UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)





x   QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For
the quarterly period ended September 30, 2009





 ̈   TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT





For the
transition period from_________, 20__, to________, 20__.





Commission
File Number: 000-31395





VillageEDOCS,
Inc.


(Exact
name of Registrant as specified in its charter)





Delaware
            
            33-0668917(State
      or Other Jurisdiction of Incorporation or
              Organization)
            
            I.R.S.
      Employer Identification Number1401
      N. Tustin Ave, Ste. 230, Santa Ana, California
              92705
            
            (714)
      734-1030(Address
      of principal executive offices)
            
            (Registrant's
      telephone number, including area
code)





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


YES
              x
              NO
               ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


YES
               ̈
              NO
               ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check One):





Large
      Accelerated Filer
                o
                Accelerated
      Filer
                 ̈
                Non-accelerated
      filer
                 ̈
                Smaller
      reporting company
                x(Do
      not check if a smaller
                  reporting
      company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


YES
               ̈
              NO
              x





There
were 193,046,613 shares of the Registrant’s common stock outstanding as of
October 31, 2009.








VillageEDOCS


Index





Page
      No.PART
      I. FINANCIAL INFORMATIONItem
      1.
                  
                  Condensed
      Consolidated Financial StatementsCondensed
      Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and
      December 31, 2008 (Audited)
                  
                  1Condensed
      Consolidated Statements of Operations for the three and nine months
      ended September 30, 2009 and 2008 (Unaudited)
                  
                  2Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2009 and 2008 (Unaudited)
                  
                  3Notes
      to Unaudited Condensed Consolidated Financial Statements
                  
                  5Item
      2.
                  
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                  
                  27Item
      4.
                  
                  Controls
      and Procedures
                  
                  45PART
      II. OTHER INFORMATIONItem
      1.
                  
                  Legal
      Proceedings
                  
                  46Item
      2.
                  
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  
                  46Item
      3.
                  
                  Defaults
      Upon Senior Securities
                  
                  46Item
      4.
                  
                  Submission
      of Matters to a Vote of Security Holders
                  
                  47Item
      5.
                  
                  Other
      Information
                  
                  47Item
      6.
                  
                  Exhibits
                  
                  48Signatures
                  
                  54


i





VillageEDOCS,
Inc. and subsidiaries


Condensed
Consolidated Balance Sheets





September
      30,
                                                                        
                                                                        
                                                                        December
      31,2009
                                                                        
                                                                        
                                                                        2008(unaudited)
                                                                        
                                                                        
                                                                        (audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                                        
                                                                        $
                                                                        324,433
                                                                        
                                                                        
                                                                        $
                                                                        567,447Accounts
      receivable, net of allowance for doubtfulaccounts
      of approximately $48,000 and $47,000, respectively
                                                                        
                                                                        
                                                                        1,101,342
                                                                        
                                                                        
                                                                        
                                                                        1,093,606Inventories
                                                                        
                                                                        
                                                                        63,815
                                                                        
                                                                        
                                                                        
                                                                        41,031Prepaid
      expenses and other current assets
                                                                        
                                                                        
                                                                        122,474
                                                                        
                                                                        
                                                                        
                                                                        282,397Debt
      issuance costs, net
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        17,883Total
      current assets
                                                                        
                                                                        
                                                                        1,612,064
                                                                        
                                                                        
                                                                        
                                                                        2,002,364Property
      and equipment, net
                                                                        
                                                                        
                                                                        310,788
                                                                        
                                                                        
                                                                        
                                                                        388,788Other
      assets
                                                                        
                                                                        
                                                                        26,014
                                                                        
                                                                        
                                                                        
                                                                        28,811Goodwill
                                                                        
                                                                        
                                                                        7,244,732
                                                                        
                                                                        
                                                                        
                                                                        7,244,732Other
      intangibles, net
                                                                        
                                                                        
                                                                        3,308,185
                                                                        
                                                                        
                                                                        
                                                                        3,826,728$
                                                                        12,501,783
                                                                        
                                                                        
                                                                        $
                                                                        13,491,423LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                                                                        
                                                                        $
                                                                        483,741
                                                                        
                                                                        
                                                                        $
                                                                        514,086Current
      portion of accrued expenses and other liabilities
                                                                        
                                                                        
                                                                        1,526,165
                                                                        
                                                                        
                                                                        
                                                                        1,736,419Deferred
      revenue
                                                                        
                                                                        
                                                                        947,556
                                                                        
                                                                        
                                                                        
                                                                        1,026,184Current
      portion of capital lease obligation
                                                                        
                                                                        
                                                                        6,895
                                                                        
                                                                        
                                                                        
                                                                        20,180Lines
      of credit
                                                                        
                                                                        
                                                                        431,292
                                                                        
                                                                        
                                                                        
                                                                        890,563Current
      portion of notes payable and accrued interest payable to
      relatedparties,
      net of unamortized debt discount of $47,808 and $47,808,
      respectively
                                                                        
                                                                        
                                                                        760,563
                                                                        
                                                                        
                                                                        
                                                                        438,682Convertible
      note and accrued interest payable torelated
      party
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        178,370Total
      current liabilities
                                                                        
                                                                        
                                                                        4,156,212
                                                                        
                                                                        
                                                                        
                                                                        4,804,484Accrued
      expenses and other liabilities, net of current portion
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        81,318Capital
      lease obligation, net of current portion
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        1,737Notes
      payable and accrued interest payable to related parties, net of
      currentportion
      and unamortized debt discount of $39,835 and $75,690,
      respectively
                                                                        
                                                                        
                                                                        563,528
                                                                        
                                                                        
                                                                        
                                                                        604,310Convertible
      note and accrued interest payable to related party, net of current
      portion
                                                                        
                                                                        
                                                                        183,245
                                                                        
                                                                        
                                                                        
                                                                        -Derivative
      liability
                                                                        
                                                                        
                                                                        4,650
                                                                        
                                                                        
                                                                        
                                                                        -Total
      liabilities
                                                                        
                                                                        
                                                                        4,907,635
                                                                        
                                                                        
                                                                        
                                                                        5,491,849Commitments
      and contingenciesStockholders'
      equity:Series
      A Preferred stock, par value $0.001 per share:Authorized  —
      48,000,000 sharesIssued
      and outstanding —  33,500,000 shares
                                                                        
                                                                        
                                                                        33,500
                                                                        
                                                                        
                                                                        
                                                                        33,500(liquidation
      preference of $1,675,000)Common
      stock, par value $0.0001 per share:Authorized
      — 500,000,000 sharesIssued
      and outstanding — 193,046,613 and 180,270,913 shares,
      respectively
                                                                        
                                                                        
                                                                        19,305
                                                                        
                                                                        
                                                                        
                                                                        18,027Additional
      paid-in capital
                                                                        
                                                                        
                                                                        33,943,359
                                                                        
                                                                        
                                                                        
                                                                        33,618,742Accumulated
      deficit
                                                                        
                                                                        
                                                                        (26,402,016
                                                                        )
                                                                        
                                                                        
                                                                        (25,670,695
                                                                        )Total
      stockholders' equity
                                                                        
                                                                        
                                                                        7,594,148
                                                                        
                                                                        
                                                                        
                                                                        7,999,574$
                                                                        12,501,783
                                                                        
                                                                        
                                                                        $
                                                                        13,491,423





See
accompanying notes to unaudited condensed consolidated financial
statements.


1





VillageEDOCS,
Inc. and subsidiaries


Condensed
Consolidated Statements of Operations


(Unaudited)





Three
      Months Ended September 30,
                            
                            
                            Nine
      Months Ended September 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Net
      sales
                            
                            $
                            3,659,351
                            
                            
                            $
                            4,273,114
                            
                            
                            $
                            11,593,193
                            
                            
                            $
                            10,965,907Cost
      of sales
                            
                            
                            1,539,405
                            
                            
                            
                            1,661,614
                            
                            
                            
                            4,567,485
                            
                            
                            
                            4,444,651Gross
      profit
                            
                            
                            2,119,946
                            
                            
                            
                            2,611,500
                            
                            
                            
                            7,025,708
                            
                            
                            
                            6,521,256Operating
      expenses:Product
      and technologydevelopment
                            
                            
                            513,282
                            
                            
                            
                            448,322
                            
                            
                            
                            1,545,147
                            
                            
                            
                            1,219,705Sales
      and marketing
                            
                            
                            505,093
                            
                            
                            
                            492,427
                            
                            
                            
                            1,766,448
                            
                            
                            
                            1,434,132General
      and administrative
                            
                            
                            1,091,475
                            
                            
                            
                            1,207,825
                            
                            
                            
                            3,588,019
                            
                            
                            
                            3,597,800Depreciation
      and amortization
                            
                            
                            221,547
                            
                            
                            
                            188,378
                            
                            
                            
                            695,382
                            
                            
                            
                            554,153Total
      operating expenses
                            
                            
                            2,331,397
                            
                            
                            
                            2,336,952
                            
                            
                            
                            7,594,996
                            
                            
                            
                            6,805,790Income
      (loss) from operations
                            
                            
                            (211,451
                            )
                            
                            
                            274,548
                            
                            
                            
                            (569,288
                            )
                            
                            
                            (284,534
                            )Change
      in fair value of derivative liability
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3,100
                            
                            
                            
                            -Interest
      expense
                            
                            
                            (37,185
                            )
                            
                            
                            (62,851
                            )
                            
                            
                            (123,051
                            )
                            
                            
                            (175,674
                            )Other
      income, net
                            
                            
                            2,103
                            
                            
                            
                            49,968
                            
                            
                            
                            12,760
                            
                            
                            
                            103,371Income
      (loss) before provision forincome
      taxes
                            
                            
                            (246,533
                            )
                            
                            
                            261,665
                            
                            
                            
                            (676,479
                            )
                            
                            
                            (356,837
                            )(Provision)
      benefit for income taxes
                            
                            
                            (34,624
                            )
                            
                            
                            57,135
                            
                            
                            
                            (57,452
                            )
                            
                            
                            24,137Net
      income (loss)
                            
                            $
                            (281,157
                            )
                            
                            $
                            318,800
                            
                            
                            $
                            (733,931
                            )
                            
                            $
                            (332,700
                            )Net
      income (loss) availableto
      common shareholders per common share:Basic
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -Diluted
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -Weighted
      average shares outstanding -Basic
                            
                            
                            193,046,613
                            
                            
                            
                            167,118,739
                            
                            
                            
                            188,460,464
                            
                            
                            
                            157,606,078Diluted
                            
                            
                            193,046,613
                            
                            
                            
                            201,883,203
                            
                            
                            
                            188,460,464
                            
                            
                            
                            157,606,078





See
accompanying notes to unaudited condensed consolidated financial
statements.


2





VillageEDOCS,
Inc. and subsidiaries


Condensed
Consolidated Statements of Cash Flows


(unaudited)





Nine
      Months Ended September 30,2009
                    
                    
                    2008Cash
      Flows from Operating Activities:Net
      loss
                    
                    $
                    (733,931
                    )
                    
                    $
                    (332,700
                    )Adjustments
      to reconcile net loss to net cashprovided
      by operating activities:Depreciation
      and amortization
                    
                    
                    695,382
                    
                    
                    
                    554,153Provision
      for (recovery of) doubtful accounts receivable
                    
                    
                    521
                    
                    
                    
                    (10,000
                    )Estimated
      fair value of stock options issued to employees for services
      rendered
                    
                    
                    202,638
                    
                    
                    
                    221,016Estimated
      fair value of warrants issued to consultants
                    
                    
                    23,194
                    
                    
                    
                    75,485Change
      in fair value of derivative liability
                    
                    
                    (3,100
                    )
                    
                    
                    -Common
      stock issued to employees for services
                    
                    
                    29,651
                    
                    
                    
                    -Amortization
      of debt discount and debt issuance costs
                    
                    
                    53,738
                    
                    
                    
                    143,111Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    (8,257
                    )
                    
                    
                    (118,515
                    )Inventories
                    
                    
                    (22,784
                    )
                    
                    
                    (6,066
                    )Prepaid
      expenses and other current assets
                    
                    
                    106,622
                    
                    
                    
                    (22,672
                    )Other
      assets
                    
                    
                    2,797
                    
                    
                    
                    -Accounts
      payable
                    
                    
                    (30,345
                    )
                    
                    
                    (18,555
                    )Accrued
      expenses, other liabilities and interest
                    
                    
                    (183,647
                    )
                    
                    
                    (428,206
                    )Deferred
      revenue
                    
                    
                    (78,628
                    )
                    
                    
                    147,797Net
      cash provided by operating activities
                    
                    
                    53,851
                    
                    
                    
                    204,848Cash
      Flows from Investing Activities:Purchases
      of property and equipment
                    
                    
                    (62,872
                    )
                    
                    
                    (111,761
                    )Cash
      paid in acquisition of QSI, net of cash acquired
                    
                    
                    -
                    
                    
                    
                    (286,435
                    )Costs
      incurred for purchase of QSI
                    
                    
                    -
                    
                    
                    
                    (227,291
                    )Cash
      acquired from sale of PFI
                    
                    
                    -
                    
                    
                    
                    53,832Net
      cash used in investing activities
                    
                    
                    (62,872
                    )
                    
                    
                    (571,655
                    )Cash
      Flows from Financing Activities:(Payments)
      proceeds from lines of credit, net of proceeds/repayments
                    
                    
                    (459,271
                    )
                    
                    
                    429,881Proceeds
      from notes payable to related parties
                    
                    
                    865,000
                    
                    
                    
                    300,000Payments
      on notes payable to related parties
                    
                    
                    (624,700
                    )
                    
                    
                    -Cash
      paid for debt issuance costs
                    
                    
                    -
                    
                    
                    
                    (65,000
                    )Payments
      on capital lease obligation
                    
                    
                    (15,022
                    )
                    
                    
                    (14,149
                    )Net
      cash (used in) provided by financing activities
                    
                    
                    (233,993
                    )
                    
                    
                    650,732Net
      change in cash and cash equivalents
                    
                    
                    (243,014
                    )
                    
                    
                    283,925Cash
      and cash equivalents, beginning of period
                    
                    
                    567,447
                    
                    
                    
                    749,911Cash
      and cash equivalents, end of period
                    
                    $
                    324,433
                    
                    
                    $
                    1,033,836Supplemental
      disclosure of cash flow information -Cash
      paid during the period for:Interest
                    
                    $
                    51,959
                    
                    
                    $
                    46,866Income
      taxes
                    
                    $
                    144,822
                    
                    
                    $
                    172,340





continued...


3





Supplemental
      Schedule of Noncash Investing
                        
                        Nine
      Months Ended September 30,and
      Financing Activities:
                        
                        2009
                        
                        
                        2008Issuance
      of common stock as acquisition cost
                        
                        $
                        -
                        
                        
                        $
                        2,200Issuance
      of note payable to related party in acquisition
                        
                        $
                        -
                        
                        
                        $
                        900,000Estimated
      fair value of common stock issued in connection with
      acquisition
                        
                        $
                        -
                        
                        
                        $
                        547,800Cumulative
      effect of accounting change to accumulated deficit for derivative
      liabilities
                        
                        $
                        2,610
                        
                        
                        $
                        -Cumulative
      effect of accounting change to additional paid-in capital for derivative
      liabilities
                        
                        $
                        6,200
                        
                        
                        $
                        -Estimated
      fair value of warrants issued as debt issuance costs
                        
                        $
                        -
                        
                        
                        $
                        149,661Reclassification
      of warrant from accrued liabilities to additional paid-in
      capital
                        
                        $
                        -
                        
                        
                        $
                        50,000Reclassification
      of common stock issued to employees for services from accrued liabilities
      to additional paid-in capital
                        
                        $
                        98,106
                        
                        
                        $
                        -





See
accompanying notes to unaudited condensed consolidated financial
statements.


4





VillageEDOCS,
Inc.


Notes
to Unaudited Condensed Consolidated Financial Statements


September
30, 2009 and 2008





1.          Management’s
Representation





The
accompanying unaudited condensed consolidated financial statements have been
prepared by VillageEDOCS, Inc. (the “Company” or “VillageEDOCS”)) in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information, and pursuant to the instructions to
Form 10-Q and Article 8 of Regulation S-X promulgated by the Securities and
Exchange Commission (“SEC”).  Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial statement
presentation.  In the opinion of management, all adjustments
(consisting primarily of normal recurring accruals) considered necessary for a
fair presentation have been included.  These financial statements
should be read in conjunction with the Company’s audited consolidated financial
statements and notes thereto for the year ended December 31, 2008, contained in
the Company’s Annual Report on Form 10-K, as filed with the SEC.





The
Company has evaluated subsequent events through November 16, 2009, the filing
date of its Quarterly Report on Form 10-Q, and determined that no subsequent
events have occurred that would require recognition in the condensed
consolidated financial statements or disclosure in the notes thereto other than
as disclosed in the accompanying notes.





2.          Background, Organization and
Basis of Presentation





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





3.          Going
Concern





The
accompanying unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The Company
has incurred significant losses since inception, and has a working capital
deficit ($2,544,148 at September 30, 2009).  The Company’s losses are
continuing and are expected to continue until such time as the Company is able
to sufficiently expand its existing businesses or is able to consummate business
combination transactions with other businesses whose profits are sufficient to
offset any ongoing losses from operating the holding company that owns QSI, GSI,
TBS and MVI.


5


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





The
Company believes it will have adequate cash and available borrowing capabilities
under its lines of credit to maintain operations until it achieves sustained
profitability.  However, until the Company has a history of
maintaining revenue levels sufficient to support its operations and improve its
working capital deficit, the Company may require additional financing. Sources
of financing could include capital infusions, additional equity financing or
debt offerings.  The Company does not expect to generate positive
operating cash flows again until at least the second quarter of 2010.
Should anticipated cash flows decrease for any reason, management plans to
obtain debt and/or equity financing from new and existing
stockholders.    There can be no assurance that funding will
be available on acceptable terms, if at all, or that such funds, if raised,
would enable the Company to achieve or sustain profitable
operations.





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





4.           Summary of Significant
Accounting Policies





Segments of an Enterprise
and Related Information





The
Company reports information about segments of its business in its annual
financial statements and reports selected segment information in its quarterly
reports issued to stockholders. The Company also reports on its entity-wide
disclosures about the products and services that it provides, the material
countries in which it holds assets and reports revenues and its major customers.
The Company's five reportable segments are managed separately based on
fundamental differences in their operations. At September 30, 2009, the Company
operated in the following five reportable segments (see Note 10):





(a)  Electronic
document delivery services,


(b)  Government
accounting solutions,


(c)  Electronic
content management solutions,


(d)  Integrated
communications, and


(e)  Corporate.





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





Concentration of Credit
Risk





The
Company extends credit to its customers and performs ongoing credit evaluations
of such customers.  The Company does not obtain collateral to secure
its accounts receivable.  MVI and GSI generally require a valid credit
card or ACH debit account to collateralize credit extended to non-corporate
clients. The Company evaluates its accounts receivable on a regular basis for
collectibility and provides for an allowance for potential credit losses as
deemed necessary.  At September 30, 2009 and December 31, 2008, the
Company has recorded an allowance for doubtful accounts of approximately $48,000
and $47,000, respectively.





For the
three months ended September 30, 2009 and 2008, independent representatives of
one enterprise accounted for approximately 18% and 21% of total revenues,
respectively.





For the
nine months ended September 30, 2009 and 2008, independent representatives of
one enterprise accounted for approximately 18% and 25% of total revenues,
respectively.  For the nine months ended September 30, 2009,
independent representatives of another enterprise accounted for approximately
15% of total revenue.


6





One
customer accounted for 14% of accounts receivable at September 30,
2009.  No single customer accounted for more than 10% of accounts
receivable at December 31, 2008.





At
December 31, 2008, the Company had amounts on deposit with financial
institutions in excess of the federally insured limits of $250,000, which
approximated $44,000. There were no such concentrations at September 30,
2009.





Use of Estimates in the
Preparation of Financial Statements





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates made by management
are, among others, the realizability of accounts receivable, valuation of
inventories, recoverability of long-lived assets, and valuation of derivative
liabilities, stock options, warrants, and deferred taxes.  Actual
results could differ from those estimates.





Property and
Equipment





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





Revenue
Recognition





The
Company recognizes revenue when persuasive evidence of an arrangement exists,
title transfer has occurred, or services have been performed, the price is fixed
or readily determinable and collectibility is probable.  Sales are
recorded net of sales discounts.





The
Company recognizes revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair market
values of each of the elements. The fair value of an element must be based on
vendor-specific objective evidence (“VSOE”) of fair value. Software license
revenue generated by TBS and QSI, allocated to a software product is recognized
upon delivery of the product, or deferred and recognized in future periods to
the extent that an arrangement includes one or more elements that are to be
delivered at a future date and for which VSOE has not been
established.  Maintenance and support revenue is recognized ratably
over the maintenance term.  First-year maintenance typically is sold
with the related software license and renewed on an annual basis thereafter.
Estimated fair values of ongoing maintenance and support obligations are based
on separate sales of renewals to other customers or upon renewal rates quoted in
the contracts. For such arrangements with multiple obligations, the Company
allocates revenue to each component of the arrangement based on the estimated
fair value of the undelivered elements. Fair value of services, such as
consulting or training, is based upon separate sales of these services. The
Company at times may enter into multiple-customer contracts in which the Company
allocates revenue based on the number of specified users at each customer, and
recognizes revenue upon customer acceptance and satisfying the other applicable
conditions of the above described accounting policy.





Services
revenue is recognized as the service is performed assuming that sufficient
evidence exists to estimate the fair value of the
services.  Consulting and training services are billed based on
contractual hourly rates and revenues are recognized as the services are
performed. Consulting services primarily consist of implementation services
related to the installation of the Company’s products which do not require
significant customization to or modification of the underlying software
code.


7


Revenue
from subscription agreements consists of fixed monthly fees and usage charges,
generally based on per minute rates.  Subscription agreement revenue
related to MVI and GSI usage service charges are billed monthly in arrears and
the associated revenues are recognized in the month of service. Recurring
charges for the GoSolo (TM) platform are billed in advance on a monthly basis
and recorded as deferred revenues. The Company recognizes subscription agreement
revenue ratably over the service period, which management believes approximates
the actual provision of services. Professional service fee revenue consists of
consulting fees charged to enterprise clients for GoSolo(TM) platform
enhancements. The Company recognizes professional service fee revenue on a time
and materials basis over the service period, which management believes
approximates the actual provision of services.  Wholesale enhanced
voicemail services consists of fees charged to telecommunications providers for
use of the GoSolo(TM) platform to provide their customers with hosted electronic
voicemail, billed monthly in arrears and the associated revenues are recognized
in the month of service.





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





Product and Technology
Development





Product
and technology development expense includes personnel costs relating to
developing the features, content and functionality of QSI’s electronic content
management solutions, MVI's internet-enabled fax services and web site, TBS's
government accounting software, and GSI's communications
services.  Product and technology development costs are expensed as
incurred.





Risks and
Uncertainties





The
Company operates in industries that are subject to intense competition,
government regulation and rapid technological change.  The Company’s
operations are subject to significant risks and uncertainties including
financial, operational, technological, regulatory and other risks associated
with an expanding business, including the potential risk of business
failure.





Earnings (Loss) per
Share





Basic
earnings (loss) per share is computed by dividing loss available to common
stockholders by the weighted average number of common shares assumed to be
outstanding during the period of computation. Diluted earnings (loss) per share
is computed similar to basic earnings (loss) per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potential shares had been issued and if the
additional common shares were dilutive.  All potentially dilutive
shares, approximately 34,957,000 for the three months ended September 30, 2009,
have been excluded from diluted loss per share, as their effect would be
anti-dilutive for the period.  All potentially dilutive shares,
approximately 35,233,000 and 37,455,000 of potentially dilutive shares for the
nine months ended September 30, 2009 and 2008, respectively, have been excluded
from diluted loss per share, as their effect would be anti-dilutive for the
periods then ended.


8





The
following table reconciles basic earnings per share and diluted earnings per
share and the related weighted average number of shares outstanding for the
three months ended September 30, 2008.





Numerator
                  
                  
                  Denominator
                  
                  
                  Per
      Share(Income)
                  
                  
                  (Shares)
                  
                  
                  AmountBasic
      EPS:Net
      income
                  
                  $
                  318,800
                  
                  
                  
                  -
                  
                  
                  $
                  -Income
      available to common shareholders
                  
                  $
                  318,800
                  
                  
                  
                  167,118,739
                  
                  
                  $
                  -Effect
      of dilutive securities:Convertible
      note payable to related party
                  
                  
                  -
                  
                  
                  
                  1,264,464
                  
                  
                  
                  -Convertible
      preferred stock
                  
                  
                  -
                  
                  
                  
                  33,500,000
                  
                  
                  
                  -Diluted
      EPS:Income
      available to common shareholders plus assumed exercises
                  
                  $
                  318,800
                  
                  
                  
                  201,883,203
                  
                  
                  $
                  -





Stock-Based
Compensation





At
September 30, 2009, the Company had two stock-based compensation
plans.





All
share-based payments to employees, including grants of employee stock options
and restricted stock grants, are recognized in the consolidated financial
statements based upon their fair values.  The Company uses the
Black-Scholes option pricing model to estimate the grant-date fair value of
share-based awards.  Fair value is determined at the date of
grant.  The consolidated financial statement effect of forfeitures is
estimated at the time of grant and revised, if necessary, if the actual effect
differs from those estimates.  The estimated weighted average
forfeiture rate for the nine months ended September 30, 2009 and 2008, of
approximately 14% and 17%, respectively, was based on historical forfeiture
experience and estimated future employee forfeitures.





The cash
flows resulting from the tax benefits resulting from tax deductions in excess of
the compensation cost recognized for those options to be classified as financing
cash flows. Due to the Company’s loss position, there were no such tax benefits
during the nine months ended September 30, 2009 and 2008.





Description
of Plans





The
Company’s equity incentive plans provide for awards of common stock and grants
of options to employees and directors of the Company to purchase the Company’s
shares, as determined by management and the board of directors, at or above the
fair value of such shares on the grant date. The options generally vest over a
five-year period beginning on the grant date and have a seven-year term. As of
September 30, 2009, the Company is authorized to issue up to 95,000,000 shares
under these plans and has approximately 48,000,000 shares available for future
issuances.





Summary
of Assumptions and Activity





The fair
value of stock-based awards to employees and directors is calculated using the
Black-Scholes option pricing model even though the model was developed to
estimate the fair value of freely tradeable, fully transferable options without
vesting restrictions, which differ significantly from the Company’s stock
options. The Black-Scholes model also requires subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The expected term of options granted is derived
from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate selected to value any particular grant
is based on the U.S. Treasury rate that corresponds to the pricing term of the
grant effective as of the date of the grant. The expected volatility is based on
the historical volatility of the Company’s stock price. These factors could
change in the future, affecting the determination of stock-based compensation
expense in future periods.


9





The fair
value of options granted was estimated using the following weighted average
assumptions:





Nine
      Months EndedSeptember
      30,2009
                  
                  
                  2008Stock
      options:Expected
      term (in years)
                  
                  
                  5.8
                  
                  
                  
                  6.0Expected
      volatility
                  
                  
                  185
                  %
                  
                  
                  264
                  %Risk-free
      interest rate
                  
                  
                  2.09
                  %
                  
                  
                  3.18
                  %Expected
      dividends
                  
                  
                  -
                  
                  
                  
                  -





A summary
of option activity as of September 30, 2009 and changes during the nine months
then ended, is presented below:





September
      30, 2009Weighted-AverageRemaining
                
                
                AggregateExercise
                
                
                Contractual
                
                
                IntrinsicShares
                
                
                Price
                
                
                Term
      (Years)
                
                
                ValueOptions
      outstanding at January 1, 2009
                
                
                42,730,939
                
                
                $
                0.16Options
      granted
                
                
                2,325,000
                
                
                $
                0.02Options
      forfeited/cancelled
                
                
                (3,495,000
                )
                
                $
                0.13Options
      expired
                
                
                (459,963
                )
                
                $
                0.26Options
      exercised
                
                
                -
                
                
                $
                -Options
      outstanding at September 30, 2009
                
                
                41,100,976
                
                
                $
                0.16
                
                
                
                4.6
                
                
                $
                -Options
      vested or expected to vest at September 30, 2009
                
                
                39,300,182
                
                
                $
                0.17
                
                
                
                4.5
                
                
                $
                -Options
      exercisable at September 30, 2009
                
                
                28,015,976
                
                
                $
                0.21
                
                
                
                3.9
                
                
                $
                -





The
weighted average grant date fair value of options granted during the nine months
ended September 30, 2009 and 2008 was $0.01 and $0.04 per option,
respectively.  Upon the exercise of options, the Company issues new
shares from its authorized shares.





As of
September 30, 2009, there was approximately $444,000 of total unrecognized
compensation cost, net of forfeitures, related to employee and director stock
option compensation arrangements. That cost is expected to be recognized on a
straight-line basis over the next 1.8 weighted average years.  The
total fair value of vested options issued to employees and directors during the
three months ended September 30, 2009 and 2008 was $58,558 and $98,604,
respectively, net of estimated forfeitures. The total fair value of vested
options issued to employees and directors during the nine months ended September
30, 2009 and 2008 was $202,638 and $221,016, respectively, net of estimated
forfeitures.


10





The
expense was recorded in the accompanying unaudited condensed consolidated
statements of operations as follows:





Three
      Months Ended September 30,
                  
                  
                  Nine
      Months Ended September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Cost
      of sales
                  
                  $
                  11,367
                  
                  
                  $
                  -
                  
                  
                  $
                  48,388
                  
                  
                  $
                  -General
      and administrative
                  
                  
                  36,844
                  
                  
                  
                  98,604
                  
                  
                  
                  125,223
                  
                  
                  
                  221,016Sales
      and marketing
                  
                  
                  3,330
                  
                  
                  
                  -
                  
                  
                  
                  11,323
                  
                  
                  
                  -Product
      and technology development
                  
                  
                  7,017
                  
                  
                  
                  -
                  
                  
                  
                  17,704
                  
                  
                  
                  -$
                  58,558
                  
                  
                  $
                  98,604
                  
                  
                  $
                  202,638
                  
                  
                  $
                  221,016





The
measurement date for the fair value of the equity instruments issued to
consultants and vendors in exchange for goods and services is determined at the
earlier of (i) the date at which a commitment for performance by the consultant
or vendor is reached or (ii) the date at which the consultant or vendor’s
performance is complete.  In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the term
of the consulting agreement.





All
issuances of the Company's stock to non-employees as non-cash consideration are
valued at the market value of the shares issued or the value of consideration
received whichever is more readily determinable. The majority of the non-cash
consideration received pertains to services rendered by consultants and others
and has been valued at the market value of the shares issued.





Inventories





Inventories
consist primarily of supplies, forms, envelopes, and software licenses purchased
for resale.  Cost is determined on a first-in, first-out
basis.  The Company periodically reviews its inventory quantities on
hand and adjusts for excess and obsolete inventory based primarily on historical
usage rates and its estimated forecast of product demand.  Actual
demand may differ from the Company's estimates.  Once established,
write-downs of inventory are considered permanent adjustments to the basis of
the excess or obsolete inventory.





Goodwill and Other
Intangible Assets





Goodwill
represents the excess of acquisition cost over the net assets acquired in a
business combination and is not amortized.  The Company allocates its
goodwill to its various reporting units, determines the carrying value of those
businesses, and estimates the fair value of the reporting units so that a
two-step goodwill impairment test can be performed.  In the first step of
the goodwill impairment test, the fair value of each reporting unit is compared
to its carrying value.  Management reviews, on an annual basis, the
carrying value of goodwill in order to determine whether impairment has
occurred.  Impairment is based on several factors including the Company's
projection of future discounted operating cash flows. If an impairment of the
carrying value were to be indicated by this review, the Company would perform
the second step of the goodwill impairment test in order to determine the amount
of goodwill impairment, if any.





The
Company performed an impairment test on goodwill as of December 31,
2008.  Based on its analysis as of December 31, 2008 and review at
September 30, 2009, the Company’s management believes there is no impairment of
its goodwill.  There can be no assurance, however, that market
conditions will not change or demand for the Company’s products or services will
continue, which could result in impairment of goodwill in the
future.





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


11





Long-Lived
Assets





In the
event that facts and circumstances indicate that equipment or other long-lived
assets may be impaired, an evaluation of recoverability would be
performed.  If an evaluation is required, the estimated future undiscounted
cash flows associated with the asset are compared to the asset's carrying amount
to determine if an impairment charge is necessary.  The amount of
long-lived asset impairment, if any, is charged to operations in the period in
which long-lived asset impairment is determined.  At September 30, 2009,
management believes there is no impairment of its long-lived assets.  There
can be no assurance, however, that market conditions will not change or demand
for the Company's products or services will continue, which could result in
impairment of long-lived assets in the future.





Warranty
Costs





The
Company provides a limited 90 day warranty on certain products sold. Estimated
future warranty obligations related to certain products and services are
provided by charges to operations in the period in which the related revenue is
recognized. As of September 30, 2009 and December 31, 2008, management of the
Company determined that a warranty reserve was not necessary.  In
addition, the charges to expense during the three and nine months ended
September 30, 2009 and 2008 were insignificant.





Derivative
Liability




Effective
January 1, 2009, the Company adopted the provisions of an accounting
pronouncement which applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, and to any
freestanding financial instruments that are potentially settled in an entity’s
own common stock. As a result of adopting this pronouncement, 310,000 of issued
and outstanding common stock purchase warrants previously treated as equity
pursuant to the derivative treatment exemption were no longer afforded equity
treatment. These warrants have an exercise price of $0.01, as amended, and
expire in February 2018. As such, effective January 1, 2009, the Company
reclassified the fair value of these common stock purchase warrants, which have
exercise price reset features, from equity to liability status as if these
warrants were treated as a derivative liability since their date of issue in
2008. On January 1, 2009, the Company reclassified from additional paid-in
capital, as a cumulative effect adjustment, $2,610 to beginning retained
earnings and $6,200 to a long-term warrant liability to recognize the fair value
of such warrants on such date. During the nine months ended September 30, 2009,
the Company issued an additional 155,000 warrants valued at $1,550 using the
Black-Scholes option pricing model and recorded as general and administrative
expense in the accompanying unaudited condensed consolidated statements of
operations and as a derivative liability on the accompanying unaudited condensed
consolidated balance sheet.  The fair value of the 465,000 common
stock purchase warrants declined to $4,650 as of September 30, 2009. As such,
the Company recognized a $3,100 gain from the change in fair value of these
warrants for the nine months ended September 30, 2009.




These
common stock purchase warrants were initially issued in connection with a line
of credit with a financial institution. The common stock purchase warrants were
not issued with the intent of effectively hedging any future cash flow, fair
value of any asset, liability or any net investment in a foreign operation. The
warrants do not qualify for hedge accounting, and as such, all future changes in
the fair value of these warrants will be recognized currently in earnings until
such time as the warrants are exercised or expire. These common stock purchase
warrants do not trade in an active securities market, and as such, the Company
estimates the fair value of these warrants using the Black-Scholes option
pricing model using the following weighted average assumptions:





September
      30,
                    
                    
                    January
      1,2009
                    
                    
                    2009Annual
      dividend yield
                    
                    
                    —
                    
                    
                    
                    —Expected
      life (years)
                    
                    
                    8.36
                    
                    
                    
                    9.70Risk-free
      interest rate
                    
                    
                    3.12
                    %
                    
                    
                    2.46
                    %Expected
      volatility
                    
                    
                    184
                    %
                    
                    
                    190
                    %


12




The
expected life is based on the remaining term of the warrants.  The
risk-free interest rate is based on the U.S. Treasury rate that corresponds to
the pricing term.  Expected volatility is based primarily on
historical volatility. Historical volatility was computed using daily pricing
observations for recent periods that correspond to the expected term. The
Company believes this method produces an estimate that is representative of
expectations of future volatility over the expected term of these warrants. The
Company currently has no reason to believe future volatility over the expected
remaining life of these warrants is likely to differ materially from historical
volatility.




Fair Value
Measurement




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued a
pronouncement which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. This
pronouncement does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. In February 2008, the FASB
deferred the effective date of this pronouncement by one year for certain
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). On January 1, 2008, the Company adopted the
provisions of this pronouncement, except as it applies to those nonfinancial
assets and nonfinancial liabilities for which the effective date has been
delayed by one year, which the Company adopted on January 1, 2009. The
adoption of this pronouncement did not have a material effect on the Company’s
financial position or results of operations. The carrying values of cash,
accounts receivable, accounts payable, accrued expenses, capital lease
obligations, and debt instruments approximate their respective fair values due
to the short-term nature of these instruments.




The fair
value hierarchy distinguishes between assumptions based on market data
(observable inputs) and an entity’s own assumptions (unobservable inputs). The
hierarchy consists of three levels:





·
            Level
      one — Quoted market prices in active markets for identical assets or
      liabilities;





·
            Level
      two — Inputs other than level one inputs that are either directly or
      indirectly observable; and





·
            Level
      three — Unobservable inputs developed using estimates and assumptions,
      which are developed by the reporting entity and reflect those assumptions
      that a market participant would
use.




Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter. Liabilities measured at fair value on a recurring basis are summarized
as follows (unaudited):





September
                          30,Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3
                        
                        
                        2009Fair
      value of warrants
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        $
                        4,650
                        
                        
                        $
                        4,650Total
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        4,650
                        
                        
                        $
                        4,650


13





The
following table provides a reconciliation of the beginning and ending balances
for the Company’s derivative liability measured at fair value using Level 3
inputs:




Balance
      at December 31, 2008
                      
                      $
                      —Cumulative
      effect of EITF 07-5
                      
                      
                      6,200Issuance
      of warrants
                      
                      
                      1,550Change
      in fair value
                      
                      
                      (3,100
                      )Balance
      at September 30, 2009
                      
                      $
                      4,650




The
Company has no assets that are measured at fair value on a recurring basis.
There were no assets or liabilities measured at fair value on a non-recurring
basis during the nine months ended September 30, 2009.





New Accounting
Pronouncements





In June
2009, the FASB issued a pronouncement which establishes the FASB Accounting
Standards CodificationTM as the
source of authoritative accounting guidance under GAAP. The rules and
interpretive releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. This pronouncement
is effective for periods ending after September 15, 2009. The Company does not
expect this pronouncement to have a material effect on its consolidated
financial position and results of operations.





In
April 2009, the FASB issued pronouncements to require disclosures about
fair value of financial instruments in interim and annual reporting periods. The
pronouncements are effective for interim reporting periods ending after June 15,
2009, which for the Company was the second quarter of fiscal
2009.  The Company has concluded that the application of the
pronouncements did not have a material impact on its consolidated financial
position and results of operations as of and for the period ended September 30,
2009.





In
April 2009, the FASB issued a pronouncement which provides additional
guidance for estimating fair value when the volume and level of activity for the
asset or liability have significantly decreased. This pronouncement also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. This pronouncement is effective for periods ending after
June 15, 2009.  The Company has concluded that the application of
this pronouncement did not have a material impact on its consolidated financial
position and results of operations as of and for the period ended September 30,
2009.





In
December 2007, the FASB issued a pronouncement which provides companies with
principles and requirements on how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, liabilities assumed, and
any noncontrolling interest in the acquiree as well as the recognition and
measurement of goodwill acquired in a business combination. This pronouncement
also requires certain disclosures to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
Acquisition costs associated with the business combination will generally be
expensed as incurred. This pronouncement is effective for business combinations
occurring in fiscal years beginning after December 15, 2008. The Company is
evaluating the impact this pronouncement will have on any future business
combinations.





In July
2009, the FASB issued a pronouncement which excludes all tangible products
containing both software and non-software components that function together to
deliver the product’s essential functionality.  This pronouncement is
effective for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010 and shall be applied on a prospective
basis. Earlier application is permitted as of the beginning of an entity’s
fiscal year provided it has not previously issued financial statements for any
period within that year. The Company expects to adopt this pronouncement on
January 1, 2010 and does not expect the adoption of this pronouncement to have a
material impact on its consolidated financial position and results of
operations.


14


In
September 2009, the FASB ratified a pronouncement which requires companies to
allocate revenue in arrangements involving multiple deliverables based on the
estimated selling price of each deliverable, even though such deliverables are
not sold separately either by the company itself or other vendors. This
pronouncement eliminates the requirement that all undelivered elements must have
objective and reliable evidence of fair value before a company can recognize the
portion of the overall arrangement fee that is attributable to items that
already have been delivered. As a result, the new pronouncement may allow some
companies to recognize revenue on transactions that involve multiple
deliverables earlier than under current requirements. This pronouncement is
effective for revenue arrangements entered into or materially modified in fiscal
years beginning on or after December 15, 2009. Early adoption is permitted at
the beginning of a company’s fiscal year. The Company expects to adopt this
pronouncement on January 1, 2010 and the Company is currently evaluating the
impact of this pronouncement on its consolidated financial position and results
of operations.





Other
recent accounting pronouncements issued by the FASB (including the EITF) and the
American Institute of Certified Public Accountants did not or are not believed
by management to have a material impact on the Company’s present or future
consolidated financial statements.





5.           Acquisitions and Intangible
Assets





Acquisition
of Questys (“QSI”)





On August
4, 2008, the Company completed the purchase of 100% of the issued and
outstanding capital stock of QSI, from its sole shareholder, Vojin
Hadzi-Pavlovic and Gloria Hadzi-Pavlovic, Tenants in Common (the “Pavlovics”,
“Questys Shareholder”).  The effective date of the acquisition is
August 1, 2008.





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





Three
      Months
                            
                            
                            Nine
      MonthsEnded
                            
                            
                            EndedSeptember
      30, 2008
                            
                            
                            September
      30, 2008Net
      sales
                            
                            $
                            4,455,104
                            
                            
                            $
                            12,763,450Net
      income (loss)
                            
                            $
                            137,181
                            
                            
                            $
                            (235,818
                            )Weighted
      average common shares outstanding:basic
      and diluted
                            
                            
                            174,770,913
                            
                            
                            
                            174,770,913Loss
      per share:basic
      and diluted
                            
                            $
                            -
                            
                            
                            $
                            -





The pro
forma information has been prepared for comparative purposes only and does not
purport to be indicative of what would have occurred had the acquisition
actually been made at such date, nor is it necessarily indicative of future
operating results.





Other
Intangible Assets





On May
12, 2006, the Company entered into a Patent License Agreement (the “License
Agreement”) with Catch Curve, Inc. (“Catch Curve”).  Pursuant to the
License Agreement, Catch Curve granted the Company a worldwide, non-exclusive,
non-divisible, fully paid-up license to use certain patented technology in
connection with any facsimile products or services made or sold by the Company
or its subsidiaries.  The Company made aggregate license payments of
$600,000 over the thirty-two month period that began on May 12, 2006 and ended
December 31, 2008.  The License Agreement stipulates that $350,000 of
the total license fee was attributable to sales of products and services prior
to the date of the License Agreement.  The remainder of $250,000 is
attributable to sales of products and services subsequent to the date of the
License Agreement. Accordingly, on May 12, 2006, the Company recorded an
intangible asset in the amount of $250,000.  The intangible asset is
being amortized over 58 months, the estimated life of the patents covered by the
License Agreement.


15





Other
intangibles consist of the following as of September 30, 2009:





Estimated
      Useful
                        
                        Gross
                        
                        
                        
                        
                        
                        NetLife
                        
                        Carrying
                        
                        
                        Accumulated
                        
                        
                        Carrying(Years)
                        
                        Amount
                        
                        
                        Amortization
                        
                        
                        AmountCorporate:License
      agreement
                        Five
                        
                        $
                        250,000
                        
                        
                        $
                        (174,565
                        )
                        
                        $
                        75,435TBS:Customer
      list
                        Ten
                        
                        $
                        500,000
                        
                        
                        $
                        (281,250
                        )
                        
                        $
                        218,750Trade
      name
                        Five
                        
                        
                        50,000
                        
                        
                        
                        (50,000
                        )
                        
                        
                        -$
                        550,000
                        
                        
                        $
                        (331,250
                        )
                        
                        $
                        218,750QSI:Customer
      relationships
                        Ten
                        
                        $
                        730,000
                        
                        
                        $
                        (85,167
                        )
                        
                        $
                        644,833Technology
                        Five
                        
                        
                        390,000
                        
                        
                        
                        (91,000
                        )
                        
                        
                        299,000Trade
      name
                        Five
                        
                        
                        210,000
                        
                        
                        
                        (49,000
                        )
                        
                        
                        161,000Covenant
      not to compete
                        Two
                        
                        
                        70,000
                        
                        
                        
                        (40,833
                        )
                        
                        
                        29,167$
                        1,400,000
                        
                        
                        $
                        (266,000
                        )
                        
                        $
                        1,134,000GSI:Customer
      relationships
                        Ten
                        
                        $
                        2,200,000
                        
                        
                        $
                        (751,667
                        )
                        
                        $
                        1,448,333Technology
                        Five
                        
                        
                        490,000
                        
                        
                        
                        (334,833
                        )
                        
                        
                        155,167Trade
      names and marks
                        Ten
                        
                        
                        420,000
                        
                        
                        
                        (143,500
                        )
                        
                        
                        276,500$
                        3,110,000
                        
                        
                        $
                        (1,230,000
                        )
                        
                        $
                        1,880,000$
                        5,310,000
                        
                        
                        $
                        (2,001,815
                        )
                        
                        $
                        3,308,185





Amortization
of other intangible assets was $172,431 and $117,931, respectively, during the
three months ended September 30, 2009 and 2008, and $518,543 and $353,791,
respectively, during the nine months ended September 30, 2009 and
2008.  During the nine months ended September 30, 2009, the Company
did not acquire or dispose of any intangible assets.


16





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





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





6.           Debt





Bank Lines of
Credit





On
February 6, 2008, the Company and The Private Bank of The Peninsula (“Bank”)
entered into an agreement for an asset based line of credit (the
“Line”).   On March 5, 2009, the Company received a fully
executed agreement between it and the Bank to amend the agreement for the Line
(the "Amendment").  The effective date of the Amendment is February
24, 2009.  Pursuant to the Amendment, the Bank renewed the Line and
modified the terms to include an interest rate that is floating and is
calculated at Wall Street Journal prime plus five percent (5%) on the cash
borrowed provided that the minimum rate will be eight and one half percent
(8.5%) and minimum interest will be $7,000 per three month
period.  Interest on outstanding borrowings is payable
monthly.   In addition, the Company was required to pay an
amendment fee of $10,000 and, upon each advance, a fee equal to one quarter of
one percent (0.25%) of the advance, and is subject to covenants as to minimum
quarterly income and cash flow.  The Bank’s maximum commitment amount
for the Line, as amended, is $1.0 million.  Advances are generally
limited to 80% of eligible domestic accounts receivable.


17


During
2008, the Company paid a facility fee of $15,000 to the Bank in connection with
the Line and paid a finder’s fee in the amount of $50,000 to Dragonfly Capital
Partners LLC (“Dragonfly”).  In addition, the Company issued the Bank
and Dragonfly warrants to purchase shares of its common stock (see Note
7).  The Company recorded the finders’ fees and warrants as debt
issuance costs in the accompanying consolidated balance sheets at September 30,
2009 and amortized $0 and $ 5,417, respectively, of the cash fees to interest
expense during the three and nine months then ended.  The Company
amortized $16,252 and $43,337, respectively, of the cash fees to interest
expense during the three and nine months ended September 30,
2008.  Effective January 1, 2009, the Company issued an additional
235,000 warrants to the Bank (see Note 7) and the Company reclassified the
Bank’s warrants from additional paid-in capital to a derivative liability in
connection with the adoption of an accounting pronouncement and the reset
features of the Bank’s warrant agreement.  The warrants were valued
using the Black-Scholes option pricing model at $4,310.





Outstanding
advances under the Line are secured by a first lien position on all of the
Company’s accounts receivable, contract rights, chattel paper, documents, and
payment and by a second lien on its inventory, intellectual property, and
equipment.  As of September 30, 2009, there were outstanding
borrowings of $431,292 on the Line and the Company was in compliance with all
loan covenants, except a quarterly income covenant.  As of November
16, 2009, the Company is negotiating a covenant waiver with the Bank, and it is
not known whether the Company will be subject to any penalties or limitations as
a result of the failure to obtain a waiver.  Availability on the Line
as of September 30, 2009 was approximately $174,000.





Effective
September 30, 2006, VillageEDOCS obtained a $500,000 revolving line of credit
(“RLOC”) with a financial institution.  The RLOC was guaranteed by a
stockholder of the Company.  Interest on outstanding borrowings was
payable monthly at an annual rate of interest equal to LIBOR plus
2%.  On May 8, 2009, the Company retired the RLOC using the proceeds
of the Williams May 2009 Note (see below).  The terms of the note
payable financing were deemed more favorable to the Company than the renewal
terms offered by the financial institution.





Effective
November 28, 2005, TBS renewed a $100,000 revolving line of credit (“TBS RLOC”)
with a financial institution.  As of September 30, 2009, the TBS RLOC
had become inactive due to lack of use and was not renewed.  Renewal
of the TBS RLOC was not offered by the financial institution because the assets
of TBS are encumbered in connection with the Line (see above).





QSI had
an unsecured line of credit agreement with a financial institution for
borrowings up to the maximum of $100,000 with no maturity date (“QSI
RLOC”).  Borrowings bore interest at the prime rate, plus
2.775%.  On August 3, 2009, as stipulated by the QSI acquisition
agreements, the Company repaid the outstanding borrowings of $100,000 in full
and closed the line of credit using the proceeds of the Williams July 2009 Note
(see below).





Vojin Hadzi-Pavlovic and
Gloria Hadzi-Pavlovic





Effective
August 1, 2008 and in connection with the acquisition of Questys (see Note 5),
the Company issued a secured promissory note to the Pavlovics (the “Pavlovic
Note”) in the amount of $900,000.  The Pavlovics are a related party
as a result of the common stock issued to them by the Company in connection with
the acquisition of Questys.  The Pavlovic Note is non-interest bearing
and may be prepaid in whole or in part at any time without penalty and is due on
August 1, 2011.  Principal payments are due in three equal annual
installments of $300,000 each on August 1, 2009, August 1, 2010, and August 1,
2011.  On August 1, 2009, the Company paid the first installment of
$300,000 using the proceeds of the Williams July 2009 Note (see
below).  The Pavlovic Note is secured by certain assets of Questys as
defined in a Security Agreement dated as of August 1, 2008.  Payment
obligations under the Pavlovic Note are subordinate in certain respects to the
rights of the Private Bank of the Peninsula to the extent set forth in a
Subordination Agreement dated as of August 1, 2008.





In
connection with the issuance of the Pavlovic Note, the Company recorded a debt
discount of $126,871 as a result of imputed interest.  The Company is
amortizing the discount using the effective interest method through August 1,
2011.  During the three and nine months ended September 30, 2009,
$7,048 and $31,718, respectively, of interest expense was recognized in
connection with the amortization of debt discount related to this
note.





Prior to
August 1, 2008 (effective date of acquisition of Questys), the Pavlovics made
aggregate advances to Questys in the amount of $115,000, which were assumed in
the acquisition (the “Pavlovic Shareholder Debt”).  The Pavlovic
Shareholder Debt is non-interest bearing and the Company and the Pavlovics have
agreed to the repayment of the outstanding balance as follows:  (i)
$35,000 on or before August 4, 2009, (ii) $40,000 on or before August 4, 2010,
and (iii) $40,000 on or before the August 4, 2011.  On August 3, 2009,
the Company paid the first installment of $35,000 using the proceeds of the
Williams July 2009 Note (see below).


18





In
connection with the acquisition of the Pavlovic Shareholder Debt, the Company
recorded a debt discount of $16,546 as a result of imputed
interest.  The Company is amortizing the discount using the effective
interest method through August 1, 2011.  During the three and nine
months ended September 30, 2009, $919 and $4,137, respectively, of interest
expense was recognized in connection with the amortization of debt discount
related to this debt.





The Silver Lake Group,
LLC





The
Company funded the requirement for the initial $300,000 payment for the purchase
of QSI from the proceeds of a $300,000 related party secured promissory note
offering subscribed to by The Silver Lake Group, LLC (“SLG”) on August 4, 2008
(the “SLG Note”).  SLG is owned by Ricardo A. Salas, a Director of the
Company.  The SLG Note was originally due on October 31, 2008 and bore
interest at a rate of nine percent (9%) per annum through October 31,
2008.





On
October 30, 2008, VillageEDOCS, Inc. and SLG entered into an Amendment to
Secured Promissory Note (“Amendment”) to modify the maturity date, interest
rate, and repayment terms of the SLG Note.  As of October 31, 2008,
the remaining principal balance of the SLG Note, as amended, was $250,000 and no
interest was outstanding.  Pursuant to the Amendment, the SLG Note
matured on March 31, 2009 and bore interest from November 1, 2008 at a rate of
twelve percent (12%) per annum.  As of September 30, 2009, the SLG
Note was paid in full.  The SLG Note was secured by the accounts
receivable of GoSolutions, Inc., our wholly-owned subsidiary, as defined in a
Security Agreement dated as of August 1, 2008.  Payment obligations
under the SLG Note were subordinate in certain respects to the rights of the
Bank to the extent set forth in a Subordination Agreement entered into effective
August 1, 2008.





C. Alan and Joan P.
Williams





On May 6,
2009 the Company arranged for an unsecured promissory note financing with C.
Alan Williams and Joan P. Williams in the amount of $430,000 (the “Williams May
2009 Note”).  The Williams May 2009 Note bears a per annum interest
rate equal to the most favorable rate paid by the Williams plus two percent
(2%).  The Company’s interest rate in effect through September 30,
2009 with respect to the Williams May 2009 Note was 4.87%.  The
interest rate may be adjusted once per month.  The term of the
Williams May 2009 Note is thirty-six (36) months, with monthly installments paid
by the Company consisting of principal and interest on the first of each month,
beginning on August 1, 2009.  As of September 30, 2009, the Company
recorded accrued interest of $4,944 in the accompanying unaudited condensed
consolidated balance sheet which is payable upon maturity. The Williams May 2009
Note matures on August 1, 2012.  Should the Company fail to make
payments for a period of ninety (90) days, a default shall
occur.  Upon the default, the Company shall pay a penalty interest
rate in the amount of the William’s rate plus six percent (6%) on the unpaid
amounts until the default is cured.  As of September 30, 2009, the Company
had not defaulted on the note.





Payment
obligations under the Williams May 2009 Note are subordinate in certain respects
to the rights of the Private Bank of the Peninsula.





The
Company used the proceeds from the Williams May 2009 Note, to retire the RLOC on
May 8, 2009 (see above).  The terms of the Williams May 2009 Note were
deemed more favorable to the Company than the renewal terms offered by the
financial institution.





On July
30, 2009 the Company arranged for an unsecured promissory note financing with C.
Alan Williams and Joan P. Williams in the amount of $435,000 (the “Williams July
2009 Note”).  The Williams July 2009 Note bears interest at ten
percent (10%) per annum.  The term of the Williams July 2009 Note is
twelve (12) months, with monthly installments paid by the Company at the end of
each month consisting of principal and interest, beginning on July 31,
2009.  The Williams July 2009 Note matures on July 1,
2010.  Should the Company fail to make payments for a period of ninety
(90) days, a default shall occur.  Upon the default, the Company shall
pay a penalty interest rate in the amount of fifteen percent (15%) per annum on
the unpaid amounts until the default is cured.  As of September 30, 2009,
the Company had not defaulted on the note.




Payment
obligations under the Williams July 2009 Note are subordinate in certain
respects to the rights of the Private Bank of the Peninsula.


19




The
Company used the proceeds from the Williams July 2009 Note, to retire a line of
credit with a financial institution on August 4, 2009 and to make installment
payments to Vojin and Gloria Hadzi-Pavlovic pursuant to the agreement for the
Company’s purchase of QSI dated as of August 1, 2008 (see Note
5).





On
February 17, 2004, the Company borrowed $1,700,000 from C. Alan and Joan P.
Williams and issued a convertible promissory note, bearing interest at 10
percent (10%) per annum (the “Williams Convertible Note”).  During
2005, all but $65,000 of the principal amount due pursuant to this note was
converted into shares of the Company's common stock.   In October
2009, the Williams agreed to extend the due date of the note to October 31, 2011
(see Note 11).  The note and accrued interest are due at the earlier
of one of three events: 1) October 31, 2011; 2) acquisition of a controlling
interest in the Company by a third party; or 3) the Company achieves equity
financing of a minimum of $3,000,000.  Effective April 14, 2005,
pursuant to an amendment to the note, the conversion price was fixed at $0.14
per share.  As an incentive for Mr. and Mrs. Williams to provide the
loan, the Company issued them a warrant to purchase 5,000,000 shares of the
Company's restricted common stock at $0.10 per share exercisable until February
17, 2009.  Effective February 17, 2009, the Company and the Williams
agreed to extend the expiration date of the warrant to February 16, 2012 in
exchange for the Williams’ agreement to extend their guaranty of the RLOC
through December 31, 2010.  The extension of the warrants did not have
a material effect on the unaudited condensed consolidated financial
statements.




During
the three and nine months ended September 30, 2009, $18,477 and $24,926,
respectively of interest expense was recognized in connection with these
notes.





At
September 30, 2009, the amount owed by the Company to the Williams pursuant to
the unpaid balance of the Williams May 2009 Note was $396,513 in principal and
$4,944 in unpaid interest.  The interest rate in effect as of
September 30, 2009 was 4.87% per annum.





At
September 30, 2009, the amount owed by the Company to the Williams pursuant to
the unpaid balance of the Williams July 2009 Note was $330,277 in principal and
$0 in unpaid interest.  The interest rate in effect as of September
30, 2009 was 10% per annum.





At
September 30, 2009, the amount owed by the Company to the Williams pursuant to
the unpaid balance of the Williams Convertible Note was $65,000 in principal and
$118,245 in unpaid interest.  The interest rate in effect as of
September 30, 2009 was 10% per annum.





At
December 31, 2008, the amount owed by the Company to the Williams pursuant to
the Williams Convertible Note was $65,000 in principal and $113,370 in unpaid
interest.





Interest
Expense





Interest
expense recognized on all lines of credit and notes payable was $37,185 and
$123,051, respectively, during the three and nine months ended September 30,
2009, and $62,851 and $175,674, respectively during the three and nine months
ended September 30, 2008.





Interest
expense noted above included non-cash charges (related to amortization of debt
discount and debt issuance costs) of $53,738 and $143,111, respectively, during
the 2009 and 2008 nine-month periods.





7.           Stockholders’
Equity





a.
            Common and Preferred
      Stock





On April
8, 2009 and pursuant to the terms of their respective employment agreements, the
Company issued 6,879,200 shares of its restricted common stock to K. Mason
Conner, who is the Company’s President and Chief Executive Officer and a
Director, and 5,896,500 shares of its restricted common stock to H. Jay Hill,
who is the Company’s Executive Vice President of Corporate Development and a
Director.  These shares were valued at $0.01 per share (the estimated
fair value on the measurement date) for an aggregate total of $127,757, $98,106
of which was included in accrued liabilities as of December 31,
2008.


20





b.
            Stock
      Options





During
the nine months ended September 30, 2009, the Company granted to its employees
options to purchase 2,325,000 shares of its common stock under the 2002 Plan at
a weighted average exercise price of $0.02 per share.  All options
were issued at or above fair value on the dates of grant and vest on various
dates from the dates of grant through August 2016.  During the nine
months ended September 30, 2009, options to purchase 3,954,963 shares were
forfeited due to their expiration or cancellation.





c.
            Warrants





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





In
December 2008, and in connection with a retainer agreement dated September 15,
2007 that was cancelled by the Company effective February 28, 2009, the Company
issued a warrant to purchase 1,304,074 shares of its common stock at $0.023 per
share (fair value on the measurement date) to a consultant in consideration for
public relations services.  The warrant vested immediately and is
exercisable over a five year period from date of grant.  The warrant
was valued using the Black-Scholes option pricing model, was valued at $26,001,
was recorded as prepaid consulting expense, and is being amortized to general
and administrative expense in the Company’s statements of operations over the
three month service period that began on December 1, 2008.  During the
three and nine months ended September 30, 2009, the Company recorded $0 and
$17,334, respectively, of consulting expense in connection with this
warrant.





In
consideration for the Line, (see Note 6) the Company issued the Bank an
immediately exercisable warrant to purchase 75,000 shares of its restricted
common stock at an exercise price of $0.062 per share through February 6,
2018.  The warrants were valued using the Black-Scholes option pricing
model at $4,500 and were recorded as debt issuance cost in the accompanying
unaudited condensed consolidated balance sheet at September 30,
2009.  The Company is amortizing such cost over the one-year life of
the related debt instrument.  During the three and nine months ended
September 30, 2009, the Company recorded $0 and $375, respectively, of interest
expense in the accompanying unaudited condensed consolidated statements of
operations.  Effective January 1, 2009, the Company reclassified the
fair value of these warrants, which have exercise price reset features, from
equity to liability status as if these warrants were treated as a derivative
liability since their date of issue in February 2008 and issued an additional
390,000 warrants to the Bank pursuant to the terms of the warrant agreement
valued at $5,860 using the Black-Scholes option pricing model (see the heading
“Derivative Liability” under Note 4), which was expensed during the nine months
ended September 30, 2009.





As a
finder’s fee for the Line (see Note 6), the Company issued Dragonfly an
immediately exercisable warrant to purchase 2,419,355 shares of its restricted
common stock at an exercise price of $0.062 per share through February 6,
2013.  The warrants were valued using the Black-Scholes option pricing
model at $145,161 and were recorded as debt issuance cost in the accompanying
unaudited condensed consolidated balance sheet at September 30,
2009.  The Company amortized such cost over the one-year life of the
related debt instrument.  During the three and nine months ended
September 30, 2009, the Company recorded $0 and $12,091, respectively, of
interest expense, and during the three and nine months ended September 30, 2008,
the Company recorded $36,290 and $96,774, respectively, of interest expense in
the accompanying unaudited condensed consolidated statements of
operations.





On
February 8, 2008, the Company issued Agile Equity LLC an immediately exercisable
warrant to purchase 653,214 shares of its common stock at $0.077 per share
through February 8, 2009 in consideration for consulting services
rendered.  The warrant was valued at $50,484 based on the
Black-Scholes option pricing model. During the three and nine months ended
September 30, 2008, the Company expensed consulting fees of $0 and $484,
respectively, in accordance with the timing of the services
performed.





On
October 1, 2007, and in connection with a retainer agreement dated September 15,
2007, the Company issued a warrant to purchase 2,000,000 shares of its common
stock at $0.05 per share (fair value on the measurement date) to a consultant in
consideration for public relations services.  The warrants are
exercisable over a five year period from date of grant.  The warrants
were valued using the Black-Scholes option pricing model, were valued at
$100,000, and were recorded as general and administrative expense in the
Company’s statements of operations over the twelve month vesting period that
began on September 15, 2007.  During the three and nine months ended
September 30, 2008, the Company recorded $25,001, and $75,001, respectively, of
such expense in the accompanying unaudited condensed consolidated statements of
operations.


21





8.           Commitments and
Contingencies





Leases





The
Company leases certain property and equipment under operating lease agreements
(including three related party leases – see Note 9) which expire on various
dates through 2015 and provide for monthly lease payments ranging from $108 to
$15,164.





The
Company also leases equipment under a related party capital lease agreement
which expires in January 2010 and provides for a monthly lease payment of
$1,746.





Rent
expense for the three and nine months ended September 30, 2009 was $121,186
(including $59,842 of related party rent) and $371,692 (including $174,695 of
related party rent), respectively.





Rent
expense for the three and nine months ended September 30, 2008 was $133,976
(including $109,080 of related party rent) and $368,631 (including $227,361 of
related party rent), respectively.





Legal Proceedings and
Claim





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





In
connection with the acquisition of GSI the Company is entitled to certain rights
of indemnification from GoSolutions Equity, LLC, which is a former shareholder
of GSI that became a shareholder of the Company as a result of our acquisition
of GSI.  The Company made a claim of indemnification from this entity
in connection with the bankruptcy of one of GSI’s significant customers – Vartec
Telecom, Inc. – and the facts and circumstances relating to the procurement and
maintenance of the Primerica Life Insurance account and related Citigroup
affiliates.  GoSolutions Equity, LLC has indicated that it does not
believe that we have a valid basis for making such indemnification
claims.





The
Company has engaged in limited discussions with GoSolutions Equity, LLC as it
relates to the indemnification claims notice and their response to such claims
notice.  However, the Company is unable to advise whether it will be
successful in the indemnification claims against GoSolutions Equity,
LLC.  Pursuant to the agreement with GSI, if the Company is
successful, GoSolutions Equity, LLC would only be required to return up to
approximately 4.4 million of our shares issued to that entity to satisfy such
indemnification claims.  GoSolutions Equity, LLC is not required to
contribute cash to satisfy any indemnification claims.





In the
opinion of management, the amount of ultimate liability, if any, with respect to
these actions will not materially affect the consolidated financial position or
results of operations of the Company.





Consulting and Employee
Agreements





The
Company has entered into a variety of consulting and employee agreements for
services to be provided to the Company in the ordinary course of
business.  These agreements call for minimum salary levels and/or
option grants and/or common share issuances and various payments upon
performance of services and/or termination of the agreements (except for
cause).





22


Indemnities and
Guarantees





During
the normal course of business, the Company has made certain indemnities and
guarantees under which it may be required to make payments in relation to
certain transactions.  The Company indemnifies its directors,
officers, employees and agents to the maximum extent permitted under the laws of
the States of California, Florida, and Georgia.  These indemnities
include certain agreements with the Company’s officers under which the Company
may be required to indemnify such person for liabilities arising out of their
employment relationship.  In connection with its facility leases, the
Company has indemnified its lessors for certain claims arising from the use of
the facilities.  In connection with the Company's acquisition of TBS,
the parties have agreed to indemnify each other from claims relating to the
acquisition agreement to a maximum of $1,500,000 except in the event of fraud,
willful misconduct, or breaches of certain representations and warranties
contained in the agreement.  In connection with the Company's
acquisition of both QSI and GSI, the parties have agreed to indemnify each other
from claims relating to the acquisition agreement.  The duration of
these indemnities and guarantees varies and, in certain cases, is
indefinite.  The majority of these indemnities and guarantees do not
provide for any limitation of the maximum potential future payments the Company
could be obligated to make.  Historically, the Company has not been
obligated to make significant payments for these obligations and no liabilities
have been recorded for these indemnities and guarantees in the accompanying
unaudited condensed consolidated balance sheets, respectively.





9.           Related Party
Transactions





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





TBS has a
related party operating lease with Perimeter Center Partners for the rental of
the land and building occupied by TBS.  The lease, as amended,
commenced on February 1, 2004 and has a term of six years, with monthly payments
of $6,200.  The Company has executed a Guaranty with respect to the
lease.  Perimeter Center Partners is owned by Stephen A. Garner and
James L. Campbell, who are significant employees of the Company and the former
owners of TBS.





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


GSI
leases the St. Petersburg office space pursuant to a noncancelable operating
lease agreement expiring on April 30, 2011 at a cost of $12,653, $13,232,
$13,841, $14,485, and $15,164 per month for each of the twelve month periods
ended April 2007, 2008, 2009, 2010, and 2011, respectively.  The
building in which the office space is located is owned by an entity in which a
member of GoSolutions Equity, LLC (a related party) owns an
interest.





10.           Segment
Reporting





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





(a)  Electronic
document delivery services,


(b)  Government
accounting solutions,


(c)  Electronic
content management solutions,


(d)  Integrated
communications, and


(e)  Corporate.





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





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


23





Three
      Months
                  
                  
                  Three
      Months
                  
                  
                  Nine
      Months
                  
                  
                  Nine
      Monthsended
      / As of
                  
                  
                  ended
                  
                  
                  ended
      / As of
                  
                  
                  endedSeptember
      30
                  
                  
                  September
      30
                  
                  
                  September
      30
                  
                  
                  September
      302009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      revenue from external customers:Electronic
      document delivery
                  
                  $
                  641,817
                  
                  
                  $
                  742,117
                  
                  
                  $
                  1,979,495
                  
                  
                  $
                  2,124,344Government
      accounting solutions
                  
                  
                  1,345,266
                  
                  
                  
                  1,530,089
                  
                  
                  
                  3,451,276
                  
                  
                  
                  3,873,142Electronic
      content management
                  
                  
                  409,150
                  
                  
                  
                  447,408
                  
                  
                  
                  1,669,467
                  
                  
                  
                  447,408Integrated
      communications
                  
                  
                  1,263,118
                  
                  
                  
                  1,553,500
                  
                  
                  
                  4,492,955
                  
                  
                  
                  4,521,013Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      net revenue from external customers:
                  
                  $
                  3,659,351
                  
                  
                  $
                  4,273,114
                  
                  
                  $
                  11,593,193
                  
                  
                  $
                  10,965,907Income
      (loss) from operations:Electronic
      document delivery
                  
                  $
                  147,754
                  
                  
                  $
                  148,514
                  
                  
                  $
                  398,181
                  
                  
                  $
                  325,150Government
      accounting solutions
                  
                  
                  167,046
                  
                  
                  
                  259,028
                  
                  
                  
                  228,634
                  
                  
                  
                  353,122Electronic
      content management
                  
                  
                  (234,534
                  )
                  
                  
                  13,244
                  
                  
                  
                  (476,399
                  )
                  
                  
                  13,244Integrated
      communications
                  
                  
                  146,325
                  
                  
                  
                  407,724
                  
                  
                  
                  704,581
                  
                  
                  
                  854,405Corporate
                  
                  
                  (438,042
                  )
                  
                  
                  (553,962
                  )
                  
                  
                  (1,424,285
                  )
                  
                  
                  (1,830,455
                  )Total
      income (loss) from operations:
                  
                  $
                  (211,451
                  )
                  
                  $
                  274,548
                  
                  
                  $
                  (569,288
                  )
                  
                  $
                  (284,534
                  )Depreciation
      and amortization:Electronic
      document delivery
                  
                  $
                  18,479
                  
                  
                  $
                  22,566
                  
                  
                  $
                  59,279
                  
                  
                  $
                  62,999Government
      accounting solutions
                  
                  
                  19,366
                  
                  
                  
                  24,824
                  
                  
                  
                  63,564
                  
                  
                  
                  75,524Electronic
      content management
                  
                  
                  65,760
                  
                  
                  
                  6,739
                  
                  
                  
                  199,829
                  
                  
                  
                  6,739Integrated
      communications
                  
                  
                  105,012
                  
                  
                  
                  121,319
                  
                  
                  
                  333,918
                  
                  
                  
                  369,522Corporate
                  
                  
                  12,930
                  
                  
                  
                  12,930
                  
                  
                  
                  38,792
                  
                  
                  
                  39,369Total
      depreciation and amortization:
                  
                  $
                  221,547
                  
                  
                  $
                  188,378
                  
                  
                  $
                  695,382
                  
                  
                  $
                  554,153Interest
      expense:Electronic
      document delivery
                  
                  $
                  4,257
                  
                  
                  $
                  2,678
                  
                  
                  $
                  11,499
                  
                  
                  $
                  3,634Government
      accounting solutions
                  
                  
                  154
                  
                  
                  
                  2,791
                  
                  
                  
                  11,406
                  
                  
                  
                  6,152Electronic
      content management
                  
                  
                  7,248
                  
                  
                  
                  (5,470
                  )
                  
                  
                  19,051
                  
                  
                  
                  (5,470
                  )Integrated
      communications
                  
                  
                  -
                  
                  
                  
                  (77
                  )
                  
                  
                  -
                  
                  
                  
                  (350
                  )Corporate
                  
                  
                  25,526
                  
                  
                  
                  62,929
                  
                  
                  
                  81,095
                  
                  
                  
                  171,708Total
      interest expense:
                  
                  $
                  37,185
                  
                  
                  $
                  62,851
                  
                  
                  $
                  123,051
                  
                  
                  $
                  175,674





continued...


24





Three
      Months
                
                
                Three
      Months
                
                
                Nine
      Months
                
                
                Nine
      Monthsended
      / As of
                
                
                ended
                
                
                ended
      / As of
                
                
                endedSeptember
      30
                
                
                September
      30
                
                
                September
      30
                
                
                September
      302009
                
                
                2008
                
                
                2009
                
                
                2008Net
      income (loss):Electronic
      document delivery
                
                $
                143,346
                
                
                $
                145,836
                
                
                $
                381,778
                
                
                $
                308,448Government
      accounting solutions
                
                
                166,892
                
                
                
                253,943
                
                
                
                214,585
                
                
                
                344,676Electronic
      content management
                
                
                (241,782
                )
                
                
                60,494
                
                
                
                (488,825
                )
                
                
                60,494Integrated
      communications
                
                
                148,706
                
                
                
                405,933
                
                
                
                706,885
                
                
                
                879,913Corporate
                
                
                (498,319
                )
                
                
                (547,406
                )
                
                
                (1,548,354
                )
                
                
                (1,926,231
                )Total
      net income (loss):
                
                $
                (281,157
                )
                
                $
                318,800
                
                
                $
                (733,931
                )
                
                $
                (332,700
                )Identifiable
      assets:Electronic
      document delivery
                
                $
                578,643
                
                
                
                
                
                
                $
                578,643Government
      accounting solutions
                
                
                3,716,412
                
                
                
                
                
                
                
                3,716,412Electronic
      content management
                
                
                2,353,673
                
                
                
                
                
                
                
                2,353,673Integrated
      communications
                
                
                5,711,857
                
                
                
                
                
                
                
                5,711,857Corporate
                
                
                141,198
                
                
                
                
                
                
                
                141,198Total
      identifiable assets:
                
                $
                12,501,783
                
                
                
                
                
                
                $
                12,501,783Capital
      expenditures:Electronic
      document delivery
                
                $
                6,376
                
                
                $
                35,095
                
                
                $
                28,578
                
                
                $
                60,456Government
      accounting solutions
                
                
                6,588
                
                
                
                3,864
                
                
                
                8,626
                
                
                
                8,664Electronic
      content management
                
                
                3,377
                
                
                
                3,131
                
                
                
                10,346
                
                
                
                3,131Integrated
      communications
                
                
                9,227
                
                
                
                (4,165
                )
                
                
                15,322
                
                
                
                39,510Corporate
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      capital expenditures:
                
                $
                25,568
                
                
                $
                37,925
                
                
                $
                62,872
                
                
                $
                111,761


25


11.  Subsequent
Event





Effective
October 22, 2009, C. Alan Williams and Joan P. Williams agreed to extend the due
date of a $65,000 convertible promissory note to October 31,
2011.  Accordingly, we have classified the note along with interest
accrued thereon as a non-current liability in the balance sheet of the
accompanying unaudited condensed consolidated financial
statements.


26





ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





IMPORTANT
NOTIFICATIONS





This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All
statements that do not directly and exclusively relate to historical facts
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995.  You are cautioned not to
put undue reliance on any forward-looking statements.  For these
statements, we claim the protection of the safe harbor for forward-looking
statements contained in Section 21E of the Exchange Act.  For
important additional and specific information regarding these statements, we
strongly urge you to refer to the caption below entitled "CAUTIONARY INFORMATION
ABOUT FORWARD-LOOKING STATEMENTS" and the caption entitled "CERTAIN FACTORS THAT
MAY AFFECT FUTURE RESULTS" which can be found in Item 6. Management's Discussion
and Analysis of Financial Condition and Results of Operation of the Annual
Report on Form 10-K filed with the U.S. Securities and Exchange Commission
(“SEC”) on March 31, 2009.


The
Company's Internet website address is www.villageedocs.com.  The
Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments thereto, are available free of charge on
the Company's website as soon as reasonably practical after such reports are
electronically filed with, or furnished to, the U.S. Securities and Exchange
Commission.





INTRODUCTION





The
following Management's Discussion and Analysis or Plan of Operations
("MD&A") is intended to help the reader understand
VillageEDOCS.  MD&A is presented in the following six
sections:





·
            Business
      Overview


·
            Critical
      Accounting Policies and Estimates


·
            Results
      of Operations


·
            Liquidity
      and Capital Resources


·
            Cautionary
      Information About Forward-Looking Statements,
  and


·
            Recent
      Accounting Standards and
Pronouncements





MD&A
is provided as a supplement to, and should be read in conjunction with, the
unaudited condensed consolidated balance sheet as of September 30, 2009, and the
unaudited condensed consolidated statements of operations for the three and nine
months ended September 30, 2009 and 2008, the unaudited condensed consolidated
statements of cash flows for the nine months ended September 30, 2009 and 2008,
and the related notes thereto as well as the audited consolidated financial
statements of the Company for the year ended December 31, 2008 included in the
Company’s Annual Report on Form 10-K filed with the SEC on March 31,
2009.





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 discussion contains forward-looking statements
based upon current expectations that involve risks and uncertainties, such as
our plans, objectives, expectations and intentions. The Company cautions readers
that important facts and factors described in MD&A and elsewhere in this
document sometimes have affected, and in the future could affect our actual
results, and could cause our actual results for the remainder of 2009 and beyond
to differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.





Our
Internet web site address is www.villageedocs.com.  Our annual reports
on Form 10-K, quarterly reports on Form 10-Q, and current reports of Form 8-K,
and all amendments thereto, are available free of charge on our website as soon
as reasonably practical after such reports are electronically filed with, or
furnished to, the U.S. Securities and Exchange Commission.  The
information on our web site is not incorporated by reference in this quarterly
report on Form 10-Q.


27





As
reported in the Report of Independent Registered Public Accounting Firm on our
December 31, 2008 consolidated financial statements, we have suffered recurring
losses from operations and have a working capital deficit that raises
substantial doubt about our ability to continue as a going concern.





Our
business and results of operations are affected by a wide variety of factors, as
we discussed under the caption “Certain Factors That May Affect
Future Results” in Item 6. Management's Discussion and Analysis or Plan
of Operations of our Annual Report on Form 10-K filed with the SEC on March 31,
2009 and elsewhere in this report, which could materially and adversely affect
us and our actual results.  As a result of these factors, we may
experience material fluctuations in future operating results on a quarterly or
annual basis, which could materially and adversely affect our business,
financial condition, operating results and stock price.





Effective
August 1, 2008, we purchased Decision Management Company, Inc. d/b/a Questys
Solutions (“Questys,” “QSI”).  This acquisition has caused our results
of operations for the first nine months of 2009 to vary significantly from those
reported for the first nine months of 2008.  See Note 5 to our
unaudited condensed consolidated financial statements contained elsewhere in
this report for additional information regarding the acquisition.





Any
forward-looking statements herein speak only as of the date hereof. Except as
required by applicable law, we undertake no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.  Please refer to the discussion
below under the caption entitled Liquidity and Capital
Resources.





BUSINESS
OVERVIEW




General




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




We
conduct our business through four wholly-owned subsidiaries.  QSI, our
most recent acquisition, provides electronic content management and workflow
software and services.  GSI provides enhanced voice and data
communications services.  MVI operates our Internet based document
delivery services.  TBS operates our government accounting products
and services business.  We generate revenue, operating income, and
cash flows from:




·
            subscription
      agreements for enhanced voice, data, and conferencing
      services;


·
            usage
      charges for delivery, management, and other services involving electronic
      documents;


·
            usage
      charges for our governmental accounting and online payment hosted
      application services;


·
            recurring
      fixed monthly service fees for access to voice, data, or application
      services;


·
            per
      item and flat fee charges for volume printing services to governmental
      entities;


·
            fees
      for professional service;


·
            wholesale
      enhanced voicemail services;


·
            the
      sale of licenses for proprietary software and third party
      software;


·
            fees
      for maintenance and support
agreements;


·
            installation
      services;


·
            sales
      of third party computer hardware;
and


·
            fees
      for training.


28




Our
Objective




A core
component of our mission is to provide solutions that facilitate the movement of
business information between business enterprises using a dynamic and diverse
set of delivery methods and content formats.  Our products and
services have been designed to help enterprises meet various communications
challenges, 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;


§
            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.




Our
target markets include Financial Services, Healthcare, Manufacturing, and Local
Government, and we serve approximately 1,500 active clients with approximately
20,000 users.




While we
do have some sources of non-recurring revenue, such as hardware sales and third
party software, we focus on developing and maintaining sources of monthly
recurring revenue, such as providing subscribers with solutions for their
critical day to day business processes for the movement, processing, and storage
of business information.




Key
Items in First Nine Months of 2009





§
            Consolidated
      net revenue for the nine months ended September 30, 2009 increased by 6%
      over the 2008 period;





§
            Gross
      margin improved to 61% compared to 59% in the 2008 period due to sales mix
      differences;





§
            Operating
      expenses increased by 12% compared to the prior year period and
      represented 66% of sales compared to 62% of sales in the 2008
      period;





§
            The
      most significant factor in the increase is the addition of the operating
      expenses of QSI for the first nine months of 2009, compared to two months
      during the 2008 period.  In addition, GSI’s operating expenses
      increased 5%;





§
            Operating
      expenses decreased at Corporate (-22%), MVI (-14%), and TBS
      (-1%);





§
            Net
      income increased 24% at MVI and net loss decreased 20% at Corporate;
      however, these improvements were offset by a net loss of $488,825 at QSI
      and decreases of 38% and 20% at TBS and GSI,
  respectively;





§
            Net
      loss for the nine months ended September 30, 2009 was $733,931, a 121%
      change from the net loss of $332,700  reported for the 2008
      period; and





§
            We
      retired approximately $184,000 in accrued expenses that existed as of
      December 31, 2008.





§
            Our
      net borrowings pursuant to lines of credit and notes payable decreased by
      approximately $219,000 in the nine months ended September 30,
      2009.


29




Areas
of Focus




Growth
Strategy





Our
current and future growth strategy is focused on supporting organic revenue
growth and acquiring intellectual and technology assets that improve our ability
to take a client's unstructured content and documents and deliver it to the
other party through the method preferred by each party, presenting the content
in a manner that surpasses our client’s goals.  In essence, we strive
to bring a Business Process Management discipline to their
information.  We believe that if we are successful in executing this
strategy, our clients will enjoy improved compliance, collaboration, cost
containment, and superior continuity of business processes.





Our
ultimate vision is to become a business process management/workflow service that
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).





We intend
to continue our focus on obtaining growth from sales of higher margin products
and services at Questys, GSI, MVI, and TBS and by acquiring companies that
consistently generate net income and positive cash flows.  We believe that
this strategy offers the best opportunity for our operations to generate
positive operating income and cash flows from operations and to achieve net
income.





Our
acquisition strategy is focused in two areas: service infrastructure and
vertical market silo.  The service infrastructure area is our focus to
acquire enterprises that fulfill our identified strategic technological core
competencies.  The vertical market silo acquisition strategy is to
acquire companies that assist us in penetrating our target market segments of
financial services, healthcare, manufacturing, and local
government.





Capital
Formation





During
the remainder of 2009 and continuing into the first half of 2010, we are
actively seeking additional financing by issuing equity or obtaining a
combination of equity and debt financing from new shareholders and/or
lenders.  Although we believe we will generate adequate cash to
sustain operations at current levels in conjunction with borrowings from our
existing lines of credit, we will require additional funding should we wish to
complete acquisitions or to accelerate revenue growth from existing lines of
business.  In addition, should we be required to repay certain of our
debt instruments prior to maturity, we will require additional
funding.  We continue to caution that there can be 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 maintain profitable
operations.


30


In spite
of the impact of new laws, regulations, and accounting pronouncements that have
significantly increased our cost of operating as a public company, we intend to
contain general and administrative costs where possible.  However, we
expect to incur significant costs during the remainder of 2009 and in 2010
related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002,
including new infrastructure required to remediate certain material weaknesses
we have identified in our internal controls over financial
reporting.  Should additional growth capital become available during
the remainder of 2009 and the first half of 2010, we intend to direct the
capital toward increasing sales and marketing while holding down costs for
non-essential general and administrative as well as product and technology
expenses to the extent possible.





Organizational
Enhancements





Our goal
is to drive efficiency and effectiveness throughout our group of
companies.  We are working to align each business unit around shared
goals and performance targets.  In addition, we are striving to
streamline corporate overhead and maximize cross-selling
activities.  We are devoting strategic product management and
technical resources both to strengthening the integration of our existing
products and services and to developing new products and services that will
allow us to offer our clients powerful new solutions comprised of the best that
each of our business units has to offer.





Challenges
and Risks





Looking
forward, management has identified certain challenges and risks that demand our
attention.  Of these, three key challenges and risks are discussed
below.





Weakness
in the financial markets and the economy in general





Weakness
in the financial markets and in the economy as a whole has adversely affected
and may continue to adversely affect segments of our customers, which has
resulted and may continue to result in decreased usage levels, customer
acquisitions and customer retention rates and, in turn, could lead to a decrease
in our revenues or rate of revenue growth.  Certain segments of our
customers - those whose business activity is tied to the health of the credit
markets and the broader economy, such as banks, brokerage firms and those in the
real estate industry - have been and may continue to be adversely affected by
the current turmoil in the credit markets and weakness in the general economy.
To the extent our customers’ businesses have been adversely affected by these
economic factors, we have and may continue to experience a decrease in
usage-based revenue and sales of our software products. In addition, continued
weakness in the economy has adversely affected and may continue to adversely
affect our customer retention rates and the number of our new customer
acquisitions. These factors have adversely impacted, and may continue to
adversely impact, our revenues and our ability to achieve cash flow growth
during the remainder of 2009 and through at least the first half of
2010.  However, we believe increased value to our shareholders can
still be achieved through a combination of a focus on innovation to support
productivity and disciplined expense control, while we continue to invest
prudently in sales and marketing and product development to support long-term
profitable growth.





Increased
Competition and Capabilities in the Marketplace





We face
strong competition from well-established national and global companies as well
as from relatively new companies. We must continue to selectively expand into
other profitable segments of our markets and offer powerful product and service
offerings in order to increase our share of the marketplace.  The
introduction of new technologies could render our existing products and services
obsolete or unmarketable or require us to invest in research and development at
much higher rates with no assurance of developing competitive products. Changes
in technologies or customer requirements also may cause the development cycle
for our new products and services to be lengthy and result in significant
development costs.  Competitive pressures may impair our ability to
achieve profitability.


31


Capital
Resources





We
believe that current and future available capital resources, including the net
proceeds from sale of our products and services, will be sufficient to fund our
operations at current levels for the foreseeable future, but will be
insufficient to allow us to repay our debt in full.  The exact amount
of funds that we will require will depend upon many factors, and it is likely
that we will require additional financing.  Such sources of financing
could include capital infusions, additional equity financing, or debt
offerings.  In addition, since our revenues and cash flows have
historically been subject to seasonality, we believe that it is important to
secure greater access to short term borrowing facilities, such as operating
lines of credit.  There can be no assurance that additional funding or
borrowing facilities will be available to us on acceptable terms, if at all.
There can be no assurance that additional funds, if raised, would enable us to
achieve or maintain profitable operations.  The inability to secure
new sources of working capital during the remainder of 2009 or 2010 could have a
material adverse effect on our business, financial condition and results of
operations.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





In
preparing our consolidated financial statements, we make estimates, assumptions
and judgments that can have a significant effect on our revenues, income/loss
from operations, and net income/net loss, as well as on the value of certain
assets on our consolidated balance sheet.




Effective
January 1, 2009, we adopted the provisions of an accounting pronouncement
which applies to any freestanding financial instruments or embedded features
that have the characteristics of a derivative and to any freestanding financial
instruments that are potentially settled in an entity’s own common stock. As a
result of adopting this pronouncement, certain of our issued and outstanding
common stock purchase warrants previously treated as equity pursuant to the
derivative treatment exemption were no longer afforded equity treatment as more
fully described in Note 4 to the accompanying unaudited condensed consolidated
financial statements.




In
September 2006, the FASB issued a pronouncement which defines fair value,
establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. This pronouncement does not require
any new fair value measurements, but provides guidance on how to measure fair
value by providing a fair value hierarchy used to classify the source of the
information. In February 2008, the FASB deferred the effective date of this
pronouncement by one year for certain non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). On
January 1, 2008, the Company adopted the provisions of this pronouncement,
except as it applies to those nonfinancial assets and nonfinancial liabilities
for which the effective date has been delayed by one year, which the Company
adopted on January 1, 2009. The adoption of this pronouncement did not have
a material effect on our financial position or results of operations. The book
values of cash, accounts receivable, accounts payable, accrued expenses, capital
lease obligations, and debt instruments approximate their respective fair values
due to the short-term nature of these instruments.





There
were no other significant changes in critical accounting policies or estimates
from those at December 31, 2008.





RESULTS
OF OPERATIONS





The
following discussion of our performance is organized by reportable operating
segments, which is consistent with the way we manage our
business.  Effective August 1, 2008, we completed the acquisition of
QSI.  Accordingly, we have included the results of operations of QSI
from the date of acquisition.





Three Months Ended September
30, 2009 Compared to Three Months Ended September 30, 2008





Net Revenue from External
Customers





Net
revenue from external customers for the three months ended September 30, 2009
was $3,659,351, a 14% decrease compared to net revenue for the prior year
quarter of $4,273,114.





For the
three months ended September 30, 2009, QSI, GSI, TBS, and MVI generated 11%,
35%, 37% and 18% of our net revenue, respectively.  For the three
months ended September 30, 2008, QSI, GSI, TBS, and MVI generated 10%, 36%, 36%
and 17% of our net revenue, respectively.


32





The
following is a comparison of the components of consolidated net revenue from
external customers:





Three
      Months Ended
                          
                          
                          Three
      Months Ended
                          
                          
                          VarianceSeptember
      30, 2009
                          
                          
                          September
      30, 2008
                          
                          
                          Amount
                          
                          
                          PercentNet
      revenue from external customers:Electronic
      document delivery services (MVI)
                          
                          $
                          641,817
                          
                          
                          $
                          742,117
                          
                          
                          $
                          (100,300
                          )
                          
                          
                          -14
                          %Government
      accounting solutions (TBS)
                          
                          
                          1,345,266
                          
                          
                          
                          1,530,089
                          
                          
                          
                          (184,823
                          )
                          
                          
                          -12
                          %Electronic
      content management (QSI)
                          
                          
                          409,150
                          
                          
                          
                          447,408
                          
                          
                          
                          (38,258
                          )
                          
                          
                          -9
                          %Integrated
      communications (GSI)
                          
                          
                          1,263,118
                          
                          
                          
                          1,553,500
                          
                          
                          
                          (290,382
                          )
                          
                          
                          -19
                          %Corporate
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          *Total
      net revenue from external customers
                          
                          $
                          3,659,351
                          
                          
                          $
                          4,273,114
                          
                          
                          $
                          (613,763
                          )
                          
                          
                          -14
                          %


*
calculation is not meaningful





Revenue
decreased 19% at GSI due to decreases in user subscription fees and revenue from
corporate clients.





Revenue
decreased 12% at TBS due to decreases in revenue from printing, software,
maintenance, and hardware sales.  These decreases were partially
offset by an increase in revenue from online services.





Revenue
decreased 14% at MVI due to a decrease in outbound revenue as a result of
customer attrition and reduced usage volumes.





Revenue
decrease 19% at QSI due to lower software sales compared to the prior year
quarter.





Cost of
Sales





The
following is a comparison of the components of consolidated cost of
sales:





Three
      Months Ended
                  
                  
                  Three
      Months Ended
                  
                  
                  VarianceSeptember
      30, 2009
                  
                  
                  September
      30, 2008
                  
                  
                  Amount
                  
                  
                  PercentCost
      of sales:Electronic
      document delivery services (MVI)
                  
                  $
                  227,764
                  
                  
                  $
                  269,002
                  
                  
                  $
                  (41,238
                  )
                  
                  
                  -15
                  %Government
      accounting solutions (TBS)
                  
                  
                  867,471
                  
                  
                  
                  1,003,456
                  
                  
                  
                  (135,985
                  )
                  
                  
                  -14
                  %Electronic
      content management (QSI)
                  
                  
                  170,379
                  
                  
                  
                  111,256
                  
                  
                  
                  59,123
                  
                  
                  
                  53
                  %Integrated
      communications (GSI)
                  
                  
                  273,791
                  
                  
                  
                  277,900
                  
                  
                  
                  (4,109
                  )
                  
                  
                  -1
                  %Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  *Total
      cost of sales:
                  
                  $
                  1,539,405
                  
                  
                  $
                  1,661,614
                  
                  
                  $
                  (122,209
                  )
                  
                  
                  -7
                  %


*
calculation is not meaningful





Total
cost of sales represented 42% and 39% of net sales during the 2009 and 2008
quarters, respectively.





Cost of
sales for MVI for the three months ended September 30, 2009 represented 35% of
MVI’s net sales as compared with 36% in the 2008 quarter as a result of reduced
telecommunications expenses.





Cost of
sales for TBS for the three months ended September 30, 2009 represented 64% of
TBS’ net sales as compared with 66% in the 2008 quarter.  The
decreased costs at TBS were attributable to a reduction in lower margin
third-party hardware sales.


33





Cost of
sales for GSI for the three months ended September 30, 2009 and 2008 represented
22% of GSI’s net sales as compared with 18% in the 2008 quarter because fixed
cost of sales were not subject to reduction as revenue declined.





Cost of
sales for QSI for the three months ended September 30, 2009 and 2008 represented
42% of GSI’s net sales as compared with 25% in the 2008 quarter because fixed
cost of sales were not subject to reduction as revenue declined.





On a
consolidated basis, cost of sales in the 2009 quarter included $11,367 in
compensation expense related to the vesting of stock options, compared to $0 in
the 2008 quarter.





Gross
Profit





Gross
profit for the three months ended September 30, 2009 decreased 19% to $2,119,946
as compared to $2,611,500 for the 2008 quarter.  The decrease in the
2009 quarter of $491,554 resulted from decreases of $59,062, $48,838, $97,381
and $286,273 from MVI, TBS, QSI, and GSI, respectively.   Gross
profit margin for the 2009 and 2008 quarters was 58% and 61%,
respectively.





Operating
Expenses





The
following is a comparison of the components of consolidated operating
expenses:





Three
      Months Ended
                  
                  
                  Three
      Months Ended
                  
                  
                  VarianceSeptember
      30, 2009
                  
                  
                  September
      30, 2008
                  
                  
                  Amount
                  
                  
                  PercentOperating
      expenses:Electronic
      document delivery services (MVI)
                  
                  $
                  266,299
                  
                  
                  $
                  324,601
                  
                  
                  $
                  (58,302
                  )
                  
                  
                  -18
                  %Government
      accounting solutions (TBS)
                  
                  
                  310,749
                  
                  
                  
                  267,605
                  
                  
                  
                  43,144
                  
                  
                  
                  16
                  %Electronic
      content management (QSI)
                  
                  
                  473,305
                  
                  
                  
                  322,908
                  
                  
                  
                  150,397
                  
                  
                  
                  47
                  %Integrated
      communications (GSI)
                  
                  
                  843,002
                  
                  
                  
                  867,876
                  
                  
                  
                  (24,874
                  )
                  
                  
                  -3
                  %Corporate
                  
                  
                  438,042
                  
                  
                  
                  553,962
                  
                  
                  
                  (115,920
                  )
                  
                  
                  -21
                  %Total
      operating expenses:
                  
                  $
                  2,331,397
                  
                  
                  $
                  2,336,952
                  
                  
                  $
                  (5,555
                  )
                  
                  
                  0
                  %


*
calculation is not meaningful





During
the three months ended September 30, 2009, the operating expenses of Corporate
decreased 21% as a result of decreased compensation, recruiting fees, insurance,
and consulting expenses.  These decreases were offset by increases in
filing fees, travel, legal fees, and accounting fees paid for non-audit services
that for compliance reasons were not included in the services performed by our
independent registered public accounting firm.





During
the three months ended September 30, 2009, MVI’s operating expenses decreased by
$58,302 (-18%) compared to the 2008 quarter.  Product and technology
development increased by $17,184 (+21%) due to staff changes.  Sales
and marketing decreased by $43,993 (-50%) as a result of reduced staff expenses
and advertising.  General and administrative decreased by $27,406
(-20%) due to decreased bad debt and insurance expenses.  Depreciation
and amortization expense decreased by $4,087 (-18%).





During
the three months ended September 30, 2009, operating expenses at TBS increased
by 16% compared to the 2008 quarter.  Product and technology
development decreased $2,123 (-6%) due to lower contractor
fees.  Sales and marketing decreased by $6,998 (-10%) due to lower
bonus expenses and advertising.  General and administrative increased
by $57,723 (+43%) on higher travel, bank charges, insurance, and
utilities.   Depreciation and amortization expenses decreased by
$5,458 (-22%).





During
the three months ended September 30, 2009, GSI’s operating expenses decreased 3%
compared to the 2008 quarter.  Product and technology development
increased by $19,631 (+10%) due to staff changes.  Sales and marketing
increased by $32,101 (+13%) due to increased travel, trade show, and
compensation expense, including reseller commissions.  General and
administrative decreased by $60,299 (-20%) due to decreased staffing and lower
bank fees resulting from lower transaction volume.  Depreciation and
amortization expenses decreased by $16,307 (-13%).


34





During
the three months ended September 30, 2009, QSI’s operating expenses increased
47% compared to the 2008 quarter.  Product and technology development
increased by $30,268.  Sales and marketing increased by
$50,726.  General and administrative increased by
$10,382.  All such increases resulted from comparing three months in
2009 compared with two months (from the August 1, 2009 date of acquisition) in
the 2008 quarter.  Depreciation and amortization expenses increased by
$59,021 as a result of greater intangible asset amortization.





On a
consolidated basis, operating expenses in the 2009 quarter included $47,191in
compensation expense related to the vesting of stock options, compared to
$98,604 in the 2008 quarter.





Operating Income
(Loss):





As a
result of the foregoing, the Company reported an operating loss for the three
months ended September 30, 2009 of $211,451, compared to an operating income of
$274,548 for the three months ended September 30, 2008.





The
following is a comparison of the components of consolidated income (loss) from
operations:





Three
      Months Ended
                  
                  
                  Three
      Months Ended
                  
                  
                  VarianceSeptember
      30, 2009
                  
                  
                  September
      30, 2008
                  
                  
                  Amount
                  
                  
                  PercentOperating
      income (loss):Electronic
      document delivery services (MVI)
                  
                  $
                  147,754
                  
                  
                  $
                  148,514
                  
                  
                  $
                  (760
                  )
                  
                  
                  -1
                  %Government
      accounting solutions (TBS)
                  
                  
                  167,046
                  
                  
                  
                  259,028
                  
                  
                  
                  (91,982
                  )
                  
                  
                  -36
                  %Electronic
      content management (QSI)
                  
                  
                  (234,534
                  )
                  
                  
                  13,244
                  
                  
                  
                  (247,778
                  )
                  
                  
                  *Integrated
      communications (GSI)
                  
                  
                  146,325
                  
                  
                  
                  407,724
                  
                  
                  
                  (261,399
                  )
                  
                  
                  -64
                  %Corporate
                  
                  
                  (438,042
                  )
                  
                  
                  (553,962
                  )
                  
                  
                  115,920
                  
                  
                  
                  21
                  %Total
      operating income (loss)
                  
                  $
                  (211,451
                  )
                  
                  $
                  274,548
                  
                  
                  $
                  (485,999
                  )
                  
                  
                  *


*
calculation is not meaningful





Each of
MVI, TBS, QSI, and GSI reported lower operating income compared to the prior
year quarter, which were partially offset by a lower operating loss from
Corporate.





Interest Expense,
net





Interest
expense, net for the three months ended September 30, 2009 decreased by $25,666
to $37,185 from the $62,851 reported in the 2008 quarter.  The most
significant factor in the decrease was a reduction in the amortization of debt
issue costs, which was partially offset by higher interest charges incurred in
connection with the Company’s borrowings.





Other Income,
net





Other
income, net for the three months ended September 30, 2009 was $2,103 compared to
other income, net of $49,968 reported in the 2008 quarter.  In each of
the quarters, we recorded other income and expense related to settlement of
liabilities related to prior years.  In the 2008 quarter, this
included an adjustment for income tax.





Net Income
(Loss)





As a
result of the foregoing, net loss for the three months ended September 30, 2009
was $281,157, compared to a net income of $318,800, for the three months ended
September 30, 2008.





Basic and
diluted loss per share for the three months ended September 30, 2009 was $0.00
and $0.00 per share, respectively, based on weighted average shares of
193,046,613 and 193,046,613, respectively.


35





Basic and
diluted net income per share for the three months ended September 30, 2008 was
$0.00 and $0.00 per share, respectively, based on weighted average shares of
167,118,739 and 201,883,203, respectively.





The
following is a comparison of the components of consolidated net income
(loss):





Three
      Months Ended
                
                
                Three
      Months Ended
                
                
                VarianceSeptember
      30, 2009
                
                
                September
      30, 2008
                
                
                Amount
                
                
                PercentNet
      income (loss):Electronic
      document delivery services (MVI)
                
                $
                143,346
                
                
                $
                145,836
                
                
                $
                (2,490
                )
                
                
                -2
                %Government
      accounting solutions (TBS)
                
                
                166,892
                
                
                
                253,943
                
                
                
                (87,051
                )
                
                
                -34
                %Electronic
      content management (QSI)
                
                
                (241,782
                )
                
                
                60,494
                
                
                
                (302,276
                )
                
                
                *Integrated
      communications (GSI)
                
                
                148,706
                
                
                
                405,933
                
                
                
                (257,227
                )
                
                
                -63
                %Corporate
                
                
                (498,319
                )
                
                
                (547,406
                )
                
                
                49,087
                
                
                
                9
                %Total
      net income (loss)
                
                $
                (281,157
                )
                
                $
                318,800
                
                
                $
                (599,957
                )
                
                
                -188
                %


*
calculation is not meaningful





Nine Months Ended September
30, 2009 Compared to Nine Months Ended September 30, 2008





Net Revenue from External
Customers





Net
revenue from external customers for the nine months ended September 30, 2009 was
$11,593,193, a 6% increase over net revenue for the prior year period of
$10,965,907.





For the
nine months ended September 30, 2009, QSI, GSI, TBS, and MVI generated 14%, 39%,
30% and 17% of our net revenue, respectively.  For the nine months
ended September 30, 2008, QSI, GSI, TBS, and MVI generated 4%, 42%, 35% and 19%
of our net revenue, respectively.





The
following is a comparison of the components of consolidated net revenue from
external customers:





Nine
      Months Ended
                  
                  
                  Nine
      Months Ended
                  
                  
                  VarianceSeptember
      30, 2009
                  
                  
                  September
      30, 2008
                  
                  
                  Amount
                  
                  
                  PercentNet
      revenue from external customers:Electronic
      document delivery services (MVI)
                  
                  $
                  1,979,495
                  
                  
                  $
                  2,124,344
                  
                  
                  $
                  (144,849
                  )
                  
                  
                  -7
                  %Government
      accounting solutions (TBS)
                  
                  
                  3,451,276
                  
                  
                  
                  3,873,142
                  
                  
                  
                  (421,866
                  )
                  
                  
                  -11
                  %Electronic
      content management (QSI)
                  
                  
                  1,669,467
                  
                  
                  
                  447,408
                  
                  
                  
                  1,222,059
                  
                  
                  
                  273
                  %Integrated
      communications (GSI)
                  
                  
                  4,492,955
                  
                  
                  
                  4,521,013
                  
                  
                  
                  (28,058
                  )
                  
                  
                  -1
                  %Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  *Total
      net revenue from external customers
                  
                  $
                  11,593,193
                  
                  
                  $
                  10,965,907
                  
                  
                  $
                  627,286
                  
                  
                  
                  6
                  %


*
calculation is not meaningful





Revenue
decreased 1% at GSI due to decreases in user subscription fees and revenue from
corporate clients.





Revenue
decreased 11% at TBS due to decreases in revenue from printing, software,
maintenance, and hardware sales.  These decreases were partially
offset by an increase in revenue from online services.





Revenue
decreased 7% at MVI due to a decrease in outbound revenue as a result of
customer attrition and reduced usage volumes.





Revenue
increased 273% at QSI due to comparing nine months in the 2009 period with two
months in the 2008 period (from August 1, 2008, the date of
acquisition).  On a pro forma basis, QSI’s revenue for the nine months
ended September 30, 2008 was $2,244,951.


36





Cost of
Sales





The
following is a comparison of the components of consolidated cost of
sales:





Nine
      Months Ended
                    
                    
                    Nine
      Months Ended
                    
                    
                    VarianceSeptember
      30, 2009
                    
                    
                    September
      30, 2008
                    
                    
                    Amount
                    
                    
                    PercentCost
      of sales:Electronic
      document delivery services (MVI)
                    
                    $
                    764,337
                    
                    
                    $
                    846,127
                    
                    
                    $
                    (81,790
                    )
                    
                    
                    -10
                    %Government
      accounting solutions (TBS)
                    
                    
                    2,325,160
                    
                    
                    
                    2,616,323
                    
                    
                    
                    (291,163
                    )
                    
                    
                    -11
                    %Electronic
      content management (QSI)
                    
                    
                    618,145
                    
                    
                    
                    111,256
                    
                    
                    
                    506,889
                    
                    
                    
                    456
                    %Integrated
      communications (GSI)
                    
                    
                    859,843
                    
                    
                    
                    870,945
                    
                    
                    
                    (11,102
                    )
                    
                    
                    -1
                    %Corporate
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    *Total
      cost of sales:
                    
                    $
                    4,567,485
                    
                    
                    $
                    4,444,651
                    
                    
                    $
                    122,834
                    
                    
                    
                    3
                    %


*
calculation is not meaningful




Total
cost of sales represented 39% and 41% of net sales during the 2009 and 2008 nine
month periods, respectively.





Cost of
sales for MVI for the nine months ended September 30, 2009 represented 39% of
MVI’s net sales as compared with 40% in the 2008 period as a result of reduced
telecommunications expenses.





Cost of
sales for TBS for the nine months ended September 30, 2009 and 2008 represented
67% of TBS’s net sales as compared with 68% in the 2008 period as a result of
lower hardware sales.





Cost of
sales for GSI for the nine months ended September 30, 2009 and 2008 represented
19% of GSI’s net sales in each period.





Cost of
sales for QSI for the nine months ended September 30, 2009 represented 37% of
QSI’s net sales as compared with 25% in the 2008 period as a result of lower
sales of software, which produce higher margins than support
revenue.





On a
consolidated basis, cost of sales in the 2009 period included $48,388 in
compensation expense related to the vesting of stock options, compared to $0 in
the 2008 period.





Gross
Profit





Gross
profit for the nine months ended September 30, 2009 increased 8% to $7,025,708
as compared to $6,521,256 for the 2008 period.  The increase in the
2009 period of $504,452 resulted from an increase of $715,170 from QSI (nine
months in 2009 compared to two months in 2008), which was offset by decreases of
$63,059, $130,703, and $16,956 from MVI, TBS, and GSI,
respectively.  Gross profit margin for the 2009 and 2008 nine month
periods was 61% and 59%, respectively.


37


Operating
Expenses





The
following is a comparison of the components of consolidated operating
expenses:





Nine
      Months Ended
                  
                  
                  Nine
      Months Ended
                  
                  
                  VarianceSeptember
      30, 2009
                  
                  
                  September
      30, 2008
                  
                  
                  Amount
                  
                  
                  PercentOperating
      expensesElectronic
      document delivery services (MVI)
                  
                  $
                  816,977
                  
                  
                  $
                  953,067
                  
                  
                  $
                  (136,090
                  )
                  
                  
                  -14
                  %Government
      accounting solutions (TBS)
                  
                  
                  897,482
                  
                  
                  
                  903,697
                  
                  
                  
                  (6,215
                  )
                  
                  
                  -1
                  %Electronic
      content management (QSI)
                  
                  
                  1,527,721
                  
                  
                  
                  322,908
                  
                  
                  
                  1,204,813
                  
                  
                  
                  373
                  %Integrated
      communications (GSI)
                  
                  
                  2,928,531
                  
                  
                  
                  2,795,663
                  
                  
                  
                  132,868
                  
                  
                  
                  5
                  %Corporate
                  
                  
                  1,424,285
                  
                  
                  
                  1,830,455
                  
                  
                  
                  (406,170
                  )
                  
                  
                  -22
                  %Total
      operating expenses:
                  
                  $
                  7,594,996
                  
                  
                  $
                  6,805,790
                  
                  
                  $
                  789,206
                  
                  
                  
                  12
                  %





During
the nine months ended September 30, 2009, the operating expenses of Corporate
decreased 22% as a result of decreased compensation, recruiting fees,
consulting, and insurance expenses.  These decreases were offset by
increases in filing fees, director fees, and accounting fees paid for non-audit
services that for compliance reasons were not included in the services performed
by our independent registered public accounting firm.





During
the nine months ended September 30, 2009, MVI’s operating expenses decreased 14%
compared to the 2008 period.  Product and technology development
increased $1,585 (+1%).  Sales and marketing decreased by $101,629
(-43%) as a result of reduced staff expenses and advertising.  General
and administrative decreased by $32,326 (-9%) due to decreased placement fees,
bad debt and recruiting fees.  Depreciation and amortization expense
decreased by $3,720 (-6%).





During
the nine months ended September 30, 2009, operating expenses at TBS decreased 1%
compared to the 2008 period.  Product and technology development
increased by $5,550 (+5%) due to staffing.  Sales and marketing
decreased by $91,987 (-33%) due to lower bonus expenses and
advertising.  General and administrative increased by $92,182 (+21%)
on higher travel, insurance, client care staffing, and bad debt
expense.   Depreciation and amortization expenses decreased by
$11,960 (-16%).





During
the nine months ended September 30, 2009, GSI’s operating expenses increased 5%
compared to the 2008 period.  Product and technology development
decreased by $55,128 (-8%) due to staff attrition.  Sales and
marketing increased by $349,533 (+47%) due to increased travel, trade show, and
compensation expense, including third party commissions.  General and
administrative decreased by $125,933 (-13%) due to reduced bonus and rent
expense.  Depreciation and amortization expenses decreased by $35,604
(-10%).





During
the nine months ended September 30, 2009, QSI incurred $1,527,721 of operating
expenses.  Product and technology, sales and marketing, general and
administrative, and depreciation expenses were $510,268, $284,063, $533,561, and
$199,829, respectively.  On a pro forma basis, operating expenses at
QSI for the ninth months ended September 30, 2008 were $1,675,035.





On a
consolidated basis, operating expenses in the 2009 period included $154,250 in
compensation expense related to the vesting of stock options, compared to
$221,016 in the 2008 period.





Operating Income
(Loss):





As a
result of the foregoing, the Company reported an operating loss for the nine
months ended September 30, 2009 of $569,288, compared to an operating loss of
$284,534 for the nine months ended September 30, 2008.


38


The
following is a comparison of the components of consolidated income (loss) from
operations:





Nine
      Months Ended
                    
                    
                    Nine
      Months Ended
                    
                    
                    VarianceSeptember
      30, 2009
                    
                    
                    September
      30, 2008
                    
                    
                    Amount
                    
                    
                    PercentOperating
      income (loss):Electronic
      document delivery services (MVI)
                    
                    $
                    398,181
                    
                    
                    $
                    325,150
                    
                    
                    $
                    73,031
                    
                    
                    
                    22
                    %Government
      accounting solutions (TBS)
                    
                    
                    228,634
                    
                    
                    
                    353,122
                    
                    
                    
                    (124,488
                    )
                    
                    
                    -35
                    %Electronic
      content management (QSI)
                    
                    
                    (476,399
                    )
                    
                    
                    13,244
                    
                    
                    
                    (489,643
                    )
                    
                    
                    *Integrated
      communications (GSI)
                    
                    
                    704,581
                    
                    
                    
                    854,405
                    
                    
                    
                    (149,824
                    )
                    
                    
                    -18
                    %Corporate
                    
                    
                    (1,424,285
                    )
                    
                    
                    (1,830,455
                    )
                    
                    
                    406,170
                    
                    
                    
                    22
                    %Total
      operating loss, net
                    
                    $
                    (569,288
                    )
                    
                    $
                    (284,534
                    )
                    
                    $
                    (284,754
                    )
                    
                    
                    -100
                    %


*
calculation is not meaningful





Both MVI
and Corporate reported improvements in operating income (loss) compared to the
prior year period, which were offset by reduced operating income from GSI, TBS
and QSI.





Interest Expense,
net





Interest
expense, net for the nine months ended September 30, 2009 decreased by $52,623
to $123,051 from the $175,674 reported in the 2008 period.  The most
significant factor in the decrease was a reduction in the amortization of debt
issue costs as offset by increases in interest paid in connection with the
Company’s lines of credit.





Other Income,
net





Other
income, net for the nine months ended September 30, 2009 was $12,760 compared to
other income, net of $103,371 reported in the 2008 period.  In each of
the periods, we recorded other income and expense related to settlement of
liabilities.





Net Loss





As a
result of the foregoing, net loss for the nine months ended September 30, 2009
was $733,931, compared to a net loss of $332,700, for the nine months ended
September 30, 2008.





Basic and
diluted loss per share for the nine months ended September 30, 2009 and 2008 was
$0.00 in each of the respective periods on weighted average shares of
188,460,464 and 157,606,078, respectively.





The
following is a comparison of the components of consolidated net income
(loss):





Nine
      Months Ended
                    
                    
                    Nine
      Months Ended
                    
                    
                    VarianceSeptember
      30, 2009
                    
                    
                    September
      30, 2008
                    
                    
                    Amount
                    
                    
                    PercentNet
      income (loss):Electronic
      document delivery services (MVI)
                    
                    $
                    381,778
                    
                    
                    $
                    308,448
                    
                    
                    $
                    73,330
                    
                    
                    
                    24
                    %Government
      accounting solutions (TBS)
                    
                    
                    214,585
                    
                    
                    
                    344,676
                    
                    
                    
                    (130,091
                    )
                    
                    
                    -38
                    %Electronic
      content management (QSI)
                    
                    
                    (488,825
                    )
                    
                    
                    60,494
                    
                    
                    
                    (549,319
                    )
                    
                    
                    *Integrated
      communications (GSI)
                    
                    
                    706,885
                    
                    
                    
                    879,913
                    
                    
                    
                    (173,028
                    )
                    
                    
                    -20
                    %Corporate
                    
                    
                    (1,548,354
                    )
                    
                    
                    (1,926,231
                    )
                    
                    
                    377,877
                    
                    
                    
                    20
                    %Total
      net loss
                    
                    $
                    (733,931
                    )
                    
                    $
                    (332,700
                    )
                    
                    $
                    (401,231
                    )
                    
                    
                    -121
                    %


*
calculation is not meaningful


39


LIQUIDITY AND CAPITAL RESOURCES





During
the nine months ended September 30, 2009, our net cash position decreased by
$243,014 to $324,433.  Although our operating activities provided net
cash of $53,851, our investing and financing activities used net cash of $62,872
and $233,993, respectively.





We do not
currently have any material commitments for capital expenditures other than
those expenditures incurred in the ordinary course of business.





Our
sources of capital include cash flow from operations, available credit
facilities, and the issuance of debt and equity securities.  During
the first nine months of 2009, we relied heavily on our operating lines of
credit and related party notes payable financing to fund the negative cash flows
we experienced due to the retirement of debt.  We expect to experience
negative operating cash flows through at least the first half of 2010, and we
expect to make use of available borrowing capability under our operating lines
of credit to offset such negative cash flows.





During
the first nine months of 2009, we used cash flows generated by our operations to
retire approximately $184,000 in accrued expenses which existed as of December
31, 2008.  We also retired approximately $625,000 in notes payable
debt in 2009 while incurring $865,000 in new notes payable
debt.  During the remainder of 2009 and for all of 2010, we expect to
use available cash to continue to reduce notes payable debt.





On
February 6, 2008, we entered into an agreement with The Private Bank of The
Peninsula (“Bank”) for an asset based line of credit (the
“Line”).   Pursuant to an amendment, the Bank renewed the Line
and modified the terms to include an interest rate that is floating and is
calculated at Wall Street Journal prime plus five percent (5%) on the cash
borrowed provided that the minimum rate will be eight and one half percent
(8.5%) and minimum interest will be $7,000 per three month
period.  Interest on outstanding borrowings is payable
monthly.   In addition, we were required to pay an amendment fee
of $10,000 and, upon each advance, a fee equal to one quarter of one percent
(0.25%) of the advance, and is subject to covenants as to minimum quarterly
income and cash flow.  The Bank’s maximum commitment amount for the
Line, as amended, is $1.0 million.  Advances are generally limited to
80% of our eligible domestic accounts receivable.





Outstanding
advances under the Line are secured by a first lien position on all of our
accounts receivable, contract rights, chattel paper, documents, and payment and
by a second lien on its inventory, intellectual property, and
equipment.  As of September 30, 2009, there were outstanding
borrowings of $431,292 on the Line and we were in compliance with all loan
covenants, except a quarterly income covenant.  As of November 16,
2009, we are negotiating a covenant waiver with the Bank, and it was not known
whether we will be subject to any penalties or limitations as a result of the
failure to obtain a waiver.  Availability on the Line as of September
30, 2009 was approximately $174,000





Effective
September 30, 2006, we obtained a $500,000 revolving line of credit (“RLOC”)
with a financial institution.  The RLOC was guaranteed by one of our
stockholders.  Interest on outstanding borrowings was payable monthly
at an annual rate of interest equal to LIBOR plus 2%.  On May 8, 2009,
we retired the RLOC using the proceeds of the Williams May 2009 Note (see
below).  The terms of the note payable financing were deemed more
favorable to us than the renewal terms offered by the financial
institution.





Effective
November 28, 2005, TBS renewed a $100,000 revolving line of credit (“TBS RLOC”)
with a financial institution.  As of September 30, 2009, the TBS RLOC
had become inactive due to lack of use and was not renewed.  Renewal
of the TBS RLOC was not offered by the financial institution because the assets
of TBS are encumbered in connection with the Line (see above).





On May 6,
2009 we arranged for an unsecured promissory note financing with C. Alan
Williams and Joan P. Williams in the amount of $430,000 (the “Williams May 2009
Note”).  The Williams May 2009 Note bears a per annum interest rate
equal to the most favorable rate paid by the Williams plus two percent
(2%).  Our interest rate in effect through September 30, 2009 with
respect to the Williams May 2009 Note was 4.87%.  The interest rate
may be adjusted once per month.  The term of the Williams May 2009
Note is thirty-six (36) months, with monthly installments paid by the Company
consisting of principal and interest on the first of each month, beginning on
August 1, 2009.  As of September 30, 2009, we recorded accrued
interest of $4,944 in the accompanying unaudited condensed consolidated balance
sheet which is payable upon maturity. The Williams May 2009 Note matures on
August 1, 2012.  Should we fail to make payments for a period of
ninety (90) days, a default shall occur.  Upon the default, we shall
pay a penalty interest rate in the amount of the William’s rate plus six percent
(6%) on the unpaid amounts until the default is cured.


40





Payment
obligations under the Williams May 2009 Note are subordinate in certain respects
to the rights of the Private Bank of the Peninsula.





We used
the proceeds from the Williams May 2009 Note, to retire the RLOC on May 8, 2009
(see above).  The terms of the Williams May 2009 Note were deemed more
favorable to us than the renewal terms offered by the financial
institution.





On July
30, 2009 we arranged for an unsecured promissory note financing with C. Alan
Williams and Joan P. Williams in the amount of $435,000 (the “Williams July 2009
Note”).  The Williams July 2009 Note bears interest at ten percent
(10%) per annum.  The term of the Williams July 2009 Note is twelve
(12) months, with monthly installments paid by us at the end of each month
consisting of principal and interest, beginning on July 31, 2009.  The
Williams July 2009 Note matures on July 1, 2010.  Should we fail to
make payments for a period of ninety (90) days, a default shall
occur.  Upon the default, we shall pay a penalty interest rate in the
amount of fifteen percent (15%) per annum on the unpaid amounts until the
default is cured.





Payment
obligations under the Williams July 2009 Note are subordinate in certain
respects to the rights of the Private Bank of the Peninsula.





We used
the proceeds from the Williams July 2009 Note, to retire a line of credit with a
financial institution on August 4, 2009 and to make installment payments to
Vojin and Gloria Hadzi-Pavlovic pursuant to the agreement for our purchase of
Decision Management Company, Inc. dba Questys Solutions dated as of August 1,
2008.





On
February 17, 2004, we borrowed $1,700,000 from C. Alan and Joan P. Williams and
issued a convertible promissory note, bearing interest at 10 percent (10%) per
annum (the “Williams Convertible Note”).  During 2005, all but $65,000
of the principal amount due pursuant to this note was converted into shares of
the Company's common stock.   In October 2009, the Williams
agreed to extend the due date of the note to October 31, 2011 (see Note
11).  The note and accrued interest are due at the earlier of one of
three events: 1) October 31, 2011; 2) acquisition of a controlling interest in
us by a third party; or 3) we achieve equity financing of a minimum of
$3,000,000.  Effective April 14, 2005, pursuant to an amendment to the
note, the conversion price was fixed at $0.14 per share.  As an
incentive for Mr. and Mrs. Williams to provide the loan, we issued them a
warrant to purchase 5,000,000 shares of our restricted common stock at $0.10 per
share exercisable until February 17, 2009.  Effective February 17,
2009, we and the Williams agreed to extend the expiration date of the warrant to
February 16, 2012 in exchange for the Williams’ agreement to extend their
guaranty of the RLOC through December 31, 2010.  The extension of the
warrants did not have a material effect on the unaudited condensed consolidated
financial statements.





During
the three and nine months ended September 30, 2009, $18,477 and $24,926,
respectively of interest expense was recognized in connection with these
notes.





At
September 30, 2009, the amount owed by us to the Williams pursuant to the unpaid
balance of the Williams May 2009 Note was $396,513 in principal and $4,944 in
unpaid interest.  The interest rate in effect as of September 30, 2009
was 4.87% per annum.





At
September 30, 2009, the amount owed by us to the Williams pursuant to the unpaid
balance of the Williams July 2009 Note was $330,277 in principal and $0 in
unpaid interest.  The interest rate in effect as of September 30, 2009
was 10% per annum.





At
September 30, 2009, the amount owed by us to the Williams pursuant to the unpaid
balance of the Williams Convertible Note was $65,000 in principal and $118,245
in unpaid interest.  The interest rate in effect as of September 30,
2009 was 10% per annum.





QSI had
an unsecured line of credit agreement with a financial institution for
borrowings up to the maximum of $100,000 with no maturity date (“QSI
RLOC”).  Borrowings bore interest at the prime rate, plus
2.775%.  On August 3, 2009, as stipulated by the QSI acquisition
agreements, we repaid the outstanding borrowings of $100,000 in full and closed
the line of credit using the proceeds of the Williams July 2009
Note.


41





Effective
August 1, 2008 and in connection with the acquisition of Questys, we issued a
secured promissory note to the Pavlovics (the “Pavlovic Note”) in the amount of
$900,000.  The Pavlovics are a related party as a result of the common
stock issued to them by us in connection with the acquisition of
Questys.  The Pavlovic Note is non-interest bearing and may be prepaid
in whole or in part at any time without penalty and is due on August 1,
2011.  Principal payments are due in three equal annual installments
of $300,000 each on August 1, 2009, August 1, 2010, and August 1,
2011.  On August 1, 2009, we paid the first installment of $300,000
using proceeds from the Williams July 2009 Note financing.  The
Pavlovic Note is secured by certain assets of Questys as defined in a Security
Agreement dated as of August 1, 2008.  Payment obligations under the
Pavlovic Note are subordinate in certain respects to the rights of the Private
Bank of the Peninsula to the extent set forth in a Subordination Agreement dated
as of August 1, 2008.





Prior to
August 1, 2008 (effective date of acquisition of Questys), the Pavlovics made
aggregate advances to Questys in the amount of $115,000, which were assumed in
the acquisition (the “Pavlovic Shareholder Debt”).  The Pavlovic
Shareholder Debt is non-interest bearing and we and the Pavlovics have agreed to
the repayment of the outstanding balance as follows:  (i) $35,000 on
or before August 1, 2009, (ii) $40,000 on or before August 1, 2010, and (iii)
$40,000 on or before the August 1, 2011. On August 3, 2009, we paid the first
installment of $35,000 using proceeds from the Williams July 2009 Note
financing.





We funded
the requirement for the initial $300,000 payment for the purchase of QSI from
the proceeds of a $300,000 related party secured promissory note offering
subscribed to by The Silver Lake Group, LLC (“SLG”) on August 4, 2008 (the “SLG
Note”).  SLG is owned by Ricardo A. Salas.  Mr. Salas is one
of our Directors.  The SLG Note was originally due on October 31, 2008
and bore interest at a rate of nine percent (9%) per annum through October 31,
2008.





On
October 30, 2008, VillageEDOCS, Inc. and SLG entered into an Amendment to
Secured Promissory Note (“Amendment”) to modify the maturity date, interest
rate, and repayment terms of the SLG Note.  Pursuant to the Amendment,
the SLG Note matured on March 31, 2009 and bore interest from November 1, 2008
at a rate of twelve percent (12%) per annum.  On March 31, 2009, the
SLG Note was paid in full.  The SLG Note was secured by the accounts
receivable of GoSolutions, Inc., our wholly-owned subsidiary, as defined in a
Security Agreement dated as of August 1, 2008.  Payment obligations
under the SLG Note were subordinate in certain respects to the rights of the
Bank to the extent set forth in a Subordination Agreement to be entered into as
of August 1, 2008.





Our
inability to repay outstanding borrowings when due would have a material adverse
effect on us.





Substantial
risk exists that a decrease in demand for our products and services would reduce
the availability of cash from this source since our operating cash flows are
derived from products and services that are subject to rapid technological
change.





Since our
inception, our operating and investing activities have used substantially more
cash than they have generated. We believe that we have made considerable
progress toward achieving profitable operations by increasing revenues from
electronic document delivery services and through our acquisition of QSI, TBS
and GSI.  In addition, we are actively seeking opportunities to
acquire or otherwise combine with businesses that are operating profitably and
generating positive cash flows.  However, at present and for the
foreseeable future, we believe that we will continue to need working capital to
fund the growth of our businesses and to absorb the increasing costs associated
with operating as a fully reporting company in the prevailing regulatory
environment.  Accordingly, we anticipate negative operating and
investing cash flows through at least the first half of 2010 and at least until
QSI, MVI, TBS, and GSI consistently generate net cash flows sufficient to offset
the projected expense to operate the holding company.





We expect
to use cash flow generated from operations, the Line, and potentially other
sources, to fund expected negative operating cash flows during the remainder of
2009.





While we
believe that our available cash resources combined with our current revenue
streams and lines of credit will be sufficient to meet our anticipated working
capital requirements for the next twelve months, we would likely require new
sources of debt or equity financing during the remainder of 2009 should we be
required to expand or significantly upgrade our technology infrastructure
through additional capital expenditures.  Should our current revenue
streams or margins be subjected to even minor decreases, our external funding
requirements would likely be greater.


42





We
believe that sustainable profitability is achievable; however, we have a history
of losses.  While GSI, MVI, and TBS each reported net income for the
first nine months of 2009, this income was not sufficient to offset the net loss
of QSI, interest expense and other corporate overhead.  If we are not
successful in sustaining and increasing operating profits from our four
operating segments, or in reducing expenses of the holding company as a
percentage of revenue, we may not achieve profitability on a consolidated
basis.





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





The
Report of Independent Registered Public Accounting Firm on our December 31, 2008
consolidated financial statements includes an explanatory paragraph stating that
the recurring losses incurred from operations and a working capital deficit
raise substantial doubt about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.





CAUTIONARY
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS





This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All
statements that do not directly and exclusively relate to historical facts
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995.  Our forward-looking
statements are based on our plans, intentions, expectation, and belief and are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected or expressed herein. You can identify
these statements by forward-looking words such as "may", "will", "expect",
"intend", "anticipate", "believe", "expect", "plan", "seek", "estimate",
"project", "could",  and "continue" or similar words. You should read
statements that contain these words carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or of our future financial condition, or state other
"forward-looking" information. These statements include, among others,
information regarding future operations, future capital expenditures, and future
net cash flow. Such statements reflect the Company's current views with respect
to future events and financial performance and involves risks and uncertainties,
including, without limitation, general economic and business conditions, changes
in foreign, political, social and economic conditions, regulatory initiatives
and compliance with governmental regulations, the ability to achieve further
market penetration and additional customers, and various other matters, many of
which are beyond the Company's control, including, without limitation, the risks
described in Item 1A of the Company's Annual Report on Form 10-K filed with the
Commission on March 31, 2009. Our future results and stockholder values may
differ materially from those expressed in these forward- looking statements.
Many of the factors that will determine these results and values are beyond our
ability to control or predict. We assume no obligation to update any
forward-looking statements.  Investors are cautioned not to put undue
reliance on any forward-looking statements, which speak only as of the date of
this Quarterly Report on Form 10-Q.  Readers should also consult the
cautionary statements and risk factors listed from time to time in our Reports,
and all amendments thereto, on Forms 10-K, 10-KSB, 10-Q, 10-QSB, 8-K, and other
SEC filings.  For these statements, we claim the protection of the
safe harbor for forward-looking statements contained in Section 21E of the
Exchange Act.





Forward
looking statements in this Quarterly Report on Form 10-Q include, without
limitation:





The
statements in MD&A under the captions Introductionand Business Overviewof our
strategies, beliefs, plans, expectations, anticipations and hopes with respect
to (1) our expectations about the benefits we may derive from acquisitions, (2)
our current and future growth strategy to acquire intellectual and technology
assets and our expectations about the benefits we may derive, (3) our beliefs
about our vision to become a business process management/workflow service and
the benefits we expect to derive, (4) our acquisition strategy, and (5) our
belief that obtaining planned financings will allow us to generate adequate cash
flows to sustain operations at current levels until we being to operate
profitably on a consistent, month-over month basis, which statements are subject
to various risks and uncertainties, including, without limitation, our limited
operating history, risks that we may not be able to obtain any additional
financing at terms acceptable to us, or at all, risks that we may not
successfully implement our acquisition program, risks associated with
assimilating acquired personnel and technology into the Company, and the risk
that we will not be able to compete effectively because our market place is
highly competitive and has low barriers to entry.


43





The
statements in MD&A under the caption Results of Operationsof our
strategies, beliefs, plans, expectations, anticipations and hopes with respect
to Net Revenue, Gross Profit, Operating Expenses, Income (Loss) from Operations,
and Net Loss and our strategies, beliefs, plans, expectations, anticipations and
hopes with respect to Liquidity and Capital Resources set forth in MD&A
under the caption Liquidity
and Capital Resources, including, without limitation (1) our belief that
we have made considerable progress toward achieving profitable operations, (2)
our strategy of actively seeking to combine with business that operate
profitably and generate positive cash flows, (3) our belief that sustainable
profitability is achievable, (4) our expectations about future funding
requirements, and (5) our belief that current cash position, cash generated
through operations and equity offerings and available borrowings will be
sufficient to meet our needs through at least the next twelve months, which
statements are subject to various risks and uncertainties, including, without
limitation, our limited operating history, risks that we may not be able to
obtain any additional financing at terms acceptable to us, or at all, the risk
that we may be unable to sustain all or part of our operations if we are not
able to obtain sufficient additional funds from investors, the risk that our
funding requirements could be greater should our current revenue streams or
margins decrease, risks that we may not successfully implement our acquisition
program, risks associated with assimilating acquired personnel and technology
into the Company, and the risk that we will not be able to compete effectively
because our market place is highly competitive and has low barriers to
entry.





The
statements in Part II under the heading Item 4  Controls and Procedures, of
our belief that we are addressing the deficiencies that affected our internal
control over financial reporting and the time we estimate we will require before
we would be able to conclude that all material weaknesses have been remediated
or our belief regarding the potential impact to us, which statements are subject
to various risks and uncertainties including, without limitation the risk that
for financial or other reasons we will be unable to effect some or all of the
changes we believe are required within the time periods estimated, or at
all.





RECENT
ACCOUNTING PRONOUNCEMENTS





In June
2009, the FASB issued a pronouncement which establishes the FASB Accounting
Standards CodificationTM as the source of authoritative accounting guidance
under GAAP. The rules and interpretive releases of the SEC under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. This pronouncement is effective for periods ending after September
15, 2009. We do not expect this pronouncement to have a material effect on our
consolidated financial position and results of operations.





In April
2009, the FASB issued pronouncements to require disclosures about fair value of
financial instruments in interim and annual reporting periods. The
pronouncements are effective for interim reporting periods ending after June 15,
2009, which for us was the second quarter of fiscal 2009.  We have
concluded that the application of the pronouncements did not have a material
impact on our consolidated financial position and results of operations as of
and for the period ended September 30, 2009.





In April
2009, the FASB issued a pronouncement which provides additional guidance for
estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased. This pronouncement also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. This pronouncement is effective for periods ending after June 15,
2009.  We have concluded that the application of this pronouncement
did not have a material impact on our consolidated financial position and
results of operations as of and for the period ended September 30,
2009.





In
December 2007, the FASB issued a pronouncement which provides companies with
principles and requirements on how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, liabilities assumed, and
any noncontrolling interest in the acquiree as well as the recognition and
measurement of goodwill acquired in a business combination. This pronouncement
also requires certain disclosures to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
Acquisition costs associated with the business combination will generally be
expensed as incurred. This pronouncement is effective for business combinations
occurring in fiscal years beginning after December 15, 2008. We are evaluating
the impact this pronouncement will have on any future business
combinations.


44


In July
2009, the FASB issued a pronouncement which excludes all tangible products
containing both software and non-software components that function together to
deliver the product’s essential functionality.  This pronouncement is
effective for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010 and shall be applied on a prospective
basis. Earlier application is permitted as of the beginning of an entity’s
fiscal year provided it has not previously issued financial statements for any
period within that year. We expect to adopt this pronouncement on January 1,
2010 and do not expect the adoption of this pronouncement to have a material
impact on our consolidated financial position and results of
operations.





In
September 2009, the FASB ratified a pronouncement which requires companies to
allocate revenue in arrangements involving multiple deliverables based on the
estimated selling price of each deliverable, even though such deliverables are
not sold separately either by the company itself or other vendors. This
pronouncement eliminates the requirement that all undelivered elements must have
objective and reliable evidence of fair value before a company can recognize the
portion of the overall arrangement fee that is attributable to items that
already have been delivered. As a result, the new pronouncement may allow some
companies to recognize revenue on transactions that involve multiple
deliverables earlier than under current requirements. This pronouncement is
effective for revenue arrangements entered into or materially modified in fiscal
years beginning on or after December 15, 2009. Early adoption is permitted at
the beginning of a company’s fiscal year. We expect to adopt this pronouncement
on January 1, 2010 and we are currently evaluating the impact of this
pronouncement on our consolidated financial position and results of
operations.





ITEM
4 – CONTROLS AND PROCEDURES





(a) As of
September 30, 2009, an evaluation was carried out under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934).  As a result of this evaluation, we identified material
weaknesses in our internal control over financial reporting as of September 30,
2009.  Accordingly, although we continue to make progess in executing
our plan to remediate significant deficiencies, we concluded that our disclosure
controls and procedures were not effective as of September 30, 2009 and that our
internal controls over financial reporting were not effective as of September
30, 2009.  For more information regarding the material weaknesses
identified and our remediation plans, we encourage you to read Item 9A Controls and Procedures
included in the Annual Report on Form 10-K that we filed with the SEC on March
31, 2009.





(b)
Changes in internal control over financial reporting: There were no changes in
the Company's internal control over financial reporting that occurred during the
quarter ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.





LIMITATIONS
ON THE EFFECTIVENESS OF INTERNAL CONTROLS





The
Company's management, including the CEO and CFO, does not expect that our
disclosure controls and procedures or our internal control over financial
reporting will necessarily prevent all fraud and material error. An internal
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of the control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the internal control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, and/or the degree of
compliance with the policies or procedures may deteriorate.


45


PART
II





ITEM
1 – LEGAL PROCEEDINGS.





Claims





In
connection with our acquisition of QSI, we have made a claim of indemnification
in connection with the Purchase Agreement.  The claim relates
primarily to undisclosed material adverse facts and circumstances of which
former QSI shareholders and officers may have had prior knowledge.  We
are in our preliminary stages of evaluating this matter.  We have made
the required payments under the Purchase Agreement to date.  We
reserve the right to withhold future payments pending the final results of this
matter.





In
connection with our acquisition of GSI, we are entitled to certain rights of
indemnification from GoSolutions Equity, LLC, which is a former shareholder of
GSI that became a shareholder of VillageEDOCS, Inc. as a result of our
acquisition of GSI.  We have made a claim of indemnification from this
entity Pursuant to the agreement with GSI, if we are successful, GoSolutions
Equity, LLC would only be required to return up to approximately 4.4 million of
our shares issued to that entity to satisfy such indemnification
claims.  GoSolutions Equity, LLC is not required to contribute cash to
satisfy any indemnification claims.





In the
opinion of management, the amount of ultimate liability, if any, with respect to
these actions will not materially affect our consolidated financial position or
results of operations.





ITEM
2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.





During
the three months ended September 30, 2009, we granted to our employees options
to purchase 325,000 shares of our common stock under the 2002 Plan at a weighted
average exercise price of $0.01 per share.  All options were issued at
or above fair value on the dates of grant and vest on various dates from the
dates of grant through August 2016.





All
offers and sales of our securities described above were made pursuant to Section
4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder.





ITEM
3 – DEFAULTS UPON SENIOR SECURITIES.





None.


46





ITEM
4 – SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.





Effective
      August 20, 2009, our shareholders approved election of K. Mason Conner,
      Gerik M. Degner, H. Jay Hill, Ricardo A. Salas, and J. Thomas Zender as
      directors to serve until the 2010 annual meeting of stockholders and until
      their successors are elected and qualified.  The approval was by
      means of a written consent action of the shareholders representing 68.6%
      of the 193,046,613 shares of common stock outstanding on July 20, 2009,
      the record date.





Below is
a tabulation of the shares consenting in writing to the election of our
directors





Proposals
                  
                  For
      Proposal
                  
                  
                  Abstain/WithheldElection
      of J. Thomas Zender
                  
                  
                  132,541,762
                  
                  
                  
                  -Election
      of Ricardo A. Salas
                  
                  
                  132,541,762
                  
                  
                  
                  -Election
      of H. Jay Hill
                  
                  
                  132,541,762
                  
                  
                  
                  -Election
      of Gerik M. Degner
                  
                  
                  132,541,762Election
      of K. Mason Conner
                  
                  
                  132,541,762
                  
                  
                  
                  -





ITEM
5 – OTHER INFORMATION.





None.




47




ITEM
6 – EXHIBITS.





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 Exhibit 2.1 to the
      Company’s Current Report on Form 8-K filed on December 11, 2007.
      **2.7
            Assets
      Purchase Agreement dated December 10, 2007 by and between Phoenix Forms,
      Inc. and DocPath Corp.  Previously filed as Exhibit 2.1 to the
      Companys’s Current Report on Form 8-K filed on December 11,
      2007.**2.8
            Stock
      Purchase Agreement dated as of August 1, 2008 by and among VillageEDOCS,
      Inc. and Decision Management Company, Inc. d/b/a Questys Solutions, Inc.
      and Its Sole Shareholder, Vojin Hadzi-Pavlovic and Gloria Hadzi-Pavlovic,
      Tenants In Common.  Previously filed as Exhibit 99.1 to the
      Company’s Current Report on Form 8-K filed on August 6, 2008.
      **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. **


48





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.
**


49





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
            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. **4.20
            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. **4.21
            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. **4.22
            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.
      **4.24
            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. **4.25
            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. **4.26
            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. **4.27
            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. **4.28
            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. **4.29
            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. **4.30
            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.
      **4.31
            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. **4.32
            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. **4.33
            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. **4.34
            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.
    **4.35
            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. **4.36
            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.
      **


50





4.37
            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. **4.38
            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.**4.39
            Promissory
      Note of VillageEDOCS, Inc. dated August 1, 2008 for $900,000 held by Vojin
      Hadzi-Pavlovic and Gloria Hadzi-Pavlovic, Tenants In
      Common.  Previously filed as Exhibit 99.2 to the Company’s
      Current Report on Form 8-K filed on August 6, 2008. **4.40
            Security
      Agreement dated as of August 1, 2008, by and among VillageEDOCS, Inc,
      Decision Management Company, Inc. d/b/a Questys Solutions, Inc. and Vojin
      Hadzi-Pavlovic and Gloria Hadzi-Pavlovic, Tenants In
      Common.  Previously filed as Exhibit 99.3 to the Company’s
      Current Report on Form 8-K filed on August 6, 2008. **4.41
            Subordination
      Agreement dated as of August 1, 2008 by and between The Private Bank of
      the Peninsula and Vojin Hadzi-Pavlovic and Gloria Hadzi-Pavlovic, Tenants
      In Common.  Previously filed as Exhibit 99.4 to the Company’s
      Current Report on Form 8-K filed on August 6, 2008. **4.42
            Form
      of Promissory Note of VillageEDOCS, Inc. dated August 1, 2008 for $300,000
      held by The Silver Lake Group, LLC.  Previously filed as Exhibit
      99.6 to the Company’s Current Report on Form 8-K filed on August 6, 2008.
      **4.43
            Form
      of Security Agreement dated as of August 1, 2008, by and among
      VillageEDOCS, Inc, GoSolutions, Inc., and The Silver Lake Group
      LLC.  Previously filed as Exhibit 99.7 to the Company’s Current
      Report on Form 8-K filed on August 6, 2008. **4.44
            Form
      of Subordination Agreement dated as of August 1, 2008 by and between The
      Private Bank of the Peninsula and The Silver Lake Group
      LLC.  Previously filed as Exhibit 99.8 to the Company’s Current
      Report on Form 8-K filed on August 6, 2008. **4.45
            Amendment
      to Secured Promissory Note dated October 31, 2008 by and between
      VillageEDOCS, Inc. and The Silver Lake Group, LLC.  Previously
      filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on
      October 31, 2008.**4.46
            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. **4.47
            First
      Amendment to Loan and Security Agreement dated as of February 24, 2009 by
      and between The Private Bank of the Peninsula and the
      Registrant.  Previously filed as Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed on March 6, 2009. **4.48
            Promissory
      Note by and between the Registrant and C. Alan Williams and Joan P.
      Williams dated May 6, 2009.  Previously filed as Exhibit 99.1 to
      the Company’s Current Report on Form 8-K filed on May 11,
      2009.**4.49
            Promissory
      Note by and between the Registrant and C. Alan Williams and Joan P.
      Williams dated July 30, 2009.  Previously filed as Exhibit 99.1
      to the Company’s Current Report on Form 8-K filed on August 4,
      2009.**4.50
            Third
      Amendment to Convertible Promissory Note by and between the Registrant and
      C. Alan Williams and Joan P. Williams dated as of October 22,
      2009.*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.
  **


51





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
            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.
      **10.5
            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.
      **10.6
            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.
      **10.7
            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. **10.8
            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.
    **10.9
            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.
      **10.10
            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.
      **10.11
            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.
      **10.12
            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.
    **10.13
            Employment
      Agreement dated as of August 1, 2008 by and between VillageEDOCS, Inc. and
      Andre Hadzi-Pavlovic.  Previously filed as Exhibit 99.5 to the
      Company’s Current Report on Form 8-K filed on August 6, 2008.
      **10.14
            Employment
      Agreement dated November 13, 2008 by and between VillageEDOCS, Inc. and K.
      Mason Conner.  Previously filed as Exhibit 10.15 to the
      Company’s Quarterly Report on Form 10-Q filed on November 14, 2008.
      **10.15
            Employment
      Agreement dated November 13, 2008 by and between VillageEDOCS, Inc. and H.
      Jay Hill.  Previously filed as Exhibit 10.16 to the Company’s
      Quarterly Report on Form 10-Q filed on November 14,
  2008.**10.16
            Employment
      Agreement dated November 13, 2008 by and between VillageEDOCS, Inc. and
      Michael A. Richard.  Previously filed as Exhibit 10.17 to the
      Company’s Quarterly Report on Form 10-Q filed on November 14, 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
      November 16, 2009 by K. Mason Conner, Chief Executive
      Officer.*


52





31.2
              Certification
      Under Section 302 of The Sarbanes-Oxley Act of 2002 signed and dated
      November 16, 2009 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 November 16, 2009 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 November 16, 2009 by Michael
      A. Richard, Chief Financial
Officer.***
  *
            Filed
      herewith**
            Previously
      filed***
            Furnished
      herewith


53


SIGNATURES





Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized, in the capacities and on the dates indicated:





VillageEDOCS
      (Registrant)Dated:  November
      16, 2009
                  By
                  /s/ K. Mason ConnerK.
      Mason ConnerChief
      Executive Officer, President, and DirectorDated:  November
      16, 2009
                  By:
                  /s/ Michael A. RichardMichael
      A. RichardChief
      Financial Officer(Principal
      Accounting
Officer)


54