**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C. 20549

 

**FORM 10-Q**

(Mark One)

[**X**]   QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the quarterlyperiod ended June 30, 2008**

 

[   ]   TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT 

For the transitionperiod from_________, 20__, to________, 20__.

 

Commission FileNumber: 000-31395

 

 

**VillageEDOCS, Inc.**(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                        | ** ** | **33-0668917**                                           |
|---------------------------------------------------------------------|------------|----------------------------------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization)      |       | I.R.S. Employer Identification Number                    |
|                                                                |       |                                                     |
| **1401 N. Tustin Ave, Ste. 230, Santa Ana, California  92705** | ** ** | ** **

**(714) 734-1030**                           |
| (Address of principal executive offices)                            |       | (Registrant's telephone number, including area code) |

 

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

|   | YES | **X** | NO |   |
|--------|-----|-------|----|--------|

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

 

| Large Accelerated Filer |     | Accelerated Filer |     | Non-accelerated filer |     | Smaller reporting company | X |
|-------------------------|--------------------|-------------------|--------------------|-----------------------|--------------------|---------------------------|---|

 

|                                        |     |                              |     |   (Do not check if  a smaller                 |   |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------|---------------------------------------------------------|--------|--------|--------|
|                                                                                                                                                                                                                                 |               |                                                                                                                                                                     |               |       reporting  company) |   |   |   |

 

 

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

|   | YES |   | NO**** | **X** |
|--------|-----|--------|--------|-------|

 

**APPLICABLE ONLY TOISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS**

Indicate by check mark whether the registrant has filed alldocuments and reports required to be filed by Sections 12, 13, or 15(d) of theExchange Act subsequent to the distribution of securities under a planconfirmed by a court.

|   | YES |   | NO |   |
|--------|-----|--------|----|--------|

** **

**APPLICABLE ONLY TOCORPORATE ISSUERS**

There were 174,770,913 shares of the Registrant's commonstock outstanding as of August 4, 2008 

 

----

**VillageEDOCS**

**Index**

** **

| ** ** | ** **                         | Page No. |
|------------|------------------------------------|----------|
| ** ** | **PART I.  FINANCIAL INFORMATION** |     |   |
|       |                               |     |   |   |   |
|       | Item 1.                            |     |  Condensed Consolidated Financial  Statements |   |   |
|       |                               |     |  Condensed Consolidated Balance  Sheets as of June 30, 2008 (Unaudited)         and  December 31, 2007 (Audited) |   | 1 |
|       |                               |     |  Condensed Consolidated Statements  of Operations for the three and six     months ended June  30, 2008 and 2007 (Unaudited) |   | 2 |
|       |                               |     |  Condensed Consolidated Statements  of Cash Flows for the six months     ended June 30, 2008  and  2007 (Unaudited) |   | 3 |
|       |                               |     |  Notes to  Unaudited Condensed Consolidated  Financial Statements |   | 5 |
|       | Item 2.                            |     |  Management's Discussion and  Analysis of Financial Condition and Results     of  Operations. |   | 22 |
|       | Item 4.                            |     |  Controls and Procedures |   | 37 |
|       |                               |     |   |   |   |
| ** ** | **PART II. OTHER  INFORMATION**    |     |   |
|       |                               |     |   |   |   |
|       | Item 1.                            |     |  Legal Proceedings |   | 38 |
|       | Item 2.                            |     |  Unregistered Sales of Equity Securities and Use of  Proceeds |   | 38 |
|       | Item 3.                            |     |  Defaults Upon Senior Securities |   | 38 |
|       | Item 4.                            |     |  Submission of Matters to a Vote of Security Holders |   | 38 |
|       | Item 5.                            |     |  Other Information |   | 38 |
|       | Item 6.                            |     |  Exhibits |   | 39 |
|       |                               |     |  Signatures |   | 46 |
|       |                               |     |   |   |   |
|       |                               |     |   |   |   |

----

 

| **VillageEDOCS, Inc. and subsidiaries**                                                       |   |                                                                          |       |                                                                          |
|-----------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|
| **Condensed Consolidated  Balance Sheets**                                                    |   |                                                                          |       |                                                                          |
|                                                                                          |   | **June 30, **                                                            | ** ** | **December 31, **                                                        |
|                                                                                          |   | **2008 **                                                                | ** ** | **2007 **                                                                |
| ** **                                                                                    |   | **(Unaudited)**                                                               | ** ** | **(Audited)**                                                                 |
| **ASSETS**                                                                                    |   |                                                                          |       |                                                                          |
| Current assets:                                                                               |   |                                                                          |       |                                                                          |
| Cash                                                                                          |   | $478,371                                                                 |       | $749,911                                                                 |
| Accounts  receivable, net of allowance for doubtful                                           |   |                                                                          |       |                                                                          |
| accounts  of approximately $42,000 and $49,000, respectively                                  |   | 822,001                                                                  |       | 899,117                                                                  |
| Inventories                                                                                   |   | 27,484                                                                   |       | 31,988                                                                   |
| Prepaid  expenses and other current assets                                                    |   | 152,962                                                                  |       | 193,557                                                                  |
| Debt  issuance costs, net                                                                     |   | 125,217                                                                  |       | -                                                                        |
| Total  current assets                                                                         |   | 1,606,035                                                                |       | 1,874,573                                                                |
|                                                                                          |   |                                                                          |       |                                                                          |
| Property and equipment, net                                                                   |   | 353,167                                                                  |       | 379,192                                                                  |
| Other assets                                                                                  |   | 48,611                                                                   |       | 48,611                                                                   |
| Goodwill                                                                                      |   | 6,272,457                                                                |       | 6,272,457                                                                |
| Other intangibles, net                                                                        |   | 2,757,589                                                                |       | 2,993,449                                                                |
|                                                                                          |   | $         11,037,859        |       | $          11,568,282  |
|                                                                                          |   |                                                                          |       |                                                                          |
|                                                                                          |   |                                                                          |       |                                                                          |
| **LIABILITIES AND  STOCKHOLDERS' EQUITY**                                                     |   |                                                                          |       |                                                                          |
| Current liabilities:                                                                          |   |                                                                          |       |                                                                          |
| Accounts  payable                                                                             |   | $493,680                                                                 |       | $561,845                                                                 |
| Accrued  expenses                                                                             |   | 2,195,195                                                                |       | 2,491,416                                                                |
| Deferred  revenue                                                                             |   | 449,405                                                                  |       | 425,636                                                                  |
| Capital  lease obligations, current                                                           |   | 20,947                                                                   |       | 19,008                                                                   |
| Lines  of credit                                                                              |   | 579,928                                                                  |       | 484,680                                                                  |
| Convertible  note and accrued interest payable to                                             |   |                                                                          |       |                                                                          |
| related  party                                                                                |   | 175,120                                                                  |       | 171,870                                                                  |
|         Total current  liabilities                         |   | 3,914,275                                                                |       | 4,154,455                                                                |
|                                                                                          |   |                                                                          |       |                                                                          |
| Capital lease obligations,  net of current portion                                            |   | 10,617                                                                   |       | 21,918                                                                   |
|                                                                                          |   |                                                                          |       |                                                                          |
|         Total liabilities                                  |   | 3,924,892                                                                |       | 4,176,373                                                                |
|                                                                                          |   |                                                                          |       |                                                                          |
| Commitments and  contingencies                                                                |   |                                                                          |       |                                                                          |
|                                                                                          |   |                                                                          |       |                                                                          |
| Stockholders' equity:                                                                         |   |                                                                          |       |                                                                          |
| Series  A Preferred stock, par value $0.001 per share:                                        |   |                                                                          |       |                                                                          |
| Authorized   -- 48,000,000 shares                                                        |   |                                                                          |       |                                                                          |
|         Issued and  outstanding --  33,500,000 shares |   | 33,500                                                                   |       | 33,500                                                                   |
| (liquidation  preference of $1,675,000)                                                       |   |                                                                          |       |                                                                          |
| Common  stock, par value $0.0001 per share:                                                   |   |                                                                          |       |                                                                          |
| Authorized  -- 500,000,000 shares                                                             |   |                                                                          |       |                                                                          |
|         Issued and  outstanding -- 152,770,913 shares      |   | 15,277                                                                   |       | 15,277                                                                   |
| Additional paid-in capital                                                                    |   | 32,770,143                                                               |       | 32,397,585                                                               |
| Accumulated deficit                                                                           |   | (25,705,953)                                                                  |       | (25,054,453)                                                                  |
| Total  stockholders' equity                                                                   |   | 7,112,967                                                                |       | 7,391,909                                                                |
|                                                                                          |   | $          11,037,859  |       | $          11,568,282  |
| See accompanying notes to  unaudited condensed consolidated financial statements.             |   |                                                                          |       |                                                                          |

** **

----

| **VillageEDOCS,  Inc. and subsidiaries**                                          | ** ** | ** **                                                                                                                 | ** ** | ** **                                                                                                                 | ** ** |                                                                                                                       |       |                                                                                                                       |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|
| **Condensed Consolidated  Statements of Operations**                              | ** ** | ** **                                                                                                                 | ** ** |                                                                                                                       |       |                                                                                                                       |
| **(Unaudited)**                                                                   | ** ** | ** **                                                                                                                 | ** ** | ** **                                                                                                                 | ** ** |                                                                                                                       |       | ** **                                                                                                                 |
| ** **                                                                        | ** ** | **Three Months Ended June 30,**                                                                                            | ** ** | **Six Months Ended June 30,**                                                                                              |
|                                                                              |       | **2008**                                                                                                                   | ** ** | **2007**                                                                                                                   |       | **2008**                                                                                                                   | ** ** | **2007**                                                                                                                   |
| Net sales                                                                         |       |  $     3,414,808                                                                        |       |  $     3,335,435                                                                        |       |  $     6,692,793                                                                        |       |  $     6,593,984                                                                        |
| Cost of sales                                                                     |       |  1,409,902                                                                                                       |       | 1,245,665                                                                                                             |       |  2,783,037                                                                                                       |       |  2,439,071                                                                                                       |
| Gross  profit                                                                     |       |  2,004,906                                                                                                       |       | 2,089,770                                                                                                             |       |  3,909,756                                                                                                       |       |  4,154,913                                                                                                       |
| Operating expenses:                                                               |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
| Product  and technology                                                           |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
| development                                                                       |       |  365,450                                                                                                         |       |  442,571                                                                                                         |       |  771,383                                                                                                         |       |  919,370                                                                                                         |
| Sales  and marketing                                                              |       |  496,757                                                                                                         |       |  572,994                                                                                                         |       |  941,705                                                                                                         |       |  1,071,393                                                                                                       |
| General  and administrative                                                       |       |  1,064,849                                                                                                       |       | 1,325,403                                                                                                             |       |  2,389,975                                                                                                       |       |  2,787,713                                                                                                       |
| Depreciation  and amortization                                                    |       |  184,130                                                                                                         |       |  202,195                                                                                                         |       |  365,775                                                                                                         |       |  404,766                                                                                                         |
| Total  operating expenses                                                         |       |  2,111,186                                                                                                       |       | 2,543,163                                                                                                             |       |  4,468,838                                                                                                       |       |  5,183,242                                                                                                       |
| Loss  from operations                                                             |       | (106,280)                                                                                                                  |       |  (453,393)                                                                                                            |       | (559,082)                                                                                                                  |       |  (1,028,329)                                                                                                          |
|                                                                              |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
| Interest expense, net of  interest income                                         |       |  (46,575)                                                                                                             |       |  (29,434)                                                                                                             |       | (112,823)                                                                                                                  |       | (57,269)                                                                                                                   |
| Other income (expense), net                                                       |       |  1,811                                                                                                           |       |  (61,760)                                                                                                             |       |  53,403                                                                                                          |       | (54,339)                                                                                                                   |
| Loss  before provision for                                                        |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
| income  taxes                                                                     |       | (151,044)                                                                                                                  |       |  (544,587)                                                                                                            |       | (618,502)                                                                                                                  |       |  (1,139,937)                                                                                                          |
|                                                                              |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
| Provision for income taxes                                                        |       |  (5,621)                                                                                                              |       |  (21,962)                                                                                                             |       | (32,998)                                                                                                                   |       | (26,072)                                                                                                                   |
| Loss  from continuing operations                                                  |       | (156,665)                                                                                                                  |       | (566,549)                                                                                                                  |       | (651,500)                                                                                                                  |       |  (1,166,009)                                                                                                          |
|                                                                              |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
| Income from discontinued  operations                                              |       |  -                                                                                                               |       |  89,474                                                                                                          |       |  -                                                                                                                    |       | 186,172                                                                                                               |
| Net  loss                                                                         |       |  $     (156,665)                                                                             |       |  $     (477,075)                                                                             |       |  $     (651,500)                                                                             |       |  $     (979,837)                                                                             |
|                                                                              |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
| Basic and diluted loss  available to                                              |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
| common  stockholders per common share                                             |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
| Loss  from continuing operations                                                  |       |  $                  -  |       |  $                  -       |       |  $                  -  |       |  $           (0.01)                                            |
| Income  from discontinued operations                                              |       |  $                  -  |       |  $                  -  |       |  $                  -  |       |  $                  -  |
| Loss  per share                                                                   |       |  $                  -  |       |  $                  -  |       |  $                  -  |       |  $           (0.01)                                            |
|                                                                              |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
| Weighted average shares  outstanding -                                            |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
|   basic and diluted                                                          |       |  152,770,913                                                                                                     |       |  149,309,709                                                                                                     |       |  152,770,913                                                                                                     |       |  148,444,518                                                                                                     |
|                                                                              |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |       |                                                                                                                       |
| See accompanying notes to  unaudited condensed consolidated financial statements. |       |                                                                                                                       |       |                                                                                                                       |

** **

----

** **

| **VillageEDOCS, Inc. and  subsidiaries**                    |   |                                                                      |       |                                                                      |
|-------------------------------------------------------------|--------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|
| **Condensed Consolidated  Statements of Cash Flows**        |   |                                                                      |       |                                                                      |
| **(Unaudited)**                                             |   |                                                                      |       |                                                                      |
| ** **                                                  |   | ** Six Months Ended June 30, **                                 |
|                                                        |   | **2008 **                                                            | ** ** | **2007 **                                                            |
| Cash Flows from Operating  Activities:                      |   |                                                                      |       |                                                                      |
| Net  loss                                                   |   |  $        (651,500)          |       |  $        (979,837)          |
| Adjustments  to reconcile net loss to net cash              |   |                                                                      |       |                                                                      |
| used  in operating activities:                              |   |                                                                      |       |                                                                      |
| Depreciation  and amortization                              |   |  365,775                                                        |       |  472,605                                                        |
| (Recovery  of) provision for doubtful accounts receivable   |   |  (3,613)                                                             |       |  15,009                                                         |
| Estimated  fair value of stock options issued to            |   |                                                                      |       |                                                                      |
| employees  for services rendered                            |   |  122,412                                                        |       |  454,486                                                        |
| Estimated  fair value of warrants issued to consultants     |   |  50,485                                                         |       |  -                                                              |
| Common  stock issued to employees and non-employees         |   |                                                                      |       |                                                                      |
| for  services rendered                                      |   |  -                                                              |       |  46,211                                                         |
| Amortization  of debt discount and debt issuance costs      |   |  89,444                                                         |       |  7,338                                                          |
| Changes  in operating assets and liabilities, net of        |   |                                                                      |       |                                                                      |
|    acquisitions and divestitures:                      |   |                                                                      |       |                                                                      |
| Accounts  receivable                                        |   |  80,729                                                         |       | (64,389)                                                                  |
| Inventories                                                 |   |  4,504                                                          |       |  14,188                                                         |
| Prepaid  expenses and other current assets                  |   | (43,291)                                                                  |       |  24,493                                                         |
| Other  assets                                               |   |  -                                                              |       | (11,068)                                                                  |
| Accounts  payable                                           |   | (68,165)                                                                  |       | (22,873)                                                                  |
| Accrued  expenses and interest                              |   | (242,971)                                                                 |       |  132,883                                                        |
| Deferred  revenue                                           |   |  23,769                                                         |       | (173,738)                                                                 |
| Net  cash used in operating activities                      |   | (272,422)                                                                 |       | (84,692)                                                                  |
| Cash Flows from Investing  Activities:                      |   |                                                                      |       |                                                                      |
| Purchases  of property and equipment                        |   | (73,836)                                                                  |       | (112,408)                                                                 |
| Cash  acquired from sale of PFI                             |   |  53,832                                                         |       |  -                                                              |
| Net  cash used in investing activities                      |   | (20,004)                                                                  |       | (112,408)                                                                 |
| Cash Flows from Financing  Activities:                      |   |                                                                      |       |                                                                      |
| Proceeds  from lines of credit, net of repayments           |   |  95,248                                                         |       |  347,206                                                        |
| Cash  paid for debt issuance costs                          |   | (65,000)                                                                  |       |  -                                                              |
| Payments  on capital lease obligation                       |   |  (9,362)                                                             |       | (12,026)                                                                  |
| Principal  payments on notes payable to related parties     |   |  -                                                              |       | (30,000)                                                                  |
| Principal  payments on convertible notes to related parties |   |  -                                                              |       | (200,000)                                                                 |
| Net  cash provided by financing activities                  |   |  20,886                                                         |       |  105,180                                                        |
| Net  change in cash                                         |   | (271,540)                                                                 |       | (91,920)                                                                  |
|                                                        |   |                                                                      |       |                                                                      |
| Cash,  beginning of period                                  |   |  749,911                                                        |       |  568,819                                                        |
| Cash,  end of period                                        |   |  $        478,371       |       |  $        476,899       |
| Supplemental disclosure of  cash flow information -         |   |                                                                      |       |                                                                      |
| Cash  paid during the period for:                           |   |                                                                      |       |                                                                      |
| Interest                                                    |   |  $         34,913  |       |  $         47,853  |
| Income  taxes                                               |   |  $         47,400  |       |  $         26,072  |
|                                                        |   |                                                                      |       |                                                                      |
| continued.                                                  |   |                                                                      |       |                                                                      |

** **

** **

----

** **

| Supplemental Schedule of  Noncash Investing                                       |   | **Six Months Ended June 30,**                                                                                              |
|-----------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------|
|   and Financing Activities:                                                  |   | **2008 **                                                                                                             | ** ** | **2007 ** |
|                                                                              |   |                                                                                                                       |   |   |
|                                                                              |   |                                                                                                                       |   |   |
| Issuance of common stock as  acquisition cost                                     |   |  $                  -  |   |  $         92,400  |
| Acquisition of property and  equipment through capital lease obligation           |   |  $                 -        |   |  $         55,858  |
| Estimated  fair value of warrants issued as debt issuance costs                   |   |  $        149,661                                                        |   |  $                 -  |
| Reclassification  of warrant from accrued liabilities to additional               |   |                                                                                                                       |   |   |
| paid-in  capital                                                                  |   |  $          50,000                                             |   |  $                 -  |
|                                                                              |   |                                                                                                                       |   |   |
| See accompanying notes to  unaudited condensed consolidated financial statements. |   | *** ***                                                                                                               | *** *** |   |

** **

** **

----

 

**VillageEDOCS, Inc.**

**Notes to Unaudited Condensed Consolidated FinancialStatements**

**June 30, 2008 and 2007**

 

** **

**1.          Management'sRepresentation**

 

The accompanying unaudited condensed consolidated financialstatements have been prepared by VillageEDOCS, Inc. (the "Company" or"VillageEDOCS")) in accordance with accounting principles generally accepted inthe United States of America for interim financial information, and pursuant tothe instructions to Form 10-Q and Article 8 of Regulation S-X promulgated bythe Securities and Exchange Commission ("SEC").  Accordingly, they do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatement presentation.  In the opinion of management, all adjustments(consisting primarily of normal recurring accruals) considered necessary for afair presentation have been included.  These financial statements should beread in conjunction with the Company's audited consolidated financialstatements and notes thereto for the year ended December 31, 2007, contained inthe Company's Annual Report on Form 10-KSB, as filed with the SEC.

 

 

**2.          Background,Organization and Basis of Presentation**

 

The Company was incorporated in 1995 in Delaware,reincorporated in California in 1997, and reincorporated in Delaware inSeptember 2007. The Company has historically operated an electronic documentdelivery service marketed to organizations throughout the United States and internationally.  On February 17, 2004, the Company acquired Tailored BusinessSystems, Inc. ("TBS").  TBS provides various programming, processingand printing services to governmental entities, including installing software,hardware, printing and mailing of property tax forms.  On June 16, 2004, theholders of a majority of the voting capital stock of the Company voted toapprove a Plan of Restructuring that included the reorganization of theCompany's electronic document delivery business into a wholly owned subsidiaryof the Company.  In connection with the reorganization, the Company formedMessageVision, Inc. ("MVI") on October 25, 2004.  Effective April 1,2005, the Company acquired Phoenix Forms, Inc. dba Resolutions ("PFI"or "Resolutions"), which it subsequently sold effective December 1,2007.  Effective May 1, 2006, the Company acquired GoSolutions, Inc.("GSI").  GSI provides enhanced voice and data communicationsservices including speech-driven messaging, unified communications, and audioconferencing applications.  The unaudited condensed consolidated financialstatements include the accounts of the Company and those of MVI, TBS,Resolutions, and GSI, its wholly owned subsidiaries, since October 25, 2004,February 17, 2004, April 1, 2005, and May 1, 2006, respectively.   The results ofoperations of Resolutions are included in discontinued operations for the threeand six months ended June 30, 2007.  See Note 5 for additional informationregarding the accounting for Resolutions as a discontinued operation.  Allsignificant inter-company transactions and balances have been eliminated inconsolidation.

 

 

**3.          GoingConcern**

 

The accompanying unaudited condensed consolidated financialstatements have been prepared assuming that the Company will continue as agoing concern. The Company has incurred significant losses since inception, andhas a working capital deficit ($2,308,240 at June 30, 2008).  The Company'slosses are continuing and are expected to continue until such time as theCompany is able to sufficiently expand its existing businesses or is able toconsummate business combination transactions with other businesses whoseprofits are sufficient to offset any ongoing losses from operating the holdingcompany that owns GSI, TBS and MVI.  See Note 11 for important informationregarding the Company's acquisition of Decision Management Company, Inc. d/b/aQuestys Solutions effective August 1, 2008.

 

The Company's success is dependent upon numerous items,certain of which are the successful growth of revenues from its products andservices, its ability to obtain new customers in order to achieve levels ofrevenues adequate to support the Company's current and future cost structure,and its success in obtaining financing for equipment and operations, for whichthere is no assurance. Unanticipated problems, expenses, and delays arefrequently encountered in establishing and maintaining profitable operations. These include, but are not limited to, competition, the need to developcustomer support capabilities and market expertise, setbacks in productdevelopment, technical difficulties, market acceptance and sales andmarketing.  The failure of the Company to meet any of these conditions couldhave a materially adverse effect on the Company and may force the Company toreduce or curtail operations. No assurance can be given that the Company canachieve or maintain profitable operations.

 

The Company believes it will have adequate cash andavailable borrowing under its lines of credit to maintain operations until itachieves sustained profitability.  However, until the Company has a history ofmaintaining revenue levels sufficient to support its operations and repay itsworking capital deficit, the Company may require additional financing. Sourcesof financing could include capital infusions, additional equity financing ordebt offerings.  The Company's operations used net cash during the first sixmonths of 2008.  Should such cash flows continue to decrease for any reason,management plans to obtain debt and equity financing from new and existingstockholders.    There can be no assurance that funding will be available onacceptable terms, if at all, or that such funds, if raised, would enable theCompany to achieve or sustain profitable operations.

 

These factors raise substantial doubt about the Company'sability to continue as a going concern.  The unaudited condensed consolidatedfinancial statements do not include any adjustments to reflect the possiblefuture effects on the recoverability and classification of assets or theclassification of liabilities that might result from the outcome of theseuncertainties.

 

 

**4.           Summaryof Significant Accounting Policies**

 

Segments of an Enterprise andRelated Information 

 

TheCompany has adopted Statement of Financial Accounting Standards ("SFAS") No.131, *Disclosures about Segments of an Enterprise and Related Information*. SFAS No. 131 requires the Company to report information about segments of itsbusiness in annual financial statements and requires it to report selectedsegment information in its quarterly reports issued to stockholders. SFAS No.131 also requires entity-wide disclosures about the products and services anentity provides, the material countries in which it holds assets and reportsrevenues and its major customers. The Company's four reportable segments aremanaged separately based on fundamental differences in their operations. At June30, 2008, the Company operated in the following four reportable segments (seeNote 10): 

 

(a)  Electronic document deliveryservices,

(b)  Government accounting solutions,

(c)  Integrated communications, and

(d)  Corporate. 

 

TheCompany evaluates performance and allocates resources based upon operatingincome. The accounting policies of the reportable segments are the same asthose described in this summary of significant accounting policies.

 

Concentration of Credit Risk

 

TheCompany extends credit to its customers and performs ongoing credit evaluationsof such customers.  The Company does not obtain collateral to secure itsaccounts receivable.  MVI and GSI generally require a valid credit card or ACHdebit account to collateralize credit extended to non-corporate clients. TheCompany evaluates its accounts receivable on a regular basis for collectibilityand provides for an allowance for potential credit losses as deemed necessary. At June 30, 2008 and December 31, 2007, the Company has recorded an allowancefor doubtful accounts of approximately $42,000 and $49,000, respectively.

 

Forthe three months ended June 30, 2008 and 2007, independent representatives ofone enterprise accounted for approximately 27% and 28% of total revenues,respectively.

 

Forthe six months ended June 30, 2008 and 2007, independent representatives of oneenterprise accounted for approximately 28% of total revenues in each period.

 

Nosingle customer accounted for more than 10% of accounts receivable at June 30,2008 or December 31, 2007.

 

AtJune 30, 2008 and December 31, 2007, the Company had amounts on deposit withfinancial institutions in excess of the federally insured limits of $100,000,which approximated $54,000 and $410,000, respectively.

 

 

Use of Estimates in the Preparation of FinancialStatements

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. Significant estimates made by management are, among others,the realizability of accounts receivable, inventories, recoverability oflong-lived assets, and valuation of stock options, warrants, and deferredtaxes.  Actual results could differ from those estimates.

 

Property and Equipment

 

Propertyand equipment are stated at cost and are depreciated using the straight-linemethod over the estimated useful lives of the assets, ranging from three toseven years.  Equipment under capital lease obligations is depreciated over theshorter of the estimated useful life or the term of the lease.  Majorbetterments and renewals are capitalized, while routine repairs and maintenanceare charged to expense when incurred.

 

Revenue Recognition

 

The Company recognizes revenue inaccordance with Staff Accounting Bulletin ("SAB") No. 101, *RevenueRecognition in Financial Statements*, as revised by SAB No. 104.  As such,the Company recognizes revenue when persuasive evidence of an arrangementexists, title transfer has occurred, or services have been performed, the priceis fixed or readily determinable and collectibility is probable.  Sales arerecorded net of sales discounts.

 

The Company has adopted Statementof Position ("SOP") 97-2, *Software Revenue Recognition*, as well as SOP98-9, *Modification of SOP 97-2, Software Revenue Recognition with Respect toCertain Transactions*"  The SOPs generally require revenue earned onsoftware arrangements involving multiple elements to be allocated to eachelement based on the relative fair market values of each of the elements. Thefair value of an element must be based on vendor-specific objective evidence("VSOE") of fair value. Software license revenue generated by TBS andResolutions (through the date of disposal - see Note 5), allocated to asoftware product is recognized upon delivery of the product, or deferred andrecognized in future periods to the extent that an arrangement includes one ormore elements that are to be delivered at a future date and for which VSOE hasnot been established.  Maintenance and support revenue is recognized ratablyover the maintenance term.  First-year maintenance typically is sold with therelated software license and renewed on an annual basis thereafter. Estimatedfair values of ongoing maintenance and support obligations are based onseparate sales of renewals to other customers or upon renewal rates quoted inthe contracts. For such arrangements with multiple obligations, the Companyallocates revenue to each component of the arrangement based on the estimatedfair value of the undelivered elements. Fair value of services, such asconsulting or training, is based upon separate sales of these services. TheCompany at times may enter into multiple-customer contracts in which theCompany allocates revenue based on the number of specified users at eachcustomer, and recognizes revenue upon customer acceptance and satisfying theother applicable conditions of the above described accounting policy. 

 

Services revenue is recognized asthe service is performed assuming that sufficient evidence exists to estimatethe fair value of the services.  Consulting and training services are billedbased on contractual hourly rates and revenues are recognized as the servicesare performed. Consulting services primarily consist of implementation servicesrelated to the installation of the Company's products which do not requiresignificant customization to or modification of the underlying software code. 

 

Revenue from subscriptionagreements consists of fixed monthly fees and usage charges, generally based onper minute rates.  Subscription agreement revenue related to MVI and GSI usageservice charges are billed monthly in arrears and the associated revenues arerecognized in the month of service. Recurring charges for the GoSolo (TM)platform are billed in advance on a monthly basis and recorded as deferredrevenues. The Company recognizes subscription agreement revenue ratably overthe service period, which management believes approximates the actual provisionof services. Professional service fee revenue consists of consulting feescharged to enterprise clients for GoSol(TM) platform enhancements. The Companyrecognizes professional service fee revenue on a time and materials basis overthe service period, which management believes approximates the actual provisionof services.  Wholesale enhanced voicemail services consists of fees charged totelecommunications providers for use of the GoSolo(TM) platform to providetheir customers with hosted electronic voicemail, billed monthly in arrears andthe associated revenues are recognized in the month of service.

 

Significant management judgmentsand estimates must be made in connection with determination of the revenue tobe recognized in any accounting period. If the Company made different judgmentsor utilized different estimates for any period, material differences in theamount and timing of revenue recognized could result.

 

Product and Technology Development

 

Product and technology developmentexpense includes personnel costs relating to developing the features, contentand functionality of MVI's internet-enabled fax services and web site, TBS'sgovernment accounting software, and GSI's communications services.  Product andtechnology development costs are expensed as incurred.

 

Risks andUncertainties

 

The Company operates inindustries that are subject to intense competition, government regulation andrapid technological change.  The Company's operations are subject tosignificant risks and uncertainties including financial, operational,technological, regulatory and other risks associated with an expandingbusiness, including the potential risk of business failure.

 

Fair Value ofFinancial Statements

 

The Company's financial instrumentsconsist principally of cash, accounts receivable, accounts payable, accruedexpenses, capital lease obligations and debt instruments. Pursuant to SFAS No.157, *Fair Value Measurements*, the fair value of the Company's cashequivalents and investments in marketable securities is determined based on"Level 1" inputs, which consist of quoted prices in active markets foridentical assets. The Company believes that the carrying values of all otherfinancial instruments approximate their current values due to their nature andrespective durations.

 

Loss per Share

 

Basic loss per share iscomputed by dividing loss available to common stockholders by the weightedaverage number of common shares assumed to be outstanding during the period ofcomputation. Diluted loss per share is computed similar to basic loss per shareexcept that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if the potential shares had beenissued and if the additional common shares were dilutive.  All potentiallydilutive shares, approximately 2,679,000 and 1,200,000 of potentially dilutiveshares as of June 30, 2008 and 2007, respectively, have been excluded fromdiluted loss per share, as their effect would be anti-dilutive for the periods thenended.

 

Software DevelopmentCosts

 

The Company capitalizessoftware development costs pursuant to SFAS No. 86, *Accounting for the Costsof Computer Software to be Sold, Leased or Otherwise Marketed,* aftertechnological feasibility of the software is established, which is generallythe completion of a working prototype and ends upon general release of theproduct to the Company's customers. All costs incurred in the research anddevelopment of new software and costs incurred prior to the establishment of technologicalfeasibility are expensed as incurred. Capitalized costs consist of direct costsand allocated overhead associated with the development of the softwareproducts.  Amortization of software development costs commences when theproduct becomes available for general release to customers and is computedbased on the straight-line method over the software's estimated economic lifeof approximately three years.  The Company reviews the unamortized softwaredevelopment costs at each balance sheet date and, if necessary, will write downthe balance to net realizable value if the unamortized costs exceed the netrealizable value of the asset.  At June 30, 2008, management determined that noimpairment existed.

 

 

Stock-Based Compensation

 

At June 30, 2008, the Company hadtwo stock-based compensation plans.

 

On January 1,2006, the Company adopted SFAS No. 123 (revised 2004), *Share-Based Payment*,("SFAS 123(R)") which establishes standards for the accounting of transactionsin which an entity exchanges its equity instruments for goods or services,primarily focusing on accounting for transactions where an entity obtainsemployee services in share-based payment transactions. SFAS 123(R) requires apublic entity to measure the cost of employee services received in exchange foran award of equity instruments, including stock options, based on thegrant-date fair value of the award and to recognize it as compensation expenseover the period the employee is required to provide service in exchange for theaward, usually the vesting period.  In March 2005, the United States Securitiesand Exchange Commission ("SEC" or "Commission") issued Staff AccountingBulletin ("SAB") No. 107 *Share-Based Payment* ("SAB 107") relating toSFAS 123(R). The Company has applied the provisions of SAB 107 in its adoptionof SFAS 123(R).

 

SFAS 123(R)requires companies to estimate the fair value of share-based payment awards onthe date of grant using an option-pricing model. The value of the portion ofthe award that is ultimately expected to vest is recognized as expense over therequisite service periods in the Company's consolidated statements ofoperations.

 

Stock-basedcompensation expense recognized during the period is based on the value of theportion of share-based payment awards that is ultimately expected to vestduring the period. Stock-based compensation expense recognized in the Company'sunaudited condensed consolidated statements of operations for the three and sixmonths ended June 30, 2008 and 2007 included compensation expense forshare-based payment awards granted prior to, but not yet vested as of December31, 2005 based on the grant date fair value estimated in accordance with thepro forma provisions of SFAS No. 123, *Accounting for Stock-BasedCompensation* ("SFAS 123"), and compensation expense for the share-basedpayment awards granted subsequent to December 31, 2005 based on the grant datefair value estimated in accordance with the provisions of SFAS 123(R). Asstock-based compensation expense recognized in the unaudited condensed consolidatedstatements of operations for the three and six months ended June 30, 2008 and2007 is based on awards ultimately expected to vest, it has been reduced forestimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. The estimated average forfeiture ratesfor the three and six months ended June 30, 2008 and 2007 were based onhistorical forfeiture experience and estimated future employee forfeitures.

 

SFAS 123(R)requires the cash flows resulting from the tax benefits resulting from taxdeductions in excess of the compensation cost recognized for those options tobe classified as financing cash flows. Due to the Company's loss position,there were no such tax benefits during the six months ended June 30, 2008 and2007.

 

***Description of Plans***

 

The Company's stock option plans provide for grants of options toemployees and directors of the Company to purchase the Company's shares, asdetermined by management and the board of directors, at the fair value of suchshares on the grant date. The options generally vest over a five-year periodbeginning on the grant date and have a seven-year term. As of June 30, 2008,the Company is authorized to issue up to 95,000,000 shares under these plansand has approximately 62,000,000 shares available for future issuances.

*** ***

***Summary of Assumptions andActivity***

 

The fair value of stock-basedawards to employees and directors is calculated using the Black-Scholes optionpricing model even though the model was developed to estimate the fair value offreely tradeable, fully transferable options without vesting restrictions,which differ significantly from the Company's stock options. The Black-Scholesmodel also requires subjective assumptions, including future stock pricevolatility and expected time to exercise, which greatly affect the calculatedvalues. The expected term of options granted is derived from historical data onemployee exercises and post-vesting employment termination behavior. Therisk-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 ofthe date of the grant. The expected volatility is based on the historicalvolatility of the Company's stock price. These factors could change in thefuture, affecting the determination of stock-based compensation expense infuture periods.  The fair value of options granted was estimated using thefollowing weighted average assumptions:

 

|                     |   | Six Months Ended                                                     |
|--------------------------|--------|----------------------------------------------------------------------|
|                     |   | June 30,                                                             |
|                     |   | 2008                                                                 |   | 2007 |
| Stock options:           |   |                                                                 |   |   |
| Expected term (in years) |   | 6.0                                                                  |   | 5.0 |
| Expected volatility      |   | 272%                                                                 |   | 360% |
| Risk-free interest rate  |   | 3.48%                                                                |   | 4.86% |
| Expected dividends       |   |           -   |   |           -   |

 

 

A summary of option activity as of June 30, 2008 and changes during the sixmonths then ended, is presented below:

 

|                                                |   | **June 30, 2008** |
|-----------------------------------------------------|--------|-------------------|
|                                                |   | ** **        | **Weighted-Average** | ** ** |
|                                                |   | ** **        | ** ** | **Remaining** | **Aggregate** |
|                                                |   | ** **        | **Exercise** | **Contractual** | **Intrinsic** |
|                                                |   | **Shares**        | **Price** | **Term (Years)** | **Value** |
| Options outstanding at January 1, 2008              |   | 37,230,669   | $0.21 |   |   |
| Options granted                                     |   | 3,615,000    | $0.11 |   |   |
| Options forfeited                                   |   | (8,112,792)       | $0.16 |   |   |
| Options exercised                                   |   | -            | $     - |   |   |
| Options outstanding at June 30, 2008                |   | 32,732,877   | $0.21 | 5.2 | $              -  |
| Options vested or expected to vest at June 30, 2008 |   | 30,709,039   | $0.21 | 4.8 | $              -  |
| Options exercisable at June 30, 2008                |   | 24,404,325   | $0.24 | 4.7 | $              -  |
|                                                |   |              |   |   |   |

 

Theweighted average grant date fair value of options granted during the six monthsended June 30, 2008 was $0.04 per option.  Upon the exercise of options, theCompany issues new shares from its authorized shares.

 

As of June 30, 2008, there was approximately $715,872 of totalunrecognized compensation cost, net of forfeitures, related to employee anddirector stock option compensation arrangements. That cost is expected to berecognized on a straight-line basis over the next 4.5 weighted average years.The total fair value of vested options issued to employees and directors duringthe three and six months ended June 30, 2008 was $52,904 and $122,412,respectively,net of estimated forfeitures, which was recorded as general and administrativeexpense in the accompanying unaudited condensed consolidated statements ofoperations.  The total fair value of vested options issued to employees anddirectors during the three and six months ended June 30, 2007 was $227,911 and$454,486, respectively,net of estimated forfeitures, which was recorded as general and administrativeexpense in the accompanying unaudited condensed consolidated statements ofoperations.

 

Inventories

 

Inventories consist primarily ofsupplies, forms, envelopes, and software licenses purchased for resale.  Costis determined on a first-in, first-out basis.  The Company periodically reviewsits inventory quantities on hand and adjusts for excess and obsolete inventorybased primarily on historical usage rates and its estimated forecast of productdemand.  Actual demand may differ from the Company's estimates.  Onceestablished, write-downs of inventory are considered permanent adjustments tothe basis of the excess or obsolete inventory.

 

Goodwill and Other IntangibleAssets

 

Goodwill represents the excess ofacquisition cost over the net assets acquired in a business combination and isnot amortized in accordance with SFAS No. 142, *Goodwill and Other IntangibleAssets.* The provisions of SFAS No. 142 require that the Company allocateits goodwill to its various reporting units, determine the carrying value ofthose businesses, and estimate the fair value of the reporting units so that atwo-step goodwill impairment test can be performed.  In the first step ofthe goodwill impairment test, the fair value of each reporting unit is comparedto its carrying value.  Management reviews, on an annual basis, thecarrying value of goodwill in order to determine whether impairment hasoccurred.  Impairment is based on several factors including the Company'sprojection of future discounted operating cash flows. If an impairment of thecarrying value were to be indicated by this review, the Company would performthe second step of the goodwill impairment test in order to determine theamount of goodwill impairment, if any.

 

The Company performed an impairmenttest on goodwill as of December 31, 2007.  Based on its analysis as of December31, 2007, and review at June 30, 2008, the Company's management believes thereis no impairment of its goodwill.  There can be no assurance, however, thatmarket conditions will not change or demand for the Company's products orservices will continue, which could result in impairment of goodwill in thefuture.

 

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

 

Long-Lived Assets

 

In the event that facts andcircumstances indicate that equipment or other long-lived assets may beimpaired, an evaluation of recoverability would be performed.  If anevaluation is required, the estimated future discounted cash flows associatedwith the asset are compared to the asset's carrying amount to determine if animpairment charge is necessary.  The amount of long-lived assetimpairment, if any, is charged to operations in the period in which long-livedasset impairment is determined.  At June 30, 2008, management believesthere is no impairment of its long-lived assets.  There can be noassurance, however, that market conditions will not change or demand for theCompany's products or services will continue, which could result in impairmentof long-lived assets in the future.

 

Warranty Costs

 

The Company provides a limited 90day warranty on certain products sold. Estimated future warranty obligationsrelated to certain products and services are provided by charges to operationsin the period in which the related revenue is recognized. As of June 30, 2008and December 31, 2007,management of the Company determined that a warranty reserve was notnecessary.  In addition, the charges to expense during the six months ended June30, 2008 and 2007 were insignificant.

 

New Accounting Pronouncements

 

In September 2006, the FinancialAccounting Standards Board ("FASB") issued SFAS No. 157, *Fair Value Measurements*.SFAS No. 157 defines fair value, establishes a framework for measuring fairvalue in GAAP and expands disclosures about fair value measurements. ThisStatement applies under other accounting pronouncements that require or permitfair value measurements, the FASB having previously concluded in thoseaccounting pronouncements that fair value is the relevant measurementattribute. Accordingly, this Statement does not require any new fair valuemeasurements. SFAS No. 157 is effective for fiscal years beginning afterDecember 15, 2007. The Company adopted SFAS No. 157 effective January 1, 2008. In December 2007, the FASB released a proposed FASB Staff Position (FSP FAS157-2- Effective Date of FASB Statement No. 157) which, if adopted as proposed,would delay the effective date of SFAS No. 157 for all nonfinancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fairvalue in the financial statements on a recurring basis (at least annually). TheCompany is currently evaluating the effect of SFAS No. 157 on its financial statements.

 

In December 2007, the FASB issuedSFAS No. 141(R), *Business Combinations*. SFAS No. 141(R) provides companieswith principles and requirements on how an acquirer recognizes and measures inits financial statements the identifiable assets acquired, liabilities assumed,and any noncontrolling interest in the acquiree as well as the recognition andmeasurement of goodwill acquired in a business combination. SFAS No. 141(R) alsorequires certain disclosures to enable users of the financial statements toevaluate the nature and financial effects of the business combination.Acquisition costs associated with the business combination will generally beexpensed as incurred. SFAS No. 141(R) is effective for business combinationsoccurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141(R) is not permitted.The Company is evaluating the impact SFAS No. 141(R) willhave on any future business combinations.

 

Other recent accountingpronouncements issued by the FASB (including the EITF) and the AmericanInstitute of Certified Public Accountants did not or are not believed bymanagement to have a material impact on the Company's present or futureconsolidated financial statements.

 

 

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

 

*DiscontinuedOperations and Disposition of Resolutions*

 

OnDecember 10, 2007, the Company sold substantially all of the assets of itswholly-owned subsidiary Phoenix Forms, Inc. d/b/a Resolutions to DocPath Corp.for $970,000 in cash, plus the cancellation of 10,000,000 warrants previouslyissued with an exercise price of $0.15 per share.  The warrants were originallyissued to Alexander Riess and William Falcon as consideration in theacquisition of Phoenix Forms, Inc. by VillageEDOCS, Inc. in April 2005 and werevalued at $553,000 on the date of cancellation (see below).

 

TheCompany's Board of Directors approved the disposal of the assets on December 7,2007 as part of a strategy to reduce debt and focus on growth at the remainingbusiness units and growth by acquisition.  The Company used $845,005 of theproceeds from the asset sale to retire a commercial note with a bank on December11, 2007.

 

Thepurchaser assumed substantially all of the employment agreements of PhoenixForms, Inc., its office lease, accounts payable, and certain other accruedliabilities and contracts as stipulated by the Assets Purchase Agreement.

 

In 2007and in connection with the disposal, the Company recorded a loss fromdiscontinued operations of $1,625,424, net of tax of $485,000.  Such lossincluded income from PFI's operations of $264,099 before income taxes and aloss on the disposal of approximately $1,404,523 (which consisted of netproceeds of $926,835 (net of $43,165 of expenses), plus the fair value of thecancelled warrant of approximately $553,000, less the net assets sold of$2,884,358, which includes the carrying value of goodwill and certainintangible assets with a carrying value of $3,019,916 at the time ofdisposition, which were written off and $35,493 of cash retained by theseller.  The Company received $873,003 in December 2007 and the remaining$53,832 in January 2008.

 

Inaccordance with SFAS No. 144, *Accounting for the Impairment of Disposal ofLong Lived Assets*, the operations associated with this transaction havebeen classified as income (loss) from discontinued operations in theaccompanying unaudited condensed consolidated statements of operations for thethree and six months ended June 30, 2007.

 

Discontinuedoperations' results were as follows:

 

|                                |   | **Three Months**                                                                                                                                                                             | ** ** | **Six Months**                                                                                                                                                                   |
|-------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |   | **Ended**                                                                                                                                                                                    | ** ** | **Ended**                                                                                                                                                                        |
|                                |   | **June 30,2007**                                                                                                                                                                             | ** ** | **June 30,2007**                                                                                                                                                                 |
| Results of discontinued operations  |   |                                                                                                                                                                                         |       |                                                                                                                                                                             |
| Net sales                           |   |  $                 477,490                                                                    |       |  $           1,039,151                                                                                          |
| Income before income taxes          |   |  $                   89,474                                                         |       |  $              186,172                                                                          |
| Income taxes                        |   | $                              -  |       |  $                           -  |
| Income from discontinued operations |   |  $                   89,474                                                         |       |  $              186,172                                                                          |
|                                |   |                                                                                                                                                                                         |       |                                                                                                                                                                             |

 

 

*Other Intangible Assets*

 

On May 12, 2006, the Companyentered into a Patent License Agreement (the "License Agreement") with CatchCurve, Inc. ("Catch Curve").  Pursuant to the License Agreement, Catch Curvegranted the Company a worldwide, non-exclusive, non-divisible, fully paid-uplicense to use certain patented technology in connection with any facsimileproducts or services made or sold by the Company or its subsidiaries.  TheCompany is obligated to make aggregate license payments of $600,000 over aperiod of up to thirty-two months beginning on May 12, 2006, at which time nofurther payments are required under the License Agreement.   License paymentsof $180,000 are due in each of the years ended December 31, 2007 and 2008. TheLicense Agreement stipulates that $350,000 of the total license fee isattributable to sales of products and services prior to the date of the LicenseAgreement.  The remainder of $250,000 is attributable to sales of products andservices subsequent to the date of the License Agreement. Accordingly, on May12, 2006, the Company recorded an intangible asset in the amount of $250,000. The intangible asset is being amortized over 58 months, the current remaininglife of the patents covered by the License Agreement.  During the three and six monthsended June 30, 2008, the Company made license payments of $45,000 and $90,000,respectively, under theLicense Agreement.  At June 30, 2008 and December 31, 2007, the unpaid balancedue was $90,000, and $180,000, respectively.  In accordance with the terms ofthe License Agreement, the Company has classified the total amount due as acurrent liability on the accompanying condensed consolidated balance sheets.

 

Other intangibles consist of thefollowing as of June 30, 2008: 

 

|   |                                                            |   | Estimated Useful  Life |   | Gross  Carrying | Accumulated  | Net Carrying  |
|--------|-----------------------------------------------------------------|--------|------------------------|--------|-----------------|--------------|---------------|
|   |                                                            |   | (Years)                |   | Amount          | Amortization | Amount        |
|   | Corporate:                                                      |   |                   |   |            |         |          |
|   |    License  agreement                            |   | Five                   | $      | 250,000    |  $      | (109,911)     |  $ | 140,089  |
|   |                                                            |   |                   |   |            |         |          |
|   | TBS:                                                            |   |                   |   |            |         |          |   |   |
|   |   Customer  list        |   | Ten                    |   | 500,000    |         | (218,750)     |   | 281,250  |
|   |   Trade name                                               |   | Five                   |   | 50,000     | (43,750)     | 6,250    |
|   |                                                            |   |                   |   | 550,000    | (262,500)    | 287,500  |
|   |                                                            |   |                   |   |            |         |          |
|   |                                                            |   |                   |   |            |         |          |   |   |
|   | GSI:                                                            |   |                   |   |            |         |          |   |   |
|   |    Customer relationships                        |   | Ten                    |   | 2,200,000  |         | (476,667)     |   | 1,723,333  |
|   |    Technology                                    |   | Five                   |   | 490,000    |         | (212,333)     |   | 277,667  |
|   |    Trade names and marks                         |   | Ten                    |   | 420,000    |         | (91,000)      |   | 329,000  |
|   |                                                            |   |                   |   | 3,110,000  |         | (780,000)     |   | 2,330,000  |
|   |                                                            |   |                   |   |            |         |          |   |   |
|   | Total other  intangible assets                                  |   |                   | $      | 3,910,000  |  $      | (1,152,411)   |  $ | 2,757,589  |
|        |                                                                 |        |                        |        |                 |              |               |  |  |  |  |

 

Amortization of other intangibleassets was $117,929 and $139,318, respectively, during the three months endedJune 30, 2008 and 2007, and $235,860 and $278,637, respectively, during the six months ended June30 2008 and 2007.  During the six months ended June 30, 2008, the Company did notacquire or dispose of any intangible assets.

 

Other intangible assets consist ofthe following as of December 31, 2007: 

 

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

 

** **

** **

** **

**6.           Debt**

** **

               Bank Lines of Credit

 

On February 6, 2008, the Companyand The Private Bank of The Peninsula ("Bank") entered into an agreement for anasset based line of credit (the "Line").  The Bank's maximum commitment amountfor the Line is $1.5 million.  Advances will generally be limited to 85% ofeligible domestic accounts receivable.  The interest rate is floating and iscalculated at Wall Street Journal prime rate plus 3% on the cash borrowed. Interest on outstanding borrowings is payable monthly.

 

A facility fee of $15,000 was paidto the Bank in connection with the Line.  A finder's fee in the amount of$50,000 was paid by the Company to Dragonfly Capital Partners LLC("Dragonfly").  In addition, the Company issued the Bank and Dragonfly warrantsto purchase shares of its common stock (see Note 7).  The Company recorded thefinders' fees and warrants as debt issuance costs in the accompanying unauditedcondensed consolidated balance sheet at June 30, 2008, and amortized $10,834 and $27,085,respectively, tointerest expense during the three and six months then ended.

 

Outstanding advances under the Lineare 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 onits inventory, intellectual property, and equipment.  As of June 30, 2008 andDecember 31, 2007, there were outstanding borrowings of $113,096, and $0,respectively, on the Line and the Company was in compliance with all loancovenants.

 

Effective September 30, 2006,VillageEDOCS obtained a $500,000 revolving line of credit ("VEDO RLOC") with Bankof America.  The VEDO RLOC is guaranteed by a shareholder of the Company. Interest on outstanding borrowings is payable monthly at an annual rate ofinterest equal to LIBOR plus 2%.  As of June 30, 2008 and December 31, 2007, therewere outstanding borrowings of $466,832, and $484,680, respectively, on the VEDORLOC and the Company was in compliance with all loan covenants.

 

Effective November 28, 2005, TBSrenewed a $100,000 revolving line of credit ("TBS RLOC)" with BB&T.  TheTBS RLOC is guaranteed by the assets of TBS.  Interest on outstandingborrowings is payable monthly at a variable annual rate equal to the financialinstitution's prime rate in effect.  As of June 30, 2008 and December 31, 2007,there were no outstanding borrowings under TBS RLOC and the Company was incompliance with all loan covenants.

 

C. Alan and Joan P. Williams

 

On February 17, 2004, the Company borrowed $1,700,000 from C. Alan and Joan P.Williams and issued a convertible promissory note, bearing interest at 10percent per annum.  During 2005, all but $65,000 of the principal amountdue pursuant to this note was converted into shares of the Company's commonstock.   The note and accrued interest are due at the earlier of oneof three events: 1) October 31, 2009; 2) acquisition of a controlling interestin the Company by a third party; or 3) the Company achieves equity financing ofa minimum of $3,000,000.  Effective April 14, 2005, pursuant to anamendment 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 Companyissued them a warrant to purchase 5,000,000 shares of the Company's restrictedcommon stock at $0.10 per share exercisable until February 17, 2009.  Inconnection with the issuance of the note, the Company recorded a debt discountof $730,000, consisting of an embedded put option of $280,000 and the fair valueof the warrant of $450,000, which were recorded as derivative liabilities uponnote issuance and subsequently reclassified to additional paid-in capital.

 

The Company amortized the discount using the effective interest method throughOctober 31, 2007.  During the three and six months ended June 30,2007, $3,669 and $7,338, respectively, of interest expense was recognizedin connection with the amortization of debt discount related to these notes.

 

At June 30, 2008, the amount owedby the Company to the Williams pursuant to the unpaid balance of theconvertible promissory note payable was $65,000 in principal and $110,120 in unpaidinterest.

 

At December 31, 2007, the amountowed by the Company to the Williams pursuant to the unpaid balance of theconvertible promissory note payable was $65,000 in principal and $106,870 in unpaidinterest.

 

Interest Expense

 

Interest expense recognized on alllines of credit and the related party convertible note payable was $69,978 and$8,276, respectively, during the three months ended June 30, 2008 and 2007, and $93,955 and$36,767, respectively, during the six months ended June 30, 2008 and 2007,respectively.  

 

Interest expense  included non-cash charges(related to amortization of debt discount and debt issuance costs) of $35,788and $3,670, respectively, during the 2008 and 2007 quarters, and $89,444 and$7,338, respectively, during the 2008 and 2007 six-month periods.

 

 

**7.           Stockholders'Equity**

 

a.       Common and Preferred Stock

 

Effective September 7, 2007, the Companyreincorporated in Delaware under the name VillageEDOCS, Inc.  Pursuant to itsArticles of Incorporation filed with the State of Delaware, the Company isauthorized to issue two classes of shares of stock.  The first class isdesignated as preferred stock.  The total number of shares of Series APreferred stock that the Company is authorized to issue is forty eight million(48,000,000) of $0.001 par value per share.  The second class is designated ascommon stock.  The total number of shares of common stock that the Company isauthorized to issue is five hundred million (500,000,000) of $0.0001 par value.

 

The Company issued no shares of itscommon or preferred stock during the six months ended June 30, 2008.

 

b.       StockOptions

 

During the six months ended June30, 2008, the Company granted to its employees options to purchase shares ofits common stock under the 2002 Plan as follows:  2,075,000 shares at $0.15 pershare and 1,540,000 shares at $0.05 per share.  All options were issued at or abovefair value on the dates of grant and vest on various dates from the dates ofgrant through June 2015.  During the six months ended June 30, 2008, options topurchase 8,112,792 shares were forfeited due to their expiration.

 

c.       Warrants

 

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

 

In consideration for the Line, (seeNote 6) the Company issued the Bank an immediately exercisable warrant topurchase 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 theBlack-Scholes option pricing model at $4,500 and were recorded as debt issuancecost in the accompanying condensed consolidated balance sheet at June 30,2008.  The Company is amortizing such cost over the one-year life of therelated debt instrument.  During the three and six months ended June 30, 2008, theCompany recorded $750 and $1,875 , respectively, of interest expense in the accompanying unauditedcondensed consolidated statements of operations.

 

As a finder's fee for the Line (seeNote 6), the Company issued Dragonfly an immediately exercisable warrant topurchase 2,419,355 shares of its restricted common stock at an exercise priceof $0.062 per share through February 6, 2013.  The warrants were valued usingthe Black-Scholes option pricing model at $145,161 and were recorded as debtissuance cost in the accompanying condensed consolidated balance sheet at June30, 2008.  The Company is amortizing such cost over the one-year life of therelated debt instrument.  During the three and six months ended June 30, 2008, theCompany recorded $24,194 and $60,484, respectively, of interest expense in the accompanying unauditedcondensed consolidated statements of operations.

 

On February 8, 2008, the Companyissued Agile Equity LLC an immediately exercisable warrant to purchase 653,214shares of its restricted common stock at $0.077 per share through February 8,2009 in consideration for consulting services rendered in connection withacquisition due diligence.  During the year ended December 31, 2007 and the sixmonths ended June 30, 2008, the Company expensed consulting fees of $50,000 and$484, respectively, in accordance with the timing of the services performed.

 

On October 1, 2007, and inconnection with a retainer agreement dated September 15, 2007, the Companyissued a warrant to purchase 2,000,000 shares of its common stock at $0.05 pershare (fair value on the measurement date) to a consultant in consideration forpublic relations services.  The warrants are exercisable over a five yearperiod from date of grant.  The warrants were valued using the Black-Scholesoption pricing model, were valued at $100,000, and will be recorded as generaland administrative expense in the Company's statements of operations over thetwelve month vesting period that began on September 15, 2007.  During thethree and sixmonths ended June 30, 2008, the Company recorded $25,001 and $50,001,respectively, of such expense in theaccompanying unaudited condensed consolidated statements of operations.

               

 

**8.           Commitmentsand Contingencies**

 

Leases

 

The Company leases certain property and equipmentunder operating lease agreements (including three related party leases - seeNote 9) which expire on various dates through 2012 and provide for monthlylease payments ranging from $108 to $12,653.

 

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

 

Rent expense for thethree months ended June 30, 2008and 2007 was $116,674 (including $48,614 of related party rent) and $93,191(including$56,558 of related party rent), respectively.  Rent expense for the six months ended June 30, 2008and 2007 was $234,655 (including $118,281 of related party rent) and $189,017(including $113,116 of related party rent), respectively.

 

LegalProceedings and Claim

 

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

 

In connection with the acquisition of GSI theCompany is entitled to certain rights of indemnification from GoSolutionsEquity, LLC, which is a former shareholder of GSI that became a shareholder ofthe Company as a result of our acquisition of GSI.  The Company made a claim ofindemnification from this entity in connection with the bankruptcy of one ofGSI's significant customers - Vartec Telecom, Inc. - and the facts andcircumstances relating to the procurement and maintenance of the Primerica LifeInsurance account and related Citigroup affiliates.  GoSolutions Equity, LLChas indicated that it does not believe that we have a valid basis for makingsuch indemnification claims.

 

The Company has engaged in limited discussions withGoSolutions Equity, LLC as it relates to the indemnification claims notice andtheir response to such claims notice.  However, the Company is unable to advisewhether it will be successful in the indemnification claims against GoSolutionsEquity, LLC.  Pursuant to the agreement with GSI, if the Company is successful,GoSolutions Equity, LLC would only be required to return up to approximately4.4 million of our shares issued to that entity to satisfy such indemnificationclaims.  GoSolutions Equity, LLC is not required to contribute cash to satisfyany indemnification claims.

 

In the opinion of management, the amount ofultimate liability, if any, with respect to these actions will not materiallyaffect the consolidated financial position or results of operations of theCompany.

 

Consulting and Employee Agreements

 

The Company has entered into a variety ofconsulting and employee agreements for services to be provided to the Companyin the ordinary course of business.  These agreements call for minimum salarylevels and/or option grants and/or common share issuances and various paymentsupon performance of services and/or termination of the agreements (except forcause).

Indemnities and Guarantees

 

During the normal course of business, the Companyhas made certain indemnities and guarantees under which it may be required tomake payments in relation to certain transactions.  The Company indemnifies itsdirectors, officers, employees and agents to the maximum extent permitted underthe laws of the States of California, Florida, and Georgia.  These indemnitiesinclude certain agreements with the Company's officers under which the Companymay be required to indemnify such person for liabilities arising out of theiremployment relationship.  In connection with its facility leases, the Companyhas indemnified its lessors for certain claims arising from the use of thefacilities.  In connection with the Company's acquisition of TBS, the partieshave agreed to indemnify each other from claims relating to the acquisitionagreement to a maximum of $1,500,000 except in the event of fraud, willfulmisconduct, or breaches of certain representations and warranties contained inthe agreement.  In connection with the Company's acquisition of GSI, theparties have agreed to indemnify each other from claims relating to theacquisition agreement.  The duration of these indemnities and guarantees variesand, in certain cases, is indefinite.  The majority of these indemnities andguarantees do not provide for any limitation of the maximum potential futurepayments the Company could be obligated to make.  Historically, the Company hasnot been obligated to make significant payments for these obligations and noliabilities have been recorded for these indemnities and guarantees in theaccompanying unaudited condensed and consolidated balance sheets, respectively.

 

 

**9.           RelatedParty Transactions**

 

The Company has borrowed significantly from relatedparties, issued a significant number of options and warrants to relatedparties, and issued a significant number of shares of its common stock torelated parties upon conversion of convertible promissory notes payable asdescribed more fully in Note 6.

 

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

 

TBS has a related party capital lease withPerimeter Center Partners for an inserting machine.  The lease commenced on May19, 2007 and ends on January 31, 2010.  Monthly payments are $1,746.  TheCompany has executed a Guaranty with respect to the lease.

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

 

 

**10.           SegmentReporting**

 

The Company's operationsare classified into four principal reportable segments that provide differentproducts or services.  Separate management of each segment is required becauseeach business unit is subject to different marketing, production, andtechnology strategies.  The Company operates in the following four reportablesegments: 

 

(a)  Electronic document delivery services,(b)  Government accounting solutions,

(c)  Integrated communications, and

(d)  Corporate. 

 

The Company evaluatesperformance and allocates resources based upon operating income.  The accountingpolicies of the reportable segments are the same as those described in thesummary of accounting policies.  Inter-segment sales are eliminated uponconsolidation.

 

The following tablesummarizes segment asset and operating balances by reportable segment, has beenprepared in accordance with the internal accounting policies, and may not bepresented in accordance with accounting principles generally accepted in the United States of America:

 

|                                                     |    | **Three Months** | ** **      | **Three Months**                                           | ** **                                                                                                                 | **Six Months**                                                    | ** **                                                                                                   | **Six Months**                             |
|----------------------------------------------------------|---------|------------------|-----------------|------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|--------------------------------------------|
|                                                     |    | **ended**        | ** **      | **ended**                                                  | ** **                                                                                                                 | **ended**                                                         | ** **                                                                                                   | **ended**                                  |
|                                                     |    | **June 30,**     | ** **      | **June 30,**                                               | ** **                                                                                                                 | **June 30,**                                                      | ** **                                                                                                   | **June 30,**                               |
|                                                     |    | **2008**         | ** **      | **2007**                                                   | ** **                                                                                                                 | **2008**                                                          | ** **                                                                                                   | **2007**                                   |
|                                                     |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |
| Net revenue from external  customers:                    |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |
|                                                     |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |
| Electronic document delivery                             |    |  $          | 695,339    |                                                       |  $        773,762                                                        |                                                              |  $          1,382,227                            |                                       |  $      1,547,010  |
| Government accounting  solutions                         |    |             | 1,180,112  |                                                       |  961,411                                                                                                         |                                                              |  2,343,053                                                                                         |                                       | 2,027,838  |
| Integrated communications                                |    |             | 1,539,357  |                                                       | 1,600,262                                                                                                             |                                                              |  2,967,513                                                                                         |                                       | 3,019,136  |
| Corporate                                                |    |             | -          |                                                       |  -                                                                                                               |                                                              | -                                                                                                            |                                       |  -  |
| Total  net revenue from                                  |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |   |
|       external  customers: |    | $           | 3,414,808  |                                                       |  $      3,335,435                                                                  |                                                              |  $         6,692,793                                  |                                       |  $      6,593,984  |
|                                                     |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |   |
| Operating income (loss) from  continuing                 |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |   |
| operations:                                              |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |   |
| Electronic document delivery                             |    |  $          | 123,605    |                                                       |  $        100,200                                                        |                                                              |  $           176,636                        |                                       |  $         232,964  |
| Government accounting  solutions                         |    |             | (3,914)         |                                                       |  (36,253)                                                                                                             |                                                              | 94,094                                                                                                  |                                       |  107,545  |
| Integrated communications                                |    |             | 365,989    |                                                       |  194,744                                                                                                         |                                                              | 446,681                                                                                                 |                                       |  253,206  |
| Corporate                                                |    |             | (591,960)       |                                                       |  (712,084)                                                                                                            |                                                              | (1,276,493)                                                                                                  |                                       | (1,622,044) |
| Total  operating loss from continuing operations:        |  $ | (106,280)        |            |  $       (453,393) |                                                                                                                       |  $         (559,082) |                                                                                                         |  $    (1,028,329) |
|                                                     |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |   |
| Depreciation and  amortization:                          |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |   |
|                                                     |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |   |
| Electronic document delivery                             |    |  $          | 21,229     |                                                       |  $          15,478                                             |                                                              | $             40,433                             |                                       |  $          28,481  |
| Government accounting  solutions                         |    |             | 25,430     |                                                       |  27,909                                                                                                          |                                                              | 50,700                                                                                                  |                                       |  55,980  |
| Integrated communications                                |    |             | 124,155    |                                                       |  145,878                                                                                                         |                                                              | 248,203                                                                                                 |                                       |  294,445  |
| Corporate                                                |    |             | 13,316     |                                                       |  12,930                                                                                                          |                                                              | 26,439                                                                                                  |                                       |  25,860  |
| Total  depreciation and amortization:                    |    |  $          | 184,130    |                                                       |  $        202,195                                                        |                                                              |  $          365,775                              |                                       |  $        404,766  |
|                                                     |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |   |
| Interest expense, net of  interest income:               |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |   |
|                                                     |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |   |
| Electronic document delivery                             |    |  $          | 956        |                                                       |  $                  -  |                                                              |  $                 956  |                                       |  $                  -  |
| Government accounting  solutions                         |    |             | 2,770      |                                                       |  258                                                                                                             |                                                              |  3,361                                                                                             |                                       |  258  |
| Integrated communications                                |    |             | (127)           |                                                       |  (182)                                                                                                                |                                                              | (273)                                                                                                        |                                       |  (334) |
| Corporate                                                |    |             | 42,976     |                                                       |  29,358                                                                                                          |                                                              | 108,779                                                                                                 |                                       |  57,345  |
| Total  interest expense, net of interest income:         |    |  $          | 46,575     |                                                       |  $        29,434                                                         |                                                              |  $         112,823                                    |                                       |  $         57,269  |
| continued.                                               |    |             |            |                                                       |                                                                                                                       |                                                              |                                                                                                         |                                       |

 

 

 

 

|                                          |   | **Three Months**                                                                                       | ** ** | **Three Months**                                                    | ** ** | **Six Months**                                                            | ** ** | **Six Months**                                                            |
|-----------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|
|                                          |   | **ended / As of**                                                                                      | ** ** | **ended**                                                           | ** ** | **ended / As of**                                                         | ** ** | **ended**                                                                 |
|                                          |   | **June 30,**                                                                                           | ** ** | **June 30,**                                                        | ** ** | **June 30,**                                                              | ** ** | **June 30,**                                                              |
|                                          |   | **2008**                                                                                               | ** ** | **2007**                                                            | ** ** | **2008**                                                                  | ** ** | **2007**                                                                  |
| Income (loss) from  continuing operations:    |   |                                                                                                   |       |                                                                |       |                                                                      |       |                                                                      |
|                                          |   |                                                                                                   |       |                                                                |       |                                                                      |       |                                                                      |
| Electronic document delivery                  |   |  $           122,655                       |       |  $       100,703            |       |  $         162,612      |       |  $        233,467            |
| Government accounting  solutions              |   | (6,684)                                                                                                |       |  (36,511)                                                      |       | 90,733                                                                    |       |  113,587                                                             |
| Integrated communications                     |   | 373,832                                                                                                |       |  110,734                                                       |       | 473,980                                                                   |       |  169,685                                                             |
| Corporate                                     |   |  (646,468)                                                                                        |       |  (741,475)                                                     |       | (1,378,825)                                                               |       |  (1,682,748)                                                         |
| Total   loss from continuing operations: |   |  $        (156,665)                                       |       |  $     (566,549)                      |       |  $      (651,500)                      |       |  $   (1,166,009)                                      |
|                                          |   |                                                                                                   |       |                                                                |       |                                                                      |       |                                                                      |
| Identifiable assets:                          |   |                                                                                                   |       |                                                                |       |                                                                      |       |                                                                      |
|                                          |   |                                                                                                   |       |                                                                |       |                                                                      |       |                                                                      |
| Electronic document delivery                  |   |  $           719,626                       |       |                                                                |       |  $         719,626      |       |                                                                      |
| Government accounting  solutions              |   | 3,733,641                                                                                              |       |                                                                |       |  3,733,641                                                           |       |                                                                      |
| Integrated communications                     |   | 6,314,546                                                                                              |       |                                                                |       |  6,314,546                                                           |       |                                                                      |
| Corporate                                     |   | 270,046                                                                                                |       |                                                                |       | 270,046                                                                   |       |                                                                      |
| Total  identifiable assets:                   |   |  $      11,037,859                                                  |       |                                                                |       |  $    11,037,859                                 |       |                                                                      |
|                                          |   |                                                                                                   |       |                                                                |       |                                                                      |       |                                                                      |
| Capital expenditures:                         |   |                                                                                                   |       |                                                                |       |                                                                      |       |                                                                      |
|                                          |   |                                                                                                   |       |                                                                |       |                                                                      |       |                                                                      |
| Electronic document delivery                  |   |  $               8,082 |       |  $         31,153 |       |  $          25,361 |       |  $          52,217 |
| Government accounting  solutions              |   | 4,800                                                                                                  |       |  50,909                                                        |       |  4,800                                                               |       |  63,175                                                              |
| Integrated communications                     |   | -                                                                                                      |       |  35,452                                                        |       | 43,675                                                                    |       |  46,113                                                              |
| Corporate                                     |   | -                                                                                                      |       | 5,788                                                               |       | -                                                                         |       | 5,788                                                                     |
| Total  capital expenditures:                  |   |  $             12,882            |       |  $       123,302            |       |  $          73,836 |       |  $        167,293            |
|                                          |   |                                                                                                   |       |                                                                |       |                                                                      |       |                                                                      |

 

 

 

** **

**11.       SubsequentEvents**

 

Acquisition of 100% of the Outstanding Stock of DecisionManagement Company, Inc. dba Questys Solutions, Inc.

 

On August 4, 2008, the Company completed the purchase of100% of the issued and outstanding capital stock of Decision ManagementCompany, Inc. dba Questys Solutions, Inc. ("Questys" or "QSI"), fromits sole shareholder, Vojin Hadzi-Pavlovic and Gloria Hadzi-Pavlovic, Tenantsin Common (the "Pavlovics", "Questys Shareholder").  The effective date of theacquisition is August 1, 2008.

 

The Company purchased Questys with $300,000 in cash, asecured promissory note in the amount of $900,000 (the "Pavlovic Note"), and 22million shares of the Company's restricted common stock.   The Pavlovic Note isnon-interest bearing and may be prepaid in whole or in part at any time withoutpenalty and is due on August 1, 2011.  Principal payments are due in threeequal annual installments of $300,000 each on August 1, 2009, August 1, 2010,and August 1, 2011.  The Pavlovic Note is secured by certain assets of Questysas defined in a Security Agreement dated as of August 1, 2008.  Paymentobligations under the Pavlovic Note are subordinate in certain respects to therights of the Private Bank of the Peninsula ("Senior Lender") to the extent setforth in a Subordination Agreement dated as of August 1, 2008.

 

The terms of the purchase were the result of arms-lengthnegotiations.  The Pavlovics were not previously affiliated with the Company. The acquisition will be accounted for as a purchase.

 

Questys is a California corporation formed in 1981 and isheadquartered in Mission Viejo, California.  Questys provides products andservices for document and content management, document archiving, documentimaging, automated data capture, electronic agenda management, and businessprocess workflow.  Questys has clients in a number of markets, includingcorporate, government, healthcare, financial services, education, legal, lawenforcement, manufacturing, and retail. 

 

The Company funded the requirement for the initial $300,000payment to the Pavlovics from the proceeds of a $300,000 related party securedpromissory note offering subscribed to by The Silver Lake Group, LLC on August4, 2008 (the "Silver Lake Note").  The Silver Lake Group is owned by Ricardo A.Salas.  Mr. Salas is a Director of the Company.  The Silver Lake Note is due onOctober 31, 2008 and bears interest at a rate of nine percent (9%) per annum. The Silver Lake Note is secured by the accounts receivable of GSI, as definedin a Security Agreement dated as of August 1, 2008.  Payment obligations underthe Silver Lake Note are subordinate in certain respects to the rights of theSenior Lender to the extent set forth in a Subordination Agreement to beentered into effective August 1, 2008.

 

A finder's fee is due to Agile Equity in connection with theacquisition of Questys.  The Company is currently in negotiations with AgileEquity regarding the payment of the fee.  The amount of such fee is notexpected to exceed $125,000.

 

----

 

ITEM 2 - MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

**IMPORTANT NOTIFICATIONS**

 

*This Quarterly Report on Form 10-Q includes forward-looking statementswithin the meaning of Section 21E of the Securities Exchange Act of 1934, asamended. All statements that do not directly and exclusively relate tohistorical facts constitute forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995.  You are cautioned not toput undue reliance on any forward-looking statements.  For these statements, weclaim the protection of the safe harbor for forward-looking statementscontained in Section 21E of the Exchange Act.  For important additional andspecific information regarding these statements, we strongly urge you to referto the caption below entitled "CAUTIONARY INFORMATION ABOUTFORWARD-LOOKING STATEMENTS" and the caption entitled "CERTAIN FACTORSTHAT MAY AFFECT FUTURE RESULTS" which can be found in Item 6. Management'sDiscussion and Analysis or Plan of Operation of the Annual Report on Form10-KSB filed with the U.S. Securities and Exchange Commission ("SEC") on March31, 2008.*

** **

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

** **

** **

** **

 

**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 presentedin the following six sections:

 

•       BusinessOverview

•       CriticalAccounting Policies and Estimates

•       Resultsof Operations

•       Liquidityand Capital Resources

•       CautionaryInformation About Forward-Looking Statements, and

•       RecentAccounting Standards and Pronouncements

 

MD&A is provided as a supplement to, and should be read inconjunction with, the unaudited condensed consolidated balance sheet as of June30, 2008, and the unaudited condensed consolidated statements of operations forthe three and six months ended June 30, 2008 and 2007, the unaudited condensedconsolidated statements of cash flows for the six months ended June 30, 2008and 2007, and the related notes thereto as well as the audited consolidated financialstatements of the Company for the year ended December 31, 2007 included in theCompany's Annual Report on Form 10-KSB filed with the SEC on March 31, 2008.

 

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

 

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

 

As reported in the Report of Independent Registered Public AccountingFirm on our December 31, 2007 consolidated financial statements, we havesuffered recurring losses from operations and have a working capital deficitthat raises substantial doubt about our ability to continue as a going concern.

 

Our business and results of operations are affected by a wide variety offactors, as we discussed under the caption "*Certain Factors That May AffectFuture Results*" in Item 6. Management's Discussion and Analysis or Plan ofOperations of our Annual Report on Form 10-KSB filed with the SEC on March 31,2008 and elsewhere in this report, which could materially and adversely affectus and our actual results.  As a result of these factors, we may experiencematerial fluctuations in future operating results on a quarterly or annualbasis, which could materially and adversely affect our business, financialcondition, operating results and stock price.

 

Effective August 1,2008, we purchased Decision Management Company, Inc. d/b/a Questys Solutions("Questys," "QSI").  This acquisition will cause our results of operation forthe remainder of 2008 to vary significantly from those reported for the firstseven months of 2008.  See Note 11 to our unaudited condensed consolidatedfinancial statements contained elsewhere in this report for additionalinformation regarding the acquisition.

 

Effective December 1,2007, we sold Resolutions.  Our Board of Directors approved the disposal of theassets and liabilities on December 7, 2007 as part of a strategy to reduce debtand focus on growth at the remaining business units and growth by acquisition. We closed the transaction on December 10, 2007.  The sale of Resolutions in2007 will cause our results of operations for 2008 to vary significantly fromthose reported for the first three quarters of 2007 due to the classificationof Resolutions as discontinued operations.   See Note 5 to our unaudited condensedconsolidated financial statements contained elsewhere in this report foradditional information regarding the accounting for this segment asdiscontinued operations.

 

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

 

 

**BUSINESS OVERVIEW**

 

***General***

We have been in business since 1995.  From inception untilSeptember 7, 2007, we were a California corporation.  As the result of a mergerinto our wholly-owned Delaware subsidiary, we became a Delaware corporation. In 2003, we implemented a strategy to acquire profitable companies to improveour ability to bring new service offerings more rapidly, provide surgicalmarket penetration, and accelerate our growth.  Building on the MVI foundation,we acquired TBS in 2004.  In 2006, we acquired GSI.

We operate three subsidiaries.  MVI provides a Software as aService ("SaaS") offering that remotely prints critical business documents suchas orders, invoices, just-in-time manufacturing documents, and medical claims. Additionally, MVI receives fax documents for clients and then delivers thedocuments electronically via the internet.  GSI provides a SaaS full-featuredvirtual office product fully integrated into its clients' business processeswith unified messaging, a conferencing bridge, automated callrouting/forwarding and online address book.  TBS specializes in fully featuredmunicipal business management systems for local and county government, eitherSaaS or customer premise software, including printing and mailing of tax andutility bills.  From April 2005 through November 2007, Resolutions sold andoperated our e-forms, archiving, imaging, and workflow products and services.

We provide services that range from document management,email, faxing, and unified messaging to physical printing and mailing.  Theinformation we move for clients includes medical reports, orders, invoices,employment verifications, and documents related to just-in-time manufacturing, mortgage,and insurance. 

We generate revenue, operating income, and cash flows from:

- subscription agreements for enhanced voice, data, and     conferencing services;
- usage charges for delivery and other services involving     electronic documents;
- usage charges for our governmental accounting and online     payment hosted application services;
- recurring fixed monthly service fees for access to voice,     data, or application services;
- per item and flat fee charges for volume printing and     mailing services to governmental entities;
- fees for professional services such as custom application     development;
- wholesale enhanced voicemail services;
- the sale of licenses for proprietary software and third     party software;
- fees for maintenance and support agreements;
- fees for training and installation services; and
- sales of third party computer hardware; and

 

***Our Objective***

A core component of our mission is to provide solutions thatfacilitate the movement of business information between business enterprisesusing a dynamic and diverse set of delivery methods and content formats.  Ourproducts and services have been designed to help enterprises meet variouscommunications challenges, including the need to:

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

 

Our target markets include Financial Services, Healthcare,Manufacturing, and Local Government, and we serve approximately 900 activeclients with over 25,000 users.

While we do have some sources of non-recurring revenue, suchas hardware sales and third party software, we focus on developing andmaintaining sources of monthly recurring revenue, such as providing subscriberswith solutions for their critical day to day business processes for themovement of business information.

 

***Key Items in First Six Months of 2008***

 

- Consolidated net revenue for the six months ended June 30,     2008 increased by 1% over the 2007 period.  While revenue at TBS increased     by 16%, GSI revenue decreased by 2% and revenue at MVI decreased by 11% compared     to the six months ended June 30, 2007;

 

- Gross margin dipped to 58% compared to 63% in the 2007 period     due to a combination of sales mix differences and increases in sales     commission and telephony costs;

 

- Operating expenses decreased by 14% compared to the prior     year period.  Consolidated operating expenses during the 2008 period were 67%     of sales compared to 79% of sales in the 2007 period;

 

- Operating expenses decreased at Corporate (-21%), MVI (-15%),     TBS (-8%), and GSI (-10%);

 

- Net income increased significantly at GSI to $473,980 compared     to $169,685 for the first half of 2007; 

 

- Net borrowings on our lines of credit during the six     months ended June 30, 2008 were approximately $95,000, compared to $347,206     during the 2007 period; and

 

- Received additional cash proceeds of $53,832 from the sale     of Resolutions.

 

***Areas of Focus***

*Growth Strategy*

 

Our current and future growth strategy is focused onacquiring intellectual and technology assets that improve our ability to take aclient's unstructured content and documents and deliver it to the other partythrough the method preferred by each party, presenting the content in a mannerthat surpasses our client's goals.  In essence, we strive to bring a BusinessProcess Management discipline to their information.  We believe that if we aresuccessful in executing this strategy, our clients will enjoy improvedcompliance, collaboration, cost containment, and superior continuity ofbusiness processes.

 

Our ultimate vision is to become a business processmanagement/workflow service that provides competency and functionality in thefollowing 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;
- Archival Storage;
- Content Integration,;
- Search and Retrieval;
- Content Syndication;
- Localization and     Personalization; and
- Publication (paper or     electronic).

 

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

 

Our acquisition strategy is focused in two areas: serviceinfrastructure and vertical market silo.  The service infrastructure area isour focus to acquire enterprises that fulfill our identified strategictechnological core competencies.  The vertical market silo acquisition strategyis to acquire companies that assist us in penetrating our target marketsegments of financial services, healthcare, manufacturing, and localgovernment.

 

*Capital Formation*

* *

During the remainder of 2008, we are actively seekingadditional financing by issuing equity or obtaining a combination of equity anddebt financing from new shareholders and/or lenders.  Although we believe wewill generate adequate cash to sustain operations at current levels inconjunction with borrowings from our operating lines of credit, we will requireadditional funding to invest in resources that will enable us to operateprofitably on a consistent, month-over-month basis.  In addition, we may berequired to repay certain of our debt instruments in which case we will requireadditional funding.  We continue to caution that there can be no assurance thatfunding will be available on acceptable terms, if at all, or that any suchfunds we raise would enable us to achieve or maintain profitable operations. 

 

In spite of the impact of new laws, regulations, andaccounting pronouncements that have significantly increased our cost ofoperating as a public company, we intend to contain general and administrativecosts where possible.  However, we expect to incur significant costs during theremainder of 2008 and in 2009 related to compliance with Section 404 of theSarbanes-Oxley Act of 2002, including new infrastructure required to improveour internal controls over financial reporting.  Should additional growthcapital become available during 2008, we intend to direct the capital towardincreasing sales and marketing while holding down costs for non-essentialgeneral and administrative as well as product and technology expenses to theextent possible.

 

*Organizational Enhancements*

* *

Our goal is to drive efficiency and effectiveness throughoutour group of companies.  We are working to align each business unit aroundshared goals and performance targets.  In addition, we are striving to maximizecross-selling activities and we are devoting strategic product management andtechnical resources both to strengthening the integration of our existingproducts and services and to developing new products and services that willallow us to offer our clients powerful new solutions comprised of the best thateach of our business units has to offer.

*** ***

***Challenges and Risks***

 

Looking forward, management has identified certainchallenges and risks that demand our attention.  Of these, two key challengesand risks are discussed below.

 

*Increased Competition and Capabilities in the Marketplace*

* *

We face strong competition from well-established nationaland global companies as well as from relatively new companies. We must continueto selectively expand into other profitable segments of our markets and offerpowerful product and service offerings in order to increase our share of themarketplace.  The introduction of new technologies could render our existingproducts and services obsolete or unmarketable or require us to invest inresearch and development at much higher rates with no assurance of developingcompetitive products. Changes in technologies or customer requirements also maycause the development cycle for our new products and services to be lengthy andresult in significant development costs.  Competitive pressures may impair ourability to achieve profitability.

 

*Capital Resources*

* *

We believe that current and futureavailable capital resources, including the net proceeds from sale of ourproducts and services, will be sufficient to fund our operations at currentlevels for the foreseeable future, but will be insufficient to allow us to repayour debt.  We believe that it is desirable to maintain greater cash reservesthan we have in prior periods.  The exact amount of funds that we will requirewill depend upon many factors, and it is likely that we will require additionalfinancing.  Such sources of financing could include capital infusions,additional equity financing, or debt offerings.  In addition, since ourrevenues and cash flows have historically been subject to seasonality, webelieve that it is important to secure greater access to short term borrowingfacilities, such as operating lines of credit.  There can be no assurance thatadditional funding or borrowing facilities will be available to us onacceptable 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 capitalduring the remainder of 2008 or 2009 could have a material adverse effect onour business, financial condition and results of operations.

 

 

**CriticalAccounting Policies and estimates **

 

In preparing our consolidated financial statements, we makeestimates, assumptions and judgments that can have a significant effect on ourrevenues, income/loss from operations, and net income/net loss, as well as onthe value of certain assets on our consolidated balance sheet.  There were nosignificant changes in critical accounting policies or estimates from those atDecember 31, 2007.

 

** **

** **

** **

** **

**RESULTS OF OPERATIONS**

 

The following discussion of our performance is organized byreportable operating segments, which is consistent with the way we manage ourbusiness.  In 2007, we completed the sale of substantially all of the assetsand liabilities of Resolutions.  The sale has resulted in the reclassificationof the revenues and expenses of Resolutions to discontinued operations for allperiods presented through the date of sale.

 

**Three Months Ended June 30, 2008 Compared to ThreeMonths Ended June 30, 2007**

 

Net Revenue from External Customers

 

Net revenue fromexternal customers for the three months ended June 30, 2008 was $3,414,808, a 2%increase over net revenue for the prior year quarter of $3,335,435.

 

For the three months ended June 30, 2008, GSI, TBS, and MVI generated45%, 35% and 20% of our net revenue, respectively.  For the three months ended June30, 2007, GSI, TBS, and MVI generated 48%, 29% and 23% of our net revenue,respectively.

 

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

 

|                                       |    |                |                |                |          |
|--------------------------------------------|---------|---------------------|---------------------|---------------------|---------------|
|                                       |    | Three Months Ended  | Three Months Ended  | Variance            |
|                                       |    | June 30, 2008       | June 30, 2007       | Amount              | Percent       |
|                                       |    |                |                |                |          |
| Net revenue from external customers:       |    |                |                |                |          |
|                                       |    |                |                |                |          |
| Electronic document delivery services      |    |  $             | 695,339        |  $             | 773,762  |  $ | (78,423) | -10% |
| Government accounting solutions            |    | 1,180,112      | 961,411        | 218,701        | 23%           |
| Integrated communications                  |    | 1,539,357      | 1,600,262      | (60,905)            | -4%           |
| Corporate                                  |    | -    | -    | -    |          |
| Total net revenue from external  customers |  $ | 3,414,808      |  $             | 3,335,435      |  $       | 79,373  | 2% |

 

 

Revenue increased 23% at TBS due to increases in revenuefrom hardware sales, support services and printing.  These increases werepartially offset by decreases in software which resulted in part from ourstrategy to promote online, usage-based services rather than single unitproduct sales.

 

Revenue decreased 4% at GSI due to decreases in revenue fromprofessional service fees revenue and sales to corporate clients, which werepartially offset by an increase from user subscription fees.

 

Revenue decreased 10% at MVI due to a decrease in inboundrevenue as a result of mortgage industry customer attrition and, to a lesserextent, a reduction in supplemental services revenue. 

 

Cost of Sales

** **

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

 

|                                  |   |                |                |                |            |
|---------------------------------------|--------|---------------------|---------------------|---------------------|-----------------|
|                                  |   | Three Months Ended  | Three Months Ended  | Variance            |            |
|                                  |   | June 30, 2008       | June 30, 2007       | Amount              | Percent         |
|                                  |   |                |                |                |            |
| Cost of sales:                        |   |                |                |                |            |
|                                  |   |                |                |                |            |
| Electronic document delivery services |   |  $             | 278,268        |  $             | 303,404    |  $ | (25,136) | -8% |
| Government accounting solutions       |   | 857,154        | 630,052        | 227,102        | 36%             |
| Integrated communications             |   | 274,480        | 312,209        | (37,729)            | -12%            |
| Corporate                             |   | -    | -    | -    |            |
| Total cost of sales:                  |   |  $             | 1,409,902      |  $             | 1,245,665  |  $ | 164,237  | 13% |

 

Total cost of sales represented 41% and 37% of net salesduring the 2008 and 2007 quarters, respectively.

 

Cost of sales for MVI for the three months ended June 30,2008 represented 40% of MVI's net sales as compared with 39% in the 2007 quarter. The small increase is attributable to increased telephony costs.

 

Cost of sales for TBS for the three months ended June 30,2008 represented 73% of TBS' net sales as compared with 66% in the 2007 quarter. The increased costs at TBS were attributable to higher revenue and increasedcosts related to the sale of third party hardware, and an increase in salescommissions.

 

Cost of sales for GSI for the three months ended June 30,2008 represented 18% of GSI's net sales as compared with 20% in the 2007quarter.  Telephony charges were up slightly; however, the increases were offsetby reduced staff costs.

 

Gross Profit

 

Gross profit for the three months ended June 30, 2008 decreased4% to $2,004,906 as compared to $2,089,770 for the 2007 quarter.  The decreasein the 2008 quarter of $84,864 resulted from decreases of $53,287, $23,176, and$8,401 from MVI, GSI, and TBS, respectively.  Gross profit margin for the 2008and 2007 quarters was 59% and 63%, respectively.

 

Operating Expenses

 

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

 

|                                  |   |               |               |      |            |
|---------------------------------------|--------|--------------------|--------------------|-----------|-----------------|
|                                  |   | Three Months Ended | Three Months Ended | Variance  |            |
|                                  |   | June 30, 2008      | June 30, 2007      | Amount    | Percent         |
|                                  |   |               |               |      |            |
| Operating expenses                    |   |               |               |      |            |
|                                  |   |               |               |      |            |
| Electronic document delivery services |   |  $            | 293,466       |  $   | 370,158    |  $ | (76,692) | -21% |
| Government accounting solutions       |   | 326,872       | 367,612       | (40,740)  | -11%            |
| Integrated communications             |   | 898,888       | 1,093,309     | (194,421) | -18%            |
| Corporate                             |   | 591,960       | 712,084       | (120,124) | -17%            |
| Total operating expenses:             |   |  $            | 2,111,186     |  $   | 2,543,163  |  $ | (431,977) | -17% |

 

** **

During the three months ended June 30, 2008, the operatingexpenses of Corporate decreased 17% as a result of decreased compensation andaccounting expenses.  These decreases were offset by increases in legal feesand recruiting fees. Operating expenses in the 2008 quarter included $52,904 incompensation expense related to the vesting of stock options, compared to $227,911in the 2007 quarter.

 

During the three months ended June 30, 2008, MVI's operatingexpenses decreased 21% compared to the 2007 quarter.  Product and technologydevelopment decreased $42,548 (-30%) as a result of reduced staffing.  Salesand marketing decreased by $47,920 (-41%) as a result of reduced staff expensesand advertising.  General and administrative increased by $8,025 (+9%) due to increasedrent and recruiting fees as offset by decreased bad debt charges.  Depreciationand amortization expense increased $5,751 (+37%).

 

During the three months ended June 30, 2008, operatingexpenses at TBS decreased 11% compared to the 2007 quarter.  Product andtechnology development decreased $20,090 (-37%) due to reduced staffing.  Salesand marketing decreased by $15,468 (-12%) due to lower bonus expenses.  Generaland administrative decreased by $2,703 (-2%).  Depreciation and amortizationexpenses decreased by $2,479 (-9%).

 

During the three months ended June 30, 2008, GSI's operatingexpenses decreased 18% compared to the 2007 quarter.  Product and technologydevelopment decreased $14,483 (-6%) due to staffing changes.  Sales andmarketing decreased $62,164 (-19%) due to decreased sales management staffexpense and commission expense, as offset by increased outside marketingservices.  General and administrative decreased by $96,051 (-25%) due to lowerbonus payments.  Depreciation and amortization expenses decreased by $21,723 (-15%).

 

Operating Loss

 

As a result of the foregoing, the Company reported anoperating loss for the three months ended June 30, 2008 of $106,280, comparedto an operating loss of $453,393 for the three months ended June 30, 2007.

 

The following is a comparison of the components ofconsolidated income from operations:

 

|                                  |   | Three Months Ended | Three Months Ended | Variance      |          |
|---------------------------------------|--------|--------------------|--------------------|---------------|---------------|
|                                  |   | June 30, 2008      | June 30, 2007      | Amount        | Percent       |
|                                  |   |               |               |          |          |
| Operating income (loss):              |   |               |               |          |          |
|                                  |   |               |               |          |          |
| Electronic document delivery services |   |  $            | 123,605       |  $       | 100,200  |  $ | 23,405  | 23% |
| Government accounting solutions       |   | (3,914)            | (36,253)           | 32,339   | 89%           |
| Integrated communications             |   | 365,989       | 194,744       | 171,245  | 88%           |
| Corporate                             |   | (591,960)          | (712,084)          | 120,124  | 17%           |
| Total operating income (loss)         |   |  $            | (106,280)          |  $       | (453,393)     |  $ | 347,113  | 77% |

 

Each of GSI, TBS, MVI, and Corporate reported improvementsin operating income (loss) compared to the prior year quarter.

 

Interest Expense, net

 

Interest expense, net for the three months ended June 30,2008 increased by $17,141 to $46,575 from the $29,434 reported in the 2007 quarter. The most significant factor in the increase was amortization of debt issuecosts incurred in connection with finders' fees for a new operating line ofcredit.

 

Other Income, net

 

Other income, net for the three months ended June 30, 2008 was$1,811 compared to other income, net of $(61,760) reported in the 2007quarter.  In each of the quarters, we recorded other income and expense relatedto settlement of liabilities related to prior years.

 

Discontinued Operations

 

For the three months ended June 30, 2007, income fromdiscontinued operations was $89,474, and included the results of operations ofPFI, our electronic forms segment.  See Note 5 to our unaudited condensed consolidatedfinancial statements contained elsewhere in this Report for additionalinformation related to discontinued operations.

 

Net Loss

** **

As a result of the foregoing, net loss for the three monthsended June 30, 2008 was $156,665, or $0.00 per share, compared to a net loss of$477,075, or $0.00 per share, for the three months ended June 30, 2007 onweighted average shares of 152,770,913 and 149,309,709, respectively.

 

The following is a comparison of the components ofconsolidated net loss:

** **

|                                  |   | Three Months Ended        | Three Months Ended  | Variance            |                |
|---------------------------------------|--------|---------------------------|---------------------|---------------------|---------------------|
|                                  |   | June 30, 2008             | June 30, 2007       | Amount              | Percent             |
|                                  |   |                      |                |                |                |
| Net income (loss):                    |   |                      |                |                |                |
|                                  |   |                      |                |                |                |
| Electronic document delivery services |   |  $                   | 122,655   |  $             | 100,703   |  $ | 21,952   | 22 % |
| Government accounting solutions       |   | (6,684)                   | (36,511)            | 29,827    | 82 %           |
| Integrated communications             |   | 373,832         | 110,734   | 263,098   | 238 %          |
| Corporate                             |   | (646,468)                 | (741,475)           | 95,007    | 13 %           |
| Discontinued operations               |   | -     | 89,474    | (89,474)            | -100 %         |
| Total net income (loss)               |   |  $                   | (156,665)           |  $             | (477,075)           |  $ | 320,410   | 67 % |

 

 

** **

Six Months Ended June30, 2008 Compared to Six Months Ended June 30, 2007

** **

Net Revenue from External Customers

 

Net revenue from external customers for the six months endedJune 30, 2008 was $6,692,793, a 1% increase over net revenue for the prior yearperiod of $6,593,984.

 

For the six months ended June 30, 2008, GSI, TBS, and MVIgenerated 44%, 35% and 21% of our net revenue, respectively.  For the sixmonths ended June 30, 2007, GSI, TBS, and MVI generated 46%, 31% and 23% of ournet revenue, respectively.

 

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

 

|                                       |    | Six Months Ended    | Six Months Ended    | Variance            |            |
|--------------------------------------------|---------|---------------------|---------------------|---------------------|-----------------|
|                                       |    | June 30, 2008       | June 30, 2007       | Amount              | Percent         |
|                                       |    |                |                |                |            |
| Net revenue from external customers:       |    |                |                |                |            |
|                                       |    |                |                |                |            |
| Electronic document delivery services      |    |  $             | 1,382,227      |  $             | 1,547,010  |  $ | (164,783) | -11% |
| Government accounting solutions            |    | 2,343,053      | 2,027,838      | 315,215        | 16%             |
| Integrated communications                  |    | 2,967,513      | 3,019,136      | (51,623)            | -2%             |
| Corporate                                  |    | -    | -    | -    |            |
| Total net revenue from external  customers |  $ | 6,692,793      |  $             | 6,593,984      |  $         | 98,809  | 1% |

 

Revenue increased 16% at TBS due to increases in revenue fromhardware sales, support services and printing.  These increases were partiallyoffset by decreases in software which resulted in part from our strategy topromote online, usage-based services rather than single unit product sales.

 

Revenue decreased 2% at GSI due to decreases in revenue fromprofessional service fees revenue and sales to corporate clients, which werepartially offset by an increase from user subscription fees.

 

Revenue decreased 11% at MVI due to a decrease in inboundrevenue as a result of mortgage industry customer attrition and, to a lesserextent, a reduction in supplemental services revenue. 

 

 

Cost of Sales

 

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

 

|                                  |   | Six Months Ended    | Six Months Ended    | Variance            |            |
|---------------------------------------|--------|---------------------|---------------------|---------------------|-----------------|
|                                  |   | June 30, 2008       | June 30, 2007       | Amount              | Percent         |
|                                  |   |                |                |                |            |
| Cost of sales:                        |   |                |                |                |            |
|                                  |   |                |                |                |            |
| Electronic document delivery services |   |  $             | 577,125        |  $             | 578,826    |  $ | (1,701) | 0% |
| Government accounting solutions       |   | 1,612,867      | 1,231,495      | 381,372        | 31%             |
| Integrated communications             |   | 593,045        | 628,750        | (35,705)            | -6%             |
| Corporate                             |   | -    | -    | -    |            |
| Total cost of sales:                  |   |  $             | 2,783,037      |  $             | 2,439,071  |  $ | 343,966  | 14% |

 

Total cost of sales represented 42% and 37% of net salesduring the 2008 and 2007 periods, respectively.

 

Cost of sales for MVI for the six months ended June 30, 2008represented 42% of MVI's net sales as compared with 37% in the 2007 period as aresult of higher telephony costs.

 

Cost of sales for TBS for the six months ended June 30, 2008represented 69% of TBS' net sales as compared with 61% in the 2007 period.  Theincreased costs at TBS were attributable to higher revenue and increased costsrelated to the sale of third party hardware, and an increase in salescommissions.

 

Cost of sales for GSI for the six months ended June 30, 2008represented 20% of GSI's net sales as compared with 21% in the 2007 period. Telephony charges were up slightly; however, the increases were offset byreduced staff costs.

 

 

Gross Profit

 

Gross profit for the six months ended June 30, 2008 decreased6% to $3,909,756 as compared to $4,154,913 for the 2007 period.  The decreasein the 2008 period of $245,157 resulted from decreases of $163,082, $15,918, and$66,157 from MVI, GSI, and TBS, respectively.  Gross profit margin for the 2008and 2007 periods was 58% and 63%, respectively.

Operating Expenses

 

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

 

|                                  |   | Six Months Ended | Six Months Ended | Variance  |            |
|---------------------------------------|--------|------------------|------------------|-----------|-----------------|
|                                  |   | June 30, 2008    | June 30, 2007    | Amount    | Percent         |
|                                  |   |             |             |      |            |
| Operating expenses                    |   |             |             |      |            |
|                                  |   |             |             |      |            |
| Electronic document delivery services |   |  $          | 628,466     |  $   | 735,220    |  $ | (106,754) | -15% |
| Government accounting solutions       |   | 636,092     | 688,798     | (52,706)  | -8%             |
| Integrated communications             |   | 1,927,787   | 2,137,180   | (209,393) | -10%            |
| Corporate                             |   | 1,276,493   | 1,622,044   | (345,551) | -21%            |
| Total operating expenses:             |   |  $          | 4,468,838   |  $   | 5,183,242  |  $ | (714,404) | -14% |

 

 

During the six months ended June 30, 2008, the operatingexpenses of Corporate decreased 21% as a result of decreased compensation andaccounting expenses.  These decreases were offset by increases in legal feesand recruiting fees. Operating expenses in the 2008 period included $122,412 incompensation expense related to the vesting of stock options, compared to $454,486in the 2007 period.

 

During the six months ended June 30, 2008, MVI's operatingexpenses decreased 15% compared to the 2007 period.  Product and technologydevelopment decreased $88,165 (-29%) as a result of reduced staffing.  Salesand marketing decreased by $77,183 (-34%) as a result of reduced staff expensesand advertising.  General and administrative increased by $46,642 (+26%) due toincreased rent and recruiting fees as offset by decreased bad debt charges. Depreciation and amortization expense increased $11,952 (+42%).

 

During the six months ended June 30, 2008, operatingexpenses at TBS decreased 8% compared to the 2007 period.  Product andtechnology development decreased $63,369 (-48%) due to reduced staffing.  Salesand marketing increased by $16,705 (+9%) due to higher sales salaries andtravel costs.  General and administrative decreased by $762.  Depreciation andamortization expenses decreased by $5,280 (-9%).

 

During the six months ended June 30, 2008, GSI's operatingexpenses decreased 10% compared to the 2007 period.  Product and technologydevelopment increased $3,547 (+1%).  Sales and marketing decreased $147,613(-23%) due to decreased sales management staff expense and commission expense,as offset by increased outside marketing services.  General and administrative decreasedby $19,085 (-3%) due to lower salary and bonus expenses.  Depreciation andamortization expenses decreased by $46,242 (-16%).

 

Operating Loss

 

As a result of the foregoing, the Company reported anoperating loss for the six months ended June 30, 2008 of $559,082, compared toan operating loss of $1,028,329 for the six months ended June 30, 2007.  

 

The following is a comparison of the components ofconsolidated income from operations:

 

|                                  |   | Six Months Ended | Six Months Ended | Variance      |          |
|---------------------------------------|--------|------------------|------------------|---------------|---------------|
|                                  |   | June 30, 2008    | June 30, 2007    | Amount        | Percent       |
|                                  |   |             |             |          |          |
| Operating income (loss):              |   |             |             |          |          |
|                                  |   |             |             |          |          |
| Electronic document delivery services |   |  $          | 176,636     |  $       | 232,964  |  $ | (56,328) | -24% |
| Government accounting solutions       |   | 94,094      | 107,545     | (13,451)      | -13%          |
| Integrated communications             |   | 446,681     | 253,206     | 193,475  | 76%           |
| Corporate                             |   | (1,276,493)      | (1,622,044)      | 345,551  | 21%           |
| Total operating income (loss)         |   |  $          | (559,082)        |  $       | (1,028,329)   |  $ | 469,247  | 46% |
|                                       |        |                  |                  |               |               |  |  |  |  |  |

 

Each of GSI and Corporate reported a significant improvementin operating income (loss) compared to the prior year period.  However, theseimprovements were offset by reduced operating income at TBS and MVI.

 

Interest Expense, net

 

Interest expense, net for the six months ended June 30, 2008increased by $55,554 to $112,823 from the $57,269 reported in the 2007 period. The most significant factor in the increase was amortization of debt issuecosts incurred in connection with finders' fees for a new operating line ofcredit.

 

Other Income, net

 

Other income, net for the six months ended June 30, 2008 was$53,403 compared to other income, net of $(54,339) reported in the 2007 period. In each of the periods, we recorded other income and expense related tosettlement of liabilities related to prior years.

 

Discontinued Operations

 

For the six months ended June 30, 2007, income fromdiscontinued operations was $186,172, and included the results of operations ofPFI, our electronic forms segment.  See Note 5 to our unaudited condensedconsolidated financial statements contained elsewhere in this Report foradditional information related to discontinued operations.

 

Net Loss

** **

As a result of the foregoing, net loss for the six monthsended June 30, 2008 was $651,500, or $0.00 per share, compared to a net loss of$979,837, or $0.01 per share, for the six months ended June 30, 2007 onweighted average shares of 152,770,913 and 148,444,518, respectively.

 

The following is a comparison of the components ofconsolidated net loss:

 

|                                  |   | Six Months Ended    | Six Months Ended | Variance      |          |
|---------------------------------------|--------|---------------------|------------------|---------------|---------------|
|                                  |   | June 30, 2008       | June 30, 2007    | Amount        | Percent       |
|                                  |   |                |             |          |          |
| Net income (loss):                    |   |                |             |          |          |
|                                  |   |                |             |          |          |
| Electronic document delivery services |   |  $             | 162,612     |  $       | 233,467  |  $ | (70,855) | -30% |
| Government accounting solutions       |   | 90,733         | 113,587     | (22,854)      | -20%          |
| Integrated communications             |   | 473,980        | 169,685     | 304,295  | 179%          |
| Corporate                             |   | (1,378,825)         | (1,682,748)      | 303,923  | 18%           |
| Discontinued operations               |   | -    | 186,172     | (186,172)     | -100%         |
| Total net loss                        |   |  $             | (651,500)        |  $       | (979,837)     |  $ | 328,337  | 34% |

** **

** **

**LIQUIDITY AND****CAPITAL RESOURCES**

 

During the six months ended June 30, 2008, our net cashposition decreased by $271,540 to $478,371.  Although our financing activitiesprovided net cash of $20,886, our operating and investing activities used netcash of $272,422 and $20,004, respectively.

 

Net cash used in operating activities for the six monthsended June 30, 2008 was $272,422, an increase of $187,730 from the $84,692 usedin operating activities during the 2007 period.

 

Our investing activities during the first half of 2008 consistedof the purchase of computer equipment and acquiring cash from the sale ofResolutions. Net cash used in investing activities during the 2008 period decreased$92,404 to $20,004 from the $112,408 used in investing activities during the 2007period, during which we purchased computer equipment.

 

Net cash provided by financing activities for the six monthsended June 30, 2008 was $20,886, and included $95,248 of proceeds, net ofrepayments, from our operating lines of credit which were offset by $65,000 ofcash paid for debt issuance costs and payments on capital lease obligations of$9,362.  Net cash provided by financing activities for the 2007 period was $105,180and included $347,206 in proceeds, net of repayments, from our operating linesof credit which were offset by $12,026 of payments on capital leases andrepayment of $230,000 of related party notes in connection with the TBS andResolutions acquisitions.

 

We do not currently have any material commitments forcapital expenditures other than those expenditures incurred in the ordinarycourse of business. 

 

Our sources of capital include cash flow from operations,available credit facilities, and the issuance of debt and equity securities. During the first half of 2008, we relied heavily on cash reserves to fund ournet cash used in operating activities.  During the remainder of 2008, weanticipate using our operating lines of credit to fund any further negativeoperating cash flows.

 

On February 6, 2008, we entered into an agreement with ThePrivate Bank of The Peninsula ("Bank") for an asset based line of credit (the"Line").  The Bank's maximum commitment amount for the Line is $1.5 million. Advances are generally limited to 85% of eligible domestic accountsreceivable.  The interest rate is floating and is calculated at Wall StreetJournal prime plus 3% on the cash borrowed.  Interest on outstanding borrowingsis payable monthly.  As of June 30, 2008, outstanding borrowings on the Linewere approximately $113,000.  Outstanding advances under the Line are securedby 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.

 

In consideration for the Line, we paid a facility fee of$15,000 to the Bank and we issued the Bank a warrant to purchase 75,000 sharesof our restricted common stock at an exercise price of $0.062 per share throughFebruary 6, 2018.  In addition, we paid a finder's fee in the amount of $50,000to Dragonfly Capital Partners LLC ("Dragonfly") and issued Dragonfly a warrantto purchase 2,419,355 shares of our restricted common stock at an exerciseprice of $0.062 per share through February 6, 2013.

 

TBS has a $100,000 unsecured operating line of credit withBB&T that it had not utilized as of August 4, 2008.  During July 2008,VillageEDOCS renewed a $500,000 operating line of credit with Bank of America guaranteedby a shareholder on which it owed approximately $467,000 as of June 30, 2008.

 

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

 

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

 

Since our inception, our operating and investing activitieshave used substantially more cash than they have generated. We believe that wehave made considerable progress toward achieving profitable operations byincreasing revenues from electronic document delivery services and through ouracquisition of TBS and GSI.  In addition, we are actively seeking opportunitiesto acquire or otherwise combine with businesses that are operating profitably andgenerating positive cash flows.  However, at present and for the foreseeablefuture, we believe that we will continue to need working capital to fund thegrowth of our businesses and to absorb the increasing costs associated withoperating as a fully reporting company in the prevailing regulatoryenvironment.  Accordingly, we anticipate negative operating and investing cashflows during the remainder of 2008 and at least until MVI, TBS, and GSIconsistently generate net cash flows sufficient to offset the projected expenseto operate the holding company.

 

We expect to use cash flow generated from operations, theLine, and potentially other sources, to fund any such negative operating cashflows during the remainder of 2008.

 

While we believe that our available cash resources combinedwith our current revenue streams and lines of credit will be sufficient to meetour anticipated working capital requirements for the next twelve months, we wouldlikely require new sources of debt or equity financing during the remainder of2008 should we be required to expand or significantly upgrade our technologyinfrastructure through additional capital expenditures.  Should our currentrevenue streams or margins be subjected to even minor decreases, our externalfunding requirements would likely be greater.

 

We believe that sustainable profitability is achievable;however, we have a history of losses.  While GSI, MVI, and TBS each reportednet income for the first half of 2008, this income was not sufficient to offsetoperating losses, interest expense and corporate overhead.  If we are notsuccessful in sustaining and increasing operating profits from our threeoperating segments, or in reducing expenses of the holding company as apercentage of revenue, we may not achieve profitability on a consolidatedbasis.

 

This estimate is a forward-looking statement that involvesrisks and uncertainties. The actual time period may differ materially from thatindicated as a result of a number of factors so that we cannot assure you thatour cash resources will be sufficient for anticipated or unanticipated workingcapital and capital expenditure requirements for this period. We have advisedthat we will need to raise additional capital in the future to meet ouroperating and investing cash requirements. Such sources of financing couldinclude capital infusions, additional equity financing, or debt offerings.There can be no assurance that additional funding will be available onacceptable terms, if at all, or that such funds if raised, would enable us toachieve and maintain profitable operations. If we are not able to obtainsufficient additional funds from investors, we may be unable to sustain all orpart of our operations.  If we raise additional funds through the issuance ofsecurities, these securities may have rights, preferences or privileges seniorto those of our common stock, and our stockholders may experience additionaldilution to their equity ownership. 

 

The Report of Independent Registered Public Accounting Firmon our December 31, 2007 consolidated financial statements includes anexplanatory paragraph stating that the recurring losses incurred fromoperations and a working capital deficit raise substantial doubt about ourability to continue as a going concern. The unaudited condensed consolidatedfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

 

 

**CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Q includes forward-lookingstatements within the meaning of Section 21E of the Securities Exchange Act of1934, as amended. All statements that do not directly and exclusively relate tohistorical facts constitute forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995.  Our forward-lookingstatements are based on our plans, intentions, expectation, and belief and aresubject to certain risks and uncertainties that could cause actual results todiffer materially from those projected or expressed herein. You can identifythese statements by forward-looking words such as "may","will", "expect", "intend","anticipate", "believe", "expect","plan", "seek", "estimate", "project", "could", and "continue" or similar words. You should read statements thatcontain these words carefully because they discuss our expectations about ourfuture performance, contain projections of our future operating results or ofour future financial condition, or state other "forward-looking"information. These statements include, among others, information regardingfuture operations, future capital expenditures, and future net cash flow. Suchstatements reflect the Company's current views with respect to future eventsand financial performance and involves risks and uncertainties, including,without limitation, general economic and business conditions, changes inforeign, political, social and economic conditions, regulatory initiatives andcompliance with governmental regulations, the ability to achieve further marketpenetration and additional customers, and various other matters, many of whichare beyond the Company's control, including, without limitation, the risksdescribed under the caption "*Certain Factors That May Affect FutureResults"* in Item 6 of the Company's Annual Report on Form 10-KSB filedwith the Commission on March 31, 2008. Our future results and stockholdervalues may differ materially from those expressed in these forward- lookingstatements. Many of the factors that will determine these results and valuesare beyond our ability to control or predict. We assume no obligation to updateany forward-looking statements.  Investors are cautioned not to put unduereliance on any forward-looking statements, which speak only as of the date ofthis Quarterly Report on Form 10-Q.  Readers should also consult the cautionarystatements and risk factors listed from time to time in our Reports, and allamendments thereto, on Forms 10-K, 10-KSB, 10-Q, 10-QSB, 8-K, and other SECfilings.  For these statements, we claim the protection of the safe harbor forforward-looking statements contained in Section 21E of the Exchange Act.

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

 

The statements in MD&A under the captions *Introduction*and *Business Overview*of our strategies, beliefs, plans,expectations, anticipations and hopes with respect to (1) our expectationsabout the benefits we may derive from acquisitions, (2) our current and futuregrowth strategy to acquire intellectual and technology assets and ourexpectations about the benefits we may derive, (3) our beliefs about our visionto become a business process management/workflow service and the benefits weexpect to derive, (4) our acquisition strategy, and (5) our belief thatobtaining planned financings will allow us to generate adequate cash flows tosustain operations at current levels until we being to operate profitably on aconsistent, month-over month basis, which statements are subject to variousrisks and uncertainties, including, without limitation, our limited operatinghistory, risks that we may not be able to obtain any additional financing atterms acceptable to us, or at all, risks that we may not successfully implementour acquisition program, risks associated with assimilating acquired personneland technology into the Company, and the risk that we will not be able tocompete effectively because our market place is highly competitive and has lowbarriers to entry. 

 

The statements in MD&A underthe caption *Results of Operations*of our strategies, beliefs, plans,expectations, anticipations and hopes with respect to Net Revenue, GrossProfit, Operating Expenses, Income (Loss) from Operations, and Net Loss and ourstrategies, beliefs, plans, expectations, anticipations and hopes with respectto Liquidity and Capital Resources set forth in MD&A under the caption *Liquidityand Capital Resources*, including, without limitation (1) our belief that wehave made considerable progress toward achieving profitable operations byincreasing revenues from electronic document delivery services and through ouracquisitions, (2) our strategy of actively seeking to combine with businessthat operate profitably and generate positive cash flows, (3) our belief thatsustainable profitability is achievable, (4) our expectations about futurefunding requirements, and (5) our belief that current cash position, cashgenerated through operations and equity offerings and available borrowings willbe sufficient to meet our needs through at least the next twelve months, whichstatements are subject to various risks and uncertainties, including, withoutlimitation, our limited operating history, risks that we may not be able toobtain any additional financing at terms acceptable to us, or at all, the riskthat we may be unable to sustain all or part of our operations if we are notable to obtain sufficient additional funds from investors, the risk that ourfunding requirements could be greater should our current revenue streams ormargins decrease, risks that we may not successfully implement our acquisitionprogram, risks associated with assimilating acquired personnel and technologyinto the Company, and the risk that we will not be able to compete effectivelybecause our market place is highly competitive and has low barriers to entry.

 

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

 

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In September 2006, the FASB issued SFAS No. 157, *FairValue Measurements*. SFAS No. 157 defines fair value, establishes aframework for measuring fair value in GAAP and expands disclosures about fairvalue measurements. This Statement applies under other accountingpronouncements that require or permit fair value measurements, the FASB havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this Statement does not requireany new fair value measurements. SFAS No. 157 is effective for fiscal yearsbeginning after December 15, 2007. The Company adopted SFAS No. 157 effectiveJanuary 1, 2008.  In December 2007, the FASB released a proposed FASB StaffPosition (FSP FAS 157-2- Effective Date of FASB Statement No. 157) which, ifadopted as proposed, would delay the effective date of SFAS No. 157 for allnonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). We are currently evaluating the effect ofSFAS No. 157 on our financial statements.

 

In December 2007, the FASB issued SFAS No. 141(R), *BusinessCombinations*. SFAS No. 141(R) provides companies with principles andrequirements on how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition andmeasurement of goodwill acquired in a business combination. SFAS No. 141(R) alsorequires certain disclosures to enable users of the financial statements toevaluate the nature and financial effects of the business combination.Acquisition costs associated with the business combination will generally beexpensed as incurred. SFAS No. 141(R) is effective for business combinationsoccurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141(R) is not permitted. We are currently evaluating the impact SFAS No.141(R) will have on any future business combinations.

 

 

 

ITEM 4 - CONTROLS ANDPROCEDURES

 

(a) As of June 30, 2008, an evaluation was carried out underthe supervision and with the participation of the Company's management,including our Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934).  As a result of this evaluation, we identified materialweaknesses in our internal control over financial reporting as of June 30, 2008. Accordingly, although we continue to make progess toward our goal to remediatesignificant deficiencies, we concluded that our disclosure controls andprocedures were not effective as of June 30, 2008.  For more informationregarding the material weaknesses identified and our remediation plans, weencourage you to read Item 8A *Controls and Procedures* included in theAnnual Report on Form 10-KSB that we filed with the SEC on March 31, 2008.

 

(b) Changes in internal control over financial reporting:There were no changes in the Company's internal control over financialreporting that occurred during the quarter ended June 30, 2008 that havematerially affected, or are reasonably likely to materially affect, theCompany's internal control over financial reporting.

 

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS 

 

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

** **

----

**PART II**

** **

** **

**ITEM 1 - LEGAL PROCEEDINGS.**

** **

Claim

 

In connection with our acquisition of GSI, we are entitledto certain rights of indemnification from GoSolutions Equity, LLC, which is aformer shareholder of GSI that became a shareholder of the Company as a resultof our acquisition of GSI.  We have made a claim of indemnification from thisentity in connection with the bankruptcy of one of GSI's significant customers- Vartec Telecom, Inc. - and the facts and circumstances relating to theprocurement and maintenance of the Primerica Life Insurance account and relatedCitigroup affiliates.  GoSolutions Equity, LLC has indicated that it does notbelieve that we have a valid basis for making such indemnification claims.

 

The Company has engaged in limited discussions withGoSolutions Equity, LLC as it relates to the indemnification claims notice andtheir response to such claims notice.  However, the Company is unable to advisewhether it will be successful in the indemnification claims against GoSolutionsEquity, LLC.  Pursuant to the agreement with GSI, if the Company is successful,GoSolutions Equity, LLC would only be required to return up to approximately4.4 million of our shares issued to that entity to satisfy such indemnificationclaims.  GoSolutions Equity, LLC is not required to contribute cash to satisfyany indemnification claims.

 

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

 

** **

** **

**ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USEOF PROCEEDS.**

 

None.

** **

** **

**ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.**

** **

None.

** **

** **

**ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS.**

** **

None. 

 

** **

**ITEM 5 - OTHER INFORMATION.**

** **

None.****

**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    | Stock Purchase Agreement dated as of August 1, 2008 by and  among VillageEDOCS, Inc. and Decision Management Company, Inc. d/b/a Questys  Solutions, Inc. and Its Sole Shareholder, Vojin Hadzi-Pavlovic and Gloria  Hadzi-Pavlovic, Tenants In Common.  Previously filed as Exhibit 99.1 to the  Company's Current Report on Form 8-K filed on August 6, 2008. ** |
| 3.1    | Articles of Incorporation, as amended.  Previously  filed with the Company's Form 10-SB filed on August 29, 2000.  **                                                                                                                                                                                                                                         |
| 3.2    | By-laws.  Previously filed with the Company's Form  10-SB filed on August 29, 2000.  **                                                                                                                                                                                                                                                                       |
| 3.3    | Article of Amendment to Articles of Incorporation to  increase authorized number of common shares.  Previously filed with the  Company's 14C Information Statement filed on July 23, 2004. **                                                                                                                                                                      |
| 3.4    | Article of Amendment to Articles of Incorporation to  increase authorized number of common shares and to create a class of  preferred stock.  Previously filed with the Company's 14C Information  Statement filed on June 7, 2005. **                                                                                                                             |
| 3.5    | Form of Certificate of Designations of Preferences, Rights  and Limitations of Series A Convertible Preferred Stock.  Previously  filed as Exhibit 4.8 to the Company's Current Report on Form 8-K filed on  April 19, 2005. **                                                                                                                                    |
| 3.6    | Certificate of Amendment of Articles of Incorporation to  increase authorized number of common shares.  Previously filed with the  Company's Current Report on Form 8-K filed on January 20, 2006. **                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                    |
| 3.7    | Form of Certificate of Incorporation of VillageEDOCS,  Inc.  Previously filed with the Company's Definitive Information Statement on  Schedule 14A filed on May 24, 2007.**                                                                                                                                                                                        |
| 3.8    | Form of Bylaws of VillageEDOCS, Inc.  Previously filed  with the Company's Definitive Information Statement on Schedule 14A filed on  May 24, 2007.                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                    |
| 4.1    | Letter Agreement dated July 30, 2002 by and between the  Company, C. Alan Williams, and Joan P. Williams previously filed as Exhibit  4.1 to the Company's Quarterly Report on Form 10-QSB for the period ended  June 30, 2002 and incorporated herein by reference.  **                                                                                           |
| 4.2    | Form of Unsecured Convertible Promissory Note. Previously  filed as Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-QSB  filed with the Securities and Exchange Commission on May 15, 2002 and  incorporated herein by reference. **                                                                                                                        |
| 4.3    | Form of Convertible Secured Promissory Note. Previously  filed as Exhibit 4.6 to the Registrant's Quarterly Report on Form 10-QSB  filed with the Securities and Exchange Commission on May 15, 2002 and  incorporated herein by reference. **                                                                                                                          |
| 4.4    | 2002 Equity Incentive Plan dated as of January 30,  2002.  Previously filed as Exhibit 4.1 to the Registrant's Quarterly  Report on Form 10-QSB filed with the Securities and Exchange Commission on  May 15, 2002 and incorporated herein by reference. **                                                                                                        |
| 4.5    | Form of Stock Option Agreement.  Previously filed as  Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-QSB filed with  the Securities and Exchange Commission on May 15, 2002 and incorporated  herein by reference. **                                                                                                                                 |
| 4.6    | Promissory Note Modification Agreement dated May 9, 2002  by and among the Company, Joan P. Williams and C. Alan Williams.   Previously filed as Exhibit 4.3 to the Registrant's Quarterly Report on Form  10-QSB filed with the Securities and Exchange Commission on May 15, 2002 and  incorporated herein by reference. **                                      |
| 4.7    | Security Agreement dated May 9, 2002 by and among the  Company, Joan P. Williams and C. Alan Williams.  Previously filed as  Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-QSB filed with  the Securities and Exchange Commission on May 15, 2002 and incorporated  herein by reference. **                                                          |
| 4.8    | Promissory Note to Stephen A. Garner dated February 17,  2004 previously filed as Exhibit 4.1 to the Company's Current Report on Form  8-K filed on February 18, 2004 and incorporated herein by reference. **                                                                                                                                                          |
| 4.9    | Promissory Note to James L. Campbell dated February 17,  2004 previously filed as Exhibit 4.2 to the Company's Current Report on Form  8-K filed on February 18, 2004 and incorporated herein by reference. **                                                                                                                                                          |
| 4.10   | Guaranty by Tailored Business Systems, Inc. to Stephen A.  Garner dated February 17, 2004 previously filed as Exhibit 4.3 to the  Company's Current Report on Form 8-K filed on February 18, 2004 and  incorporated herein by reference. **                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                    |
| 4.11   | Guaranty by Tailored Business Systems, Inc. to James L.  Campbell dated February 17, 2004 previously filed as Exhibit 4.4 to the  Company's Current Report on Form 8-K filed on February 18, 2004 and  incorporated herein by reference. **                                                                                                                             |
| 4.12   | Form of Security Agreement dated February 17, 2004 by and  between Tailored Business Systems, Inc. and Stephen A. Garner previously  filed as Exhibit 4.5 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference. **                                                                                              |
| 4.13   | Form of Security Agreement dated February 17, 2004 by and  between Tailored Business Systems, Inc. and James L. Campbell previously  filed as Exhibit 4.6 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference. **                                                                                              |
| 4.14   | Registration Rights Agreement dated February 17, 2004 by  and between VillageEDOCS and Stephen A. Garner previously filed as Exhibit  4.7 to the Company's Current Report on Form 8-K filed on February 18, 2004  and incorporated herein by reference. **                                                                                                              |
| 4.15   | Registration Rights Agreement dated February 17, 2004 by  and between VillageEDOCS and James L. Campbell previously filed as Exhibit  4.8 to the Company's Current Report on Form 8-K filed on February 18, 2004  and incorporated herein by reference. **                                                                                                              |
| 4.16   | Form of Stock Pledge Agreement dated February 17, 2004 by  and between Tailored Business Systems, Inc. and Stephen A. Garner previously  filed as Exhibit 4.9 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference. **                                                                                          |
| 4.17   | Form of Stock Pledge Agreement dated February 17, 2004 by  and between Tailored Business Systems, Inc. and James L. Campbell previously  filed as Exhibit 4.10 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference. **                                                                                         |
| 4.18   | Notice of Intent to Exercise Conversion Right dated  February 10, 2005 by Joan P. Williams and C. Alan Williams.  Previously  filed as Exhibit 4.5 to the Company's Current Report on Form 8-K filed on  February 14, 2005. **                                                                                                                                     |
| 4.19   | Promissory Note to Alexander Riess dated April 15,  2005.  Previously filed as Exhibit 4.1 to the Company's Current Report  on Form 8-K filed on April 19, 2005. **                                                                                                                                                                                                |
| 4.20   | Promissory Note to William R. Falcon dated April 15,  2005.  Previously filed as Exhibit 4.2 to the Company's Current Report  on Form 8-K filed on April 19, 2005. **                                                                                                                                                                                              |
| 4.21   | Common Stock Purchase Warrant to Alexander Riess dated as  of April 1, 2005.  Previously filed as Exhibit 4.3 to the Company's  Current Report on Form 8-K filed on April 19, 2005. **                                                                                                                                                                             |
| 4.22   | Common Stock Purchase Warrant to William R. Falcon dated  as of April 1, 2005.  Previously filed as Exhibit 4.4 to the Company's  Current Report on Form 8-K filed on April 19, 2005. **                                                                                                                                                                           |
| 4.23   | Note Purchase Agreement dated April 13, 2005 by and  between VillageEDOCS and Barron Partners LP.  Previously filed as  Exhibit 4.5 to the Company's Current Report on Form 8-K filed on April 19,  2005. **                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                    |
| 4.24   | Convertible Note to Barron Partners LP dated April 13,  2005.  Previously filed as Exhibit 4.6 to the Company's Current Report  on Form 8-K filed on April 19, 2005. **                                                                                                                                                                                            |
| 4.25   | Registration Rights Agreement dated April 13, 2005 by and  between VillageEDOCS and Barron Partners LP.  Previously filed as  Exhibit 4.7 to the Company's Current Report on Form 8-K filed on April 19,  2005. **                                                                                                                                                 |
| 4.26   | Form of Certificate of Designations of Preferences, Rights  and Limitations of Series A Convertible Preferred Stock.  Previously  filed as Exhibit 4.8 to the Company's Current Report on Form 8-K filed on  April 19, 2005. **                                                                                                                                    |
| 4.27   | Stock Purchase Warrant "A" dated April 13, 2005  to Barron Partners LP.  Previously filed as Exhibit 4.9 to the Company's  Current Report on Form 8-K filed on April 19, 2005. **                                                                                                                                                                        |
| 4.28   | Stock Purchase Warrant "B" dated April 13, 2005  to Barron Partners LP.  Previously filed as Exhibit 4.10 to the  Company's Current Report on Form 8-K filed on April 19, 2005. **                                                                                                                                                                       |
| 4.29   | Form of Note Assignment.  Previously filed as Exhibit  4.1 to the Company's Current Report on Form 8-K filed on July 6, 2005. **                                                                                                                                                                                                                                   |
| 4.30   | Form of Promissory Note Modification Agreement.   Previously filed as Exhibit 4.2 to the Company's Current Report on Form 8-K  filed on July 6, 2005. **                                                                                                                                                                                                           |
| 4.31   | Form of Notice of Intent to Exercise Conversion  Right.  Previously filed as Exhibit 4.3 to the Company's Current Report  on Form 8-K filed on July 6, 2005. **                                                                                                                                                                                                    |
| 4.32   | Notice of conversion by Barron Partners LP dated September  30, 2005.  Previously filed as Exhibit 4.6 to the Company's Current  Report on Form 8-K filed on October 5, 2005. **                                                                                                                                                                                   |
| 4.33   | Form of Convertible Secured Promissory Note by and among  C. Alan Williams, Joan P. Williams, and the Company previously filed as  Exhibit 4.19 to the Company's Annual Report on Form 10-KSB filed on April 14,  2006 and incorporated herein by reference. **                                                                                                         |
| 4.34   | Convertible Secured Promissory Note dated February 16,  2004 by and among C. Alan Williams, Joan P. Williams, and the Company  previously filed as Exhibit 4.20 to the Company's Annual Report on Form  10-KSB filed on April 14, 2006 and incorporated herein by reference. **                                                                                         |
| 4.35   | Notice of conversion by Barron Partners LP dated October  21, 2005.  Previously filed as Exhibit 4.1 to the Company's Current  Report on Form 8-K filed on October 24, 2005 and incorporated herein by  reference. **                                                                                                                                              |
| 4.36   | Notice of conversion by Barron Partners LP dated March 8,  2006.  Previously filed as Exhibit 4.1 to the Company's Current Report  on Form 8-K filed on March 9, 2006 and incorporated herein by reference. **                                                                                                                                                     |
| 4.37   | Registration Rights Agreement dated as of April 28, 2006  by and among VillageEDOCS and the principal stockholders of GoSolutions,  Inc.  Previously filed as Exhibit 99.5 to the Company's Current Report  on Form 8-K filed on May 4, 2006. **                                                                                                                   |
| 4.38   | Principal VEDO Stockholders Voting Agreement dated as of  April 28, 2006 by and among Barron Partners, LP, C. Alan Williams, Joan P.  Williams and GoSolutions, Inc.  Previously filed as Exhibit 99.6 to the  Company's Current Report on Form 8-K filed on May 4, 2006. **                                                                                       |
| 4.39   | Indemnity/Contribution Agreement effective April 30, 2006,  by and among VillageEDOCS, GoSolutions Equity, LLC (the "LLC"), and  the principals of the LLC identified on the signature page thereto.   Previously filed as Exhibit 99.7 to the Company's Current Report on Form 8-K  filed on May 4, 2006. **                                            |
| 4.40   | Settlement and Release Agreement dated as of April 28,  2006 by and among VillageEDOCS, GoSolutions, Inc., The Zant Group Trust and  Louis J. Zant.  Previously filed as Exhibit 99.9 to the Company's  Current Report on Form 8-K filed on May 4, 2006. **                                                                                                        |
| 4.41   | Second Extension Agreement dated as of April 28, 2006 by  and between The Zant Group Trust and GoSolutions, Inc.  Previously filed  as Exhibit 99.9 to the Company's Current Report on Form 8-K filed on May 4,  2006. **                                                                                                                                          |
| 4.42   | Settlement and Release Agreement dated as of June 30,  2006, by and among VillageEDOCS, GoSolutions, Inc., Bruce H. Bennett and  Sandra G. Bennett.  Previously filed as Exhibit 10.1 to the Company's Current  Report on Form 8-K filed on July 12, 2006. **                                                                                                      |
| 4.43   | Warrant Exchange Agreement dated as of November 20, 2006  by and between the Company and Barron Partners, LP.  Previously filed as  Exhibit 10.1 to the Company's Amended Current Report on Form 8-K/A filed on  November 22, 2006.**                                                                                                                              |
| 4.44   | 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. **                                                                                                    |
| 4.45   | 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. **                                |
| 4.46   | 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. **                                                                            |
| 4.47   | 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. **                                                                                                                                   |
| 4.48   | 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. **                                                                                                              |
| 4.49   | 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. **                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.1   | General Release and Noncompetition Agreement dated  February 17, 2004 by Stephen A. Garner in favor of Tailored Business Systems,  Inc. previously filed as Exhibit 10.3 to the Company's Current Report on Form  8-K filed on February 18, 2004 and incorporated herein by reference. **                                                                               |
| 10.2   | General Release and Noncompetition Agreement dated  February 17, 2004 by James L. Campbell in favor of Tailored Business Systems,  Inc. previously filed as Exhibit 10.4 to the Company's Current Report on Form  8-K filed on February 18, 2004 and incorporated herein by reference. **                                                                               |
| 10.3   | Lease Agreement dated February 17, 2004 by and between  Perimeter Center Partners and Tailored Business Systems, Inc. previously  filed as Exhibit 10.5 to the Company's Current Report on Form 8-K filed on  February 18, 2004 and incorporated herein by reference. **                                                                                                |
| 10.4   | Employment Agreement dated June 10, 2004 by and between  the Company and K. Mason Conner previously filed as Exhibit C to the  Company's Schedule 14C Information Statement filed on July 23, 2004 and  incorporated herein by reference. **                                                                                                                            |
| 10.5   | Employment Agreement dated June 10, 2004 by and between  the Company and H. Jay Hill previously filed as Exhibit D to the Company's  Schedule 14C Information Statement filed on July 23, 2004 and incorporated  herein by reference. **                                                                                                                                |
| 10.6   | Employment Agreement dated June 10, 2004 by and between  the Company and Michael Richard previously filed as Exhibit E to the  Company's Schedule 14C Information Statement filed on July 23, 2004 and  incorporated herein by reference. **                                                                                                                            |
| 10.7   | Release of Claims Agreement dated as of April 1, 2005 by  Alexander Riess in favor of Phoenix Forms, Inc.  Previously filed as  Exhibit 10.3 to the Company's Current Report on Form 8-K filed on April 19,  2005. **                                                                                                                                              |
| 10.8   | Release of Claims Agreement dated as of April 1, 2005 by  William R. Falcon in favor of Phoenix Forms, Inc.  Previously filed as  Exhibit 10.4 to the Company's Current Report on Form 8-K filed on April 19,  2005. **                                                                                                                                            |
| 10.9   | Amendment No. 1 to Executive Employment Agreement dated  April 28, 2005 by and between the Registrant and K. Mason Conner.   Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K  filed on April 29, 2005. **                                                                                                                             |
| 10.10  | Amendment No. 1 to Executive Employment Agreement dated  April 28, 2005 by and between the Registrant and H. Jay Hill.   Previously filed as Exhibit 10.2 to the Company's Current Report on Form 8-K  filed on April 29, 2005. **                                                                                                                                 |
| 10.11  | Amendment No. 1 to Executive Employment Agreement dated  April 28, 2005 by and between the Registrant and Michael A. Richard.   Previously filed as Exhibit 10.3 to the Company's Current Report on Form 8-K  filed on April 29, 2005. **                                                                                                                          |
| 10.12  | Executive Employment Agreement, dates as of March 1, 2006,  by and between the Company and Jerry T. Kendall.  Previously files as  Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 1,  2006. **                                                                                                                                            |
| 10.13  | Amendment No. 2 to Michael Richard Executive Employment  Agreement effective as of May 1, 2006.  Previously filed as Exhibit  99.11 to the Company's Current Report on Form 8-K filed on May 4, 2006. **                                                                                                                                                           |
| 10.14  | Amendment No. 2 to H. Jay Hill Executive Employment Agreement  effective as of May 1, 2006.  Previously filed as Exhibit 99.12 to the  Company's Current Report on Form 8-K filed on May 4, 2006. **                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.15  | Amendment No. 2 to K. Mason Conner Executive Employment  Agreement effective as of May 1, 2006.  Previously filed as Exhibit  99.13 to the Company's Current Report on Form 8-K filed on May 4, 2006. **                                                                                                                                                           |
| 10.16  | Thor Bendickson Employment Agreement effective as of May  1, 2006.  Previously filed as Exhibit 99.14 to the Company's Current  Report on Form 8-K filed on May 4, 2006. **                                                                                                                                                                                        |
| 10.17  | Patent License Agreement, dated as of May 12, 2006, by and  between VillageEDOCS and Catch Curve, Inc..  Previously filed as Exhibit  10.1 to the Company's Current Report on Form 8-K filed on May 16, 2006. **                                                                                                                                                   |
| 10.18  | Office Lease Agreement effective June 1, 2007 by and  between the Company and Tustin Avenue Investors, LLC.  Previously filed as  Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 25,  2007. **                                                                                                                                            |
| 10.19  | Placement Agency Agreement effective October 13, 2006 by  and between the Company and Stonegate Securities, Inc.  Previously filed as  Exhibit 10.28 to the Company's Quarterly Report on Form 10-QSB filed on  August 14, 2007. **                                                                                                                                |
| 10.20  | Engagement Agreement effective July 10, 2007 by and  between the Company and GemStone Securities, LLC.  Previously filed as  Exhibit 10.29 to the Company's Quarterly Report on Form 10-QSB filed on  August 14, 2007. **                                                                                                                                          |
| 10.21  | Settlement Agreement dated June 6, 2007 by and among  Jeffrey H. Mims, VarTec Telecom, Inc, Excel Telecommunications, Inc., VarTec  Solutions, Inc., and GoSolutions, Inc. Previously filed as Exhibit 10.29 to  the Company's Quarterly Report on Form 10-QSB filed on August 14, 2007. **                                                                             |
| 10.22  | Form of Loan and Security Agreement dated February 6, 2008  by and between The Private Bank of the Peninsula and each of the Registrant,  MessageVision, Inc., and Tailored Business Systems, Inc.  Previously filed as  Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February  11, 2008. **                                                  |
| 10.23  | 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. **                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                    |
| 14.1   | Code of Ethics.  Previously filed as Exhibit 14.1 to the  Company's Annual Report on Form 10-KSB filed on March 29, 2004 and  incorporated herein by reference. **                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                    |
| 21.1   | Subsidiaries of the Registrant.*                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                    |
| 31.1   | Certification Under Section 302 of The Sarbanes-Oxley Act  of 2002 signed and dated August 14, 2008 by K. Mason Conner, Chief Executive  Officer.*                                                                                                                                                                                                                      |
| 31.2   | Certification Under Section 302 of The Sarbanes-Oxley Act  of 2002 signed and dated August 14, 2008 by Michael A. Richard, Chief  Financial Officer.*                                                                                                                                                                                                                   |
| 32.1   | Certification Pursuant To 18 U.S.C. §1350, As Adopted Pursuant  To Section 906 of the Sarbanes-Oxley Act of 2002 signed and dated August 14, 2008  by K. Mason Conner, Chief Executive Officer.***                                                                                                                                                                 |
| 32.2   | Certification Pursuant To 18 U.S.C. §1350, As Adopted  Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 signed and dated August  14, 2008 by Michael A. Richard, Chief Financial Officer.***                                                                                                                                                              |

| *   | Filed herewith     |
|-----|--------------------|
| **  | Previously filed   |
| *** | Furnished herewith |

** **

** **

----

**SIGNATURES**

** **

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

** **

** **

| ** **                            | **VillageEDOCS (Registrant)**                                                                   |
|---------------------------------------|-------------------------------------------------------------------------------------------------|
| ** **                            | ** **                                                                                      |
| ** **                            | ** **                                                                                      |
| **Dated:  August 14, 2008** | **By:    /s/ K. Mason Conner**                                                   |
| ** **                            | **       K. Mason  Conner**                                  |
| ** **                            | **       Chief  Executive Officer, President, and Director** |
| ** **                            | ** **                                                                                      |
| ** **                            | ** **                                                                                      |
| ** **                            | ** **                                                                                      |
| **Dated:  August 14, 2008** | **By:  /s/ Michael A. Richard**                                                            |
| ** **                            | **      Michael A. Richard**                                      |
|                                  | **      Chief Financial  Officer**                                |
| ** **                            | **      (Principal  Accounting Officer)**                         |
| ** **                            | ** **                                                                                      |

** **

** **

** **