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

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

INTRODUCTION

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

· Business Overview

· Critical Accounting Policies and Estimates

· Results of Operations

· Liquidity and Capital Resources

· Cautionary Information About Forward-Looking Statements, and

· Recent Accounting Standards and Pronouncements

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

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

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

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

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

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

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

BUSINESS OVERVIEW

General

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

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

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

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

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

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

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

· fees for professional service;

· wholesale enhanced voicemail services;

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

· fees for maintenance and support agreements;

· installation services;

· sales of third party computer hardware; and

· fees for training.

Our Objective

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

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

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

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

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

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

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

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

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

Key Items in First Nine Months of 2009

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

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

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

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

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

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

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

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

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

Areas of Focus

Growth Strategy

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

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

· Web Content Management;

· Digital Asset Management;

· Email Management;

· Records Management;

· Documentation Management;

· Information Indexing;

· Categorization/Taxonomy;

· Recognition;

· Document Imaging;

· Form Processing;

· Scanning;

· Collaboration;

· Repositories;

· Storage;

· Long Term Archival;

· Content Integration;

· Search and Retrieval;

· Content Syndication;

· Localization and Personalization; and

· Publication (paper or electronic).

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

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

Capital Formation

During the remainder of 2009 and continuing into the first half of 2010, we are actively seeking additional financing by issuing equity or obtaining a combination of equity and debt financing from new shareholders and/or lenders. Although we believe we will generate adequate cash to sustain operations at current levels in conjunction with borrowings from our existing lines of credit, we will require additional funding should we wish to complete acquisitions or to accelerate revenue growth from existing lines of business. In addition, should we be required to repay certain of our debt instruments prior to maturity, we will require additional funding. We continue to caution that there can be no assurance that funding will be available on acceptable terms, if at all, or that any such funds we raise would enable us to achieve or maintain profitable operations.

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

Organizational Enhancements

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

Challenges and Risks

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

Weakness in the financial markets and the economy in general

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

Increased Competition and Capabilities in the Marketplace

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

Capital Resources

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

RESULTS OF OPERATIONS

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

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

Net Revenue from External Customers

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

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

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

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

Net revenue from external customers:

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

* calculation is not meaningful

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

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

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

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

Cost of Sales

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

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

Cost of sales:

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

* calculation is not meaningful

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

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

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

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

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

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

Gross Profit

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

Operating Expenses

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

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

Operating expenses:

Electronic document delivery services (MVI)   $            266,299     $            324,601     $  (58,302 )          -18 %
Government accounting solutions (TBS)                      310,749                  267,605         43,144             16 %
Electronic content management (QSI)                        473,305                  322,908        150,397             47 %
Integrated communications (GSI)                            843,002                  867,876        (24,874 )           -3 %
. . .