** **

**U.S. SECURITIES ANDEXCHANGE COMMISSION**

Washington, D.C. 20549

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

 

**FORM 10-KSB**

 

(**X**) ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 

 

| **For  the fiscal year ended December 31, 2007** | **Commission  File Number:  00031395** |
|--------------------------------------------------|---------------------------------------------|

**VillageEDOCS, Inc.**

(Name of Small Business Issuer in itsCharter)

 

| ** ** | **Delaware**                                                    | ** ** | **33-0668917**                                                                                                                         | ** ** |
|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
|       | ----------------------------------------------------------      |       | ----------------------------------                                                                                                     |       |
|       | (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.)                                                                                                   |       |
|       |                                                            |       |                                                                                                                                   |       |
| ** ** | **1401 N. Tustin Ave., Suite 230, Santa  Ana, CA**              | ** ** | **92705**                                                                                                                              | ** ** |
|       | ------------------------------------------------------------    |       | ----------------------------------                                                                                                     |       |
|       | (Address of principal executive offices)                        |       | (Zip Code)                                                                                                                             |       |
|       |                                                            |       |                                                                                                                                   |       |
|       | Issuer's Telephone Number:                                      |       | **  (714)  734-1030                  ** | ** ** |

 

Securitiesregistered under Section 12(b) of the Exchange Act:

 
|   | Title of  each class |   | Name of  each exchange on which registered |   |
|--------|----------------------|--------|--------------------------------------------|--------|
|   | **NONE**             |   | **N/A**                                    |   |
|   |                 |   |                                       |   |

Securitiesregistered under Section 12(g) of the Exchange Act:

 

**Common Stock,  $0.0001 par value**

(Title of each class)

 

Check whetherthe issuer (1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.   YES(**X**)                              NO()

 

Check ifdisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained herein, and will not be contained, to the best of issuer'sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form10-KSB.  (**X**)

 

Indicate by acheck mark whether the issuer is a shell company.  YES(   )____NO (**X**)

 

Stateissuer's revenues for its most recent fiscal year:  **$14,180,658**

 

State theaggregate market value of the voting stock held by non-affiliates of theissuer:  **$2,138,723 as of February 29, 2008.**

 

Number ofshares of the issuer's common stock, $0.0001 par value, outstanding as ofFebruary 29, 2008:  **152,770,913 shares**.

DOCUMENTSINCORPORATED BY REFERENCE:  None.

 

TransitionalSmall Business Disclosure Format                YES (   )____NO(**X**)

 

Indicateby check mark whether the Issuer  is an accelerated filer (as defined in Rule12b-2 of the Act)        YES (   )____NO (**X**)

 

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**VillageEDOCS**

FORM 10-KSB INDEX

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
|   |     |       |                                                                                                                    |   |
|--------|----------|------------|-------------------------------------------------------------------------------------------------------------------------|--------|
|   |     |       |                                                                                                                    | Page   |
|   | PART I   |       |                                                                                                                    |   |
|   |     |       |                                                                                                                    |   |
|   |     | Item 1.    | Description  of Business                                                                                                | 3      |
|   |     | Item 2.    | Description  of Property                                                                                                | 8      |
|   |     |       |                                                                                                                    |   |
|   |     | Item 3.    | Legal  Proceedings                                                                                                      | 9      |
|   |     |       |                                                                                                                    |   |
|   |     | Item 4.    | Submission  of Matters to a Vote of Security Holders                                                                    | 10     |
|   |     |       |                                                                                                                    |   |
|   | PART II  |       |                                                                                                                    |   |
|   |     |       |                                                                                                                    |   |
|   |     | Item 5.    | Market for  Equity Securities and Related Stockholder Matters                                                           | 11     |
|   |     |       |                                                                                                                    |   |
|   |     | Item 6.    | Management's  Discussion and Analysis or Plan of Operation                                                              | 12     |
|   |     |       |                                                                                                                    |   |
|   |     | Item 7.    | Financial  Statements                                                                                                   | 42     |
|   |     |       |                                                                                                                    |   |
|   |     | Item 8.    | Changes In  and Disagreements with Accountants on Accounting and Financial Disclosure                                   | 42     |
|   |     |       |                                                                                                                    |   |
|   |     | Item 8A.   | Controls  and Procedures                                                                                                | 42     |
|   |     |       |                                                                                                                    |   |
|   |     | Item 8B.   | Other  Information                                                                                                      | 42     |
|   |     |       |                                                                                                                    |   |
|   | PART III |       |                                                                                                                    |   |
|   |     |       |                                                                                                                    |   |
|   |     | Item 9.    | Directors,  Executive Officers, Promoters and Control Persons;  Compliance With Section  16(a) of the Exchange Act | 45     |
|   |     |       |                                                                                                                    |   |
|   |     | Item 10.   | Executive  Compensation                                                                                                 | 50     |
|   |     |       |                                                                                                                    |   |
|   |     | Item 11.   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        | 59     |
|   |     |       |                                                                                                                    |   |
|   |     | Item 12.   | Certain  Relationships and Related Transactions and Director Independence                                               | 61     |
|   |     |       |                                                                                                                    |   |
|   |     | Item 13.   | Exhibits                                                                                                                | 64     |
|   |     |       |                                                                                                                    |   |
|   |     | Item 14.   | Principal  Accountant Fees and Services                                                                                 | 71     |
|   |     |       |                                                                                                                    |   |
|   |     | Signatures |                                                                                                                    | 72     |
|   |     |       |                                                                                                                    |   |

 

 

 

| 2 |
|---|

** **

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###### PART I

** **

**ITEM 1.  DESCRIPTION OF BUSINESS**

 

**IMPORTANTNOTIFICATIONS**

 

*This Annual Report on Form 10-KSB includes forward-looking statementswithin the meaning of Section 21E of the Securities Exchange Act of 1934, asamended. All statements that do not directly and exclusively relate tohistorical facts constitute forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995.  You are cautioned not toput undue reliance on any forward-looking statements.  For these statements, weclaim the protection of the safe harbor for forward-looking statementscontained in Section 21E of the Exchange Act.  For important additional andspecific information regarding these statements, we strongly urge you to referto the captions entitled "CAUTIONARY INFORMATION ABOUTFORWARD-LOOKING STATEMENTS" and "CERTAIN FACTORS THAT MAY AFFECTFUTURE RESULTS" which can be found in Item 6. Management's Discussion andAnalysis or Plan of Operation of this Annual Report on Form 10-KSB.*

** **

The Company's Internet website address iswww.villageedocs.com.  The Company's annual reports on Form 10-KSB, quarterlyreports on Form 10-QSB, current reports on Form 8-K, and all amendmentsthereto, are available free of charge on the Company's website as soon asreasonably practical after such reports are electronically filed with, orfurnished to, the U.S. Securities and Exchange Commission.

 

Unless otherwise indicated by thecontext, "we", "our" or the "Company" means the parent company,VillageEDOCS, Inc. and our wholly-owned subsidiaries, GoSolutions, Inc.,MessageVision, Inc., and Tailored Business Systems, Inc.  Between April 2005and November 2007, we operated Phoenix Forms, Inc. dba Resolutions, anelectronic forms business that we discontinued and sold effective December 1,2007.

** **

** **

** **

**BUSINESS OVERVIEW**

 

General

 

VillageEDOCS,Inc. is a global outsource provider of business process solutions thatsimplify, facilitate and enhance critical business processes.  Our mission isto provide solutions that facilitate the movement of business criticalinformation between business enterprises and their trading partners.  Ourstrategy is to further develop innovative solutions to existing services toexpand our ability to benefit our enterprise clients and increase the breadthand size of the markets we satisfy today.  Our acquisition growth strategy isfocused on acquiring intellectual and technology assets that continue toaccelerate the expansion of our client solutions.

 

Clientsuse our hosted services and client premise solutions for a spectrum ofbusiness-critical communications and business processes, including just-in-timemanufacturing, receivables, invoice delivery, securities filings, insurance andhealthcare transactions, document capture and automation, utility and taxbilling, electronic payment capture, general ledger, marketing campaigns, andprinting of documents and other applications.

 

Ourtarget markets include financial services, healthcare, manufacturing, and localgovernment, and we served approximately 900 active clients, includingapproximately 25,000 individual users, as of December 31, 2007.  We have amulti-channel sales approach, selling directly to clients through our telesalesand field sales and tele-marketing professionals and indirectly throughstrategic partners.

 

Weare incorporated in the State of Delaware and have been in business since1995.  Our corporate headquarters are located at 1401 N. Tustin Road, Suite#230, Santa Ana, CA  92705, and our telephone number is (714) 734-1030.  As of February29, 2008, 2007, we had 62 employees, and we service clients throughout theworld.

 

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IndustryBackground

 

Abusiness enterprise's success is dependent upon the ability to communicate withan ever-expanding number of prospects, clients and trading partners.  Businessenterprises are challenged to support an increasing number of communicationmethods while required to meet more stringent compliance and regulation. Today's global competition and markets effectively require business enterprisesto have increased speed of communication, accuracy, security management, andcontrol of business processes.

 

Businessenterprises are increasingly outsourcing their inter-enterprise business processesto services like ours.  We offer a wide spectrum of business process solutions,a scalable global platform and proven expertise.

 

BusinessServices

 

Wemarket a complete set of business communications services and solutions thatenable business enterprise clients to increase competitiveness and efficiencythrough the automation of labor- and paper-intensive business processes. andsolutions that capture client data, shape it into useful information, anddeliver it through efficient and secure channels to and from trading partnersand their constituents.  We believe that our communications technologies-basedservices improve and enhance data delivery and critical business communicationsfor global enterprises.  We believe our hosted "on demand" solutions enableorganizations to pay as they utilize services, outsourcing the friction pointsof business document processing, communications, and messaging, while retainingcontrol of business information, processes, and services.  Examples of theinformation we move for our clients include medical reports, orders, invoices,employment verifications, and insurance documents.  We employ a hostedapplication model that provides low operational cost, high ratio of recurringto non-recurring revenue, and the ability to introduce new service offeringsrapidly.

 

OperatingSegments

 

Weconduct our business through three wholly-owned subsidiaries.  GoSolutions,Inc. ("GoSolutions", "GSI"), operates our enhanced voice and datacommunications services.  MessageVision, Inc. ("MessageVision,""MVI") operates our Internet-based document delivery services andprovides workflow solutions.  Tailored Business Systems, Inc. ("TBS")operates our government accounting products and services business.

 

Segmentrevenue and profit information for MessageVision, TBS, and GoSolutions ispresented in Note 12 of the Company's 2007 Consolidated Financial Statements,included as Exhibit 99.1 to this report.  See "Management's Discussion andAnalysis of Financial Condition or Plan of Operation" for additionalfinancial data and commentary on recent financial results for operatingsegments.

 

GoSolutions- Enhanced Voice and Data Communications Services

 

GoSolutions(44% of consolidated revenues in 2007), which we acquired in May 2006, offersnext generation communications services to enterprise customers through itshosted suite of enhanced telephony applications.  GoSolutions develops,licenses and delivers technology to address the expanding needs of thetelecommunications market.  

 

Asof February 29, 2008, GSI had over 24,000 active users.  GSI has two wholly-ownedsubsidiaries: Go Solo Technologies, Inc. and GoSolutions Canada, Inc., whichhas no significant operations. During 2007, independent representatives of onecustomer accounted for 70% of GSI's consolidated net sales.

 

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GSIoffers a portfolio of progressive, Telco-grade calling services including basicvoicemail, enhanced voicemail (which includes speech navigation and Web/phonemessage access), unified communications, audio and Web conferencing solutions. All GSI's applications can be bundled with traditional voice and data productsto provide the enhanced features found with VoIP offerings.  GSI has created avoicemail platform that enables companies to start out with the basics and add enhancedfeatures as they grow.  In addition to the features of GoSolutions' BasicVoicemail, GoSolutions' Enhanced Voicemail solution offers subscribers avirtual attendant with Find Me call routing capable of ringing up to 9 numbers. Privacy features allow callers to hear who's calling and either accept thecall or transfer the caller to voicemail.  A Web interface is available tocheck messages online. Enhanced Voicemail subscribers enjoy an enhancedprofessional image and the confidence of never missing another call orpotential opportunity. Enhanced Voicemail is offered with a generic brand.Private branding and custom branding options are also available.

 

GSI'sflagship product, Unified Communications, is a communications suite thatenables subscribers to have a unified inbox.  All voice, fax, and emailmessages are centrally located and accessible via the phone or the Web.  Usersreceive all their messages by consolidating them into the most widely usedemail application available, MS Outlook.  In addition, users can use GSI's speechrecognition system to send and receive voicemail and email over the phone.  GSIhas combined flexible technology in conjunction with a custom IVR applicationto deliver a corporate directory product.  Proprietary speech recognitiontechnology directs a caller to a main line to access other sub accounts (usersor departments) by name. Out of office attendant is included with this solution. GSI offers both audio and Web conferencing services.  A custom-branding optionis available.  We intend to use GSI's service platform to deliver new servicesobtained through future development or acquisitions.

 

Netsales to external customers for the fiscal years ended December 31, 2007 and 2006were $6,222,458 and $3,720,998 (from date of acquisition), respectively.

 

 

 

MessageVision- Electronic Document Delivery Services

 

MessageVision(21% of consolidated revenues in 2007) is a California corporation formed in2004 to operate the historical business of VillageEDOCS, an Internet-based electronicdocument delivery service.

 

Webelieve that MessageVision provides superior flexibility, availability,reliability, scalability, and security to enterprises.  Virtually all industrysegments produce documents that require extreme attention to content, format,security, and accuracy prior to delivery to the recipient.  One feature thatMVI's service provides is the ability for a user to send an electronic faxdocument to an individual or to a broadcast list of thousands through a webbrowser, e-mail package, Microsoft Windows-based application, EnterpriseResource Planning or Customer Relationship Management system, or a proprietarycorporate information system.   In addition, MVI provides "inbound"fax services that enable our clients to receive fax documents electronically.Once received electronically, documents may be stored digitally, printed,forwarded, sent to a fax machine, deleted with a single click, or annotatedusing popular desktop software.  The service also fulfills the reliability and capacityconsiderations normally applied to production applications.  When a fax isreceived by the service, it can be sent directly to an individual's email,central administrator for further distribution, or to back office applicationsfor processing.  Users are assigned a personal toll or toll-free number.

 

Anotherexample of MVI's service is the ability to capture information from anypredefined output format, standard interface, data stream (i.e., API, Barcode,Print, Spool, Control File, etc.) or directly from the actual document.

 

Ourintegration tools automatically extract data values to automate businessprocesses such as creating and distributing forms, addressing and re-routingfaxes and email transmissions, and archiving data for immediate retrieval.

 

Asof February 29, 2008, MVI had approximately 380 active clients.  During 2007,no single customer accounted for more than 10% of consolidated net sales.

 

5

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Weuse proprietary, internally-developed document processing and transmissionsystems to create and send or receive documents for our clients.  We provide easyto deploy Internet-based fax services that integrate with existingInternet-connected systems within companies where invoices, statements,purchase orders, ticket confirmations, and other key documents originate. Atypical application is characterized by the need to deliver time sensitive,personalized documents to a disparate group of recipients in multiple formatsand delivery methods.  Our services are designed for use by a wide range of industriesand enterprise sizes using such diverse platforms as Microsoft Windows XP,UNIX, and IBM iSeries (AS/400). Our clients currently include financialservices companies, healthcare companies, manufacturing companies, E-commerceproviders, application service providers, food service corporations, valueadded resellers, weather reporting services, public relations firms, and directmarketing organizations.   Businesses using Oracle and SAP environments, amongothers, can use our service to become fax-enabled without traditional capitalexpenditures and ongoing maintenance costs.  We offer our clients theflexibility to send Microsoft Office, IBM PCL, Adobe PDF, next-generation HTML,and other types of documents through our Internet fax service.  In addition,our service is compatible with virtually any foreign language includingcharacter-based Pacific Rim, Middle and Far Eastern languages.  In addition, weoffer our clients robust activity reporting and job control functions that arenot offered by many of our competitors.  We offer workflow, archiving and documentmanagement solutions that provide electronic document presentation functionsthat enable our clients to automatically generate and deliverpresentation-quality documents from enterprise systems such as ERP, CRM, andE-Commerce and to populate a database with data from a document that has eitherbeen scanned or received as a fax.

 

MVIcharges our clients a fee primarily based upon either the number of pagesdelivered and received, or upon the number of minutes expended, for thedelivery or receipt of our clients' documents during the month.  In some cases,we charge one-time and annual perpetuation fees for custom-developed clientsolutions.  Our net revenues are impacted by the number of effective businessdays in any period.

 

Netsales to external customers for the fiscal years ended December 31, 2007 and 2006were $2,956,857 and $2,890,640, respectively.

 

TailoredBusiness Systems, Inc. - Government Accounting Products and Services

 

TBS(35% of consolidated revenues in 2007) is a Georgia corporation established in1973.  The Company acquired TBS in February 2004.  TBS is engaged in thebusiness of creating, maintaining, training, customizing and supportingcomputer application programs primarily for the use of city and countygovernments, the sale of online payment solutions, the sale and installation ofcomputer equipment and supplies, the printing and ordering of forms, thefurnishing of consulting services, and the implementation of internal computernetworks in communication with IBM iSeries servers.  We generate revenues fromTBS' established client base in the form of volume printing, billing, andfulfillment services as well as online services, maintenance and trainingrevenues.  We have achieved a dominant share of the Georgia market for small tomedium government entities, enjoying two-thirds of the city,  municipal andcounty government market in that state. Our goals include expanding ourbusiness model to governmental entities regionally and, eventually,nationwide.  In addition, we intend to expand revenue both from printing andfrom subscription-based hosted solutions.

 

Asof February 29, 2008, TBS had approximately 500 active clients.  During 2007,no single customer accounted for more than 10% of consolidated net sales.

 

Wecharge for our proprietary software and for general-purpose hardware used inproviding in-house solutions.  When a client elects to use the hostedApplication Service Provider service, we charge a monthly fee per user for theuse of the Internet based services.  For our online payment services, chargesare usage-based.  In addition to our application offerings, we charge forconsulting, installation, implementation, support, annual maintenance andtraining.  We charge separately for printing and forms jobs based on thespecific nature of the requirements.  For printing, it is generally per mailingand for forms on a per page basis.  We deliver an efficient, economical andsecure environment for our municipal clients.  Our net revenues vary quarterlybased on the budget and property tax assessment cycles of our local governmentclients.

 

6

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Netsales for the fiscal years ended December 31, 2007 and 2006 were $5,001,343 and$4,130,458, respectively.

 

 

Productsand Services Development

 

TheCompany actively and continually engages in development of additional productsand services to offer to our existing and potential new clients.

 

Ourability to sustain our development activities is dependent upon theavailability of sufficient funds from operations or other sources such asproceeds received by the Company from the sale of common stock, bank lines ofcredit or other credit facilities.

 

Competition

 

Manyof our existing competitors, as well as a number of potential new competitors,have longer operating histories, greater name recognition, larger customerbases and significantly greater financial, technical and marketing resourcesthan the Company's subsidiaries. Such competitors may be able to undertake moreextensive marketing campaigns, adopt more aggressive pricing policies and makemore attractive offers to potential employees and distribution partners.  Inaddition, our clients may be able to replace several of the services we offerwith internally developed or managed products.  We believe that GSI and MVI cancompete effectively because we offer our clients certain capabilities that muchof the competition does not offer, such as ease of deployment, customintegration, private-labeling, intelligent document routing, enhanced deliverytracking, time-released training messaging, integrated distribution lists, calltransfer functionality, and electronic document presentation.  We believe TBScan compete effectively because we provide affordable and reliable full-servicesolutions tailored to the needs of local governments.  However, there can be noassurance that our competitors will not develop and market similar products andservices that are equal or superior to ours, or that achieve greater marketacceptance than our offerings.

 

 

Outlookand Strategy

 

Weintend to continue our focus on obtaining growth from higher margin productsand services at GSI, MVI and TBS, as well as growth from acquisitions ofcompanies that consistently generate net income and positive cash flows.  Webelieve that this strategy offers the best opportunity for our operations tocontinue to generate positive operating income and cash flows from operationsand to achieve net income.

 

During2006 and 2007, we pursued a strategy of preparing VillageEDOCS for significantgrowth.  One area that we focused on was adding to the leadership team so thatsufficient management resources would be in place to properly manage ourplanned growth.  Our strategy for 2008 is to direct capital toward increasingsales and marketing while holding down costs for general and administrative aswell as product and technology expenses. 

 

GovernmentRegulation

 

Ourservices relate principally to the Internet and telecommunications.Accordingly, we are subject to legal and regulatory developments affectingeither Internet or telecommunications services in general. Due to theincreasing popularity and use of the Internet, a number of laws and regulationshave been adopted at the international, federal, state and local levels with respectto the Internet. Many of these laws cover issues such as privacy, freedom ofexpression, pricing, on-line products and services, taxation, advertising,intellectual property, information security and the convergence of traditionaltelecommunications services with Internet communications. Moreover, a number oflaws and regulations have been proposed and are currently being considered byfederal, state, local and foreign legislatures with respect to these issues.The nature of any new laws and regulations and the manner in which existing andnew laws and regulations may be interpreted and enforced cannot be fullydetermined.

 

\

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Researchand Development

 

Themarkets for our services are evolving rapidly, requiring ongoing expendituresfor research and development and timely introduction of new services andservice enhancements. Our future success will depend, in part, on our abilityto enhance our current services, to respond effectively to technologicalchanges, to sell additional services to our existing customer base and tointroduce new services and technologies that address the growing needs of ourtarget markets and existing clients.

 

Employees

 

Asof February 29, 2008, VillageEDOCS had five full-time employees, three of whomare executive officers.  GoSolutions had twenty eight full-time employees. These employees include two engaged in sales and marketing, nine in customerservice, three in product development, ten in engineering and operations, andfour in administration.  MessageVision had eight full-time employees. Theseemployees include one engaged in sales and marketing, five in engineering andoperations, and two in administration.  TBS had twenty-one full-time employees,including two engaged in sales and marketing, two in technology development, thirteenin operations, and four in administration.

 

** **

** **

**ITEM2.  DESCRIPTION OF PROPERTY**

 

We occupy office space in California,Georgia and Florida.  The operations of VillageEDOCS, Inc. and MVI areconducted from approximately 5,750 square feet of leased office space locatedat 1401 N. Tustin Avenue, Suite 230, Santa Ana, CA  92705.  We lease the SantaAna office space pursuant to an operating lease agreement expiring in May 2012at a cost of $10,063 per month.  The operations of GoSolutions are conductedfrom approximately 8,000 square feet of leased office space located at 10701Danka Way North, Suite 100, St. Petersburg, Florida  33716.  GoSolutions leasesthe St. Petersburg office space pursuant to a noncancelable operating leaseagreement expiring in April 30, 2011 at a cost of $12,653 per month.    Thebuilding in which the office space is located is owned by an entity in which amember of GoSolutions Equity LLC (a significant shareholder of VillageEDOCS)owns an interest.  The operations of TBS are conducted from approximately 6,200square feet of leased office space located at 40 Joe Kennedy Blvd., Statesboro,GA  30458.  The Company leases the Statesboro office space pursuant to anoperating lease expiring in January 2009 at a cost of $6,200 per month.  Theoffice building is owned by a partnership controlled by TBS' former owners, whoare presently employees of TBS (see "*Certain Relationships and RelatedTransactions* ").  In addition, TBS subleases office space located at3360 Martin Farm Road, Suwanee GA 30024 from DocPath Corp at a cost of $2,800per month expiring on December 31, 2008.

 

Additionally, the Company leases space andoperating systems equipment from Level 3 in Tustin, California and from Qwestin Tampa, Florida, primarily to support the service operations of MVI and GSI. The highly secure facilities are served by all major global telecommunicationscarriers and are physically-, environmentally-, and utility-redundant siteswith multiple telecommunications feeds, multiple emergency power generators,and emergency fuel reserves. These fully redundant systems and emergency powerprovisions are designed to provide non-stop service and no single point offailure.

** **

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**ITEM3.  LEGAL PROCEEDINGS**

 

Litigationand Claim

 

Inconnection with our acquisition of GSI, we are entitled to certain rights ofindemnification from GoSolutions Equity, LLC, which is a former shareholder ofGSI that became a shareholder of the Company as a result of our acquisition ofGSI.  We have made a claim of indemnification from this entity in connectionwith the bankruptcy of one of GSI's significant customers - Vartec Telecom,Inc. - and the facts and circumstances relating to the procurement andmaintenance of the Primerica Life Insurance account and related Citigroupaffiliates.  GoSolutions Equity, LLC has indicated that it does not believethat we have a valid basis for making such indemnification claims.

 

TheCompany has engaged in limited discussions with GoSolutions Equity, LLC as itrelates to the indemnification claims notice and their response to such claimsnotice.  However, the Company is unable to advise whether it will be successfulin the indemnification claims against GoSolutions Equity, LLC.  Pursuant to theagreement with GSI, if the Company is successful, GoSolutions Equity, LLC wouldonly be required to return up to approximately 4.4 million of our shares issuedto that entity to satisfy such indemnification claims.  GoSolutions Equity, LLCis not required to contribute cash to satisfy any indemnification claims.

 

InMarch 2007, GSI was served by the Trustee for Vartec Telecom, Inc. ("Trustee")in the United States Bankruptcy Court for the Northern District of Texas,Dallas Division ("Bankruptcy Court"), Case No. 04-81694-hdh-7.  The complaintsought recovery of approximately $400,000 for alleged preferential transfersmade in 2004.  On July 19, 2007, the Bankruptcy Court issued an order approvinga compromise and settlement between the Trustee and GSI pursuant to which theclaims of the Trustee and the counterclaims of GSI were settled inconsideration for GSI's payment of $55,000 over a four month period that beganon July 1, 2007.

 

Inthe opinion of management, the amount of ultimate liability, if any, withrespect to these actions will not materially affect the consolidated financialposition or results of operations of the Company.

 

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**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

During 2007, our shareholders approved thefollowing actions.  These approvals were by consent action of the shareholders.

 

1.               Theelection of J. Thomas Zender, K. Mason Conner, Jerry T. Kendall, H. Jay Hill,and Richard Salas as directors to serve until the 2008 annual meeting ofstockholders and until their successors are elected and qualified; and 

 

2.               Thereincorporation of the Company from California to Delaware by means of a mergerwith and into a wholly owned Delaware subsidiary;

 

3.               Inconnection with the reincorporation in Delaware, to increase the number ofshares of common stock we are authorized to issued from four hundred million(400,000,000) to five hundred million (500,000,000); and

 

4.               Toincrease the number of options that we are authorized to grant pursuant to our2002 Equity Incentive Plan from sixty million (60,000,000) to ninety million(90,000,000). 

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**PART II**

** **

**ITEM5.  MARKET FOR EQUITY SECURITIES AND RELATED STOCKHOLDER MATTERS**

 

Ourcommon stock is traded on the Over-the-Counter Bulletin Board ("OTCBB").  The following sets forth the range of high and low bid quotations for theperiods indicated as reported by Nasdaq Trading and Market Services.  Suchquotations reflect prices between dealers without retail mark-up, markdown orcommission and may not represent actual transactions.  The Company'scommon stock is quoted on the OTCBB under the symbol VEDO.  The stock isthinly traded and transactions in the stock are sporadic and infrequent.

```
 
```

|   | Quarter Ended      | High Bid | Low Bid |   |
|--------|--------------------|----------|---------|--------|
|   | March 31, 2006     | $0.165   | $0.080  |   |
|   | June 30, 2006      | $0.200   | $0.080  |   |
|   | September 30, 2006 | $0.100   | $0.060  |   |
|   | December 31, 2006  | $0.140   | $0.085  |   |
|   | March 31, 2007     | $0.115   | $0.034  |   |
|   | June 30, 2007      | $0.070   | $0.020  |   |
|   | September 30, 2007 | $0.075   | $0.040  |   |
|   | December 31, 2007  | $0.090   | $0.040  |   |

```
 
```

Asof December 31, 2007, there were 346****holders of record of the Company'scommon stock and one holder of record of the Company's preferred stock.

 

Dividend Policy

 

We have never declared dividends orpaid cash dividends on our common stock.  We intend to retain and use anyfuture earnings for the development and expansion of our business and do notanticipate paying any cash dividends in the foreseeable future.  

** **

Recent Sales of Unregistered Securities

 

On October 1, 2007, and in connection with aretainer agreement dated September 15, 2007, we issued a warrant to purchase2,000,000 shares of our common stock at $0.05 per share (fair value on themeasurement date) to a consultant in consideration for public relationsservices.  The warrants are exercisable over a five year period from date ofgrant.  The warrants were valued using the Black-Scholes option pricing model,were valued at $100,000, and will be recorded as consulting expense in ourconsolidated statements of operations over the twelve month vesting period thatbegan on September 15, 2007.

 

Alloffers and sales of our securities described above were made pursuant toSection 4(2) of the Securities Act of 1933, as amended (the "Securities Act")and Regulation D promulgated thereunder.

 

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**ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS ORPLAN OF OPERATION**

** **

** **

**INTRODUCTION**

** **

The following Management Discussion and Analysis or Plan of Operation ("MD&A")is intended to help the reader understand VillageEDOCS, Inc.  MD&A ispresented in the following seven sections:

 

-          BusinessOverview 
-          CriticalAccounting Policies and Estimates 
-          RecentAccounting Standards and Pronouncements 
-          Resultsof Operations 
-          Liquidityand Capital Resources 
-          CautionaryInformation About Forward-Looking Statements; and 
-          CertainFactors That May Affect Future Results. 

 

 

MD&A is provided as a supplement to, and should be read inconjunction with, our audited consolidated balance sheet as of December 31, 2007and our audited consolidated statements of operations, stockholders' equity andcash flows for each of the years in the two-year period then ended and therelated notes thereto. 

 

In MD&A, we use "we," "our," "us,""VillageEDOCS," and "the Company" to refer to VillageEDOCS,Inc. and its wholly-owned subsidiaries, unless the context requires otherwise. Amounts and percents in tables may not total due to rounding.  This discussioncontains forward-looking statements based upon current expectations thatinvolve risks and uncertainties, such as our plans, objectives, expectationsand intentions. We caution readers that important facts and factors describedin MD&A and elsewhere in this document sometimes have affected, and in thefuture could affect our actual results, and could cause our actual resultsduring 2008 and beyond to differ materially from those expressed in anyforward-looking statements made by, or on behalf of, us. 

 

Our Internet web site address is www.villageedocs.com.  Our annualreports on Form 10-KSB, quarterly reports on Form 10-QSB, and current reportsof Form 8-K, and all amendments thereto, are available free of charge on ourwebsite as soon as reasonably practical after such reports are electronicallyfiled with, or furnished to, the U.S. Securities and Exchange Commission.  Theinformation on our web site is not incorporated by reference in this annualreport on Form 10-KSB.

** **

Asreported in the Report of Independent Registered Public Accounting Firm on ourDecember 31, 2007 consolidated financial statements, we have suffered recurringlosses from operations and has a working capital deficit that raisessubstantial doubt about our ability to continue as a going concern. 

 

Effective May 1, 2006, we acquired GoSolutions.  The acquisition ofGoSolutions has caused our results of operations during 2007 to varysignificantly from those reported for 2006 due to the consolidation ofGoSolutions for twelve months in 2007 compared to eight months in 2006 (fromdate of acquisition).  Effective December 1, 2007, we sold Resolutions.  OurBoard of Directors approved the disposal of the assets and liabilities onDecember 7, 2007 as part of a strategy to reduce debt and focus on growth atthe remaining business units and growth by acquisition.  We closed thetransaction on December 10, 2007.  The sale of Resolutions in 2007 has causedour results of operations for the year ended 2007 to vary significantly fromthose reported for the first nine months of 2007 and for 2006 due to the classificationof Resolutions as discontinued operations for 2007.  See Note 5 to ourcondensed consolidated financial statements contained elsewhere in this reportfor additional information regarding the accounting for this segment asdiscontinued operations.

 

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Our business and results of operations are affected by a wide variety offactors, as we discuss under the caption "*Certain Factors That May AffectFuture Results*" and elsewhere in this report, which could materially andadversely affect us and our actual results.  As a result of these factors, wemay experience material fluctuations in future operating results on a quarterlyor annual basis, which could materially and adversely affect our business,financial condition, operating results and stock price.

 

Any forward-looking statements herein speak only as of the date hereof.Except as required by applicable law, we undertake no obligation to publiclyrelease the results of any revisions to these forward-looking statements that maybe made to reflect events or circumstances after the date hereof or to reflectthe occurrence of unanticipated events.

 

** **

**BUSINESS OVERVIEW**

** **

***General***

Wehave been in business since 1995.  From inception until September 7, 2007, wewere a California corporation.  As the result of a merger into our wholly-ownedDelaware subsidiary, we became a Delaware corporation.

Weconduct our business through three wholly-owned subsidiaries.  GSI, our mostrecent acquisition, provides enhanced voice and data communications services.  MVIoperates our Internet based document delivery services.  TBS operates ourgovernment accounting products and services business.  From April 2005 throughNovember 2007, Resolutions sold and operated our e-forms, archiving, imaging,and workflow products and services.

Wegenerate revenue, operating income, and cash flows from:

•       subscriptionagreements for enhanced voice, data, and conferencing services;

•       usagecharges for delivery and other services involving electronic documents;

•       usagecharges for our governmental accounting and online payment hosted applicationservices;

•       recurringfixed monthly service fees for access to voice, data, or application services;

•       peritem and flat fee charges for volume printing services to governmental entities;

•       feesfor professional service;

•       wholesaleenhanced voicemail services;

•       thesale of licenses for proprietary software and third party software;

•       feesfor maintenance and support agreements; 

•       installationservices;

•       salesof third party computer hardware; and 

•       feesfor training.

 

***OurObjective***

 

Acore component of our mission is to provide solutions that facilitate themovement of business information between business enterprises using a dynamicand diverse set of delivery methods and content formats.  Our products andservices have been designed to help enterprises meet various communicationschallenges, including the need to:

-  communicate     with an ever-expanding number of trading partners, customers, and     enterprises;
-  increase     the control, management, speed, accuracy and security of the information     delivered;

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-  manage     an increasing set of methods used to communicate (print/mail, email, web,     fax, XML, and wireless);
-  cost-effectively     implement a solution that will allow the enterprise to endure the slow     acceptance of a common set of delivery methods;
-  meet     the communications challenges with a service that is more robust than     available commercial grade proprietary technologies; and
-  mitigate     the negative impact of delivery methods on workflow, business process and     security requirements.

 

Ourtarget markets include Financial Services, Healthcare, Manufacturing, and LocalGovernment, and we serve approximately 1,000 active clients with over 25,000users.

Whilewe do have some sources of non-recurring revenue, such as hardware sales andthird party software, we focus on developing and maintaining sources of monthlyrecurring revenue, such as providing subscribers with solutions for theircritical day to day business processes for the movement of businessinformation.

 

***KeyItems in 2007***

 

-  Consolidated     net revenue for 2007 increased by 32% over 2006 due to a 21% increase from     TBS, a 2% increase from MVI, and a 67% increase from GSI (acquired May 1,     2006);

 

-  Recurring     revenue comprised 86% of total revenue from continuing operations;

 

-  Average     annual revenue per employee during 2007 was approximately $715,000 (2006:     $690,000);

 

-  Gross     Margin 60% during 2007, which is consistent with 2006;

 

-  Although     operating expenses increased during 2007 compared to 2006, the most     significant factor in the overall increase was the addition of $1,428,223     in operating expenses of GSI (full year in 2007 compared to eight months     in 2006).  Consolidated operating expenses during 2007 were 72% of sales     compared to 68% of sales in 2006;

 

-  Operating     expenses decreased at TBS (-1%).  This decrease was offset by increases at     GSI (+55%), MVI (+17%) and Corporate (+62%);

 

-  Net     income increased significantly at TBS to $511,848 (+129% compared to  2006);

 

-  Net     income increase significantly at GSI to $1,005,091 (+261% compared to     2006), in part due to consolidating a full year 2007 compared to eight     months in 2006 (acquired May 1, 2006);

 

-  Obtained     $200,000 in working capital from the exercise of 2,000,000 warrants at     $0.10 per share;

 

-  Sold     Resolutions for $926,835 in net cash proceeds ($53,832 of which were received     in 2008).  In April 2005, we acquired Resolutions for $432,000 in cash,     promissory notes of $200,000 (which were repaid from Resolution's 2005 and     2006 operating cash flows), and warrants to purchase 10,000,000 shares.  The     warrants were returned to us and cancelled in connection with the sale;

 

-  Repaid     $1,040,000 of secured debt and $30,000 of unsecured debt during 2007;

 

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-  Completed     data center and technology platform upgrades and developed  new features     to facilitate the marketing of both new services and existing services at     more attractive margins; and

 

-  Entered     2008 executing on a plan to streamline the corporate structure and bolster     sales resources to achieve greater organic growth and take advantage of     the unique cross selling opportunities among the operating units.

 

***Areasof Focus***

*Growth Strategy*

 

Ourcurrent and future growth strategy is focused on supporting organic revenuegrowth and acquiring intellectual and technology assets that improve ourability to take a client's unstructured content and documents and deliver it tothe other party through the method preferred by each party, presenting thecontent in a manner that surpasses our client's goals.  In essence, we striveto bring a Business Process Management discipline to their information.  Webelieve that if we are successful in executing this strategy, our clients willenjoy improved compliance, collaboration, cost containment, and superiorcontinuity of business processes.

 

Ourultimate vision is to become a business process management/workflow servicethat provides competency and functionality in the following areas: 

 

-  Web Content Management;
-  Digital Asset Management;
-  Email Management;
-  Records Management;
-  Documentation Management;
-  Information Indexing;
-  Categorization/Taxonomy;
-  Recognition;
-  Document Imaging;
-  Form Processing;
-  Scanning;
-  Collaboration;
-  Repositories;
-  Storage;
-  Long Term Archival;
-  Content Integration;
-  Search and Retrieval;
-  Content Syndication;
-  Localization and Personalization; and
-  Publication (paper or electronic).

 

Weintend to continue our focus on obtaining growth from sales of higher marginproducts and services at GSI, MVI, and TBS and by acquiring companies thatconsistently generate net income and positive cash flows.  We believe thatthis strategy offers the best opportunity for our operations to generatepositive operating income and cash flows from operations and to achieve netincome. 

 

Ouracquisition strategy is focused in two areas: service infrastructure andvertical market silo.  The service infrastructure area is our focus to acquireenterprises that fulfill our identified strategic technological corecompetencies.  The vertical market silo acquisition strategy is to acquirecompanies that assist us in penetrating our target market segments of financialservices, healthcare, manufacturing, and local government.

 

 

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*CapitalFormation*

* *

During2008, we are actively seeking additional financing by issuing equity or obtaininga combination of equity and debt financing from new shareholders and/or lenders. Although we believe we will generate adequate cash to sustain operations atcurrent levels in conjunction with borrowings from our operating lines ofcredit, we will require additional funding to invest in resources that willenable us to operate profitably on a consistent, month-over-month basis.  Inaddition, we may be required to repay certain of our debt instruments in whichcase we will require additional funding.  We continue to caution that there canbe no assurance that funding will be available on acceptable terms, if at all,or that any such funds we raise would enable us to achieve or maintainprofitable operations. 

 

Inspite of the impact of new laws, regulations, and accounting pronouncementsthat have significantly increased our cost of operating as a public company, weintend to contain general and administrative costs where possible.  However,we expect to incur significant costs during the remainder of 2008 and in 2009related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002,including new infrastructure required to remediate certain material weaknesses wehave identified in our internal controls over financial reporting.  Shouldadditional growth capital become available during 2008, we intend to direct thecapital toward increasing sales and marketing while holding down costs for non-essentialgeneral and administrative as well as product and technology expenses to theextent possible.

 

*OrganizationalEnhancements*

* *

Ourgoal is to drive efficiency and effectiveness throughout our group ofcompanies.  We are working to align each business unit around shared goals andperformance targets.  In addition, we are striving to streamline corporateoverhead and maximize cross-selling activities.  We are devoting strategicproduct management and technical resources both to strengthening theintegration of our existing products and services and to developing newproducts and services that will allow us to offer our clients powerful newsolutions comprised of the best that each of our business units has to offer.

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***Challengesand Risks***

 

Lookingforward, management has identified certain challenges and risks that demand ourattention.  Of these, two key challenges and risks are discussed below.

 

*IncreasedCompetition and Capabilities in the Marketplace*

* *

Weface strong competition from well-established national and global companies aswell as from relatively new companies. We must continue to selectively expandinto other profitable segments of our markets and offer powerful product andservice offerings in order to increase our share of the marketplace.  Theintroduction of new technologies could render our existing products andservices obsolete or unmarketable or require us to invest in research anddevelopment at much higher rates with no assurance of developing competitiveproducts. Changes in technologies or customer requirements also may cause thedevelopment cycle for our new products and services to be lengthy and result insignificant development costs.  Competitive pressures may impair our ability toachieve profitability.

 

*CapitalResources*

* *

We believe that current and future available capital resources,including the net proceeds from sale of our products and services, will besufficient to fund our operations at current levels for the foreseeablefuture.  However, the exact amount of funds that we will require will dependupon many factors, and it is possible that we will require additionalfinancing.  Suchsources of financing could include capital infusions, additional equityfinancing, or debt offerings. There can be no assurance that additional fundingwill be available on acceptable terms, if at all, or that such funds if raised,would enable us to achieve and maintain profitable operations.  Theinability to obtain such financing could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

Seealso the section entitled *Certain Factors That May Affect Future Results*below for more information about risks and uncertainties facing VillageEDOCS,Inc.

 

 

**Critical Accounting Policies and estimates **

 

Inpreparing our consolidated financial statements, we make estimates, assumptionsand judgments that can have a significant effect on our revenues, income/lossfrom operations, and net income/net loss, as well as on the value of certainassets on our consolidated balance sheet.  We believe that there are severalaccounting policies that are critical to an understanding of our historical andfuture performance as these policies affect the reported amounts of revenues,expenses, and significant estimates and judgments applied by management.

 

Whilethere are a number of accounting policies, methods and estimates affecting our consolidatedfinancial statements, areas that are particularly significant include:

 

-  revenue     recognition;
-  stock-based     compensation;
-  software     development costs;
-  goodwill     and other intangible assets;
-  long-lived     assets;
-  beneficial     conversion features;
-  income     taxes; and
-  contingencies

 

Inaddition, please refer to Note 3 to the accompanying consolidated financialstatements for further discussion of our significant accounting policies.

 

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**RevenueRecognition. **Werecognize revenue in accordance with Staff Accounting Bulletin ("SAB") No. 101,"*Revenue Recognition in Financial Statements*", as revised by SABNo. 104.  As such, we recognize revenue when persuasive evidence of anarrangement exists, title transfer has occurred, or the services have beenperformed, the price is fixed or readily determinable and collectibility isprobable.  Sales are recorded net of sales discounts.  

 

Wehave adopted Statement of Position ("SOP") 97-2, "*Software RevenueRecognition*," 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 involvingmultiple elements to be allocated to each element based on the relative fairmarket values of each of the elements. The fair value of an element must bebased on vendor-specific objective evidence ("VSOE") of fair value. Softwarelicense revenue generated by TBS and Resolutions allocated to a softwareproduct is recognized upon delivery of the product, or deferred and recognizedin future periods to the extent that an arrangement includes one or moreelements that are to be delivered at a future date and for which VSOE has notbeen established.  Maintenance and support revenue is recognized ratably overthe maintenance term.  First-year maintenance typically is sold with the relatedsoftware license and renewed on an annual basis thereafter. Estimated fairvalues of ongoing maintenance and support obligations are based on separatesales of renewals to other customers or upon renewal rates quoted in thecontracts. For such arrangements with multiple obligations, we allocate revenueto each component of the arrangement based on the estimated fair value of theundelivered elements. Fair value of services, such as consulting or training,is based upon separate sales of these services. At times, we may enter intomultiple-customer contracts in which we allocate revenue based on the number ofspecified users at each customer, and recognizes revenue upon customeracceptance and satisfying the other applicable conditions of the above describedaccounting policy. 

 

Servicesrevenue is recognized as the service is performed assuming that sufficientevidence exists to estimate the fair value of the services.  Consulting andtraining services are billed based on contractual hourly rates and revenues arerecognized as the services are performed. Consulting services primarily consistof implementation services related to the installation of our products which donot require significant customization to or modification of the underlyingsoftware code. 

 

Revenuefrom subscription agreements consists of fixed monthly fees and usage charges,generally based on per minute rates.  Subscription agreement revenue related toMVI and GSI usage service charges are billed monthly in arrears and theassociated revenues are recognized in the month of service. Recurring chargesfor the GoSolo(TM) platform are billed in advance on a monthly basis andrecorded as deferred revenues.  We recognize subscription agreement revenueratably over the service period, which management believes approximates theactual provision of services. Professional service fee revenue consists ofconsulting fees charged to enterprise clients for GoSolo (TM) platformenhancements.  We recognize professional service fee revenue on a time and materialsbasis over the service period, which management believes approximates theactual provision of services.  Wholesale enhanced voicemail services consistsof fees charged to telecommunications providers for use of the GoSolo (TM)platform to provide their customers with hosted electronic voicemail, billedmonthly in arrears and the associated revenues are recognized in the month ofservice.

 

Significantmanagement judgments and estimates must be made in connection withdetermination of the revenue to be recognized in any accounting period. If wemade different judgments or utilized different estimates for any period,material differences in the amount and timing of revenue recognized couldresult. 

 

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**Stock-BasedCompensation. **OnJanuary 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(revised 2004), "*Share-Based Payment*," ("SFAS 123(R)") which requiresthe measurement and recognition of compensation expense for all share-basedpayment awards made to our employees and directors based on estimated fairvalues. We adopted SFAS 123(R) using the modified prospective transactionmethod, which requires the application of the accounting standard as of January1, 2006, the first day of our fiscal year 2006. Our consolidated financial statementsas of and for the years ended December 31, 2007 and 2006 reflect the impact ofSFAS 123(R). In accordance with the modified prospective transition method, ourconsolidated financial statements for prior periods have not been restated toreflect, and do not include, the impact of SFAS 123(R). The value of theportion of the award that is ultimately expected to vest is recognized as anexpense over the requisite service periods in our consolidated statement ofoperations. Prior to the adoption of SFAS 123(R), we accounted for stock-basedawards to employees and directors using the intrinsic value method inaccordance with Accounting Principles Board Opinion No. 25, *Accounting forStock Issued to Employees* (APB 25), as allowed under Statement of FinancialAccounting Standards No. 123, "*Accounting for Stock-Based Compensation* "(SFAS 123). As stock-based compensation expense recognized in the consolidated statementof operations for 2007 is based on awards ultimately expected to vest, it hasbeen reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimated.  The estimated averageforfeiture rates for the years ended December 31, 2007 and 2006, ofapproximately 11% and 12%, respectively, were based on historical forfeitureexperience and estimated future employee forfeitures.

 

Stock-basedcompensation expense recognized as operating expense under SFAS 123(R) for the yearended December 31, 2007 was $879,088, determined by the Black-Scholes valuationmodel, and consisting of stock-based compensation expense related to employeestock options.  As of December 31, 2007, there was approximately $1,085,000 oftotal unrecognized compensation cost, net of forfeitures, related to employeeand director stock option compensation arrangements.  See Note 3 to theconsolidated financial statements for additional information.

 

**SoftwareDevelopment Costs**. We capitalize software development costs pursuant to SFAS No. 86, "*Accountingfor the Costs of Computer Software to be Sold, Leased or Otherwise Marketed*,"after technological feasibility of the software is established, which isgenerally the completion of a working prototype and ends upon general releaseof the product to our customers. All costs incurred in the research anddevelopment of new software and costs incurred prior to the establishment oftechnological feasibility are expensed as incurred. Capitalized costs consistof direct costs and allocated overhead associated with the development of thesoftware products.  Amortization of software development costs commences whenthe product becomes available for general release to customers and is computedbased on the straight-line method over the software's estimated economic lifeof approximately three years.  We review the unamortized software developmentcosts at each balance sheet date and, if necessary, will write down the balanceto net realizable value if the unamortized costs exceed the net realizablevalue of the asset.

 

**Goodwilland Other Intangible Assets**.  In accordance with SFAS No. 141, "*BusinessCombinations*," we record the assets acquired and liabilities assumed inbusiness combinations at their respective fair values at the date ofacquisition, with any excess purchase price recorded as goodwill. Because ofthe expertise required to value intangible assets, we typically engageindependent valuation specialists to assist us in determining those values.Valuation of intangible assets entails significant estimates and assumptionsincluding, but not limited to, estimating future cash flows from product sales,developing appropriate discount rates, continuation of customer relationshipsand renewal of customer contracts, and approximating the useful lives of theintangible assets acquired. To the extent actual results differ from theseestimates, our future results of operations may be affected. The Company hasadopted SFAS No. 142 "*Goodwill and Other Intangible Assets*." Under SFAS No. 142, goodwill and other intangible assets with indefinite livesare no longer subject to periodic amortization but are instead reviewedannually for impairment, or more frequently if impairment indicators arise.

 

Webelieve that the accounting estimates related to impairment of goodwill andother intangible assets are "critical accounting estimates" because(1) they are highly susceptible to change from period to period because theyrequire company management to make assumptions about future sales and cost ofsales, and (2) the impact that recognizing an impairment would have on theassets reported on our consolidated balance sheet as well as our net loss wouldbe material.  Management's assumptions about future sales prices and futuresales volumes have fluctuated in the past and are expected to continue to doso.

 

Inestimating future sales, we use our internal budgets.  We develop our budgetsbased on recent sales data for existing products and services, planned timingof new product and service launches, and customer commitments related toexisting and newly developed products and services.

 

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Ineach of the last two years, we have used the services of independent valuationfirms to assist us with identifying and valuing intangible assets and testingthe reported carrying value of our goodwill and intangible assets.  In eachyear we determined that, based on our assumptions, as well as the impairmentanalysis conducted by the valuation firm, that the sum of the expected futurediscounted cash flows exceeded the reported carrying value and therefore we didnot recognize an impairment loss.

 

Ifwe had been required to recognize an impairment loss on our goodwill andintangible assets, it would likely not have materially affected our liquidityand capital resources because we are not subject to any restrictive covenantsrelated to the results of operations we report in our consolidated financialstatements.

 

**Long-LivedAssets. **Weassess the recoverability of our long-lived assets by determining whether thedepreciation and amortization of long-lived assets over their remaining livescan be recovered through projected undiscounted future cash flows.  The amountof long-lived asset impairment, if any, is measured based on fair value and ischarged to operations in the period in which long-lived asset impairment isdetermined by management.****

 

**BeneficialConversion Feature. **Our convertible note provides for a rate of conversion that canfall below market value. Such feature is normally characterized as a "beneficialconversion feature" ("BCF"). Pursuant to Emerging Issues TaskForce Issue No. 98-5 ("EITF 98-5"), *Accounting For ConvertibleSecurities with Beneficial Conversion Features or Contingently AdjustableConversion Ratio* and Emerging Issues Task Force Issue No. 00-2, *Applicationof EITF Issue No. 98-5 To Certain Convertible Instruments*, the relativefair values of the BCFs have been recorded as a discount from the face amountof the respective debt instrument. We are amortizing the discount using the effectiveinterest method through maturity of such instruments.  We will record thecorresponding unamortized debt discount related to the BCF and warrants asinterest expense when the related instrument is converted into our commonstock.

 

**IncomeTaxes.** We account for income taxes using the asset and liability method under whichdeferred tax assets or liabilities are calculated at the balance sheet dateusing current tax laws and rates in effect for the year in which thedifferences are expected to affect taxable income. Valuation allowances areestablished, when necessary, to reduce deferred tax assets to the amountsexpected to be realized.

 

**Contingencies.** From time to time weare or may be subject to various claims and contingencies, sometimes related tolegal proceedings.  Due to their nature, such legal proceedings involveinherent uncertainties including, but not limited to, court rulings,negotiations between affected parties, and governmental actions.  Managementassesses the probability of loss for such contingencies and accrues a liabilityand/or discloses the relevant circumstances, as appropriate.

 

 

**RECENTACCOUNTING STANDARDS AND PRONOUNCEMENTS**

 

Referto Note 3 of Notes to Consolidated Financial Statements for a discussion ofrecent accounting standards and pronouncements.

 

** **

** **

**RESULTSOF OPERATIONS**

 

Thefollowing discussion of our performance is organized by reportable operatingsegments, which is consistent with the way we manage our business.  In 2007, wecompleted the sale of substantially all of the assets and liabilities ofResolutions.  The sale has resulted in the reclassification of the revenues andexpenses of Resolutions to discontinued operations for all periods presentedthrough the date of sale.

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** **

**YearEnded December 31, 2007 Compared to Year Ended December 31, 2006**

** **

**NetRevenue from External Customers**

** **

Netrevenue from external customers for 2007 was $14,180,658, a 32% increase over 2006net revenue of $10,742,096.

 

During2007, GSI, MVI, and TBS generated 44%, 21%, and 35% of our net revenue,respectively.  During 2006, GSI, MVI, and TBS, generated 35%, 27%, and 38% of ournet revenue, respectively.

 

Thefollowing is a comparison of the components of consolidated net revenue fromexternal customers:

 

 

|                                       |    |                |                |                |            |
|--------------------------------------------|---------|---------------------|---------------------|---------------------|-----------------|
|                                       |    | Year Ended          | Year Ended          | Variance            |            |
|                                       |    | December 31, 2007   | December 31, 2006   | Amount              | Percent         |
|                                       |    |                |                |                |            |
| Net revenue from external  customers:      |    |                |                |                |            |
|                                       |    |                |                |                |            |
| Electronic document  delivery services     |    |  $             | 2,956,857      |  $             | 2,890,640  |  $ | 66,217  | 2 % |
| Government accounting  solutions           |    | 5,001,343      | 4,130,458      | 870,885        | 21 %       |
| Integrated communications                  |    | 6,222,458      | 3,720,998      | 2,501,460      | 67 %       |
| Corporate                                  |    | -    | -    | -    |            |
| Total  net revenue from external customers |  $ | 14,180,658     |  $             | 10,742,096     |  $         | 3,438,562  | 32 % |

 

Asanticipated, the most significant factor in the increase in consolidatedrevenue during 2007 was the consolidation of a full twelve months of revenue ofGSI compared to eight months from May 1, 2006 (date of acquisition).  Revenueincreased 67% at GSI.  Onan annualized (not pro forma) basis, GSI's revenue increased approximately 11%over 2006 due to increases in revenue from subscription agreements and anincrease in professional service fees revenue from its largest client.

 

Revenueincreased at MVI by 2% due primarily to increases in revenue from monthly fixedcharges and recurring revenue from existing clients.  These increases wereoffset by a decrease in revenue from outbound document delivery services thatresulted from client attrition.  MVI intends to continue to concentrate salesefforts toward opportunities with larger clients.  While such sales typicallyinvolve longer and more complex sales cycles, we believe they provide a greaterprotection from pricing erosion due to the additional functionality andintegration that are elements more often associated with our larger clientrelationships.

 

Revenueincreased 21% at TBS due to increases in revenue from printing, maintenanceagreements, online services, and software that resulted from pursuing astrategy to expand our sales of printing business into new areas, such asutility billing, which build upon the property tax form processing businessthat has historically produced the largest share of TBS's overall printingrevenue, typically in the second half of each calendar year.  These increaseswere partially offset by decreases in hardware sales and installation whichresulted in part from our strategy to promote online, usage-based servicesrather than single unit product sales.

 

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**Costof Sales**

 

Thefollowing is a comparison of the components of consolidated cost of sales:

 

 

|                                   |   |                |                |                |            |
|----------------------------------------|--------|---------------------|---------------------|---------------------|-----------------|
|                                   |   | Year Ended          | Year Ended          | Variance            |            |
|                                   |   | December 31, 2007   | December 31, 2006   | Amount              | Percent         |
|                                   |   |                |                |                |            |
| Cost of sales:                         |   |                |                |                |            |
|                                   |   |                |                |                |            |
| Electronic document  delivery services |   |  $             | 1,253,026      |  $             | 946,941    |  $ | 306,085  | 32 % |
| Government accounting  solutions       |   | 3,142,297      | 2,533,461      | 608,836        | 24 %       |
| Integrated communications              |   | 1,216,064      | 834,720        | 381,344        | 46 %       |
| Corporate                              |   | -    | -    | -    |            |
| Total  cost of sales:                  |   |  $             | 5,611,387      |  $             | 4,315,122  |  $ | 1,296,265  | 30 % |

 

Costof sales for 2007 were $5,611,387 as compared to the $4,315,122 reported for 2006. Total cost of sales during 2007 represented 40% of net sales in each of 2007and 2006.

 

Costof sales for MVI during 2007 represented 42% of net sales as compared with 33%of net sales in 2006.  During 2007, MVI experienced increases in telephonyexpense, Internet connectivity and data center expense due to a combination ofprice increases and temporary redundancies required to complete a move to moresuitable data center facilities.  In addition, operations staffing costs wereup 18% due to allocation of additional staff time to operational activities.

 

Costof sales for TBS during 2007 represented 63% of net sales as compared with 61%of net sales in 2006.  The increased costs at TBS were largely attributable tothe increase in revenue as well as reallocation of staff resources whichincreased operations staff costs and correspondingly reduced administrativestaff expenses.  

 

Costof sales for GSI for 2007 represented 20% of net sales as compared with 22% inthe 2006 period as a result of increased usage-based revenues and reductions intelephony and operations staff costs.

 

 

**GrossProfit**

 

Grossprofit for 2007 increased 33% to $8,569,271 as compared to $6,426,974 in 2006. The increase in 2007 of $2,142,297 resulted from increases of $2,120,116 and$262,049 from GSI and TBS, respectively, which were offset by a decrease of$239,868 from MVI.  Gross profit margin for the 2007 period on a consolidatedbasis was 60% in each of 2007 and 2006.

 

22

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**OperatingExpenses**

 

Thefollowing is a comparison of the components of consolidated operating expenses:

 

 

|                                   |   |              |              |            |            |
|----------------------------------------|--------|-------------------|-------------------|-----------------|-----------------|
|                                   |   | Year Ended        | Year Ended        | Variance        |            |
|                                   |   | December 31, 2007 | December 31, 2006 | Amount          | Percent         |
|                                   |   |              |              |            |            |
| Operating expenses                     |   |              |              |            |            |
|                                   |   |              |              |            |            |
| Electronic document  delivery services |   |  $           | 1,376,543    |  $         | 1,179,012  |  $ | 197,531  | 17 % |
| Government accounting  solutions       |   | 1,357,964    | 1,375,461    | (17,497)        | -1 %       |
| Integrated communications              |   | 4,023,474    | 2,595,251    | 1,428,223  | 55 %       |
| Corporate                              |   | 3,491,916    | 2,157,851    | 1,334,065  | 62 %       |
| Total  operating expenses:             |   |  $           | 10,249,897   |  $         | 7,307,575  |  $ | 2,942,322  | 401 % |

 

During2007, operating expenses of Corporate were $3,491,916, an increase of $1,334,065(+62%) compared to 2006.  The increase resulted from higher costs related toamortization of intangible assets, compensation, consulting, legal, andaccounting expenses, including $879,088 in stock-based compensation expenserelated to vested employee and director stock options.  During 2006, stock-basedcompensation expense related to such stock options was $557,111.  During 2007,we incurred approximately $170,000 in consulting, travel, legal, and accountingexpenses related to planned acquisitions that we elected to terminate.  Had wecompleted the acquisitions, these charges would have been allocated to thepurchase price and not included in operations.  In addition, accountingexpenses increased in 2007 period as a result of new requirements and theacquisition of GSI, which generated significant additional audit and tax returnpreparation costs for the consolidated entity due to increased scope andcomplexity.

 

During2007, operating expenses at MVI were $1,376,543, an increase of $197,531 (+17%)compared to 2006.  Product and technology development increased $120,288 (+29%)compared to 2006 as a result of additional staffing.  Sales and marketingincreased by $80,879 (+22%) compared to 2006 as a result of reallocation ofsales staff to MVI during most of 2007.  General and administrative decreasedby $25,488 (-7%) compared to 2006 due to decreases in placement fees and baddebt expenses as offset by increased facilities and benefits charges. Depreciation and amortization expense increased $21,852 (+52%) due to anincrease in depreciable fixed assets.

 

During2007, operating expenses at TBS were $1,357,964, a decrease of $17,497 (-1%)compared to 2006.  Product and technology development decreased $167,606 (-44%)compared to 2006 due to reduced staffing.  Sales and marketing increased $184,861(+84%) compared to 2006 due to a change in the incentive compensation structurecombined with increased travel and trade show expenses.  General andadministrative decreased $23,267 (-4%) compared to 2006 due to reducedtelephone and maintenance as well as staff restructuring.  Depreciation andamortization expenses decreased $11,485 (-10%).

 

During2007, GSI incurred $4,023,474 of operating expenses.  Sales and marketing,product and technology, general and administrative, and depreciation andamortization expenses were $1,090,575, $979,183, $1,388,127, and $565,589,respectively, and are consistent with prior periods although not directlycomparable to 2006 since GSI was acquired effective May 1, 2006. On anannualized (not pro forma) basis, operating expenses increased approximately 3%over 2006.

 

**OperatingIncome (Loss)**

 

Asa result of the foregoing, the Company reported an operating loss for 2007 of $1,680,626,compared to an operating loss of $880,601 for 2006.

 

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Thefollowing is a comparison of the components of consolidated loss fromoperations:

 

 

|                                   |   |              |              |          |          |
|----------------------------------------|--------|-------------------|-------------------|---------------|---------------|
|                                   |   | Year Ended        | Year Ended        | Variance      |          |
|                                   |   | December 31, 2007 | December 31, 2006 | Amount        | Percent       |
|                                   |   |              |              |          |          |
| Operating income (loss):               |   |              |              |          |          |
|                                   |   |              |              |          |          |
| Electronic document  delivery services |   |  $           | 327,288      |  $       | 764,687  |  $ | (437,399) | -57 % |
| Government accounting  solutions       |   | 501,082      | 221,536      | 279,546  | 126 %    |
| Integrated communications              |   | 982,920      | 291,027      | 691,893  | 238 %    |
| Corporate                              |   | (3,491,916)       | (2,157,851)       | (1,334,065)   | -62 %    |
| Total  operating loss                  |   |  $           | (1,680,626)       |  $       | (880,601)     |  $ | (800,025) | -91 % |

 

Inaddition to increases in compensation, legal, and accounting expenses, twoother factors that contributed to the significant change in operating loss werean increase in depreciation and amortization of $191,480 over 2006 (due to anincrease in intangible assets and related amortization expense and theacquisition of GSI) and the impact of employee related stock option expenses,which increased by $321,977 over 2006.

 

**InterestExpense, net**

 

Duringthe year ended December 31, 2007, interest expense, net was $111,561, an increaseof $5,775 (+5%) compared to 2006.

 

During2007, the most significant element of interest expense were interest charges incurredin connection with borrowings against our operating lines of credit.  Inaddition, we incurred charges for interest on promissory notes and convertiblepromissory notes payable to related party and amortization of debt discount.

 

 

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**OtherIncome (Expense)**

 

Otherincome for 2007 was $43,381 compared to other income of $40,099 reported in2006.  In each of the periods, we recorded other income and expense related tosettlement of liabilities related to prior years as well as other non-operatingincome and expense items. 

 

 

**DiscontinuedOperations**

 

Forthe years ended December 31. 2007 and 2006, income (loss) from discontinuedoperations, net of income tax provision of $485,000 and $0, was $(1,625,424)and $78,161, respectively, and included the results of operations of PFI, ourelectronic forms segment.  See Note 5 to our consolidated financial statementscontained elsewhere in this report for additional information related todiscontinued operations.

 

 

**NetLoss**

 

Asa result of the foregoing, net loss for 2007 was $3,285,230, or $0.02 pershare, compared to a net loss of $882,132, or $0.01 per share, for 2006 onweighted average shares of 150,218,437 and 131,185,095, respectively.

 

Thefollowing is a comparison of the components of consolidated net loss:

 

** **

|                                   |   |              |               |          |          |
|----------------------------------------|--------|-------------------|--------------------|---------------|---------------|
|                                   |   | Year Ended        | Year Ended         | Variance      |          |
|                                   |   | December 31, 2007 | December 31, 2006  | Amount        | Percent       |
|                                   |   |              |               |          |          |
| Net income (loss):                     |   |              |               |          |          |
|                                   |   |              |               |          |          |
| Electronic document  delivery services |   |  $           | 318,334       |  $       | 822,206  |  $ | (503,872) | -61 % |
| Government accounting  solutions       |   | 511,848      | 223,236       | 288,612  | 129 %    |
| Integrated communications              |   | 1,005,091    | 278,305       | 726,786  | 261 %    |
| Corporate                              |   | (3,495,079)       | (2,284,040)        | (1,211,039)   | -64 %    |
| Discontinued operations                |   | (1,625,424)       | 78,161   | (1,703,585)   | *             |
| Total  net loss                        |   |  $           | (3,285,230)        |  $       | (882,132)     |  $ | (2,403,098) | -262 % |
|                                   |   |              |               |          |          |
| *  calculation is not meaningful       |   |              |               |          |          |

** **

** **

** **

**LIQUIDITYAND CAPITAL RESOURCES**

 

Duringthe year ended December 31, 2007, our net cash position increased by $181,092to $749,911.  Our investing activities provided net cash of $689,830;however, our operating and investing activities used net cash of $93,019 and $415,719,respectively.

 

Netcash used in operating activities for 2007 was $93,019, a decrease of $469,643from the $376,624 provided by operating activities during 2006.

 

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Ourinvesting activities during 2007 consisted of the proceeds from the sale of ourResolutions business unit and purchase of computer equipment. Net cash providedby investing activities during 2007 increased $718,049 to $689,830 from the $29,219used in investing activities during 2006, when our investing activitiesconsisted of acquiring net cash in the acquisition of GSI and purchasingcomputer equipment.

 

Netcash used in financing activities during 2007 was $415,719, and included $484,680of proceeds, net of repayments, from a line of credit, and $200,000 in proceedsfrom a warrant exercise.  These sources of cash were offset by an $840,000repayment of a secured line of credit, $230,000 of payments on notes andconvertible notes related to the TBS and Resolutions acquisitions, and paymentson capital lease obligations of $30,399.  Net cash used in financing activitiesduring 2006 was $540,637 and included proceeds from notes payable to relatedparties of $10,000, as offset by $546,562 of payments on notes related to theTBS, Resolutions, and GSI acquisitions, and payments on capital leaseobligations of $4,075. 

 

Wedo not currently have any material commitments for capital expenditures otherthan those expenditures incurred in the ordinary course of business. 

 

Oursources of capital include cash flow from operations, available creditfacilities, and the issuance of debt and equity securities.

 

OnFebruary 6, 2008, we entered into an agreement with The Private Bank of ThePeninsula ("Bank") for an asset based line of credit (the "Line").  The Bank'smaximum commitment amount for the Line is $1.5 million.  Advances willgenerally be limited to 85% of eligible domestic accounts receivable.  Theinterest rate is floating and is calculated at Wall Street Journal prime plus3% on the cash borrowed.  Interest on outstanding borrowings is payable monthly. As of February 29, 2008, outstanding borrowings on the Line were approximately$75,000.  Outstanding advances under the Line are secured by a first lienposition on all of our accounts receivable, contract rights, chattel paper,documents, and payment and by a second lien on our inventory, intellectualproperty, and equipment.

 

Inconsideration for the Line, we paid a facility fee of $15,000 to the Bank andwe issued the Bank a warrant to purchase 75,000 shares of our restricted commonstock at an exercise price of $0.062 per share through February 6, 2018.   Inaddition, we paid a finder's fee in the amount of $50,000 to Dragonfly CapitalPartners LLC ("Dragonfly") and issued Dragonfly a warrant to purchase 2,419,355shares of our restricted common stock at an exercise price of $0.062 per sharethrough February 6, 2013.

 

TBShas a $100,000 unsecured operating line of credit with BB&T that it had notutilized as of February 29, 2008.  During July 2007, VillageEDOCS renewed a$500,000 operating line of credit with Bank of America guaranteed by ashareholder on which it owed approximately $479,000 as of February 29, 2008.  OnDecember 11, 2007, we repaid outstanding borrowings of $840,000 to SunTrustBank in full satisfaction of a commercial note issued in connection with GSI's$1,000,000 revolving line of credit.  The line of credit matured on December12, 2007 and we did not elect to renew it.  Our inability to repay outstandingborrowings when due would have a material adverse effect on us.

 

Substantialrisk exists that a decrease in demand for our products and services wouldreduce the availability of cash from this source since our operating cash flowsare derived from products and services that are subject to rapid technologicalchange.

 

Sinceour inception, our operating and investing activities have used substantiallymore cash than they have generated. We believe that we have made considerableprogress toward achieving profitable operations by increasing revenues from electronicdocument delivery services and through our acquisition of TBS and GSI.  Inaddition, we are actively seeking opportunities to acquire or otherwise combinewith businesses that are operating profitably and generating positive cashflows.  However, at present and for the foreseeable future, we believe that wewill continue to need working capital to fund the growth of our businesses andto absorb the increasing costs associated with operating as a fully reportingcompany in the prevailing regulatory environment.  Accordingly, we expect toexperience negative operating and investing cash flows during 2008 and at leastuntil MVI, TBS, and GSI consistently generate net cash flows sufficient tooffset the anticipated expenses of operating the holding company.  

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Weexpect to use cash flow generated from operations, the Line, and potentiallyother sources, to fund negative operating cash flows during 2008.

 

Whilewe believe that our available cash resources combined with our current revenuestreams and lines of credit will be sufficient to meet our anticipated workingcapital requirements for the next twelve months, we expect to utilize newsources of debt or equity financing during the remainder of 2008 to fundcapital expenditure requirements.  Should our current revenue streams ormargins be subjected to even minor decreases, our external funding requirementswould likely be greater.

 

Webelieve that sustainable profitability is achievable; however, we have ahistory of losses.  While GSI, MVI, and TBS each reported net income for 2007,this income was not sufficient to offset operating losses, interest expense andcorporate overhead.  If we are not successful in sustaining and increasingoperating profits from our three operating segments, or in reducing expenses ofthe holding company as a percentage of revenue, we may not achieveprofitability on a consolidated basis.

 

Thisestimate is a forward-looking statement that involves risks and uncertainties.The actual time period may differ materially from that indicated as a result ofa number of factors so that we cannot assure you that our cash resources willbe sufficient for anticipated or unanticipated working capital and capitalexpenditure requirements for this period. We have advised that we will need toraise additional capital in the future to meet our operating and investing cashrequirements. Such sources of financing could include capital infusions,additional equity financing, or debt offerings. There can be no assurance thatadditional funding will be available on acceptable terms, if at all, or thatsuch funds if raised, would enable us to achieve and maintain profitableoperations. If we are not able to obtain sufficient additional funds frominvestors, we may be unable to sustain all or part of our operations.  If weraise additional funds through the issuance of securities, these securities mayhave rights, preferences or privileges senior to those of our common stock, andour stockholders may experience additional dilution to their equity ownership.

 

TheReport of Independent Registered Public Accounting Firm on our December 31, 2007consolidated financial statements includes an explanatory paragraph statingthat the recurring losses incurred from operations and a working capitaldeficit raise substantial doubt about our ability to continue as a goingconcern. The condensed consolidated financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

**CAUTIONARYINFORMATION ABOUT FORWARD-LOOKING STATEMENTS**

 

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ThisAnnual Report on Form 10-KSB includes forward-looking statements within themeaning of Section 21E of the Securities Exchange Act of 1934, as amended. Allstatements that do not directly and exclusively relate to historical factsconstitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995.  The "forward-looking statements"safe harbor does not apply to our company because we issue "penny stock" andare excluded from the safe harbor pursuant to Section 27A(b)(1)(C) of theSecurities Act of 1933, as amended, and Section 21E(h)(1)(C) of the SecuritiesExchange Act of 1934, as amended (the "Exchange Act"). Our forward-lookingstatements are based on our plans, intentions, expectation, and belief and aresubject to certain risks and uncertainties that could cause actual results todiffer materially from those projected or expressed herein. You can identifythese statements by forward-looking words such as "may","will", "expect", "intend", "anticipate","believe", "expect", "plan", "seek", "estimate","project", "could",  and "continue" or similarwords. You should read statements that contain these words carefully becausethey discuss our expectations about our future performance, contain projectionsof our future operating results or of our future financial condition, or stateother "forward-looking" information. . These statements include,among others, information regarding future operations, future capitalexpenditures, and future net cash flow. Such statements reflect the our currentviews with respect to future events and financial performance and involvesrisks and uncertainties, including, without limitation, general economic andbusiness conditions, changes in foreign, political, social and economicconditions, regulatory initiatives and compliance with governmentalregulations, the ability to achieve further market penetration and additionalcustomers, and various other matters, many of which are beyond our control,including, without limitation, the risks described under the caption "*CertainFactors That May Affect Future Results"* in Item 6 of this AnnualReport. Our future results and stockholder values may differ materially fromthose expressed in these forward- looking statements. Many of the factors thatwill determine these results and values are beyond our ability to control orpredict. We assume no obligation to update any forward-looking statements.  Investorsare cautioned not to put undue reliance on any forward-looking statements, whichspeak only as of the date of this Annual Report on Form 10-KSB.  Readers shouldalso consult the cautionary statements and risk factors listed from time totime in our Reports, and all amendments thereto, on Forms 10-QSB, 8-K, andother SEC filings

Forwardlooking statements in this Annual Report on Form 10-KSB include, withoutlimitation:

 

Thestatements under the heading "Item 1.  Business" and inMD&A under the caption *Business Overview* concerning (1) our strategyto develop innovative solutions to expand our ability to benefit our enterpriseclients and increase the breadth and size of the markets we satisfy today, (2)our strategy to focus on acquiring intellectual and technology assets thatcontinue to accelerate expansion of our client solutions, (3) our goal toexpand the business model of TBS regionally and nationwide and to expandrevenue both from printing and from subscription-based hosted solutions, (4)our belief that we offer a complete set of business communication services andsolutions and a scalable global platform, (5) our belief that our servicesimprove and enhance data delivery or help customers to optimize the processingand delivery of the entire range of business documents, (6) our belief aboutthe benefits businesses will derive from our software and service solutions andabout its capabilities, (7) our intent to focus on obtaining growth from highermargin products and services and to make acquisitions of companies thatconsistently generate net income and positive cash flows, (8) our belief as to thereason that each of our businesses can compete effectively, (9) our strategy ofpreparing for significant growth and the expected benefits of adding to ourleadership team, and (10) our strategy of directing new capital primarily towardincreasing sales and marketing, which statements are subject to various risksand uncertainties, including, without limitation, our limited operatinghistory, risks that we may not successfully implement our acquisition program,risks associated with assimilating acquired personnel and technology into theCompany, the risk that we will not be able to compete effectively because ourmarket place is highly competitive and has low barriers to entry, and ourdependence on third party technology suppliers to provide key software andinfrastructure.

 

Thestatements under "Item 3. Legal Proceedings" concerning our belief as to themateriality of the indemnity claim.

 

Thestatements in MD&A under the captions *Introduction*and *BusinessOverview*of our strategies, beliefs, plans, expectations, anticipations andhopes with respect to (1) our expectations about the business prospects of  MVI,TBS, and GSI, (2) our belief that we have improved our corporate governance,(3) our current and future growth strategy to streamline the corporatestructure, bolster sales resources, acquire intellectual and technology assetsand our expectations about the benefits we may derive, (4) our belief about ourvision to become a business process management/workflow service and the benefitswe expect to derive, (5) our acquisition strategy, (6) our expectationsregarding challenges and risks that we believe are key challenges and risks,and (7) our belief that obtaining planned financings will allow us to generateadequate cash flows to sustain operations at current levels until we being tooperate profitably on a consistent, month-over month basis, which statementsare subject to various risks and uncertainties, including, without limitation,our limited operating history, risks that we may not be able to obtain anyadditional financing at terms acceptable to us, or at all, risks that we maynot successfully implement our acquisition program, risks associated withassimilating acquired personnel and technology into the Company, and the riskthat we will not be able to compete effectively because our market place ishighly competitive and has low barriers to entry. 

 

Thestatements in MD&A under the caption *Critical Accounting Policies*regardingcalculation of allowances, reserves, and other estimates that are based onhistorical experience, the judgment of management, and various otherassumptions that are believed to be reasonable under the circumstances, theresults of which for the basis for making judgments about the carrying value ofassets and liabilities that are not readily apparent from any other sources,our beliefs about critical accounting policies, and the significant judgmentsand estimates used in the preparation of our consolidated financial statements,which statements are subject to certain risks, including, among other things,the inaccuracy of our beliefs regarding critical accounting policies and thatactual customer reserves or other estimates may be different from ourestimates, requiring revisions to our estimated allowance for doubtfulaccounts, additional inventory write-downs, impairment charges, restructuringcharges, litigation, warranty, and other reserves.

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Thestatements in MD&A under the caption *Results of Operations*of ourstrategies, beliefs, plans, expectations, anticipations and hopes with respectto Net Revenue, Gross Profit, Operating Expenses, Income (Loss) fromOperations, and Net Loss and our strategies, beliefs, plans, expectations,anticipations and hopes with respect to Liquidity and Capital Resources setforth in MD&A under the caption Liquidity and Capital Resources, including,without limitation (1) our belief that we have made progress toward achievingprofitable operations by increasing revenues from electronic document deliveryservices and through our acquisitions of TBS and GSI, (2) our strategy ofactively seeking to combine with business that operate profitably and generatepositive cash flows, (3) our belief that sustainable profitability isachievable, (4) our expectations about future funding requirements, and (5) ourbelief that current cash position, cash generated through operations and equityofferings and available borrowings will be sufficient to meet our needs throughat least the next twelve months, which statements are subject to various risksand uncertainties, including, without limitation, our limited operatinghistory, risks that we may not be able to obtain any additional financing atterms acceptable to us, or at all, the risk that we may be unable to sustainall or part of our operations if we are not able to obtain sufficientadditional funds from investors, the risk that our funding requirements couldbe greater should our current revenue streams or margins decrease, risks thatwe may not successfully implement our acquisition program, risks associatedwith assimilating acquired personnel and technology into the Company, and therisk that we will not be able to compete effectively because our market placeis highly competitive and has low barriers to entry.

 

Thestatements under the heading "Item 8A.  Controls and Procedures ofour belief that we are addressing the deficiencies that affected our internalcontrol over financial reporting and the time we estimate we will requirebefore we would be able to conclude that all material weaknesses have beenremediated or our belief regarding the potential impact to us, which statementsare subject to various risks and uncertainties including, without limitationthe risk that for financial or other reasons we will be unable to effect someor all of the changes we believe are required within the time periodsestimated, or at all.

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**CERTAINFACTORS THAT MAY AFFECT FUTURE RESULTS**

** **

Webelieve it is important to communicate our expectations to our stockholders.There may be events in the future, however, that we are not able to predictaccurately or over which we have no control. The risk factors listed in thissection, as well as any cautionary language in this report, provide examples ofrisks, uncertainties and events that may cause our actual results to differmaterially from the expectations we describe in our forward-looking statements.Before you make an investment decision with respect to our common stock, youshould be aware that the occurrence of any of the events described in theserisk factors and elsewhere in this report could have a material and adverseeffect on our business, results of operations and financial condition and thatupon the occurrence of any of these events, the trading price of our commonstock could decline and you could lose all or part of your investment.

 

The risks and uncertainties described below are not the only ones weface. Additional risks and uncertainties not presently known to us may alsoadversely impact our business operations. If any of the following risksactually occur, our business, financial condition, or operating results couldbe negatively affected.

 

**Risks Relating to Our Business**

 

We have a limited operating history which makes financialforecasting and evaluation of our business and prospects difficult and we havereceived an opinion from our independent registered public accounting firmregarding substantial doubt regarding our ability to continue as a goingconcern.

Our limited operating history makes itdifficult to forecast our future operating results.  We were founded and beganoperating in March 1999, but did not report income from operations until thequarter ended June 30, 2004, and have reported net losses through at least December31, 2007. We do not have a long history upon which to base forecasts of futureoperating results, and any predictions about our future revenues and expensesmay not be as accurate as they would be if we had a longer business history. 

The likelihood of our future success must be considered in lightof such limited operating history, as well as the problems, expenses,difficulties, complications and delays frequently encountered in connectionwith any business. There can be no assurance that our future revenues will everbe significant or that our operations will ever be profitable.

The Report of Independent Registered Public Accounting Firm on ourDecember 31, 2007 consolidated financial statements includes an explanatoryparagraph stating that the recurring losses incurred from operations and aworking capital deficiency raise substantial doubt about our ability tocontinue as a going concern. The consolidated financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

Our ability to operate is conditioned on our ability to obtainadditional financing.

*** ***

Our ability to satisfy our future capital requirements andimplement our growth plans will depend upon many factors, including thefinancial resources available to us, the expansion of our sales and marketing effortsand the status of competition.  We believe that current and future availablecapital resources, including the net proceeds from sale of our products andservices, will be sufficient to fund our operations at current levels for theforeseeable future.  However, the exact amount of funds that we will requirewill depend upon many factors, and it is possible that we will requireadditional financing.  There can be no assurance that additional financing willbe available to us on acceptable terms, or at all. If additional funds areraised by issuing equity securities, further dilution to the existingstockholders will result. If adequate funds are not available, we may berequired to delay, reduce or eliminate our programs or obtain funds througharrangements with partners or others that may require us to relinquish rightsto certain of our products, technologies or other assets. Accordingly, theinability to obtain such financing could have a material adverse effect on our business, financialcondition and results of operations.

 

Wecannot predict whether we will be successful together with TBS and GoSolutionsbecause the combined business model is unproven and markets in which they areoperating are developing.

 

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Thecombined business strategy is unproven, and it is too early to gauge reliablymarket penetration rates for our services. There can be no assurance that wewill be successful in the offering of any additional services that arecurrently planned.  If the demand is lower than anticipated, or the cost to adda customer is higher than anticipated, our business, prospects, financialcondition and results of operations would be materially and adversely affected.

 

GoSolutionscurrently depends on one large customer for the majority of its revenue.

 

For2007, seventy percent (70%) of GoSolutions' revenue was derived fromindependent representatives of Primerica Life Insurance Company ("PLIC"). PLICrepresents the majority of GoSolutions' client base.  PLIC is currentlyendorsing GoSolutions flagship service, *GoSolo*, and is under contract todo so only until the end of August 2009.

 

Wemay have difficulty in retaining our customers, which may prevent our long-termsuccess.

 

Weanticipate that our sales and marketing and other costs of acquiring newsubscriptions outside of our existing client base will be substantial relativeto the monthly fees derived from subscriptions. Accordingly, we believe thatour long-term success depends largely on our ability to retain our existingcustomers, while continuing to attract new ones. We continue to investsignificant resources in our network infrastructure and customer and technicalsupport capabilities to provide high levels of customer service. We cannot becertain that these investments will maintain or improve customer retention. Webelieve that competition from our competitors has caused, and may continue tocause, some of our customers to switch to a competing service provider. Inaddition, some new customers use our services only as a novelty and do notbecome consistent users of the service and, therefore, may be more likely todiscontinue their service. These factors adversely affect our customerretention rates. Any decline in customer retention rates could have a materialadverse effect on our business, prospects, financial condition and results ofoperations.

 

Weare dependent on third party technologies and services.

 

Wehave incorporated technology developed by third parties in our services to beprovided to our partners. We will continue to incorporate third-partytechnology in future products and services. We have limited control overwhether or when these third-party technologies will be developed or enhanced.In addition, our competitors may acquire interests in these third parties ortheir technologies, which may render the technology unavailable to us. If athird party fails or refuses to timely develop, license or support technologynecessary to our services, market acceptance of our services could be adverselyaffected. In addition, we rely on, and will continue to rely on, servicessupplied by third parties such as telecommunications, Internet access andelectrical power. If these services fail to meet industry standards for qualityand reliability, market acceptance of our services could be adversely affected.

 

Ourservices may become subject to burdensome telecommunications regulation whichcould increase our costs or restrict our service offerings.

 

Our*GoSolo* service provides Internet messaging and telecommunicationservices through data transmissions over both the public switchedtelecommunication network ("PSTN") and the Internet. The PSTN basedtelecommunications services provided by *GoSolo* are subject to regulationby the Federal Communications Commission ("FCC"), state public utilitycommissions and foreign governmental authorities. These regulations affect theprices we pay for transmission services, the competition we face fromtelecommunications services and other aspects of our market. The FCC does notcurrently regulate the Internet messaging services provided as part of *GoSolo.*However, as Internet services and telecommunications services converge or asthe services we offer expand, there may be increased regulation of ourbusiness. Therefore, in the future, we believe it will very likely becomesubject to additional agency regulations. Changes in the regulatory environmentcould decrease our revenues, increase our costs and restrict our serviceofferings. 

 

 

The markets in which we operate are highlycompetitive, and we may be unable to compete successfully against new entrantsand established industry competitors with significantly greater financialresources.

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Competition in the converging Internet andtelecommunications industries is becoming increasingly intense.  We facecompetition for products and services from both public and private companies,as well as general voice mail providers, fax providers, paging companies,Internet service providers, email providers and internet telephony companies.Competitive pressures may impair our ability to achieve profitability. Theincreased competition may also make it more difficult for us to successfullyenter into strategic relationships with major companies, particularly if thegoal is to have an exclusive relationship with a particular company.  Wecompete against other companies that provide one or more of the services thatwe currently provide.  In addition, these competitors may add services to theirofferings to provide enhanced telephony services comparable to those offered bythe combined companies.  Future competition could come from a variety ofcompanies both in the Internet industry and the telecommunications industry.These industries include major companies that have much greater resources thanwe have, have been in operation for many years, and have large customer bases.These companies may be able to develop and expand their communications andnetwork infrastructures more quickly, adapt more swiftly to new or emergingtechnologies and changes in customer requirements, take advantage ofacquisition and other opportunities more readily, and devote greater resourcesto the marketing and sale of their products and services than we may be able todo. There can be no assurance that additional competitors will not entermarkets that we plan to serves or that we will be able to compete effectively.Increased competition may result in price reductions, reduced gross margins andloss of market share. We may be unable to attain, maintain or enhance ourcompetitive position against current and future competitors.

Our industry is subject to rapidtechnological change and we must adapt quickly to compete effectively. 

The markets in which we compete arecharacterized by (i) rapidly changing technology in information systems,networks, and information security software; (ii) evolving industry standardsand communications protocols; and (iii) frequent improvements in products andservices. Speech driven communications in particular have experienced rapidchanges. These changes can be attributable to frequent new productintroductions, continuing advances in technology, and changes in customerrequirements and preferences. To succeed, we must continually improve ourcurrent products and services and develop and introduce new products andservices that are competitive in terms of price, performance, and quality.These products must adequately address the information security requirements ofour customers and their evolving information systems and networks.

The introduction of new technologies couldrender our existing products and services obsolete or unmarketable or requireus to invest in research and development at much higher rates with no assuranceof developing competitive products. Changes in technologies or customerrequirements also may cause the development cycle for our new products andservices to be lengthy and result in significant development costs. We may notbe able to counter challenges to our current products and services, and ourfuture products and service offerings may not keep pace with the technologicalchanges implemented by competitors, developers of operating systems ornetworking systems, or persons seeking to breach information security. Ourproducts and services may not satisfy evolving preferences of customers andprospects. Because of the complexity of our applications, which operate on oruse multiple platforms and communications protocols, we may experience delaysin introducing new products and service enhancements primarily due todevelopment difficulties or shortages of development personnel. There can be noassurance that we will not experience lengthy delays or other difficulties thatcould delay or prevent the successful development, introduction or marketing ofnew products and services or service enhancements. If we fail to develop andintroduce new products or improve existing services in a timely fashion, suchfailure may have a material adverse effect on our business, prospects,financial condition and results of operations.

Our failure to manage growth effectivelycould impair our business.

We believe that our acquisitions will opennew cross-marketing opportunities in each company's respective customer base.This expansion of business could place a significant strain on our management,financial resources, and other resources.  There can be no assurance that suchexpansion will occur.  

 

Weintend to continue to grow by increasing our sales efforts and completingstrategic acquisitions. To effectively manage our growth, we must, among otherthings: 

 

-  engage,     train and manage a larger sales force and additional service personnel;  

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-  expand     the geographic coverage of our sales force;  
-  expand     our information systems;  
-  identify     and successfully integrate acquired businesses into our operations; and  
-  administer     appropriate financial and administrative control procedures.  

 

 

Ouranticipated growth will likely place a significant strain on our management,financial, operational, technical, sales and administrative resources. Our ability to managefuture growth, if it occurs, will also depend upon the capacity, reliabilityand security of our network infrastructure.  Any failure to effectively manageour growth or to promptly address and respond to these circumstances may causeour business to suffer and our stock price to decline. 

 

Weintend to acquire new and complementary businesses, products and technologiesand may be unable to complete these acquisitions or may not be able tosuccessfully integrate an acquired business in a cost-effective andnon-disruptive manner 

 

Oursuccess depends on our ability to continually enhance and broaden our productofferings in response to changing technologies, customer demands andcompetitive pressures. To this end, we have, from time to time, engaged in theprocess of identifying, analyzing and negotiating possible acquisitiontransactions and we expect to continue to do so in the future. We may choose toacquire new and complementary businesses, products, technologies and/orservices instead of developing them ourselves. We may, however, facecompetition for acquisition targets from larger and more established companieswith greater financial resources, making it more difficult for us to completeacquisitions. We cannot provide any assurance that we will be successful inconsummating future acquisitions on favorable terms or that we will realize thebenefits that we anticipate from one or more acquisitions that we consummate.Integrating any business, product technology or service we acquire could beexpensive and time-consuming and/or disrupt our ongoing business. Further, weare aware of the numerous risks associated therewith, including but not limitedto: 

 

-  diversion     of management's attention from day-to-day operational matters and current     products and customers;  
-  lack     of synergy, or the inability to realize expected synergies;  
-  failure     to commercialize the new technology or business;  
-  failure     to meet the expected performance of the new technology or business;  
-  failure     to retain key employees and customer or supplier relationships;  
-  lower-than-expected     market opportunities or market acceptance of any new products;
-  unexpected     reduction of sales of existing products and services by new products or     services;  
-  inability     to achieve the financial and strategic goals for the acquired and combined     businesses;
-  difficulty     in maintaining controls, procedures and policies during the transition and     integration;
-  difficulty     effectively integrating the acquired technologies or products with our     current products and technologies, particularly where such products reside     on different technology platforms;
-  difficulty     managing geographically-dispersed operations;
-  adverse     effect on our relationships with partner companies or third-party     providers of technology or products; and
-  failure     of our due diligence process to identify significant issues with product     quality, product architecture, legal or tax contingencies, and product     development, among other things.

 

Inaddition, as a successor we may be subject to certain liabilities of ouracquisition targets.  Weare, and will be, required to review goodwill and other intangible assets forimpairment in connection with past and future acquisitions.  We may be requiredto sustain significant exit or impairment charges if products or servicesacquired in business combinations are unsuccessful, which may materiallyincrease operating expenses.

 

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Ourinability to consummate one or more acquisitions on such favorable terms or ourfailure to realize the intended benefits from one or more acquisitions, couldhave a material adverse effect on our business, liquidity, financial positionand/or results of operations, including as a result of our incurrence ofindebtedness and related interest expense and our assumption of unforeseencontingent liabilities. In addition, in order to finance any acquisitions, wewill need to raise additional funds through public or private equity or debtfinancings. In that event, we could be forced to obtain financing on terms thatare not favorable to us and, in the case of equity financing, that result indilution to our stockholders. 

** **

Chargesto earnings resulting from past or future acquisitions or internalreorganizations may adversely affect our operating results. 

 

Underpurchase accounting, we allocate the total purchase price to an acquired company'snet tangible assets, amortizable intangible assets and in-process research anddevelopment based on their fair values as of the date of the acquisition andrecord the excess of the purchase price over those fair values as goodwill.Management's estimates of fair value are based upon assumptions believed to bereasonable but which are inherently uncertain. As a result, any of thefollowing or other factors could result in material charges that wouldadversely affect our results: 

 

-  Loss     on impairment of goodwill and/or other intangible assets;   
-  Changes     in the useful lives or the amortization of identifiable intangible     assets;   
-  Accrual     of newly identified pre-merger contingent liabilities, in which case the     related charges could be required to be included in earnings in the period     in which the accrual is determined to the extent it is identified     subsequent to the finalization of the purchase price allocation; and   
-  Charges     to income to reduce our cost structure.

 

Inaddition, fluctuations in the price of our common stock may expose us to therisk of securities class action lawsuits. Defending against such lawsuits couldresult in substantial costs and divert management's attention and resources.Furthermore, any settlement or adverse determination of these lawsuits couldsubject us to significant liabilities. 

 

Ourbusiness and users may be subject to sales tax and other taxes.

 

Theapplication of indirect taxes (such as sales and use tax, value added tax, orVAT, goods and services tax, business tax, and gross receipt tax) to e-commercebusinesses such as MVI and MVI's users is a complex and evolving issue. Many ofthe fundamental statutes and regulations that impose these taxes wereestablished before the growth of the Internet and e-commerce. In many cases, itis not clear how existing statutes apply to the Internet or e-commerce. Inaddition, some jurisdictions have implemented laws specifically addressing theInternet or some aspect of e-commerce and several other proposals have beenmade at the U.S. federal, state and local level that would impose additionaltaxes on the sale of goods and services through the Internet. These proposals,if adopted, could substantially impair the growth of e-commerce, hamper ourability to retain and attract new customers and diminish our ability to derivefinancial benefit from our activities. In December 2004, the U.S. federalgovernment enacted legislation extending the moratorium on states and otherlocal authorities imposing access or discriminatory taxes on the Internetthrough November 2007.  On October 31, 2007, the moratorium was extendedthrough November 2014.  This moratorium does not prohibit federal, state, orlocal authorities from collecting taxes on our income or from collecting taxesthat are due under existing tax rules. The application of existing, new, orfuture laws could have adverse effects on our business, prospects and operatingresults. There have been, and will continue to be, substantial ongoing costsassociated with complying with the various indirect tax requirements in thenumerous markets in which we conduct or will conduct business.

 

Ourproducts and technology depend on the continued availability of licensedtechnology from third parties. The loss of such products and technology wouldsignificantly and adversely affect our business. 

 

Welicense and will continue to license certain technology and software from thirdparties. These licenses are integral to our business. If any of theserelationships were terminated or if any of these third parties were to ceasedoing business, we would be forced to spend significant time and money toreplace the licensed software. We cannot assure you that we would be able toreplace these licenses. This could have a material adverse effect on ourbusiness, financial condition, and operating results.

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Thesuccessful operation of our business depends upon the provisioning of criticaltechnology from other companies.

 

Wedepend upon third parties for several critical elements of our business,including various technology and infrastructure components. We rely on privatethird-party providers for our Internet and telephony connections and forco-location of a significant portion of our communications servers. Anyprotracted disruption in the services provided by any of these suppliers, orany failure by them to handle current or higher volumes of activity could havea material adverse effect on our business, prospects, financial condition,operating results and cash flows.

 

Anincrease in the cost of email transmissions could have a material adverseeffect on our business.

 

Werely on email for the delivery of some of MVI's electronic documents.  Inaddition, the Company regularly communicates with our clients via email. Ifregulations or other changes in the industry lead to a charge associated withthe sending or receiving of email, the cost of providing MVI's services wouldincrease and, if significant, could materially adversely affect our business,prospects, financial condition, operating results and cash flows.

 

Werely significantly on the revenue generated by our fax services.

 

During2007, approximately 21% of our net revenue was fax-related.  Our future successis therefore subject to the continued use of fax as a messaging medium and/orour ability to diversify our service offerings and derive more revenue fromother services, such as voice, email and unified messaging solutions.  If thedemand for fax as a messaging medium decreases, and we are unable to replacelost revenues from decreased usage of our fax services with a proportionalincrease in our customer base or with revenues from our other services, ourbusiness, financial condition, operating results and cash flows could bematerially and adversely affected.

 

Webelieve that one of the attractions to fax versus alternatives, such as email,is that fax signatures are a generally accepted method of executing contracts. Various governmental and non-governmental entities, many of which possessgreater resources than we do, are attempting to create a universally acceptedmethod for electronically signing documents. Widespread adoption of so-called"digital signatures" could reduce demand for our fax services and, as a result,could have a material adverse effect on our business, prospects, financialcondition, operating results and cash flows.

 

Protectionof our intellectual property is limited and there is a risk of third partyclaims of infringement.

 

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Weregard our software as proprietary, and our success and ability to competedepends, in part, on our ability to protect our proprietary technology andoperate without infringing upon the rights of others; we may fail to do so.  Wewill rely on copyright and trade secret laws, trademarks, confidentialityprocedures and contractual provisions to protect our proprietary software,documentation, and other proprietary information. In addition, we executeconfidentiality and non-disclosure agreements with our employees and limitaccess to distribution of our proprietary information. These efforts will allowus to rely upon the knowledge and experience of our management and technicalpersonnel, to market our existing products, and to develop new products. Thedeparture of any of our management or technical personnel, the breach of theirconfidentiality and non-disclosure obligations to us, or the failure to achieveour intellectual property objectives may have a material adverse effect on ourbusiness. Although we believe that the effectiveness of our products andservices does not depend entirely upon the secrecy of our proprietary orlicensed technology, the public disclosure of our technology could reduce thelevel of our product licensing. Further, litigation to defend and enforce ourintellectual property rights could result in substantial costs and diversion ofour resources and could have a material adverse effect on our business,prospects, financial condition and results of operations regardless of thefinal outcome of such litigation. Despite our efforts to safeguard and maintainour proprietary rights, we may not be successful in doing so or the steps takenby us in this regard may not be adequate to deter misappropriation orindependent third-parties from copying or otherwise obtaining and using ourproducts, services, technology, or other information that we regard asproprietary. Also, others may independently develop similar technologies orduplicate our technology.  Our inability to protect our proprietary rights mayhave a material adverse effect on us. As the number of similar products andservices in the industry increases and the functionality of these productsfurther overlap, we may increasingly become subject to claims of infringementor misappropriation of the intellectual property or proprietary rights ofothers. Other third parties could assert infringement or misappropriationclaims against us in the future with respect to current or future products andservices. Any claims or litigation, with or without merit, could be costly andcould result in a diversion of management's attention and of our resources.

 

Specifically,GoSolutions has been notified that it may be infringing on one or more patentsheld by Webley Systems, Inc. Although, in connection with its merger withGoSolutions, we received a written declaration of counsel that based upon suchfirm's review of the actions of GoSolutions, as stated in a GoSolutionscertificate describing such actions, it is more likely than not that a courtwould determine that GoSolutions acted in good faith, and reasonably believedit had a right to act in the manner that was found to be infringing by Webley,there is no assurance that the ultimate outcome of the Webley Systems, Inc.patent infringement claim will not have an adverse impact upon us.  We andGoSolutions agreed to carve out the Webley Systems, Inc. patent infringementclaims as a matter giving us a right of indemnification against GoSolutionspursuant to the merger documents.

 

Ourbusiness could be adversely affected if we infringe on intellectual propertyrights of third parties. 

 

Litigationregarding intellectual property rights is common in the software and technologyindustries. 

 

Inthe past, we have received letters alleging that we have infringed theintellectual property rights of CatchCurve, Inc. with respect to its AudioFaxtechnology.  To avoid the costs of litigating the matter with CatchCurve ormigrating our fax service software to another provider, we have entered into alicense agreement with CatchCurve for its AudioFax technology. 

 

GoSolutionshas in the past received letters alleging that they are infringing theintellectual property rights of Parus Holdings, the parent company of WebleySystems.  We have received advice from an intellectual property attorney withexperience in this industry with respect to the validity of the claim of theParus patent, and have been made aware that there is substantial evidence tothe effect that there existed prior art to the Parus patent that could impactits effectiveness. We have made efforts to migrate away from the technologiesthat are affected, and plan to continue to derive larger portions of revenuefrom different technologies to reduce any exposure to this intellectualproperty.

 

Wemay in the future be the subjects of claims for infringement, invalidity, orindemnification claims based on such claims of other parties' proprietaryrights. These claims, with or without merit, could be time consuming and costlyto defend or litigate, divert our attention and resources, or require us toenter into royalty or licensing agreements. There is a risk that such licenseswould not be available on reasonable terms, or at all. Although we believe wehave the ability to use our intellectual property to operate, market, andlicense our existing products without incurring liability to third parties,there is a risk that our products and services infringe the intellectualproperty rights of third parties. 

 

Oursuccess depends on the retention of existing executive officers and the abilityto hire and retain additional key personnel.

 

Ourfuture performance depends in significant part upon the continued service ofthe executive officers named in the "Management" section of this prospectus andother key technical, sales and management personnel. The loss of the servicesof one or more of any of the named executive officers or other key employeescould have a material adverse effect on the business, prospects, financialcondition and results of our operations.  Our future success also depends onits continuing ability to attract and retain highly qualified technical, salesand managerial personnel.  Competition for such personnel is intense.  Sometechnical job categories are under conditions of severe shortage in the UnitedStates. We may not be able to recruit or retain the caliber of staff requiredto carry out essential functions at the pace necessary to sustain or expand ourbusiness.   There can be no assurance that we can retain our key employees orthat we can attract, assimilate or retain other highly qualified technical,sales and managerial personnel in the future.

 

 

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TheInternet could become subject to regulations that affect our business.

 

Ourbusiness segments, both directly and indirectly, rely on the Internet and otherelectronic communications gateways. We intend to expand our use of thesegateways. To date, the use of the Internet has been relatively free fromregulatory restraints. However, legislation, regulations, or interpretationsmay be adopted in the future that constrain our own and our customers'abilities to transact business through the Internet or other electroniccommunications gateways. There is a risk that any additional regulation of theuse of such gateways could have a material adverse effect on our business andfinancial condition.

 

Ourcurrent and future revenues are unpredictable and our quarterly operatingresults may fluctuate significantly.

 

Wehave a limited operating history, and have generated only limited revenues todate. We cannot forecast with any degree of certainty the amount of revenue tobe generated by any of our services. In addition, we cannot predict theconsistency of our quarterly operating results.  Factors which may cause ouroperating results to fluctuate significantly from quarter to quarter include:

 

|   |   |                                                                                      |
|--------|--------|-------------------------------------------------------------------------------------------|
|   | • | our ability to attract new and repeat  customers;                                         |
|   |   |                                                                                      |
|   | • | our ability to keep current with the  evolving requirements of our target market;         |
|   |   |                                                                                      |
|   | • | our ability to protect our proprietary  technology;                                       |
|   |   |                                                                                      |
|   | • | the ability of our competitors to offer  new or enhanced products or services; and        |
|   |   |                                                                                      |
|   | • | unanticipated delays or cost increases  with respect to research and development.

  |

 

Becauseof these and other factors, we believe that quarter-to-quarter comparisons ofour results of operations are not good indicators of our future performance. Ifour operating results fall below the expectations of securities analysts andinvestors in some future periods, then our stock price may decline. 

 

We have some exposure because of the current situation in thesubprime lending markets.   MVI does business with several companies that areengaged in subprime lending.  One customer in the subprime arena has ceasedbusiness.  It is possible that one or more of our remaining clients in thatbusiness could also be unable to sustain operations.

 

 

 

Oneshareholder owns a significant portion of our outstanding common stock and isable to influence our actions.

 

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Oneshareholder and his wife own 60,653,171 shares, or approximately 40%, of theoutstanding shares of our common stock as of February 29, 2008.  In addition,as of February 29, 2008, these individuals hold warrants to purchase anadditional 3,000,000 shares of our common stock at $0.10 per share and securedconvertible promissory notes and accrued interest thereon convertible into anadditional 1,227,643 shares of our common stock at $0.14 per share.  Althoughthese individuals do not own a majority of our outstanding shares, thesignificant number of shares they own gives them the ability to greatlyinfluence the election of our board of directors and to approve or disapproveall other matters requiring the vote of shareholders. In addition, we believethat Barron Partners, LP owns up to 5,000,000 shares, or approximately 3% ofthe outstanding shares of our common stock as of February 29, 2008 and has theright to acquire up to 33,500,000 shares of the common stock pursuant tooutstanding shares of the Series A Preferred Stock (convertible to 33,500,000shares of the common stock on a one-for-one basis). Barron Partners, LP willalso be able to significantly influence corporate actions requiring shareholderconsent.  In addition, GoSolutions Equity LLC owns 26,786,840 shares, orapproximately 15% of the outstanding shares of our common stock as of February29, 2008.  Each of Barron Partners, LP and GoSolutions Equity LLC will also beable to significantly influence corporate actions requiring shareholderconsent.

 

OurCertificate of Incorporation limits director liability, thereby making itdifficult to bring any action against them for breach of fiduciary duty. 

 

Aspermitted by Delaware law, our Certificate of Incorporation limits theliability of directors to us or our stockholders for monetary damages forbreach of a director's fiduciary duty except for liability in certaininstances. As a result of its charter provision and Delaware law, stockholdersmay have limited rights to recover against directors for breach of fiduciaryduty. 

 

 

 

*Thefollowing risks relate principally to our common stock and its market value:*

 

Pennystock regulations may impose certain restrictions on marketability of ourstock. 

 

TheCommission has adopted regulations which generally define a "penny stock" to beany equity security that has a market price (as defined) of less than $5.00 pershare, subject to certain exceptions. As a result, our common stock is subjectto rules that impose additional sales practice requirements on broker-dealerswho sell such securities to persons other than established customers andaccredited investors (generally those with assets in excess of $1,000,000 orannual income exceeding $200,000, or $300,000 with their spouse). Fortransactions covered by these rules, the broker-dealer must make a specialsuitability determination for the purchase of such securities and have receivedthe purchaser's written consent to the transaction prior to the purchase.Additionally, for any transaction involving a penny stock, unless exempt, therules require delivery, prior to the transaction, of a risk disclosure documentmandated by the Commission relating to the penny stock market. Thebroker-dealer must also disclose the commission payable to both thebroker-dealer and the registered representative, current quotations for thesecurities and, if the broker-dealer is the sole market maker, thebroker-dealer must disclose this fact and the broker-dealers presumed controlover the market. Finally, monthly statements must be sent disclosing recentprice information for the penny stock held in the account and information onthe limited market in penny stocks. Consequently, the "penny stock" rules mayrestrict the ability of broker-dealers to sell our securities and may affectthe ability of our shareholders to sell our securities in the secondary marketand the price at which such purchasers can sell any such securities. 

 

Wehave never paid dividends on our common stock and do not expect to pay any inthe foreseeable future. 

 

Wehave not paid any dividends on our common stock since our inception and do notintend to pay dividends on our common stock in the foreseeable future. Anyearnings that we may realize in the foreseeable future will be retained tofinance our growth. 

 

Thenumber of shares eligible for future sale may adversely affect the market forour common stock. 

 

Asof February 29, 2008, we had 152,770,913 shares of our common stock issued andoutstanding, approximately 140,000,000 of which were "restricted securities"when issued.  Rule 144 of the Commission provides, in essence, that a personholding "restricted securities" for a period of six months may sell only anamount every three months equal to the greater of (a) one percent of the issuedand outstanding shares, or (b) the average weekly volume of sales during thefour calendar weeks preceding the sale. The amount of "restricted securities"which a person who is not an affiliate may sell is not so limited, sincenon-affiliates may sell without volume limitation their shares held for oneyear if there is adequate current public information available concerning us.In such an event, "restricted securities" would be eligible for sale to thepublic at an earlier date. The sale in the public market of such shares ofcommon stock may adversely affect prevailing market prices of the common stock.

 

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OnOctober 15, 2007, we filed a registration statement with respect to approximately189,000,000 of our shares of common stock.  The registration statement wasdeclared effective by the Commission on November 7, 2007. 

 

Outstandingoptions and warrants could affect the market price of our common stock. 

 

Asof December 31, 2007, there were outstanding stock options and warrants topurchase an aggregate of 42,796,669 shares of our common stock at exerciseprices ranging between $0.05 per share and $2.50 per share. The exercise ofsuch outstanding options and warrants will dilute the percentage ownership ofour stockholders, and any sales in the public market of shares of common stockunderlying such securities may adversely affect prevailing market prices forthe common stock. Moreover, the terms upon which we will be able to obtainadditional equity capital may be adversely affected since the holders of suchoutstanding securities can be expected to exercise their respective rightstherein at a time when we would, in all likelihood, be able to obtain anyneeded capital on terms more favorable to us than those provided in suchsecurities.

 

Our stock price will fluctuate which couldresult in substantial losses for investors.

 

The market price for our common stock mayfluctuate significantly in response to a number of factors, some of which arebeyond our control. These factors include:

 

 

|   |   |                                                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------|
|   | • | Quarterly variations in operating results;                                                                                |
|   | • | Changes in financial estimates by securities  analysts;                                                                   |
|   | • | Announcements by us or our competitors of new  products, significant contracts, acquisitions, or strategic relationships; |
|   | • | Disputes concerning our proprietary rights or  any future patents, trademarks or copyrights;                              |
|   | • | Publicity about us, our products and services,  or our competitors;                                                       |
|   | • | Additions or departures of key personnel;                                                                                 |
|   | • | Any future sales of our common stock or other  securities;                                                                |
|   | • | Stock market price and volume fluctuations of  publicly-traded companies; and                                             |
|   | • | Business combination transactions.                                                                                        |

 

Theseand other external factors have caused and may continue to cause the marketprice and demand for our common stock to fluctuate substantially, which maylimit or prevent investors from readily selling their shares of common stockand may otherwise negatively affect the liquidity of our common stock. 

 

Inthe past, securities class action litigation has often been brought againstcompanies following periods of volatility in the market price of theirsecurities. If securities class action litigation is brought against us, itcould result in substantial costs and a diversion of management's attention andresources, which could hurt our business. 

 

Tradingin our common stock on the OTCBB may be limited thereby making it moredifficult for investors to resell their shares of our common stock. 

 

Ourcommon stock trades on the OTCBB. The OTCBB is not an exchange and, becausetrading of securities on the OTCBB is often more sporadic than the trading ofsecurities listed on an exchange or NASDAQ, you may have difficulty resellingany of your shares. 

 

 

 

Ourcommon shareholders may experience substantial dilution.

 

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Thesale of a substantial number of shares of our common stock in the publicmarket, or the prospect of such sales, could materially and adversely affectthe market price of the Company's common stock. We are authorized to issue upto 500,000,000 shares of common stock. To the extent of such authorization, ourBoard of Directors will have the ability, without seeking stockholder approval,to issue additional shares of common stock in the future for such considerationas the Board of Directors may consider sufficient. The issuance of additionalcommon stock in the future will reduce the proportionate ownership and votingpower of the Company's common stock held by existing stockholders. Sales in thepublic market of substantial amounts of our common stock, including sales ofcommon stock issuable upon exercise of options and warrants, could depressprevailing market prices for our common stock. Even the perception that suchsales could occur might impact market prices for the common stock. Theexistence of outstanding options and warrants may prove to hinder our futureequity financings. 

 

Ifwe fail to establish or maintain effective internal controls over financialreporting, the price of our common stock may be adversely affected.

 

Wehave determined that our internal controls over financial reporting havematerial weaknesses and conditions that need to be addressed, the disclosure ofwhich may have an adverse impact on the price of our common stock.  We arerequired to establish and maintain appropriate internal controls over financialreporting.  Failure to establish those controls, or any failure of thosecontrols once established, could adversely impact our public disclosuresregarding our business, financial condition or results of operations.  Inaddition, our future assessments of internal controls over financial reportingmay identify additional weaknesses and conditions that need to be addressed inour internal controls over financial reporting or other matters that may raiseconcerns for investors.  Any actual or perceived weaknesses and conditions thatneed to be addressed in our internal control over financial reporting,disclosure of management's assessment of our internal controls over financialreporting or disclosure of our independent registered public accounting firm'sattestation to or report on management's assessment of our internal controlsover financial reporting may have an adverse impact on the price of our commonstock.

 

Standards for compliance with Section 404 of theSarbanes-Oxley Act of 2002 are uncertain, and if we fail to comply in a timelymanner, our business could be harmed and our stock price could decline.

 

Rulesadopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002require annual assessment of our internal controls over financial reporting,and attestation of our assessment by our independent registered publicaccounting firm.  Currently, we believe these two requirements apply to ourannual reports for fiscal 2007 and 2009, respectively.  The standards that mustbe met for management to assess the internal controls over financial reportingas effective are evolving and complex, and require significant documentation,testing, and possible remediation to meet the detailed standards.  We haveincurred, and expect to incur, significant expenses and to devote resources toSection 404 compliance during the remainder of 2008 and on an ongoing basis. It is difficult for us to predict how long it will take to complete the assessmentof the effectiveness of our internal control over financial reporting for eachyear and to remediate any deficiencies in our internal control over financialreporting. As a result, we may not be able to complete the assessment andremediation process on a timely basis.  In addition, the attestation process byour independent registered public accounting firm is new and we may encounterproblems or delays in completing the implementation of any requestedimprovements and receiving an attestation of our assessment by our independentregistered public accounting firm.  In the event that our Chief ExecutiveOfficer, Chief Financial Officer or independent registered public accountingfirm determine that our internal control over financial reporting is noteffective as defined under Section 404, we cannot predict how regulators willreact or how the market prices of our shares will be affected; however, webelieve that there is a risk that investor confidence and share value may benegatively impacted.

 

 

Wecannot be certain that our internal control over financial reporting will beeffective or sufficient in the future. 

 

Ourability to manage our operations and growth requires us to maintain effectiveoperations, compliance and management controls, as well as our internal controlover financial reporting. We may not be able to implement necessaryimprovements to our internal control over financial reporting in an efficientand timely manner and may discover deficiencies and weaknesses in existingsystems and controls, especially when such systems and controls are tested byincreased rate of growth or the impact of acquisitions. In addition, upgradesor enhancements to our computer systems could cause internal controlweaknesses. 

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Itmay be difficult to design and implement effective internal control overfinancial reporting for combined operations as we integrate acquiredbusinesses. In addition, differences in existing controls of acquiredbusinesses may result in weaknesses that require remediation when internalcontrols over financial reporting are combined. The integration of twocompliant systems could result in a noncompliant system or an acquired companymay not have compliant systems. In either case, the effectiveness of ourinternal control may be impaired. 

 

Ifwe fail to achieve and maintain an effective system of internal controls, wemay be unable to produce reliable financial reports or prevent fraud. If we areroutinely unable to assert that our internal control over financial reportingis effective, or if our independent registered public accounting firm isrequired to attest to the effectiveness of our internal controls but is unableto deliver a report at all or can deliver only a qualified report, we could besubject to regulatory enforcement and may lose investor confidence in ourability to operate in compliance with existing internal control rules andregulations, either of which could result in a decline in our stock price.

 

SignificantIndebtedness

 

Our significant debt could adversely affect our financial resources andprevent us from satisfying our debt service obligations.  We have a significantamount of indebtedness and are very likely to incur additional indebtedness inthe future.  In the future, we may not generate sufficient cash flow fromoperations, or have future borrowings available to us, sufficient to pay ourdebt.

 

Inorder to finance the acquisition consideration for future acquisitions, we mayincur additional significant indebtedness. This additional indebtedness may,among other things, require us to: 

 

-  Maintain     a specific ratio of net debt to consolidated operating income or other     measurements;   
-  Dedicate     a significant portion of our cash flow from operations to payments on this     debt, thereby reducing the availability of cash flow to fund capital     expenditures, to pursue other acquisitions or investments in new     technologies and for general corporate purposes;   
-  Increase     our vulnerability to general adverse economic conditions; and   
-  Limit     our flexibility in planning for, or reacting to, changes in or challenges     relating to its business and industry.   

 

Inaddition, the terms of the financing obligations may contain restrictions,including limitations on our ability to: 

 

-  Incur     additional indebtedness;   
-  Create     or incur liens;   
-  Dispose     of assets;   
-  Consolidate     or merge with or acquire another entity;   
-  Pay     dividends, redeem shares of capital stock or effect stock repurchases;     and   
-  Make     loans and investments.   

 

Therequirements and limitations that could be associated with additionalindebtedness have the potential to increase our vulnerability to generaladverse economic conditions, and limit our ability to respond to changes andchallenges in our business. In addition, a failure to comply with any suchrestrictions could result in a default under these financing obligations orcould require us to obtain waivers from our lenders for failure to comply withthese restrictions. The occurrence of a default that we are unable to cure orthe inability to secure a necessary consent or waiver could have a materialadverse effect on our business, financial condition or results of operations.

 

Ourofficers and directors may be able to influence stockholder actions. 

 

41

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AtFebruary 29, 2008, executive officers and directors, in the aggregate,beneficially own approximately 10% of our outstanding voting stock (includingrights to purchase common stock). These stockholders acting together may beable to significantly influence matters requiring approval by our stockholders,including the election of directors, and the approval of mergers or otherbusiness combination transactions in a manner that could conflict with ourother stockholders. 

 

 

Ourconvertible preferred stock may adversely impact VillageEDOCS and our commonstockholders or have a material adverse affect on VillageEDOCS.

** **

Wehave issued shares of Series A Preferred Stock to Barron Partners LP, the termsof which may have a material adverse effect on our financial condition andresults of operations. The preferred stock has a liquidation preference in theamount of $1,675,000 which must be paid before common stockholders wouldreceive funds in the event of liquidation, 

** **

** **

** **

** **

** **

**ITEM 7.  FINANCIAL STATEMENTS**

** **

               Exhibit99.1, "*VillageEDOCS, Inc. Financial Statements*" is incorporated hereinby this reference.

| ** ** |   |   |   |   |
|------------|--------|--------|--------|--------|

**ITEM8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

 

None.

 

**ITEM8A. - CONTROLS AND PROCEDURES**

 

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

 

Under the supervision and withthe participation of our management, including our principal executive officerand principal financial officer, we conducted an evaluation of our disclosurecontrols and procedures, as such term is defined under Rule 13a-15(e)promulgated under the Securities Exchange Act of 1934, as amended (the ExchangeAct).  As a result of this evaluation, we identified material weaknesses in ourinternal control over financial reporting as of December 31, 2007. Accordingly, we concluded that our disclosure controls and procedures were noteffective as of December 31, 2007.

 

Our internal controls overfinancial reporting ("ICFR") are designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation ofconsolidated financial statements for external purposes in accordance withgenerally accepted accounting principles. Our internal control over financialreporting includes those policies and procedures that: 

i.             pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of our assets;

ii.            providereasonable assurance that transactions are recorded as necessary to permitpreparation of consolidated financial statements in accordance with generallyaccepted accounting principles, and that our receipts and expenditures arebeing made only in accordance with authorizations of our management anddirectors; and

iii.              providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton the consolidated financial statements.

 

 

 

 

 

42

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**Management'sAnnual Report on Internal Control Over Financial Reporting.**

 

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting.  Our management conducted an evaluation of theeffectiveness of our internal control over financial reporting based on theframework in *Internal Control - Integrated Framework* issued by the Committeeof Sponsoring Organizations of the Treadway Commission.  Based on ourevaluation, management has concluded, as of December 31, 2007, we did notmaintain effective controls over the financial reporting process because we hadthe following deficiencies:

 

-  Shortageof qualified information technology and financial reporting personnel due tolimited financial resources and number of locations.  This shortage infinancial reportin staff created an adjustment to our annual report for 2007,which was not detected initially by management.  The adjustment was related to the sale of PFI. Management has concluded that this control deficiency constitutes a materialweakness. 
-  The Company did not maintain effectivecontrols to ensure there is timely analysis and review of accounting records,spreadsheets, and supporting data.  This control deficiency did not result inaudit adjustments to the 2007 interim or annual consolidated financialstatements.  However, this control deficiency could result in a materialmisstatement of significant accounts or disclosures that would result in amaterial misstatement to the Company's interim or annual consolidated financialstatements that would not be prevented or detected.  Accordingly,management has determined that this control deficiency constitutes a materialweakness. 
-  The Company did not effectively monitoraccess to, or maintain effective controls over changes to, certain financialapplication programs and related data.  This control deficiency did not resultin audit adjustments to the 2007 interim or annual consolidated financialstatements. However, this control deficiency could result in a materialmisstatement of significant accounts or disclosures that would result in amaterial misstatement to the Company's interim or annual consolidated financialstatements that would not be prevented or detected. Accordingly, management hasdetermined that this control deficiency constitutes a material weakness. 
-  The Company does not maintain a sufficientlevel of IT personnel to execute general computing controls over our informationtechnology structure, which include the implementation and assessment ofinformation technology policies and procedures. This control deficiency did notresult in an audit adjustment to the 2007 interim or annual consolidatedfinancial statements, but could result in a material misstatement of significantaccounts or disclosures, which would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutesa material weakness. 
-  The Company did not maintain adequatesegregation of duties within its critical financial reporting applications, therelated modules and financial reporting processes. This control deficiency didnot result in audit adjustments to the 2007 interim or annual consolidatedfinancial statements. This control deficiency could result in a misstatement ofbalance sheet and income statement accounts, in the Company's interim or annualconsolidated financial statements that would not be prevented or detected.Accordingly, management has determined that this control deficiency constitutesa material weakness.  

 

Managementhas determined that these control deficiencies constituted a material weaknessin our internal control over financial reporting as of December 31, 2007. Amaterial weakness is a control deficiency, or combination of control deficiencies,in ICFR such that there is a reasonable possibility that a materialmisstatement of our annual or interim financial statements will not beprevented or detected on a timely basis by employees in the normal course oftheir assigned functions.

 

**InherentLimitations Over Internal Controls**

 

Internalcontrol over financial reporting cannot provide absolute assurance of achievingfinancial reporting objectives because of its inherent limitations, includingthe possibility of human error and circumvention by collusion or overriding ofcontrols. Accordingly, even an effective internal control system may notprevent or detect material misstatements on a timely basis. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions or thatthe degree of compliance with the policies or procedures may deteriorate.

43

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**Remediation of Material Weakness**

As discussed in *Management's Annual Reporton Internal Control over Financial Reporting*, as of December 31, 2007,there were material weaknesses in our internal control over financialreporting. To the extent reasonably possible in our current financialcondition, we have authorized the addition of additional staff members to thefinance department to ensure that there are sufficient resources within thedepartment to prepare our financial statements and disclosures in accordancewith accounting principles generally accepted in the United States of America. We are in the process of centralizing accounts receivable and accounts payableprocesses for all business units, which will establish mitigating controls tocompensate for the risk due to lack of segregation of duties.  In addition, weare taking steps to unify the financial reporting of all of our componentcompanies and we are in the initial planning phase of upgrading, wherepossible, certain of our information technology systems impacting financialreporting.  We are currently seeking information technology management staffthat is adequately qualified to ensure that the IT general computing controlsare effective over our systems impacting financial reporting.

Through these steps, we believe we areaddressing the deficiencies that affected our internal control over financialreporting as of December 31, 2007. However, the effectiveness of anysystem of internal controls is subject to inherent limitations and there can beno assurance that our internal control over financial reporting will prevent ordetect all errors.  Because the remedial actions require hiring of additionalpersonnel, upgrading certain of our information technology systems, and relyingextensively on manual review and approval, the successful operation of thesecontrols for at least several quarters may be required before management may beable to conclude that the material weakness has been remediated.  We intend tocontinue to evaluate and strengthen our ICFR systems. These efforts requiresignificant time and resources.  If we are unable to establish adequate ICFRsystems, we may encounter difficulties in the audit or review of our financialstatements by our independent public accountants, which in turn may have amaterial adverse effect on our ability to prepare financial statements in accordancewith GAAP and to comply with our SEC reporting obligations.

 

**AttestationReport of the Registered Public Accounting Firm.**

** **

Thisannual report does not include an attestation report of our registered publicaccounting firm regarding internal control over financial reporting.Management's report was not subject to attestation by our registered publicaccounting firm pursuant to temporary rules of the SEC that permit us toprovide only management's report in this annual report.

 **Changes in InternalControl Over Financial Reporting.**

** **

We have made no change in our internalcontrol over financial reporting that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

44

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**PART III**

** **

##### ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS AND CONTROL PERSONS OF THE COMPANY

 

**DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANTEMPLOYEES OF THE COMPANY**

 

**Directors and Executive Officers**

 

The following table sets forth certaininformation with respect to each person who is a director, executive officer,or significant employee of the Company or its subsidiary as of February 29,2008.

 

|   | Name               | Age    | Position                                                     |
|--------|--------------------|--------|--------------------------------------------------------------|
|   |               |   |                                                         |
|   | J. Thomas Zender   | 68     | Chairman of the Board                                        |
|   |               |   |                                                         |
|   | K. Mason Conner    | 49     | Chief Executive Officer, President, Director                 |
|   |               |   |                                                         |
|   | H. Jay Hill        | 68     | Executive Vice President of Corporate  Development, Director |
|   |               |   |                                                         |
|   | Ricardo A. Salas   | 44     | Director                                                     |
|   |               |   |                                                         |
|   | Michael A. Richard | 39     | Chief Financial Officer and Secretary                        |
|   |               |   |                                                         |

 

Executiveofficers are appointed by the Board of Directors and, subject to the terms oftheir employment agreements, serve until their successors are duly elected andqualify, subject to earlier removal by the Board of Directors.   Directors areelected at the annual meeting of shareholders to serve for their term and untiltheir successors are duly elected and qualify, or until their earlierresignation, removal from office, or death. The remaining directors may fillany vacancy in the Board of Directors for an unexpired term. The term of thecurrent directors continues until the next annual meeting of shareholders to beheld in 2007.  Mr. Zender has been a director since August 1997, Mr. Hill sinceOctober 1997, Mr. Conner since October 1998, and Mr. Salas since July 2005.

 

**BusinessExperience of Executive Officers, Directors, and Significant Employees**

 

J.THOMAS ZENDER has been a director since 1997 and has been Chairman of the Boardsince January 2001.  He currently serves on our Audit Committee and ourCompensation Committee. Mr. Zender is an information technology industry boardmember and executive with over 35 years management and business developmentexperience.  He has held management positions at General Electric, Honeywell,ITT and other companies.  Mr. Zender has been an officer in three publicly heldcorporations, one NYSE listed company and two NASDAQ traded companies.  From1996 through 2001, he served as an interim executive for several early stagecompanies, including CEO of VillageEDOCS from 1997 to 1999.  From 2001 to 2007Mr. Zender served as president and CEO of Unity, a worldwide not-for-profit,trans-denominational spiritual support movement.  He is currently a Director ofPeerless Systems, a NASDAQ traded company, and serves on the Audit andNominating Committees.  Mr. Zender served on the board of SAMSys Technologies,a Toronto Stock Exchange traded corporation from 1996 to 2006.  He holds aBusiness Administration degree from Ottawa University, with focus areas ofmanagement, marketing, and information technology..

 

45

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K.MASON CONNER has been our Chief Executive Officer since 1999 and has served asour President since January 1, 2007.  Mr. Conner joined the Company asVice-President of Sales in 1997 and has been a Board Member since 1998, ActingVice-President of Sales between 1998 and 2002, and President between 1998 andMarch 2006, and Mr. Conner is also a Director of GoSolutions, MVI, and TBS. Hehas 27 years in sales and business management experience, including 23 years ofdirect and channel sales experience in the voice and data communications productsand services industry. In the early 1980's he was involved in the applicationof Internet Protocol technologies. In the late 1980s and early 1990s he was aprincipal strategist for an international initiative to transform K-12education through the use of the Internet. He was a principal consultant withLTS for the electronic vulnerability threat assessment of the Los AngelesAirport Department after the "UnaBomber" threat. He has held salesmanagement positions with Banyan Systems, Doelz Networks, and Timeplex. Duringthe five years prior to joining the Company, Mr. Conner was Director of Salesat Telecom Multimedia Systems from 1996 to 1997, Vice President of Sales at LoTiro-Sapere from 1995 to 1996, and Vice President of Sales at Digital Network Architecturesfrom 1991 to 1995. 

 

H.JAY HILL has been a director since 1997 and became the Executive Vice Presidentof Corporate Development in May 2003. Mr. Hill is also a Vice President ofTailored Business Systems, Inc. and GoSolutions, Inc..  For the last 20 years,he has primarily been a senior executive in turnaround situations ininformation technology and telecommunication companies. From November 2000 toMay 2003, Mr. Hill was CEO, President and a Director of LightPort Advisors,Inc, a private Internet service provider for the financial services market. Hehas held similar positions with Unitron Medical Communications, Inc. (d/b/aMoon Communications) (1999-2000) and Amnet Corporation (Netlink) (1989-1994),and has held senior sales and marketing management positions with SunCoastEnvironmental Controls (1996-1999), Technology Research Corporation(1994-1996), Harris Corporation, Doelz Networks, Paradyne/AT&T, andInforex. His primary background in sales and marketing commenced withPhiladelphia Electric Company and IBM. Mr. Hill currently serves on our AuditCommittee and our Compensation Committee.

 

RICARDOSALAS joined the board of directors in the second quarter of 2005.  Mostrecently, Mr. Salas served as the President and Chief Executive Officer ofLiquidmetal Technologies. From January 2000 through June 2005, Mr. Salas servedas Chief Executive Officer of iLIANT Corporation, an information technology andoutsourcing service firm in the health care industry, and he continues to serveas Chairman of iLIANT. From 1987 through 2004, he was Vice President of J.Holdsworth Capital Ltd., a private investment firm. As an officer of J.Holdsworth Capital Ltd., Mr. Salas held positions in various investmentsincluding Medical Manager Corporation as a vice president between June 1999 andJanuary 2000, National Medical Systems, Inc. as vice president between April1994 and February 1997, and Uni Flange Corporation as vice president betweenJune 1989 and June 1994. He currently serves as a director of VillageEDOCS, aprovider of business information delivery services and products. Mr. Salasreceived his B.A. in Economics in 1986 from Harvard University in Cambridge,Massachusetts. Mr. Salas currently serves on our Audit Committee and ourCompensation Committee.

 

MICHAELA. RICHARD joined the Company in February 2001 and is the Chief FinancialOfficer and Corporate Secretary. Mr. Richard is also a Director and theSecretary of our wholly-owned subsidiaries, GSI, TBS and MVI. Mr. Richard hasover 15 years of diverse management and public corporate reporting experiencefor start-up and early stage ventures. From 1999-2000 he served as V.P.Controller for The BigHub.com, Inc., a public new media company providingunique content, private label search engine, e-commerce solutions, and directmail. From 1995-1999, Mr. Richard served first as Controller and then as VicePresident, Accounting (principal accounting officer), and finally as a Directorof PortaCom Wireless, Inc., a public developer and operator of companies withcontracts to provide wireless telecommunication services in China and otheremerging markets.

 

 

 

 

##### Our Corporate Governance Practices

 

Wehave always believed in strong and effective corporate governance proceduresand practices. In that spirit, we have summarized several of our corporategovernance practices below.

 

 

 

 

46

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| **Adopting  Governance Guidelines**                  |    |  Our board of directors has adopted a set of  corporate governance guidelines to establish a framework within which it will  conduct its business and to guide management in its running of your Company.  The governance guidelines can be found on our website at www.villageedocs.com  and are summarized below.                                                                                                                                                                                                                                                 |
|------------------------------------------------------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |         |
| **Monitoring  Board Effectiveness**                  |    | It is important that our board of directors  and its committees are performing effectively and in the best interest of the  Company and its stockholders. The board of directors and each committee are  responsible for annually assessing their effectiveness in fulfilling their  obligations.                                                                                                                                                                                                                                                                        |
|                                                 |         |
| **Conducting  Formal Independent Director Sessions** |    | At the conclusion of each regularly scheduled board  meeting, the independent directors meet without our management or any  non-independent directors.                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                 |         |
| **Hiring  Outside Advisors**                         |    | The board and each of its committees may  retain outside advisors and consultants of their choosing at our expense,  without management's consent.                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                 |         |
| **Avoiding  Conflicts of Interest**                  |    | We expect our directors, executives and  employees to conduct themselves with the highest degree of integrity, ethics  and honesty. Our credibility and reputation depend upon the good judgment,  ethical standards and personal integrity of each director, executive and  employee. In order to provide assurances to the Company and its stockholders,  we have implemented standards of business conduct which provide clear  conflict of interest guidelines to its employees and directors, as well as an  explanation of reporting and investigatory procedures. |
|                                                 |         |
|                                                 |         |

 

| **Providing  Transparency** |    | We believe it is important that stockholders  understand our governance practices. In order to help ensure transparency of  our practices, we have posted information regarding our corporate governance  procedures on our website at www.villageedocs*.*com. |  
 

 

 
**Communications  with the Board of Directors**

  

Although we do not have a formal policy regarding  communications with the board of directors, stockholders may communicate with  the board of directors by writing to the Company at VillageEDOCS, Inc. Attention:  Investor Relations, 1401 N. Tustin Ave., Ste. 230, Santa Ana, CA  92705. Stockholders  who would like their submission directed to a member of the board may so  specify, and the communication will be forwarded, as appropriate.

 
 

 

 
**Standards  of Business Conduct**

  

The board of directors has adopted a Code of  Business Conduct and Ethics for all of our employees and directors, including  the Company's principal executive and senior financial officers. You can  obtain a copy of our Code of Business Conduct and Ethics via our website at www.villageedocs.com,  or by making a written request to the Company at VillageEDOCS, Attention:  Investor Relations, 1401 N. Tustin Ave., Ste. 230, Santa Ana, CA  92705. We  will disclose any amendments to the Code of Business Conduct and Ethics, or  waiver of a provision therefrom, on our website at the same address.

 
 

 

**Ensuring Auditor Independence**

  

We have taken a number  of steps to ensure the continued independence of our independent registered  public accounting firm.  That firm reports directly to the Audit Committee,  which also has the ability to pre-approve or reject any non-audit services  proposed to be conducted by our independent registered public accounting firm.

 

 

 
 
 

 

47

 

 

 

 

 
REPORT OF THE COMPENSATION COMMITTEE ONEXECUTIVE COMPENSATION
 

General

 

The Compensation Committee of the Board of Directors iscurrently composed of two independent directors, Messrs. Zender and Salas, whohave no "interlocking relationships" (as defined by the SEC), and Mr. Hill, whorecuses himself from votes and discussions on his own compensation.

 

We are engaged in highly competitive businesses andcompete nationally for personnel at the executive and technical staff level. Outstanding candidates are aggressively recruited, often at premium salaries. Highly qualified employees are essential to our success.  We are committed toproviding competitive compensation that helps attract, retain, and motivate thehighly skilled people we require.  We strongly believe that a considerableportion of the compensation for the Chief Executive Officer and other topexecutives must be tied to the achievement of business objectives, completingacquisitions, and to business unit and overall financial performance, bothcurrent and long-term.

 

Executive Compensation

 

Ourexecutive compensation program is administered by the Compensation Committee.The role of the Compensation Committee is to review and approve salaries andother compensation of the executive officers of the Company, to administer theLong-Term Incentive Plan, and to review and approve stock option grants to allemployees including the executive officers of the Company.

 

General Compensation Philosophy

 

Ourcompensation philosophy is that total cash compensation should vary with ourperformance and any long-term incentive should be closely aligned with theinterest of the stockholders.  Total cash compensation for the executiveofficers consists of the following components:

 
-  Base     salary
-  An     executive officer bonus that is related to growth in our sales and     operating earnings.

 

Long-termincentives are realized through the granting of stock options to executives andkey employees through the 2002 Equity Incentive Plan.  We have also grantedwarrants to certain of our executive officers.  We have no other long-termincentive plans for our officers and employees.

 

**BaseSalary and Executive Officer Bonus Target**

 

Currentbase salaries for the executive officers were determined by arms' lengthnegotiations with the Board of Directors.  Messrs. Conner, Richard and Hillhave employment contracts with the Company which set a base salary and, withrespect to Messrs. Conner and Hill, allow for bonus targets and levels to beset at the sole discretion of this committee. During 2007, none of theexecutive officers reached their bonus targets, hence no bonuses were awardedto executive officers in 2007, nor will bonuses be awarded in 2008 forperformance in 2007.

 

Chief Executive OfficerCompensation

 

Thecurrent base salary for the Chief Executive Officer of $236,250 is setaccording to his employment contract, which also includes provision for annualbonuses at the sole discretion of this committee.  No bonuses were awarded tothe Chief Executive Officer in 2007 and none were accrued based upon 2007 performance.

 

 

 

 

 

48

 

 

 

 

 

Stock Options

 

Stockoptions are granted to aid in the retention of executive and key employees andto align the interests of executive and key employees with those of thestockholders.  The level of stock options granted (i.e., the number of sharessubject to each stock option grant) is based on the employee's ability to impactfuture corporate results.  An employee's ability to impact future corporateresults depends on the level and amount of job responsibility of theindividual.  Therefore, the level of stock options granted is proportional tothe Compensation Committee's evaluation of each employee's job responsibility. For example, Mason Conner, as the President and Chief Executive Officer, hasthe highest level of responsibility and would typically be awarded the highestlevel of stock options.  Stock options are granted at a price not less than thefair market value on the date granted.

49

 

 

 

 

 

**ITEM 10. EXECUTIVE COMPENSATION**

 

The following table sets forth the aggregate compensation, foreach of the last two years, awarded to, earned by or paid to:

 

 

(a)

  

our chief executive officer;

 

    

(b)

  

each of our two most highly compensated executive officers who  were serving as executive officers at the end of the most recently completed  fiscal year and whose total salary and bonus exceeds $100,000 per year; or

 

 

(c)

 

any additional individuals for whom disclosure would have been  provided under (b) but for the fact that the individual was not serving as an  executive officer of our company at the end of the most recently completed  fiscal year (collectively, the "Named Executive Officers").

 

**SUMMARYCOMPENSATION TABLE**

** **

**Name and Principal  Position**

**Year**

**Salary**

**($)**

**Bonus**

**($)**

**Stock Awards**

**($)**

**Option Awards (2)**

**($)**

**Non-Equity Incentive  plan Compensation ($)**

**Total**

**($)**

** **

** **

** **

** **

** **

** **

** **

** **

K.  Mason Conner, President and CEO 

2007

232,500

- 

-

110,000

-

342,500

 

2006

210,000

- 

-

-

-

210,000

 

 

 

 

 

 

 

 

Jerry  T. Kendall, President,

Chief  Operating Officer (1)

2007

208,300

- 

-

132,000

-

340,300

 

2006

166,700

-

-

120,000

-

286,700

 

 

 

 

 

 

 

 

H.  Jay Hill, Executive Vice President - Corporate Development

2007

206,700

- 

2,600

44,000

-

253,300

 

2006

183,300

-

7,300

-

-

190,600

 

 

 

 

 

 

 

 

Michael  A. Richard, CFO and Secretary

 

2007

160,000

- 

-

25,000

-

185,000

 

2006

125,417

- 

-

-

-

125,417

** **

** **

** **

** **

** **

** **

** **

** **

              

 

(1)  Effective December 31, 2007, Mr. Kendall ceased to be anofficer and director of the Company.

(2)  Assumptions relating to the estimated fair value of stockoptions granted to Mr. Kendall  during 2006 which we are accounting for inaccordance with SFAS 123(R) are as follows:  risk-free interest rate of 3.55%;expected dividend yield 0%; expected option life of 5.0 years; and volatilityof 316%.  Assumptions relating to the estimated fair value of stock granted toMessrs. Conner, Hill, and Richard during 2007, which we are accounting for inaccordance with SFAS 123(R) are as follows: risk-free interest rate of 3.5%;expected dividend yield 0%; expected option  life of 6.0 years; and volatility between121% - 124%..  Please see Note 3 to our consolidated financial statements forfurther discussion of our assumptions relating to the estimated fair value ofequity awards.

 

 

**NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE**

 

50

 

 

 

 

 

We compensate our executive officers through a combination of abase salary, a cash bonus, and options to purchase shares of our common stock. In addition, in the future, we may provide other perquisites to some of ourexecutive officers.  We do not have a formal plan for determining thecompensation of our executive officers. Instead, each executive officernegotiates their respective employment agreement with us.

 

All agreements with our named executive officers that provide forpayments to such named executive officers at, following or in connection withthe resignation, retirement or other termination of such named executive officers,or a change in control of our company or a change in the responsibilities ofsuch named executive officers following a change in control are set forth inthe following description of their respective employment agreements.

 

 

**EMPLOYMENTAND OTHER AGREEMENTS**

 

Wehave entered into employment agreements with K. Mason Conner, our President andChief Executive Officer, Jerry T. Kendall, who served as our President andChief Operating Officer through December 31, 2007, H. Jay Hill, our ExecutiveVice President - Corporate Development, and Michael Richard, our ChiefFinancial Officer. On June 16, 2004, a written consent was filed with theCompany to approve the employment agreements with Messrs. Conner, Hill, andRichard and on April 28, 2005 and again on May 1, 2006, each of theseagreements was amended. Following is a summary of the significant terms of eachof the employment agreements:

 

K.MASON CONNER. Mr. Conner's employment agreement, dated as of June 10, 2004, andamended as of May 1, 2006, provides for Mr. Conner to serve as our Presidentand Chief Executive Officer for a term ending June 14, 2010. The employmentagreement provides that, the term of the agreement shall automatically beextended for successive one year renewal terms, provided that if either Mr.Conner or the Company gives the other party at least ninety days advancewritten notice of his or its intention to not renew the agreement for anadditional term, the agreement will terminate upon the expiration of thecurrent term.

 

Pursuantto the employment agreement, Mr. Conner received a base salary of $150,000 forthe period from June 15, 2004 until April 16, 2005, at which time his basesalary was increased to $180,000. Effective as of May 1, 2006, Mr. Conner'sannual salary was increased to $225,000 and to $236,250 on May 1, 2007. TheBoard will review his salary at annual intervals, and may adjust his annualbase salary from time to time as the Board of Directors or its CompensationCommittee deems to be appropriate, provided, however, that the salary for thetwelve month period beginning May 1, 2007 and each succeeding year shall not beless than 105% of the salary for the prior year. Mr. Conner is entitled to anincentive bonus based upon the Company's net income. For the 2004 fiscal year, Mr.Conner was paid a bonus equal to 10% of the Company's net income. For the year2005, the percentage bonus will be 7% of the net income paid in cash and 5%paid in Company shares. The number of Company shares issuable to the Executiveshall be based upon the average closing price of the Company's shares for theten (10) trading days ending on March 31st of the following year. Each yearsubsequent to 2005, the board will establish the percentages; during 2006 and2007 the percentages shall not be less than 4% and 2% respectively. 

 

Pursuantto the employment agreement, we have granted Mr. Conner options for 3,500,000shares of our common stock (the "Option Shares"). The Option Shareswill vest over a five year period and may be exercised during the seven yearperiod after vesting. If Mr. Conner voluntarily resigns or is terminated forcause, all unvested options will be forfeited and cancelled; provided, that Mr.Conner shall be fully vested in one-half of his then unvested Option Shares (A)in the event of his termination by the Company other than for cause, (B) uponthe consummation of a Change in Control, or (C) upon Mr. Conner's death ordisability. The Company has agreed to use its best efforts to register, andmaintain the effectiveness of a registration statement on Form S-8, for resaleall of the Option Shares granted to Mr. Conner and, at any time that Form S-8is not effective, to grant him piggyback registration with respect to anyregistration statement filed by the Company. 

 

Mr.Conner also is entitled to participate in any benefits plans maintained by theCompany for its executives or employees and is entitled to four weeks annualvacation. He is also entitled to be reimbursed for business expenses incurredby him in promoting the Company's business. 

 

51

 

 

 

 

 

IfMr. Conner's employment is terminated for reasons other than death, disability,cause, or voluntary termination by Mr. Conner, the Company will be obligated tomake monthly payments to Mr. Conner for twelve (12) months. Each monthlypayment shall be equal to one-twelfth (1/12th) of twice Mr. Conner's annualbase salary, as in effect on the date of termination. In addition, anyrestricted stock, stock options or other awards granted to him will becomeimmediately vested in full and, in the case of stock options, exercisable infull.  Mr. Conner will also be permitted to continue to participate for aperiod of one year, at the Company's expense, in all benefit and insuranceplans, coverage and programs in which he was participating as of the terminationdate.

 

TheCompany may terminate the agreement if it determines that Mr. Conner has beenunable to attend to his duties for at least ninety (90) days because of amedically diagnosable physical or mental condition, and has received a writtenopinion from a physician acceptable to the Board that such condition preventshim from resuming full performance of his duties and is likely to continue foran indefinite period. Upon such termination, the Company shall pay Mr. Conner amonthly disability benefit equal to one-twelfth (1/12th) of his current annualbase salary at the time he became permanently disabled until the earliest of(i) the month in which the he returns to active employment, either with theCompany or otherwise, (ii) the end of the initial term of the agreement, or thecurrent renewal term, as the case may be, or (iii) the twenty-fourth monthafter the date of the termination. Any such payments shall be reduced by anyamounts paid to Mr. Conner under any long-term disability plan or other disabilityprogram or insurance policies maintained or provided by the Company.

 

IfMr. Conner is terminated for Cause, he shall be entitled to receive his basesalary through the date of termination and any non-forfeitable benefits earnedand payable to him under the terms of deferred compensation or incentive plansmaintained by the Company. In the event of a Change in Corporate Control, anyrestricted stock, stock options or other awards granted to Mr. Conner shallbecome immediately vested in full and, in the case of stock options,exercisable in full. Additionally, if at any time during the twelve (12)consecutive months following or six (6) months prior to the occurrence of aChange in Corporate Control, Mr. Conner is involuntarily terminated (other thanfor Cause) by the Company, he shall be entitled to lump sum severance pay in anamount equal to the sum of (i) 299% of his annual base salary in effect at thetime of the Change in Corporate Control plus (ii) 299% of the annual bonus paidto him with respect to the last fiscal year ending prior to the Change inCorporate Control.

 

JERRYT. KENDALL. Effective December 31, 2007, Mr. Kendall ceased to be an officerand director of the Company.  On March 1, 2006, we entered into an executiveemployment agreement with Jerry T. Kendall, who had served as a director of theCompany from the second quarter of 2005.  The employment agreement provided forMr. Kendall to serve as our President and Chief Operating Officer for a term oftwo years from March 1, 2006.  Pursuant to his employment agreement, Mr.Kendall received a base salary of $200,000, which increased to $210,000 on May1, 2007 pursuant to his employment agreement.  Pursuant to his employmentagreement, the Company granted Mr. Kendall options for 4,000,000 shares of itscommon stock which were to have vested over a five year period and were exercisableduring the seven year period after vesting.  Mr. Kendall will also be permittedto continue to participate for the remainder of 2008, at the Company's expense,in all benefit and insurance plans, coverage and programs in which he wasparticipating as of the termination date.  Upon termination, Mr. Kendall vested25% of the unvested portion of the stock option granted in connection with theagreement and any stock options granted Mr. Kendall prior to the employmentagreement, has a modified term of the covenant not to compete equal to thegreater of twelve months or the number of months of severance pay granted, and isentitled to receive a series of monthly payments for a period of twelve months,each of which shall be equal to one-twelfth of Mr. Kendall's annual base salaryas in effect upon termination.

 

H.JAY HILL.  Mr. Hill's employment agreement, dated as of June 10, 2004, asamended May 1, 2006, provides for Mr. Hill to serve as our Executive VicePresident - Corporate Development for a term commencing June 16, 2004 andending June 15, 2010. The employment agreement provides that, the term of theagreement shall automatically be extended for successive one year renewalterms, provided that if either Mr. Hill or the Company gives the other party atleast ninety days advance written notice of his or its intention to not renewthe agreement for an additional term, the agreement will terminate upon theexpiration of the current term. 

 

52

 

 

 

 

 

Theemployment agreement provides for Mr. Hill to receive a base salary of $120,000until April 16, 2005, at which time his base salary was increased to $150,000.Effective May 1, 2006, Mr. Hill's annual salary was increased to $200,000 andto $210,000 on May 1, 2007.  The Board will review Mr. Hill's salary at annualintervals, and may adjust his annual base salary from time to time as the Boardof Directors or its Compensation Committee deems to be appropriate, provided,however, that the salary for the twelve month period beginning May 1, 2007 andeach succeeding year shall not be less than 105% of the salary for the prioryear.

 

Mr.Hill will be paid an incentive bonus based on the Company's profitability.  Atthe end of each fiscal year, commencing with 2005, Mr. Hill will earn apercentage of the net income under GAAP to be paid the month following thefiling of the 10K report. For the year 2005, the percentage bonus will be 5% ofthe net income paid in cash and 4% paid in Company shares. The number ofCompany shares issuable to Mr. Hill shall be based upon the average closingprice of the Company's shares for the ten (10) trading days ending on March31st of the following year. Each year subsequent to 2005, the board willestablish the percentages; during 2006 and 2007 the percentages shall not beless than 3% and 2% respectively.

 

Pursuantto the employment agreement, we have granted Mr. Hill options for 500,000shares of our common stock (the "Option Shares"). The Option Shareswill vest over a five year period and may be exercised during the seven yearperiod after vesting. If Mr. Hill voluntarily resigns or is terminated forcause, all unvested options will be forfeited and cancelled; provided, that Mr.Hill shall be fully vested in then unvested Option Shares (A) in the event ofhis termination by the Company other than for cause, (B) upon the consummationof a Change in Control, or (C) upon Mr. Hill's death or disability. The Companyhas agreed to use its best efforts to register, and maintain the effectivenessof a registration statement on Form S-8, for resale all of the Option Sharesgranted to Mr. Hill and, at any time that Form S-8 is not effective, to granthim piggyback registration with respect to any registration statement filed bythe Company.

 

Mr.Hill also is entitled to participate in any benefits plans maintained by theCompany for its executives or employees and is entitled to four weeks annualvacation. He is also entitled to be reimbursed for business expenses incurredby him in promoting the Company's business.

 

IfMr. Hill's employment is terminated for reasons other than death, disability,or voluntary termination by Mr. Hill, the Company will be obligated to makemonthly payments to Mr. Hill for each month during the remaining term of theemployment agreement, but not less than twelve (12) months. Each monthlypayment shall be equal to one-twelfth (1/12th) of twice Mr. Hill's annual basesalary, as in effect on the date of termination.  In addition, any restrictedstock, stock options or other awards granted to him will become immediatelyvested in full and, in the case of stock options, exercisable in full. Mr. Hillwill also be permitted to continue to participate for a period of one year, atthe Company's expense, in all benefit and insurance plans, coverage andprograms in which he was participating as of the termination date.

 

TheCompany may terminate the agreement if it determines that Mr. Hill has beenunable to attend to his duties for at least ninety (90) days because of amedically diagnosable physical or mental condition, and has received a writtenopinion from a physician acceptable to the Board that such condition preventshim from resuming full performance of his duties and is likely to continue for anindefinite period.  Upon such termination, the Company shall pay Mr. Hill amonthly disability benefit equal to one-twelfth (1/12th) of his current annualbase salary at the time he became permanently disabled until the earliest of(i) the month in which the he returns to active employment, either with theCompany or otherwise, (ii) the end of the initial term of the agreement, or thecurrent renewal term, as the case may be, or (iii) the twenty-fourth monthafter the date of the termination. Any such payments shall be reduced by any amountspaid to Mr. Hill under any long-term disability plan or other disabilityprogram or insurance policies maintained or provided by the Company.

 

IfMr. Hill is terminated for Cause, he shall be entitled to receive his basesalary through the date of termination and any non-forfeitable benefits earnedand payable to him under the terms of deferred compensation or incentive plansmaintained by the Company.

 

53

 

 

 

 

 

Inthe event of a Change in Corporate Control, any restricted stock, stock optionsor other awards granted to Mr. Hill shall become immediately vested in fulland, in the case of stock options, exercisable in full. Additionally, if at anytime during the twelve (12) consecutive months following or six (6) monthsprior to the occurrence of a Change in Corporate Control, Mr. Hill isinvoluntarily terminated (other than for Cause) by the Company, he shall beentitled to lump sum severance pay in an amount equal to the sum of (i) 200% ofhis annual base salary in effect at the time of the Change in Corporate Controlplus (ii) 200% of the annual bonus paid to him with respect to the last fiscalyear ending prior to the Change in Corporate Control. 

 

MICHAELRICHARD. Mr. Richard's employment agreement, dated as of June 10, 2004, asamended May 1, 2006, provides for Mr. Richard to serve as our Chief FinancialOfficer for a term commencing June 15, 2004 and ending June 14, 2008.  Theemployment agreement provides that, the term of the agreement shallautomatically be extended for successive one year renewal terms, provided thatif either Mr. Richard or the Company gives the other party at least ninety daysadvance written notice of his or its intention to not renew the agreement foran additional term, the agreement will terminate upon the expiration of thecurrent term.

 

Theemployment agreement provides for Mr. Richard to receive a base salary of$95,000 until April 16, 2005, at which time his base salary was increased to$100,000. Effective May 1, 2006, Mr. Richard's annual base salary was increasedto $125,000 and to $160,000 on October 1, 2006.  The Board will review Mr.Richard's salary at annual intervals, and may adjust his annual base salaryfrom time to time as the Chief Executive Officer deems to be appropriate,provided, however, that the salary for the twelve month period beginning May 1,2007 and each succeeding year shall not be less than 105% of the salary for theprior year.

 

Pursuantto the employment agreement, we have granted Mr. Richard options for 650,000shares of our common stock (the "Option Shares"). The Option Shareswill vest over a five year period and may be exercised during the seven yearperiod after vesting. If Mr. Richard voluntarily resigns or is terminated forcause, all unvested options will be forfeited and cancelled; provided, that Mr.Richard shall be fully vested in then unvested Option Shares (A) in the eventof his termination by the Company other than for cause, (B) upon theconsummation of a Change in Control, or (C) upon Mr. Richard's death ordisability.  The Company has agreed to use its best efforts to register, andmaintain the effectiveness of a registration statement on Form S-8, for resaleall of the Option Shares granted to Mr. Richard and, at any time that Form S-8is not effective, to grant him piggyback registration with respect to anyregistration statement filed by the Company.

 

Mr.Richard also is entitled to participate in any benefits plans maintained by theCompany for its executives or employees and is entitled to three weeks annualvacation. He is also entitled to be reimbursed for business expenses incurredby him in promoting the Company's business. If Mr. Richard's employment isterminated for reasons other than death, disability, or voluntary terminationby Mr. Richard, the Company will be obligated to make monthly payments to Mr.Richard for each month during the remaining term of the employment agreement,but not less than six (6) months.  Each monthly payment shall be equal toone-twelfth (1/12th) of his annual base salary, as in effect on the date oftermination. In addition, any restricted stock, stock options or other awardsgranted to him will become immediately vested in full and, in the case of stockoptions, exercisable in full. Mr. Richard will also be permitted to continue toparticipate for a period of six (6) months, at the Company's expense, in allbenefit and insurance plans, coverage and programs in which he wasparticipating as of the termination date.

 

TheCompany may terminate the agreement if it determines that Mr. Richard has beenunable to attend to his duties for at least ninety (90) days because of amedically diagnosable physical or mental condition, and has received a writtenopinion from a physician acceptable to the Board that such condition preventshim from resuming full performance of his duties and is likely to continue foran indefinite period.  Upon such termination, the Company shall pay Mr. Richarda monthly disability benefit equal to one-twelfth (1/12th) of his currentannual base salary at the time he became permanently disabled until theearliest of (i) the month in which the he returns to active employment, eitherwith the Company or otherwise, (ii) the end of the initial term of theagreement, or the current renewal term, as the case may be, or (iii) the sixthmonth after the date of the termination.  Any such payments shall be reduced byany amounts paid to Mr. Richard under any long-term disability plan or otherdisability program or insurance policies maintained or provided by the Company.

54

 

 

 

 

 

 

IfMr. Richard is terminated for Cause, he shall be entitled to receive his basesalary through the date of termination and any non-forfeitable benefits earnedand payable to him under the terms of deferred compensation or incentive plansmaintained by the Company.

 

Inthe event of a Change in Corporate Control, any restricted stock, stock optionsor other awards granted to Mr. Richard shall become immediately vested in fulland, in the case of stock options, exercisable in full.  Additionally, if atany time during the twelve (12) consecutive months following or six (6) monthsprior to the occurrence of a Change in Corporate Control, Mr. Richard isinvoluntarily terminated (other than for Cause) by the Company, he shall beentitled to lump sum severance pay in an amount equal to the sum of (i) 50% ofhis annual base salary in effect at the time of the Change in Corporate Controlplus (ii) 50% of the annual bonus paid to him with respect to the last fiscalyear ending prior to the Change in Corporate Control.

 

 

Theforegoing descriptions of the employment agreements are qualified in theirentirety by reference to the actual terms of each agreement, copies of whichhave been filed with the Commission.

** **

**OUTSTANDINGEQUITY AWARDS AT FISCAL YEAR-END TABLE**

 

The following table presentsinformation regarding outstanding options held by our named executive officersas of the end of our fiscal year ended December 31, 2007.

55

 

 

 

 

 

 

**Name**

**Option Awards**

** **

** **

** **

** **

**Stock Awards**

** **

** **

** **

** **

**Number  of Securities Underlying Unexercised Options**

**Number  of Securities Underlying Unexercised Options**

**Equity  Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned  Options**

**Option**

**Option  Expiration**

**Number  of Shares or Units of Stock That Have Not Vested**

**Market  Value of Shares or Units of Stock That Have Not Vested**

**Equity  Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That  Have Not Vested**

**Equity  Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or  Other Rights That Have Not Vested**

** **

**(#)**

**(#)**

**(#)**

**Exercise**

**Date**

**(#)**

**($)**

**(#)**

**($)**

** **

 

 

 

**Price**

 

 

 

 

 

** **

**Exercisable**

**Unexercisable**

 

**($)**

 

 

 

 

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**K. Mason Conner (1)**

100,000 

- 

- 

0.25 

5/31/09 

- 

- 

- 

- 

** **

31,138 

- 

- 

2.50 

8/4/10 

- 

- 

- 

- 

** **

34,536 

- 

- 

2.50 

10/1/11 

- 

- 

- 

- 

** **

- 

- 

1,719,658 

0.19 

1/30/14 

- 

- 

- 

- 

** **

3,500,000 

- 

- 

0.15 

6/15/12 

- 

- 

- 

- 

** **

2,000,000 

- 

- 

0.16 

12/27/12 

- 

- 

- 

- 

** **

 

- 

- 

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

**H. Jay Hill (1)**

31,138 

- 

- 

2.50 

8/4/10 

- 

- 

- 

- 

** **

34,536 

- 

- 

2.50 

10/1/11 

- 

- 

- 

- 

** **

- 

- 

686,325 

0.19 

1/30/14 

- 

- 

- 

- 

** **

1,500,000 

- 

- 

0.18 

8/15/13 

- 

- 

- 

- 

** **

1,000,000 

- 

- 

0.10 

8/15/13 

- 

- 

- 

- 

** **

500,000 

- 

- 

0.15 

6/15/12 

- 

- 

- 

- 

** **

2,000,000 

- 

- 

0.16 

12/27/12 

- 

- 

- 

- 

** **

 

 

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

**Michael A. Richard (1)**

150,000 

- 

- 

2.50 

2/27/11 

- 

- 

- 

- 

** **

- 

- 

387,500 

0.19 

1/30/14 

- 

- 

- 

- 

** **

650,000 

- 

- 

0.15 

6/15/12 

- 

- 

- 

- 

** **

250,000 

- 

- 

0.16 

12/27/12 

- 

- 

- 

- 

** **

 

 

 

 

 

 

 

 

 

 

(1) Except as indicated, these options held byMessrs. Conner, Hill, and Richard are vested in full as of December 31, 2007. 

**STOCKOPTIONS**

 

56

 

 

 

 

 

TheCompany has adopted an equity incentive plan (the "2002 Plan") thatauthorizes the issuance of options to acquire up to 90,000,000 shares of commonstock, as amended, to employees and certain outside consultants.  The 2002 Planallows for the issuance of either non-qualified or, subject to stockholderapproval, incentive stock options pursuant to Section 422 of the InternalRevenue Code.  Options vest at the discretion of the Board of Directors asdetermined at the grant date, but not longer than a ten-year term. Under the2002 Plan, the exercise price of each option shall not be less than fair marketvalue on the date the option is granted.

 

During1997, the Board of Directors of the Company adopted a stock option plan (the"1997 Plan") that authorizes the issuance of options to acquire up to5,000,000 shares of common stock to employees and certain outside consultants. The 1997 Plan allows for the issuance of either non-qualified or incentivestock options pursuant to Section 422 of the Internal Revenue Code. Optionsvest at the discretion of the Board of Directors as determined at the grantdate, but not longer than a ten-year term. Under the 1997 Plan, the exerciseprice of each option shall not be less than 85 percent of fair market value onthe date the option is granted.

 

AtDecember 31, 2006, we have outstanding options to purchase 37,230,669 shares ofour common stock pursuant to the 2002 Plan and the 1997 Plan.  The number ofoptions under both the 2002 Plan and the 1997 Plan available for grant atDecember 31, 2007 is approximately 58,000,000 (see Notes to accompanying consolidatedfinancial statements).

 

 

**DIRECTOR COMPENSATION**

 

The following table presentsinformation regarding compensation paid to our non-employee directors for ourfiscal year ended December 31, 2007.

 

** **

**Name**

**Fees Earned or Paid in  Cash**

**($)**

**Stock Awards**

**($)**

**Option Awards**

**($)**

**Non-Equity Incentive  Plan Compensation**

**($)**

**Change in Pension Value  and Nonqualified Deferred Compensation Earnings**

**($)**

**All Other Compensation**

**($)**

**Total**

**($)**

** **

** **

** **

** **

** **

** **

** **

** **

Jerry  T. Kendall

-

-

$41,625

 

 

 

 

 

 

 

 

 

 

 

 

Ricardo  A. Salas

-

-

$36,000

-

-

-

-

 

 

 

 

 

 

 

 

J.  Thomas Zender

-

-

$75,803

-

-

-

-

** **

** **

** **

** **

** **

** **

** **

** **

 

Assumptions relating to the estimated fair value of stock options grantedto Messrs. Kendall, Salas, and Zender during 2007, which we are accounting forin accordance with SFAS 123(R), are as follows: risk-free interest rate of 3.5%;expected dividend yield 0%; expected option  life of 6.0 years; and volatilityof 121%.  Mr. Kendall ceased to be a director effective December 31, 2007.  Pleasesee Note 3 to our consolidated financial statements for further discussion ofour assumptions relating to the estimated fair value of equity awards.

** **

**NARRATIVEDISCLOSURE TO DIRECTOR COMPENSATION TABLE**

 

Membersof our board of directors receive no cash compensation for services as adirector or for attendance at or participation in meetings. Directors receiveoptions to purchase common stock as compensation for services as a director. Inpast years, directors have received options to purchase the Company's commonstock in consideration for services as a director. There has been nodetermination made as to the number and exercise price of options, if any, thatwill be issued to either K. Mason Conner or H. Jay Hill for service duringterms following the term that expired on October 5, 2001. Directors arereimbursed for out-of-pocket expenses incurred by them in connection withattending meetings. All directors have options to purchase shares of theCompany's common stock as set forth in the table in this report. The Companyhas no other arrangements regarding compensation for services as a director.

 

 

 

57

 

 

 

 

 

**COMMITTEESOF THE BOARD AND AUDIT COMMITTEE FINANCIAL EXPERT**

 

TheBoard of Directors has an Audit Committee and a Compensation Committee. 

 

AUDITCOMMITTEE. The Audit Committee of the Board of Directors (the "AuditCommittee") monitors the integrity of the Company's financial statements,the independence and qualifications of the independent registered publicaccounting firm, the performance of the Company's independent registered publicaccounting firm and the effectiveness of the Company's disclosure controls andprocedures and internal controls. It is also responsible for retaining,evaluating, and, if appropriate, recommending the termination of the Company'sindependent registered public accounting firm. The Audit Committee has beenestablished under a charter approved by the Board. Our Audit Committee consistsof Messrs. Zender, Hill, and Salas.  Mr. Salas serves as Chairman.  During 2006the Audit Committee met one time.  In March 2006, Mr. Zender replaced Mr.Kendall on the Audit Committee in connection with Mr. Kendall's appointment asthe Company's President and Chief Executive Officer. Because our board ofdirectors is comprised of only five members, the Audit Committee includes onemember of executive management, H. Jay Hill, who is not considered to beindependent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of theSecurities Exchange Act of 1934, as amended. We are not required by the OTCBBto have an audit committee comprised entirely of independent directors. We donot have an audit committee financial expert as defined by Item 401(e) ofRegulation S-B of the Exchange Act at this time because we believe that we arenot in a position to attract suitable candidates due to insufficient capitalresources. In addition, we are not required by the OCTBB to have an auditcommittee financial expert.

 

COMPENSATIONCOMMITTEE. The Compensation Committee of the Board of Directors (the"Compensation Committee") administers the benefits, incentives andcompensation of the Company's executive officers, reviews the performance ofthe Company's executive officers, reviews and approves executive compensationpolicy and objectives, concludes whether Company executives are compensatedaccording to such standards, makes recommendations to the Board of Directorswith respect to compensation, and carries out the Board's responsibilitiesrelating to all forms of executive compensation. The Compensation Committee hasbeen established under a charter approved by the Board. Non-qualified stockoptions which are granted to the members of the Compensation Committee arerecommended by the Company's Chief Executive Officer and approved by the Boardof Directors. Our Compensation Committee consists of Messrs. Zender, Hill, andSalas..  Mr. Zender serves as Chairman.  During 2006 the Compensation Committeemet one time.  In March 2006, Mr. Zender replaced Mr. Kendall on theCompensation Committee in connection with Mr. Kendall's appointment as theCompany's President and Chief Executive Officer.  Because our board ofdirectors is comprised of only five members, the Compensation Committeeincludes one member of executive management, H. Jay Hill.  Mr. Hill recuses himself from votes anddiscussions on his own compensation.  We are not required by the OTCBBto have a compensation committee comprised entirely of independent directors.

58

 

 

 

 

 

**ITEM11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 
The following table sets forth certain information with respect to the beneficial ownership of shares of the Company's common stock owned as of February 29, 2008 beneficially by (i) each person who beneficially owns more than 5% of the outstanding common stock, (ii) each director of the Company, (iii) the President and Chief Executive Officer of the Company, the executive officers and significant employees of the Company whose cash and non-cash compensation for services rendered to the Company for the year ended December 31, 2007 exceeded $100,000), and (iv) directors, executive officers, and significant employees as a group:
 

 

 

 

**Name of Beneficial**

**Amount and Nature of**

**Percent**

 

**Owner (1)**

**Beneficial Ownership  (2)**

**of Class (3) (4) (13)**

 

 

 

 

 

James  Townsend (5) 

11,147,720 

6.4

 

 

 

 

 

C.  Alan Williams (6)

64,880,814

37.3

 

 

 

 

 

K.  Mason Conner (7)

7,709,438 

4.4

 

 

 

 

 

J.  Thomas Zender (8)

1,814,499 

1.0

 

 

 

 

 

H.  Jay Hill (9)

6,431,999 

3.7

 

 

 

 

 

Ricardo  A. Salas (10)

 420,000 

 * 

 

 

 

 

 

Michael  Richard (11)

1,504,167

*

 

 

 

 

 

GoSolutions  Equity LLC (12)

26,786,840

15.4

 

 

 

 

 

All  directors, executive officers,  

 

 

 

and  significant employees as a

 

 

 

group  (5 persons)

17,880,103

10.3

 

 

 
*  Less than 1 % (1)  The address of each individual is in care of the Company.(2)  Represents sole voting and investment power unless otherwise indicated.(3)  Based on 152,770,913 shares of the Company's common stock outstanding at February 29, 2008, plus, as to each person listed, that portion of the Company's common stock subject to outstanding options, warrants, and convertible debt which may be exercised or converted by such person, and as to all directors and executive officers as a group, unissued shares of the Company's common stock as to which the members of such group have the right to acquire beneficial ownership upon the exercise of stock options or warrants, or conversion of convertible debt within 60 days of February 29, 2008.(4)  Excludes 25,631,665 shares reserved for issuance under outstanding options and warrants.(5)  Includes options to acquire 65,674 shares of common stock at $2.50 per share.(6)  Includes $171,870 of debt and accrued interest convertible to 1,227,643 shares of common stock at $0.14 per share and warrants to acquire 3,000,000 shares at $0.10 per share.(7)  Includes 124,106 shares and options to acquire 100,000 shares of common stock at $0.25 per share, options to acquire 65,674 shares at $2.50 per share, options to acquire 1,719,658 shares at $0.19 per share, options to acquire 3,500,000 shares at $0.15 per share, options to acquire 2,000,000 shares at $0.16 per share, and warrants to acquire 200,000 shares at $0.15 per share.(8)  Includes options to acquire 290,000 shares of common stock at $0.20 per share, options to acquire 66,261 shares at $2.50 per share, options to acquire 918,825 shares at $0.19 per share, and options to acquire 300,000 shares at $0.15 per share.(9)  Includes options to acquire 65,674 shares at $2.50 per share, options to acquire 686,325 shares at $0.19 per share, options to acquire 1,500,000 shares at $0.18 per share, options to acquire 1,000,000 shares at $0.10 per share, options to acquire 500,000 shares at $0.15 per share, options to acquire 2,000,000 shares at $0.16 per share, and warrants to acquire 350,000 shares at $0.15 per share.
59

 

 

 

 

 
 (10)  Includes options to acquire 400,000 shares of common stock at $0.18 per share.(11)  Includes options to purchase 150,000 shares of common stock at $2.50 per share, options to purchase 387,500 shares of common stock at $0.19 per share, options to purchase 650,000 shares of common stock at $0.15 per share, and options to purchase 250,000 shares at $0.16 per share.(12)  The members of GoSolutions Equity LLC are Daniel M. Doyle, Sr., H. Scott Seltzer, Larry C. Morgan, Shaun C. Pope, Tom C. Lokey, and William Thompson Thorn, III.(13)  Excludes up to 33,500,000 shares of our common stock underlying conversion of our Convertible Series A Preferred Stock issued to Barron Partners, LP ("Barron").  We have entered into an agreement with Barron which provides that Barron will not acquire any additional shares of our common stock in the open market or convert our Convertible Series A Preferred Stock into our common stock or exercise warrants if the effect of such a purchase, exercise or conversion would be to increase Barron's equity ownership position above 4.99%.  Accordingly, because it is not anticipated that Barron will acquire beneficial ownership within the next 60 days or shares of our common stock above 4.99% of our outstanding number of shares of common stock, such securities are excluded from the above table.
 

SecuritiesAuthorized for Issuance Under Equity Compensation Plans

 

Thefollowing provides information, as of December 31, 2007, concerningcompensation plans (including individual compensation arrangements) under whichequity securities of the Company are authorized for issuance.

 

 

** **

**(a)**

**(b)**

**(c)**

 

 

** **

** **

** **

** **

 

 

**Plan Category**

** **

** **

** **

** **

**Number of securities to  be issued upon exercise of outstanding options, warrants and rights**

** **

** **

** **

**Weighed-average  exercise price of outstanding options, warrants**

**and rights**

** **

**Number of securities  remaining available for future issuances under equity compensation plans  (excluding securities reflected in**

**column (a))**

 

 

 

 

 

 

 

 

Equity compensation plans

 

 

 

 

 

   approved by security holders

37,230,669 

 $

0.19 

57,699,331 

 

 

 

 

 

 

 

 

Equity compensation plans not

 

 

 

 

 

   approved by security holders

5,566,000 

 $

0.09 

-- 

 

 

 

 

 

 

 

 

      Total

42,796,669 

 $

0.18 

 

57,699,331 

 

 

 

For a complete description of our equitycompensation plans, please refer to Note 7 of our consolidated financialstatements as of December 31, 2007, which are filed as Exhibit 99.1 hereto.

 

** **

60

 

 

 

 

 

**ITEM 12.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Review and Approval of Related PersonTransactions.

 

In the future, the Audit Committee will reviewall relationships and transactions in which the company and our directors andexecutive officers or their immediate family members are participants todetermine whether such persons have a direct or indirect material interest. Thecompany's legal consultant is primarily responsible for the development andimplementation of processes and controls to obtain information from thedirectors and executive officers with respect to related person transactionsand for then determining, based on the facts and circumstances, whether thecompany or a related person has a direct or indirect material interest in thetransaction. As required under SEC rules, transactions that are determined tobe directly or indirectly material to the company or a related person aredisclosed in the company's proxy statement. In addition, the Audit Committeereviews and approves or ratifies any related person transaction that isrequired to be disclosed. As set forth in the Audit Committee's key practices,in the course of its review and approval or ratification of a disclosablerelated party transaction, the committee considers: 

 

 

•

 

the nature of the related person's interest in  the transaction; 

 

 

•

 

the material terms of the transaction,  including, without limitation, the amount and type of transaction; 

 

 

•

 

the importance of the transaction to the  related person; 

 

 

•

 

the importance of the transaction to the  company; 

 

 

•

 

whether the transaction would impair the  judgment of a director or executive officer to act in the best interest of  the company; and 

 

 

•

 

any other matters the committee deems  appropriate. 

 

Anymember of the Audit Committee who is a related person with respect to atransaction under review may not participate in the deliberations or voterespecting approval or ratification of the transaction, provided, however, thatsuch director may be counted in determining the presence of a quorum at ameeting of the committee that considers the transaction. 

 

Description of Related Party Transactions

 

TBSleases the building that houses substantially all of its operations fromPerimeter Center Partners, which is controlled by James L. Campbell and StephenA. Garner.  Messrs. Campbell and Garner are the former owners of TBS and aresignificant employees of the Company.  The lease commenced on February 1, 2004and has a term of six years, as amended, with monthly payments of $6,200 permonth.  The Company has executed a Guaranty with respect to the lease.

 

TBShas a related party capital lease with Perimeter Center Partners for aninserting 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 withrespect to the lease.

 

Inconnection with the acquisition of TBS, the Company issued a $300,000convertible promissory note to Stephen A. Garner and a $300,000 convertiblepromissory note to James L. Campbell (the "TBS Notes").  Messrs.Campbell and Garner are employees of TBS.  Each of the TBS Notes bore interestat 5 percent per annum and was due and payable in three equal annualinstallments of $100,000, with the first installment paid in February 2005, thesecond installment paid in March 2006 and the third and final installment paidin February 2007.

 

61

 

 

 

 

 

GSIleases the St. Petersburg office space pursuant to a noncancelable operatinglease agreement expiring in April 30, 2011 at a cost of $12,653 per month.   The building in which the office space is located is owned by an entity inwhich a member of GoSolutions Equity LLC (a related party) owns an interest. 

 

OnMay 7, 2007, and pursuant to the TBS acquisition agreement, the Company issued1,100,000 shares of common stock to each of Messrs. Garner and Campbell.  Theshares were valued at $0.04 per share (the estimated fair value on themeasurement date) and recorded as additional purchase price.  No additionalshares of common stock are due to Messrs. Garner and Campbell pursuant to theTBS acquisition agreement.

 

OnMay 7, 2007, and in connection with the acquisition of TBS, the Company issued66,000 shares of its restricted common stock to H. Jay Hill, who is an officerand 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).

 

OnMay 1, 2006 and in connection with the acquisition of GSI, the Company issued42,663,879 shares of its restricted common stock to approximately 37shareholders of GSI.  The shares were valued at $0.10 per share (the estimatedfair value on the date of acquisition).

 

OnMay 1, 2006 and in connection with the acquisition of TBS, the Company issued1,100,000 shares of its restricted common stock to each of James L. Campbelland Stephen A. Garner, pursuant to the acquisition agreement.  The shares werevalued at $0.11 per share (the estimated fair value on the measurement date).

 

OnJune 29, 2006 and in connection with the acquisition of TBS, the Company issued66,000 shares of its restricted common stock to H. Jay Hill, who is an officerand director of the Company, as a finder's fee.  The shares were valued at$0.11 per share (the estimated fair value on the measurement date).

 

Inconnection with the acquisition of Resolutions, the Company issued promissorynotes in the amount of $120,000 and $80,000 to Alexander Riess and WilliamFalcon, respectively.  The notes bear interest at 5% per annum and are due inten monthly installments, payment of which is subject to certain conditionsincluding availability of sufficient positive cash flow from the operations ofResolutions following the acquisition.  As of February 28, 2006, all amountsdue pursuant to the promissory notes had been paid by the Company.

 

 

 

Boardof Director Independence

 

Thestandards relied upon by the Board of Directors in affirmatively determining whethera director is "independent" are those of the Nasdaq, which include thefollowing objective standards: 

 

(a) a director who is an employee, or whoseimmediate family member (defined as a spouse, parent, child, sibling, father-and mother-in-law, son- and daughter-in-law and anyone, other than a domesticemployee, sharing the director's home) is an executive officer of the Company,would not be independent for a period of three years after termination of suchrelationship; 

 

(b) a director who receives, or whose immediatefamily member receives, payments of more than $120,000 (or one percent of theaverage of our total assets at year-end for the last three completed fiscalyears, whichever is greater) during any period of twelve consecutive monthsfrom the Company, except for certain permitted payments, would not beindependent for a period of three years after ceasing to receive such amount;

 

(c) a director who is or who has an immediatefamily member who is, a current partner of the Company's outside auditor or whowas, or who has an immediate family member who was, a partner or employee ofthe Company's outside auditor who worked on the Company's audit at any timeduring any of the past three years would not be independent until a period ofthree years after the termination of such relationship; 

62

 

 

 

 

 

 

(d) a director who is, or whose immediate familymember is, employed as an executive officer of another company where any of theCompany's present executive officers serve on the other company's compensation committeewould not be independent for a period of three years after the end of suchrelationship; and 

 

(e) a director who is, or who has an immediatefamily member who is, a partner in, or a controlling shareholder or anexecutive officer of any organization that makes payments to, or receivespayments from, the Company for property or services in an amount that, in anysingle fiscal year, exceeds the greater of $200,000, or 5% of such othercompany's consolidated gross revenues, would not be independent until a periodof three years after falling below such threshold.. In addition, no directorwill qualify as "independent" unless the Board affirmatively determines thatthe director has no material relationship with the Company (either, directly oras a partner, shareholder or officer of an organization that has a relationshipwith the Company). 

 

TheBoard of Directors, in applying the above-referenced standards, hasaffirmatively determined that the Company's current "independent" directorsare: J. Thomas Zender and Ricardo A. Salas.

** **

63

 

 

 

 

 

**ITEM13.  EXHIBITS**

 

64

 

 

 

 

 

 

2.1

Agreement  and Plan of Merger dated January 31, 2004 by and among VillageEDOCS,  VillageEDOCS Merger Sub, Inc., Tailored Business Systems, Inc., Stephen A.  Garner, and James L. Campbell previously filed as Exhibit 2.1 to the  Company's Current Report on Form 8-K filed on February 18, 2004 and  incorporated herein by reference. **

2.2

Plan  of Internal Restructuring previously filed as Exhibit B to the Company's  Schedule 14C Information Statement filed on July 23, 2004 and incorporated  herein by reference. **

2.3

Stock  Purchase Agreement dated as of April 1, 2005 and executed April 15, 2005 by  and among VillageEDOCS Acquisition Corp, Phoenix Forms, Inc., and Its  Shareholders.  Previously filed as Exhibit 2.1 to the Company's Current  Report on Form 8-K filed on April 19, 2005. **

2.4

Merger  Agreement, dated as of February 17, 2006, by and among VillageEDOCS, VEDO  Merger Sub, Inc., GoSolutions, Inc. and certain stockholders of  GoSolutions.  Previously filed as Exhibit 2.1 to the Company's Current  Report on Form 8-K filed on February 21, 2006. **

2.5

Articles  of Merger and Plan of Merger.  Previously filed as Exhibit 99.2 to the  Company's Current Report on Form 8-K filed on May 4, 2006. **

2.6

Assets  Purchase Agreement dated December 10, 2007 by and between Phoenix Forms, Inc.  and DocPath Corp.  Previously filed as Exhibt 2.1 to the Company's Current  Report on Form 8-K filed on December 11, 2007. **

3.1

Articles  of Incorporation, as amended.  Previously filed with the Company's Form  10-SB filed on August 29, 2000.  **

3.2

By-laws.   Previously filed with the Company's Form 10-SB filed on August 29, 2000.  **

3.3

Article  of Amendment to Articles of Incorporation to increase authorized number of  common shares.  Previously filed with the Company's 14C Information  Statement filed on July 23, 2004. **

3.4

Article  of Amendment to Articles of Incorporation to increase authorized number of  common shares and to create a class of preferred stock.  Previously  filed with the Company's 14C Information Statement filed on June 7, 2005. **

3.5

Form  of Certificate of Designations of Preferences, Rights and Limitations of  Series A Convertible Preferred Stock.  Previously filed as Exhibit 4.8  to the Company's Current Report on Form 8-K filed on April 19, 2005. **

3.6

Certificate  of Amendment of Articles of Incorporation to increase authorized number of  common shares.  Previously filed with the Company's Current Report on  Form 8-K filed on January 20, 2006. **

3.7

Form  of Certificate of Incorporation of VillageEDOCS, Inc.  Previously filed with  the Company's Definitive Information Statement on Schedule 14A filed on May  24, 2007.**

3.8

Form  of Bylaws of VillageEDOCS, Inc.  Previously filed with the Company's  Definitive Information Statement on Schedule 14A filed on May 24, 2007.

4.1

Letter  Agreement dated July 30, 2002 by and between the Company, C. Alan Williams,  and Joan P. Williams previously filed as Exhibit 4.1 to the Company's  Quarterly Report on Form 10-QSB for the period ended June 30, 2002 and  incorporated herein by reference.  **

4.2

Form  of Unsecured Convertible Promissory Note. Previously filed as Exhibit 4.5 to  the Registrant's Quarterly Report on Form 10-QSB filed with the Securities  and Exchange Commission on May 15, 2002 and incorporated herein by reference.  **

4.3

Form  of Convertible Secured Promissory Note. Previously filed as Exhibit 4.6 to  the Registrant's Quarterly Report on Form 10-QSB filed with the Securities  and Exchange Commission on May 15, 2002 and incorporated herein by reference.  **

4.4

2002  Equity Incentive Plan dated as of January 30, 2002.  Previously filed as  Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-QSB filed with  the Securities and Exchange Commission on May 15, 2002 and incorporated  herein by reference. **

4.5

Form  of Stock Option Agreement.  Previously filed as Exhibit 4.2 to the  Registrant's Quarterly Report on Form 10-QSB filed with the Securities and  Exchange Commission on May 15, 2002 and incorporated herein by reference. **

4.6

Promissory  Note Modification Agreement dated May 9, 2002 by and among the Company, Joan  P. Williams and C. Alan Williams.  Previously filed as Exhibit 4.3 to  the Registrant's Quarterly Report on Form 10-QSB filed with the Securities  and Exchange Commission on May 15, 2002 and incorporated herein by reference.  **

4.7

Security  Agreement dated May 9, 2002 by and among the Company, Joan P. Williams and C.  Alan Williams.  Previously filed as Exhibit 4.4 to the Registrant's  Quarterly Report on Form 10-QSB filed with the Securities and Exchange  Commission on May 15, 2002 and incorporated herein by reference. **

4.8

Promissory  Note to Stephen A. Garner dated February 17, 2004 previously filed as Exhibit  4.1 to the Company's Current Report on Form 8-K filed on February 18, 2004  and incorporated herein by reference. **

4.9

Promissory  Note to James L. Campbell dated February 17, 2004 previously filed as Exhibit  4.2 to the Company's Current Report on Form 8-K filed on February 18, 2004  and incorporated herein by reference. **

4.10

Guaranty  by Tailored Business Systems, Inc. to Stephen A. Garner dated February 17,  2004 previously filed as Exhibit 4.3 to the Company's Current Report on Form  8-K filed on February 18, 2004 and incorporated herein by reference. **

4.11

Guaranty  by Tailored Business Systems, Inc. to James L. Campbell dated February 17,  2004 previously filed as Exhibit 4.4 to the Company's Current Report on Form  8-K filed on February 18, 2004 and incorporated herein by reference. **

4.12

Form  of Security Agreement dated February 17, 2004 by and between Tailored  Business Systems, Inc. and Stephen A. Garner previously filed as Exhibit 4.5  to the Company's Current Report on Form 8-K filed on February 18, 2004 and  incorporated herein by reference. **

4.13

Form  of Security Agreement dated February 17, 2004 by and between Tailored  Business Systems, Inc. and James L. Campbell previously filed as Exhibit 4.6  to the Company's Current Report on Form 8-K filed on February 18, 2004 and  incorporated herein by reference. **

4.14

Registration  Rights Agreement dated February 17, 2004 by and between VillageEDOCS and  Stephen A. Garner previously filed as Exhibit 4.7 to the Company's Current  Report on Form 8-K filed on February 18, 2004 and incorporated herein by reference.  **

4.15

Registration  Rights Agreement dated February 17, 2004 by and between VillageEDOCS and  James L. Campbell previously filed as Exhibit 4.8 to the Company's Current  Report on Form 8-K filed on February 18, 2004 and incorporated herein by reference.  **

4.16

Form  of Stock Pledge Agreement dated February 17, 2004 by and between Tailored  Business Systems, Inc. and Stephen A. Garner previously filed as Exhibit 4.9  to the Company's Current Report on Form 8-K filed on February 18, 2004 and  incorporated herein by reference. **

4.17

Form  of Stock Pledge Agreement dated February 17, 2004 by and between Tailored  Business Systems, Inc. and James L. Campbell previously filed as Exhibit 4.10  to the Company's Current Report on Form 8-K filed on February 18, 2004 and  incorporated herein by reference. **

4.18

Notice  of Intent to Exercise Conversion Right dated February 10, 2005 by Joan P.  Williams and C. Alan Williams.  Previously filed as Exhibit 4.5 to the  Company's Current Report on Form 8-K filed on February 14, 2005. **

4.19

Promissory  Note to Alexander Riess dated April 15, 2005.  Previously filed as  Exhibit 4.1 to the Company's Current Report on Form 8-K filed on April 19,  2005. **

4.20

Promissory  Note to William R. Falcon dated April 15, 2005.  Previously filed as  Exhibit 4.2 to the Company's Current Report on Form 8-K filed on April 19,  2005. **

4.21

Common  Stock Purchase Warrant to Alexander Riess dated as of April 1, 2005.   Previously filed as Exhibit 4.3 to the Company's Current Report on Form 8-K  filed on April 19, 2005. **

4.22

Common  Stock Purchase Warrant to William R. Falcon dated as of April 1, 2005.   Previously filed as Exhibit 4.4 to the Company's Current Report on Form 8-K  filed on April 19, 2005. **

4.23

Note  Purchase Agreement dated April 13, 2005 by and between VillageEDOCS and  Barron Partners LP.  Previously filed as Exhibit 4.5 to the Company's  Current Report on Form 8-K filed on April 19, 2005. **

4.24

Convertible  Note to Barron Partners LP dated April 13, 2005.  Previously filed as  Exhibit 4.6 to the Company's Current Report on Form 8-K filed on April 19,  2005. **

4.25

Registration  Rights Agreement dated April 13, 2005 by and between VillageEDOCS and Barron  Partners LP.  Previously filed as Exhibit 4.7 to the Company's Current Report  on Form 8-K filed on April 19, 2005. **

4.26

Form  of Certificate of Designations of Preferences, Rights and Limitations of  Series A Convertible Preferred Stock.  Previously filed as Exhibit 4.8  to the Company's Current Report on Form 8-K filed on April 19, 2005. **

4.27

Stock  Purchase Warrant "A" dated April 13, 2005 to Barron Partners  LP.  Previously filed as Exhibit 4.9 to the Company's Current Report on  Form 8-K filed on April 19, 2005. **

4.28

Stock  Purchase Warrant "B" dated April 13, 2005 to Barron Partners  LP.  Previously filed as Exhibit 4.10 to the Company's Current Report on  Form 8-K filed on April 19, 2005. **

4.29

Form  of Note Assignment.  Previously filed as Exhibit 4.1 to the Company's  Current Report on Form 8-K filed on July 6, 2005. **

4.30

Form  of Promissory Note Modification Agreement.  Previously filed as Exhibit  4.2 to the Company's Current Report on Form 8-K filed on July 6, 2005. **

4.31

Form  of Notice of Intent to Exercise Conversion Right.  Previously filed as  Exhibit 4.3 to the Company's Current Report on Form 8-K filed on July 6,  2005. **

4.32

Notice  of conversion by Barron Partners LP dated September 30, 2005.   Previously filed as Exhibit 4.6 to the Company's Current Report on Form 8-K  filed on October 5, 2005. **

4.33

Form  of Convertible Secured Promissory Note by and among C. Alan Williams, Joan P.  Williams, and the Company previously filed as Exhibit 4.19 to the Company's  Annual Report on Form 10-KSB filed on April 14, 2006 and incorporated herein  by reference. **

4.34

Convertible  Secured Promissory Note dated February 16, 2004 by and among C. Alan  Williams, Joan P. Williams, and the Company previously filed as Exhibit 4.20  to the Company's Annual Report on Form 10-KSB filed on April 14, 2006 and  incorporated herein by reference. **

4.35

Notice  of conversion by Barron Partners LP dated October 21, 2005.  Previously  filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on  October 24, 2005 and incorporated herein by reference. **

 

 

 

 

4.36

Notice  of conversion by Barron Partners LP dated March 8, 2006.  Previously  filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on  March 9, 2006 and incorporated herein by reference. **

4.37

Registration  Rights Agreement dated as of April 28, 2006 by and among VillageEDOCS and the  principal stockholders of GoSolutions, Inc.  Previously filed as Exhibit  99.5 to the Company's Current Report on Form 8-K filed on May 4, 2006. **

4.38

Principal  VEDO Stockholders Voting Agreement dated as of April 28, 2006 by and among  Barron Partners, LP, C. Alan Williams, Joan P. Williams and GoSolutions,  Inc.  Previously filed as Exhibit 99.6 to the Company's Current Report  on Form 8-K filed on May 4, 2006. **

4.39

Indemnity/Contribution  Agreement effective April 30, 2006, by and among VillageEDOCS, GoSolutions  Equity, LLC (the "LLC"), and the principals of the LLC identified  on the signature page thereto.  Previously filed as Exhibit 99.7 to the  Company's Current Report on Form 8-K filed on May 4, 2006. **

4.40

Settlement  and Release Agreement dated as of April 28, 2006 by and among VillageEDOCS,  GoSolutions, Inc., The Zant Group Trust and Louis J. Zant.  Previously  filed as Exhibit 99.9 to the Company's Current Report on Form 8-K filed on  May 4, 2006. **

4.41

Second  Extension Agreement dated as of April 28, 2006 by and between The Zant Group  Trust and GoSolutions, Inc.  Previously filed as Exhibit 99.9 to the  Company's Current Report on Form 8-K filed on May 4, 2006. **

4.42

Settlement  and Release Agreement dated as of June 30, 2006, by and among VillageEDOCS,  GoSolutions, Inc., Bruce H. Bennett and Sandra G. Bennett.  Previously filed  as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 12,  2006. **

4.43

Warrant  Exchange Agreement dated as of November 20, 2006 by and between the Company  and Barron Partners, LP.  Previously filed as Exhibit 10.1 to the Company's  Amended Current Report on Form 8-K/A filed on November 22, 2006.**

10.1

General  Release and Noncompetition Agreement dated February 17, 2004 by Stephen A.  Garner in favor of Tailored Business Systems, Inc. previously filed as  Exhibit 10.3 to the Company's Current Report on Form 8-K filed on February  18, 2004 and incorporated herein by reference. **

10.2

General  Release and Noncompetition Agreement dated February 17, 2004 by James L.  Campbell in favor of Tailored Business Systems, Inc. previously filed as  Exhibit 10.4 to the Company's Current Report on Form 8-K filed on February  18, 2004 and incorporated herein by reference. **

10.3

Lease  Agreement dated February 17, 2004 by and between Perimeter Center Partners  and Tailored Business Systems, Inc. previously filed as Exhibit 10.5 to the  Company's Current Report on Form 8-K filed on February 18, 2004 and  incorporated herein by reference. **

 

 

10.4

Employment  Agreement dated June 10, 2004 by and between the Company and K. Mason Conner  previously filed as Exhibit C to the Company's Schedule 14C Information  Statement filed on July 23, 2004 and incorporated herein by reference. **

10.5

Employment  Agreement dated June 10, 2004 by and between the Company and H. Jay Hill  previously filed as Exhibit D to the Company's Schedule 14C Information  Statement filed on July 23, 2004 and incorporated herein by reference. **

10.6

Employment  Agreement dated June 10, 2004 by and between the Company and Michael Richard  previously filed as Exhibit E to the Company's Schedule 14C Information  Statement filed on July 23, 2004 and incorporated herein by reference. **

10.7

Release  of Claims Agreement dated as of April 1, 2005 by Alexander Riess in favor of  Phoenix Forms, Inc.  Previously filed as Exhibit 10.3 to the Company's  Current Report on Form 8-K filed on April 19, 2005. **

10.8

Release  of Claims Agreement dated as of April 1, 2005 by William R. Falcon in favor  of Phoenix Forms, Inc.  Previously filed as Exhibit 10.4 to the  Company's Current Report on Form 8-K filed on April 19, 2005. **

10.9

Amendment  No. 1 to Executive Employment Agreement dated April 28, 2005 by and between  the Registrant and K. Mason Conner.  Previously filed as Exhibit 10.1 to  the Company's Current Report on Form 8-K filed on April 29, 2005. **

10.10

Amendment  No. 1 to Executive Employment Agreement dated April 28, 2005 by and between  the Registrant and H. Jay Hill.  Previously filed as Exhibit 10.2 to the  Company's Current Report on Form 8-K filed on April 29, 2005. **

10.11

Amendment  No. 1 to Executive Employment Agreement dated April 28, 2005 by and between  the Registrant and Michael A. Richard.  Previously filed as Exhibit 10.3  to the Company's Current Report on Form 8-K filed on April 29, 2005. **

10.12

Executive  Employment Agreement, dates as of March 1, 2006, by and between the Company  and Jerry T. Kendall.  Previously files as Exhibit 10.1 to the Company's  Current Report on Form 8-K filed on March 1, 2006. **

10.13

Amendment  No. 2 to Michael Richard Executive Employment Agreement effective as of May  1, 2006.  Previously filed as Exhibit 99.11 to the Company's Current  Report on Form 8-K filed on May 4, 2006. **

10.14

Amendment  No. 2 to H. Jay Hill Executive Employment Agreement effective as of May 1,  2006.  Previously filed as Exhibit 99.12 to the Company's Current Report  on Form 8-K filed on May 4, 2006. **

10.15

Amendment  No. 2 to K. Mason Conner Executive Employment Agreement effective as of May  1, 2006.  Previously filed as Exhibit 99.13 to the Company's Current  Report on Form 8-K filed on May 4, 2006. **

10.16

Thor  Bendickson Employment Agreement effective as of May 1, 2006.  Previously  filed as Exhibit 99.14 to the Company's Current Report on Form 8-K filed on  May 4, 2006. **

10.17

Patent  License Agreement, dated as of May 12, 2006, by and between VillageEDOCS and  Catch Curve, Inc..  Previously filed as Exhibit 10.1 to the Company's  Current Report on Form 8-K filed on May 16, 2006. **

10.18

Office  Lease Agreement effective June 1, 2007 by and between the Company and Tustin  Avenue Investors, LLC.  Previously filed as Exhibit 10.1 to the Company's  Current Report on Form 8-K filed on April 25, 2007. **

10.19

Placement  Agency Agreement effective October 13, 2006 by and between the Company and  Stonegate Securities, Inc.  Previously filed as Exhibit 10.28 to the  Company's Quarterly Report on Form 10-QSB filed on August 14, 2007. **

10.20

Engagement  Agreement effective July 10, 2007 by and between the Company and GemStone  Securities, LLC.  Previously filed as Exhibit 10.29 to the Company's  Quarterly Report on Form 10-QSB filed on August 14, 2007. **

10.21

Settlement  Agreement dated June 6, 2007 by and among Jeffrey H. Mims, VarTec Telecom,  Inc, Excel Telecommunications, Inc., VarTec Solutions, Inc., and GoSolutions,  Inc. Previously filed as Exhibit 10.29 to the Company's Quarterly Report on  Form 10-QSB filed on August 14, 2007. **

10.22

Form  of Loan and Security Agreement dated February 6, 2008 by and between The  Private Bank of the Peninsula and each of the Registrant, MessageVision,  Inc.,  and Tailored Business Systems, Inc.  Previously filed as Exhibit 10.1  to the Company's Current Report on Form 8-K filed on February 11, 2008. **

 

 

14.1

Code  of Ethics.  Previously filed as Exhibit 14.1 to the Company's Annual Report  on Form 10-KSB filed on March 29, 2004 and incorporated herein by reference.  **

21.1

Subsidiaries  of the Registrant.*

31.1

Certification  Under Section 302 of The Sarbanes-Oxley Act of 2002 signed and dated March 31,  2008 by K. Mason Conner, Chief Executive Officer.*

31.2

Certification  Under Section 302 of The Sarbanes-Oxley Act of 2002 signed and dated March 31,  2008 by Michael A. Richard, Chief Financial Officer.*

32.1

Certification  Pursuant To 18 U.S.C. §1350, As Adopted Pursuant To Section 906 of the  Sarbanes-Oxley Act of 2002 signed and dated March 31, 2008 by K. Mason  Conner, Chief Executive Officer.***

32.2

Certification  Pursuant To 18 U.S.C. §1350, As Adopted Pursuant To Section 906 of the  Sarbanes-Oxley Act of 2002 signed and dated March 31, 2008 by Michael A.  Richard, Chief Financial Officer.***

99.1

VillageEDOCS,  Inc. Consolidated Financial Statements For The Fiscal Years Ended December  31, 2007 and 2006 together with Report of Independent Registered Public  Accounting Firm.*

*

Filed  herewith

**

Previously  filed

***

Furnished  herewith

** **

** **

68

 

 

 

 

 

** **

**ITEM14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

 

Thefollowing table sets forth fees billed to us by our auditors during the fiscalyears ended December 31, 2007 and 2006 for: (i) services rendered for the auditof our annual financial statements and the review of our quarterly financialstatements, (ii) services by our auditors that are reasonably related to theperformance of the audit or review of our financial statements and that are notreported as Audit Fees, including procedures related to our acquisition of GSIand Resolutions (iii) services rendered in connection with tax compliance, taxadvice, and tax planning, and (iv) all other fees for services rendered. "All Other Fees" consisted of fees related to our proxy statements, registrationstatements, SEC comment letters, and press releases.

 

 

 

 

2007

 

2006

 

 

 

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

 

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

 

(i)

Audit  Fees

 $

205,000 

 

 $

185,000 

 

(ii)

Audit  Related Fees

- 

 

40,000 

 

(iii)

Tax  Fees

40,000 

 

40,000 

 

(iv)

All  Other Fees

- 

 

- 

 

 

 

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

 

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

 

 

      Total

 $

245,000 

 

 $

265,000 

 

 

 

==============

 

=================

 

 

69

 

 

 

 

 

 
SIGNATURES
 

In accordance withSection 13 or 15(d) of the Securities Exchange Act of 1934, VillageEDOCS, Inc.has caused this Annual Report on Form 10-KSB to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 

VillageEDOCS, Inc.

 

(Registrant)

 

 

 

**VillageEDOCS, Inc.**

** **

** **

 

By:   /s/ Michael A. Richard

 

Michael A. Richard

 

Chief Financial Officer and

 

Principal Accounting Officer

 

 

 

Date:  March 31, 2008

 

 

               Pursuant to the requirements ofthe Securities Exchange Act of 1934, this Annual Report on Form 10-KSB has beensigned by the following persons below on behalf of the registrant and in thecapacities and on the dates indicated.

 

 

**SIGNATURE**

**TITLE**

**DATE**

** **

** **

** **

** **

** **

** **

** **

** **

** **

/s/ K. Mason Conner

** **

March 31, 2008

 

K. Mason Conner

Director, President, and

 

 

 

Chief Executive Officer

 

 

 

 

 

 

/s/ Michael A. Richard

 

March 31, 2008

 

Michael A. Richard

Chief Financial Officer,

 

 

 

Principal Accounting Officer

 

 

 

 

 

 

/s/ J. Thomas Zender

 

March 31, 2008

 

J. Thomas Zender

Director,

 

 

 

Chairman of the Board

 

 

 

 

 

 

/s/ Ricardo A. Salas

 

March 31, 2008

 

Ricardo A. Salas

Director

 

 

 

 

 

 

/s/ H. Jay Hill

 

March 31, 2008

 

H. Jay Hill

Executive Vice President,

 

 

 

Director

 

70

 

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