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

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

INTRODUCTION

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

· Business Overview

· Critical Accounting Policies and Estimates

· Results of Operations

· Liquidity and Capital Resources

· Cautionary Information About Forward-Looking Statements, and

· Recent Accounting Standards and Pronouncements

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

In MD&A, we use "we," "our," "us," "VillageEDOCS," and "the Company" to refer to VillageEDOCS, Inc. and its wholly-owned subsidiaries, unless the context requires otherwise. Amounts and percents in tables may not total due to rounding. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. The Company cautions readers that important facts and factors described in MD&A and elsewhere in this document sometimes have affected, and in the future could affect our actual results, and could cause our actual results for the remainder of 2009 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company.

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

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

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

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

BUSINESS OVERVIEW

General

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

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

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

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

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

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

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

· fees for professional service;

· wholesale enhanced voicemail services;

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

· fees for maintenance and support agreements;

· installation services;

· sales of third party computer hardware; and

· fees for training.

Our Objective

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

† communicate with an ever-expanding number of trading partners, customers, and enterprises;

† increase the control, management, speed, accuracy and security of the information delivered;

† manage an increasing set of methods used to communicate (print/mail, email, web, fax, XML, and wireless);

† cost-effectively implement a solution that will allow the enterprise to endure the slow acceptance of a common set of delivery methods;

† meet the communications challenges with a service that is more robust than available commercial grade proprietary technologies; and

† mitigate the negative impact of delivery methods on workflow, business process and security requirements.

Our target markets include Financial Services, Healthcare, Manufacturing, and Local Government, and we serve approximately 1,500 active clients with over 25,000 users.

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

Key Items in First Half of 2009

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

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

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

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

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

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

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

Areas of Focus

Growth Strategy

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

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

· Web Content Management;

· Digital Asset Management;

· Email Management;

· Records Management;

· Documentation Management;

· Information Indexing;

· Categorization/Taxonomy;

· Recognition;

· Document Imaging;

· Form Processing;

· Scanning;

· Collaboration;

· Repositories;

· Storage;

· Long Term Archival;

· Content Integration;

· Search and Retrieval;

· Content Syndication;

· Localization and Personalization; and

· Publication (paper or electronic).

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

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

Capital Formation

During 2009, we are actively seeking additional financing by issuing equity or obtaining a combination of equity and debt financing from new shareholders and/or lenders. Although we believe we will generate adequate cash to sustain operations at current levels in conjunction with borrowings from our existing lines of credit, we will require additional funding should we wish to complete acquisitions or to accelerate revenue growth from existing lines of business. In addition, should we be required to repay certain of our debt instruments prior to maturity, we will require additional funding. We continue to caution that there can be no assurance that funding will be available on acceptable terms, if at all, or that any such funds we raise would enable us to achieve or maintain profitable operations.

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

Organizational Enhancements

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

Challenges and Risks

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

Weakness in the financial markets and the economy in general

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

Increased Competition and Capabilities in the Marketplace

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

Capital Resources

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Effective January 1, 2009, we adopted the provisions of EITF No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock ("EITF 07-5"). EITF 07-5 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and to any freestanding financial instruments that are potentially settled in an entity's own common stock. As a result of adopting EITF 07-5, certain of our issued and outstanding common stock purchase warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as more fully described in Note 4 to the accompanying unaudited condensed consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, the Company adopted the provisions of SFAS 157, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year, which the Company adopted on January 1, 2009. The adoption of SFAS 157 did not have a material effect on our financial position or results of operations. The book values of cash, accounts receivable, accounts payable, accrued expenses, capital lease obligations, and debt instruments approximate their respective fair values due to the short-term nature of these instruments.

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

RESULTS OF OPERATIONS

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

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

Net Revenue from External Customers

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

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

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

                                               Three Months Ended       Three Months Ended       Variance
                                                 June 30, 2009            June 30, 2008           Amount        Percent

Net revenue from external customers:

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

* calculation is not meaningful

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

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

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

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

Cost of Sales

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

                                               Three Months Ended       Three Months Ended       Variance
                                                 June 30, 2009            June 30, 2008           Amount        Percent

Cost of sales:

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

* calculation is not meaningful

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

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

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

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

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

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

Gross Profit

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

Operating Expenses

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

                                               Three Months Ended       Three Months Ended       Variance
                                                 June 30, 2009            June 30, 2008           Amount        Percent

Operating expenses:

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

* calculation is not meaningful

During the three months ended June 30, 2009, the operating expenses of Corporate . . .