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 June 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  o
                            
                            Non-accelerated filer  o
                            
                            Smaller reporting company  x


(Do not check if a smallerreporting 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 July
31, 2009










VillageEDOCS


Index





Page
      No.PART
      I. FINANCIAL INFORMATIONItem
      1.
                    
                    Condensed
      Consolidated Financial StatementsCondensed
      Consolidated Balance Sheets as of June 30, 2009 (Unaudited) and December
      31, 2008 (Audited)
                    
                    1Condensed
      Consolidated Statements of Operations for the three and six months
      ended June 30, 2009 and 2008 (Unaudited)
                    
                    2Condensed
      Consolidated Statements of Cash Flows for the six months ended June 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.
                    
                    26Item
      4.
                    
                    Controls
      and Procedures
                    
                    43PART
      II. OTHER INFORMATIONItem
      1.
                    
                    Legal
      Proceedings
                    
                    44Item
      2.
                    
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    
                    44Item
      3.
                    
                    Defaults
      Upon Senior Securities
                    
                    44Item
      4.
                    
                    Submission
      of Matters to a Vote of Security Holders
                    
                    45Item
      5.
                    
                    Other
      Information
                    
                    45Item
      6.
                    
                    Exhibits
                    
                    46Signatures
                    
                    53





i




VillageEDOCS,
Inc. and subsidiaries


Condensed
Consolidated Balance Sheets





June 30,
                
                
                December 31,2009
                
                
                2008(unaudited)
                
                
                (audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                324,763
                
                
                $
                567,447Accounts
      receivable, net of allowance for doubtful accounts of approximately
      $41,000 and $47,000, respectively
                
                
                1,068,196
                
                
                
                1,093,606Inventories
                
                
                42,776
                
                
                
                41,031Prepaid
      expenses and other current assets
                
                
                143,868
                
                
                
                282,397Debt
      issuance costs, net
                
                
                -
                
                
                
                17,883Total
      current assets
                
                
                1,579,603
                
                
                
                2,002,364Property
      and equipment, net
                
                
                327,136
                
                
                
                388,788Other
      assets
                
                
                26,164
                
                
                
                28,811Goodwill
                
                
                7,244,732
                
                
                
                7,244,732Other
      intangibles, net
                
                
                3,480,616
                
                
                
                3,826,728$
                12,658,251
                
                
                $
                13,491,423LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                439,269
                
                
                $
                514,086Current
      portion of accrued expenses and other liabilities
                
                
                1,647,809
                
                
                
                1,736,419Deferred
      revenue
                
                
                729,376
                
                
                
                1,026,184Current
      portion of capital lease obligation
                
                
                11,978
                
                
                
                20,180Lines
      of credit
                
                
                474,213
                
                
                
                890,563Current
      portion of notes payable and accrued interest payable to related parties
      net of unamortized debt discount of $47,808 and $47,808,
      respectively
                
                
                415,193
                
                
                
                438,682Convertible
      note and accrued interest payable to related party
                
                
                181,620
                
                
                
                178,370Total
      current liabilities
                
                
                3,899,458
                
                
                
                4,804,484Accrued
      expenses and other liabilities, net of current portion
                
                
                -
                
                
                
                81,318Capital
      lease obligation, net of current portion
                
                
                -
                
                
                
                1,737Notes
      payable to related parties, net of current portion and unamortized debt
      discount of $47,802 and $75,690, respectively
                
                
                937,396
                
                
                
                604,310Derivative
      liability
                
                
                4,650
                
                
                
                -Total
      liabilities
                
                
                4,841,504
                
                
                
                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
                
                
                33,884,801
                
                
                
                33,618,742Accumulated
      deficit
                
                
                (26,120,859
                )
                
                
                (25,670,695
                )Total
      stockholders' equity
                
                
                7,816,747
                
                
                
                7,999,574$
                12,658,251
                
                
                $
                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 June 30,
                    
                    
                    Six Months Ended June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      sales
                    
                    $
                    4,075,893
                    
                    
                    $
                    3,414,808
                    
                    
                    $
                    7,933,842
                    
                    
                    $
                    6,692,793Cost
      of sales
                    
                    
                    1,491,527
                    
                    
                    
                    1,409,902
                    
                    
                    
                    3,028,080
                    
                    
                    
                    2,783,037Gross
      profit
                    
                    
                    2,584,366
                    
                    
                    
                    2,004,906
                    
                    
                    
                    4,905,762
                    
                    
                    
                    3,909,756Operating
      expenses:Product
      and technology development
                    
                    
                    524,873
                    
                    
                    
                    365,450
                    
                    
                    
                    1,031,865
                    
                    
                    
                    771,383Sales
      and marketing
                    
                    
                    642,465
                    
                    
                    
                    496,757
                    
                    
                    
                    1,261,355
                    
                    
                    
                    941,705General
      and administrative
                    
                    
                    1,152,051
                    
                    
                    
                    1,064,849
                    
                    
                    
                    2,496,544
                    
                    
                    
                    2,389,975Depreciation
      and amortization
                    
                    
                    230,836
                    
                    
                    
                    184,130
                    
                    
                    
                    473,835
                    
                    
                    
                    365,775Total
      operating expenses
                    
                    
                    2,550,225
                    
                    
                    
                    2,111,186
                    
                    
                    
                    5,263,599
                    
                    
                    
                    4,468,838Income
      (loss) from operations
                    
                    
                    34,141
                    
                    
                    
                    (106,280
                    )
                    
                    
                    (357,837
                    )
                    
                    
                    (559,082
                    )Change
      in fair value of derivative liability
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,100
                    
                    
                    
                    -Interest
      expense, net of interest income
                    
                    
                    (40,071
                    )
                    
                    
                    (46,575
                    )
                    
                    
                    (85,866
                    )
                    
                    
                    (112,823
                    )Other
      income (expense), net
                    
                    
                    (7,273
                    )
                    
                    
                    1,811
                    
                    
                    
                    10,657
                    
                    
                    
                    53,403Loss
      before provision for income taxes
                    
                    
                    (13,203
                    )
                    
                    
                    (151,044
                    )
                    
                    
                    (429,946
                    )
                    
                    
                    (618,502
                    )Provision
      for income taxes
                    
                    
                    (18,828
                    )
                    
                    
                    (5,621
                    )
                    
                    
                    (22,828
                    )
                    
                    
                    (32,998
                    )Net
      loss
                    
                    $
                    (32,031
                    )
                    
                    $
                    (156,665
                    )
                    
                    $
                    (452,774
                    )
                    
                    $
                    (651,500
                    )Basic
      and diluted loss available to common shareholders per common
      share:
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Weighted
      average shares outstanding -basic and diluted
                    
                    
                    192,063,867
                    
                    
                    
                    152,770,913
                    
                    
                    
                    186,129,383
                    
                    
                    
                    152,770,913





See
accompanying notes to unaudited condensed consolidated financial
statements.




2




VillageEDOCS,
      Inc. and subsidiariesCondensed
      Consolidated Statements of Cash Flows(unaudited)





Six
      Months Ended June 30,2009
                  
                  
                  2008Cash
      Flows from Operating Activities:Net
      loss
                  
                  $
                  (452,774
                  )
                  
                  $
                  (651,500
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  473,835
                  
                  
                  
                  365,775Recovery
      of doubtful accounts receivable
                  
                  
                  (7,047
                  )
                  
                  
                  (3,613
                  )Estimated
      fair value of stock options issued to employees for services
      rendered
                  
                  
                  144,080
                  
                  
                  
                  122,412Estimated
      fair value of warrants issued to consultants
                  
                  
                  23,194
                  
                  
                  
                  50,485Change
      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
                  
                  
                  45,771
                  
                  
                  
                  89,444Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  32,457
                  
                  
                  
                  80,729Inventories
                  
                  
                  (1,745
                  )
                  
                  
                  4,504Prepaid
      expenses and other current assets
                  
                  
                  92,428
                  
                  
                  
                  (43,291
                  )Other
      assets
                  
                  
                  2,647
                  
                  
                  
                  -Accounts
      payable
                  
                  
                  (74,817
                  )
                  
                  
                  (68,165
                  )Accrued
      expenses, other liabilities and interest
                  
                  
                  (65,373
                  )
                  
                  
                  (242,971
                  )Deferred
      revenue
                  
                  
                  (296,808
                  )
                  
                  
                  23,769Net
      cash used in operating activities
                  
                  
                  (57,601
                  )
                  
                  
                  (272,422
                  )Cash
      Flows from Investing Activities:Purchases
      of property and equipment
                  
                  
                  (37,304
                  )
                  
                  
                  (73,836
                  )Cash
      acquired from sale of PFI
                  
                  
                  -
                  
                  
                  
                  53,832Net
      cash used in investing activities
                  
                  
                  (37,304
                  )
                  
                  
                  (20,004
                  )Cash
      Flows from Financing Activities:Proceeds
      from lines of credit, net of repayments
                  
                  
                  (416,350
                  )
                  
                  
                  95,248Proceeds
      from note payable to related parties
                  
                  
                  430,000
                  
                  
                  
                  -Cash
      paid for debt issuance costs
                  
                  
                  -
                  
                  
                  
                  (65,000
                  )Payments
      on capital lease obligation
                  
                  
                  (9,939
                  )
                  
                  
                  (9,362
                  )Principal
      payments on notes payable to related parties
                  
                  
                  (151,490
                  )
                  
                  
                  -Net
      cash (used in) provided by financing activities
                  
                  
                  (147,779
                  )
                  
                  
                  20,886Net
      change in cash and cash equivalents
                  
                  
                  (242,684
                  )
                  
                  
                  (271,540
                  )Cash
      and cash equivalents, beginning of period
                  
                  
                  567,447
                  
                  
                  
                  749,911Cash
      and cash equivalents, end of period
                  
                  $
                  324,763
                  
                  
                  $
                  478,371Supplemental
      disclosure of cash flow information -Cash paid during the period
      for:Interest
                  
                  $
                  33,646
                  
                  
                  $
                  34,913Income
      taxes
                  
                  $
                  49,314
                  
                  
                  $
                  47,400





continued...





3





Six
      Months Ended June 30,2009
                    
                    
                    2008Supplemental
      Schedule of Noncash Investing  and Financing
      Activities:Cumulative
      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


June
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.





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 ($2,319,855 at June 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.





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.





5


The
Company believes it will have adequate cash and available borrowing 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 until at least the first quarter of 2010.
Should anticipated cash flows decrease for any reason, management plans to
obtain debt and equity financing from new and existing
stockholders.    There can be no assurance that funding will
be available on acceptable terms, if at all, or that such funds, if raised,
would enable the Company to achieve or sustain profitable
operations.





These
factors raise substantial doubt about the Company’s ability to continue as a
going concern.  The 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 has adopted Statement of Financial Accounting Standards (“SFAS”) No.
131, Disclosures about
Segments of an Enterprise and Related Information.  SFAS No.
131 requires the Company to report information about segments of its business in
annual financial statements and requires it to report selected segment
information in its quarterly reports issued to stockholders. SFAS No. 131 also
requires entity-wide disclosures about the products and services that an entity
provides, the material countries in which it holds assets and reports revenues
and its major customers. The Company's five reportable segments are managed
separately based on fundamental differences in their operations. At June 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 June 30, 2009 and December 31, 2008, the Company
has recorded an allowance for doubtful accounts of approximately $41,000 and
$47,000, respectively.





For the
three months ended June 30, 2009 and 2008, independent representatives of one
enterprise accounted for approximately 17% and 27% of total revenues,
respectively.  For the three months ended June 30, 2009, independent
representatives of another enterprise accounted for approximately 17% of total
revenue.





For the
six months ended June 30, 2009 and 2008, independent representatives of one
enterprise accounted for approximately 18% and 28% of total revenues,
respectively.  For the six months ended June 30, 2009, independent
representatives of another enterprise accounted for approximately 17% of total
revenue.





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





6


At June
30, 2009 and December 31, 2008, the Company had amounts on deposit with
financial institutions in excess of the federally insured limits of $250,000,
which approximated $0 and $44,000, respectively.
  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 in accordance with Staff Accounting Bulletin (“SAB”)
No. 101, Revenue Recognition
in Financial Statements, as revised by SAB No. 104.  As such,
the Company recognizes revenue when persuasive evidence of an arrangement
exists, title transfer has occurred, or services have been performed, the price
is fixed or readily determinable and collectibility is
probable.  Sales are recorded net of sales discounts.





The
Company has adopted Statement of Position (“SOP”) 97-2, Software Revenue Recognition,
as well as SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions  The
SOPs generally require revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
market values of each of the elements. The fair value of an element must be
based on vendor-specific objective evidence (“VSOE”) of fair value. Software
license revenue generated by TBS 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.





Loss per
Share





Basic
loss per share is computed by dividing loss available to common stockholders by
the weighted average number of common shares assumed to be outstanding during
the period of computation. Diluted loss per share is computed similar to basic
loss per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
shares had been issued and if the additional common shares were
dilutive.  Approximately 35,242,000 and 36,179,000 of potentially
dilutive shares as of June 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.





Stock-Based
Compensation





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





Effective
January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, (“SFAS
123(R)”).SFAS
123(R) requires all share-based payments to employees, including grants of
employee stock options and restricted stock grants, to be recognized in the
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 under SFAS 123(R).  Fair value is
determined at the date of grant.  In accordance with SFAS 123(R), 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 average forfeiture rate for the six months
ended June 30, 2009 and 2008, of approximately 15% and 17%, respectively, was
based on historical forfeiture experience and estimated future employee
forfeitures.





SFAS
123(R) requires the cash flows resulting from the tax benefits resulting from
tax deductions in excess of the compensation cost recognized for those options
to be classified as financing cash flows. Due to the Company’s loss position,
there were no such tax benefits during the six months ended June 30, 2009 and
2008.





8


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
June 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.





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





Six Months EndedJune 30,2009
                  
                  
                  2008Stock
      options:Expected
      term (in years)
                  
                  
                  5.9
                  
                  
                  
                  6.0Expected
      volatility
                  
                  
                  183
                  %
                  
                  
                  272
                  %Risk-free
      interest rate
                  
                  
                  2.04
                  %
                  
                  
                  3.48
                  %Expected
      dividends
                  
                  
                  -
                  
                  
                  
                  -








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





June 30, 2009Weighted-AverageRemaining
                
                
                AggregateExercise
                
                
                Contractual
                
                
                IntrinsicShares
                
                
                Price
                
                
                Term (Years)
                
                
                ValueOptions
      outstanding at January 1, 2009
                
                
                42,730,939
                
                
                $
                0.16Options
      granted
                
                
                2,000,000
                
                
                $
                0.02Options
      forfeited/cancelled
                
                
                (3,345,000
                )
                
                $
                0.13Options
      expired
                
                
                (100,000
                )
                
                $
                0.25Options
      exercised
                
                
                -
                
                
                $
                -Options
      outstanding at June 30, 2009
                
                
                41,285,939
                
                
                $
                0.16
                
                
                
                4.8
                
                
                $
                -Options
      vested or expected to vest at June 30, 2009
                
                
                39,363,733
                
                
                $
                0.17
                
                
                
                4.7
                
                
                $
                -Options
      exercisable at June 30, 2009
                
                
                26,011,439
                
                
                $
                0.22
                
                
                
                3.9
                
                
                $
                -





The
weighted average grant date fair value of options granted during the six months
ended June 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.


9


As of
June 30, 2009, there was approximately $493,000 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 1.9 weighted average years.  The
total fair value of vested options issued to employees and directors during the
three months ended June 30, 2009 and 2008 was $61,667 and $52,904, respectively,
net of estimated forfeitures. The total fair value of vested options issued to
employees and directors during the six months ended June 30, 2009 and 2008 was
$144,080 and $122,412, respectively, net of estimated
forfeitures.





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





Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Cost
      of sales
                  
                  $
                  11,459
                  
                  
                  $
                  -
                  
                  
                  $
                  37,021
                  
                  
                  $
                  -General
      and administrative
                  
                  
                  39,945
                  
                  
                  
                  52,904
                  
                  
                  
                  88,379
                  
                  
                  
                  122,412Sales
      and marketing
                  
                  
                  3,535
                  
                  
                  
                  -
                  
                  
                  
                  7,993
                  
                  
                  
                  -Product
      and technology development
                  
                  
                  6,728
                  
                  
                  
                  -
                  
                  
                  
                  10,687
                  
                  
                  
                  -$
                  61,667
                  
                  
                  $
                  52,904
                  
                  
                  $
                  144,080
                  
                  
                  $
                  122,412




The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of the
Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, and EITF Issue No. 00-18, Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than
Employees.  The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at which
a commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor’s performance is complete.  In
the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting
agreement.







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 in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets.The provisions of SFAS No. 142 require that the Company allocate
its goodwill to its various reporting units, determine the carrying value of
those businesses, and estimate the fair value of the reporting units so that a
two-step goodwill impairment test can be performed.  In the first step of
the goodwill impairment test, the fair value of each reporting unit is compared
to its carrying value.  Management reviews, on an annual basis, the
carrying value of goodwill in order to determine whether impairment has
occurred.  Impairment is based on several factors including the Company's
projection of future 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.





10


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
June 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.





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 June 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 June 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 six months ended June 30, 2009 and
2008 were insignificant.





Derivative
Liability




Effective
January 1, 2009, the Company adopted the provisions of EITF No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”).
EITF 07-5 applies to any freestanding financial instruments or embedded features
that have the characteristics of a derivative, as defined by SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities, and to any freestanding financial
instruments that are potentially settled in an entity’s own common stock. As a
result of adopting EITF 07-5, 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 six months ended June 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 on the accompanying unaudited
condensed consolidated statements of operations and as a derivative liability on
the accompanying unaudited condensed consolidated balance sheets.  The
fair value of the 465,000 common stock purchase warrants declined to $4,650 as
of June 30, 2009. As such, the Company recognized a $3,100 gain from the change
in fair value of these warrants for the six months ended June 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:




11





June 30,
                  
                  January 1,2009
                  
                  2009Annual
      dividend yield
                  
                  
                  —
                  
                  
                  
                  —Expected
      life (years)
                  
                  
                  8.61
                  
                  
                  
                  9.70Risk-free
      interest rate
                  
                  
                  3.36
                  %
                  
                  
                  2.46
                  %Expected
      volatility
                  
                  
                  184
                  %
                  
                  
                  190
                  %




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 FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. SFAS
157 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 SFAS 157 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 SFAS 157, 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 SFAS 157 did not have a material effect on
our 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):




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








Balance
      at December 31, 2008
                        
                        $
                        —Cumulative
      effect of EITF 07-5
                        
                        
                        6,200Issuance
      of warrants
                        
                        
                        1,550Change
      in fair value
                        
                        
                        (3,100
                        )Balance
      at June 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 six months ended June 30, 2009.




12





New Accounting
Pronouncements





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles. SFAS No. 168 replaces SFAS No.
162, The Hierarchy of
Generally Accepted Accounting Principles, and 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. SFAS No. 168 is
effective for periods ending after September 15, 2009. The Company does not
expect SFAS No. 168 to have a material effect on its consolidated financial
position and results of operations.





In
April 2009, the FASB issued FASB Staff Position (“FSP”) FAS 107-1 and
Accounting Principles Board (“APB”) 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“FSP FAS 107-1” and “ABP 28-1”, respectively),
which amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting,
respectively, to require disclosures about fair value of financial instruments
in interim and annual reporting periods. FSP FAS 107-1 and APB 28-1 are
effective for interim reporting periods ending after June 15, 2009, which for
the Company is the second quarter of fiscal 2009.  The Company has
concluded that the application of FSP FAS 107-1 and APB 28-1 did not have a
material impact on its consolidated financial position and results of operations
as of and for the period ended June 30, 2009.





In
April 2009, the FASB issued FSP SFAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, which
provides additional guidance for estimating fair value in accordance with FASB
Statement No. 157, Fair
Value Measurements, when the volume and level of activity for the asset
or liability have significantly decreased. This FSP 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 FSP SFAS
157-4 did not have a material impact on its consolidated financial position and
results of operations as of and for the period ended June 30, 2009.





In
October 2008, the FASB issued FASB Staff Position No. 157-3, Determining Fair Value of a
Financial Asset When the Market for That Asset is Not Active (“FSP No.
157-3”).  FSP No. 157-3 clarifies the application of SFAS No. 157 in a
market that is not active, and provides an illustrative example intended to
address certain key application issues.  FSP No. 157-3 is effective
immediately, and applies to the Company’s June 30, 2009 financial
statements.  The Company has concluded that the application of FSP No.
157-3 did not have a material impact on its consolidated financial position and
results of operations as of and for the period ended June 30, 2009.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141(R) provides companies with principles and requirements on how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, liabilities assumed, and any noncontrolling interest in the
acquiree as well as the recognition and measurement of goodwill acquired in a
business combination. SFAS No. 141(R) also requires certain disclosures to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. Acquisition costs associated with the
business combination will generally be expensed as incurred. SFAS No. 141(R) is
effective for business combinations occurring in fiscal years beginning after
December 15, 2008. The Company is evaluating the impact SFAS No. 141(R) will
have on any future business combinations.





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.





13





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
                  
                  
                  Six MonthsEnded
                  
                  
                  EndedJune 30, 2008
                  
                  
                  June 30, 2008Net
      sales
                  
                  $
                  4,316,370
                  
                  
                  $
                  8,234,206Net
      loss
                  
                  $
                  (46,283
                  )
                  
                  $
                  (734,912
                  )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.





14


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





Estimated Useful
                            
                            Gross
                            
                            
                            
                            
                            
                            NetLife
                            
                            Carrying
                            
                            
                            Accumulated
                            
                            
                            Carrying(Years)
                            
                            Amount
                            
                            
                            Amortization
                            
                            
                            AmountCorporate:License
      agreement
                            
                            Five
                            
                            $
                            250,000
                            
                            
                            $
                            (161,634
                            )
                            
                            $
                            88,366TBS:Customer
      list
                            
                            Ten
                            
                            $
                            500,000
                            
                            
                            $
                            (268,750
                            )
                            
                            $
                            231,250Trade
      name
                            
                            Five
                            
                            
                            50,000
                            
                            
                            
                            (50,000
                            )
                            
                            
                            -$
                            550,000
                            
                            
                            $
                            (318,750
                            )
                            
                            $
                            231,250QSI:Customer
      relationships
                            
                            Ten
                            
                            $
                            730,000
                            
                            
                            $
                            (66,917
                            )
                            
                            $
                            663,083Technology
                            
                            Five
                            
                            
                            390,000
                            
                            
                            
                            (71,500
                            )
                            
                            
                            318,500Trade
      name
                            
                            Five
                            
                            
                            210,000
                            
                            
                            
                            (38,500
                            )
                            
                            
                            171,500Covenant
      not to compete
                            
                            Two
                            
                            
                            70,000
                            
                            
                            
                            (32,083
                            )
                            
                            
                            37,917$
                            1,400,000
                            
                            
                            $
                            (209,000
                            )
                            
                            $
                            1,191,000GSI:Customer
      relationships
                            
                            Ten
                            
                            $
                            2,200,000
                            
                            
                            $
                            (696,667
                            )
                            
                            $
                            1,503,333Technology
                            
                            Five
                            
                            
                            490,000
                            
                            
                            
                            (310,333
                            )
                            
                            
                            179,667Trade
      names and marks
                            
                            Ten
                            
                            
                            420,000
                            
                            
                            
                            (133,000
                            )
                            
                            
                            287,000$
                            3,110,000
                            
                            
                            $
                            (1,140,000
                            )
                            
                            $
                            1,970,000$
                            5,310,000
                            
                            
                            $
                            (1,829,384
                            )
                            
                            $
                            3,480,616





Amortization
of other intangible assets was $172,430 and $117,929, respectively, during the
three months ended June 30, 2009 and 2008, and $346,112 and $235,860,
respectively, during the six months ended June 30, 2009 and
2008.  During the six months ended June 30, 2009, the Company did not
acquire or dispose of any intangible assets.





15




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.





16


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 June 30, 2009
and amortized $0 and $ 5,417, respectively, of the cash fees to interest expense
during the three and six months then ended.  The Company amortized
$10,834 and $27,085, respectively, of the cash fees to interest expense during
the three and six months ended June 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 EITF 07-5 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 June 30, 2009, there were outstanding borrowings of
$374,213 on the Line and the Company was in compliance with all loan covenants.
Availability on the Line as of June 30, 2009 was approximately
$267,000.





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.  The TBS RLOC is guaranteed by the
assets of TBS.   Interest on outstanding borrowings is payable
monthly at a variable annual rate equal to the financial institution's prime
rate in effect (3.25% at June 30, 2009).  As of June 30, 2009, the
Company had not utilized the TBS RLOC and was in compliance with all loan
covenants.





QSI has
an unsecured line of credit agreement with a financial institution for
borrowings up to the maximum of $100,000 with no maturity date (“QSI
RLOC”).  Borrowings bear interest at the prime rate, plus 2.775%
(6.025% at June 30, 2009).  QSI had borrowings totaling $100,000 at
June 30, 2009 and had $0 available for future borrowings under the line of
credit.  On August 3, 2009, the Company repaid the outstanding
borrowings in full and closed the line of credit using the proceeds of a note
payable financing provided by a related party (see Note 11).





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 a note payable financing provided by a related
party (see Note 11).  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 six months ended June 30, 2009, $14,097
and $24,670, 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 a note
payable financing provided by a related party (see Note 11).





17





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 six
months ended June 30, 2009, $1,840 and $3,218, 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 June 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 June 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 June 30, 2009, the Company
recorded accrued interest of $3,199 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.





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
February 17, 2004, the Company borrowed $1,700,000 from C. Alan and Joan P.
Williams and issued a convertible promissory note, bearing interest at 10
percent per annum.  During 2005, all but $65,000 of the principal
amount due pursuant to this note was converted into shares of the Company's
common stock.   The note and accrued interest are due at the
earlier of one of three events: 1) October 31, 2009; 2) acquisition of a
controlling interest in the Company by a third party; or 3) the Company achieves
equity financing of a minimum of $3,000,000.  Effective April 14,
2005, pursuant to an amendment to the note, the conversion price was fixed at
$0.14 per share.  As an incentive for Mr. and Mrs. Williams to provide
the loan, the Company issued them a warrant to purchase 5,000,000 shares of the
Company's 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 condensed consolidated financial
statements.  In connection with the issuance of the note, the Company
recorded a debt discount of $730,000, consisting of an embedded put option of
$280,000 and the fair value of the warrant of $450,000, which were recorded as
derivative liabilities upon note issuance and subsequently reclassified to
additional paid-in capital.





18


During
the three and six months ended June 30, 2009 and 2008, $4,824 and $6,449,
respectively of interest expense was recognized in connection with these
notes.





At June
30, 2009, the amount owed by the Company to the Williams pursuant to the unpaid
balance of the convertible promissory note payable was $65,000 in principal and
$116,620 in unpaid interest.  The interest rate in effect as of June
30, 2009 was ten percent (10%) per annum.





At
December 31, 2008, the amount owed by the Company to the Williams pursuant to
the unpaid balance of the convertible promissory note payable was $65,000 in
principal and $113,370 in unpaid interest.





Interest
Expense





Interest
expense recognized on all lines of credit and notes payable was $36,087 and
$81,882, respectively, during the three months and six ended June 30, 2009, and
$69,978 and $93,955, respectively during the three and six months ended June 30,
2008.





Interest
expense noted above included non-cash charges (related to amortization of debt
discount and debt issuance costs) of $27,888 and $89,444, respectively, during
the 2009 and 2008 six 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.





b.
            Stock
      Options





During
the six months ended June 30, 2009, the Company granted to its employees options
to purchase 2,000,000 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 June 2016.  During the six months
ended June 30, 2009, options to purchase 3,445,000 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 six months ended June 30, 2009, the Company recorded $0 and $17,334,
respectively, of consulting expense in connection with this
warrant.





19


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 June 30, 2009.  The
Company is amortizing such cost over the one-year life of the related debt
instrument.  During the three and six months ended June 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 six months
ended June 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 June 30, 2009.  The
Company amortized such cost over the one-year life of the related debt
instrument.  During the three and six months ended June 30, 2009, the
Company recorded $0 and $12,091, respectively, of interest expense, and during
the three and six months ended June 30, 2008, the Company recorded $24,194 and
$60,484, 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 six months ended June
30, 2008, the Company expensed consulting fees of $484 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 six months ended
June 30, 2008, the Company recorded $25,001, and $50,001, respectively, of such
expense in the accompanying unaudited condensed consolidated statements of
operations.





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 six months ended June 30, 2009 was $118,208 (including
$55,275 of related party rent) and $250,506 (including $114,853 of related party
rent), respectively.





Rent
expense for the three and six months ended June 30, 2008 was $116,674 (including
$48,614 of related party rent) and $234,655 (including $118,281 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.





20


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).





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
Notes 6 and 11.





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.





21


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:




22




Three
      Months
                  
                  
                  Three
      Months
                  
                  
                  Six
      Months
                  
                  
                  Six
      Monthsended
      / As of
                  
                  
                  ended
                  
                  
                  ended
      / As of
                  
                  
                  endedJune
      30
                  
                  
                  June
      30
                  
                  
                  June
      30
                  
                  
                  June
      302009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      revenue from external customers:Electronic
      document delivery
                  
                  $
                  668,261
                  
                  
                  $
                  695,339
                  
                  
                  $
                  1,337,678
                  
                  
                  $
                  1,382,227Government
      accounting solutions
                  
                  
                  1,049,510
                  
                  
                  
                  1,180,112
                  
                  
                  
                  2,106,010
                  
                  
                  
                  2,343,053Electronic
      content management
                  
                  
                  732,649
                  
                  
                  
                  -
                  
                  
                  
                  1,260,317
                  
                  
                  
                  -Integrated
      communications
                  
                  
                  1,625,473
                  
                  
                  
                  1,539,357
                  
                  
                  
                  3,229,837
                  
                  
                  
                  2,967,513Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      net revenue from external customers:
                  
                  $
                  4,075,893
                  
                  
                  $
                  3,414,808
                  
                  
                  $
                  7,933,842
                  
                  
                  $
                  6,692,793Income
      (loss) from operations:Electronic
      document delivery
                  
                  $
                  135,766
                  
                  
                  $
                  123,605
                  
                  
                  $
                  250,427
                  
                  
                  $
                  176,636Government
      accounting solutions
                  
                  
                  11,178
                  
                  
                  
                  (3,914
                  )
                  
                  
                  61,588
                  
                  
                  
                  94,094Electronic
      content management
                  
                  
                  (2,025
                  )
                  
                  
                  -
                  
                  
                  
                  (241,865
                  )
                  
                  
                  -Integrated
      communications
                  
                  
                  300,930
                  
                  
                  
                  365,989
                  
                  
                  
                  558,256
                  
                  
                  
                  446,681Corporate
                  
                  
                  (411,708
                  )
                  
                  
                  (591,960
                  )
                  
                  
                  (986,243
                  )
                  
                  
                  (1,276,493
                  )Total
      income (loss) from operations:
                  
                  $
                  34,141
                  
                  
                  $
                  (106,280
                  )
                  
                  $
                  (357,837
                  )
                  
                  $
                  (559,082
                  )Depreciation
      and amortization:Electronic
      document delivery
                  
                  $
                  19,137
                  
                  
                  $
                  21,229
                  
                  
                  $
                  40,800
                  
                  
                  $
                  40,433Government
      accounting solutions
                  
                  
                  21,297
                  
                  
                  
                  25,430
                  
                  
                  
                  44,198
                  
                  
                  
                  50,700Electronic
      content management
                  
                  
                  67,053
                  
                  
                  
                  -
                  
                  
                  
                  134,069
                  
                  
                  
                  -Integrated
      communications
                  
                  
                  110,419
                  
                  
                  
                  124,155
                  
                  
                  
                  228,906
                  
                  
                  
                  248,203Corporate
                  
                  
                  12,930
                  
                  
                  
                  13,316
                  
                  
                  
                  25,862
                  
                  
                  
                  26,439Total
      depreciation and amortization:
                  
                  $
                  230,836
                  
                  
                  $
                  184,130
                  
                  
                  $
                  473,835
                  
                  
                  $
                  365,775Interest
      expense, net of interest income:Electronic
      document delivery
                  
                  $
                  4,065
                  
                  
                  $
                  956
                  
                  
                  $
                  7,242
                  
                  
                  $
                  956Government
      accounting solutions
                  
                  
                  6,522
                  
                  
                  
                  2,770
                  
                  
                  
                  11,252
                  
                  
                  
                  3,361Electronic
      content management
                  
                  
                  8,876
                  
                  
                  
                  -
                  
                  
                  
                  11,803
                  
                  
                  
                  -Integrated
      communications
                  
                  
                  -
                  
                  
                  
                  (127
                  )
                  
                  
                  -
                  
                  
                  
                  (273
                  )Corporate
                  
                  
                  20,608
                  
                  
                  
                  42,976
                  
                  
                  
                  55,569
                  
                  
                  
                  108,779Total
      interest expense, net of interest income:
                  
                  $
                  40,071
                  
                  
                  $
                  46,575
                  
                  
                  $
                  85,866
                  
                  
                  $
                  112,823


continued...





23





Three Months
                  
                  
                  Three Months
                  
                  
                  Six Months
                  
                  
                  Six Monthsended / As of
                  
                  
                  ended
                  
                  
                  ended / As of
                  
                  
                  endedJune 30
                  
                  
                  June 30
                  
                  
                  June 30
                  
                  
                  June 302009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      income (loss):Electronic
      document delivery
                  
                  $
                  131,488
                  
                  
                  $
                  122,655
                  
                  
                  $
                  238,432
                  
                  
                  $
                  162,612Government
      accounting solutions
                  
                  
                  (332
                  )
                  
                  
                  (6,684
                  )
                  
                  
                  47,693
                  
                  
                  
                  90,733Electronic
      content management
                  
                  
                  (14,440
                  )
                  
                  
                  -
                  
                  
                  
                  (247,043
                  )
                  
                  
                  -Integrated
      communications
                  
                  
                  302,320
                  
                  
                  
                  373,832
                  
                  
                  
                  558,179
                  
                  
                  
                  473,980Corporate
                  
                  
                  (451,067
                  )
                  
                  
                  (646,468
                  )
                  
                  
                  (1,050,035
                  )
                  
                  
                  (1,378,825
                  )Total
      net loss:
                  
                  $
                  (32,031
                  )
                  
                  $
                  (156,665
                  )
                  
                  $
                  (452,774
                  )
                  
                  $
                  (651,500
                  )Identifiable
      assets:Electronic
      document delivery
                  
                  $
                  547,072
                  
                  
                  
                  
                  
                  
                  $
                  547,072Government
      accounting solutions
                  
                  
                  3,611,049
                  
                  
                  
                  
                  
                  
                  
                  3,611,049Electronic
      content management
                  
                  
                  2,504,752
                  
                  
                  
                  
                  
                  
                  
                  2,504,752Integrated
      communications
                  
                  
                  5,853,086
                  
                  
                  
                  
                  
                  
                  
                  5,853,086Corporate
                  
                  
                  142,292
                  
                  
                  
                  
                  
                  
                  
                  142,292Total
      identifiable assets:
                  
                  $
                  12,658,251
                  
                  
                  
                  
                  
                  
                  $
                  12,658,251Capital
      expenditures:Electronic
      document delivery
                  
                  $
                  2,534
                  
                  
                  $
                  8,082
                  
                  
                  $
                  22,202
                  
                  
                  $
                  25,361Government
      accounting solutions
                  
                  
                  686
                  
                  
                  
                  4,800
                  
                  
                  
                  2,038
                  
                  
                  
                  4,800Electronic
      content management
                  
                  
                  3,295
                  
                  
                  
                  -
                  
                  
                  
                  6,969
                  
                  
                  
                  -Integrated
      communications
                  
                  
                  1,701
                  
                  
                  
                  -
                  
                  
                  
                  6,095
                  
                  
                  
                  43,675Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      capital expenditures:
                  
                  $
                  8,216
                  
                  
                  $
                  12,882
                  
                  
                  $
                  37,304
                  
                  
                  $
                  73,836




24




11.
            Subsequent
      Events





Related
Party Note Payable





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.




Payment
obligations under the Williams July 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 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 Decision Management Company, Inc. dba Questys Solutions
dated as of August 1, 2008.


25





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 June 30, 2009, and the
unaudited condensed consolidated statements of operations for the three and six
months ended June 30, 2009 and 2008, the unaudited condensed consolidated
statements of cash flows for the six months ended June 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.




26


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 half of 2009 to vary significantly from those reported
for the first half 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.




27




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 over 25,000
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 Half of 2009




§
            Consolidated
      net revenue for the six months ended June 30, 2009 increased by 19% over
      the 2008 period;





§
            Gross
      margin improved to 62% compared to 58% in the 2008 period due to sales mix
      differences;





§
            Operating
      expenses increased by 18% compared to the prior year period. However,
      consolidated operating expenses during the 2009 period were 66% of sales
      compared to 67% of sales in the 2008
period;





§
            Operating
      expenses decreased at Corporate (-23%), MVI (-12%), and TBS (-8%) while
      GSI’s operating expenses increased
8%;





§
            Net
      income increased at GSI to $558,179 compared to $473,980 for the 2008
      period;





§
            Net
      loss for the six months ended June 30, 2009 was $452,774, a 31%
      improvement from the $651,500 reported for the 2008 period;
      and





§
            We
      retired approximately $343,000 in accrued expenses and notes payable debt
      that existed as of December 31,
2008.




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.





28




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
2009, 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.





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, 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.




29




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. 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.





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.





30




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 EITF No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”).
EITF 07-5 applies to any freestanding financial instruments or embedded features
that have the characteristics of a derivative, as defined by SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities, and to any freestanding financial
instruments that are potentially settled in an entity’s own common stock. As a
result of adopting EITF 07-5, 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 SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. SFAS
157 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 SFAS 157 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 SFAS 157, 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 SFAS 157 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 June 30,
2009 Compared to Three Months Ended June 30, 2008





Net Revenue from External
Customers





Net
revenue from external customers for the three months ended June 30, 2009 was
$4,075,893, a 19% increase over net revenue for the prior year quarter of
$3,414,808.





For the
three months ended June 30, 2009, QSI, GSI, TBS, and MVI generated 18%, 40%, 26%
and 16% of our net revenue, respectively. For the three months ended June 30,
2008, QSI, GSI, TBS, and MVI generated 0%, 45%, 35% and 20% of our net revenue,
respectively.


31




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





Three Months Ended
                  
                  
                  Three Months Ended
                  
                  
                  VarianceJune 30, 2009
                  
                  
                  June 30, 2008
                  
                  
                  Amount
                  
                  
                  PercentNet
      revenue from external customers:Electronic
      document delivery services (MVI)
                  
                  $
                  668,261
                  
                  
                  $
                  695,339
                  
                  
                  $
                  (27,078
                  )
                  
                  
                  -4
                  %Government
      accounting solutions (TBS)
                  
                  
                  1,049,510
                  
                  
                  
                  1,180,112
                  
                  
                  
                  (130,602
                  )
                  
                  
                  -11
                  %Electronic
      content management (QSI)
                  
                  
                  732,649
                  
                  
                  
                  -
                  
                  
                  
                  732,649
                  
                  
                  
                  *Integrated
      communications (GSI)
                  
                  
                  1,625,473
                  
                  
                  
                  1,539,357
                  
                  
                  
                  86,116
                  
                  
                  
                  6
                  %Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  *Total
      net revenue from external customers
                  
                  $
                  4,075,893
                  
                  
                  $
                  3,414,808
                  
                  
                  $
                  661,085
                  
                  
                  
                  19
                  %


*
calculation is not meaningful




Revenue
increased 6% at GSI due to increases in user subscription fees, which were
partially offset by decreases in revenue from corporate clients.





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





Revenue
decreased 4% at MVI due to a decrease in outbound revenue as a result of
customer attrition and reduced usage volumes.





QSI
contributed $732,649 in revenue during the three months ended June 30,
2009.




Cost of
Sales





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





Three Months Ended
                  
                  
                  Three Months Ended
                  
                  
                  VarianceJune 30, 2009
                  
                  
                  June 30, 2008
                  
                  
                  Amount
                  
                  
                  PercentCost
      of sales:Electronic
      document delivery services (MVI)
                  
                  $
                  249,519
                  
                  
                  $
                  278,268
                  
                  
                  $
                  (28,749
                  )
                  
                  
                  -10
                  %Government
      accounting solutions (TBS)
                  
                  
                  734,954
                  
                  
                  
                  857,154
                  
                  
                  
                  (122,200
                  )
                  
                  
                  -14
                  %Electronic
      content management (QSI)
                  
                  
                  206,936
                  
                  
                  
                  -
                  
                  
                  
                  206,936
                  
                  
                  
                  *Integrated
      communications (GSI)
                  
                  
                  300,118
                  
                  
                  
                  274,480
                  
                  
                  
                  25,638
                  
                  
                  
                  9
                  %Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  *Total
      cost of sales:
                  
                  $
                  1,491,527
                  
                  
                  $
                  1,409,902
                  
                  
                  $
                  81,625
                  
                  
                  
                  6
                  %


*
calculation is not meaningful




Total
cost of sales represented 37% and 41% of net sales during the 2009 and 2008
quarters, respectively.





Cost of
sales for MVI for the three months ended June 30, 2009 represented 37% of MVI’s
net sales as compared with 40% in the 2008 quarter as a result of reduced
telecommunications expenses.





Cost of
sales for TBS for the three months ended June 30, 2009 represented 70% of TBS’
net sales as compared with 73% in the 2008 quarter. The decreased costs at TBS
were attributable to a reduction in third-party hardware sales.




32




Cost of
sales for GSI for the three months ended June 30, 2009 and 2008 represented 18%
of GSI’s net sales in each of the respective quarters.





Cost of
sales for QSI for the three months ended June 30, 2009 represented 28% of QSI’s
net sales.





On a
consolidated basis, cost of sales in the 2009 quarter included $11,459 in
compensation expense related to the vesting of stock options, compared to $0 in
the 2008 period.




Gross
Profit





Gross
profit for the three months ended June 30, 2009 increased 29% to $2,584,366 as
compared to $2,004,906 for the 2008 quarter. The increase in the 2009 quarter of
$579,460 resulted from increases of $60,478 and $1,671 from GSI and MVI,
respectively, which were offset by a decrease of $8,402 from TBS. In addition,
QSI contributed $525,713 in gross profit. Gross profit margin for the 2009 and
2008 quarters was 63% and 59%, respectively.





Operating
Expenses





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





Three Months Ended
                
                
                Three Months Ended
                
                
                VarianceJune 30, 2009
                
                
                June 30, 2008
                
                
                Amount
                
                
                PercentOperating
      expenses:Electronic
      document delivery services (MVI)
                
                $
                282,976
                
                
                $
                293,466
                
                
                $
                (10,490
                )
                
                
                -4
                %Government
      accounting solutions (TBS)
                
                
                303,378
                
                
                
                326,872
                
                
                
                (23,494
                )
                
                
                -7
                %Electronic
      content management (QSI)
                
                
                527,738
                
                
                
                -
                
                
                
                527,738
                
                
                
                *Integrated
      communications (GSI)
                
                
                1,024,425
                
                
                
                898,888
                
                
                
                125,537
                
                
                
                14
                %Corporate
                
                
                411,708
                
                
                
                591,960
                
                
                
                (180,252
                )
                
                
                -30
                %Total
      operating expenses:
                
                $
                2,550,225
                
                
                $
                2,111,186
                
                
                $
                439,039
                
                
                
                21
                %


*
calculation is not meaningful




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





During
the three months ended June 30, 2009, MVI’s operating expenses decreased by
$10,490 (-4%) compared to the 2008 quarter. Product and technology
development increased by $71. Sales and marketing decreased by $24,362
(-35%) as a result of reduced staff expenses and advertising. General and
administrative increased by $15,893 (+15%) due to increased bad debt and
facility expenses. Depreciation and amortization expense decreased by $2,092
(-10%).





During
the three months ended June 30, 2009, operating expenses at TBS decreased 7%
compared to the 2008 quarter. Product and technology development increased
$2,809 (+8%) due to staffing. Sales and marketing decreased by $45,722 (-41%)
due to lower bonus expenses and advertising. General and administrative
increased by $23,552 (+15%) on higher travel, insurance, and utilities.
 Depreciation and amortization expenses decreased by $4,133
(-16%).





During
the three months ended June 30, 2009, GSI’s operating expenses increased 14%
compared to the 2008 quarter. Product and technology development decreased by
$21,078 (-9%) due to staff attrition. Sales and marketing increased by $144,483
(+55%) due to increased travel, trade show, and compensation expense, including
reseller commissions. General and administrative increased by $15,868 (+6%)
due to higher legal fees and stock option vesting expense. Depreciation and
amortization expenses decreased by $13,736 (-11%).





33




During
the three months ended June 30, 2009, QSI incurred $527,738 of operating
expenses. Product and technology, sales and marketing, general and
administrative, and depreciation expenses were $177,621, $100,479, $182,585, and
$67,053, respectively.





On a
consolidated basis, operating expenses in the 2009 quarter included $50,208 in
compensation expense related to the vesting of stock options, compared to
$52,904 in the 2008 quarter.





Operating Income
(Loss):





As a
result of the foregoing, the Company reported operating income for the three
months ended June 30, 2009 of $34,141, compared to an operating loss of $106,280
for the three months ended June 30, 2008.





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





Three Months Ended
                
                
                Three Months Ended
                
                
                VarianceJune 30, 2009
                
                
                June 30, 2008
                
                
                Amount
                
                
                PercentOperating
      income (loss):Electronic
      document delivery services (MVI)
                
                $
                135,766
                
                
                $
                123,605
                
                
                $
                12,161
                
                
                
                10
                %Government
      accounting solutions (TBS)
                
                
                11,178
                
                
                
                (3,914
                )
                
                
                15,092
                
                
                
                *Electronic
      content management (QSI)
                
                
                (2,025
                )
                
                
                -
                
                
                
                (2,025
                )
                
                
                *Integrated
      communications (GSI)
                
                
                300,930
                
                
                
                365,989
                
                
                
                (65,059
                )
                
                
                -18
                %Corporate
                
                
                (411,708
                )
                
                
                (591,960
                )
                
                
                180,252
                
                
                
                30
                %Total
      operating income (loss)
                
                $
                34,141
                
                
                $
                (106,280
                )
                
                $
                140,421
                
                
                
                *


*
calculation is not meaningful





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





Interest Expense,
net





Interest
expense, net for the three months ended June 30, 2009 decreased by $6,504 to
$40,071 from the $46,575 reported in the 2008 quarter. The most significant
factor in the decrease was a reduction in the amortization of debt issue
costs.





Other Income (Expense),
net





Other
income (expense), net for the three months ended June 30, 2009 was $(7,273)
compared to other income, net of $1,811 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.





Net Loss





As a
result of the foregoing, net loss for the three months ended June 30, 2009 was
$32,031, compared to a net loss of $156,665, for the three months ended June 30,
2008.





Basic and
diluted loss per share for the three months ended June 30, 2009 and 2008 was
$0.00 in each of the respective periods on weighted average shares of
192,063,867 and 152,770,913, respectively.


34


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





Three Months Ended
                
                
                Three Months Ended
                
                
                VarianceJune 30, 2009
                
                
                June 30, 2008
                
                
                Amount
                
                
                PercentNet
      income (loss):Electronic
      document delivery services (MVI)
                
                $
                131,488
                
                
                $
                122,655
                
                
                $
                8,833
                
                
                
                7
                %Government
      accounting solutions (TBS)
                
                
                (332
                )
                
                
                (6,684
                )
                
                
                6,352
                
                
                
                95
                %Electronic
      content management (QSI)
                
                
                (14,440
                )
                
                
                -
                
                
                
                (14,440
                )
                
                
                *Integrated
      communications (GSI)
                
                
                302,320
                
                
                
                373,832
                
                
                
                (71,512
                )
                
                
                -19
                %Corporate
                
                
                (451,067
                )
                
                
                (646,468
                )
                
                
                195,401
                
                
                
                30
                %Total
      net income (loss)
                
                $
                (32,031
                )
                
                $
                (156,665
                )
                
                $
                124,634
                
                
                
                80
                %


*
calculation is not meaningful




Six Months Ended June 30,
2009 Compared to Six Months Ended June 30, 2008





Net Revenue from External
Customers





Net
revenue from external customers for the six months ended June 30, 2009 was
$7,933,842, a 19% increase over net revenue for the prior year period of
$6,692,793.





For the
six months ended June 30, 2009, QSI, GSI, TBS, and MVI generated 16%, 41%, 27%
and 17% of our net revenue, respectively. For the six months ended June 30,
2008, QSI, GSI, TBS, and MVI generated 0%, 44%, 35% and 21% of our net revenue,
respectively.





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





Six Months Ended
                  
                  
                  Six Months Ended
                  
                  
                  VarianceJune 30, 2009
                  
                  
                  June 30, 2008
                  
                  
                  Amount
                  
                  
                  PercentNet
      revenue from external customers:Electronic
      document delivery services (MVI)
                  
                  $
                  1,337,678
                  
                  
                  $
                  1,382,227
                  
                  
                  $
                  (44,549
                  )
                  
                  
                  -3
                  %Government
      accounting solutions (TBS)
                  
                  
                  2,106,010
                  
                  
                  
                  2,343,053
                  
                  
                  
                  (237,043
                  )
                  
                  
                  -10
                  %Electronic
      content management (QSI)
                  
                  
                  1,260,317
                  
                  
                  
                  -
                  
                  
                  
                  1,260,317
                  
                  
                  
                  *Integrated
      communications (GSI)
                  
                  
                  3,229,837
                  
                  
                  
                  2,967,513
                  
                  
                  
                  262,324
                  
                  
                  
                  9
                  %Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  *Total
      net revenue from external customers
                  
                  $
                  7,933,842
                  
                  
                  $
                  6,692,793
                  
                  
                  $
                  1,241,049
                  
                  
                  
                  19
                  %


*
calculation is not meaningful




Revenue
increased 9% at GSI due to increases in user subscription fees, which were
partially offset by decreases in revenue from corporate clients.





Revenue
decreased 10% at TBS due to decreases in revenue from printing, software, and
hardware sales. These decreases were partially offset by increases in revenue
from online services and support services.





Revenue
decreased 3% at MVI due to a decrease in outbound revenue as a result of
customer attrition and reduced usage volumes.





QSI
contributed $1,260,317 in revenue during the six months ended June 30,
2009.




35




Cost of
Sales





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





Six Months Ended
                  
                  
                  Six Months Ended
                  
                  
                  VarianceJune 30, 2009
                  
                  
                  June 30, 2008
                  
                  
                  Amount
                  
                  
                  PercentCost
      of sales:Electronic
      document delivery services (MVI)
                  
                  $
                  536,573
                  
                  
                  $
                  577,125
                  
                  
                  $
                  (40,552
                  )
                  
                  
                  -7
                  %Government
      accounting solutions (TBS)
                  
                  
                  1,457,689
                  
                  
                  
                  1,612,867
                  
                  
                  
                  (155,178
                  )
                  
                  
                  -10
                  %Electronic
      content management (QSI)
                  
                  
                  447,766
                  
                  
                  
                  -
                  
                  
                  
                  447,766
                  
                  
                  
                  *Integrated
      communications (GSI)
                  
                  
                  586,052
                  
                  
                  
                  593,045
                  
                  
                  
                  (6,993
                  )
                  
                  
                  -1
                  %Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  *Total
      cost of sales:
                  
                  $
                  3,028,080
                  
                  
                  $
                  2,783,037
                  
                  
                  $
                  245,043
                  
                  
                  
                  9
                  %


*
calculation is not meaningful





Total
cost of sales represented 38% and 42% of net sales during the 2009 and 2008 six
month periods, respectively.





Cost of
sales for MVI for the six months ended June 30, 2009 represented 40% of MVI’s
net sales as compared with 42% in the 2008 period as a result of reduced
telecommunications expenses.





Cost of
sales for TBS for the six months ended June 30, 2009 and 2008 represented 69% of
TBS’ net sales.





Cost of
sales for GSI for the six months ended June 30, 2009 represented 18% of GSI’s
net sales as compared with 20% in the 2008 period on lower carrier usage fees as
offset by increased payphone usage charges.





Cost of
sales for QSI for the six months ended June 30, 2009 represented 36% of QSI’s
net sales.





On a
consolidated basis, cost of sales in the 2009 period included $37,021 in
compensation expense related to the vesting of stock options, compared to $0 in
the 2008 period.




Gross
Profit





Gross
profit for the six months ended June 30, 2009 increased 25% to $4,905,762 as
compared to $3,909,756 for the 2008 period. The increase in the 2009 period of
$996,006 resulted from an increase of $269,317 from GSI, which was offset by
decreases of $3,997 and $81,865 from MVI and TBS, respectively, as well as the
addition of $812,551 in gross profit from QSI. Gross profit margin for the 2009
and 2008 six month periods was 62% and 58%, respectively.





Operating
Expenses





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





Six Months Ended
                
                
                Six Months Ended
                
                
                VarianceJune 30, 2009
                
                
                June 30, 2008
                
                
                Amount
                
                
                PercentOperating
      expensesElectronic
      document delivery services (MVI)
                
                $
                550,678
                
                
                $
                628,466
                
                
                $
                (77,788
                )
                
                
                -12
                %Government
      accounting solutions (TBS)
                
                
                586,733
                
                
                
                636,092
                
                
                
                (49,359
                )
                
                
                -8
                %Electronic
      content management (QSI)
                
                
                1,054,416
                
                
                
                -
                
                
                
                1,054,416
                
                
                
                *Integrated
      communications (GSI)
                
                
                2,085,529
                
                
                
                1,927,787
                
                
                
                157,742
                
                
                
                8
                %Corporate
                
                
                986,243
                
                
                
                1,276,493
                
                
                
                (290,250
                )
                
                
                -23
                %Total
      operating expenses:
                
                $
                5,263,599
                
                
                $
                4,468,838
                
                
                $
                794,761
                
                
                
                18
                %


*
calculation is not meaningful





36





During
the six months ended June 30, 2009, the operating expenses of Corporate
decreased 23% as a result of decreased compensation, recruiting fees,
consulting, insurance, travel, and legal expenses. These decreases were offset
by increases in filing fees and accounting fees paid for non-audit services that
for compliance reasons were not included in the services performed by our
independent public accountants.





During
the six months ended June 30, 2009, MVI’s operating expenses decreased 12%
compared to the 2008 period. Product and technology development decreased
$15,599 (-7%) as a result of reduced staffing. Sales and marketing decreased by
$57,636 (-38%) as a result of reduced staff expenses and advertising. General
and administrative decreased by $4,920 (-2%) due to decreased placement fees,
bad debt and recruiting fees. Depreciation and amortization expense increased by
$367 (+1%).





During
the six months ended June 30, 2009, operating expenses at TBS decreased 8%
compared to the 2008 period. Product and technology development increased by
$7,673 (+11%) due to staffing. Sales and marketing decreased by $84,989 (-41%)
due to lower bonus expenses and advertising. General and administrative
increased by $34,459 (+11%) on higher travel, insurance, and utilities.
 Depreciation and amortization expenses decreased by $6,502
(-13%).





During
the six months ended June 30, 2009, GSI’s operating expenses increased 8%
compared to the 2008 period. Product and technology development decreased by
$74,759 (-15%) due to staff attrition. Sales and marketing increased by $317,432
(+64%) due to increased travel, trade show, and compensation expense, including
third party commissions. General and administrative decreased by $65,634 (-9%)
due to reduced bonus and rent expense. Depreciation and amortization expenses
decreased by $19,297 (-8%).





During
the six months ended June 30, 2009, QSI incurred $1,054,416 of operating
expenses. Product and technology, sales and marketing, general and
administrative, and depreciation expenses were $343,167, $193,322, $383,858, and
$134,069, respectively.





On a
consolidated basis, operating expenses in the 2009 period included $107,059 in
compensation expense related to the vesting of stock options, compared to
$122,412 in the 2008 period.





Operating Income
(Loss):





As a
result of the foregoing, the Company reported an operating loss for the six
months ended June 30, 2009 of $357,837, compared to an operating loss of
$559,082 for the six months ended June 30, 2008.





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





Six Months Ended
                
                
                Six Months Ended
                
                
                VarianceJune 30, 2009
                
                
                June 30, 2008
                
                
                Amount
                
                
                PercentOperating
      income (loss):Electronic
      document delivery services (MVI)
                
                $
                250,427
                
                
                $
                176,636
                
                
                $
                73,791
                
                
                
                42
                %Government
      accounting solutions (TBS)
                
                
                61,588
                
                
                
                94,094
                
                
                
                (32,506
                )
                
                
                -35
                %Electronic
      content management (QSI)
                
                
                (241,865
                )
                
                
                -
                
                
                
                (241,865
                )
                
                
                *Integrated
      communications (GSI)
                
                
                558,256
                
                
                
                446,681
                
                
                
                111,575
                
                
                
                25
                %Corporate
                
                
                (986,243
                )
                
                
                (1,276,493
                )
                
                
                290,250
                
                
                
                23
                %Total
      operating loss, net
                
                $
                (357,837
                )
                
                $
                (559,082
                )
                
                $
                201,245
                
                
                
                36
                %


*
calculation is not meaningful




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




37




Interest Expense,
net





Interest
expense, net for the six months ended June 30, 2009 decreased by $26,957 to
$85,866 from the $112,823 reported in the 2008 period. The most significant
factor in the decrease was a reduction in the amortization of debt issue
costs.





Other Income,
net





Other
income, net for the six months ended June 30, 2009 was $10,657 compared to other
income, net of $53,403 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 six months ended June 30, 2009 was
$452,774, compared to a net loss of $651,500, for the six months ended June 30,
2008.





Basic and
diluted loss per share for the six months ended June 30, 2009 and 2008 was $0.00
in each of the respective periods on weighted average shares of 186,129,383 and
152,770,913, respectively.





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





Six Months Ended
                
                
                Six Months Ended
                
                
                VarianceJune 30, 2009
                
                
                June 30, 2008
                
                
                Amount
                
                
                PercentNet
      income (loss):Electronic
      document delivery services (MVI)
                
                $
                238,432
                
                
                $
                162,612
                
                
                $
                75,820
                
                
                
                47
                %Government
      accounting solutions (TBS)
                
                
                47,693
                
                
                
                90,733
                
                
                
                (43,040
                )
                
                
                -47
                %Electronic
      content management (QSI)
                
                
                (247,043
                )
                
                
                -
                
                
                
                (247,043
                )
                
                
                *Integrated
      communications (GSI)
                
                
                558,179
                
                
                
                473,980
                
                
                
                84,199
                
                
                
                18
                %Corporate
                
                
                (1,050,035
                )
                
                
                (1,378,825
                )
                
                
                328,790
                
                
                
                24
                %Total
      net loss
                
                $
                (452,774
                )
                
                $
                (651,500
                )
                
                $
                198,726
                
                
                
                31
                %


*
calculation is not meaningful




LIQUIDITY AND CAPITAL RESOURCES





During
the six months ended June 30, 2009, our net cash position decreased by $242,684
to $324,763. Our operating, financing, and investing activities used net cash of
$57,601, $147,779 and $37,304, 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
half 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 quarter 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 half of 2009, we used cash flows generated by our operations to retire
approximately $343,000 in accrued expenses and notes payable debt which existed
as of December 31, 2008. During the remainder of 2009, we expect to use
available cash to continue to reduce accrued expenses and notes payable
debt.





38




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”).  On
March 5, 2009, we a fully executed agreement from The Private Bank of The
Peninsula ("Bank") to amend the agreement for the Line (the "Amendment"). The
effective date of the Amendment is February 24, 2009. Pursuant to the Amendment,
the Bank renewed the Line and modified the terms to include an interest rate
that is floating and is calculated at Wall Street Journal prime plus five
percent (5%) on the cash borrowed provided that the minimum rate will be eight
and one half percent (8.5%) and minimum interest will be $7,000 per three month
period. Interest on outstanding borrowings is payable monthly.  In
addition, 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
June 30, 2009, there were outstanding borrowings of $374,213 on the Line and we
were in compliance with all loan covenants. Availability on the Line as of June
30, 2009 was approximately $267,000.





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 a note payable financing provided by a related party
on May 6, 2009 (see below). The terms of the note payable financing were deemed
more favorable to us than the renewal terms offered by the financial
institution.





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 May 31, 2009 with respect to the Williams May 2009 Note
is 4.87%. Thereafter, 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 us consisting of principal and interest on the first of
each month, beginning on August 1, 2009. As of June 30, 2009, the Company
recorded accrued interest of $3,199 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.





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





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.





Effective
November 28, 2005, TBS renewed a $100,000 revolving line of credit (“TBS RLOC”)
with a financial institution. The TBS RLOC is guaranteed by the assets of TBS.
 Interest on outstanding borrowings is payable monthly at a variable annual
rate equal to the financial institution's prime rate in effect. As of the date
of this report, we had not utilized the TBS RLOC and were in compliance with all
loan covenants.





QSI has
an unsecured line of credit agreement with a financial institution for
borrowings up to the maximum of $100,000 with no maturity date (“QSI RLOC”).
Borrowings bear interest at the prime rate, plus 2.775%. QSI had borrowings
totaling $100,000 at June 30, 2009 and had $0 available for future borrowings
under the line of credit. On August 3, 2009, the Company repaid the outstanding
borrowings in full and closed the line of credit using proceeds from the
Williams July 2009 Note financing.




39




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, the Company 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, the Company 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.





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 per annum.
During 2005, all but $65,000 of the principal amount due pursuant to this note
was converted into shares of our common stock.  The note and accrued
interest are due at the earlier of one of three events: 1) October 31, 2009; 2)
acquisition of a controlling interest in 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, 2012, as amended.  At June 30, 2009,
the amount owed by us to the Williams pursuant to the unpaid balance of the
convertible promissory note payable was $65,000 in principal and 116,620 in
unpaid interest.





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 quarter 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.





40




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.





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 half
of 2009, this income was not sufficient to offset the net loss of QSI, interest
expense and 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:





41




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.





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 by
increasing revenues from electronic document delivery services and through our
acquisitions, (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
October 2008, the FASB issued FASB Staff Position No. 157-3, Determining Fair Value of a
Financial Asset When the Market for That Asset is Not Active (“FSP No.
157-3”). FSP No. 157-3 clarifies the application of SFAS No. 157 in a market
that is not active, and provides an illustrative example intended to address
certain key application issues. FSP No. 157-3 is effective immediately, and
applies to the Company’s March 31, 2009 financial statements. The Company has
concluded that the application of FSP No. 157-3 did not have a material impact
on its consolidated financial position and results of operations as of and for
the periods ended June 30, 2009.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141(R) provides companies with principles and requirements on how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, liabilities assumed, and any noncontrolling interest in the
acquiree as well as the recognition and measurement of goodwill acquired in a
business combination. SFAS No. 141(R) also requires certain disclosures to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. Acquisition costs associated with the
business combination will generally be expensed as incurred. SFAS No. 141(R) is
effective for business combinations occurring in fiscal years beginning after
December 15, 2008. We are currently evaluating the impact SFAS No. 141(R) will
have on any future business combinations.




In June
2009, the FASB issued SFAS No. 168, The
FASB Accounting Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles.  SFAS
No. 168 replaces SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles,and 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.  SFAS No. 168 is effective for
periods ending after September 15, 2009.  The Company does not expect
SFAS No. 168 to have a material effect on its consolidated financial position
and results of operations.
  In April
2009, the FASB issued FASB Staff Position (“FSP”) FAS 107-1 and Accounting
Principles Board (“APB”) 28-1, Interim
Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1”
and “ABP 28-1”, respectively), which amends SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim
Financial Reporting, respectively, to require disclosures about fair
value of financial instruments in interim and annual reporting periods. FSP FAS
107-1 and APB 28-1 are effective for interim reporting periods ending after June
15, 2009, which for the Company is the second quarter of fiscal 2009. The
Company has concluded that the application of FSP FAS 107-1 and APB 28-1 did not
have a material impact on its consolidated financial position and results of
operations as of and for the period ended June 30, 2009.
  In April
2009, the FASB issued FSP SFAS 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly,which provides additional guidance for estimating fair value in
accordance with FASB Statement No. 157, Fair Value Measurements, when the volume
and level of activity for the asset or liability have significantly decreased.
This FSP 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 FSP SFAS
157-4 did not have a material impact on its consolidated financial position and
results of operations as of and for the period ended June 30,
2009.




42




ITEM
4 – CONTROLS AND PROCEDURES





(a) As of
June 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 June 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
June 30, 2009 and that our internal controls over financial reporting were not
effective as of June 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 June 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.




43


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.




On April
8, 2009 and pursuant to the terms of their respective employment agreements, we
issued 6,879,200 shares of our common stock to K. Mason Conner, who is our
President and Chief Executive Officer and a Director, and 5,896,500 shares of
our common stock to H. Jay Hill, who is our Executive Vice President of
Corporate Development and a Director. These shares were valued at $0.01 per
share.





During
the three months ended June 30, 2009, we granted to our employees options
to purchase 1,325,000 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 June 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.




44




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.




45





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.
**




46





3.7
                
                Form
      of Certificate of Incorporation of VillageEDOCS, Inc. Previously filed
      with the Company’s Definitive Information Statement on Schedule 14A filed
      on May 24, 2007.**3.8
                
                Form
      of Bylaws of VillageEDOCS, Inc. Previously filed with the Company’s
      Definitive Information Statement on Schedule 14A filed on May 24,
      2007.4.1
                
                Letter
      Agreement dated July 30, 2002 by and between the Company, C. Alan
      Williams, and Joan P. Williams previously filed as Exhibit 4.1 to the
      Company's Quarterly Report on Form 10-QSB for the period ended June 30,
      2002 and incorporated herein by reference. **4.2
                
                Form
      of Unsecured Convertible Promissory Note. Previously filed as Exhibit 4.5
      to the Registrant's Quarterly Report on Form 10-QSB filed with the
      Securities and Exchange Commission on May 15, 2002 and incorporated herein
      by reference. **4.3
                
                Form
      of Convertible Secured Promissory Note. Previously filed as Exhibit 4.6 to
      the Registrant's Quarterly Report on Form 10-QSB filed with the Securities
      and Exchange Commission on May 15, 2002 and incorporated herein by
      reference. **4.4
                
                2002
      Equity Incentive Plan dated as of January 30, 2002.  Previously filed
      as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-QSB filed
      with the Securities and Exchange Commission on May 15, 2002 and
      incorporated herein by reference. **4.5
                
                Form
      of Stock Option Agreement.  Previously filed as Exhibit 4.2 to the
      Registrant's Quarterly Report on Form 10-QSB filed with the Securities and
      Exchange Commission on May 15, 2002 and incorporated herein by reference.
      **4.6
                
                Promissory
      Note Modification Agreement dated May 9, 2002 by and among the Company,
      Joan P. Williams and C. Alan Williams.  Previously filed as Exhibit
      4.3 to the Registrant's Quarterly Report on Form 10-QSB filed with the
      Securities and Exchange Commission on May 15, 2002 and incorporated herein
      by reference. **4.7
                
                Security
      Agreement dated May 9, 2002 by and among the Company, Joan P. Williams and
      C. Alan Williams.  Previously filed as Exhibit 4.4 to the
      Registrant's Quarterly Report on Form 10-QSB filed with the Securities and
      Exchange Commission on May 15, 2002 and incorporated herein by reference.
      **4.8
                
                Promissory
      Note to Stephen A. Garner dated February 17, 2004 previously filed as
      Exhibit 4.1 to the Company's Current Report on Form 8-K filed on February
      18, 2004 and incorporated herein by reference. **4.9
                
                Promissory
      Note to James L. Campbell dated February 17, 2004 previously filed as
      Exhibit 4.2 to the Company's Current Report on Form 8-K filed on February
      18, 2004 and incorporated herein by reference. **4.10
                
                Guaranty
      by Tailored Business Systems, Inc. to Stephen A. Garner dated February 17,
      2004 previously filed as Exhibit 4.3 to the Company's Current Report on
      Form 8-K filed on February 18, 2004 and incorporated herein by reference.
      **




47





4.11
              
              Guaranty
      by Tailored Business Systems, Inc. to James L. Campbell dated February 17,
      2004 previously filed as Exhibit 4.4 to the Company's Current Report on
      Form 8-K filed on February 18, 2004 and incorporated herein by reference.
      **4.12
              
              Form
      of Security Agreement dated February 17, 2004 by and between Tailored
      Business Systems, Inc. and Stephen A. Garner previously filed as Exhibit
      4.5 to the Company's Current Report on Form 8-K filed on February 18, 2004
      and incorporated herein by reference. **4.13
              
              Form
      of Security Agreement dated February 17, 2004 by and between Tailored
      Business Systems, Inc. and James L. Campbell previously filed as Exhibit
      4.6 to the Company's Current Report on Form 8-K filed on February 18, 2004
      and incorporated herein by reference. **4.14
              
              Registration
      Rights Agreement dated February 17, 2004 by and between VillageEDOCS and
      Stephen A. Garner previously filed as Exhibit 4.7 to the Company's Current
      Report on Form 8-K filed on February 18, 2004 and incorporated herein by
      reference. **4.15
              
              Registration
      Rights Agreement dated February 17, 2004 by and between VillageEDOCS and
      James L. Campbell previously filed as Exhibit 4.8 to the Company's Current
      Report on Form 8-K filed on February 18, 2004 and incorporated herein by
      reference. **4.16
              
              Form
      of Stock Pledge Agreement dated February 17, 2004 by and between Tailored
      Business Systems, Inc. and Stephen A. Garner previously filed as Exhibit
      4.9 to the Company's Current Report on Form 8-K filed on February 18, 2004
      and incorporated herein by reference. **4.17
              
              Form
      of Stock Pledge Agreement dated February 17, 2004 by and between Tailored
      Business Systems, Inc. and James L. Campbell previously filed as Exhibit
      4.10 to the Company's Current Report on Form 8-K filed on February 18,
      2004 and incorporated herein by reference. **4.18
              
              Notice
      of Intent to Exercise Conversion Right dated February 10, 2005 by Joan P.
      Williams and C. Alan Williams.  Previously filed as Exhibit 4.5 to
      the Company's Current Report on Form 8-K filed on February 14, 2005.
      **4.19
              
              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. **




48





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.
      **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.**




49





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.**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.
  **




50





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.
    **




51





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
      August 14, 2009 by K. Mason Conner, Chief Executive
    Officer.*31.2
                    
                    Certification
      Under Section 302 of The Sarbanes-Oxley Act of 2002 signed and dated
      August 14, 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 August 14, 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 August 14, 2009 by Michael A.
      Richard, Chief Financial
Officer.***




*
                  
                  Filed
      herewith**
                  
                  Previously
      filed***
                  
                  Furnished
      herewith


52


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:  August
      14, 2009
                By:
                /s/ K. Mason
  ConnerK.
      Mason ConnerChief
      Executive Officer, President, and DirectorDated:  August
      14, 2009
                By:
                /s/ Michael A.
    RichardMichael
      A. RichardChief
      Financial Officer(Principal
      Accounting Officer)




53