grant date fair value estimated inaccordance with the provisions of SFAS 123(R). As stock-based compensationexpense recognized in the consolidated statement of operations for the yearended December 31, 2006 is based on awards ultimately expected to vest, it hasbeen reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates. The estimated averageforfeiture rate for the year ended December 31, 2006, of approximately 11% wasbased on historical forfeiture experience and estimated future employeeforfeitures. The estimated pricing term of option grants for 2006 was fiveyears. In the Company's pro forma information required under SFAS 123 for theperiods prior to fiscal 2006, the Company accounted for forfeitures as theyoccurred.

SFAS 123(R) requires thecash flows resulting from the tax benefits resulting from tax deductions inexcess of the compensation cost recognized for those options to be classifiedas financing cash flows. Due to the Company's loss position, there were no suchtax benefits during the year ended December 31, 2006. Prior to the adoption ofSFAS 123(R) those benefits would have been reported as operating cash flows hadthe Company received any tax benefits related to stock option exercises.

***Descriptionof Plans***

TheCompany's stock option plans provide for grants of options to employees anddirectors of the Company to purchase the Company's shares, as determined bymanagement and the board of directors, at the fair value of such shares on thegrant date. The options generally vest over a five-year period beginning on thegrant date and have a seven-year term. As of December 31, 2006, the Company isauthorized to issue up to 65,000,000 shares under these plans and hasapproximately 26,000,000 shares available for future issuances.

***Summary of Assumptions and Activity***

The fair value of stock-based awards toemployees and directors is calculated using the Black-Scholes option pricingmodel even though the model was developed to estimate the fair value of freelytradeable, fully transferable options without vesting restrictions, whichdiffer significantly from the Company's stock options. The Black-Scholes modelalso requires subjective assumptions, including future stock price volatilityand expected time to exercise, which greatly affect the calculated values. Theexpected term of options granted is derived from historical data on employeeexercises and post-vesting employment termination behavior. The risk-free rateselected to value any particular grant is based on the U.S. Treasury rate thatcorresponds to the pricing term of the grant effective as of the date of thegrant. The expected volatility is based on the historical volatility of theCompany's stock price. These factors could change in the future, affecting thedetermination of stock-based compensation expense in future periods.  The fairvalue of options granted was estimated using the following weighted-averaeassumptions:

|                          |  |       |
|--------------------------|--|-------|
|                          |  |       |
|                          |  | 2006  |  | 2005 |
| Stock  options:          |  |       |  |  |
| Expected term (in years) |  | 5.0   |  | 5.3 |
| Expected volatility      |  | 316%  |  | 209% |
| Risk-free interest rate  |  | 3.55% |  | 3.80% |
| Dividend yield           |  | -     |  | - |

The following table illustrates the effect onnet loss and net loss per share for the year ended December 31, 2005 as if theCompany had applied the fair value recognition provisions of SFAS 123 tooptions granted under the Company's stock option plans. For purposes of thispro forma disclosure, the fair value of the options is estimated using theBlack-Scholes option-pricing model and amortized on a straight-line basis toexpense over the options' vesting period:

|                                                     |  | ** ** | ** ** | **Year**                                                                              |
|-----------------------------------------------------|--|------------|------------|---------------------------------------------------------------------------------------|
|                                                     |  | ** ** | ** ** | **Ended**                                                                             |
|                                                     |  | ** ** | ** ** | **December 31,**                                                                      |
|                                                     |  | ** ** | ** ** | **2005**                                                                              |
|                                                     |  |            |            |                                                                                       |
| Net  loss - as reported                             |  |            |            | $       (8,144,928)                                |
| Add:   Share-based employee compensation       |  |            |            |                                                                                       |
|    expense included in net loss - as reported  |  |            |            | -                                                                                     |
| Deduct:   Share-based employee compensation    |  |            |            |                                                                                       |
|    expense determined under fair value method, |  |            |            |                                                                                       |
|    net of related tax effects - pro forma      |  |            |            |  (960,000)                                                                       |
| Net  loss - pro forma                               |  |            |            | (9,104,928)                                                                           |
|                                                     |  |            |            |                                                                                       |
| Basic  and diluted loss available to common         |  |            |            |                                                                                       |
| stockholders per common share - as reported         |  |            |            | $             (0.10) |
|                                                     |  |            |            |                                                                                       |
| Basic  and diluted loss available to common         |  |            |            |                                                                                       |
| stockholders per common share - pro  forma          |  |            |            | $            (0.11)       |
|                                                     |  |            |            |                                                                                       |

A summary of option activity as of December 31,2006 and changes during the year then ended, is presented below:

|                                           |  | **December 31, 2006** |
|-------------------------------------------|--|-----------------------|
|                                           |  | ** **            | **Weighted-Average** | ** ** |
|                                           |  | ** **            | ** ** | **Remaining** | **Aggregate** |
|                                           |  | ** **            | **Exercise** | **Contractual** | **Intrinsic** |
|                                           |  | **Shares**            | **Price** | **Term (Years)** | **Value** |
| Options  outstanding at January 1, 2006   |  | 27,184,670       |  $ | 0.22  |  |  |
| Options  granted                          |  | 14,120,000       |  $ | 0.15  |  |  |
| Options  forfeited                        |  | (2,333,113)           |  $ | 0.28  |  |  |
| Options  exercised                        |  | -                |  $ | -  |  |  |
| Options  outstanding at December 31, 2006 |  | 38,971,557       |  $ | 0.19  | 5.7  |  $ | 21,000  |
| Options  vested or expected to vest       |  | 37,216,997       |  $ | 0.19  | 5.7  |  $ | 21,000  |
| Options  exercisable at December 31, 2006 |  | 22,419,108       |  $ | 0.26  | 4.1  |  $ | 21,000  |
|                                           |  |                       |  |  |  |

The weighted-average grant date fair value ofoptions granted during 2006 was $0.14 per option.  Upon the exercise ofoptions, the Company issues new shares from its authorized shares.

As of December 31, 2006, there was $1,013,714 oftotal unrecognized compensation cost related to employee and director stockoption compensation arrangements. That cost is expected to be recognized on astraight-line basis over the next 4.1 weighted average years.

As a result of adopting SFAS 123(R) on January1, 2006, the Company's loss before provision for income taxes and net loss for2006 was $557,111 higher than if it had continued to account for share-basedcompensation under APB 25. Basic and diluted net loss per share for 2006 wasnot affected by the adoption of SFAS 123(R).

The following table summarizes stock-basedcompensation expense related to employee and director stock options under SFAS123(R) for the year ended December 31, 2006, net of estimated forfeitures, whichwas allocated as follows:

| ** **                                     | ** ** | ** ** | ** ** | **Year**         |
|------------------------------------------------|------------|------------|------------|------------------|
| ** **                                     | ** ** | ** ** | ** ** | **Ended**        |
| ** **                                     | ** ** | ** ** | ** ** | **December 31,** |
| ** **                                     | ** ** | ** ** | ** ** | **2006**         |
|                                                |            |            |            |                  |
| Stock-based  compensation expense included in: |            |            |            |                  |
| General and administrative                     |            |            |            |  $          | 557,111  |
|                                                |            |            |            |                  |

All issuances of the Company's stock fornon-cash consideration have been assigned a dollar amount equaling either themarket value of the shares issued or the value of consideration receivedwhichever is more readily determinable. The majority of the non-cash considerationreceived pertains to services rendered by consultants and others and has beenvalued at the market value of the shares issued. In certain issuances, theCompany may discount the value assigned to the issued shares for illiquidityand restrictions on resale.

p.              Inventories

Inventories consist primarily of supplies, forms, envelopes, and softwarelicenses purchased for resale.  Cost is determined on a first-in, first-outbasis.  The Company periodically reviews its inventory quantities on hand andadjusts for excess and obsolete inventory based primarily on historical usagerates and its estimated forecast of product demand.  Actual demand may differfrom the Company's estimates.  Once established, write-downs of inventory areconsidered permanent adjustments to the basis of the excess or obsoleteinventory.

q.              Goodwilland Other Intangible Assets

Goodwill represents the excess of acquisition cost over the net assets acquiredin a business combination and is not amortized in accordance with SFAS No. 142,"*Goodwill and Other Intangible Assets*." The provisions of SFASNo. 142 require that the Company allocate its goodwill to its various reportingunits, determine the carrying value of those businesses, and estimate the fairvalue of the reporting units so that a two-step goodwill impairment test can beperformed.  In the first step of the goodwill impairment test, the fairvalue of each reporting unit is compared to its carrying value. Management reviews, on an annual basis, the carrying value of goodwill in orderto determine whether impairment has occurred.  Impairment is based onseveral factors including the Company's projection of future undiscountedoperating cash flows. If an impairment of the carrying value were to beindicated by this review, the Company would perform the second step of thegoodwill impairment test in order to determine the amount of goodwillimpairment, if any. 

The changes in the carrying amount of goodwillfor the year ended December 31, 2006 are as follows (see Note 5):

| Balance, December 31,  2005         |  | $               | 5,166,132                                                         |
|-------------------------------------|--|-----------------|-----------------------------------------------------------------------------|
| Goodwill acquired                   |  | 3,805,351       |
| Goodwill adjustment  related to PFI |  | (279,000)  |
|                                     |  |                 |
| Balance, December 31,  2006         |  | $               |           8,692,483  |

The Company performed an impairment test ongoodwill as of December 31, 2006.  Based on its analysis as of December31, 2006, the Company's management believes there is no impairment of itsgoodwill.  There can be no assurance, however, that market conditions willnot change or demand for the Company's products or services will continue, whichcould result in impairment of goodwill in the future. 

Identifiable intangibles acquired in connection with business acquisitions arerecorded at their respective fair values (see Note 5).  Deferred incometaxes have been recorded to the extent of differences between the fair valueand the tax basis of the assets acquired and liabilities assumed.  

r.               BeneficialConversion Feature

The convertible features of convertible notesprovides for a rate of conversion that is below market value (see Note 6). Suchfeature is normally characterized as a "beneficial conversionfeature" ("BCF"). Pursuant to EITF No. 98-5 "*AccountingFor Convertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratio*" and EITF No. 00-27,"*Applicationof EITF Issue No. 98-5 To Certain Convertible Instruments,*" therelative fair values of the BCFs have been recorded as a discount from the faceamount of the respective debt instrument. The Company is amortizing thediscount using the effective interest method through maturity of suchinstruments. The Company records the corresponding unamortized debt discountrelated to the BCF as interest expense when the related instrument is convertedinto the Company's common stock.

s.               Long-LivedAssets

In the event that facts and circumstancesindicate that equipment or other long-lived assets may be impaired, anevaluation of recoverability would be performed.  If an evaluation is required,the estimated future discounted cash flows associated with the asset are comparedto the asset's carrying amount to determine if an impairment charge isnecessary.  The amount of long-lived asset impairment, if any, is charged tooperations in the period in which long-lived asset impairment is determined. At December 31, 2006, management believes there is no impairment of itslong-lived assets.  There can be no assurance, however, that market conditionswill not change or demand for the Company's products or services will continue,which could result in impairment of long-lived assets in the future.

t.                WarrantyCosts

The Company provides a limited 90 day warrantyon certain products sold. Estimated future warranty obligations related tocertain products and services are provided by charges to operations in theperiod in which the related revenue is recognized. As of December 31, 2006,management of the Company determined that a warranty reserve was notnecessary.  In addition, the charges to expense during the years ended December31, 2006 and 2005 were insignificant.

u.     New AccountingPronouncements

In July 2006, the Financial AccountingStandards Board ("FASB") finalized and issued Interpretation No. 48, ("FIN48"), entitled "*Accounting for Uncertainty in Income Taxes - aninterpretation of FASB Statement No. 109* ," which defines thethreshold for recognizing the benefits of tax return positions as well asguidance regarding the measurement of the resulting tax benefits. FIN 48 requires a company to recognize for financial statementpurposes the impact of a tax position if that position is "more likely thannot" to prevail (defined as a likelihood of more than fifty percent of beingsustained upon audit, based on the technical merits of the tax position). FIN48 will be effective as of the beginning of the Company's fiscal year endingDecember 31, 2007, with the cumulative effect of the change in accountingprinciple recorded as an adjustment to retained earnings. The Company iscurrently evaluating the impact of adopting FIN 48 on its consolidated financialstatements.

In September 2006, the SEC Staff issued SABNo. 108 "*Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements*" to requireregistrants to quantify financial statement misstatements that have beenaccumulating in their financial statements for years and to correct them, ifmaterial, without restating. Under the provisions of SAB No. 108,financial statement misstatements are to be quantified and evaluated formateriality using both balance sheet and income statement approaches. SABNo. 108 is effective for fiscal years ending after November 15, 2006. Theadoption of this pronouncement did not have a material impact on the Company's consolidatedresults of operations or financial condition.

In September 2006, the FASB issued SFASNo. 157, entitled "*Fair Value Measurements,*" to define fair value,establish a framework for measuring fair value and expand disclosures aboutfair value measurements. This statement provides guidance related to thedefinition of fair value, the methods used to measure fair value anddisclosures about fair value measurements. SFAS No. 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The Company is currentlyevaluating the impact of adopting SFAS No. 157 on its consolidated financialstatements.

v.              DerivativeFinancial Instruments 

In connection with the issuance of certainconvertible notes payable (see Note 6), the terms of the notes payable providedfor a conversion of the notes into shares of the Company's common stock at arate which was determined to be variable. The Company determined that thevariable conversion feature was an embedded derivative instrument pursuant toSFAS No. 133, "*Accounting for Derivative Instruments and HedgingActivities,*" as amended. The accounting treatment of derivativefinancial instruments required that the Company record the derivatives andrelated warrants at their fair values as of the inception date of the noteagreements and at fair value as of each subsequent balance sheet date. Inaddition, under the provisions of EITF Issue No. 00-19, "*Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany's Own Stock,*" as a result of entering into the noteagreements, the Company was required to classify all other non-employeewarrants as derivative liabilities and record them at their fair values at eachbalance sheet date. Any change in fair value was recorded as non-operating,non-cash income or expense at each balance sheet date. If the fair value of thederivatives was higher at the subsequent balance sheet date, the Companyrecorded a non-operating, non-cash charge. If the fair value of the derivativeswas lower at the subsequent balance sheet date, the Company recordednon-operating, non-cash income. 

At December 31, 2006, the Company had noderivative liabilities since the related variable debt instruments were settledin full in 2005.  During 2005, the Company recognized other income of $130,903related to recording the derivative liabilities at fair value.  At thesettlement date, the remaining derivative liabilities with a value of $7,302,899were reclassified to additional paid-in capital. 

Warrant-related derivatives were valued usingthe Black-Scholes Option Pricing Model with the following assumptions duringthe year ended December 31, 2005: dividend yield of 0%; average annualvolatility of 209%; and an average risk free interest rate of 3.8%.

4.              Propertyand Equipment

            Propertyand equipment consist of the following as of December 31, 2006:

                                                                                                                        

|  |                                  |                                                              |                     |  |
|--|----------------------------------|--------------------------------------------------------------|---------------------|--|
|  | Computer  equipment              | $                                                            | 685,667        |  |
|  | Furniture  and equipment         |                                                              | 675,333        |  |
|  | Automobiles                      |                                                              | 98,116         |  |
|  | Software                         |            | 211,970        |  |
|  |                                  |                                                              | 1,671,086      |  |
|  | Less--  accumulated depreciation |                                                              | (1,197,429)         |  |
|  |                                  | $                                                            | 473,657   |  |
|  |                                  |                                                              |                     |  |

                                                                                                      

Depreciation expense for property and equipmentfor 2006 and 2005 was $279,865 and $156,452, respectively.

5.              Acquisitionsand Intangible Assets

*TBS*

On February 17, 2004, the Company purchased 100%of the issued and outstanding capital stock of TBS from Stephen A. Garner andJames L. Campbell.  On May 1, 2006 and pursuant to the TBS acquisitionagreement, the Company issued 1,100,000 shares of common stock to each ofMessrs. Garner and Campbell.  The shares were valued at $0.11 per share (theestimated fair value on the date that the shares were earned) and recorded asadditional purchase price.

On June 29, 2006 and in connection with theacquisition of TBS, the Company issued 110,000 shares of its restricted commonstock to a non-affiliate pursuant to a finder's fee agreement.  The shares werevalued at $0.11 per share (the estimated fair value on the date that the shareswere earned) and recorded as additional purchase price.

*GSI*

Effective May 1, 2006, VEDO Merger Sub, Inc., awholly owned subsidiary of VillageEDOCS, acquired 100% of the outstandingcommon and preferred stock of GSI (the "Acquisition"). 

GSI is a Florida corporation formed in 2000 toacquire Go Solo Technologies, Inc., which has been operating continuously since1999.  GSI is headquartered in St. Petersburg, Florida.  

The terms of the Acquisition were the result ofarms-length negotiations.  None of the GSI shareholders were previouslyaffiliated with VillageEDOCS.

GSI is an emerging integrated communicationsprovider offering Web based communication services that enables users toutilize naturally spoken voice commands and a telephone to gain access to awide range of vital Internet and database driven information services as wellas its proprietary unified messaging and enhanced services platform, GoSolo(TM). The GoSolo (TM) platform provides toll-free telephone service primarilyto enterprises, their independent representatives and individual consumers.  

The Company acquired GSI because it believesthat the combined entities will be able to create a more complete suite ofbusiness products and services, more effectively sell and market its businessproduct and service offerings, create a unified applications platform, increasethe likelihood of accessing public capital markets and obtaining conventionalfinancing from commercial banks, and respond more quickly and effectively totechnological change, increased competition and market demands.

Effective May 1, 2006, VillageEDOCS issued42,663,879 shares of its common stock, net of approximately 17,336,121 sharesnot issued in connection with two settlements (see below), with an estimatedfair value of $4,266,388, to GSI's stockholders.  VillageEDOCS' common stockwas valued at $0.10 per share, the fair value of VillageEDOCS' common stock onthe date of the acquisition.

In connection with the Acquisition, VillageEDOCSand dissenting shareholders of GSI holding approximately 1,771,000 and3,021,000 shares of GSI's common and preferred Series A stock, respectively,entered into settlement agreements (the "Settlement Agreements"). Pursuant to the Settlement Agreements, the dissenting shareholders agreed towaive all dissenters' rights regarding approval of the Acquisition.  Inexchange for the waiver, VillageEDOCS agreed to pay cash in the amount of$965,000 in lieu of shares of its common stock.  

The Acquisition has been accounted for using thepurchase method of accounting. 

VillageEDOCS funded the required payment underthe Settlement Agreements with proceeds from GSI's cash balance of $965,000,$840,000 of which was provided by its $1,000,000 revolving line of credit witha financial institution (see Note 6).

In connection with the Acquisition, VillageEDOCSincurred approximately $130,000 in acquisition-related costs including, but notlimited to, expenses incurred for legal, accounting and travel.

The acquisition price was comprised of thefollowing:

| Cash  in accordance with settlement agreements      |                 |  $       | 965,000    |
|-----------------------------------------------------|-----------------|---------------|-----------------|
| Estimated  fair value of VillageEDOCS' common stock | 4,266,388  |
| Legal,  accounting, and other costs                 |                 | 130,054  |
|                                                     |                 |  $       | 5,361,442  |

The following represents an allocation of thepurchase price over the historical net book value of the acquired assets andliabilities of GSI as of May 1, 2006, the effective date of the Acquisition:

| Cash                                       |  |  $         | 1,199,535  |
|--------------------------------------------|--|-----------------|-----------------|
| Accounts  receivable, net                  |  | 332,457    |
| Prepaid  expenses and other current assets |  | 68,912     |
| Property  and equipment, net               |  | 240,272    |
| Other  assets                              |  | 34,895     |
| Line  of credit                            |  | (840,000)       |
| Deferred  revenue                          |  | (1,386,194)     |
| Other  liabilities                         |  | (949,686)       |
| Net tangible liabilities assumed           |  | (1,299,809)     |
|                                            |  |                 |
| Identifiable  intangibles:                 |  |                 |
| Customer relationships                     |  | 2,200,000  |
| Technology                                 |  | 490,000    |
| Trade names and marks                      |  | 420,000    |
| Goodwill                                   |  | 3,551,251  |
|                                            |  |  $         | 5,361,442  |

The pro forma combined historical results, as ifGSI had been acquired as of the beginning of the periods presented and as ifPFI had been acquired as of the beginning of the 2005 period, are estimated asfollows: 

|                          |  |  |                   |                  |  |                   |
|--------------------------|--|--|-------------------|------------------|--|-------------------|
|                          |  |  | Year              |                  |  | Year              |
|                          |  |  | Ended             |                  |  | Ended             |
|                          |  |  | December 31, 2006 |                  |  | December 31, 2005 |
| Net  sales               |  |  |  $           | 15,079,240  |  |                   |  $ | 16,200,366  |
| Net  loss                |  |  |  $           | (1,173,259)      |  |                   |  $ | (8,210,239) |
| Weighted  average common |  |  |                   |                  |  |                   |
| shares outstanding:      |  |  |                   |                  |  |                   |
| basic and diluted        |  |  | 145,211,587  |                  |  | 125,275,112  |
| Loss  per share:         |  |  |                   |                  |  |                   |
| basic and diluted        |  |  |  $           | (0.01)           |  |                   |  $ | (0.07) |

The pro forma information has been prepared forcomparative purposes only and does not purport to be indicative of what wouldhave occurred had the acquisition actually been made at such date, nor is itnecessarily indicative of future operating results.

*Other Intangible Assets*

Based on certain asserted claims of potentialpatent infringements from Catch Curve, Inc., a Delaware corporation ("CatchCurve"), the Company recorded an estimated expense of $325,000 at December 31,2005 related to potential settlement costs of the claims.  On May 12, 2006, theCompany entered into a Patent License Agreement (the "License Agreement") withCatch Curve.  Pursuant to the License Agreement, Catch Curve granted theCompany a worldwide, non-exclusive, non-divisible, fully paid-up license to usecertain patented technology in connection with any facsimile products orservices made or sold by the Company or its subsidiaries.  The Company isobligated to make aggregate license payments of $600,000 over a period of up tothirty-two months beginning on May 12, 2006, at which time no further paymentsare required under the License Agreement.   License payments of $180,000 aredue in each of the years ended December 31, 2007 and 2008. The LicenseAgreement stipulates that $350,000 of the total license fee is attributable tosales of products and services prior to the date of the License Agreement.  Theremainder of $250,000 is attributable to sales of products and servicessubsequent to the date of the License Agreement. Accordingly, on May 12, 2006,the Company recorded an additional $25,000 of expense and recorded anintangible asset in the amount of $250,000.  The intangible asset will beamortized over 58 months, the current remaining life of the patents covered bythe License Agreement.  During 2006, the Company made license payments of$120,000 under the License Agreement.  At December 31, 2006, the unpaid balancedue was $360,000.  In accordance with the terms of the License Agreement, the Companyhas classified $180,000 of the total amount due as a current liability and hasclassified the remainder of $180,000 as a long-term liability on theaccompanying consolidated balance sheet.

Other intangible assets consist of the followingas of December 31, 2006: 

|  |                                                                |  | Estimated Useful Life |   | Gross Carrying  | Accumulated  | Net Carrying  |
|--|----------------------------------------------------------------|--|-----------------------|---|-----------------|--------------|---------------|
|  |                                                                |  | (Years)               |   | Amount          | Amortization | Amount        |
|  | Corporate:                                                     |  |                       |   |                 |              |               |
|  |    License agreement                            |  | Five                  | $ | 250,000    |  $      | (32,327)      |  $ | 217,673  |
|  |                                                                |  |                       |   |                 |              |               |
|  | TBS:                                                           |  |                       |   |                 |              |               |  |  |
|  |  Customer  list        |  | Ten                   |   | 500,000    |              | (143,750)     |  | 356,250  |
|  |    Trade name                                             |  | Five                  |   | 50,000     | (28,750)     | 21,250   |
|  |                                                                |  |                       |   | 550,000    | (172,500)    | 377,500  |
|  | Resolutions:                                                   |  |                       |   |                 |              |               |
|  |    Customer relationships                                 |  | Ten                   |   | 570,000    | (101,925)    | 468,075  |
|  |    Software development                                   |  | Five                  |   | 104,170    | (21,815)     | 82,355   |
|  |    Trade name                                             |  | Five                  |   | 50,000     | (17,500)     | 32,500   |
|  |    Covenant not to compete                                |  | Three                 |   | 26,100     | (13,050)     | 13,050   |
|  |                                                                |  |                       |   | 750,270    |              | (154,290)     |  | 595,980  |
|  | GSI:                                                           |  |                       |   |                 |              |               |  |  |
|  |    Customer  relationships                      |  | Ten                   |   | 2,200,000  |              | (146,667)     |  | 2,053,333  |
|  |    Technology                                   |  | Five                  |   | 490,000    |              | (65,333)      |  | 424,667  |
|  |    Trade  names and marks                       |  | Ten                   |   | 420,000    |              | (28,000)      |  | 392,000  |
|  |                                                                |  |                       |   | 3,110,000  |              | (240,000)     |  | 2,870,000  |
|  |                                                                |  |                       |   |                 |              |               |  |  |
|  | Total other intangible  assets                                 |  |                       | $ | 4,660,270  |  $      | (599,117)     |  $ | 4,061,153  |
|  |                                                                |  |                       |   |                 |              |               |  |  |  |  |

Amortization of other intangible assets was $417,321and $129,296 during 2006 and 2005, respectively.  During 2006, the Companycapitalized $3,110,000 in connection with the acquisition of GSI, $1,189related to software development costs, and $250,000 in connection with alicense agreement.

The estimated amortization expense for the nextfive years is as follows: 

|   | Years  Ending  December  31, |  |  |
|--------|------------------------------|--|--|
|        |                              |  |  |  
2007

$

566,000

 
2008

562,000

 
2009

549,000

 
2010

539,000

 
2011

419,000

 
$

2,635,000

6.              Debt

Bank Lines of Credit

In connection with the acquisition of GSI, theCompany has a $1,000,000 revolving line of credit (the "Line") with afinancial institution and used the proceeds to fund a required payment of$840,000 pursuant to the Settlement Agreements with dissenting shareholders ofGSI.  The Line matures on September 12, 2007.  Interest on outstandingborrowings is payable monthly at a rate equal to the prime rate (8% per annumas of December 31, 2006 and subject to adjustment).  The line is collateralizedby the assets of GSI and guaranteed by four shareholders of the Company whowere formerly shareholders of GSI.   As of December 31, 2006, no principalpayments have been made against outstanding borrowings of $840,000 and the Companywas in compliance with all loan covenants.

Effective September 30, 2006, VillageEDOCSobtained a $500,000 revolving line of credit ("RLOC") with a financialinstitution.  The RLOC is guaranteed by a shareholder of the Company.  Intereston outstanding borrowings is payable monthly at an annual rate of interestequal to LIBOR plus 2%.  As of December 31, 2006, the Company had not utilized theRLOC and was in compliance with all loan covenants,

Effective November 28, 2005, TBS renewed a$100,000 revolving line of credit ("TBS RLOC)" with a financial institution. The TBS RLOC is guaranteed by the assets of TBS.   Interest on outstandingborrowings is payable monthly at a variable annual rate equal to the financialinstitution's prime rate in effect.  As of December 31, 2006, the Company hadnot utilized the TBS RLOC and was in compliance with all loan covenants.

C. Alan and Joan P. Williams

On February 17, 2004, the Company borrowed$1,700,000 from C. Alan and Joan P. Williams, a related party, and issued aconvertible promissory note, bearing interest at 10 percent per annum.  Thenote and accrued interest are due at the earlier of one of three events: 1)October 31, 2007; 2) acquisition of a controlling interest in the Company by athird party; or 3) the Company achieves equity financing of a minimum of$3,000,000.  Effective April 14, 2005, pursuant to an amendment to the note,the conversion price was fixed at $0.14 per share.  As an incentive for Mr. andMrs. Williams to provide the loan, the Company issued them a warrant topurchase 5,000,000 shares of the Company's restricted common stock at $0.10 pershare exercisable until February 17, 2009.  In connection with the issuance ofthe note, the Company recorded a debt discount of $730,000, consisting of anembedded put option of $280,000 and the fair value of the warrant of $450,000,which were recorded as derivative liabilities upon note issuance andsubsequently reclassified to additional paid-in capital (see Note 3).  TheCompany is amortizing the discount using the effective interest method throughOctober 31, 2007.

On February 10, 2005, the Company receivednotice from Mr. and Mrs. Williams of their intent to convert $3,682,609 in previouslyissued convertible secured promissory notes payable and accrued interestthereon to 40,332,669 shares of the Company's restricted common stock.  Per theterms of the convertible secured promissory notes, the conversion price withrespect to $1,939,652 in principal and interest was $0.07 per share.  The conversionprice with respect to $853,091 in principal and interest was $0.1275 per commonshare, which was eighty-five percent of the average of the Company's commonstock closing bid price on the Over-The-Counter Bulletin Board for the tenconsecutive trading days prior to February 10, 2005.  The conversion price withrespect to $889,866 in principal and interest was $0.15 per share, which wasthe average of the Company's common stock closing bid price on theOver-The-Counter Bulletin Board for the ten consecutive trading days prior toFebruary 10, 2005.

On June 30, 2005, the Company accepted noticesfrom a group of 18 holders of an aggregate of $715,000 in convertible securedpromissory notes payable (the "Note Holders") of their intent to convert theentire amount of outstanding principal on their notes to an aggregate of7,150,000 shares of VillageEDOCS' restricted common stock at $0.10 per share. The shares were issued on June 30, 2005.  The Note Holders had previouslypurchased their notes from Mr. and Mrs. Williams during June 2005.  The Companyand the Note Holders subsequently executed agreements to amend the terms of thenotes to reduce the conversion price to $0.10 per share from $0.14 per sharesubject to the notes being converted to common stock within 30 days of the dateof the amendment.  The amendment to the conversion price was recorded as aninducement, and accordingly, the Company recorded additional interest expenseof $333,858 at the time of conversion.  In addition, in connection with the repricing,the Company recorded additional debt discount of $87,190 related to BCF, whichwas immediately recorded as interest expense upon conversion.

On June 30, 2005, in connection with theconversion of the notes, the Company issued an aggregate of 500,010 shares ofits restricted common stock to five individuals as finders' fees.  The 500,010shares were valued at $0.15 per share (fair value on date of issuance) and recordedas interest expense during 2005.

On September 30, 2005, the Company accepted noticesfrom a group of seven holders of an aggregate of $220,000 in convertiblesecured promissory notes payable of their intent to convert the entire amountof outstanding principal on their notes to an aggregate of 2,200,000 shares ofVillageEDOCS' restricted common stock at $0.10 per share.   The shares wereissued on September 30, 2005.  The note holders had previously purchased theirnotes from Mr. and Mrs. Williams during August and September 2005.  The Companyand the note holders subsequently executed agreements to amend the terms of thenotes to reduce the conversion price to $0.10 per share from $0.14 per sharesubject to the notes being converted to common stock within 30 days of the dateof the amendment.  The amendment to the conversion price was recorded as aninducement, and accordingly, the Company recorded additional interest expenseof $100,714 at the time of conversion.  In addition, in connection with therepricing, the Company recorded additional debt discount of $45,548 related toBCF, which was immediately recorded as interest expense upon conversion.

On September 30, 2005, in connection with theconversion of the notes, the Company issued an aggregate of 148,336 shares ofits restricted common stock to five individuals as finder's fees.  The 148,336shares were valued at $0.14 per share (fair value on date of issuance) and recordedas interest expense during 2005.

During 2006 and 2005, $14,676 and $1,844,770,respectively, of interest expense was recognized in connection with the amortizationof debt discount related to the notes originally held by the Williams.

Pursuant to the terms of the original notes heldby the Williams, the shares of common stock underlying the notes were subjectto piggyback registration rights.  The registration rights were transferred tothe note nolders along with the conversion right when they purchased the notesfrom the Williams.

At December 31, 2006, the amount owed by theCompany to Mr. and Mrs. Williams pursuant to the unpaid balance of theconvertible promissory note payable was $65,000 in principal and $100,370 inunpaid interest and are included in convertible notes payable and accruedinterest payable to related parties in the accompanying consolidated balancesheet.

Barron Partners, LP

On April 13, 2005, the Company issued aconvertible note payable to Barron Partners, LP ("Barron") in theprincipal amount of $800,000 (the "Convertible Note") which wasconverted into 16,000,000 shares of the Company's Series A preferred stock onSeptember 30, 2005.

In connection with the Convertible Note, theCompany issued Barron a warrant ("Warrant A") to purchase up to32,000,000 shares of its common stock at $0.10 per share (subject toadjustment, as defined).  Pursuant to the warrant agreement, the holder has theright to purchase preferred shares of the Company for a limited time, asdefined.  In addition, the Company issued Barron a warrant ("WarrantB") to purchase up to 8,000,000 shares of its common stock at $0.25 pershare (subject to adjustment, as defined).  Warrants A and B vested upon grantand are exercisable through April 2010.  The warrants contain certain cashlessexercise and anti-dilution provisions, as defined.

In connection with the issuance of theConvertible Note, the Company recorded a debt discount of $800,000 and interestexpense of $5,600,000 (based on accounting treatment proscribed under EITF00-19 - see Note 3), related to the fair value of the warrants of $6,400,000. The Company amortized the discount using the effective interest method throughSeptember 2005, at which time the Convertible Note was converted into16,000,000 shares of Series A Preferred Stock (see Note 7).  During the ninemonths ended September 30, 2005, the Company amortized the entire amount of thedebt discount and charged $800,000 to interest expense.

The Company and Barron entered into aRegistration Rights Agreement pursuant to which the Company agreed to prepareand file with the Securities and Exchange Commission a registration statementcovering the resale of the securities underlying the convertible promissorynote and the warrants within 60 days of April 13, 2005.  The Company satisfiedthat requirement by filing a registration statement on Form SB-2 on June 13,2005.  The registration statement, as amended, was declared effective by theU.S. Securities and Exchange Commission on August 10, 2005.

The Convertible Note and Warrants A and Binclude provisions prohibiting the holder from converting the Convertible Noteor exercising a warrant if, after such conversion or exercise, the holder andits affiliates would beneficially own more than 4.99% of the outstanding sharesof Company's common stock.  This restriction (a) may be revoked upon sixty-one(61) days prior notice from the holder to the Company and (b) shall not applyin the event of a sale by the Company of substantially all of its assets, or amerger involving the Company or an underwritten public offering of theCompany's common stock.

On November 17, 2006, the Company and Barronentered into a Warrant Exchange Agreement (the "Exchange Agreement").  Pursuantto the Exchange Agreement, Barron agreed to cancel Warrants A and B to theCompany.  In consideration for the cancellation of the foregoing warrants, theCompany issued 22,500,000 shares of its Series A Preferred Stock to Barron. Preferred Stock is convertible at the option of the holder into common stock ona one-for-one basis.  No gain or loss was recorded as a result of the ExchangeAgreement.  Pursuant to the Exchange Agreement, the Company granted Barroncertain registration rights (see Note 7).

James Townsend

On June 3, 2005, James Townsend, a holder of$779,736 in convertible secured promissory notes payable and accrued interestthereon, exercised the right to convert the entire amount of outstandingprincipal and interest on his notes to 7,797,361 shares of VillageEDOCS'restricted common stock at a price of $0.10 per share. 

Zant Trust

On September 1, 2001, GSI executed and delivereda note payable to a related party in the principal amount of $500,000, whichmatured in September 2006, as amended.  The note bore interest at 10% perannum, was secured by the assets of GSI, and was paid in full during 2006.

James L. Campbell and Stephen A. Garner

In connection with the acquisition of TBS, theCompany issued a $300,000 convertible promissory note to Stephen A. Garner anda $300,000 convertible promissory note to James L. Campbell (the "TBSNotes").  Messrs. Campbell and Garner are employees of TBS.  Each of theTBS Notes bore interest at 5 percent per annum and was due and payable in threeequal annual installments of $100,000, with the first installment paid inFebruary 2005, the second installment paid in March 2006 and the finalinstallment paid in February 2007.  The TBS Notes were secured by a StockPledge Agreement and a Security Agreement.  In addition, Messrs. Garner andCampbell had the right to convert the balance of unpaid principal and interestof the TBS Notes into shares of the Company's common stock at the rate of 9.8shares of common stock for each $1.00 of principal and interest to beconverted.  As of December 31, 2006, the outstanding principal balance on theTBS Notes was $200,000.

Alexander Riess and William Falcon

In connection with the acquisition ofResolutions, the Company issued promissory notes in the amount of $120,000 and$80,000 to Alexander Riess and William Falcon, respectively.  Messrs. Riess andFalcon are employees of Resolutions.  The notes bore interest at 5% per annumand were paid in full in February 2006.

Also in connection with the acquisition ofResolutions, Messrs. Riess and Falcon loaned the Company $60,000 and $40,000,respectively, through February 28, 2006.  The notes bore interest at 7.5% perannum and were paid in full as of December 31, 2006.

In addition, $30,000 in related notes payable toMessrs. Riess and Falcon were assumed in the acquisition of Resolutions.  Thenotes were non-interest bearing. No principal payments had been made on thesenotes as of December 31, 2006.  The notes were paid in full as of March 1, 2007in accordance with the acquisition agreement.

Interest Expense

Interest expense recognized on the Line and allthe notes payable and convertible notes payable to related parties was $111,652and $8,095,067 during 2006 and 2005, respectively.  Interest expense during2006 included non-cash charges of $14,676 related to amortization of debtdiscount.  Interest expense during 2005 included non-cash charges of $7,444,770related to the amortization of debt discount, $434,572 related to an inducementfor the conversion of convertible notes payable, and $85,000 related toamortization of debt issue costs.  

Theaggregate amount of $1,135,000 in principal outstanding as of December 31, 2006pursuant to the above debt agreements is due and payable during 2007.

7.              Stockholders'Equity (Deficit)

a.       Preferred Stock

On May 20, 2005, stockholders holding sharesrepresenting 74% of the votes entitled to be cast at a meeting of the Company'sstockholders consented in writing to a proposal to amend the Company's articlesof incorporation to create and establish a series of preferred stock of theCompany in connection with a private placement of the Company's $800,000convertible promissory note. The amendment authorized 48,000,000 shares of SeriesA Convertible Preferred Stock, par value $0.001 ("Series A PreferredStock").  Each share of Series A Preferred Stock shall be convertible intoone share of Common Stock.  Series A Preferred Stock will be immediatelyconvertible into common stock, however, the Company is prohibited fromeffecting any conversion of the Series A Preferred Stock, and the holder shallnot have the right to convert any portion of the Series A Preferred Stock, tothe extent that after giving effect to such conversion, the holder (togetherwith the holder's affiliates) would beneficially own in excess of 4.99% of thenumber of shares of common stock outstanding immediately after giving effect tothe conversion.  The foregoing restriction may be waived (a) uponsixty-one days prior notice from the holder to the Company and (b) shall notapply in the event of a sale of substantially all of the assets or securitiesof the Company, a merger involving the corporation or an underwritten publicoffering of the Company's common stock.  No dividends shall be payable withrespect to the Series A Preferred Stock.  The Series A Preferred Stock shallhave no voting rights, except with respect to changes in the powers,preferences or rights of the Preferred Stock.   The liquidation preference ofthe Series A Preferred Stock is equal to $0.05 per share (the "LiquidationValue").  Upon liquidation of the Company, holders of Series A PreferredShares will be paid the Liquidation Value prior to distribution of any amountsto holders of our common stock.  

On September 30, 2005, the Company accepted anotice from Barron Partners, LP of its intent to convert the entire amount ofan $800,000 convertible promissory note to 16,000,000 shares of the Company'sSeries A Preferred Stock at $0.05 per share.  The shares were issued onSeptember 30, 2005.

On October 21, 2005, the Company accepted anotice from Barron Partners, LP of its intent to convert 2,500,000 shares ofthe Company's Series A Preferred Stock into 2,500,000 shares of the Company'scommon stock.  The shares of common stock were issued on October 24, 2005.

On March 8, 2006, the Company accepted a noticefrom Barron Partners, LP of its intent to convert an additional 2,500,000shares of the Company's Series A Preferred Stock into 2,500,000 shares of theCompany's common stock.  The shares of common stock were issued on March 8,2006.

On November 17, 2006, the Company and Barronentered into a Warrant Exchange Agreement (the "Exchange Agreement").  Pursuantto the Exchange Agreement, Barron agreed to cancel Warrants A and B (see Note6).  In consideration for the cancellation of the foregoing warrants, theCompany issued 22,500,000 shares of its Series A Preferred Stock to Barron.  Nogain or loss was recorded as a result of the Exchange Agreement.  Pursuant tothe Exchange Agreement, the Company agreed to file a registration statement onor before December 7, 2006 with respect to the common stock underlying thePreferred Stock.  The Company satisfied that requirement by filing aregistration statement on Form SB-2 on December 7, 2006.  The registrationstatement was declared effective by the U.S. Securities and Exchange Commissionon December 27, 2006.

b.       Common Stock 

On May 20, 2005, stockholders holding sharesrepresenting 74% of the votes entitled to be cast at a meeting of the Company'sstockholders consented in writing to a proposal to amend the Company's articlesof incorporation to increase the number of authorized shares of the Company'scommon stock from 175,000,000 to 250,000,000, no stated par value per share.

On January 9, 2006, the Company filed aCertificate of Amendment of Articles of Incorporation with the Secretary ofState of the State of California in order to increase the authorized number ofshares of common stock of the Company from 250,000,000 to 400,000,000. Theshareholders holding shares representing 70% of the votes entitled to be castat a meeting of the Company's stockholders consented in writing to the proposedactions.  The Company's Board of Directors approved these actions onDecember 6, 2005 and recommended that the Articles of Incorporation and theIncentive Plan be amended to reflect the above action.  The Secretary ofState accepted the Certificate of Amendment on January 19, 2006 with aneffective date of January 9, 2006.

During 2005 and in connection with theconversion of $5,397,345 in principal and accrued interest on securedpromissory notes, the Company issued an aggregate of 57,480,030 shares of itsrestricted common stock (see Note 6).

During 2005 and in connection with theconversion of certain notes payable, the Company issued an aggregate of 648,346shares of its common stock as finders' fees.  The shares were valued based ontheir respective dates of grant and were recorded as additional interest expensein the accompanying statement of operations (see Note 6).

During February 2005 and in connection with theacquisition of TBS, the Company agreed to issue 1,100,000 shares of itsrestricted common stock to each of James L. Campbell and Stephen A. Garner,pursuant to the acquisition agreement.  The shares were valued at $0.14 pershare (the estimated fair value on the date that the shares were earned) andrecorded as additional consideration of the purchase.  

During February 2005 and in connection with theacquisition of TBS, the Company agreed to issue 66,000 shares of its restrictedcommon stock to H. Jay Hill, who is an officer and director of the Company, asa finder's fee.  The shares were valued at $0.14 per share (the estimated fairvalue on the date that the shares were earned) and recorded as compensationexpense in the accompanying statement of operations.  

During February 2005 and in connection with theacquisition of TBS, the Company agreed to issue 110,000 shares of itsrestricted common stock to a non-affiliate pursuant to a finder's feeagreement.  The shares were valued at $0.14 per share (the estimated fair valueon the date that the shares were earned) and recorded as additionalconsideration of the purchase.  

On April 15, 2005 and in connection with theacquisition of Resolutions, the Company agreed to issue 76,606 shares ofrestricted common stock to K. Mason Conner, its Chief Executive Officer and adirector, as a finder's fee.  The shares were valued at $12,257 (estimated fairvalue based on the closing price of the Company's common stock on the dateearned) and recorded as compensation expense in the accompanying statement ofoperations.

On June 30, 2005, the Company issued 50,000shares of common stock to a consultant for services.  The shares were valued at$0.15 per share (fair value on date of issuance) and the Company recorded$7,500 of consulting expense in accordance with the nature of the servicesprovided.

On May 1, 2006 and in connection with theacquisition of GSI, the Company issued 42,663,879 shares of its restrictedcommon stock to approximately 37 shareholders of GSI (see Note 5).  The shareswere valued at $0.10 per share (the estimated fair value on the date ofacquisition).

On May 1, 2006 and in connection with theacquisition of TBS, the Company issued 1,100,000 shares of its restrictedcommon stock to each of James L. Campbell and Stephen A. Garner, pursuant tothe acquisition agreement.  The shares were valued at $0.11 per share (theestimated fair value on the date that the shares were earned) and recorded asadditional purchase price.

On June 29, 2006 and in connection with theacquisition of TBS, the Company issued 66,000 shares of its restricted commonstock to H. Jay Hill, who is an officer and director of the Company, as afinder's fee.  The shares were valued at $0.11 per share (the estimated fairvalue on the date that the shares were earned) and recorded as compensationexpense in the accompanying statement of operations.

On June 29, 2006 and in connection with theacquisition of TBS, the Company issued 110,000 shares of its restricted commonstock to a non-affiliate pursuant to a finder's fee agreement.  The shares werevalued at $0.11 per share (the estimated fair value on the date that the shareswere earned) and recorded as additional purchase price.

On June 29, 2006, the Company issued 160,722shares of its restricted common stock to a non-affiliate independent contractorfor project management services rendered.  The shares were valued at $0.14 pershare (the estimated fair value on the date of issuance) and recorded asconsulting expense in the accompanying statement of operations.

On October 31, 2006, the Company issued anaggregate of 500,000 shares of its restricted common stock to a consultant inconnection with a placement agency agreement.  The 500,000 shares were valuedat $0.09 per share (fair value on date of issuance) and the Company recorded$45,000 of consulting expense in the accompanying consolidated statement ofoperations in accordance with the nature of the services provided.

c.      Stock Options

TheCompany has adopted an equity incentive plan (the "2002 Plan") that authorizesthe issuance of options to acquire up to 60,000,000 shares of common stock, asamended, to employees and certain outside consultants.   The 2002 Plan allowsfor the issuance of either non-qualified or, subject to stockholder approval,incentive stock options pursuant to Section 422 of the Internal Revenue Code.Options vest at the discretion of the Board of Directors as determined at thegrant date, but not longer than a ten-year term.  Under the 2002 Plan, theexercise price of each option shall not be less than fair market value on thedate the option is granted.  The number of options under the 2002 Plan availablefor grant at December 31, 2006, and 2005 was 23,788,645 and 35,725,532,respectively.

During 1997, the Board of Directors of theCompany adopted a stock option plan (the "1997 Plan") that authorizes theissuance of options to acquire up to 5,000,000 shares of common stock toemployees and certain outside consultants.  The 1997 Plan allows for theissuance of either non-qualified or incentive stock options pursuant to Section422 of the Internal Revenue Code. Options vest at the discretion of the Boardof Directors as determined at the grant date, but not longer than a ten-yearterm.  Under the 1997 Plan, the exercise price of each option shall not be lessthan 85 percent of fair market value on the date the option is granted.  Thenumber of options under the 1997 Plan available for grant at December 31, 2006and 2005 was 2,239,798 and 2,089,798, respectively.

During2006, the Company granted to its employees options to purchase shares of itscommon stock under the 2002 Plan as follows:  13,520,000 shares at $0.15 pershare, 500,000 shares at $0.16 per share, and 100,000 shares at $0.18 pershare.   All options were issued above or at the fair market value on the datesof grant and vest on various dates from the date of grant through December 2011(see Note 3).

During 2006, 2,183,113 options under the 2002Plan and 150,000 other options were cancelled due to their expiration or thetermination of employment. 

During2005, the Company granted to its employees options to purchase shares of itscommon stock under the 2002 Plan as follows:  4,250,000 shares at $0.16 pershare, 3,906,000 shares at $0.18 per share, and 100,000 shares at $0.1875 pershare.   All options were issued above or at the fair market value on the datesof grant and vest on various dates from the date of grant through October 2010.

During 2005, 1,165,000 options under the 2002Plan were cancelled due to their expiration or the termination of employment. 

Stock option activity for the years endedDecember 31, 2006 and 2005 is as follows:

Weighted Average

Number

Exercise Price

of Options

Per Share

Outstanding at January 1, 2005

20,093,670 

 $

0.37 

Granted

8,256,000 

0.17 

Exercised

- 

- 

Canceled

(1,165,000)

0.18 

Outstanding at December 31, 2005

27,184,670 

0.22 

Granted

14,120,000 

0.15 

Exercised

- 

- 

Canceled

(2,333,113)

0.28 

Outstanding at December 31, 2006

38,971,557 

 $

0.19 

Exercisable at  December 31, 2006

22,419,108 

 $

0.26 

Weighted average fair value of options granted

2005 

 $

0.17 

2006 

 $

0.14 

The following summarizes information about optionsoutstanding at December 31, 2006:

Options Outstanding

Options Exercisable

Weighted

Average

Weighted

Weighted

Range of

Number of

Remaining

Average

Number of

Average

Exercise

Shares

Contractual

Exercise

Shares

Exercise

Prices

Outstanding

Life (Years)

Price

Exercisable

Price

$0.10 - $0.25

38,111,398 

4.1

$  0.17 

21,558,949 

$   0.17  

$1.00

 50,000 

2.1

 1.00 

 50,000 

 1.00 

$2.50

 810,159 

3.5

 2.50 

 810,159 

 2.50 

38,971,557 

$  0.19 

22,419,108 

$   0.26  

d.   Warrants

From time to time, the Company issues warrantspursuant to various consulting and third party agreements.  

In connection with the Convertible Note (seeNote 6), the Company issued Barron a warrant ("Warrant A") topurchase up to 32,000,000 shares of its common stock at $0.10 per share(subject to adjustment, as defined).  Pursuant to the warrant agreement, theholder had the right to purchase shares of the Company's preferred stock for alimited time, as defined.  In addition, the Company issued Barron a warrant("Warrant B") to purchase up to 8,000,000 shares of its common stockat $0.25 per share (subject to adjustment, as defined) (see Note 6).  Thewarrants were valued using the Black-Scholes option pricing model and werevalued at $6,400,000.  Warrants A and B vested upon grant and were exercisablethrough April 2010.  The warrants contained certain cashless exercise andanti-dilution provisions, as defined.  On November 17, 2006, the Company andBarron entered into a warrant exchange agreement (see Note 7).

The Company and Barron entered into aRegistration Rights Agreement pursuant to which the Company agreed to prepareand file with the Securities and Exchange Commission a registration statementcovering the resale of the securities underlying the convertible promissorynote and the warrants within 60 days of April 13, 2005.  The Company satisfiedthat requirement by filing a registration statement on Form SB-2 on June 13,2005.  The registration statement, as amended, was declared effective by theU.S. Securities and Exchange Commission on August 10, 2005.

On April 15, 2005 and in connection with theacquisition of PFI, the Company issued warrants to purchase an aggregate of10,000,000 shares of VillageEDOCS' common stock at $0.15 per share.  Thewarrants were valued at $2,100,000 (estimated based on the Black-Scholes optionpricing model) and included as consideration in the purchase price, and willvest at various amounts during the third, twelfth, twenty-fourth, andthirty-sixth months following the date of closing.

On April 15, 2005 and in connection with theacquisition of PFI, the Company agreed to issue warrants to purchase anaggregate of 200,000 and 350,000 shares of VillageEDOCS' common stock at $0.15per share to K. Mason Conner and H. Jay Hill, respectively, as a finder's fee. Messrs. Conner and Hill are directors and executive officers of the Company. The warrants were valued at $105,000 (based on the Black-Scholes option pricingmodel) and recorded against additional paid in capital based on the nature ofthe employee stock-based compensation.

The following represents a summary of thewarrants outstanding for the years ended December 31, 2006 and2005:

Weighted Average

Number

Exercise Price

of Warrants

Per Share

Outstanding  at January 1, 2005

5,016,000 

 $

0.10 

Granted

50,550,000 

0.13 

Exercised

-  

- 

Expired/Forfeited

-  

- 

Balance  at December 31, 2005

55,566,000 

 $

0.13 

Granted

-   

- 

Exercised

-   

- 

Expired/Forfeited

(40,000,000) 

0.13 

Balance  at December 31, 2006

15,566,000 

 $

0.13 

Weighted  average fair value of warrants granted in 2005:

 $

0.09 

The following summarizes information aboutwarrants outstanding at December 31, 2006:

Warrants Outstanding and Exercisable

Weighted

Average

Weighted 

Number of 

Remaining

Average

Exercise

Shares

Contractual

Exercise

Price

Outstanding

Life (Years)

Price

$0.10  

5,000,000 

3.1

$    0.10 

$0.15

10,550,000

8.3

$    0.15

$0.18  

16,000 

3.3

$    0.18 

15,566,000

$   0.13 

8.              IncomeTaxes

AtDecember 31, 2006, the Company had approximately $24,376,000 and $22,173,000,respectively, of federal and state net operating loss carryforwards for taxreporting purposes available to offset future taxable income; federal and statenet operating loss carryforwards expire through 2025 and 2012, respectively.Under the Tax Reform Act of 1986, the amounts of and benefits from netoperating losses carried forward may be impaired or limited in certaincircumstances. Events which may cause limitations in the amount of netoperating losses that the Company may utilize in any one year include, but arenot limited to, a cumulative ownership change of more than 50 percent over athree-year period. At December 31, 2006, the effect of such limitation, ifimposed, has not been determined.

Pursuantto Internal Revenue Code Sections 382 and 383, the use of the Company's netoperating loss and credit carryforwards may be limited if a cumulative changein ownership of more than 50% occurs within a three-year period.  The annuallimitation may result in the expiration of net operating losses and creditsbefore utilization.

Deferredtax assets consist primarily of the tax effect of net operating losscarryforwards. The Company has provided a full valuation allowance on thedeferred tax assets because of the uncertainty regarding realizability.  Thevaluation allowance increased approximately $497,000 and $3,029,000 during theyears ended December 31, 2006 and 2005, respectively.

Deferredtax assets consist of the following at December 31, 2006:

                                                                                            

Deferred  tax assets:

Net  operating loss carryforwards

 $

9,362,000 

Purchased  intangibles

(1,283,000)

Other

180,000 

Less  valuation allowance

(8,259,000)

---------------- 

 $

- 

 =========

Areconciliation of income taxes computed at the federal statutory rate of 34% tothe provision for income taxes is as follows for the years ended December 31:

2006 

2005 

---------------

---------------

Computed  benefit at federal statutory rate

$

(295,000)

 $

(2,754,000)

State  income tax benefit, net of federal effect

(10,000) 

(473,000)

Increase  in valuation allowance

497,000  

3,029,000 

Other

(177,995)

242,054 

---------------- 

---------------- 

 $

14,005  

 $

44,054 

=========

=========

9.              Lossper Share

 

Basicand diluted loss per common share is computed as follows for the years endedDecember 31:

 
2006

2005

 
--------------

--------------

 
Numerator  for basic and diluted loss per common share:

 
Net  loss available to common stockholders

 $

(882,132)

 $

(8,144,928)

 
=========

=========

 
 
Denominator  for basic and diluted loss per common share:

 
 
Weighted  average common shares outstanding

131,185,095 

82,728,108 

 
========

=========

 
Basic  and diluted loss available to common stockholders 

 
per common share

 $

(0.01)

 $

(0.10)

========

=========

 
10.           Commitmentsand Contingencies

a.      Leases

The Company leases certain property andequipment under operating lease agreements (including related party leases -see Note 11) which expire on various dates through 2011 and provide for monthlylease payments ranging from $28 to $12,653. 

The Company also leases equipment under acapital lease agreement which expires in August 2007 and provides for a monthlylease payment of $1,019.

Future annual minimum payments under noncancelableoperating leases is as follows:

Operating Leases

Related Party

Other

Total    

2007

$   231,000 

 $    225,000  

$    456,000 

2008

238,000 

132,000 

370,000 

2009

177,000 

116,000 

293,000 

2010

179,000 

4,000 

183,000 

2011

57,000 

 4,000

61,000 

Total

$   882,000 

$   481,000  

$ 1,363,000 

** **

Rent expense for the years ended December 31, 2006and 2005 was $371,049 (including $175,624 of related party rent) and $242,142 (including$74,400 of related party rent), respectively.

b.     Litigation

The Company is, from time to time, involved invarious legal and other proceedings which arise in the ordinary course ofoperating its business. 

In connection with our acquisition of GSI, weare entitled to certain rights of indemnification from GoSolutions Equity, LLC,which is a former shareholder of GSI that became a shareholder of the Companyas a result of our acquisition of GSI.  We have made a claim of indemnificationfrom this entity in connection with the bankruptcy of one of GSI's significantcustomers - Vartec Telecom, Inc. - and the facts and circumstances relating tothe procurement and maintenance of the Primerica Life Insurance account andrelated Citigroup affiliates.  GoSolutions Equity, LLC has indicated that itdoes not believe that we have a valid basis for making such indemnificationclaims.

We have not engaged in meaningful discussionswith GoSolutions Equity, LLC as it relates to our indemnification claims noticeand their response to such claims notice.  Accordingly, we are unable to advisewhether we will be successful in our indemnification claims against GoSolutionsEquity, LLC.  Pursuant to our agreement with GSI, if we are successful,GoSolutions Equity, LLC would only be required to return up to approximately4.4 million of our shares issued to that entity to satisfy such indemnificationclaims.  GoSolutions Equity, LLC is not required to contribute cash to satisfyany indemnification claims.

In March 2007, GSI was served by the Trustee forVartec Telecom, Inc. in the United States Bankruptcy Court for the NorthernDistrict of Texas, Dallas Division, Case No. 04-81694-hdh-7.  The complaint seeksrecovery of approximately $400,000 for alleged preferential transfers made in2004.  VillageEDOCS and GSI intend to vigorously defend in an attempt to settlethis case.  The Company has been advised that the maximum potential loss shouldbe approximately $150,000; however, based on the early stage of this case, itis difficult to evaluate the merits of the claim and too early to predict withany certainty the ultimate outcome of this case.

In the opinion of management, the amount ofultimate liability, if any, with respect to these actions will not materiallyaffect the consolidated financial position or results of operations of theCompany.****

c.      Consulting and EmployeeAgreements

The Company has entered into a variety ofconsulting and employee agreements for services to be provided to the Companyin the ordinary course of business.  These agreements call for minimum salarylevels and/or option grants and/or common share issuances and various paymentsupon performance of services and/or termination of the agreements (except forcause).

d.     Indemnities andGuarantees

During the normal course of business, theCompany has made certain indemnities and guarantees under which it may berequired to make payments in relation to certain transactions.  The Company indemnifiesits directors, officers, employees and agents to the maximum extent permittedunder the laws of the States of California, Florida, and Georgia.  These indemnities include certain agreements with the Company's officers under which theCompany may be required to indemnify such person for liabilities arising out oftheir employment relationship.  In connection with its facility leases, theCompany has indemnified its lessors for certain claims arising from the use ofthe facilities.  In connection with the Company's acquisition of TBS, theparties have agreed to indemnify each other from claims relating to theacquisition agreement to a maximum of $1,500,000 except in the event of fraud,willful misconduct, or breaches of certain representations and warrantiescontained in the agreement.  In connection with the Company's acquisitions ofResolutions and GSI, the parties have agreed to indemnify each other fromclaims relating to the acquisition agreement.  The duration of theseindemnities and guarantees varies and, in certain cases, is indefinite.  Themajority of these indemnities and guarantees do not provide for any limitationof the maximum potential future payments the Company could be obligated tomake.  Historically, the Company has not been obligated to make significantpayments for these obligations and no liabilities have been recorded for theseindemnities and guarantees in the accompanying consolidated balance sheet.

11.           RelatedParty Transactions

TheCompany has borrowed significantly from related parties, issued a significantnumber of options and warrants to related parties, and issued a significantnumber of shares of its common stock to related parties upon conversion ofconvertible promissory notes payable as described more fully in Notes 6 and 7. 

TBShas a related party operating lease with Perimeter Center Partners for therental of the land and building occupied by TBS.  The lease commenced onFebruary 1, 2004 and has a term of five years, with monthly payments of$6,200.  The Company has executed a Guaranty with respect to the lease.  Perimeter Center Partners is owned by Stephen A. Garner and James L. Campbell, who aresignificant employees of the Company and the former owners of TBS.

GSIleases the St. Petersburg office space pursuant to a noncancelable operatinglease agreement expiring in April 30, 2011 at a cost of $12,653, $13,232,$13,841, $14,485, and $15,164 per month for each of the twelve month periodsended April 2007, 2008, 2009, 2010, and 2011, respectively.    The building inwhich the office space is located is owned by an entity in which a member ofGoSolutions Equity, LLC (a related party) owns an interest.  
12.           SegmentReporting
TheCompany's operations are classified into five principal reportable segmentsthat provide different products or services.  Separate management of eachsegment is required because each business unit is subject to differentmarketing, production, and technology strategies.  The Companyoperates in the following five reportable segments: 

(a)  Electronicdocument delivery services(b)  Government accounting solutions,(c)  Electronic forms,(d)  Integratedcommunications, and(e)  Corporate.

TheCompany evaluates performance and allocates resources based upon operatingincome.  The accounting policies of the reportable segments are the same asthose described in the summary of accounting policies.  Inter-segment sales areeliminated upon consolidation.

Thefollowing table summarizes segment asset and operating balances by reportablesegment, has been prepared in accordance with the internal accounting policies,and may not be presented in accordance with accounting principles generallyaccepted in the United States of America:
 
 

** **

**Years**

** **

**Years**

** **

**Ended /**

** **

**Ended/**

(1)

** **

**As of**

** **

**As of**

** **

**December 31,**

** **

**December 31,**

** **

**2006**

** **

**2005**

(2)

Net revenue from external customers:

Electronic document delivery

$      2,890,640  

$     3,093,450  

Government accounting solutions

4,130,458 

3,779,211 

Electronic forms

2,170,077 

1,895,785 

Integrated communications

3,720,998 

 - 

Corporate

- 

 - 

Total net revenue from 

    external customers:

$    12,912,173  

$     8,768,446  

Operating income (loss):

Electronic document delivery

$ 764,687  

$     750,390  

Government accounting solutions

221,536  

 (936)

Electronic forms

84,608  

 409,593  

Integrated communications

291,027  

 - 

Corporate

(2,157,851)

 (1,033,861)

Total operating income  (loss):

$      (795,993)

$      125,186   

Depreciation and amortization:

Electronic document delivery

$          42,321  

$        37,431  

Government accounting solutions

120,773 

 148,746 

Electronic forms

138,619 

 106,890 

Integrated communications

404,464 

 - 

Corporate

32,327 

 - 

Total depreciation and  amortization:

$      738,504  

$      293,067  

Interest expense, net of interest income:

Electronic document delivery

$              31  

$             566  

Government accounting solutions

- 

1,120,703 

Electronic forms

6,447 

6,499,070 

Integrated communications

4,258 

 - 

Corporate

101,497 

 454,150 

Total interest expense,  net of interest income:

$     112,233  

$   8,074,489  

continued.

 

** **

**Years**

** **

**Years**

** **

**ended /**

** **

**Ended /**

(1)

** **

**As of**

** **

**As of**

** **

**December 31,**

** **

**December 31,**

** **

**2006**

** **

**2005**

(2)

Net income (loss):

Electronic document delivery

$        822,206   

$        778,923   

Government accounting solutions

223,236  

 (1,161,493)

Electronic forms

78,161  

 (6,076,850)

Integrated communications

278,305  

 - 

Corporate

(2,284,040)

 (1,685,508)

Total net loss:

$    (882,132)

$  (8,144,928)

Identifiable assets:

Electronic document delivery

$       686,491  

Government accounting solutions

3,540,368 

Electronic forms

3,827,220 

Integrated communications

3,954,965 

Corporate

3,145,757 

Total identifiable  assets:

$  15,154,801 

Capital expenditures:

Electronic document delivery

$         55,590  

$         13,575  

Government accounting solutions

13,211 

9,584 

Electronic forms

  15,809 

 32,981 

Integrated communications

48,690 

 - 

Corporate

- 

 - 

Total capital expenditures:

  $      134,889  

$        56,140  

(1) 2005 period results and balances for the  Electronic forms segment are reported as of and for the period 

   from April 1, 2005 (date of acquisition)  through December 31, 2005.

(2) 2006 period results and balances for the  Integrated communications segment are reported as of and for the 

   period from May 1, 2006 (date of  acquisition) through December 31, 2006.

13.           SubsequentEvent

OnFebruary 22, 2007, the Company issued 500,000 shares of its restricted commonstock to a consultant in connection with a placement agency agreement.  The500,000 shares were valued at $0.085 per share (fair value on date of issuance)and the Company recorded $42,500 of consulting expense in accordance with thenature of the services provided. |