Exhibit 99.1

VILLAGEEDOCS, INC.

Financial
Statements 
For the Years Ended December 31, 2008 and 2007 
Together with Report of Independent Registered Public Accounting Firm

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board
of Directors of VillageEDOCS, Inc.

We have
audited the accompanying consolidated balance sheets of VillageEDOCS, Inc. and
subsidiaries (the Company) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of VillageEDOCS, Inc.
and subsidiaries at December 31, 2008 and 2007, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred recurring losses from operations
and has a working capital deficit of $2,802,120. These factors raise
substantial doubt about the Companys ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be
unable to continue as a going concern.

/s/ KMJ Corbin
& Company LLP 
Costa Mesa, California 
March 31, 2009

F-2

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VillageEDOCS, Inc. and subsidiaries
Consolidated Balance Sheets

|                                                                                                                |  |                    |             |                    |   |             |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | ------------------ | - | ----------- | -
|                                                                                                                |  | December 31,
 2008 |             | December 31,
 2007 |  
|ASSETS                                                                                                          |  |                    |             |                    |   |             |  
|Current assets:                                                                                                 |  |                    |             |                    |   |             |  
|Cash and cash equivalents                                                                                       |  | $                  | 567,447     |                    | $ | 749,911     |  
|Accounts receivable, net of allowance for doubtful accounts of
 approximately $47,000 and $49,000, respectively |  |                    | 1,093,606   |                    |   | 899,117     |  
|Inventories                                                                                                     |  |                    | 41,031      |                    |   | 31,988      |  
|Prepaid expenses and other current assets                                                                       |  |                    | 282,397     |                    |   | 193,557     |  
|Debt issuance costs, net                                                                                        |  |                    | 17,883      |                    |   | -           |  
|Total current assets                                                                                            |  |                    | 2,002,364   |                    |   | 1,874,573   |  
|                                                                                                                |  |                    |             |                    |   |             |  
|Property and equipment, net                                                                                     |  |                    | 388,788     |                    |   | 379,192     |  
|Other assets                                                                                                    |  |                    | 28,811      |                    |   | 48,611      |  
|Goodwill                                                                                                        |  |                    | 7,244,732   |                    |   | 6,272,457   |  
|Other intangibles, net                                                                                          |  |                    | 3,826,728   |                    |   | 2,993,449   |  
|                                                                                                                |  | $                  | 13,491,423  |                    | $ | 11,568,282  |  
|                                                                                                                |  |                    |             |                    |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                            |  |                    |             |                    |   |             |  
|Current liabilities:                                                                                            |  |                    |             |                    |   |             |  
|Accounts payable                                                                                                |  | $                  | 514,086     |                    | $ | 561,845     |  
|Current portion of accrued expenses and other liabilities                                                       |  |                    | 1,736,419   |                    |   | 2,491,416   |  
|Deferred revenue                                                                                                |  |                    | 1,026,184   |                    |   | 425,636     |  
|Current portion of capital lease obligation, current                                                            |  |                    | 20,180      |                    |   | 19,008      |  
|Lines of credit                                                                                                 |  |                    | 890,563     |                    |   | 484,680     |  
|Current portion of notes payable to related parties, net of
 unamortized debt discount of $47,808               |  |                    | 438,682     |                    |   | -           |  
|Convertible note and accrued interest payable to related
party                                                  |  |                    | 178,370     |                    |   | 171,870     |  
|Total current liabilities                                                                                       |  |                    | 4,804,484   |                    |   | 4,154,455   |  
|                                                                                                                |  |                    |             |                    |   |             |  
|Accrued expenses and other liabilities, net of current portion                                                  |  |                    | 81,318      |                    |   | -           |  
|Capital lease obligation, net of current portion                                                                |  |                    | 1,737       |                    |   | 21,918      |  
|Notes payable to related parties, net of current portion and
 unamortized debt discount of $75,690              |  |                    | 604,310     |                    |   | -           |  
|Total liabilities                                                                                               |  |                    | 5,491,849   |                    |   | 4,176,373   |  
|                                                                                                                |  |                    |             |                    |   |             |  
|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      |                    |   | 33,500      |  
|(liquidation preference of $1,675,000)                                                                          |  |                    |             |                    |   |             |  
|Common stock, par value $0.0001 per share:                                                                      |  |                    |             |                    |   |             |  
|Authorized -- 500,000,000 shares                                                                                |  |                    |             |                    |   |             |  
|Issued and outstanding -- 180,270,913 and 152,770,913 shares,
 respectively                                     |  |                    | 18,027      |                    |   | 15,277      |  
|Additional paid-in capital                                                                                      |  |                    | 33,618,742  |                    |   | 32,397,585  |  
|Accumulated deficit                                                                                             |  |                    | (25,670,695 | )                  |   | (25,054,453 | )
|Total stockholders equity                                                                                      |  |                    | 7,999,574   |                    |   | 7,391,909   |  
|                                                                                                                |  | $                  | 13,491,423  |                    | $ | 11,568,282  |  
|                                                                                                                |  |                    |             |                    |   |             |  
|See accompanying notes to consolidated financial
statements.                                                    |  |                    |             |                    |   |             |  

F-3

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VillageEDOCS, Inc. and subsidiaries
Consolidated Statements of Operations

|                                                                             |  |                          |             |      |   |             |  
|---------------------------------------------------------------------------- |  | ------------------------ | ----------- | ---- | - | ----------- | -
|                                                                             |  | Years Ended December 31, |            
|                                                                             |  | 2008                     |             | 2007 |  
|Net sales                                                                    |  | $                        | 15,176,393  |      | $ | 14,180,658  |  
|Cost of sales                                                                |  |                          | 6,330,351   |      |   | 5,611,387   |  
|Gross profit                                                                 |  |                          | 8,846,042   |      |   | 8,569,271   |  
|Operating expenses:                                                          |  |                          |             |      |   |             |  
|Product and technology development                                           |  |                          | 1,674,921   |      |   | 1,724,724   |  
|Sales and marketing                                                          |  |                          | 1,976,806   |      |   | 1,975,315   |  
|General and administrative                                                   |  |                          | 4,814,569   |      |   | 5,758,493   |  
|Depreciation and amortization                                                |  |                          | 843,632     |      |   | 791,365     |  
|Total operating expenses                                                     |  |                          | 9,309,928   |      |   | 10,249,897  |  
|Loss from operations                                                         |  |                          | (463,886    | )    |   | (1,680,626  | )
|                                                                             |  |                          |             |      |   |             |  
|Interest expense, net of interest income                                     |  |                          | (281,905    | )    |   | (111,561    | )
|Other income, net                                                            |  |                          | 141,747     |      |   | 43,381      |  
|Loss before provision (benefit) for income taxes                             |  |                          | (604,044    | )    |   | (1,748,806  | )
|                                                                             |  |                          |             |      |   |             |  
|Provision (benefit) for income taxes                                         |  |                          | 12,198      |      |   | (89,000     | )
|Loss from continuing operations                                              |  |                          | (616,242    | )    |   | (1,659,806  | )
|                                                                             |  |                          |             |      |   |             |  
|Loss from discontinued operations (net of income tax provision of
 $485,000) |  |                          | -           |      |   | (1,625,424  | )
|Net loss                                                                     |  | $                        | (616,242    | )    | $ | (3,285,230  | )
|                                                                             |  |                          |             |      |   |             |  
|Basic and diluted loss available to common shareholders per common
 share:   |  |                          |             |      |   |             |  
|Loss from continuing operations                                              |  | $                        | -           |      | $ | (0.01       | )
|Loss from discontinued operations                                            |  | $                        | -           |      | $ | (0.01       | )
|Net loss per share                                                           |  | $                        | -           |      | $ | (0.02       | )
|                                                                             |  |                          |             |      |   |             |  
|Weighted average shares outstanding - basic and diluted                      |  |                          | 162,595,571 |      |   | 150,218,437 |  
|                                                                             |  |                          |             |      |   |             |  
|See accompanying notes to consolidated financial
statements.                 |  |                          |             |      |   |             |  

F-4

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VillageEDOCS and subsidiaries 
Statements of Stockholders Equity 
For the Years Ended December 31, 2008 and 2007

|                                                                                             |  |                            |            |               |   |            |  |             |             |                  |   |         |  |       |            |   |   |             |   |   |            |  
|-------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | ------------- | - | ---------- |  | ----------- | ----------- | ---------------- | - | ------- |  | ----- | ---------- | - | - | ----------- | - | - | ---------- | -
|                                                                                             |  | Series
 A
 Preferred Stock |            | Common
 Stock |   | Additional |  | Accumulated |             |                  |   |        
|                                                                                             |  | Shares                     |            | Amount        |   | Shares     |  | Amount      |             | Paid-in
 Capital |   | Deficit |  | Total |           
|Balances, January 1, 2007                                                                    |  |                            | 33,500,000 |               | $ | 33,500     |  |             | 147,368,127 |                  | $ | 14,737  |  | $     | 31,670,094 |   | $ | (21,769,223 | ) | $ | 9,949,108  |  
|                                                                                             |  |                            |            |               |   |            |  |             |             |                  |   |         |  |       |            |   |   |             |   |   |            |  
|Estimated fair value of common stock issued to employees as
 compensation                    |  |                            | -          |               |   | -          |  |             | 66,000      |                  |   | 6       |  |       | 2,634      |   |   | -           |   |   | 2,640      |  
|Estimated fair value of common stock issued as acquisition cost of
TBS                       |  |                            | -          |               |   | -          |  |             | 2,200,000   |                  |   | 220     |  |       | 87,780     |   |   | -           |   |   | 88,000     |  
|Estimated fair value of common stock issued as acquisition cost of
TBS                       |  |                            | -          |               |   | -          |  |             | 110,000     |                  |   | 11      |  |       | 4,389      |   |   | -           |   |   | 4,400      |  
|Estimated fair value of common stock issued in connection with
 consulting services          |  |                            | -          |               |   | -          |  |             | 1,026,786   |                  |   | 103     |  |       | 73,468     |   |   | -           |   |   | 73,571     |  
|Issuance of common stock in consideration for exercise of common stock
 warrrants            |  |                            | -          |               |   | -          |  |             | 2,000,000   |                  |   | 200     |  |       | 199,800    |   |   | -           |   |   | 200,000    |  
|Estimated fair value of common stock warrants issued in connection
 with consulting services |  |                            | -          |               |   | -          |  |             | -           |                  |   | -       |  |       | 33,332     |   |   | -           |   |   | 33,332     |  
|Estimated fair value of common stock warrants cancelled in disposition
 of PFI               |  |                            | -          |               |   | -          |  |             | -           |                  |   | -       |  |       | (553,000   | ) |   | -           |   |   | (553,000   | )
|Estimated fair value of vested stock options                                                 |  |                            | -          |               |   | -          |  |             | -           |                  |   | -       |  |       | 879,088    |   |   | -           |   |   | 879,088    |  
|Net loss                                                                                     |  |                            |            |               |   |            |  |             | -           |                  |   | -       |  |       | -          |   |   | (3,285,230  | ) |   | (3,285,230 | )
|                                                                                            
|Balances, December 31, 2007                                                                  |  |                            | 33,500,000 |               |   | 33,500     |  |             | 152,770,913 |                  |   | 15,277  |  |       | 32,397,585 |   |   | (25,054,453 | ) |   | 7,391,909  |  

Continued

F-5

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|                                                                                             |  |                            |            |               |   |            |  |             |             |                  |   |         |  |       |            |  |   |             |   |   |           |  
|-------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | ------------- | - | ---------- |  | ----------- | ----------- | ---------------- | - | ------- |  | ----- | ---------- |  | - | ----------- | - | - | --------- | -
|                                                                                             |  | 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                    |  |                            | -          |               |   | -          |  |             | 5,500,000   |                  |   | 550     |  |       | 81,950     |  |   | -           |   |   | 82,500    |  
|Estimated fair value of common stock issued as acquisition cost of
QSI                       |  |                            | -          |               |   | -          |  |             | 22,000,000  |                  |   | 2,200   |  |       | 547,800    |  |   | -           |   |   | 550,000   |  
|Estimated fair value of common stock warrants issued in connection
 with consulting services |  |                            | -          |               |   | -          |  |             | -           |                  |   | -       |  |       | 292,814    |  |   | -           |   |   | 292,814   |  
|Estimated fair value of vested stock options                                                 |  |                            | -          |               |   | -          |  |             | -           |                  |   | -       |  |       | 298,593    |  |   | -           |   |   | 298,593   |  
|Net loss                                                                                     |  |                            |            |               |   |            |  |             | -           |                  |   | -       |  |       | -          |  |   | (616,242    | ) |   | (616,242  | )
|Balances, December 31, 2008                                                                  |  |                            | 33,500,000 |               | $ | 33,500     |  |             | 180,270,913 |                  | $ | 18,027  |  | $     | 33,618,742 |  | $ | (25,670,695 | ) | $ | 7,999,574 |  

See accompanying notes to
consolidated financial statements

F-6

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VillageEDOCS, Inc. and subsidiaries 
Consolidated Statements of Cash Flows

|                                                                                           |  |                          |          |      |   |            |  
|------------------------------------------------------------------------------------------ |  | ------------------------ | -------- | ---- | - | ---------- | -
|                                                                                           |  | Years Ended December 31, |         
|                                                                                           |  | 2008                     |          | 2007 |  
|Cash Flows from Operating Activities:                                                      |  |                          |          |      |   |            |  
|Net loss                                                                                   |  | $                        | (616,242 | )    | $ | (3,285,230 | )
|Adjustments to reconcile net loss to net cash provided by (used in)
 operating activities: |  |                          |          |      |   |            |  
|Depreciation and amortization                                                              |  |                          | 843,632  |      |   | 909,839    |  
|Provision for (recovery of) doubtful accounts receivable                                   |  |                          | 17,667   |      |   | (18,368    | )
|Estimated fair value of stock options issued to employees for
 services rendered           |  |                          | 298,593  |      |   | 879,088    |  
|Estimated fair value of warrants issued to consultants                                     |  |                          | 75,819   |      |   | 33,332     |  
|Common stock issued and issuable to employees for services
rendered                        |  |                          | 82,500   |      |   | 76,211     |  
|Amortization of debt discount and debt issuance costs                                      |  |                          | 216,697  |      |   | 12,233     |  
|Loss on discontinued operations                                                            |  |                          | -        |      |   | 1,404,523  |  
|Changes in operating assets and liabilities, net of acquisitions and
 divestitures:        |  |                          |          |      |   |            |  
|Accounts receivable                                                                        |  |                          | 97,731   |      |   | (250,013   | )
|Inventories                                                                                |  |                          | (9,043   | )    |   | 22,960     |  
|Prepaid expenses and other current assets                                                  |  |                          | (126,552 | )    |   | (180,706   | )
|Other assets                                                                               |  |                          | 31,806   |      |   | (11,069    | )
|Accounts payable                                                                           |  |                          | (132,250 | )    |   | (63,251    | )
|Accrued expenses, other liabilities and interest                                           |  |                          | (851,213 | )    |   | 265,217    |  
|Deferred revenue                                                                           |  |                          | 109,329  |      |   | 112,215    |  
|Net cash provided by (used in) operating activities                                        |  |                          | 38,474   |      |   | (93,019    | )
|Cash Flows from Investing Activities:                                                      |  |                          |          |      |   |            |  
|Purchases of property and equipment                                                        |  |                          | (134,408 | )    |   | (147,680   | )
|Cash paid in acquisition of QSI, net of cash acquired                                      |  |                          | (286,435 | )    |   | -          |  
|Costs incurred for purchase of QSI                                                         |  |                          | (227,291 | )    |   | -          |  
|Cash acquired from sale of PFI, net                                                        |  |                          | 53,832   |      |   | 837,510    |  
|Net cash (used in) provided by investing activities                                        |  |                          | (594,302 | )    |   | 689,830    |  
|Cash Flows from Financing Activities:                                                      |  |                          |          |      |   |            |  
|Proceeds from lines of credit, net of repayments                                           |  |                          | 305,883  |      |   | (355,320   | )
|Proceeds from warrant exercise                                                             |  |                          | -        |      |   | 200,000    |  
|Cash paid for debt issuance costs                                                          |  |                          | (65,000  | )    |   | -          |  
|Payments on capital lease obligation                                                       |  |                          | (19,009  | )    |   | (30,399    | )
|Proceeds from issuance of note payable to related party                                    |  |                          | 300,000  |      |   | -          |  
|Principal payments on notes payable to related parties                                     |  |                          | (148,510 | )    |   | (30,000    | )
|Principal payments on convertible notes to related parties                                 |  |                          | -        |      |   | (200,000   | )
|Net cash provided by (used in) financing activities                                        |  |                          | 373,364  |      |   | (415,719   | )
|Net change in cash and cash equivalents                                                    |  |                          | (182,464 | )    |   | 181,092    |  
|                                                                                           |  |                          |          |      |   |            |  
|Cash and cash equivalents, beginning of year                                               |  |                          | 749,911  |      |   | 568,819    |  
|Cash and cash equivalents, end of year                                                     |  | $                        | 567,447  |      | $ | 749,911    |  
|Supplemental disclosure of cash flow information - Cash paid during
 the year for:         |  |                          |          |      |   |            |  
|Interest                                                                                   |  | $                        | 94,276   |      | $ | 95,360     |  
|Income taxes                                                                               |  | $                        | 172,340  |      | $ | 74,642     |  

continued

F-7

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|                                                                                    |      |                          |         |  |   |        | 
|----------------------------------------------------------------------------------- | ---- | ------------------------ | ------- |  | - | ------ | 
|                                                                                    |      | Years Ended December 31, |        
|                                                                                    | 2008 |                          | 2007    | 
|                                                                                    |      |                          |         |  |   |        | 
|Supplemental Schedule of Noncash Investing and Financing Activities:                |      |                          |        
|Estimated fair value of
 common stock issued in connection with acquisition         |      | $                        | 550,000 |  | $ | 92,400 | 
|Issuance of note payable
 to related party in acquisition                           |      | $                        | 773,129 |  | $ | -      | 
|Acquisition of property
 and equipment through capital lease obligation             |      | $                        | -       |  | $ | 63,175 | 
|Estimated fair value of
 warrants issued as debt issuance costs                     |      | $                        | 149,661 |  | $ | -      | 
|Reclassification of
 warrant from accrued liabilities to additional paid-in capital |      | $                        | 50,000  |  | $ | -      | 
|Estimated fair value of
 warrants issued in connection with consulting services     |      | $                        | 26,001  |  | $ | -      | 
|                                                                                    |      |                          |         |  |   |        | 
|See accompanying notes to
 consolidated financial statements.                       |      |                          |         |  |   |        | 

F-8

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VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

1. Background,
Organization and Basis of Presentation

VillageEDOCS,
Inc. (the Company or VillageEDOCS) was incorporated in 1995 in Delaware,
reincorporated in California in 1997, and reincorporated in Delaware in
September 2007. The Company has historically operated an electronic document
delivery service marketed to organizations throughout the United States and
internationally. On February 17, 2004, the Company acquired Tailored Business
Systems, Inc. (TBS). TBS provides various programming, processing and
printing services to governmental entities, including installing software,
hardware, printing and mailing of property tax forms. On June 16, 2004, the
holders of a majority of the voting capital stock of the Company voted to
approve a Plan of Restructuring that included the reorganization of the
Companys electronic document delivery business into a wholly owned subsidiary of
the Company. In connection with the reorganization, the Company formed
MessageVision, Inc. (MVI) on October 25, 2004. Effective April 1, 2005, the
Company acquired Phoenix Forms, Inc. dba Resolutions (PFI or Resolutions),
which it subsequently sold effective December 1, 2007. Effective May 1, 2006,
the Company acquired GoSolutions, Inc. (GSI). GSI provides enhanced voice and
data communications services including speech-driven messaging, unified
communications, and audio conferencing applications. Effective August 1, 2008,
the Company acquired Decision Management Company, Inc. dba Questys Solutions
(QSI or Questys). QSI provides products and services for document and
content management, automated data capture, electronic agenda management, and business
process workflow. The consolidated financial statements include the accounts of
the Company and those of MVI, TBS, Resolutions, GSI, and QSI, its wholly owned
subsidiaries, since October 25, 2004, February 17, 2004, April 1, 2005, May 1,
2006, and August 1, 2008, respectively. The results of operations of
Resolutions are included through November 30, 2007. See Note 5 for additional
information regarding the acquisition of QSI and the Companys accounting for
Resolutions as a discontinued operation. All significant inter-company
transactions and balances have been eliminated in consolidation.

2. Going
Concern

The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred
significant losses since inception, and has a working capital deficit
($2,802,120 as of December 31, 2008). The Companys losses are continuing and
may continue until such time as the Company is able to sufficiently expand its
existing businesses or is able to consummate business combination transactions
with other businesses whose profits are sufficient to offset any ongoing losses
from operating the holding company that owns QSI, GSI, TBS and MVI.

The Companys
success is dependent upon numerous items, certain of which are the successful
growth of revenues from its products and services, its ability to obtain new
customers in order to achieve levels of revenues adequate to support the
Companys current and future cost structure, and its success in obtaining
financing for equipment and operations, for which there is no assurance.
Unanticipated problems, expenses, and delays are frequently encountered in
establishing and maintaining profitable operations. These include, but are not
limited to, competition, the need to develop customer support capabilities and
market expertise, setbacks in product development, technical difficulties,
market acceptance and sales and marketing. The failure of the Company to meet
any of these conditions could have a materially adverse effect on the Company
and may force the Company to reduce or curtail operations. No assurance can be
given that the Company can achieve or maintain profitable operations.

F-9

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VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

The Company
believes it will have adequate cash to sustain operations until it achieves
sustained profitability. However, until the Company has a history of
maintaining revenue levels sufficient to support its operations and repay its
working capital deficit, the Company may require additional financing. Sources
of financing could include capital infusions, additional equity financing or
debt offerings. Although cash flows from operations improved during 2008 to a
level sufficient to support operating expenses, we do not expect that such
levels will continue until at least the second half of 2009. Should such cash
flows decrease for any reason, management plans to obtain debt and equity
financing from new and existing stockholders. There can be no assurance that
funding will be available on acceptable terms, if at all, or that such funds,
if raised, would enable the Company to achieve or sustain profitable
operations.

These factors
raise substantial doubt about the Companys ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the classification of liabilities that might result from the
outcome of these uncertainties.

3. Summary
of Significant Accounting Policies

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. Segments of an Enterprise and Related Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The Company
 has adopted Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures
 about Segments of an Enterprise and Related Information.SFAS No.
 131 requires the Company to report information about segments of its business
 in annual financial statements and requires it to report selected segment
 information in its quarterly reports issued to stockholders. SFAS No. 131
 also requires entity-wide disclosures about the products and services an
 entity provides, the material countries in which it holds assets and reports
 revenues and its major customers. The Companys five reportable segments are
 managed separately based on fundamental differences in their operations. At
 December 31, 2008, the Company operated in the following five reportable
 segments (see Note 12):

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

| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
 evaluates performance and allocates resources based upon operating income.
 The accounting policies of the reportable segments are the same as those
 described in this summary of significant accounting policies.

F-10

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. Concentration of Credit Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The Company
 extends credit to its customers and performs ongoing credit evaluations of
 such customers. The Company does not obtain collateral to secure its accounts
 receivable. MVI and GSI generally require a valid credit card or ACH debit
 account to collateralize credit extended to non-corporate clients. The
 Company evaluates its accounts receivable on a regular basis for
 collectibility and provides for an allowance for potential credit losses as
 deemed necessary. At December 31, 2008 and 2007, the Company has recorded an
 allowance for doubtful accounts of approximately $47,000 and $49,000,
 respectively.                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | For the
 years ended December 31, 2008 and 2007, independent representatives of one
 customer accounted for approximately 24% and 31%, respectively, of total
 revenues. For the year ended December 31, 2008, independent representatives
 of another customer accounted for approximately 10% of total revenues.                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | No single
 customer accounted for more than 10% of accounts receivable at December 31,
 2008 or December 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Effective
 October 3, 2008, the basic limit on federal deposit insurance coverage was
 temporarily increased from $100,000 to $250,000 per depositor through
 December 31, 2009. On January 1, 2010, FDIC deposit insurance for the
 Companys deposit accounts will return to at least $100,000 per depositor.                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | At December
 31, 2008, the Company had amounts on deposit with financial institutions in
 excess of the federally insured limits of $250,000, which approximated
 $44,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | At December
 31, 2007, the Company had amounts on deposit with financial institutions in
 excess of the federally insured limits of $100,000, which approximated
 $410,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | c. Use of Estimates in the Preparation of Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The
 preparation of financial statements in conformity with accounting principles
 generally accepted in the United States of America requires management to
 make estimates and assumptions that affect the reported amounts of assets and
 liabilities and disclosure of contingent assets and liabilities at the date
 of the consolidated financial statements and the reported amounts of revenues
 and expenses during the reporting period. Significant estimates made by
 management are, among others, the realizability of accounts receivable,
 inventories, recoverability of long-lived assets, valuation of common stock,
 stock options, warrants and deferred taxes. Actual results could differ from
 those estimates.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | d. Property and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Property and equipment are stated at cost and are depreciated using
 the straight-line method over the estimated useful lives of the assets,
 ranging from three to seven years. Equipment under capital lease obligations
 is depreciated over the shorter of the estimated useful life or the term of
 the lease. Major betterments and renewals are capitalized, while routine
 repairs and maintenance are charged to expense when incurred.                                                                                                                                                                                                                                                                                       

F-11

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | e. Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The Company recognizes revenue in accordance with Staff Accounting
 Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
 as revised by SAB No. 104, Revenue Recognition. As such, the
 Company recognizes revenue when persuasive evidence of an arrangement exists,
 title transfer has occurred, or services have been performed, the price is
 fixed or readily determinable and collectibility is probable. Sales are
 recorded net of sales discounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The Company has adopted Statement of Position (SOP) 97-2, Software
 Revenue Recognition, as well as SOP 98-9, Modification of SOP 97-2, Software
 Revenue Recognition with Respect to Certain Transactions. The SOPs
 generally require revenue earned on software arrangements involving multiple
 elements to be allocated to each element based on the relative fair market
 values of each of the elements. The fair value of an element must be based on
 vendor-specific objective evidence (VSOE) of fair value. Software license
 revenue generated by TBS, QSI and Resolutions (through the date of disposal 
 see Note 5), allocated to a software product is recognized upon delivery of
 the product, or deferred and recognized in future periods to the extent that
 an arrangement includes one or more elements that are to be delivered at a
 future date and for which VSOE has not been established. Maintenance and
 support revenue is recognized ratably over the maintenance term. First-year
 maintenance typically is sold with the related software license and renewed
 on an annual basis thereafter. Estimated fair values of ongoing maintenance
 and support obligations are based on separate sales of renewals to other
 customers or upon renewal rates quoted in the contracts. For such
 arrangements with multiple obligations, the Company allocates revenue to each
 component of the arrangement based on the estimated fair value of the
 undelivered elements. Fair value of services, such as consulting or training,
 is based upon separate sales of these services. The Company at times may
 enter into multiple-customer contracts in which the Company allocates revenue
 based on the number of specified users at each customer, and recognizes
 revenue upon customer acceptance and satisfying the other applicable
 conditions of the above described accounting policy.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Services revenue is recognized as the service is performed assuming
 that sufficient evidence exists to estimate the fair value of the services.
 Consulting and training services are billed based on contractual hourly rates
 and revenues are recognized as the services are performed. Consulting
 services primarily consist of implementation services related to the
 installation of the Companys products which do not require significant
 customization to or modification of the underlying software code.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Revenue from subscription agreements consists of fixed monthly fees
 and usage charges, generally based on per minute rates. Subscription
 agreement revenue related to MVI and GSI usage service charges are billed
 monthly in arrears and the associated revenues are recognized in the month of
 service. Recurring charges for the GoSolo (TM) platform are billed in advance on
 a monthly basis and recorded as deferred revenues. The Company recognizes
 subscription agreement revenue ratably over the service period, which
 management believes approximates the actual provision of services. Professional
 service fee revenue consists of consulting fees charged to enterprise clients
 for GoSolo(TM) platform enhancements. The Company recognizes professional
 service fee revenue on a time and materials basis over the service period,
 which management believes approximates the actual provision of services.
 Wholesale enhanced voicemail services consists of fees charged to
 telecommunications providers for use of the GoSolo(TM) platform to provide their
 customers with hosted electronic voicemail, billed monthly in arrears and the
 associated revenues are recognized in the month of service.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-12

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Significant management judgments and estimates must be made in
 connection with determination of the revenue to be recognized in any
 accounting period. If the Company made different judgments or utilized
 different estimates for any period, material differences in the amount and
 timing of revenue recognized could result.                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | f. Product
 and Technology Development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Product and
 technology development expense includes personnel costs relating to
 developing the features, content and functionality of QSIs electronic
 content management solutions, MVIs internet-enabled fax services and web
 site, TBSs government accounting software, and GSIs communications
 services. Product and technology development costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | g. Advertising                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The Company
 expenses all advertising costs as incurred. Advertising costs were $64,551
 and $57,410 for the years ended December 31, 2008 and 2007, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | h. Risks
 and Uncertainties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The Company
 operates in industries that are subject to intense competition, government
 regulation and rapid technological change. The Companys operations are
 subject to significant risks and uncertainties including financial,
 operational, technological, regulatory and other risks associated with an
 operating business, including the potential risk of business failure.                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | i. Fair
 Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The carrying
 amount of certain of the Companys financial instruments as of December 31,
 2008 and 2007 approximate their respective fair values because of the
 short-term nature of these instruments. Such instruments consist of cash,
 accounts receivable, accounts payable, accrued expenses, capital lease
 obligations, lines of credit, and notes payable. The fair value of
 convertible notes payable to related party is not determinable as the
 borrowings are with a related party.                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | j. Loss per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Basic loss
 per share is computed by dividing loss available to common stockholders by
 the weighted average number of common shares assumed to be outstanding during
 the period of computation. Diluted loss per share is computed similar to
 basic loss per share except that the denominator is increased to include the
 number of additional common shares that would have been outstanding if the
 potential shares had been issued and if the additional common shares were
 dilutive. All potentially dilutive shares, approximately 35,000,000 and
 2,700,000 as of December 31, 2008 and 2007, respectively, have been excluded
 from diluted loss per share, as their effect would be anti-dilutive for the
 years then ended.

F-13

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                   
| | --------------------------------------------------
| | k. Comprehensive Income                           
| |                                                   
| | The Company
 has no items of comprehensive income.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | l. Software
 Development Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The Company
 capitalizes software development costs pursuant to SFAS No. 86, Accounting
 for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
 after technological feasibility of the software is established, which is
 generally the completion of a working prototype and ends upon general release
 of the product to the Companys customers. All costs incurred in the research
 and development of new software and costs incurred prior to the establishment
 of technological feasibility are expensed as incurred. Capitalized costs
 consist of direct costs and allocated overhead associated with the
 development of the software products. Amortization of software development
 costs commences when the product becomes available for general release to
 customers and is computed based on the straight-line method over the
 softwares estimated economic life of approximately three years. As of
 December 31, 2008, there were no capitalized software development costs.      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | m. Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | All highly liquid instruments purchased with a maturity of three months or less at the time of purchase are considered cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | n. Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The Company
 accounts for income taxes in accordance with the asset and liability method
 for financial accounting and reporting purposes. Under this method, deferred
 tax assets and liabilities are determined based on differences between the
 financial reporting and the tax basis of assets and liabilities and are
 measured using the enacted tax rates and laws that will be in effect when the
 differences are expected to reverse. A valuation allowance is provided for
 certain deferred tax assets if it is more likely than not that the Company
 will not realize tax assets through future operations.                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | o. Stock-Based
 Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | At December
 31, 2008, the Company had two stock-based compensation plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Effective
 January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment,
 (SFAS 123(R)), which is a revision of SFAS No. 123, Accounting for Stock-Based
 Compensation. SFAS 123(R) requires all share-based payments to
 employees, including grants of employee stock options and restricted stock
 grants, to be recognized in the financial statements based upon their fair
 values. The Company uses the Black-Scholes option pricing model to estimate
 the grant-date fair value of share-based awards under SFAS 123(R). Fair value
 is determined at the date of grant. In accordance with SFAS 123(R), the
 financial statement effect of forfeitures is estimated at the time of grant
 and revised, if necessary, if the actual effect differs from those estimates.
 The estimated average forfeiture rate for the years ended December 31, 2008
 and 2007, of approximately 17%, and 12%, respectively, was based on
 historical forfeiture experience and estimated future employee forfeitures.

F-14

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SFAS 123(R)
 requires the cash flows resulting from the tax benefits resulting from tax
 deductions in excess of the compensation cost recognized for those options to
 be classified as financing cash flows. Due to the Companys loss position,
 there were no such tax benefits during the years ended December 31, 2008 and
 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Description of
 Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
 Companys equity incentive plans provide for awards of common stock and
 grants of options to employees and directors of the Company to purchase the
 Companys shares, as determined by management and the board of directors, at
 or above the fair value of such shares on the grant date. The options
 generally vest over a five-year period beginning on the grant date and have a
 seven-year term. As of December 31, 2008, the Company is authorized to issue
 up to 95,000,000 shares under these plans and has approximately 46,500,000
 shares available for future issuances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Summary of
 Assumptions and Activity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The fair
 value of stock-based awards to employees and directors is calculated using
 the Black-Scholes option pricing model even though the model was developed to
 estimate the fair value of freely tradeable, fully transferable options
 without vesting restrictions, which differ significantly from the Companys
 stock options. The Black-Scholes model also requires subjective assumptions,
 including future stock price volatility and expected time to exercise, which
 greatly affect the calculated values. The expected term of options granted is
 derived from historical data on employee exercises and post-vesting
 employment termination behavior. The risk-free rate selected to value any
 particular grant is based on the U.S. Treasury rate that corresponds to the
 pricing term of the grant effective as of the date of the grant. The expected
 volatility is based on the historical volatility of the Companys stock
 price. These factors could change in the future, affecting the determination
 of stock-based compensation expense in future periods. The fair value of
 options granted was estimated using the following weighted average
 assumptions:

F-15

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

|                         |  |            |  |            
|------------------------ |  | ---------- |  | -----------
|                         |  |            |  |            
|                         |  | 2008       |  | 2007       
|Stock
 options:          |  |            |  |            
|Expected term (in years) |  | 6.0        |  | 6.0        
|Expected volatility      |  | 258% -273% |  | 121% - 124%
|Risk-free interest rate  |  | 3.0%       |  | 3.5%       
|Dividend yield           |  | -          |  | -          

| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | A summary of
 option activity as of December 31, 2008 and changes during the year then
 ended, is presented below:

|                                          |  |                   |   |                  |      |                                      |     |                             |   |   | 
|----------------------------------------- |  | ----------------- | - | ---------------- | ---- | ------------------------------------ | --- | --------------------------- | - | - | 
|                                          |  | December 31, 2008 |  
|                                          |  |                   |   | Weighted-Average |      |                                      |    
|                                          |  | Shares            |   | Exercise
 Price  |      | Remaining
 Contractual
 Term (Years) |     | Aggregate
 Intrinsic
 Value |  
|Options
 outstanding at January 1, 2008   |  | 37,230,669        |   | $                | 0.21 |                                      |     |                             |   |   | 
|Options
 granted                          |  | 15,025,000        |   | $                | 0.05 |                                      |     |                             |   |   | 
|Options
 forfeited                        |  | (9,524,730        | ) | $                | 0.15 |                                      |     |                             |   |   | 
|Options
 exercised                        |  | -                 |   | $                | -    |                                      |     |                             |   |   | 
|Options
 outstanding at December 31, 2008 |  | 42,730,939        |   | $                | 0.16 |                                      | 5.2 |                             | $ | - | 
|Options
 vested or expected to vest       |  | 40,224,298        |   | $                | 0.16 |                                      | 5.1 |                             | $ | - | 
|Options
 exercisable at December 31, 2008 |  | 27,985,994        |   | $                | 0.22 |                                      | 4.5 |                             | $ | - | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
 weighted-average grant date fair value of options granted during 2008 and
 2007 was $0.04 and $0.07 per option, respectively. Upon the exercise of
 options, the Company issues new shares from its authorized shares.                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | As of
 December 31, 2008, there was approximately $780,000 of total unrecognized
 compensation cost, net of forfeitures, related to employee and director stock
 option compensation arrangements. That cost is expected to be recognized on a
 straight-line basis over the next 3.6 weighted average years. The total fair
 value of vested options issued to employees and directors during the years
 ended December 31, 2008 and 2007 was $298,593 and $879,088, respectively, net
 of an estimated forfeiture rate of 17% and 12%, respectively.

F-16

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | The expense was
 recorded in the accompanying consolidated statements of operations as
 follows:

|                            |  |                           |         |      |   |         | 
|--------------------------- |  | ------------------------- | ------- | ---- | - | ------- | 
|                            |  | Years Ended
 December 31, |        
|                            |  | 2008                      |         | 2007 |  
|Cost of
 sales              |  | $                         | 5,497   |      | $ | -       | 
|General and
 administrative |  |                           | 251,789 |      |   | 879,088 | 
|Sales and
 marketing        |  |                           | 21,372  |      |   | -       | 
|Product and
 technology     |  |                           | 19,935  |      |   | -       | 
|                            |  | $                         | 298,593 |      | $ | 879,088 | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| | All
 issuances of the Companys stock for non-cash consideration have been
 assigned a dollar amount equaling either the market value of the shares
 issued or the value of consideration received whichever is more readily
 determinable. The majority of the non-cash consideration received pertains to
 services rendered by consultants and others and has been valued at the market
 value of the shares issued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | The Companys accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of the Emerging Issues Task Force (EITF) Issue No. 96-18,Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,and EITF Issue No. 00-18,Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees.The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendors performance is complete.  In the case of equity
instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | p. Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | Inventories
 consist primarily of supplies, forms, envelopes, and software licenses
 purchased for resale. Cost is determined on a first-in, first-out basis. The
 Company periodically reviews its inventory quantities on hand and adjusts for
 excess and obsolete inventory based primarily on historical usage rates and
 its estimated forecast of product demand. Actual demand may differ from the
 Companys estimates. Once established, write-downs of inventory are
 considered permanent adjustments to the basis of the excess or obsolete
 inventory.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | q. Goodwill
 and Other Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | Goodwill
 represents the excess of acquisition cost over the net assets acquired in a
 business combination and is not amortized in accordance with SFAS No. 142, Goodwill
 and Other Intangible Assets. The provisions of SFAS No. 142
 require that the Company allocate its goodwill to its various reporting
 units, determine the carrying value of those businesses, and estimate the
 fair value of the reporting units so that a two-step goodwill impairment test
 can be performed. In the first step of the goodwill impairment test, the fair
 value of each reporting unit is compared to its carrying value. Management
 reviews, on an annual basis, the carrying value of goodwill in order to determine
 whether impairment has occurred. Impairment is based on several factors
 including the Companys projection of future undiscounted operating cash
 flows. If an impairment of the carrying value were to be indicated by this
 review, the Company would perform the second step of the goodwill impairment
 test in order to determine the amount of goodwill impairment, if any.

F-17

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | The changes
 in the carrying amount of goodwill for the year ended December 31, 2008 are
 as follows (see Note 5):

|                            |  |   |           | 
|--------------------------- |  | - | --------- | 
|Balance,
 January 1, 2008   |  | $ | 6,272,457 | 
|Goodwill of
 QSI acquired   |  |   | 972,275   | 
|Balance,
 December 31, 2008 |  | $ | 7,244,732 | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| | The Company
 performed an impairment test on goodwill as of December 31, 2008. Based on
 its analysis as of December 31, 2008, the Companys management believes there
 is no impairment of its goodwill. There can be no assurance, however, that
 market conditions will not change or demand for the Companys products or
 services will continue, which could result in impairment of goodwill in the
 future.                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Identifiable
 intangibles acquired in connection with business acquisitions are recorded at
 their respective fair values (see Note 5). Deferred income taxes have been
 recorded to the extent of differences between the fair value and the tax
 basis of the assets acquired and liabilities assumed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | r. Beneficial
 Conversion Feature                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| | The
 convertible note provides for a rate of conversion that could fall below
 market value (see Note 6). Such feature is normally characterized as a
 beneficial conversion feature (BCF). Pursuant to EITF Issue No. 98-5, Accounting For Convertible Securities with
 Beneficial Conversion Features or Contingently Adjustable Conversion Ratio,
 and EITF Issue No. 00-27, Application of EITF Issue No. 98-5 To Certain
 Convertible Instruments, the relative fair value of the BCF has
 been recorded as a discount from the face amount of the debt instrument. The
 Company amortized the discount using the effective interest method through
 maturity of such instrument.                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | s. Long-Lived
 Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| | In the event
 that facts and circumstances indicate that equipment or other long-lived
 assets may be impaired, an evaluation of recoverability would be performed.
 If an evaluation is required, the estimated future discounted cash flows
 associated with the asset are compared to the assets carrying amount to
 determine if an impairment charge is necessary. The amount of long-lived
 asset impairment, if any, is charged to operations in the period in which
 long-lived asset impairment is determined. At December 31, 2008 and 2007,
 management believes there is no impairment of its long-lived assets. There
 can be no assurance, however, that market conditions will 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.

F-18

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | t. Warranty
 Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| | The Company
 provides a limited 90 day warranty on certain products sold. Estimated future
 warranty obligations related to certain products and services are provided by
 charges to operations in the period in which the related revenue is
 recognized. As of December 31, 2008 and 2007, management of the Company
 determined that a warranty reserve was not necessary. In addition, the charges
 to expense during the years ended December 31, 2008 and 2007 were
 insignificant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | u. New
 Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
| | In September
 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value
 Measurements (SFAS 157), which defines fair value, establishes a
 framework for measuring fair value in accordance with generally accepted
 accounting principles, and expands disclosures about fair value measurements.
 SFAS No. 157 is effective for financial statements issued for fiscal years
 beginning after November 15, 2007. In February 2008, the FASB issued FSP
 157-2, Effective
 Date of FASB Statement No. 157, which delays the effective date of
 SFAS No. 157 for non-financial assets and liabilities to fiscal years
 beginning after November 15, 2008. The adoption of SFAS No. 157 related to
 financial assets and liabilities did not have a material impact on the
 Companys consolidated financial statements. The Company is currently
 evaluating the impact, if any, that SFAS 157 may have on its future
 consolidated financial statements related to non-financial assets and
 liabilities.                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | In October
 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a
 Financial Asset When the Market for That Asset is Not Active(FSP
 No. 157-3). FSP No. 157-3 clarifies the application of SFAS No. 157 in a
 market that is not active, and provides an illustrative example intended to
 address certain key application issues. FSP No. 157-3 is effective
 immediately, and applies to the Companys 2008 financial statements. The
 Company has concluded that the application of FSP No. 157-3 did not have a
 material impact on its consolidated financial position and results of
 operations as of and for the year ended December 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | In December
 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R)
 provides companies with principles and requirements on how an acquirer
 recognizes and measures in its financial statements the identifiable assets
 acquired, liabilities assumed, and any noncontrolling interest in the
 acquiree as well as the recognition and measurement of goodwill acquired in a
 business combination. SFAS No. 141(R) also requires certain disclosures to
 enable users of the financial statements to evaluate the nature and financial
 effects of the business combination. Acquisition costs associated with the
 business combination will generally be expensed as incurred. SFAS No. 141(R) is
 effective for business combinations occurring in fiscal years beginning after
 December 15, 2008. Early adoption of SFAS No. 141(R) is not permitted. The
 Company is evaluating the impact SFAS No. 141(R) will have on any future
 business combinations.                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | In June 2008, the Emerging Issues Task Force of the FASB
published EITF Issue No. 07-5,Determining Whether an
Instrument is Indexed to an Entitys Own Stock(EITF No. 07-5) to address concerns regarding the meaning of
indexed to an entitys own stock contained in FASB Statement
133,Accounting for Derivative Instruments and Hedging
Activities. This related to the determination of whether
a free-standing equity-linked instrument should be classified as equity or debt.
If an instrument is classified as debt, it is valued at fair value, and this
value is re-measured on an ongoing basis, with changes recorded in earnings in
each reporting period. EITF No. 07-5 is effective for years beginning after December 15, 2008 and earlier adoption is not permitted. Although EITF No. 07-5 is effective for fiscal years
beginning after December 15, 2008, any outstanding instrument at the date of
adoption will require a retrospective application of the accounting through a
cumulative effect adjustment to retained earnings upon adoption. The Company is
currently evaluating the impact of EITF No. 07-5 on its consolidated financial
position and results of operations.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Other recent
 accounting pronouncements issued by the FASB (including the EITF) and the
 American Institute of Certified Public Accountants did not or are not
 believed by management to have a material impact on the Companys present or
 future consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-19

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

|                                                                                  
|----------------------------------------------------------------------------------
|4. Property
 and Equipment                                                        
|                                                                                  
|Property
 and equipment consist of the following as of December 31, 2008 and 2007:

|                                |  |              |            |      |   |            |  
|------------------------------- |  | ------------ | ---------- | ---- | - | ---------- | -
|                                |  | December 31, |           
|                                |  | 2008         |            | 2007 |  
|Equipment
 under capital lease  |  | $            | 84,831     |      | $ | 84,831     |  
|Computer
 equipment             |  |              | 1,012,229  |      |   | 864,955    |  
|Furniture
 and equipment        |  |              | 569,351    |      |   | 518,827    |  
|Automobiles                     |  |              | 48,800     |      |   | 48,800     |  
|Software                        |  |              | 203,199    |      |   | 171,002    |  
|                                |  |              | 1,918,410  |      |   | 1,688,415  |  
|Less-
 accumulated depreciation |  |              | (1,529,622 | )    |   | (1,309,223 | )
|                                |  | $            | 388,788    |      | $ | 379,192    |  

|                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                               | Depreciation
 expense for property and equipment for 2008 and 2007 was $220,399 and
 $259,156, respectively, for continuing operations and $0 and $29,984 for
 discontinued operations, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|5. Acquisitions,
 Discontinued Operations, Dispositions, and Intangible Assets
|                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                               | Acquisition of Questys (QSI)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                               | On August 4,
 2008, the Company completed the purchase of 100% of the issued and
 outstanding capital stock of QSI, from its sole shareholder, Vojin
 Hadzi-Pavlovic and Gloria Hadzi-Pavlovic, Tenants in Common (the Pavlovics,
 Questys Shareholder). The effective date of the acquisition is August 1,
 2008.                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                               | The Company
 purchased Questys with $300,000 in cash, a secured promissory note in the
 amount of $900,000 (see Note 6), and 22 million shares of the Companys
 common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                               | The terms of
 the purchase were the result of arms-length negotiations. The Pavlovics were
 not previously affiliated with the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                               | Questys is a
 California corporation formed in 1981 and is co-located with Corporate and
 MVI in Santa Ana, California. The Company purchased Questys to add new
 products and services for document and content management, document
 archiving, document imaging, automated data capture, electronic agenda
 management, and business process workflow. In addition, as Questys has
 clients in a number of markets, including corporate, government, healthcare,
 financial services, education, legal, law enforcement, manufacturing, and
 retail, the Company expects to benefit from the potential expansion into the
 newly expanded customer base of several of the Companys products and
 services believed to be complementary.

F-20

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In
 connection with the acquisition of QSI, the Company incurred $227,291 in
 acquisition-related costs including, but not limited to, expenses incurred
 for a finders fee, legal, accounting and travel.
| |                                                                                                                                                                                                            
| | The
 acquisition price was comprised of the following:                                                                                                                                                     

|                                                             |  |   |           | 
|------------------------------------------------------------ |  | - | --------- | 
|Cash paid at
 closing                                        |  | $ | 300,000   | 
|Promissory
 note to seller, net of debt discount of $126,871 |  |   | 773,129   | 
|Estimated
 fair value of VillageEDOCS common stock          |  |   | 550,000   | 
|Legal,
 accounting, and other costs                          |  |   | 227,291   | 
|                                                             |  | $ | 1,850,420 | 

| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
 following represents an allocation of the purchase price over the historical
 net book value of the acquired assets and liabilities of QSI as of August 1,
 2008, the effective date of the acquisition:

|                                           |  |   |            |  
|------------------------------------------ |  | - | ---------- | -
|Cash                                       |  | $ | 13,565     |  
|Accounts
 receivable                       |  |   | 309,887    |  
|Prepaid
 expenses and other current assets |  |   | 55,298     |  
|Property and
 equipment                    |  |   | 95,587     |  
|Other assets                               |  |   | 12,006     |  
|Total
 liabilities                         |  |   | (1,008,198 | )
|Net tangible liabilities assumed           |  |   | (521,855   | )
|                                           |  |   |            |  
|Identifiable
 intangibles:                 |  |   |            |  
|Trade name                                 |  |   | 210,000    |  
|Technology                                 |  |   | 390,000    |  
|Customer relationships                     |  |   | 730,000    |  
|Covenant Not to Compete                    |  |   | 70,000     |  
|Goodwill                                   |  |   | 972,275    |  
|                                           |  | $ | 1,850,420  |  

F-21

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | The pro
 forma combined historical results, as if QSI had been acquired as of January
 1, 2008 and 2007, are estimated as follows:

|                                            |  |                                |             |                                |   |             |  
|------------------------------------------- |  | ------------------------------ | ----------- | ------------------------------ | - | ----------- | -
|                                            |  | Year
 Ended
 December 31, 2008 |             | Year
 Ended
 December 31, 2007 |  
|Net sales                                   |  | $                              | 16,942,123  |                                | $ | 17,322,472  |  
|Net loss                                    |  | $                              | (620,065    | )                              | $ | (3,836,784  | )
|Weighted average common shares
outstanding: |  |                                |             |                                |   |             |  
|basic and diluted                           |  |                                | 175,433,927 |                                |   | 172,218,437 |  
|Loss per
 share:                            |  |                                |             |                                |   |             |  
|basic and diluted                           |  | $                              | -           |                                | $ | (0.02       | )

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The pro
 forma information has been prepared for comparative purposes only and does
 not purport to be indicative of what would have occurred had the acquisition
 actually been made at such date, nor is it necessarily indicative of future
 operating results.                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Discontinued Operations and Disposition of
 Resolutions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | On December
 10, 2007, the Company sold substantially all of the assets of its
 wholly-owned subsidiary Phoenix Forms, Inc. dba Resolutions to DocPath Corp.
 for $970,000 in cash, plus the cancellation of 10,000,000 warrants previously
 issued with an exercise price of $0.15 per share. The warrants were
 originally issued to Alexander Riess and William Falcon as consideration in
 the acquisition of Phoenix Forms, Inc. by VillageEDOCS, Inc. in April 2005
 and were valued at $553,000 on the date of cancellation (see below).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The
 Companys Board of Directors approved the disposal of the assets on December
 7, 2007 as part of a strategy to reduce debt and focus on growth at the
 remaining business units and growth by acquisition. The Company used $845,005
 of the proceeds from the asset sale to retire a commercial note with a bank
 on December 11, 2007 (see Note 6).                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The
 purchaser assumed substantially all of the employment agreements of Phoenix
 Forms, Inc., its office lease, accounts payable, and certain other accrued
 liabilities and contracts as stipulated by the Assets Purchase Agreement.
 Accordingly, the Company does not expect to incur significant future cash
 expenditures in connection with the disposal.                                                                                                                                                                              

F-22

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2007 and
 in connection with the disposal, the Company recorded a loss from
 discontinued operations of $1,625,424, net of tax of $485,000. Such loss
 included income from PFIs operations of $264,099 before income taxes and a
 loss on the disposal of approximately $1,404,523 (which consisted of net proceeds
 of $926,835 (net of $43,165 of expenses), plus the fair value of the
 cancelled warrant of approximately $553,000, less the net assets sold of
 $2,884,358, which includes the carrying value of goodwill and certain
 intangible assets with a carrying value of $3,019,916 at the time of
 disposition, which were written off and $35,493 of cash retained by the
 seller. The Company received $873,003 in December 2007 and the remaining
 $53,832 in January 2008.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In
 accordance with SFAS No. 144, Accounting for the Impairment of Disposal of Long
 Lived Assets, the operations associated with this transaction and
 the loss on the sale have been classified as income (loss) from discontinued
 operations in the accompanying consolidated statements of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Discontinued
 operations results were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                                       |  |                                |            |  
|------------------------------------------------------ |  | ------------------------------ | ---------- | -
|                                                       |  | Year
 Ended
 December 31, 2007 |           
|Results of
 discontinued operations                    |  |                                |            |  
|Net sales                                              |  | $                              | 1,763,024  |  
|Income before income taxes                             |  | $                              | 264,099    |  
|                                                       |  |                                |            |  
|Loss on sale of discontinued operations:               |  |                                |            |  
|Sales price, net                                       |  | $                              | 1,479,835  |  
|Net assets sold                                        |  |                                | (2,884,358 | )
|Loss on sale                                           |  | $                              | (1,404,523 | )
|                                                       |  |                                |            |  
|Loss from discontinued operations before
 income taxes |  | $                              | (1,140,424 | )
|Provision for income taxes                             |  |                                | (485,000   | )
|Loss from
 discontinued operations                     |  | $                              | (1,625,424 | )

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | On May 12,
 2006, the Company entered into a Patent License Agreement (the License
 Agreement) with Catch Curve, Inc. (Catch Curve). Pursuant to the License
 Agreement, Catch Curve granted the Company a worldwide, non-exclusive,
 non-divisible, fully paid-up license to use certain patented technology in
 connection with any facsimile products or services made or sold by the
 Company or its subsidiaries. The Company is obligated to make aggregate license
 payments of $600,000 over a period of up to thirty-two months beginning on
 May 12, 2006, at which time no further payments are required under the
 License Agreement. The License Agreement stipulates that $350,000 of the
 total license fee is attributable to sales of products and services prior to
 the date of the License Agreement. The remainder of $250,000 is attributable
 to sales of products and services subsequent to the date of the License
 Agreement. Accordingly, on May 12, 2006, the Company recorded an intangible
 asset in the amount of $250,000. The intangible asset is being amortized over
 58 months, the current remaining life of the patents covered by the License
 Agreement. During 2007, the Company made license payments of $180,000 under
 the License Agreement. At December 31, 2008, the Company had paid all amounts
 due pursuant to the License Agreement.

F-23

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                           
| | --------------------------------------------------------------------------
| | Other intangible
 assets consist of the following as of December 31, 2008:

|                        |  |                                 |  |                         |           |                           |   |                       |   |   |           | 
|----------------------- |  | ------------------------------- |  | ----------------------- | --------- | ------------------------- | - | --------------------- | - | - | --------- | 
|                        |  | Estimated Useful
 Life
 (Years) |  | Gross
 Carrying
 Amount |           | Accumulated
 Amortization |   | Net
 Carrying
 Amount |  
|Corporate:              |  |                                 |  |                         |           |                           |   |                       |   |   |           | 
|License agreement       |  | Five                            |  | $                       | 250,000   |                           | $ | (135,772              | ) | $ | 114,228   | 
|                        |  |                                 |  |                         |           |                           |   |                       |   |   |           | 
|TBS:                    |  |                                 |  |                         |           |                           |   |                       |   |   |           | 
|Customer list           |  | Ten                             |  | $                       | 500,000   |                           | $ | (243,750              | ) | $ | 256,250   | 
|Trade name              |  | Five                            |  |                         | 50,000    |                           |   | (48,750               | ) |   | 1,250     | 
|                        |  |                                 |  | $                       | 550,000   |                           | $ | (292,500              | ) | $ | 257,500   | 
|QSI:                    |  |                                 |  |                         |           |                           |   |                       |   |   |           | 
|Customer relationships  |  | Ten                             |  | $                       | 730,000   |                           | $ | (30,417               | ) | $ | 699,583   | 
|Technology              |  | Five                            |  |                         | 390,000   |                           |   | (32,500               | ) |   | 357,500   | 
|Trade name              |  | Five                            |  |                         | 210,000   |                           |   | (17,500               | ) |   | 192,500   | 
|Covenant not to compete |  | Two                             |  |                         | 70,000    |                           |   | (14,583               | ) |   | 55,417    | 
|                        |  |                                 |  | $                       | 1,400,000 |                           | $ | (95,000               | ) | $ | 1,305,000 | 
|GSI:                    |  |                                 |  |                         |           |                           |   |                       |   |   |           | 
|Customer relationships  |  | Ten                             |  | $                       | 2,200,000 |                           | $ | (586,667              | ) | $ | 1,613,333 | 
|Technology              |  | Five                            |  |                         | 490,000   |                           |   | (261,333              | ) |   | 228,667   | 
|Trade names and marks   |  | Ten                             |  |                         | 420,000   |                           |   | (112,000              | ) |   | 308,000   | 
|                        |  |                                 |  | $                       | 3,110,000 |                           | $ | (960,000              | ) | $ | 2,150,000 | 
|                        |  |                                 |  |                         |           |                           |   |                       |   |   |           | 
|                        |  |                                 |  | $                       | 5,310,000 |                           | $ | (1,483,272            | ) | $ | 3,826,728 | 

| |                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amortization
 of other intangible assets was $566,721 and $471,724 during 2008 and 2007,
 respectively for continuing operations and $0 and $88,490 during 2008 and
 2007, respectively, for discontinued operations. During 2007, the Company
 wrote off $507,489 of intangible assets in connection with the sale of PFI.

F-24

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                           
| | --------------------------------------------------------------------------
| | Other
 intangible assets consist of the following as of December 31, 2007:

|                              |  |                                |  |                         |           |                           |   |                      |   |   |           | 
|----------------------------- |  | ------------------------------ |  | ----------------------- | --------- | ------------------------- | - | -------------------- | - | - | --------- | 
|                              |  | Estimated Useful Life
 (Years) |  | Gross
 Carrying
 Amount |           | Accumulated
 Amortization |   | Net Carrying
 Amount |  
|Corporate:                    |  |                                |  |                         |           |                           |   |                      |   |   |           | 
|License agreement             |  | Five                           |  | $                       | 250,000   |                           | $ | (84,051              | ) | $ | 165,949   | 
|                              |  |                                |  |                         |           |                           |   |                      |   |   |           | 
|TBS:                          |  |                                |  |                         |           |                           |   |                      |   |   |           | 
|Customer list                 |  | Ten                            |  |                         | 500,000   |                           |   | (193,750             | ) |   | 306,250   | 
|Trade name                    |  | Five                           |  |                         | 50,000    |                           |   | (38,750              | ) |   | 11,250    | 
|                              |  |                                |  |                         | 550,000   |                           |   | (232,500             | ) |   | 317,500   | 
|GSI:                          |  |                                |  |                         |           |                           |   |                      |   |   |           | 
|Customer relationships        |  | Ten                            |  |                         | 2,200,000 |                           |   | (366,667             | ) |   | 1,833,333 | 
|Technology                    |  | Five                           |  |                         | 490,000   |                           |   | (163,333             | ) |   | 326,667   | 
|Trade names and marks         |  | Ten                            |  |                         | 420,000   |                           |   | (70,000              | ) |   | 350,000   | 
|                              |  |                                |  |                         | 3,110,000 |                           |   | (600,000             | ) |   | 2,510,000 | 
|                              |  |                                |  |                         |           |                           |   |                      |   |   |           | 
|Total other intangible assets |  |                                |  | $                       | 3,910,000 |                           | $ | (916,551             | ) | $ | 2,993,449 | 

The
estimated amortization expense for the next five years approximates:

|                           |  |   |           | 
|-------------------------- |  | - | --------- | 
|Years Ending
 December 31, |  |   |          
|                           |  |   |           | 
|2009                       |  | $ | 691,000   | 
|2010                       |  |   | 675,000   | 
|2011                       |  |   | 545,000   | 
|2012                       |  |   | 505,000   | 
|2013                       |  |   | 455,000   | 
|                           |  | $ | 2,871,000 | 

6. Debt

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bank Lines
 of Credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | On February
 6, 2008, the Company and The Private Bank of The Peninsula (Bank) entered
 into an agreement for an asset based line of credit (the Line). On March 5,
 2009, the Company received a fully executed agreement between it and The
 Private Bank of The Peninsula (Bank) to amend the agreement for the Line
 (the Amendment). The effective date of the Amendment is February 24, 2009.
 Pursuant to the Amendment, the Bank renewed the Line and modified the terms
 to include an interest rate that is floating and is calculated at Wall Street
 Journal prime plus five percent (5%) on the cash borrowed provided that the
 minimum rate will be eight and one half percent (8.5%) and minimum interest
 will be $7,000 per three month period. Interest on outstanding borrowings is
 payable monthly. In addition, the Company was required to pay an amendment
 fee of $10,000 and, upon each advance, a fee equal to one quarter of one
 percent (0.25%) of the advance, and will be subject to covenants as to
 minimum quarterly income and cash flow.

F-25

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the
 initial term of the Line, the Banks maximum commitment amount for the Line
 was $1.5 million. Advances were generally limited to 85% of eligible domestic
 accounts receivable. The interest rate was floating and was calculated at
 Wall Street Journal prime rate plus 3% on the cash borrowed. Interest on
 outstanding borrowings was paid monthly.                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | During 2008,
 the Company paid a facility fee of $15,000 to the Bank in connection with the
 Line and paid a finders fee in the amount of $50,000 to Dragonfly Capital
 Partners LLC (Dragonfly). In addition, the Company issued the Bank and
 Dragonfly warrants to purchase shares of its common stock (see Note 7). The
 Company recorded the finders fees and warrants as debt issuance costs in the
 accompanying consolidated balance sheets at December 31, 2008, and amortized
 $59,583 of the cash fees to interest expense during 2008.                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Outstanding
 advances under the Line are secured by a first lien position on all of the
 Companys accounts receivable, contract rights, chattel paper, documents, and
 payment and by a second lien on its inventory, intellectual property, and
 equipment. As of December 31, 2008, there were outstanding borrowings of
 $342,955 on the Line and the Company was in compliance with all loan
 covenants. Availability on the Line as of December 31, 2008 was approximately
 $26,000.                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Effective
 September 30, 2006, VillageEDOCS obtained a $500,000 revolving line of credit
 (RLOC) with a financial institution. The RLOC is guaranteed by a
 stockholder of the Company. Interest on outstanding borrowings is payable
 monthly at an annual rate of interest equal to LIBOR plus 2% (2.46% at
 December 31, 2008). As of December 31, 2008, there were outstanding
 borrowings of $447,608 on the RLOC and the Company was in compliance with all
 loan covenants. The Company is in the process of renewing the underlying note
 and converting the revolving line to a non-revolving term loan having a term
 of twelve months and required monthly payments of interest only.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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 outstanding borrowings is payable monthly at a variable
 annual rate equal to the financial institutions prime rate in effect (3.25%
 at December 31, 2008). As of December 31, 2008, the Company had not utilized
 the TBS RLOC and was in compliance with all loan covenants.                                                                                                                                                                                                                          

F-26

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | QSI has an
 unsecured line of credit agreement with a financial institution for
 borrowings up to the maximum of $100,000 with no maturity date (QSI RLOC).
 Borrowings bear interest at the prime rate, plus 2.775% (5.775% at December
 31, 2008). QSI had borrowings totaling $100,000 at December 31, 2008 and had
 $0 available for future borrowings under the line of credit. Pursuant to the
 QSI acquisition agreements, the Company has agreed to repay all outstanding
 borrowings under the QSI RLOC on or before August 1, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | During 2007
 and as a result of the acquisition of GSI, the Company had a $1,000,000
 revolving line of credit (the GSI Line) with a financial institution and
 had used the proceeds to fund a required payment of $840,000 pursuant to the
 Settlement Agreements with dissenting shareholders of GSI. On December 11,
 2007, VillageEDOCS, Inc. paid $845,005 to the financial institution in full
 satisfaction of the commercial note issued in connection with the GSI Line.
 The GSI Line matured on December 12, 2007 and the Company did not elect to
 renew it. The Company elected to pay the commercial note in full from
 available cash in lieu of converting the GSI Line to a non-revolving term
 loan. Interest on outstanding borrowings had been payable monthly at a rate
 equal to the prime rate. During the year ended December 31, 2007, the Company
 paid $62,883 in interest on the GSI Line. The GSI Line had been
 collateralized by the assets of GSI and guaranteed by four stockholders of
 the Company who were formerly stockholders of GSI.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Vojin
 Hadzi-Pavlovic and Gloria Hadzi-Pavlovic                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Effective
 August 1, 2008 and in connection with the acquisition of Questys (see Note
 5), the Company issued a secured promissory note to the Pavlovics (the
 Pavlovic Note) in the amount of $900,000. The Pavlovics are a related party
 as a result of the common stock issued to them by the Company in connection
 with the acquisition of Questys. The Pavlovic Note is non-interest bearing
 and may be prepaid in whole or in part at any time without penalty and is due
 on August 1, 2011. Principal payments are due in three equal annual
 installments of $300,000 each on August 1, 2009, August 1, 2010, and August
 1, 2011. The Pavlovic Note is secured by certain assets of Questys as defined
 in a Security Agreement dated as of August 1, 2008. Payment obligations under
 the Pavlovic Note are subordinate in certain respects to the rights of the
 Private Bank of the Peninsula to the extent set forth in a Subordination
 Agreement dated as of August 1, 2008.                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In
 connection with the issuance of the Pavlovic Note, the Company recorded a
 debt discount of $126,871 as a result of imputed interest. The Company is
 amortizing the discount using the effective interest method through August 1,
 2011. During 2008, $17,621 of interest expense was recognized in connection
 with the amortization of debt discount related to this note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Prior to
 August 1, 2008 (effective date of acquisition of Questys), the Pavlovics made
 aggregate advances to Questys in the amount of $115,000, which were assumed
 in the acquisition (the Pavlovic Shareholder Debt). The Pavlovic
 Shareholder Debt is non-interest bearing and the Company and the Pavlovics
 have agreed to the repayment of the outstanding balance as follows: (i)
 $35,000 on or before August 1, 2009, (ii) $40,000 on or before August 1,
 2010, and (iii) $40,000 on or before the August 1, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-27

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In
 connection with the acquisition of the Pavlovic Shareholder Debt, the Company
 recorded a debt discount of $16,546 as a result of imputed interest. The
 Company is amortizing the discount using the effective interest method
 through August 1, 2011. During 2008, $2,298 of interest expense was
 recognized in connection with the amortization of debt discount related to
 this debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Silver
 Lake Group, LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Company
 funded the requirement for the initial $300,000 payment for the purchase of
 QSI from the proceeds of a $300,000 related party secured promissory note
 offering subscribed to by The Silver Lake Group, LLC (SLG) on August 4,
 2008 (the SLG Note). SLG is owned by Ricardo A. Salas. Mr. Salas is a
 Director of the Company. The SLG Note was originally due on October 31, 2008
 and bore interest at a rate of nine percent (9%) per annum through October
 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | On October
 30, 2008, VillageEDOCS, Inc. and SLG entered into an Amendment to Secured
 Promissory Note (Amendment) to modify the maturity date, interest rate, and
 repayment terms of the SLG Note. As of October 31, 2008, the remaining
 principal balance of the SLG Note, as amended, was $250,000 and no interest
 was outstanding. Pursuant to the Amendment, the SLG Note matures on March 31,
 2009 and bears interest from November 1, 2008 at a rate of twelve percent
 (12%) per annum. As of February 28, 2009, the remaining principal balance of
 the SLG Note was approximately $50,000. The Company intends to repay the SLG
 Note with a final installment of principal and interest March 31, 2009. The
 SLG Note is secured by the accounts receivable of GoSolutions, Inc., our
 wholly-owned subsidiary, as defined in a Security Agreement dated as of
 August 1, 2008. Payment obligations under the SLG Note are subordinate in
 certain respects to the rights of the Bank to the extent set forth in a
 Subordination Agreement to be entered into as of August 1, 2008. As of
 December 31, 2008, the outstanding principal balance due pursuant to the SLG
 note was $151,490.                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | C. Alan and
 Joan P. Williams                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | On February
 17, 2004, the Company borrowed $1,700,000 from C. Alan and Joan P. Williams
 and issued a convertible promissory note, bearing interest at 10 percent per
 annum. During 2005, all but $65,000 of the principal amount due pursuant to
 this note was converted into shares of the Companys common stock. The note
 and accrued interest are due at the earlier of one of three events: 1)
 October 31, 2009; 2) acquisition of a controlling interest in the Company by
 a third 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.
 and Mrs. Williams to provide the loan, the Company issued them a warrant to
 purchase 5,000,000 shares of the Companys common stock at $0.10 per share
 exercisable until February 17, 2009. Effective February 17, 2009, the Company
 and the Williams agreed to extend the expiration date of the warrant to
 February 16, 2012 in exchange for the Williams agreement to extend their
 guaranty of the RLOC through December 31, 2010. In connection with the
 issuance of the note, the Company recorded a debt discount of $730,000,
 consisting of an embedded put option of $280,000 and the fair value of the
 warrant of $450,000, which were recorded as derivative liabilities upon note
 issuance and subsequently reclassified to additional paid-in capital.

F-28

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
 amortized the discount using the effective interest method through October
 31, 2007. During 2007, $12,233 of interest expense was recognized in
 connection with the amortization of debt discount related to these notes.                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | At December
 31, 2008, the amount owed by the Company to the Williams pursuant to the
 unpaid balance of the convertible promissory note payable was $65,000 in
 principal and $113,370 in unpaid interest. The interest rate in effect as of
 December 31, 2008 was ten percent (10%) per annum.                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | At December
 31, 2007, the amount owed by the Company to the Williams pursuant to the
 unpaid balance of the convertible promissory note payable was $65,000 in
 principal and $106,870 in unpaid interest.                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | James L.
 Campbell and Stephen A. Garner                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In
 connection with the acquisition of TBS, the Company issued a $300,000
 convertible promissory note to Stephen A. Garner and a $300,000 convertible
 promissory note to James L. Campbell (the TBS Notes). Messrs. Campbell and
 Garner are employees of TBS. Each of the TBS Notes bore interest at 5 percent
 per annum and was due and payable in three equal annual installments of
 $100,000, with the first installment paid in February 2005, the second
 installment paid in March 2006 and the third and final installment paid in
 February 2007.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Alexander
 Riess and William Falcon                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | An aggregate
 of $30,000 in notes payable to Messrs. Riess and Falcon were assumed in the
 acquisition of Resolutions. The notes were non-interest bearing. The notes were
 paid in full as of March 1, 2007 in accordance with the acquisition
 agreement.                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Interest
 Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Interest
 expense recognized on all lines of credit and notes payable was $282,553 and
 $112,447, respectively, during the years ended December 31, 2008 and 2007.                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Interest
 expense noted above included non-cash charges (related to amortization of
 debt discount and debt issuance costs) of $216,697 and $12,233, respectively,
 during 2008 and 2007.                                                                                                                                                                                                                                                                                                                                                                       

F-29

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

7. Stockholders
Equity

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                            
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------
| | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Common and
 Preferred Stock
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                            
| | Effective
 September 7, 2007, the Company reincorporated in Delaware under the name
 VillageEDOCS, Inc. Pursuant to its Articles of Incorporation filed with the
 State of Delaware, the Company is authorized to issue two classes of shares
 of stock. The first class is designated as preferred stock. The total number
 of shares of Series A Preferred stock that the Company is authorized to issue
 is forty eight million (48,000,000) of $0.001 par value per share. The second
 class is designated as common stock. The total number of shares of common
 stock that the Company is authorized to issue is five hundred million
 (500,000,000) of $0.0001 par value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                            
| | As of May
 24, 2007, a majority of the Companys stockholders approved a proposal to
 increase the authorized shares of the Company to 500,000,000 from
 400,000,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                            
| | The Company
 is authorized to issue up to 48,000,000 shares of Series A Convertible
 Preferred Stock, par value $0.001 (Series A Preferred Stock). Each share of
 Series A Preferred Stock shall be convertible into one share of common stock.
 Series A Preferred Stock will be immediately convertible into common stock,
 however, the Company is prohibited from effecting any conversion of the
 Series A Preferred Stock, and the holder shall not have the right to convert
 any portion of the Series A Preferred Stock, to the extent that after giving
 effect to such conversion, the holder (together with the holders affiliates)
 would beneficially own in excess of 4.99% of the number of shares of common
 stock outstanding immediately after giving effect to the conversion. The foregoing
 restriction may be waived (a) upon sixty-one days prior notice from the
 holder to the Company and (b) shall not apply in the event of a sale of
 substantially all of the assets or securities of the Company, a merger
 involving the corporation or an underwritten public offering of the Companys
 common stock. No dividends shall be payable with respect to the Series A
 Preferred Stock. The Series A Preferred Stock shall have no voting rights,
 except with respect to changes in the powers, preferences or rights of the
 Preferred Stock. The liquidation preference of the Series A Preferred Stock
 is equal to $0.05 per share (the Liquidation Value). Upon liquidation of
 the Company, holders of Series A Preferred Shares will be paid the
 Liquidation Value prior to distribution of any amounts to holders of our
 common stock.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                            
| | On November
 17, 2008, the Company issued 2,500,000 shares of its common stock to K. Mason
 Conner pursuant to the 2002 Equity Incentive Plan. Mr. Conner is an officer
 and director of the Company. These shares were valued at $0.015 per share
 (the estimated fair value on the measurement date) and recorded as
 compensation expense. On November 17, 2008, the Company issued 2,000,000
 shares of its common stock to H. Jay Hill pursuant to the 2002 Equity
 Incentive Plan. Mr. Hill is and officer and director of the Company. These
 shares were valued at $0.015 per share (the estimated fair value on the
 measurement date) and recorded as compensation expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-30

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On November
 17, 2008, the Company issued 1,000,000 shares of its common stock to Michael
 A. Richard pursuant to the 2002 Equity Incentive Plan. Mr. Richard is an officer
 of the Company. These shares were valued at $0.015 per share (the estimated
 fair value on the measurement date) and recorded as compensation expense.                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | On August 1,
 2008 and in connection with the acquisition of Questys, the Company issued
 22,000,000 shares of its common stock to the Pavlovics (see Note 5). These
 shares were valued at $0.025 per share (the estimated fair value on the
 measurement date) and recorded as additional purchase price.                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | On August
 28, 2007, and in connection with an engagement agreement, the Company issued
 an aggregate of 500,000 shares of its common stock to Gemstone Securities LLC
 for services provided. The shares were valued at $0.06 per share (the
 estimated fair value on the measurement date).                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | On August
 28, 2007, the Company issued 2,000,000 shares of its common stock to C. Alan
 and Joan P. Williams at $0.10 per share in consideration for $200,000 in cash
 proceeds to the Company from the exercise of common stock purchase warrants.                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | On May 7,
 2007, and pursuant to the TBS acquisition agreement, the Company issued
 1,100,000 shares of common stock to each of Messrs. Garner and Campbell. The
 shares were valued at $0.04 per share (the estimated fair value on the
 measurement date) and recorded as additional purchase price. No additional
 shares of common stock are due to Messrs. Garner and Campbell pursuant to the
 TBS acquisition agreement.                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | On May 7,
 2007, and in connection with the acquisition of TBS, the Company issued
 110,000 shares of its common stock to a non-affiliate pursuant to a finders
 fee agreement. The shares were valued at $0.04 per share (the estimated fair
 value on the measurement date) and recorded as additional purchase price.                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | On May 7,
 2007, and in connection with the acquisition of TBS, the Company issued
 66,000 shares of its common stock to H. Jay Hill, who is an officer and
 director of the Company, as a finders fee. The shares were valued at $0.04
 per share (the estimated fair value on the measurement date) and were
 recorded as compensation expense.                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | On May 7,
 2007, the Company issued 26,786 shares of its common stock to a non-affiliate
 independent contractor for project management services rendered. The shares
 were valued at $0.04 per share (the estimated fair value on the measurement
 date) and were recorded as consulting expense in June 2007.                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | On February
 22, 2007, the Company issued an aggregate of 500,000 shares of its common
 stock to a consultant in connection with a placement agency agreement. The
 500,000 shares were valued at $0.085 per share (fair value on the measurement
 date) and the Company recorded $42,500 of consulting expense in the
 accompanying consolidated statements of operations during the year ended
 December 31, 2007 in accordance with the nature of the services provided.

F-31

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------
| | The Company
 did not issue any shares of its preferred stock during either of the years
 ended December 31, 2008 and 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |               
| | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Stock
 Options
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |               
| | The Company
 has adopted an equity incentive plan (the 2002 Plan) that authorizes the
 issuance of options to acquire up to 90,000,000 shares of common stock, as
 amended, to employees and certain outside consultants. The 2002 Plan allows
 for 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 the
 grant date, but not longer than a ten-year term. Under the 2002 Plan, the
 exercise price of each option shall not be less than fair market value on the
 date the option is granted. The number of options under the 2002 Plan
 available for grant at December 31, 2008 and 2007 was approximately
 43,000,000 and 55,000,000, respectively.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |               
| | During 1997,
 the Board of Directors of the Company adopted a stock option plan (the 1997
 Plan) that authorizes the issuance of options to acquire up to 5,000,000
 shares of common stock to employees and certain outside consultants. The 1997
 Plan allows for the issuance of either non-qualified or 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 the grant date, but
 not longer than a ten-year term. Under the 1997 Plan, the exercise price of
 each option shall not be less than 85 percent of fair market value on the
 date the option is granted. The number of options under the 1997 Plan
 available for grant at December 31, 2008 and 2007 was approximately 4,200,000
 and 2,900,000, respectively.      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |               
| | During 2008,
 the Company granted to its employees options to purchase shares of its common
 stock under the 2002 Plan as follows: 2,075,000 shares at $0.15 per share,
 1,540,000 shares at $0.05 per share, 325,000 shares at $0.04 per share,
 7,300,000 shares at $0.037 per share, 600,000 shares at $0.036 per share,
 570,000 shares at $0.03 per share, 425,000 shares at $0.02 per share, and
 2,190,000 at $0.015 per share. All options were issued above or at the fair
 market value on the dates of grant and vest on various dates from the date of
 grant through December 2015 (see Note 3).                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |               
| | During 2007,
 the Company granted to its employees options to purchase shares of its common
 stock under the 2002 Plan as follows: 1,180,000 shares at $0.15 per share,
 and 4,242,392 shares at $0.19 per share. All options were issued above or at
 the fair market value on the dates of grant and vest on various dates from
 the date of grant through August 2015.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-32

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------
| | d.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Warrants
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |         
| | From time to
 time, the Company issues warrants pursuant to various consulting and third
 party agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |         
| | In December
 2008, and in connection with a retainer agreement dated September 15, 2007
 that was cancelled by the Company effective February 28, 2009, the Company
 issued a warrant to purchase 1,304,074 shares of its common stock at $0.023
 per share (fair value on the measurement date) to a consultant in
 consideration for public relations services. The warrant vested immediately
 and is exercisable over a five year period from date of grant. The warrant
 was valued using the Black-Scholes option pricing model, was valued at
 $26,001, and was recorded as prepaid consulting expense, and is being amortized to general and administrative expense in the
 Companys statements of operations over the three month service period that
 began on December 1, 2008. During the year ended December 31, 2008, the
 Company recorded $8,667 of consulting expense in connection with this
 warrant.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |         
| | In
 consideration for the Line, (see Note 6) the Company issued the Bank an
 immediately exercisable warrant to purchase 75,000 shares of its common stock
 at an exercise price of $0.062 per share through February 6, 2018. The
 warrants were valued using the Black-Scholes option pricing model at $4,500
 and were recorded as debt issuance cost in the accompanying consolidated balance
 sheet at December 31, 2008. The Company is amortizing such cost over the
 one-year life of the related debt instrument. During the year ended December
 31, 2008, the Company recorded $4,125 of interest expense in the accompanying
 consolidated statements of operations.                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |         
| | As a
 finders fee for the Line (see Note 6), the Company issued Dragonfly an
 immediately exercisable warrant to purchase 2,419,355 shares of its common
 stock at an exercise price of $0.062 per share through February 6, 2013. The
 warrants were valued using the Black-Scholes option pricing model at $145,161
 and were recorded as debt issuance cost in the accompanying consolidated
 balance sheet at December 31, 2008. The Company is amortizing such cost over
 the one-year life of the related debt instrument. During the year ended
 December 31, 2008, the Company recorded $133,070 of interest expense in the
 accompanying consolidated statements of operations.                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |         
| | On February
 8, 2008, the Company issued Agile Equity LLC an immediately exercisable
 warrant to purchase 653,214 shares of its common stock at $0.077 per share
 through February 8, 2009 in consideration for consulting services rendered.
 The warrant was valued at $50,484 based on the Black Scholes option pricing
 model. During the years ended December 31, 2008 and 2007 the Company expensed
 consulting fees of $484 and $50,000 and, respectively, in accordance with the
 timing of the services performed.                                                                                                                                                                                                                                                                                                                                                                                              

F-33

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October
 1, 2007, and in connection with a retainer agreement dated September 15,
 2007, the Company issued a warrant to purchase 2,000,000 shares of its common
 stock at $0.05 per share (fair value on the measurement date) to a consultant
 in consideration for public relations services. The warrant is exercisable
 over a five year period from date of grant. The warrant was valued using the
 Black-Scholes option pricing model, was valued at $100,000, and was recorded
 as general and administrative expense in the Companys statements of
 operations over the twelve month vesting period that began on September 15,
 2007. During the years ended December 31, 2008 and 2007, the Company recorded
 $66,668 and $33,332, respectively, of consulting expense in connection with
 this warrant.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | On April 15,
 2005 and in connection with the acquisition of PFI, the Company issued
 warrants to purchase an aggregate of 10,000,000 shares of VillageEDOCS
 common stock at $0.15 per share. The warrants were valued at $2,100,000
 (estimated based on the Black-Scholes option pricing model) and included as
 consideration in the purchase price, and vested at various amounts during the
 third, twelfth, twenty-fourth, and thirty-sixth months following the date of
 closing. The warrants were tendered and cancelled effective December 1, 2007
 in connection with the sale of Resolutions (see Note 5).                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The
 following represents a summary of the warrants outstanding for the year ended
 December 31, 2008:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                                          |  |                     |            |                                              |   |      | 
|--------------------------------------------------------- |  | ------------------- | ---------- | -------------------------------------------- | - | ---- | 
|                                                          |  | Number
 of Warrants |            | Weighted
 Average
 Exercise Price
 Per Share |  
|Outstanding at January 1,
 2008                           |  |                     | 5,566,000  |                                              | $ | 0.09 | 
|Granted                                                   |  |                     | 4,451,643  |                                              |   | 0.05 | 
|Exercised                                                 |  |                     | -          |                                              |   | -    | 
|Expired/Forfeited                                         |  |                     | -          |                                              |   | -    | 
|Balance at December 31,
 2008                             |  |                     | 10,017,643 |                                              | $ | 0.07 | 
|                                                          |  |                     |            |                                              |   |      | 
|Weighted average fair
 value of warrants granted in 2008: |  | $                   | 0.05       |                                              |   |      | 
|Weighted average fair
 value of warrants granted in 2007: |  | $                   | 0.05       |                                              |   |      | 

F-34

---

VillageEDOCS, Inc. and subsidiaries

Notes to Consolidated
Financial Statements
For the Years Ended December 31, 2008 and 2007

|   |             
|-- | ------------
|8. | Income Taxes

The components
of the (benefit) provision for income taxes for December 31, 2008 and 2007 are
presented in the following table:

|          |  |         |  |                   |         |                   |   |          |  
|--------- |  | ------- |  | ----------------- | ------- | ----------------- | - | -------- | -
|          |  |         |  | December 31
 2008 |         | December 31
 2007 |  
|Current:  |  |         |  |                   |         |                   |   |          |  
|          |  | Federal |  | $                 | (16,000 | )                 | $ | (149,000 | )
|          |  | State   |  |                   | 28,000  |                   |   | 60,000   |  
|          |  |         |  |                   | 12,000  |                   |   | (89,000  | )
|          |  |         |  |                   |         |                   |   |          |  
|Deferred: |  |         |  |                   |         |                   |   |          |  
|          |  | Federal |  |                   |         |                   |   |          |  
|          |  | State   |  |                   |         |                   |   |          |  
|          |  |         |  |                   |         |                   |   |          |  
|          |  |         |  | $                 | 12,000  |                   | $ | (89,000  | )

At December
31, 2008, the Company had approximately $24,693,000 and $23,529,000,
respectively, of federal and state net operating loss carryforwards for tax
reporting purposes available to offset future taxable income; federal and state
net operating loss carryforwards expire through 2026 and 2027, respectively.
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating losses carried forward may be impaired or limited in certain
circumstances. Events which may cause limitations in the amount of net
operating losses that the Company may utilize in any one year include, but are
not limited to, a cumulative ownership change of more than 50 percent over a
three-year period. At December 31, 2008, the effect of such limitation, if
imposed, has not been determined.

At December 31, 2008, the Company had approximately $22,508 of California research and development
tax credit carryforwards which carry forward indefinitely.

At December
31, 2007, the Company had approximately 24,857,000 and $28,126,000,
respectively, of federal and state net operating loss carryforwards for tax
reporting purposes available to offset future taxable income.

F-35

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

Deferred tax
assets consist primarily of the tax effect of net operating loss carryforwards.
The Company has provided a full valuation allowance on the deferred tax assets
because of the uncertainty regarding realizability. The valuation allowance (decreased)
increased approximately $(779,000) and $784,000 during the years ended December
31, 2008 and 2007, respectively. Of the change in the valuation allowance from 2007 to 2008, $550,000 was due to purchase accounting for Questys.

Deferred tax
assets (liabilities) consist of the following:

|                                       |  |                    |            |                    |   |            |  
|-------------------------------------- |  | ------------------ | ---------- | ------------------ | - | ---------- | -
|                                       |  | December 31,
 2008 |            | December 31,
 2007 |  
|Deferred tax assets:                   |  |                    |            |                    |  
|                                      
|Net operating loss
 carryforwards      |  | $                  | 9,417,000  |                    | $ | 9,818,000  |  
|Accrued expenses                       |  |                    | 174,000    |                    |   | 80,000     |  
|Other                                  |  |                    | 54,000     |                    |   | 147,000    |  
|Less valuation allowance               |  |                    | (8,265,000 | )                  |   | (9,044,000 | )
|                                       |  | $                  | 1,380,000  |                    | $ | 1,001,000  |  
|                                       |  |                    |            |                    |   |            |  
|Deferred tax liabilities:              |  |                    |            |                    |   |            |  
|                                       |  |                    |            |                    |   |            |  
|Purchased Intangibles                  |  | $                  | (1,246,000 | )                  | $ | (899,000   | )
|Property and equipment and intangibles |  |                    | (134,000   | )                  |   | (102,000   | )
|Total deferred tax
 liabilities        |  |                    | (1,380,000 | )                  |   | (1,001,000 | )
|Net deferred tax assets
 (liabilities) |  | $                  | -          |                    | $ | -          |  

F-36

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

A reconciliation
of income taxes from continuing operations computed at the federal statutory
rate of 34% to the provision for income taxes is as follows for the years ended
December 31:

|                                                 |  |      |          |      |   |          |  
|------------------------------------------------ |  | ---- | -------- | ---- | - | -------- | -
|                                                 |  | 2008 |          | 2007 |  
|Computed benefit at
 federal statutory rate      |  | $    | (205,000 | )    | $ | (487,000 | )
|State income tax benefit,
 net of federal effect |  |      | 6,000    |      |   | (26,000  | )
|Permanent items                                  |  |      | 196,000  |      |   | 303,000  |  
|Other                                            |  |      | (11,000  | )    |   | (663,000 | )
|FIN 48 reserve                                   |  |      | 81,000   |      |   | -        |  
|Payable adjustment                               |  |      | (169,000 | )    |   | -        |  
|State net operating loss adjustment              |  |      | 197,000  |      |   | -        |  
|State effective tax rate adjustment              |  |      | 146,000  |      |   | -        |  
|Change in valuation allowance                    |  |      | (229,000 | )    |   | 784,000  |  
|                                                 |  | $    | 12,000   |      | $ | (89,000  | )

In June 2006,
the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes  an interpretation of FASB Statement 109
(FIN No. 48). FIN No. 48 establishes a single model to address accounting for
uncertain tax positions. FIN No. 48 clarifies the accounting for income taxes
by prescribing a minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements. FIN No. 48 also
provides guidance on de-recognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The
Company adopted the provisions of FIN No. 48 on January 1, 2007. Upon adoption,
the Company recognized no adjustment in the amount of unrecognized tax
benefits. As of the date of adoption, the Company had no unrecognized tax
benefits. The Companys policy is to recognize interest and penalties that
would be assessed in relation to the settlement value of unrecognized tax
benefits as a component of income tax expense.

A portion of
the net operating loss carryforwards as of December 31, 2008 includes amounts
related to stock option deductions. Under SFAS 123R, any excess tax benefits
from share-based compensation are only realized when income taxes payable is
reduces, with the corresponding credit posted to additional paid-in capital.

F-37

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

The following table summarizes the changes to unrecognized tax benefits for the years ended December 31, 2008 and 2007 (in thousands):



Balance at January 1, 2007 (FIN No. 48 adoption)

        $

        -Additions based on tax positions related to the current year

        -Additions based on tax positions of prior years

        -Balance at December 31, 2007

        -Additions based on tax positions related to the current year

        81Additions based on tax positions related to the prior year

        -Reductions as a result of lapse of applicable statute of limitations

        -Balance at December 31, 2008

        $

        81




The Company and its subsidiaries are subject to federal income tax as well as income tax of multiple state   jurisdictions.  The Company is not currently under examination by the IRS, state and local taxing authorities.  However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs and tax credits were generated and carried forward, and make adjustments up to the amount of the carryforwards.



The Company has elected to recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.   As of December 31, 2008, the Company has accrued interest and penalties associated with uncertain tax positions of $18,000.



Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future as provided by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions.  These ownership changes may limit the amount of the net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income.  Since the Companys formation, the Company has raised capital through the issuance of capital stock on several occasions which may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future.  The Company has not completed a study to assess whether a change of control has occurred or whether there have been multiple changes of control since the Companys formation due to
the significant complexity and cost associated with such study and that there could be additional changes in control in the future.  If the Company has experienced a change of control at any time since Company formation, utilization of the Companys net operating loss carryforwards would be subject to an annual limitation under Section 382.  Any limitation may result in expiration of a portion of the carryforwards before utilization.  Further, once a study is completed and any limitation known, the amounts currently presented as an uncertain tax position under FIN No. 48 may change.  Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.



|   |                
|-- | ---------------
|9. | Loss per
 Share

Basic and
diluted loss per common share is computed as follows for the years ended
December 31:

|                                                                          |  |      |             |      |   |             |  
|------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                          |  | 2008 |             | 2007 |  
|                                                                          |  |      |             |      |   |             |  
|Numerator for basic and
 diluted loss per common share:                   |  |      |             |      |   |             |  
|Net loss available to
 common stockholders                                |  | $    | (616,242    | )    | $ | (3,285,230  | )
|                                                                          |  |      |             |      |   |             |  
|Denominator for basic and
 diluted loss per common share:                 |  |      |             |      |   |             |  
|                                                                          |  |      |             |      |   |             |  
|Weighted average common
 shares outstanding                               |  |      | 162,595,571 |      |   | 150,218,437 |  
|                                                                          |  |      |             |      |   |             |  
|Basic and diluted loss
 available to common stockholders per common share |  | $    | -           |      | $ | (0.02       | )

10. Commitments
and Contingencies

| |                                                                                                                                                                                                                                                       |       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------
| | a.                                                                                                                                                                                                                                                    | Leases
| |                                                                                                                                                                                                                                                       |       
| | The Company
 leases certain property and equipment under operating lease agreements
 (including related party leases  see Note 11) which expire on various dates
 through 2015 and provide for monthly lease payments ranging from $108 to
 $13,150.
| |                                                                                                                                                                                                                                                       |       
| | The Company
 also leases equipment under a related party capital lease agreement which
 expires in January 2010 and provides for a monthly lease payment of $1,746.                                                                                  

F-38

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VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Future
 annual minimum payments under capital leases and noncancelable operating
 leases is as follows:

|                                     |  |  |      |  |                   |         |                  |   |         |  |       |           |  |   |           | 
|------------------------------------ |  |  | ---- |  | ----------------- | ------- | ---------------- | - | ------- |  | ----- | --------- |  | - | --------- | 
|                                     |  |  |      |  | Operating
 Leases |        
|                                     |  |  |      |  | Capital           |         | Related
 Parties |   | Other   |  | Total |          
|                                     |  |  |      |  |                   |         |                  |   |         |  |       |           |  |   |           | 
|                                     |  |  | 2009 |  | $                 | 21,000  |                  | $ | 246,000 |  | $     | 484,000   |  | $ | 751,000   | 
|                                     |  |  | 2010 |  |                   | 1,700   |                  |   | 185,000 |  |       | 331,000   |  |   | 517,700   | 
|                                     |  |  | 2011 |  |                   | -       |                  |   | 61,000  |  |       | 181,000   |  |   | 242,000   | 
|                                     |  |  | 2012 |  |                   | -       |                  |   | -       |  |       | 76,000    |  |   | 76,000    | 
|                                     |  |  | 2013 |  |                   | -       |                  |   | -       |  |       | 19,000    |  |   | 19,000    | 
|Total minimum lease
 payments        |  |  |      |  |                   | 22,700  |                  | $ | 492,000 |  | $     | 1,091,000 |  | $ | 1,605,700 | 
|Less: amounts representing
 interest |  |  |      |  |                   | (783    | )                |   |         |  |       |           |  |   |           | 
|Present value of lease
 obligations  |  |  |      |  |                   | 21,917  |                  |   |         |  |       |           |  |   |           | 
|Less: current portion                |  |  |      |  |                   | (20,180 | )                |   |         |  |       |           |  |   |           | 
|                                     |  |  |      |  | $                 | 1,737   |                  |   |         |  |       |           |  |   |           | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------
| | Rent expense
 for the years ended December 31, 2008 and 2007 was $1,023,271 (including
 $238,063 of related party rent) and $369,396 (including $243,851 of related
 party rent), respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |           
| | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Litigation
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |           
| | The Company
 is, from time to time, involved in various legal and other proceedings which
 arise in the ordinary course of operating its business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |           
| | In
 connection with the acquisition of GSI the Company is entitled to certain
 rights of indemnification from GoSolutions Equity, LLC, which is a former
 shareholder of GSI that became a shareholder of the Company as a result of
 our acquisition of GSI. The Company made a claim of indemnification from this
 entity in connection with the bankruptcy of one of GSIs significant
 customers  Vartec Telecom, Inc.  and the facts and circumstances relating
 to the procurement and maintenance of the Primerica Life Insurance account
 and related Citigroup affiliates. GoSolutions Equity, LLC has indicated that
 it does not believe that we have a valid basis for making such
 indemnification claims.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |           
| | The Company
 has engaged in limited discussions with GoSolutions Equity, LLC as it relates
 to the indemnification claims notice and their response to such claims
 notice. However, the Company is unable to advise whether it will be
 successful in the indemnification claims against GoSolutions Equity, LLC.
 Pursuant to the agreement with GSI, if the Company is successful, GoSolutions
 Equity, LLC would only be required to return up to approximately 4.4 million
 of our shares issued to that entity to satisfy such indemnification claims.
 GoSolutions Equity, LLC is not required to contribute cash to satisfy any
 indemnification claims.                                                         

F-39

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VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                    
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------
| | In the
 opinion of management, the amount of ultimate liability, if any, with respect
 to these actions will not materially affect the consolidated financial
 position or results of operations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                    
| | c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Consulting
 and Employee Agreements
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                    
| | The Company
 has entered into a variety of consulting and employee agreements for services
 to be provided to the Company in the ordinary course of business. These
 agreements call for minimum salary levels and/or option grants and/or common
 share issuances and various payments upon performance of services and/or
 termination of the agreements (except for cause).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                    
| | d.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Indemnities
 and Guarantees        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                    
| | During the
 normal course of business, the Company has made certain indemnities and
 guarantees under which it may be required to make payments in relation to
 certain transactions. The Company indemnifies its directors, officers,
 employees and agents to the maximum extent permitted under the laws of the
 States of California, Delaware, Florida, and Georgia. These indemnities
 include certain agreements with the Companys officers under which the
 Company may be required to indemnify such person for liabilities arising out
 of their employment relationship. In connection with its facility leases, the
 Company has indemnified its lessors for certain claims arising from the use
 of the facilities. In connection with the Companys acquisition of TBS, the
 parties have agreed to indemnify each other from claims relating to the
 acquisition agreement to a maximum of $1,500,000 except in the event of
 fraud, willful misconduct, or breaches of certain representations and
 warranties contained in the agreement. In connection with the Companys
 acquisitions of QSI and GSI, the parties have agreed to indemnify each other
 from claims relating to the acquisition agreement. The duration of these
 indemnities and guarantees varies and, in certain cases, is indefinite. The
 majority of these indemnities and guarantees do not provide for any
 limitation of the maximum potential future payments the Company could be
 obligated to make. Historically, the Company has not been obligated to make
 significant payments for these obligations and no liabilities have been
 recorded for these indemnities and guarantees in the accompanying
 consolidated balance sheets.

F-40

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VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

11. Related
Party Transactions

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

TBS has a
related party operating lease with Perimeter Center Partners for the rental of
the land and building occupied by TBS. The lease, as amended, commenced on
February 1, 2004 and has a term of six 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 are each employees
and stockholders of the Company and the former owners of TBS.

TBS has a
related party capital lease with Perimeter Center Partners for an inserting
machine. The lease commenced on May 19, 2007 and ends on January 31, 2010.
Monthly payments are $1,746. The Company has executed a Guaranty with respect
to the lease.

GSI leases the
St. Petersburg office space pursuant to a noncancelable operating lease
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 periods ended April
2007, 2008, 2009, 2010, and 2011, respectively. The building in which the
office space is located is owned by an entity in which a member of GoSolutions
Equity, LLC (a related party) owns an interest.

F-41

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

12. Segment
Reporting

The Companys
operations are classified into five principal reportable segments that provide different
products or services. Separate management of each segment is required because
each business unit is subject to different marketing, production, and
technology strategies. The Company operates in the following five reportable
segments:

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

The Company
evaluates performance and allocates resources based upon operating income. The
accounting policies of the reportable segments are the same as those described
in the summary of accounting policies. Inter-segment sales are eliminated upon
consolidation.

The following
table summarizes segment asset and operating balances by reportable segment,
has been prepared in accordance with the internal accounting policies, and may
not be presented in accordance with accounting principles generally accepted in
the United States of America:

F-42

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VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

|                                                           |  |                                        |            |                                        |   |            |  
|---------------------------------------------------------- |  | -------------------------------------- | ---------- | -------------------------------------- | - | ---------- | -
|                                                           |  | Year
 ended / As of
 December 31
 2008 |            | Year
 ended / As of
 December 31
 2007 |  
|                                                           |  |                                        |            |                                        |   |            |  
|Net revenue from external
 customers:                      |  |                                        |            |                                        |   |            |  
|                                                           |  |                                        |            |                                        |   |            |  
|Electronic document
 delivery services                     |  | $                                      | 2,761,147  |                                        | $ | 2,956,857  |  
|Government accounting
 solutions                           |  |                                        | 5,376,539  |                                        |   | 5,001,343  |  
|Electronic content
 management                             |  |                                        | 979,553    |                                        |   | -          |  
|Integrated communications                                  |  |                                        | 6,059,154  |                                        |   | 6,222,458  |  
|Corporate                                                  |  |                                        | -          |                                        |   | -          |  
|Total net revenue from external customers:                 |  | $                                      | 15,176,393 |                                        | $ | 14,180,658 |  
|                                                           |  |                                        |            |                                        |   |            |  
|Operating income (loss)
 from continuing operations:       |  |                                        |            |                                        |   |            |  
|                                                           |  |                                        |            |                                        |   |            |  
|Electronic document
 delivery services                     |  | $                                      | 295,534    |                                        | $ | 327,288    |  
|Government accounting
 solutions                           |  |                                        | 470,985    |                                        |   | 501,082    |  
|Electronic content
 management                             |  |                                        | (33,926    | )                                      |   | -          |  
|Integrated communications                                  |  |                                        | 1,102,461  |                                        |   | 982,920    |  
|Corporate                                                  |  |                                        | (2,298,940 | )                                      |   | (3,491,916 | )
|Total operating loss from continuing operations:           |  | $                                      | (463,886   | )                                      | $ | (1,680,626 | )
|                                                           |  |                                        |            |                                        |   |            |  
|Depreciation and
 amortization from continuing operations: |  |                                        |            |                                        |   |            |  
|                                                           |  |                                        |            |                                        |   |            |  
|Electronic document
 delivery services                     |  | $                                      | 89,154     |                                        | $ | 64,173     |  
|Government accounting
 solutions                           |  |                                        | 100,005    |                                        |   | 109,288    |  
|Electronic content
 management                             |  |                                        | 111,646    |                                        |   | -          |  
|Integrated communications                                  |  |                                        | 491,106    |                                        |   | 565,589    |  
|Corporate                                                  |  |                                        | 51,721     |                                        |   | 52,315     |  
|Total depreciation and amortization:                       |  | $                                      | 843,632    |                                        | $ | 791,365    |  
|                                                           |  |                                        |            |                                        |   |            |  
|Interest expense, net of
 interest income:                 |  |                                        |            |                                        |   |            |  
|                                                           |  |                                        |            |                                        |   |            |  
|Electronic document
 delivery services                     |  | $                                      | 6,507      |                                        | $ | -          |  
|Government accounting
 solutions                           |  |                                        | 12,978     |                                        |   | 1,646      |  
|Electronic content
 management                             |  |                                        | 6,507      |                                        |   | -          |  
|Integrated communications                                  |  |                                        | (408       | )                                      |   | (1,190     | )
|Corporate                                                  |  |                                        | 256,321    |                                        |   | 111,105    |  
|Total interest expense, net of interest income:            |  | $                                      | 281,905    |                                        | $ | 111,561    |  
|                                                          
|continued                                                  |  |                                        |            |                                        |   |            |  

F-43

---

VillageEDOCS, Inc. and subsidiaries

Notes to
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007

|                                           |  |                                        |            |                                        |   |            |  
|------------------------------------------ |  | -------------------------------------- | ---------- | -------------------------------------- | - | ---------- | -
|                                           |  | Year
 ended / As of
 December 31
 2008 |            | Year
 ended / As of
 December 31
 2007 |  
|Income (loss) from
 continuing operations: |  |                                        |            |                                        |   |            |  
|                                           |  |                                        |            |                                        |   |            |  
|Electronic document
 delivery services     |  | $                                      | 283,906    |                                        | $ | 318,334    |  
|Government accounting
 solutions           |  |                                        | 491,532    |                                        |   | 511,848    |  
|Electronic content
 management             |  |                                        | 16,695     |                                        |   | -          |  
|Integrated communications                  |  |                                        | 1,134,016  |                                        |   | 1,005,091  |  
|Corporate                                  |  |                                        | (2,542,391 | )                                      |   | (3,495,079 | )
|Total loss from continuing operations:     |  | $                                      | (616,242   | )                                      | $ | (1,659,806 | )
|                                           |  |                                        |            |                                        |   |            |  
|Identifiable assets:                       |  |                                        |            |                                        |   |            |  
|                                           |  |                                        |            |                                        |   |            |  
|Electronic document
 delivery services     |  | $                                      | 675,212    |                                        | $ | 693,312    |  
|Government accounting solutions            |  |                                        | 3,776,828  |                                        |   | 3,718,622  |  
|Electronic content
 management             |  |                                        | 2,628,589  |                                        |   | -          |  
|Integrated communications                  |  |                                        | 6,197,418  |                                        |   | 6,542,920  |  
|Corporate                                  |  |                                        | 213,376    |                                        |   | 613,428    |  
|Total identifiable assets:                 |  | $                                      | 13,491,423 |                                        | $ | 11,568,282 |  
|                                           |  |                                        |            |                                        |   |            |  
|Capital expenditures:                      |  |                                        |            |                                        |   |            |  
|                                           |  |                                        |            |                                        |   |            |  
|Electronic document
 delivery services     |  | $                                      | 79,946     |                                        | $ | 76,919     |  
|Government accounting
 solutions           |  |                                        | 9,064      |                                        |   | 66,850     |  
|Electronic content
 management             |  |                                        | 4,931      |                                        |   | -          |  
|Integrated communications                  |  |                                        | 40,467     |                                        |   | 60,144     |  
|Corporate                                  |  |                                        | -          |                                        |   | 5,969      |  
|Total capital expenditures:                |  | $                                      | 134,408    |                                        | $ | 209,882    |  

F-44

---