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 March 31, 2010





 ̈   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 orOrganization)
                
                I.R.S.
      Employer Identification Number1401 N. Tustin Ave, Ste. 230, Santa Ana,
      California92705
                
                (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 ̈
                
                Accelerated Filer ̈
                
                Non-accelerated filer ̈
                
                Smaller reporting companyx(Do
      not check if a smaller
                  reporting
      company)





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


YES
             ̈
            NO
            x





There
were 226,546,613 shares of the Registrant’s common stock outstanding as of April
30, 2010.







VillageEDOCS


Index





Page
      No.PART
      I. FINANCIAL INFORMATIONItem
      1.
                                                
                                                Condensed
      Consolidated Financial StatementsCondensed
      Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December
      31, 2009 (Audited)
                                                3Condensed
      Consolidated Statements of Operations for the three months ended March 31,
      2010 and 2009 (Unaudited)
                                                4Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2010 and 2009 (Unaudited)
                                                5Notes
      to Unaudited Condensed Consolidated Financial Statements
                                                7Item
      2.
                                                
                                                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                                                28Item
      4T.
                                                
                                                Controls
      and Procedures
                                                40PART
      II. OTHER INFORMATIONItem
      1.
                                                
                                                Legal
      Proceedings
                                                41Item
      2.
                                                
                                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                41Item
      3.
                                                
                                                Defaults
      Upon Senior Securities
                                                41Item
      4.
                                                
                                                Submission
      of Matters to a Vote of Security Holders
                                                42Item
      5.
                                                
                                                Other
      Information
                                                42Item
      6.
                                                
                                                Exhibits
                                                43Signatures
                                                49


2





VillageEDOCS,
Inc. and subsidiaries


Condensed
Consolidated Balance Sheets





March
      31,
                              
                              
                              December
      31,2010
                              
                              
                              2009(unaudited)
                              
                              
                              (audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                              
                              $
                              382,553
                              
                              
                              $
                              1,307,834Accounts
      receivable, net of allowance for doubtful accounts of approximately
      $65,000 and $52,000, respectively
                              
                              
                              425,631
                              
                              
                              
                              405,000Prepaid
      expenses and other current assets
                              
                              
                              167,425
                              
                              
                              
                              86,925Total
      current assets
                              
                              
                              975,609
                              
                              
                              
                              1,799,759Property
      and equipment, net
                              
                              
                              247,707
                              
                              
                              
                              217,368Other
      assets
                              
                              
                              25,014
                              
                              
                              
                              25,014Goodwill
                              
                              
                              4,523,527
                              
                              
                              
                              4,523,527Other
      intangibles, net
                              
                              
                              2,769,579
                              
                              
                              
                              2,929,508$
                              8,541,436
                              
                              
                              $
                              9,495,176LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                              
                              $
                              441,894
                              
                              
                              $
                              403,265Current
      portion of accrued expenses and other liabilities
                              
                              
                              361,526
                              
                              
                              
                              500,591Deferred
      revenue
                              
                              
                              430,433
                              
                              
                              
                              705,314Capital
      lease obligations, current
                              
                              
                              10,792
                              
                              
                              
                              -Lines
      of credit
                              
                              
                              -
                              
                              
                              
                              130,592Current
      portion of notes payable to related parties, net of unamortized debt
      discount of $47,808 and $47,808, respectively
                              
                              
                              292,192
                              
                              
                              
                              264,309Total
      current liabilities
                              
                              
                              1,536,837
                              
                              
                              
                              2,004,071Accrued
      expenses and other liabilities, net of current portion
                              
                              
                              711,210
                              
                              
                              
                              806,045Capital
      lease obligations, net of current portion
                              
                              
                              35,377
                              
                              
                              
                              -Notes
      payable to related parties, net of current portion and unamortized debt
      discount of $15,932 and $27,883, respectively
                              
                              
                              324,068
                              
                              
                              
                              340,000Derivative
      liability
                              
                              
                              4,650
                              
                              
                              
                              4,650Total
      liabilities
                              
                              
                              2,612,142
                              
                              
                              
                              3,154,766Commitments
      and contingenciesStockholders'
      equity:Series
      A Preferred stock, par value $0.001 per share:Authorized  —
      48,000,000 sharesIssued
      and outstanding —  0 shares, respectively (liquidation
      preference of $0, respectively)
                              
                              
                              -
                              
                              
                              
                              -Common
      stock, par value $0.0001 per share:Authorized
      — 500,000,000 sharesIssued
      and outstanding — 226,546,613 shares
                              
                              
                              22,655
                              
                              
                              
                              22,655Additional
      paid-in capital
                              
                              
                              34,062,182
                              
                              
                              
                              34,022,485Accumulated
      deficit
                              
                              
                              (28,155,543
                              )
                              
                              
                              (27,704,730
                              )Total
      stockholders' equity
                              
                              
                              5,929,294
                              
                              
                              
                              6,340,410$
                              8,541,436
                              
                              
                              $
                              9,495,176




See
accompanying notes to unaudited condensed consolidated financial
statements.


3


VillageEDOCS,
Inc. and subsidiaries


Condensed
Consolidated Statements of Operations


(unaudited)





Three
      Months Ended March 31,2010
                
                
                2009Net
      revenues
                
                $
                2,159,113
                
                
                $
                2,801,449Cost
      of revenues
                
                
                645,450
                
                
                
                813,818Gross
      profit
                
                
                1,513,663
                
                
                
                1,987,631Operating
      expenses:Product
      and technology development
                
                
                438,273
                
                
                
                468,068Sales
      and marketing
                
                
                402,290
                
                
                
                564,693General
      and administrative
                
                
                910,291
                
                
                
                1,177,160Depreciation
      and amortization
                
                
                196,960
                
                
                
                220,098Total
      operating expenses
                
                
                1,947,814
                
                
                
                2,430,019Loss
      from continuing operations
                
                
                (434,151
                )
                
                
                (442,388
                )Change
      in fair value of derivative liability
                
                
                -
                
                
                
                3,100Interest
      expense, net of interest income
                
                
                (19,410
                )
                
                
                (41,065
                )Other
      income, net
                
                
                2,748
                
                
                
                15,585Loss
      from continuing operations before provision for income
    taxes
                
                
                (450,813
                )
                
                
                (464,768
                )Provision
      for income taxes
                
                
                -
                
                
                
                4,000Loss
      from continuing operations
                
                
                (450,813
                )
                
                
                (468,768
                )Income
      from discontinued operations
                
                
                -
                
                
                
                48,025Net
      loss
                
                $
                (450,813
                )
                
                $
                (420,743
                )Net
      loss available to common shareholdersBasic
                
                $
                (450,813
                )
                
                $
                (420,743
                )Diluted
                
                $
                (450,813
                )
                
                $
                (420,743
                )Basic
      earnings (loss) per share:Loss
      from continuing operations
                
                $
                -
                
                
                $
                -Income
      from discontinued operations
                
                $
                -
                
                
                $
                -Net
      loss per share, basic
                
                $
                -
                
                
                $
                -Diluted
      earnings (loss) per share:Loss
      from continuing operations
                
                $
                -
                
                
                $
                -Income
      from discontinued operations
                
                $
                -
                
                
                $
                -Net
      loss per share, diluted
                
                $
                -
                
                
                $
                -Weighted
      average shares outstanding -Basic
                
                
                226,546,613
                
                
                
                180,270,913Diluted
                
                
                226,546,613
                
                
                
                215,658,064





See
accompanying notes to unaudited condensed consolidated financial
statements.




4





VillageEDOCS,
Inc. and subsidiaries


Condensed
Consolidated Statements of Cash Flows


(unaudited)





Three
      Months Ended March 31,2010
                  
                  
                  2009Cash
      Flows from Operating Activities:Net
      loss
                  
                  $
                  (450,813
                  )
                  
                  $
                  (420,743
                  )Adjustments
      to reconcile net loss to net cash (used in ) provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  196,960
                  
                  
                  
                  242,999Provision
      for (recovery of) doubtful accounts receivable
                  
                  
                  12,229
                  
                  
                  
                  (22,401
                  )Estimated
      fair value of stock options issued to employees for services
      rendered
                  
                  
                  39,697
                  
                  
                  
                  82,413Estimated
      fair value of warrants issued to consultants
                  
                  
                  -
                  
                  
                  
                  23,194Change
      in fair value of derivative liability
                  
                  
                  -
                  
                  
                  
                  (3,100
                  )Amortization
      of debt discount and debt issuance costs
                  
                  
                  11,951
                  
                  
                  
                  29,834Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (32,860
                  )
                  
                  
                  308,308Inventories
                  
                  
                  -
                  
                  
                  
                  6,990Prepaid
      expenses and other current assets
                  
                  
                  (88,235
                  )
                  
                  
                  67,790Other
      assets
                  
                  
                  -
                  
                  
                  
                  2,647Accounts
      payable
                  
                  
                  38,629
                  
                  
                  
                  65,281Accrued
      expenses, other liabilities and interest
                  
                  
                  (233,900
                  )
                  
                  
                  (119,037
                  )Deferred
      revenue
                  
                  
                  (274,881
                  )
                  
                  
                  (200,723
                  )Net
      cash (used in) provided by operating activities
                  
                  
                  (781,223
                  )
                  
                  
                  63,452Cash
      Flows from Investing Activities:Purchases
      of property and equipment
                  
                  
                  (9,435
                  )
                  
                  
                  (29,088
                  )Net
      cash used in investing activities
                  
                  
                  (9,435
                  )
                  
                  
                  (29,088
                  )Cash
      Flows from Financing Activities:Payments
      on lines of credit, net
                  
                  
                  (130,592
                  )
                  
                  
                  (60,067
                  )Payments
      on notes payable to related parties
                  
                  
                  -
                  
                  
                  
                  (151,490
                  )Payments
      on capital lease obligations
                  
                  
                  (4,031
                  )
                  
                  
                  (4,932
                  )Net
      cash used in financing activities
                  
                  
                  (134,623
                  )
                  
                  
                  (216,489
                  )Net
      change in cash and cash equivalents
                  
                  
                  (925,281
                  )
                  
                  
                  (182,125
                  )Cash
      and cash equivalents, beginning of period
                  
                  
                  1,307,834
                  
                  
                  
                  567,447Cash
      and cash equivalents, end of period
                  
                  $
                  382,553
                  
                  
                  $
                  385,322Supplemental
      disclosure of cash flow information -Cash
      paid during the period for:Interest
                  
                  $
                  7,460
                  
                  
                  $
                  14,336Income
      taxes
                  
                  $
                  145,760
                  
                  
                  $
                  30,486





continued...


5





Three
      Months Ended March 312010
                                                  
                                                  
                                                  2009Supplemental
      Schedule of Noncash Investingand
      Financing Activities:Cumulative
      effect of accounting change to accumulated deficit for derivative
      liabilities
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  2,610Cumulative
      effect of accounting change to additional paid-in capital for derivative
      liabilities
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  6,200Acquisition
      of property and equipment through capital lease
obligations
                                                  
                                                  $
                                                  50,200
                                                  
                                                  
                                                  $
                                                  -Repayment
      of line of credit with issuance of related party debt
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  430,000





See
accompanying notes to unaudited condensed consolidated financial
statements.




6


VillageEDOCS,
Inc.


Notes
to Unaudited Condensed Consolidated Financial Statements


March
31, 2010 and 2009





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 unaudited condensed consolidated
financial statements should be read in conjunction with the Company’s audited
consolidated financial statements and notes thereto for the year ended December
31, 2009, contained in the Company’s Annual Report on Form 10-K, as filed with
the SEC.




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




2.
            Background,
      Organization and Basis of
Presentation




The
Company was incorporated in 1995 in Delaware, reincorporated in California in
1997, and reincorporated in Delaware in September 2007. The Company has
historically operated an electronic document delivery service marketed to
organizations throughout the United States and internationally. On 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 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. On February 17, 2004, the Company acquired Tailored
Business Systems, Inc. ("TBS"), which it subsequently sold effective December 1,
2009. Effective April 1, 2005, the Company acquired Phoenix Forms, Inc. dba
Resolutions ("PFI" or "Resolutions"), which it subsequently sold effective
December 1, 2007. 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 accounting for TBS as a
discontinued operation. 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 ($561,228 at March 31, 2010). 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, and
MVI.




7


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




The
Company believes it will have adequate cash 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 repay its
working capital deficit, the Company may require additional financing. Sources
of financing could include capital infusions, additional equity financing or
debt offerings. The Company does not expect to generate positive operating cash
flows again until at least the fourth quarter of 2010. Should anticipated cash
flows decrease for any reason, management plans to obtain debt and/or equity
financing from new and existing stockholders. There can be no assurance that
funding will be available on acceptable terms, if at all, or that such funds, if
raised, would enable the Company to achieve or sustain profitable
operations.




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




4.
            Summary of Significant
      Accounting Policies




Segments of an Enterprise
and Related Information




The
Company reports information about segments of its business in its annual
financial statements and reports selected segment information in its quarterly
reports issued to stockholders. The Company also reports on its entity-wide
disclosures about the products and services that it provides, the material
countries in which it holds assets and reports revenues and its major customers.
The Company's four reportable segments are managed separately based on
fundamental differences in their operations. At March 31, 2010 the Company
operated in the following four reportable segments (see Note 11):




(a)
Electronic document delivery services,


(b)
Electronic content management solutions,


(c)
Integrated communications, and


(d)
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
March 31, 2010 and December 31, 2009, the Company has recorded an allowance for
doubtful accounts of approximately $65,000 and $52,000,
respectively.




For the
three months ended March 31, 2010 and 2009, independent representatives of one
enterprise accounted for approximately 30% and 19% of total revenues from
continuing operations, respectively.




For the
three months ended March 31, 2010 and 2009, independent representatives of
another enterprise accounted for approximately 4% and 17% of total revenues from
continuing operations, respectively.




One
customer accounted for 14% and 23%, respectively, of accounts receivable at
March 31, 2010 and December 31, 2009.




8


At times,
deposits held with financial institutions may exceed the amount of insurance
provided on such deposits by the Federal Deposit Insurance Corporation (“FDIC”)
which provides deposit coverage with limits up to $250,000 per owner through
December 31, 2013. As of March 31, 2010, the Company had no amounts in excess of
the FDIC limit. As of December 31, 2009, the Company had a balance of
approximately $805,000 in excess of the FDIC limit.




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, recoverability of
long-lived assets, and valuation of derivative liabilities, stock options,
warrants, and deferred taxes. Actual results could differ from those
estimates.




Property and
Equipment




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




Revenue
Recognition




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




The
Company recognizes revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the selling price of each of
the elements. The fair value of an element must be based on vendor-specific
objective evidence (“VSOE”) of the estimated selling price. Software license
revenue generated by 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 selling price of the
undelivered elements. Fair value of services, such as consulting or training, is
based upon separate sales of these services. The Company at times may enter into
multiple-customer contracts in which the Company allocates revenue based on the
number of specified users at each customer, and recognizes revenue upon customer
acceptance and satisfying the other applicable conditions of the above described
accounting policy.




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




Revenue
from subscription agreements consists of fixed monthly fees and usage charges,
generally based on per minute rates. Subscription agreement revenue related to
QSI, 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.




9


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, and
GSI's communications services. Product and technology development costs are
expensed as incurred.




Risks and
Uncertainties




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




Earnings (Loss) per
Share




Basic
earnings (loss) per share is computed by dividing the net loss available to
common stockholders by the weighted average number of common shares assumed to
be outstanding during the period of computation. Diluted earnings (loss) per
share is computed similar to basic earnings (loss) per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potential shares had been issued and if the
additional common shares were dilutive. All potentially dilutive shares,
approximately 48,000 and 35,387,000 of potentially dilutive shares for the three
months ended March 31, 2010 and 2009, respectively, have been excluded from
diluted loss per share, as their effect would be anti-dilutive for the periods
then ended.


10







Stock-Based
Compensation





At March
31, 2010 the Company had two stock-based compensation plans.





All
share-based payments to employees, including grants of employee stock options
and restricted stock grants, are recognized in the consolidated financial
statements based upon their fair values.  The Company uses the
Black-Scholes option pricing model to estimate the grant-date fair value of
share-based awards.  Fair value is determined at the date of
grant.  The consolidated financial statement effect of forfeitures is
estimated at the time of grant and revised, if necessary, if the actual effect
differs from those estimates.  The estimated weighted average
forfeiture rate for the three months ended March 31, 2010 and 2009, of
approximately 16% and 17%, respectively, was based on historical forfeiture
experience and estimated future employee forfeitures.





The cash
flows resulting from the tax benefits resulting from tax deductions in excess of
the compensation cost recognized for those options to be classified as financing
cash flows. Due to the Company’s loss position, there were no such tax benefits
during the three months ended March 31, 2010 and 2009.





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
March 31, 2010, 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:





Three Months EndedMarch 31,2010
                    
                    
                    2009Stock
      options:Expected
      term (in years)
                    
                    
                    6.0
                    
                    
                    
                    6.0Expected
      volatility
                    
                    
                    195
                    %
                    
                    
                    182
                    %Risk-free
      interest rate
                    
                    
                    2.78
                    %
                    
                    
                    1.85
                    %Expected
      dividends
                    
                    
                    -
                    
                    
                    
                    -




11




A summary
of option activity as of March 31, 2010 and changes during the three months then
ended, is presented below:





March 31, 2010Weighted-AverageRemaining
                
                
                AggregateExercise
                
                
                Contractual
                
                
                IntrinsicShares
                
                
                Price
                
                
                Term (Years)
                
                
                ValueOptions
      outstanding at January 1, 2010
                
                
                40,370,976
                
                
                $
                0.15Options
      granted
                
                
                1,075,000
                
                
                $
                0.01Options
      forfeited/cancelled
                
                
                (1,777,000
                )
                
                $
                0.06Options
      expired
                
                
                (20,000
                )
                
                $
                0.18Options
      exercised
                
                
                -
                
                
                $
                -Options
      outstanding at March 31, 2010
                
                
                39,648,976
                
                
                $
                0.15
                
                
                
                4.2
                
                
                $
                -Options
      vested or expected to vest at March 31, 2010
                
                
                38,008,286
                
                
                $
                0.15
                
                
                
                4.1
                
                
                $
                -Options
      exercisable at March 31, 2010
                
                
                28,167,976
                
                
                $
                0.19
                
                
                
                3.5
                
                
                $
                -


The
weighted average grant date fair value of options granted during the three
months ended March 31, 2010 and 2009 was $0.01 and $0.03 per option,
respectively.  Upon the exercise of options, the Company issues new
shares from its authorized shares.





As of
March 31, 2010, there was approximately $298,000 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 2.4 weighted average years.  The
total fair value of vested options issued to employees and directors during the
three months ended March 31, 2010 and 2009 was $39,697 and $63,240,
respectively, net of estimated forfeitures, for continuing operations, and
$19,173 during the three months ended March 31, 2009 for discontinued
operations.





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





Three Months Ended March 31,2010
                  
                  
                  2009Cost
      of sales
                  
                  $
                  8,480
                  
                  
                  $
                  6,623General
      and administrative
                  
                  
                  36,647
                  
                  
                  
                  48,200Sales
      and marketing
                  
                  
                  (5,906
                  )
                  
                  
                  4,458Product
      and technology development
                  
                  
                  476
                  
                  
                  
                  3,959$
                  39,697
                  
                  
                  $
                  63,240





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




12




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





Goodwill and Other
Intangible Assets





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





The
Company performed an impairment test on goodwill as of December 31,
2009.  Based on its analysis as of December 31, 2009 and review at
March 31, 2010, 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 March 31, 2010,
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 March 31, 2010 and December 31, 2009, management of the
Company determined that a warranty reserve was not necessary.  In
addition, the charges to expense during the three months ended March 31, 2010
and 2009 were insignificant.





Derivative
Liability




Effective
January 1, 2009, the Company adopted the provisions of an accounting
pronouncement which applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, and to any
freestanding financial instruments that are potentially settled in an entity’s
own common stock. As a result of adopting this pronouncement, 310,000 of issued
and outstanding common stock purchase warrants previously treated as equity
pursuant to the derivative treatment exemption were no longer afforded equity
treatment. These warrants have an exercise price of $0.01, as amended, and
expire in February 2018. As such, effective January 1, 2009, the Company
reclassified the fair value of these common stock purchase warrants, which have
exercise price reset features, from equity to liability status as if these
warrants were treated as a derivative liability since their date of issue in
2008. On January 1, 2009, the Company reclassified from additional paid-in
capital, as a cumulative effect adjustment, $2,610 to beginning retained
earnings and $6,200 to a long-term warrant liability to recognize the fair value
of such warrants on such date. During the three months ended March 31, 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 and as a derivative liability.  The fair value of the 465,000
common stock purchase warrants was $4,650 as of March 31, 2010. As such, the
Company recognized no change in fair value of these warrants for the three
months ended March 31, 2010.




13




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:





March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009Annual
      dividend yield
                      
                      
                      —
                      
                      
                      
                      —Expected
      life (years)
                      
                      
                      7.86
                      
                      
                      
                      8.11Risk-free
      interest rate
                      
                      
                      3.28
                      %
                      
                      
                      3.62
                      %Expected
      volatility
                      
                      
                      185
                      %
                      
                      
                      186
                      %




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




Fair Value
Measurement




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued a
pronouncement which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. This
pronouncement does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. 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):




14


March
      31,Level 1
                          
                          
                          Level 2
                          
                          
                          Level 3
                          
                          
                          2010Fair
      value of warrants
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          4,650
                          
                          
                          $
                          4,650Total
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          4,650
                          
                          
                          $
                          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 three months ended March 31, 2010.





New Accounting
Pronouncements





In
September 2009, the FASB issued an update to its accounting guidance regarding
multiple-deliverable revenue arrangements. The guidance addresses how to measure
and allocate consideration to one or more units of accounting. Specifically, the
guidance requires that consideration be allocated among multiple deliverables
based on relative selling prices. The guidance establishes a selling price
hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence
and (3) estimated selling price. This guidance is effective for annual periods
beginning on or after June 15, 2010 but may be early adopted as of the beginning
of an annual period. The Company adopted this guidance on January 1, 2010 and
has concluded that this guidance did not have a material impact on its
consolidated financial position and results of operations as of and for the
three months ended March 31, 2010.





In
October 2009, the FASB issued an update to its accounting guidance regarding
software revenue recognition. The guidance changes the accounting model for
revenue arrangements that include both tangible products and software elements.
Under this guidance, tangible products containing software components and
non-software components that function together to deliver the tangible product’s
essential functionality are excluded from the software revenue guidance in FASB
ASC Topic 985, “Software.” In addition, hardware components of a tangible
product containing software components are always excluded from the software
revenue guidance. This guidance is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010 but may be early adopted. The Company adopted this guidance
on January 1, 2010 and has concluded that this guidance did not have a material
impact on its consolidated financial position and results of operations as of
and for the three months ended March 31, 2010.





In
January 2010, the FASB issued an update to its accounting guidance regarding
fair value measurement and disclosure. The guidance affects the disclosures made
about recurring and non-recurring fair value measurements. This guidance is
effective for annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15,
2010.  Early adoption is permitted. The Company is currently
evaluating the impact that this guidance will have on its consolidated financial
position and results of operations.





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





5.          
 Acquisitions,
Discontinued Operations, Dispositions, and Intangible Assets





Discontinued
Operations and Disposition of TBS





On
December 4, 2009, the Company sold TBS to N. Harris Computer Corporation and its
affiliate for approximately $2.3 million in cash plus up to $0.7 million in
additional future payments subject to certain earn-out provisions as set forth
in an Intellectual Property Purchase Agreement (the “IPPA”) and a Share Purchase
Agreement (the “SPA” and, together with the IPPA, the “Sale
Agreements”).




15




The
Company’s Board of Directors approved the sale of the assets on December 2, 2009
as part of a strategy to reduce debt and focus on growth at the remaining
business units and growth by acquisition.





For the
three months ended March 31, 2009, the operations associated with this
transaction and the loss on the sale have been classified as income from
discontinued operations in the accompanying condensed consolidated statement of
operations.  Prior to reclassification, the operations associated with
this transaction were classified into the Company’s Government accounting
solutions segment.





Discontinued
operations’ results were as follows:





Three MonthsEndedMarch 31, 2009Results
      of discontinued operationsNet
      revenues
                  
                  $
                  1,056,500Income
      from discontinued operations before income taxes
                  
                  $
                  48,025Provision
      for income taxes
                  
                  
                  -Income
      from discontinued operations
                  
                  $
                  48,025





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.




16




Other
intangibles consist of the following as of March 31, 2010:





Estimated Useful
                          
                          Gross
                          
                          
                          
                          
                          
                          NetLife
                          
                          Carrying
                          
                          
                          Accumulated
                          
                          
                          Carrying(Years)
                          
                          Amount
                          
                          
                          Amortization
                          
                          
                          AmountCorporate:License
      agreement
                          
                          Five
                          
                          $
                          250,000
                          
                          
                          $
                          (200,421
                          )
                          
                          $
                          49,579QSI:Customer
      relationships
                          
                          Ten
                          
                          $
                          730,000
                          
                          
                          $
                          (121,667
                          )
                          
                          $
                          608,333Technology
                          
                          Five
                          
                          
                          390,000
                          
                          
                          
                          (130,000
                          )
                          
                          
                          260,000Trade
      name
                          
                          Five
                          
                          
                          210,000
                          
                          
                          
                          (70,000
                          )
                          
                          
                          140,000Covenant
      not to compete
                          
                          Two
                          
                          
                          70,000
                          
                          
                          
                          (58,333
                          )
                          
                          
                          11,667$
                          1,400,000
                          
                          
                          $
                          (380,000
                          )
                          
                          $
                          1,020,000GSI:Customer
      relationships
                          
                          Ten
                          
                          $
                          2,200,000
                          
                          
                          $
                          (861,667
                          )
                          
                          $
                          1,338,333Technology
                          
                          Five
                          
                          
                          490,000
                          
                          
                          
                          (383,833
                          )
                          
                          
                          106,167Trade
      names and marks
                          
                          Ten
                          
                          
                          420,000
                          
                          
                          
                          (164,500
                          )
                          
                          
                          255,500$
                          3,110,000
                          
                          
                          $
                          (1,410,000
                          )
                          
                          $
                          1,700,000$
                          4,760,000
                          
                          
                          $
                          (1,990,421
                          )
                          
                          $
                          2,769,579





Amortization
of other intangible assets was $159,929 and $159,932, respectively, during the
three months ended March 31, 2010 and 2009 for continuing operations, and
$13,750 during the three months ended March 31, 2009 for discontinued
operations.  During the three months ended March 31, 2010, the Company
did not acquire or dispose of any intangible assets.




17




Other
intangible assets consist of the following as of December 31, 2009:





Estimated Useful
                          
                          Gross
                          
                          
                          
                          
                          
                          NetLife
                          
                          Carrying
                          
                          
                          Accumulated
                          
                          
                          Carrying(Years)
                          
                          Amount
                          
                          
                          Amortization
                          
                          
                          AmountCorporate:License
      agreement
                          
                          Five
                          
                          $
                          250,000
                          
                          
                          $
                          (187,492
                          )
                          
                          $
                          62,508QSI:Customer
      relationships
                          
                          Ten
                          
                          $
                          730,000
                          
                          
                          $
                          (103,417
                          )
                          
                          $
                          626,583Technology
                          
                          Five
                          
                          
                          390,000
                          
                          
                          
                          (110,500
                          )
                          
                          
                          279,500Trade
      name
                          
                          Five
                          
                          
                          210,000
                          
                          
                          
                          (59,500
                          )
                          
                          
                          150,500Covenant
      not to compete
                          
                          Two
                          
                          
                          70,000
                          
                          
                          
                          (49,583
                          )
                          
                          
                          20,417$
                          1,400,000
                          
                          
                          $
                          (323,000
                          )
                          
                          $
                          1,077,000GSI:Customer
      relationships
                          
                          Ten
                          
                          $
                          2,200,000
                          
                          
                          $
                          (806,667
                          )
                          
                          $
                          1,393,333Technology
                          
                          Five
                          
                          
                          490,000
                          
                          
                          
                          (359,333
                          )
                          
                          
                          130,667Trade
      names and marks
                          
                          Ten
                          
                          
                          420,000
                          
                          
                          
                          (154,000
                          )
                          
                          
                          266,000$
                          3,110,000
                          
                          
                          $
                          (1,320,000
                          )
                          
                          $
                          1,790,000$
                          4,760,000
                          
                          
                          $
                          (1,830,492
                          )
                          
                          $
                          2,929,508




18




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 was February
24, 2009.  Pursuant to the Amendment, the Bank renewed the Line and
modified the terms to include an interest rate that was floating and was
calculated at Wall Street Journal prime plus five percent (5%) on the cash
borrowed provided that the minimum rate was eight and one half percent (8.5%)
and minimum interest was $7,000 per three month period.  Interest on
outstanding borrowings was 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 was
subject to covenants as to minimum quarterly income and cash
flow.  The Bank’s maximum commitment amount for the Line, as amended,
was $1.0 million.  Advances were generally limited to 80% of eligible
domestic accounts receivable.  Outstanding advances under the Line
were 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.  The Line matured on February 24, 2010 and, pursuant to an
extension granted by the Bank, the Company repaid all outstanding advances in
February and March 2010.





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 condensed consolidated balance sheet at
December 31, 2009 and amortized $5,417 of the cash fees to interest expense
during the three months ended March 31, 2009.  Effective January 1,
2009, the Company issued an additional 235,000 warrants to the Bank (see Note 7)
and the Company reclassified the Bank’s warrants from additional paid-in capital
to a derivative liability in connection with the adoption of an accounting
pronouncement and the reset features of the Bank’s warrant
agreement.  The warrants were valued using the Black-Scholes option
pricing model at $4,310.





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.





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





Vojin Hadzi-Pavlovic and
Gloria Hadzi-Pavlovic





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




19




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 each of the three months ended March 31, 2010 and 2009,
$10,573 of interest expense was recognized in each of the respective periods in
connection with the amortization of debt discount related to this
note.





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





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 each of the three
months ended March 31, 2010 and 2009, $1,378 of interest expense was recognized
in each of the respective periods in connection with the amortization of debt
discount related to this note.





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 bore 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 December 15, 2009
(date of repayment) with respect to the Williams May 2009 Note was
4.87%.  The interest rate was subject to adjustment once per
month.  The term of the Williams May 2009 Note was 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.  Payment obligations under the Williams May 2009 Note were
subordinate in certain respects to the rights of the Private Bank of the
Peninsula.





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





On July
30, 2009 the Company arranged for an unsecured promissory note financing with C.
Alan Williams and Joan P. Williams in the amount of $435,000 (the “Williams July
2009 Note”).  The Williams July 2009 Note bore interest at ten percent
(10%) per annum.  The term of the Williams July 2009 Note was 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.  Payment obligations under the Williams July 2009 Note were
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 QSI dated as of August 1, 2008.





On
February 17, 2004, the Company borrowed $1,700,000 from C. Alan and Joan P.
Williams and issued a convertible promissory note, which bore interest at ten
percent (10%) per annum (the “Williams Convertible Note”).  During
2005, all but $65,000 of the principal amount due pursuant to this note was
converted into shares of the Company's common stock.   In October
2009, the Williams agreed to extend the due date of the note to October 31,
2011.  The note and accrued interest were due at the earlier of one of
three events: 1) October 31, 2011; 2) acquisition of a controlling interest in
the Company by a third party; or 3) the Company achieved 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.




20





During
the three months ended March 31, 2009, $1,625 of interest expense was recognized
in connection with these notes.





On
December 15, 2009, the Company paid $927,917 to C. Alan and Joan P. Williams in
full satisfaction of all outstanding principal and interest owed to the Williams
pursuant to the Williams Convertible Note, the Williams May 2009 Note, and the
Williams July 2009 Note.





Interest
Expense





Interest
expense recognized on all capital lease obligations, lines of credit and notes
payable was $19,410 and $41,065, respectively, during the three months ended
March 31, 2010 and 2009 for continuing operations, and $4,730 during the three
months ended March 31, 2009 for discontinued operations.





Interest
expense noted above included non-cash charges (related to amortization of debt
discount and debt issuance costs) of $11,951 and $29,834, respectively, during
the 2010 and 2009 quarters.




7.         
  Stockholders’
Equity





a.
            Common and Preferred
      Stock





The
Company did not issue any shares of its common or preferred stock during the
three months ended March 31, 2010.




b.
            Stock
      Options





During
the three months ended March 31, 2010, the Company granted to its employees
options to purchase 1,075,000 shares of its 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 February 2017.  During the three
months ended March 31, 2010, options to purchase 1,797,000 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
February 2010, a warrant issued to a leasing company to purchase 16,000 shares
of the Company’s common stock at $0.18 per share expired
unexercised.





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 was amortized to general and
administrative expense in the accompanying unaudited condensed consolidated
statement of operations over the three month service period that began on
December 1, 2008.  During the three months ended March 31, 2010 and
2009, the Company recorded $0 and $17,334, respectively, of consulting expense
in connection with this warrant.





In
consideration for the Line, (see Note 6) the Company issued the Bank an
immediately exercisable warrant to purchase 75,000 shares of its restricted
common stock at an exercise price of $0.062 per share through February 6,
2018.  The warrants were valued using the Black-Scholes option pricing
model at $4,500 and were recorded as debt issuance cost.  The Company
amortized such cost over the one-year life of the related debt
instrument.  During the three months ended March 31, 2010 and 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 three months
ended March 31, 2009.




21




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.  The
Company amortized such cost over the one-year life of the related debt
instrument.  During the three months ended March 31, 2010 and 2009,
the Company recorded $0 and $12,091, respectively, of interest expense in the
accompanying unaudited condensed consolidated statements of
operations.





8.
            Loss Per
      Share





The
following table reconciles basic earnings per share and diluted earnings per
share and the related weighted average number of shares outstanding for the
three months ended March 31, 2009:





Numerator
                      
                      
                      Denominator
                      
                      
                      Per Share(Loss)
                      
                      
                      (Shares)
                      
                      
                      AmountBasic
      earnings per share:Net
      loss
                      
                      $
                      (420,743
                      )
                      
                      
                      -
                      
                      
                      $
                      -Loss
      available to commons shareholders
                      
                      
                      (420,743
                      )
                      
                      
                      180,270,913
                      
                      
                      
                      -Effect
      of dilutive securitiesOptions
      and warrants
                      
                      
                      -
                      
                      
                      
                      601,472
                      
                      
                      
                      -Convertible
      note payable to related party
                      
                      
                      -
                      
                      
                      
                      1,285,679
                      
                      
                      
                      -Convertible
      preferred stock
                      
                      
                      -
                      
                      
                      
                      33,500,000
                      
                      
                      
                      -Diluted
      earnings per share:Loss
      available to common shareholders plus assumed exercises
                      
                      $
                      (420,743
                      )
                      
                      
                      215,658,064
                      
                      
                      $
                      -





9.
            Commitments and
      Contingencies





Leases





The
Company leases certain property and equipment under operating lease agreements
(including three related party leases – see Note 10) which expire on various
dates through 2013 and provide for monthly lease payments ranging from $108 to
$13,747.





The
Company also leases equipment under capital lease agreements which expire in
February 2014 and provides for monthly lease payments ranging from $675 to
$776.





Rent
expense for the three months ended March 31, 2010 and 2009 was $71,378
(including $38,888 of related party rent) and $110,098 (including $40,977 of
related party rent), respectively, for continuing operations and $0, and $22,200
of related party rent, respectively, for discontinued operations.




Legal Proceedings and
Claim





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





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




22




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 Delaware, California, and Florida.  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 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.





10.
            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 issue a
significant number of shares of its common stock to related parties upon
conversion of convertible promissory notes payable as described more fully in
Note 6.





GSI
leases the St. Petersburg office space pursuant to a noncancelable operating
lease agreement expiring on April 30, 2011 at a cost of $13,841, $14,485, and
$15,164 per month for each of the twelve month periods ended April, 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.




11.
            Segment
      Reporting





The
Company's operations are classified into four 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 four reportable segments:




23




(a)  Electronic
document delivery services,


(b)  Electronic
content management solutions,


(c)  Integrated
communications, and


(d)  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 GAAP:




24




Three Months
                            
                            
                            Three Monthsended / As of
                            
                            
                            endedMarch 31,
                            
                            
                            March 31,2010
                            
                            
                            2009Net
      revenue from external customers:Electronic
      document delivery services
                            
                            $
                            589,287
                            
                            
                            $
                            669,417Electronic
      content management solutions
                            
                            
                            585,391
                            
                            
                            
                            527,668Integrated
      communications
                            
                            
                            984,435
                            
                            
                            
                            1,604,364Corporate
                            
                            
                            -
                            
                            
                            
                            -Total
      net revenue fromexternal
      customers:
                            
                            $
                            2,159,113
                            
                            
                            $
                            2,801,449Operating
      income (loss) from continuingoperations:Electronic
      document delivery services
                            
                            $
                            145,538
                            
                            
                            $
                            114,661Electronic
      content management solutions
                            
                            
                            (113,053
                            )
                            
                            
                            (239,840
                            )Integrated
      communications
                            
                            
                            (30,567
                            )
                            
                            
                            257,326Corporate
                            
                            
                            (436,069
                            )
                            
                            
                            (574,535
                            )Total
      operating loss from continuing operations:
                            
                            $
                            (434,151
                            )
                            
                            $
                            (442,388
                            )Depreciation
      and amortization fromcontinuing
      operations:Electronic
      document delivery services
                            
                            $
                            16,109
                            
                            
                            $
                            21,663Electronic
      content management solutions
                            
                            
                            64,642
                            
                            
                            
                            67,016Integrated
      communications
                            
                            
                            103,279
                            
                            
                            
                            118,487Corporate
                            
                            
                            12,930
                            
                            
                            
                            12,932Total
      depreciation and amortization:
                            
                            $
                            196,960
                            
                            
                            $
                            220,098Interest
      expense, net of interest income:Electronic
      document delivery services
                            
                            $
                            3,858
                            
                            
                            $
                            3,177Electronic
      content management solutions
                            
                            
                            4,981
                            
                            
                            
                            2,927Integrated
      communications
                            
                            
                            -
                            
                            
                            
                            -Corporate
                            
                            
                            10,571
                            
                            
                            
                            34,961Total
      interest expense, net of interest income:
                            
                            $
                            19,410
                            
                            
                            $
                            41,065continued...




25




Three Months
                  
                  
                  Three Monthsended / As of
                  
                  
                  endedMarch 31,
                  
                  
                  March 31,2010
                  
                  
                  2009Income
      (loss) from continuing operations:Electronic
      document delivery services
                  
                  $
                  140,812
                  
                  
                  $
                  106,944Electronic
      content management solutions
                  
                  
                  (117,816
                  )
                  
                  
                  (232,603
                  )Integrated
      communications
                  
                  
                  (27,169
                  )
                  
                  
                  255,859Corporate
                  
                  
                  (446,640
                  )
                  
                  
                  (598,968
                  )Total
      loss from continuing operations:
                  
                  $
                  (450,813
                  )
                  
                  $
                  (468,768
                  )Total
      assets:Electronic
      document delivery services
                  
                  $
                  538,366Electronic
      content management solutions
                  
                  
                  2,211,807Integrated
      communications
                  
                  
                  5,585,973Corporate
                  
                  
                  205,290Total
      assets:
                  
                  $
                  8,541,436Capital
      expenditures:Electronic
      document delivery services
                  
                  $
                  27,475
                  
                  
                  $
                  19,668Electronic
      content management solutions
                  
                  
                  -
                  
                  
                  
                  3,674Integrated
      communications
                  
                  
                  32,160
                  
                  
                  
                  4,394Discontinued
      operations
                  
                  
                  -
                  
                  
                  
                  1,352Corporate
                  
                  
                  -
                  
                  
                  
                  -Total
      capital expenditures:
                  
                  $
                  59,635
                  
                  
                  $
                  29,088


26





12.  Subsequent
Events





On May
20, 2010, the Company issued a convertible promissory note to C. Alan Williams
in the amount of $200,000.  The note bears interest at ten percent
(10%) per annum from April 6, 2010.  The principal and interest
accrued thereon are due at the earlier of one of three events: 1) October 31,
2011; 2) acquisition of a controlling interest in the Company by a third party;
or 3) the Company obtains equity financing of a minimum of
$5,000,000.





Effective May
24, 2010, the Company and Silicon Valley Bank (“SVB”) entered into a two-year
agreement for a revolving credit facility (the “SVB Line”).   The
terms of the SVB Line include an interest rate that is floating and is
calculated at Wall Street Journal prime plus four and one quarter percent
(4.25%) on the cash borrowed provided that the minimum rate is eight and one
quarter percent (8.25%) and minimum interest is $4,000 per three month
period.  Interest on outstanding borrowings is payable
monthly.   In addition, the Company is required to pay a loan fee
of four payments of $12,500 (initial payment due at closing and then each six
month anniversary thereafter), a monthly collateral handling fee of $1,000, and
is subject to covenants as to minimum rolling three-month EBITDA (as defined in
the SVB Line), and minimum liquidity.  SVB’s maximum commitment amount
for the SVB Line is $1.0 million.  Advances are generally limited to
the Company’s prior month’s credit card collections plus an advance rate of 80%
of eligible domestic accounts receivable.  Outstanding advances under
the SVB Line are secured by a first lien position on all of the Company’s assets
other than certain permitted liens as set forth in the SVB
Line.


27





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 April 15, 2010.


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 March 31, 2010, and the
unaudited condensed consolidated statements of operations for the three months
ended March 31, 2010 and 2009, the unaudited condensed consolidated statements
of cash flows for the three months ended March 31, 2010 and 2009, and the
related notes thereto as well as the audited consolidated financial statements
of the Company for the year ended December 31, 2009 included in the Company’s
Annual Report on Form 10-K filed with the SEC on April 15, 2010.





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 2010 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.


28





As
reported in the Report of Independent Registered Public Accounting Firm on our
December 31, 2009 consolidated financial statements, we have suffered recurring
losses from operations that raise substantial doubt about our ability to
continue as a going concern.





Effective
December 4, 2009, we sold Tailored Business Systems (“TBS”).  Our
Board of Directors approved the disposal of the assets and liabilities on
December 2, 2009 as part of a strategy to reduce debt and focus on growth at the
remaining business units and growth by acquisition.  See Note 5 to our
unaudited condensed consolidated financial statements contained elsewhere in
this report for additional information regarding the accounting for this segment
as discontinued operations.  Please refer to the discussion below
under the caption entitled Liquidity and Capital Resources.





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 April 15,
2010 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.





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 three 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.   From February 2004 through December 2009,
TBS operated 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;


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


·
            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.


29




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 over 600 active clients with approximately 23,000
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.




Areas
of Focus




Growth
Strategy





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





Our
ultimate vision is to become a business process management/workflow service that
provides competency and functionality in the following areas:





·
            Web
      Content Management;


·
            Digital
      Asset Management;


·
            Email
      Management;


·
            Records
      Management;


·
            Documentation
      Management;


·
            Information
      Indexing;


·
            Categorization/Taxonomy;


·
            Recognition;


·
            Document
      Imaging;


·
            Form
      Processing;


·
            Scanning;


·
            Collaboration;


·
            Repositories;


·
            Storage;


·
            Long
      Term Archival;


·
            Content
      Integration;


·
            Search
      and Retrieval;


·
            Content
      Syndication;


·
            Localization
      and Personalization; and


30





·
            Publication
      (paper or electronic).





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





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





Capital
Formation





During
the remainder of 2010, we are actively seeking additional financing by issuing
equity or obtaining a combination of equity and debt financing from new
shareholders and/or lenders.  Although we believe we will generate
adequate cash to sustain operations at current levels, 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 2010 related to compliance with Section
404 of the Sarbanes-Oxley Act of 2002 if we are not able to effect the
deregistration process that was approved by a majority of our stockholders in
the first quarter of 2010.  These costs would include 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 2010, we intend to direct the
capital toward increasing sales and marketing while holding down costs for
non-essential general and administrative as well as product and technology
expenses to the extent possible.





Organizational
Enhancements





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





Challenges
and Risks





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





Weakness
in the financial markets and the economy in general





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


31





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 2010 or 2011 could have a
material adverse effect on our business, financial condition and results of
operations.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





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




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




In
September 2006, the FASB issued a pronouncement which defines fair value,
establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. This pronouncement does not require
any new fair value measurements, but provides guidance on how to measure fair
value by providing a fair value hierarchy used to classify the source of the
information. 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, 2009.


32





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 December 4, 2009, we sold TBS and reclassified
the revenues and expenses of TBS to discontinued operations for
2009.





Three Months Ended March 31,
2010 Compared to Three Months Ended March 31, 2009





Net Revenue from External
Customers





Net
revenue from external customers for the three months ended March 31, 2010 was
$2,159,113, a 23% decrease compared to net revenue of $2,801,449 for the three
months ended March 31, 2009.





During
the three months ended March 31, 2010, GSI, QSI, and MVI generated 46%, 27%, and
27% of our consolidated net revenue, respectively. During the 2009 quarter, GSI,
QSI, and MVI generated 57%, 19%, and 24% of our consolidated net revenue,
respectively.





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





Three Months Ended
                
                
                Three Months Ended
                
                
                VarianceMarch 31, 2010
                
                
                March 31, 2009
                
                
                Amount
                
                
                PercentNet
      revenue from external customers:Electronic
      document delivery services (MVI)
                
                $
                589,287
                
                
                $
                669,417
                
                
                $
                (80,130
                )
                
                
                -12
                %Electronic
      content management (QSI)
                
                
                585,391
                
                
                
                527,668
                
                
                
                57,723
                
                
                
                11
                %Integrated
      communications (GSI)
                
                
                984,435
                
                
                
                1,604,364
                
                
                
                (619,929
                )
                
                
                -39
                %Corporate
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                *Total
      net revenue from external customers
                
                $
                2,159,113
                
                
                $
                2,801,449
                
                
                $
                (642,336
                )
                
                
                -23
                %


*
calculation is not meaningful





Revenue
decreased 39% at GSI due to decreases in user subscription fees that were
partially offset by improvements in text messaging service revenue and
professional services revenue.





Revenue
decreased 12% at MVI due to a decrease in outbound revenue as a result of
customer attrition and reduced usage volumes.





Revenue
increased 11% at QSI due to increased software sales, professional services, and
support fees compared to the prior year quarter.


33





Cost of
Sales





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





Three Months Ended
                
                
                Three Months Ended
                
                
                VarianceMarch 31, 2010
                
                
                March 31, 2009
                
                
                Amount
                
                
                PercentCost
      of sales:Electronic
      document delivery services (MVI)
                
                $
                219,131
                
                
                $
                287,054
                
                
                $
                (67,923
                )
                
                
                -24
                %Electronic
      content management (QSI)
                
                
                156,326
                
                
                
                240,830
                
                
                
                (84,504
                )
                
                
                -35
                %Integrated
      communications (GSI)
                
                
                269,993
                
                
                
                285,934
                
                
                
                (15,941
                )
                
                
                -6
                %Corporate
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                *Total
      cost of sales:
                
                $
                645,450
                
                
                $
                813,818
                
                
                $
                (168,368
                )
                
                
                -21
                %


*
calculation is not meaningful





Total
cost of sales represented 30% and 29% of net sales during the 2010 and 2009
quarters, respectively.





Cost of
sales for MVI for the 2010 quarter represented 37% of MVI’s net sales as
compared with 43% in the 2009 quarter as a result of reduced telecommunications
expenses.





Cost of
sales for GSI for the 2010 quarter represented 27% of GSI’s net sales as
compared with 18% in the 2009 quarter because fixed cost of sales were not
subject to reduction as revenue declined.





Cost of
sales for QSI for the 2010 quarter represented 27% of QSI’s net sales as
compared with 46% in the 2009 quarter because fixed cost of sales did not
increase materially as revenue improved.





On a
consolidated basis, cost of sales in the 2010 quarter included $8,480 in
compensation expense related to the vesting of stock options, compared to $6,623
in the 2009 quarter.





Gross
Profit





Gross
profit for the three months ended March 31, 2010 decreased 24% to $1,513,663 as
compared to $1,987,631 for the 2009 quarter. The decrease in the 2010 quarter of
$473,968 resulted from decreases of $12,207 (-3%) and $603,988 (-46%) from MVI
and GSI, respectively, which were partially offset by an increase of $142,227
(+50%) from QSI.  Gross profit margin for the 2010 and 2009 quarters was
70% and 71%, respectively.





Operating
Expenses





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





Three Months Ended
                
                
                Three Months Ended
                
                
                VarianceMarch 31, 2010
                
                
                March 31, 2009
                
                
                Amount
                
                
                PercentOperating
      expensesElectronic
      document delivery services (MVI)
                
                $
                224,618
                
                
                $
                267,702
                
                
                $
                (43,084
                )
                
                
                -16
                %Electronic
      content management (QSI)
                
                
                542,118
                
                
                
                526,678
                
                
                
                15,440
                
                
                
                3
                %Integrated
      communications (GSI)
                
                
                745,009
                
                
                
                1,061,104
                
                
                
                (316,095
                )
                
                
                -30
                %Corporate
                
                
                436,069
                
                
                
                574,535
                
                
                
                (138,466
                )
                
                
                -24
                %Total
      operating expenses:
                
                $
                1,947,814
                
                
                $
                2,430,019
                
                
                $
                (482,205
                )
                
                
                -20
                %





During
the three months ended March 31, 2010, the operating expenses of Corporate
decreased 24% as a result of decreased compensation, accounting fees, insurance,
payroll tax, and consulting expenses. These decreases were partially offset by
increases in filing fees, travel, legal fees, and director
fees.


34





During
the three months ended March 31, 2010, MVI’s operating expenses decreased 16%
compared to the 2009 quarter.  Product and technology development
decreased by $54,873 (-56%) due to staff changes.  Sales and marketing
increased by $13,577 (+29%) as a result of increased marketing
staff.  General and administrative increased by $3,766 (+4%) due to
facilities and insurance expenses.  Depreciation and amortization
expense decreased by $5,554 (-26%).





During
the three months ended March 31, 2010, GSI’s operating expenses decreased 30%
compared to the 2009 quarter.  Product and technology development
decreased by $8,319 (-4%) due to staff changes.  Sales and marketing
decreased by $178,230 (-44%) due to lower bonus and reseller commission payments
as offset by increased travel, trade show expense.  General and
administrative decreased by $114,338 (-34%) due to decreased staffing and lower
bank fees resulting from lower transaction volume and reduced processing
fees.  Depreciation and amortization expenses decreased by $15,208
(-13%).





During
the three months ended March 31, 2010, QSI’s operating expenses increased 3%
compared to the 2009 quarter.  Product and technology development
increased by $33,397 (+20%) due to higher staffing costs.  Sales and
marketing increased by $36,009 (+39%) on increased staffing and marketing
consultant expenses.  General and administrative decreased by $51,592
(-26%) on decreased rent, telephone and insurance expenses which were partially
offset by increased vacation pay and bad debt expense.  Depreciation
and amortization expenses decreased by $2,374 (-4%).





On a
consolidated basis, operating expenses in the 2010 quarter included $31,217 in
compensation expense related to the vesting of stock options, compared to
$56,617 in the 2009 quarter.





Operating Income
(Loss):





As a
result of the foregoing, the Company reported an operating loss for the three
months ended March 31, 2010 of $434,151, compared to an operating loss of
$442,388 for the three months ended March 31, 2009.





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





Three Months Ended
                
                
                Three Months Ended
                
                
                VarianceMarch 31, 2010
                
                
                March 31, 2009
                
                
                Amount
                
                
                PercentOperating
      income (loss):Electronic
      document delivery services (MVI)
                
                $
                145,538
                
                
                $
                114,661
                
                
                $
                30,877
                
                
                
                27
                %Electronic
      content management (QSI)
                
                
                (113,053
                )
                
                
                (239,840
                )
                
                
                126,787
                
                
                
                53
                %Integrated
      communications (GSI)
                
                
                (30,567
                )
                
                
                257,326
                
                
                
                (287,893
                )
                
                
                -112
                %Corporate
                
                
                (436,069
                )
                
                
                (574,535
                )
                
                
                138,466
                
                
                
                24
                %Total
      operating loss, net
                
                $
                (434,151
                )
                
                $
                (442,388
                )
                
                $
                8,237
                
                
                
                2
                %


*
calculation is not meaningful





MVI
reported higher operating income compared to the prior year quarter and GSI
swung from an operating income to an operating loss.  These changes
were partially offset by lower operating losses from QSI and
Corporate.





Interest Expense,
net





Interest
expense, net for the three months ended March 31, 2010 decreased by $21,655
(-53%) to $19,410 from the $41,065 reported in the 2009 quarter as a result of a
reduction in the amortization of debt issue costs and lower interest charges
incurred in connection with our borrowings due to repaying borrowings pursuant
to our line of credit.





Other Income,
net





Other
income, net for the three months ended March 31, 2010 was $2,748 compared to
other income, net of $15,585 reported in the 2009 quarter.  In each of
the quarters, we recorded other income and expense related to settlement of
liabilities related to prior years.


35





Net Income
(Loss)





As a
result of the foregoing, net loss for the three months ended March 31, 2010 was
$450,813, compared to a net loss of $420,743, for the 2009 quarter.





Basic and
diluted loss per share for the three months ended March 31, 2010 was $0.00 and
$0.00 per share, respectively, based on weighted average shares of
226,546,613.





Basic and
diluted net income per share for the three months ended March 31, 2009 was $0.00
and $0.00 per share, respectively, based on weighted average shares of 180,270,913
and 215,658,064, respectively.





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





Three Months Ended
                
                
                Three Months Ended
                
                
                VarianceMarch 31, 2010
                
                
                March 31, 2009
                
                
                Amount
                
                
                PercentNet
      income (loss):Electronic
      document delivery services (MVI)
                
                $
                140,812
                
                
                $
                106,944
                
                
                $
                33,868
                
                
                
                32
                %Electronic
      content management (QSI)
                
                
                (117,816
                )
                
                
                (232,603
                )
                
                
                114,787
                
                
                
                49
                %Integrated
      communications (GSI)
                
                
                (27,169
                )
                
                
                255,859
                
                
                
                (283,028
                )
                
                
                -111
                %Corporate
                
                
                (446,640
                )
                
                
                (598,968
                )
                
                
                152,328
                
                
                
                25
                %Discontinued
      operations
                
                
                -
                
                
                
                48,025
                
                
                
                (48,025
                )
                
                
                -100
                %Total
      net loss
                
                $
                (450,813
                )
                
                $
                (420,743
                )
                
                $
                (30,070
                )
                
                
                -7
                %


*
calculation is not meaningful





LIQUIDITY AND CAPITAL RESOURCES





During
the three months ended March 31, 2010 our net cash position decreased by
$925,281 to $382,553.  Our operating, investing and financing
activities used net cash of $781,223, $9,435 and $134,623,
respectively.





On May
20, 2010, we issued a convertible promissory note to C. Alan Williams in the
amount of $200,000.  The note bears interest at ten percent (10%) per
annum from April 6, 2010.  The principal and interest accrued thereon
are due at the earlier of one of three events: 1) October 31, 2011; 2)
acquisition of a controlling interest in us by a third party; or 3) we obtain
equity financing of a minimum of $5,000,000.





Effective
May 24, 2010, we and Silicon Valley Bank (“SVB”) entered into a two-year
agreement for a revolving credit facility (the “SVB Line”).   The
terms of the SVB Line include an interest rate that is floating and is
calculated at Wall Street Journal prime plus four and one quarter percent
(4.25%) on the cash borrowed provided that the minimum rate is eight and one
quarter percent (8.25%) and minimum interest is $4,000 per three month
period.  Interest on outstanding borrowings is payable
monthly.   In addition, we are required to pay a loan fee of four
payments of $12,500 (initial payment due at closing and then each six month
anniversary thereafter), a monthly collateral handling fee of $1,000, and are
subject to covenants as to minimum rolling three-month EBITDA (as defined in the
SVB Line), and minimum liquidity.  SVB’s maximum commitment amount for
the SVB Line is $1.0 million.  Advances are generally limited to our
prior month’s credit card collections plus an advance rate of 80% of eligible
domestic accounts receivable.  Outstanding advances under the SVB Line
are secured by a first lien position on all of our assets other than certain
permitted liens as set forth in the SVB Line.





On
December 4, 2009, we sold TBS to N. Harris Computer Corporation and its
affiliate for approximately $2.3 million in cash plus up to $0.7 million in
additional future payments subject to certain earn-out
provisions.  Our Board of Directors approved the disposal of TBS on
December 2, 2009 as part of a strategy to reduce debt and focus on growth at the
remaining business units and growth by acquisition.  We used $169,817
of the proceeds from the asset sale to pay outstanding amounts pursuant to the
Line (see below) on December 4, 2009 and the remainder of the proceeds between
January 2010 and April 2010 to fund operating shortfalls and income taxes
payable as a result of the sale transaction.


36





Our
sources of capital include cash flow from operations, available credit
facilities, and the issuance of debt and equity securities.  During
the first quarter of 2010, we relied heavily on our cash reserves to fund the
negative cash flows we experienced from operating shortfalls and due to the
retirement of our line of credit with the Private Bank of the
Peninsula.  We expect to experience negative operating cash flows
through at least the fourth quarter of 2010, and we expect to make use of
available borrowing capability under new sources of debt financing to offset
such negative cash flows.





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





On
February 6, 2008, we entered into an agreement with The Private Bank of The
Peninsula (“Bank”) for an asset based line of credit (the
“Line”).   Pursuant to an amendment, the Bank renewed the Line
and modified the terms to include an interest rate that was floating and was
calculated at Wall Street Journal prime plus five percent (5%) on the cash
borrowed provided that the minimum rate was eight and one half percent (8.5%)
and minimum interest was $7,000 per three month period.  Interest on
outstanding borrowings was 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, was $1.0
million.  Advances were generally limited to 80% of eligible domestic
accounts receivable.  Outstanding advances under the Line were 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 our inventory,
intellectual property, and equipment.  The Line matured on February
24, 2010 and, pursuant to an extension granted by the Bank, we repaid all
outstanding advances in February and March 2010.





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





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





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 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 end of 2010 and at least until QSI,
MVI, and GSI consistently generate net cash flows sufficient to offset the
projected expense to operate the holding company.





We expect
to use cash flow generated from operations, additional proceeds from the sale of
TBS, and potentially other sources, to fund expected negative cash flows during
the remainder of 2010.





Our
available cash resources combined with our current revenue streams will not be
sufficient to meet our anticipated working capital requirements for the next
twelve months.  We will require new sources of debt or equity
financing during the remainder of 2010, particularly if we should 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 be
greater.


37





We
believe that sustainable profitability is achievable; however, we have a history
of losses.  While MVI reported net income for the first quarter of
2010, this income was not sufficient to offset the net losses of GSI and QSI,
interest expense and other corporate overhead.  If we are not
successful in sustaining and increasing operating profits from our three
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, 2009
consolidated financial statements includes an explanatory paragraph stating that
the recurring losses incurred from operations raises 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 our 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 our control, including, without limitation, the risks described
in Item 1A of our Annual Report on Form 10-K filed with the Commission on April
15, 2010. Our future results and stockholder values may differ materially from
those expressed in these forward- looking statements. Many of the factors that
will determine these results and values are beyond our ability to control or
predict. We assume no obligation to update any forward-looking
statements.  Investors are cautioned not to put undue reliance on any
forward-looking statements, which speak only as of the date of this Quarterly
Report on Form 10-Q.  Readers should also consult the cautionary
statements and risk factors listed from time to time in our Reports, and all
amendments thereto, on Forms 10-K, 10-KSB, 10-Q, 10-QSB, 8-K, and other SEC
filings.  For these statements, we claim the protection of the safe
harbor for forward-looking statements contained in Section 21E of the Exchange
Act.





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





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


38





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





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





RECENT
ACCOUNTING PRONOUNCEMENTS





In
September 2009, the FASB issued an update to its accounting guidance regarding
multiple-deliverable revenue arrangements. The guidance addresses how to measure
and allocate consideration to one or more units of accounting. Specifically, the
guidance requires that consideration be allocated among multiple deliverables
based on relative selling prices. The guidance establishes a selling price
hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence
and (3) estimated selling price. This guidance is effective for annual periods
beginning on or after June 15, 2010 but may be early adopted as of the beginning
of an annual period. We adopted this guidance on January 1, 2010 and have
concluded that this guidance did not have a material impact on our consolidated
financial position and results of operations as of and for the three months
ended March 31, 2010.
 
 In
October 2009, the FASB issued an update to its accounting guidance regarding
software revenue recognition. The guidance changes the accounting model for
revenue arrangements that include both tangible products and software elements.
Under this guidance, tangible products containing software components and
non-software components that function together to deliver the tangible product’s
essential functionality are excluded from the software revenue guidance in FASB
ASC Topic 985, “Software.” In addition, hardware components of a tangible
product containing software components are always excluded from the software
revenue guidance. This guidance is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010 but may be early adopted. We adopted this guidance on
January 1, 2010 and have concluded that this guidance did not have a material
impact on our consolidated financial position and results of operations as of
and for the three months ended March 31, 2010.
 
 In
January 2010, the FASB issued an update to its accounting guidance regarding
fair value measurement and disclosure. The guidance affects the disclosures made
about recurring and non-recurring fair value measurements. This guidance is
effective for annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15,
2010.  Early adoption is permitted. We are currently evaluating
the impact that this guidance will have on our consolidated financial position
and results of operations.
 
 Other
recent accounting pronouncements issued by the FASB (including the Emerging
Issues Task Force) and the American Institute of Certified Public Accountants
did not or are not believed by management to have a material impact on our
present or future consolidated financial statements.


39




ITEM
4T. – CONTROLS AND PROCEDURES





(a) As of
March 31, 2010, 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 concluded that, although we
continue to make progess in executing our plan to remediate significant
deficiencies, our disclosure controls and procedures were not effective as of
March 31, 2010 and that our internal controls over financial reporting were not
effective as of March 31, 2010.  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 April 15, 2010.





(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 March 31, 2010 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.


40


PART
II





ITEM
1 – LEGAL PROCEEDINGS.





Claims





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





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





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





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





During
the three months ended March 31, 2010, we granted to our employees options to
purchase 1,075,000 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 February 2010.





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.


41





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





We
submitted no matters to a vote of our securities holders during the first
quarter of 2010.  However, as discussed in more detail elsewhere in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed
with the Commission on April 15, 2010, we do intend to solicit our shareholders,
through an action by written consent, to approve a reverse split of our common
stock, which will have the effect of terminating our status as a reporting
company under the 1934 Act, which will have the effect of our shares trading in
the pink sheets, as opposed to the OTC bulletin board.





ITEM
5 – OTHER INFORMATION.





None.




42




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.
      **2.9
                
                Intellectual
      Property Purchase Agreement, dated December 4, 2009, among N. Harris
      Computer Corporation, Tailored Business Systems, Inc., and VillageEDOCS,
      Inc.  Previously filed as Exhibit 2.1 to the Company’s Current
      Report on Form 8-K filed on December 7, 2009. **2.10
                
                Share
      Purchase Agreement, dated December 4, 2009, between Systems Design, Inc.,
      and VillageEDOCS, Inc.  Previously filed as Exhibit 2.2 to the
      Company’s Current Report on Form 8-K filed on December 7, 2009.
      **3.1
                
                Articles
      of Incorporation, as amended.  Previously filed with the Company's
      Form 10-SB filed on August 29, 2000.  **3.2
                
                By-laws. 
      Previously filed with the Company's Form 10-SB filed on August 29,
      2000.  **3.3
                
                Article
      of Amendment to Articles of Incorporation to increase authorized number of
      common shares.  Previously filed with the Company's 14C Information
      Statement filed on July 23, 2004. **3.4
                
                Article
      of Amendment to Articles of Incorporation to increase authorized number of
      common shares and to create a class of preferred stock.  Previously
      filed with the Company's 14C Information Statement filed on June 7, 2005.
      **3.5
                
                Form
      of Certificate of Designations of Preferences, Rights and Limitations of
      Series A Convertible Preferred Stock.  Previously filed as Exhibit
      4.8 to the Company's Current Report on Form 8-K filed on April 19, 2005.
      **3.6
                
                Certificate
      of Amendment of Articles of Incorporation to increase authorized number of
      common shares.  Previously filed with the Company's Current Report on
      Form 8-K filed on January 20, 2006. **3.7
                
                Form
      of Certificate of Incorporation of VillageEDOCS,
      Inc.  Previously filed with the Company’s Definitive Information
      Statement on Schedule 14A filed on May 24, 2007.**3.8
                
                Form
      of Bylaws of VillageEDOCS, Inc.  Previously filed with the
      Company’s Definitive Information Statement on Schedule 14A filed on May
      24, 2007.


43





4.1
              
              Letter
      Agreement dated July 30, 2002 by and between the Company, C. Alan
      Williams, and Joan P. Williams previously filed as Exhibit 4.1 to the
      Company's Quarterly Report on Form 10-QSB for the period ended June 30,
      2002 and incorporated herein by
reference.  **4.2
              
              Form
      of Unsecured Convertible Promissory Note. Previously filed as Exhibit 4.5
      to the Registrant's Quarterly Report on Form 10-QSB filed with the
      Securities and Exchange Commission on May 15, 2002 and incorporated herein
      by reference. **4.3
              
              Form
      of Convertible Secured Promissory Note. Previously filed as Exhibit 4.6 to
      the Registrant's Quarterly Report on Form 10-QSB filed with the Securities
      and Exchange Commission on May 15, 2002 and incorporated herein by
      reference. **4.4
              
              2002
      Equity Incentive Plan dated as of January 30, 2002.  Previously filed
      as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-QSB filed
      with the Securities and Exchange Commission on May 15, 2002 and
      incorporated herein by reference. **4.5
              
              Form
      of Stock Option Agreement.  Previously filed as Exhibit 4.2 to the
      Registrant's Quarterly Report on Form 10-QSB filed with the Securities and
      Exchange Commission on May 15, 2002 and incorporated herein by reference.
      **4.6
              
              Promissory
      Note Modification Agreement dated May 9, 2002 by and among the Company,
      Joan P. Williams and C. Alan Williams.  Previously filed as Exhibit
      4.3 to the Registrant's Quarterly Report on Form 10-QSB filed with the
      Securities and Exchange Commission on May 15, 2002 and incorporated herein
      by reference. **4.7
              
              Security
      Agreement dated May 9, 2002 by and among the Company, Joan P. Williams and
      C. Alan Williams.  Previously filed as Exhibit 4.4 to the
      Registrant's Quarterly Report on Form 10-QSB filed with the Securities and
      Exchange Commission on May 15, 2002 and incorporated herein by reference.
      **4.8
              
              Promissory
      Note to Stephen A. Garner dated February 17, 2004 previously filed as
      Exhibit 4.1 to the Company's Current Report on Form 8-K filed on February
      18, 2004 and incorporated herein by reference. **4.9
              
              Promissory
      Note to James L. Campbell dated February 17, 2004 previously filed as
      Exhibit 4.2 to the Company's Current Report on Form 8-K filed on February
      18, 2004 and incorporated herein by reference. **4.10
              
              Guaranty
      by Tailored Business Systems, Inc. to Stephen A. Garner dated February 17,
      2004 previously filed as Exhibit 4.3 to the Company's Current Report on
      Form 8-K filed on February 18, 2004 and incorporated herein by reference.
      **4.11
              
              Guaranty
      by Tailored Business Systems, Inc. to James L. Campbell dated February 17,
      2004 previously filed as Exhibit 4.4 to the Company's Current Report on
      Form 8-K filed on February 18, 2004 and incorporated herein by reference.
      **4.12
              
              Form
      of Security Agreement dated February 17, 2004 by and between Tailored
      Business Systems, Inc. and Stephen A. Garner previously filed as Exhibit
      4.5 to the Company's Current Report on Form 8-K filed on February 18, 2004
      and incorporated herein by reference. **4.13
              
              Form
      of Security Agreement dated February 17, 2004 by and between Tailored
      Business Systems, Inc. and James L. Campbell previously filed as Exhibit
      4.6 to the Company's Current Report on Form 8-K filed on February 18, 2004
      and incorporated herein by reference. **4.14
              
              Registration
      Rights Agreement dated February 17, 2004 by and between VillageEDOCS and
      Stephen A. Garner previously filed as Exhibit 4.7 to the Company's Current
      Report on Form 8-K filed on February 18, 2004 and incorporated herein by
      reference. **


44





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. **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.
**


45





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.**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.**


46





4.50
                
                Third
      Amendment to Convertible Promissory Note by and between the Registrant and
      C. Alan Williams and Joan P. Williams dated as of October 22,
      2009.**4.51
                
                Promissory
      Note by and between the Registrant and C. Alan Williams dated May 20,
      2010.*4.52
                
                Loan
      and Security Agreement by and between the Registrant and Silicon Valley
      Bank dated May 24, 2010.*10.1
                
                General
      Release and Noncompetition Agreement dated February 17, 2004 by Stephen A.
      Garner in favor of Tailored Business Systems, Inc. previously filed as
      Exhibit 10.3 to the Company's Current Report on Form 8-K filed on February
      18, 2004 and incorporated herein by reference. **10.2
                
                General
      Release and Noncompetition Agreement dated February 17, 2004 by James L.
      Campbell in favor of Tailored Business Systems, Inc. previously filed as
      Exhibit 10.4 to the Company's Current Report on Form 8-K filed on February
      18, 2004 and incorporated herein by reference. **10.3
                
                Lease
      Agreement dated February 17, 2004 by and between Perimeter Center Partners
      and Tailored Business Systems, Inc. previously filed as Exhibit 10.5 to
      the Company's Current Report on Form 8-K filed on February 18, 2004 and
      incorporated herein by reference. **10.4
                
                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.
      **


47





10.15
              
              Employment
      Agreement dated November 13, 2008 by and between VillageEDOCS, Inc. and H.
      Jay Hill.  Previously filed as Exhibit 10.16 to the Company’s
      Quarterly Report on Form 10-Q filed on November 14,
  2008.**10.16
              
              Employment
      Agreement dated November 13, 2008 by and between VillageEDOCS, Inc. and
      Michael A. Richard.  Previously filed as Exhibit 10.17 to the
      Company’s Quarterly Report on Form 10-Q filed on November 14,
      2008.**14.1
              
              Code
      of Ethics.  Previously filed as Exhibit 14.1 to the Company's
      Annual Report on Form 10-KSB filed on March 29, 2004 and incorporated
      herein by reference. **21.1
              
              Subsidiaries
      of the Registrant.*31.1
              
              Certification
      Under Section 302 of The Sarbanes-Oxley Act of 2002 signed and dated May
      24, 2010 by K. Mason Conner, Chief Executive Officer.*31.2
              
              Certification
      Under Section 302 of The Sarbanes-Oxley Act of 2002 signed and dated May
      24, 2010 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 May 24, 2010 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 May 24, 2010 by Michael A.
      Richard, Chief Financial
Officer.***




*
            Filed
      herewith


**
            Previously
      filed


***
            Furnished
      herewith


48


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:  May
      24, 2010
              By
              /s/ K. Mason
    ConnerK.
      Mason ConnerChief
      Executive Officer, President, and DirectorDated:  May
      24, 2010
              By:
              /s/ Michael A.
      RichardMichael
      A. RichardChief
      Financial Officer(Principal
      Accounting Officer)


49