UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)


xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended SEPTEMBER 30, 2010





oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the Transition Period from ________ to ___________





Commission File No.: 1-33110





DEBT RESOLVE, INC.(Exact name of registrant as specified in its charter)





Delaware

33-0889197(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)





150 White Plains Road, Suite 108

Tarrytown,New York

10591(Address of principal executive offices)

(Zip Code)





(914) 949-5500(Issuer's telephone number)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.





Large accelerated filer
o
Accelerated filer
oNon-accelerated filer
o
Smaller reporting company
x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act). Yes o No x





APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS DURING THE PRECEDING FIVE YEARS:





Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. o Yes o No





As of November 19, 2010, 76,999,515 shares of the issuer's Common Stock were outstanding.











DEBT RESOLVE, INC.





TABLE OF CONTENTS





PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements


3Condensed Balance Sheets at September 30, 2010 (unaudited) and December 31, 2009


3Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)


4Condensed Statements of Stockholders' Deficiency from January 1, 2010 through September 30, 2010 (unaudited)


5Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (unaudited)


6Notes to Condensed Financial Statements (unaudited)


7Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


27Item 3. Quantitative and Qualitative Disclosures about Market Risk


32Item 4T. Controls and Procedures


32PART II. OTHER INFORMATIONItem 1. Legal Proceedings


33Item 1A. Risk Factors


33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


34Item 3. Defaults Upon Senior Securities


34Item 4. Submission of Matters to a Vote of Security Holders


34Item 5. Other Information


34Item 6. Exhibits


35Signature


36CERTIFICATIONS











PART I.





FINANCIAL INFORMATION





Item 1. FINANCIAL STATEMENTS




DEBT RESOLVE, INC.CONDENSED BALANCE SHEETSSeptember 30,


December 31,2010


2009(unaudited)ASSETSCurrent assets:Cash

$
616,734


$
-Accounts receivable, net


33,457



11,253Prepaid and other current assets


145,802



187,562Total current assets


795,993



198,815Fixed assets, net


17,478



37,968Deposits and other assets


-



35,000Total assets

$
813,471


$
271,783LIABILITIES AND STOCKHOLDERS' DEFICIENCYCurrent liabilities:Bank overdraft

$
14,047


$
62,306Accounts payable and other accrued liabilities


2,204,461



2,761,556Convertible debentures


-



320,050Short term notes


250,000



304,225Current maturities on long-term debt


577,867



823,000Lines of credit, related parties


151,000



157,000Total current liabilities


3,197,375



4,428,137Long term debt:Convertible long-term notes, net of deferred debt discount of $981,527 and $766,389 as of September 30, 2010 and December 31, 2009, respectively


340,473



169,560Derivative liability


-



7,518,056Total liabilities


3,537,848



12,115,753COMMITMENTS AND CONTINGENCIESStockholders' deficiency:Preferred stock, $0.001 par value; 10,000,000 shares authorized, none issued and outstanding


-



-Common stock, $0.001 par value, 200,000,000 shares authorized; 74,850,528 and 39,898,584 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively


74,851



39,899Additional paid in capital


65,335,018



56,610,021Accumulated deficit


(68,134,246
)


(68,493,890
)Total stockholders' deficiency


(2,724,377
)


(11,843,970
)Total liabilities and stockholders' deficiency

$
813,471


$
271,783The accompanying notes are an integral part of these unaudited condensed financial statements




3


DEBT RESOLVE, INC.CONDENSED STATEMENTS OF OPERATIONS(unaudited)Three months ended September 30,


Nine months ended September 30,2010


2009


2010


2009REVENUES:

$
32,487


$
18,055


$
92,779


$
56,517Costs and expenses:Payroll and related expenses


156,394



963,435



1,378,631



1,338,810Selling, general and administrative expenses


740,531



890,279



2,475,923



1,223,341Depreciation and amortization


4,967



10,897



24,121



35,406Total costs and expenses


901,892



1,864,611



3,878,675



2,597,557Net loss from operations


(869,405
)


(1,846,556
)


(3,785,896
)


(2,541,040
)Other income (expense):Interest expense


(113,892
)


(85,405
)


(448,564
)


(264,698
)Amortization of debt discounts


(102,823
)


(43,875
)


(699,937
)


(265,137
)Loss on extinguishment of debt


-



(2,855,985
)


-



(2,855,985
)(Loss) gain on change in fair value of derivative liability


(855,003
)


(2,002,206
)


4,957,469



(2,823,873
)Other income (expense):


28,335



-



336,572



-Net income (loss) before provision for income taxes


(1,912,788
)


(6,834,027
)


359,644



(8,750,733
)Income tax (benefit)


-



-



-



-Net income (loss) from continuing operations


(1,912,788
)


(6,834,027
)


359,644



(8,750,733
)Income from discontinued operations


-



(164
)


-



3,164Net Income (loss)

$
(1,912,788
)

$
(6,834,191
)

$
359,644


$
(8,747,569
)Net Income (loss) per common share (basic)-Note 1Continuing operations

$
(0.03
)

$
(0.23
)

$
0.01


$
(0.45
)Discontinued operations

$
-


$
(0.00
)

$
-


$
0.00Total

$
(0.03
)

$
(0.23
)

$
0.01


$
(0.45
)Net (loss) per common share (fully diluted)-Note 1Continuing operations

$
(0.02
)

$
(0.23
)

$
(0.06
)

$
(0.45
)Discontinued operations

$
-


$
(0.00
)

$
-


$
0.00Total

$
(0.02
)

$
(0.23
)

$
(0.06
)

$
(0.45
)Weighted average number of common shares outstanding, basic-Note 1


65,304,348



29,120,586



52,556,614



19,282,750Weighted average number of common shares outstanding, fully diluted-Note 1


65,304,348



29,120,586



64,422,135



19,282,750The accompanying notes are an integral part of these unaudited condensed financial statements




4




DEBT RESOLVE, INC.CONDENSED STATEMENT OF SHAREHOLDERS' DEFICIENCYFROM JANUARY 1, 2010 THROUGH SEPTEMBER 30, 2010(unaudited)SharesAdditional


Common


HeldPreferred stock


Common stock


Paid In


Stock to


Under


AccumulatedShares


Amount


Shares


Amount


Capital


be issued


Escrow


Deficit


TotalBalance, December 31, 2009


-


$
-



39,898,584


$
39,899


$
56,610,021


$
-


$
-


$
(68,493,890
)

$
(11,843,970
)Common stock issued for exercise of warrants cashlessly


-



-



224,997



225



(225
)


-



-



-



-Common stock issued for services rendered and expense


-



-



3,202,000



3,202



341,498



-



-



-



344,700Common stock issued in settlement of convertible notes and accrued interest


-



-



12,144,948



12,145



1,810,243



-



-



-



1,822,388Sale of common stock


-



-



16,000,000



16,000



1,339,686



-



-



-



1,355,686Warrants issued for anti dilution relating to convertible notes


-



-



880,000



880



261,360



-



-



-



262,240Common stock issued in exchange for options and warrants exercised


-



-



2,499,999



2,500



214,500



-



-



-



217,000Initial fair value of conversion features and related warrants previously reclassified outside equity


-



-



-



-



3,553,062



-



-



-



3,553,062Fair value of warrants issued for services


-



-



-



-



226,623



-



-



-



226,623Fair value of options issued to employees for services


-



-



-



-



978,250



-



-



-



978,250Net income


-



-



-



-



-



-



-



359,644



359,644Balance, September 30, 2010


-


$
-



74,850,528


$
74,851


$
65,335,018


$
-


$
-


$
(68,134,246
)

$
(2,724,377
)The accompanying notes are an integral part of these unaudited condensed financial statements




5


DEBT RESOLVE, INC.CONDENSED  STATEMENT OF CASH FLOWS(unaudited)Nine months ended September 30,2010


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income(loss) from continuing operations

$
359,644


$
(8,750,733
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


24,121



35,406Amortization of debt discounts


699,937



265,136Fair value of options issued for services


978,250



-Fair value of warrants issued for services and expenses


755,278



-Fair value of warrants issued in settlement of litigation


25,000



-Non cash financing costs


201,063



120,000Loss on debt conversion on extinguishment of debt


29,509



2,855,985Common stock issued for services rendered


822,940



1,380,178Notes payable issued for services


20,000



37,000Notes payable issued for extinguishment of debt


69,000(Gain) loss in change in fair value of derivative liability


(4,957,469
)


2,823,874Net (increase) decrease in:Accounts receivable


(22,204
)


(520
)Prepaid and other assets


76,760



(22,717
)Net increase (decrease) in:Accounts payable and accrued expenses


(378,601
)


581,027Bank overdraft


(48,259
)


-Net cash used in continuing operations


(1,345,031
)


(675,364
)Net cash provided by discontinued operations


-



(3,162
)Net cash used in operating activities


(1,345,031
)


(678,526
)CASH FLOWS FROM INVESTING ACTIVITIES:Investment in subsidiaries


(3,631
)


(15,000
)Net cash used in continuing investing activities


(3,631
)


(15,000
)Net cash provided by discontinued investing activities


-



-Net cash used in investing activities


(3,631
)


(15,000
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of convertible notes


-



625,459Proceeds from sale of common stock


1,355,686



-Proceeds from issuance of short term notes


165,370



-Repayment of short term notes


(269,160
)


(113,500
)Proceeds from long term notes


712,500



-Proceeds from lines of credit, related parties


-



150,000Proceeds from exercise of options and warrants


1,000



-Net cash provided by financing operations


1,965,396



661,959Net (decrease) increase in cash and cash equivalents


616,734



(31,567
)Cash and cash equivalents at beginning of period


-



32,551Cash and cash equivalents at end of period

$
616,734


$
984Supplemental Disclosures of Cash Flow Information:Cash paid during period for interest

$
-


$
-Cash paid during period for taxes

$
-


$
-Non-Cash financing and investing transaction:Beneficial conversion feature transfer from derivative liability

$
966,522


$
-Common stock issued for debt conversion

$
910,618


$
-Note payable issued for accrued expenses

$
25,000


$
-Common stock issued for accrued interest

$
153,494


$
-
 The accompanying notes are an integral part of these unaudited condensed  financial statements


6





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 1 — BASIS AND BUSINESS PRESENTATION





A summary of the significant accounting policies applied in the presentation of the accompanying unaudited condensed financial statements follows:





General





The accompanying unaudited condensed financial statements of Debt Resolve, Inc., (the "Company"), have been prepared in accordance with Regulation S-X including the instructions to Form 10-Q. Accordingly, they do not include all of the information  necessary for a fair presentation of financial position, results of operations and cash flows in conformity with  generally accepted accounting principles for complete financial statements.





In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results from operations for the nine month period ended September 30, 2010, are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. The unaudited condensed financial statements should be read in conjunction with the consolidated December 31, 2009 financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).





Basis of presentation





The unaudited condensed financial statements include the accounts of the Company.  As of September 30, 2010, the Company has no subsidiaries.  DRV Capital and its subsidiary, EAR Capital, were both legally revoked on June 1, 2010.  First Performance Corp. was legally revoked in 2008, and its subsidiary, First Performance Recovery Corp., was legally dissolved on August 1, 2009.





Debt Resolve, Inc. (the "Company") was incorporated under the laws of the State of Delaware in April 21, 1997.  The Company offers its service as an Application Service Provider ("ASP") model, enabling clients to introduce this collection option with no modifications to their existing collections computer systems.  Its products capitalize on using the Internet as a tool for communication, resolution, settlement and payment of delinquent debt.





NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES





Estimates





The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures.  Accordingly, actual results could differ from those estimates.





Reclassification





Certain reclassifications have been made to prior periods' data to conform to the current year's presentation.  These reclassifications had no effect on reported income or losses.





Revenue Recognition





To date, the Company has earned revenue from collection agencies, collection law firms and lenders that implemented our online system.  The Company's current contracts provide for revenue based on a percentage of the amount of debt collected, a fee per settlement or through a flat monthly fee.  Although other revenue models have been proposed, most revenue earned to date has been determined using these methods, and such revenue is recognized when the settlement amount of debt is collected by the client or at the beginning of the month for a flat fee.  For the early adopters of the Company's product, the Company has waived set-up fees and other transactional fees that we anticipate charging in the future.  While the percent of debt collected will continue to be a revenue recognition method going forward, other payment models are also being offered to clients and may possibly become our preferred revenue model.  Dependent upon the structure of future contracts, revenue may be derived from a combination of set up fees or flat monthly fees with transaction fees upon debt settlement, fees per account loaded or fees per settlement.  The Company is currently marketing our system to three primary markets.  The first and second are financial institutions and collection agencies or law firms, our traditional markets.  The Company is also expanding into healthcare, particularly hospitals, which is our third market.





7





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)





In recognition of the principles expressed in Accounting Standards Codification subtopic 605-10, Revenue Recognition ("ASC 605-10") that revenue should not be recognized until it is realized or realizable and earned, and given the element of doubt associated with collectability of an agreed settlement on past due debt, the Company postpones recognition of all contingent revenue until the client receives payment from the debtor.  As is required by SAB 104, revenues are considered to have been earned when the Company has substantially accomplished the agreed-upon deliverables to be entitled to payment by the client.  For most current active clients, these deliverables consist of the successful collection of past due debts using the Company's system and/or, for clients under a flat fee arrangement, the successful availability of the Company's system to its customers.





In addition, in accordance with ASC 605-10, revenue is recognized and identified according to the deliverable provided.  Set-up fees, percentage contingent collection fees, fixed settlement fees, monthly fees, etc. are identified separately.





Accounts Receivable





The Company extends credit to large, mid-size and small companies for collection services.  The Company has a concentration of credit risk as almost 100% of the balance of accounts receivable is from three clients at September 30, 2010 and December 31, 2009. At September 30, 2010, the three clients represented receivables of $20,000 (60%), $10,445 (31%) and $3,012 (9%). We do not generally require collateral or other security to support customer receivables.  Accounts receivable are carried at their estimated collectible amounts.  Accounts receivable are periodically evaluated for collectability and the allowance for doubtful accounts is adjusted accordingly.  Management determines collectability based on their experience and knowledge of the customers.  As of September 30, 2010 and December 31, 2009 no allowance for doubtful accounts has been booked.





Cash and Cash Equivalents





For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents.





Fair Values





In the first quarter of fiscal year 2008, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures ("ASC 820-10").  ASC 820-10 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure.  ASC 820-10 delays, until the first quarter of fiscal year 2009, the effective date for ASC 820-10 for all 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).  The adoption of ASC 820-10 did not have a material impact on the Company's financial position or operations.  Refer to Footnote 17 for further discussion regarding fair valuation.





Property and Equipment





Property and equipment are stated at cost.  When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.  For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years.





Long-Lived Assets





The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment ("ASC 360-10").  ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period.  The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows.  Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.  ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.





8





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)





Income Taxes





The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes ("ASC 740-10") which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Temporary differences between taxable income reported for financial reporting purposes and income tax purposes primarily relate to debt costs.  The adoption of ASC 740-10 did not have a material impact on the Company's  results of operations or financial condition.





Net Loss per Share










Fully diluted loss per share for the nine months ended September 30, 2010 is as follows:





Nine Months

Ended

September 30, 2010Net income for the period

$
359,644Less:Gain on change in derivative liability, net of discount


(4,257,532
)Net diluted loss

$
(3,897,888
)Weighted average number of fully diluted common shares outstanding


64,422,135Fully diluted loss per common share:

$
(0.06
)





Stock-based compensation





Effective for the year beginning January 1, 2006, the Company has adopted Accounting Standards Codification subtopic 718-10, Stock-based Compensation ("ASC 718-10") which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative.  This statement does not change the accounting guidance for share based payment transactions with parties other than employees provided in ASC 718-10.  The Company implemented ASC 718-10 on January 1, 2006 using the modified prospective method.





Total stock-based compensation expense for the three months ended September 30, 2010 and 2009 amounted to $-0- and $190,000, respectively, and for the nine months ended September 30, 2010 and 2009 amounted to $978,250 and $857,850, respectively.





Defined Contribution (401k) Plan








The Company maintains a defined contribution (401k) plan for our employees.  The plan provides for a company match in the amount of 100% of the first 3% of pre-tax salary contributed and 50% of the next 3% of pre-tax salary contributed.  Due to the severe cash limitations that we have experienced, the match was suspended for 2009 and 2010 and will only be re-instated when business conditions warrant.





9





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)





Reliance on Key Personnel and Consultants





The Company has only 5 full-time employees and one part-time employee. Additionally, there are approximately 10 consultants performing various specialized services.  The Company is heavily dependent on the continued active participation of the President and key consultants.  The loss of the President or key consultants could significantly and negatively impact the business until adequate replacements can be identified and put in place.





Derivative Financial Instruments





The Company's derivative financial instruments consist of embedded derivatives and reset provisions related to certain Convertible Debentures and previously issued warrants.  These embedded derivatives include certain conversion features and reset provisions. On August 12, 2010, those financial instruments that contained embedded conversion derivatives and reset provisions were extinguished, therefore, the initial determined fair values of the conversion features and reset provisions of $3,553,062 were reclassified from liability to equity.  As of September 30, 2010, there were no derivative liabilities.





Recent Accounting Pronouncements





In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition.  The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted.  If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption.  The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.





In March 2010, the FASB issued new accounting guidance, under ASC Topic 605 on Revenue Recognition.  This standard provides that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved.  Determining whether a milestone is substantive requires judgment that should be made at the inception of the arrangement.  To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement.  No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement.  The standard is effective for interim and annual periods beginning on or after June 15, 2010.  The Company is currently evaluating the impact the adoption of this guidance will have on its financial statements.





In February 2010, the FASB issued ASU No. 2010-09, which updates the guidance in ASC 855, Subsequent Events, such that companies that file with the SEC will no longer be required to indicate the date through which they have analyzed subsequent events. This updated guidance became effective immediately upon issuance and was adopted as of the first quarter of 2010.





In January 2010 the FASB issued Update No. 2010-06 Fair Value Measurements and Disclosures—Improving Disclosures about Fair Value Measurements (“2010-06”). 2010-06 requires new disclosures regarding significant transfers between Level 1 and Level 2 fair value measurements, and disclosures regarding purchases, sales, issuances and settlements, on a gross basis, for Level 3 fair value measurements. 2010-06 also calls for further disaggregation of all assets and liabilities based on line items shown in the statement of financial position. This amendment is effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years. The Company is currently evaluating whether adoption of this standard will have a material impact on its financial position, results of operations or cash flows.





There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.





10





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 3 - GOING CONCERN MATTERS





The accompanying unaudited condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying condensed financial statements, the Company incurred an operating net loss of $(1,912,788)  for the three  month period ended September 30, 2010.  Additionally, the Company has current liabilities in excess of current assets (working capital) of $2,401,381 as of September 30, 2010 and a cumulative deficit of $68,134,246. These factors among others raise substantial doubt about the Company's ability to continue as a going concern.





The Company has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond to address its lack of liquidity by raising additional funds, either in the form of debt or equity or some combination thereof.  However, there can be no assurance that the Company can successfully accomplish these steps and or business plans, and it is uncertain that the Company will achieve a profitable level of operations and be able to obtain additional financing.





The Company's continued existence is dependent upon management's ability to develop profitable operations and resolve its liquidity problems.  The accompanying condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.





During the three months ending September 30, 2010, the Company secured gross proceeds of $1,600,000 in equity financing and $155,000 in convertible debt financing.  However, this funding is not sufficient for the next twelve months.





There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all.  In the event that the Company is unable to continue as a going concern, it may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.





NOTE 4 — PREPAID AND OTHER CURRENT ASSETS





Prepaid and other current assets as of September 30, 2010 and December 31, 2009 are comprised of the following:





September 30,

2010


December 31,

2009Employee advances

$
36,500


$
26,500Un-deposited funds


-



75,000Prepaid insurance


106,552



84,121Other prepaid expenses


2,750



1,941Total

$
145,802


$
187,562





NOTE 5 - PROPERTY AND EQUIPMENT





Property and equipment at September 30, 2010 and December 31, 2009 are comprised of the following:





September 30,

2010


December 31,

2009Computer equipment

$
110,548


$
106,917Software


42,170



42,170Telecommunication equipment


3,165



3,165Office equipment


3,067



3,067Furniture and fixtures


106,436



106,436Total


265,386



261,755Less accumulated depreciation


(247,908
)


(223,787
)Total

$
17,478


$
37,968





11





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 5 – PROPERTY AND EQUIPMENT (continued)





The Company uses the straight line method of depreciation over 3 to 5 years. During the three and nine month periods ended September 30, 2010, depreciation expense charged to operations was $4,967 and $24,121, respectively; during the three and nine month periods ended September 30, 2009, depreciation expense charged to operations was $10,897 and $35,406, respectively.





NOTE 6 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts payable and accrued liabilities as of September 30, 2010 and December 31, 2009 are comprised of the following:





September 30,

2010


December 31,

2009Accounts payable

$
1,430,625


$
2,091,045Accrued interest


318,260



272,685Payroll and related accruals


455,575



397,826Total

$
2,204,460


$
2,761,556





NOTE 7 — CONVERTIBLE NOTES, SHORT TERM




On September 30, 2008, an unaffiliated investor loaned the Company $300,000 on a 6-month unsecured convertible debenture with a maturity date of March 31, 2009.  This convertible debenture replaced a note issued on July 31, 2008 in the same amount of $300,000 with a maturity date of January 31, 2009.  The debenture carries interest at a rate of 15% per annum, with $22,500 (6 months) of interest payable in advance from the proceeds of the original loan on July 31, 2008.  Thereafter, interest is payable monthly in cash or stock.  The outstanding principal and interest may be repaid, in whole or in part, at any time without prepayment penalty.  The Exchange Agreement called for the lender to receive 150,000 shares of the common stock of the company in consideration for the exchange of the original note for the convertible debenture, which were issued during the year ended December 31, 2009. In accordance with Accounting Standards Codification subtopic 470-50, Debt-Modifications and Extinguishments ("ASC 470-50"), the exchange was determined to be an extinguishment of debt, and extinguishment accounting was applied.  The debenture was secured by an escrow of 450,000 shares of the common stock of the Company, which was held in escrow at the lender's attorney's office.  These shares were released from escrow during the year ended December 31, 2009 in payment of the interest accrued through July 31, 2009 and a partial payment of the principal (see below).  At any time on or after the Issue Date and prior to the time the Debenture is paid in full in accordance with its terms (including, without limitation, after the occurrence of an Event of Default, or, if the Debenture is not fully paid or converted after the Maturity Date), the Holder of this Debenture is entitled, at its option, to convert this Debenture at any time into shares of Common Stock, $0.001 par value ("Common Stock"), of the Company at the Conversion Price.  Conversion Price" means (i) the average VWAP for the 20 Trading Days ending on the Trading Day immediately before the relevant Conversion Date, multiplied by (ii) fifty percent (50%).  The debenture was recorded net of a beneficial conversion feature of $252,030, based on the relative fair value of the conversion feature.  The beneficial conversion feature was amortized over the term of the debenture.  The debenture was also recorded net of a deferred debt discount of $47,970 as shares to be issued based on the relative fair value of the Exchange Shares.  The deferred debt discount was also amortized over the term of the debenture.  During the nine months ended September 30, 2010 and 2009, the Company recorded amortization of the beneficial conversion feature and deferred debt discount related to this debenture of $0 and $150,000, respectively.





On August 31, 2009, the Company repaid $30,950 in note principal and $23,322 in accrued interest by the issuance of 450,000 shares of Company common stock from treasury that were valued at the closing market price of $0.25 per share.  Based on the $112,500 value of the shares issued, the Company recognized a $58,228 loss on extinguishment of the debt during the year ended December 31, 2009.  On February 16, 2010, the Company repaid $16,917 of accrued interest by issuance of 211,462 shares of Company common stock that were valued at $$0.31 per share.  On March 24, 2010, the Company repaid $9,050 in note principal and $3,096 in accrued interest by issuance of 222,447 shares of Company common stock that were valued at $0.26 per share.  On April 7, 2010, the Company repaid $100,000 in note principal by issuance of 1,831,502 shares of Company common stock that were valued at $0.17 per share.  On May 17, 2010, the Company repaid $160,000 in note principal and $6,669 in accrued interest by issuance of 3,947,194 shares of Company common stock that were valued at $0.085 per share.  As of September 30, 2010, the debenture has been paid in full and discharged.





12





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 7 - CONVERTIBLE NOTES, SHORT TERM (continued)





On July 31, 2008, the Company agreed to pay the attorney who arranged the above financing 50,000 shares of stock in the Company for introducing the investor.  Because of a delinquent payable with the Company's stock transfer agent, the shares were converted to a 6-month loan of $50,000 with a maturity date of January 31, 2009.  The note carried interest at a rate of 12% per annum, payable monthly in arrears in cash.  At December 31, 2008, due to the inability of the Company to pay the interest on the note, the note was exchanged for an unsecured convertible debenture with the same maturity date of January 31, 2009 in the amount of $51,000.  The debenture carries interest at a rate of 12% per annum, with interest payable monthly in arrears in cash.  The outstanding principal and interest may be repaid, in whole or in part, at any time without prepayment penalty.  At any time on or after the Issue Date and prior to the time the Debenture is paid in full in accordance with its terms (including, without limitation, after the occurrence of an Event of Default, or, if the Debenture is not fully paid or converted after the Maturity Date), the Holder of this Debenture is entitled, at its option to convert this Debenture at any time into shares of Common Stock, $0.001 par value ("Common Stock"), of the Company at the Conversion Price. "Conversion Price" means (i) the average of the lowest three (3) bid prices for the Common Stock over a ten (10) Trading Day period ending on the Trading Day immediately before the relevant Conversion Date, multiplied by (ii) fifty percent (50%), provided that Holder shall not receive more than 9.99% of the issued and outstanding Common Stock.  The debenture was recorded net of a beneficial conversion feature of $51,000, based on the relative fair value of the conversion feature.





The beneficial conversion feature is being amortized over the term of the debenture.  During the nine month periods ended September 30, 2010 and 2009, the Company recorded amortization of the beneficial conversion feature related to this debenture of $0 and $464, respectively.  As a result of the default on this debenture, the Company negotiated a settlement with the attorney to discharge the debenture, its accrued interest and old outstanding legal bills to the attorney for $75,000 paid $5,000 per month beginning August 1, 2009. The Company has made the required monthly payments from August through December, at which time payments ceased due to cash flow.  On May 21, 2010, the Company repaid $10,000 in note principal by issuance of 285,714 shares of Company common stock that were valued at $0.035 per share. On August 16, 2010, the note was fully discharged.





The Company had identified embedded derivatives related to the above notes. These embedded derivatives included certain conversion features and default provisions. The accounting treatment of derivative financial instruments requires that the Company determine fair value of the derivatives as of the inception date of the notes and to fair value them as of each subsequent balance sheet date. For the three and nine months ended September 30, 2010, the Company recognized (losses) gains on changes in the fair value of derivatives of $(1,170,137) and $4,642,335, respectively and for the three and nine months ended September 30, 2009, the Company incurred a charge to operations of $(2,002,206) and $(2,823,873). As of August 16, 2010, the debt was discharged resulting in the reclassification of the determined initial allocated conversion feature of the debt and other non-reset convertible debt, non-reset warrants and non employee options from debt derivative liability to equity of $3,323,062.




NOTE 8 — SHORT TERM NOTES


On November 30, 2007, an unaffiliated investor loaned the Company $100,000 on an unsecured 90-day short term note. The note carries 12% interest per annum, with interest payable monthly in cash. The principal balance outstanding will be due at any time upon 30 days written notice, subject to mandatory prepayment (without penalty) of principal and interest, in whole or in part, from the net cash proceeds of any public or private, equity or debt financing made by Debt Resolve. The note matured on February 28, 2008 and was extended to July 31, 2009 for aggregate extension fees of $85,000. In conjunction with the note the Company also issued a warrant to purchase 100,000 shares of common stock at an exercise price of $1.25 per share with an expiration date of November 30, 2012. The note was recorded net of a debt discount of $44,100, based on the relative fair value of the warrant under the Black-Scholes pricing model. The debt discount was amortized over the initial term of the note and was fully amortized by March 2008. This note is guaranteed by Mssrs. Mooney and Burchetta, two Directors of the Company. On August 27, 2009, the Company repaid $65,000 of the outstanding balance on this note, the $85,000 of accrued extension fees and $19,003 in accrued interest by the issuance of 1,126,685 shares of Company common stock that were valued at the closing market price of $0.25 per share. Based on the $281,671 value of the shares issued, the Company recognized an $112,668 loss on extinguishment of the debt during the year ended December 31, 2009. As of September 30, 2010, the outstanding balance on this note was zero. The balance was paid on August 13, 2010.





13





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 8 — SHORT TERM NOTES (continued)





On December 21, 2007, an unaffiliated investor loaned the Company $125,000 on an unsecured 18-month note with a maturity date of June 21, 2009.  The note has a provision requiring repayment once the Company has raised an aggregate of $500,000 following issuance of this note.  As a result, this note is currently in default as it has not been repaid and the Company reached the $500,000 threshold in September, 2008.  The note carries interest at a rate of 12% per annum, with interest accruing and payable at maturity.  In conjunction with the note, the Company granted to the investor a warrant to purchase 37,500 shares of common stock at an exercise price of $1.07 and an expiration date of December 21, 2012.  The note was recorded net of a deferred debt discount of $19,375, based on the relative fair value of the warrant under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note and was fully amortized in 2008.  This note is guaranteed by Mr. Burchetta, a Company director.  On April 10, 2008, the Company borrowed an additional $198,000 from this investor.  Please see discussion below.





On December 30, 2007, an unaffiliated investor loaned the Company $200,000 on an unsecured 18-month note with a maturity date of June 30, 2009.  The note carries interest at a rate of 12% per annum, with interest accruing and payable at maturity.  In conjunction with this note, the Company also issued a warrant to purchase 100,000 shares of common stock at an exercise price of $1.00 and an expiration date of December 30, 2012.  The note was recorded net of a deferred debt discount of $51,600, based on the relative fair value of the warrant under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note.  During the nine month periods ended September 30, 2010 and 2009, the amortization expense was $0 and $17,200, respectively.  This note is guaranteed by Mr. Burchetta, a Company director.  As of September 30, 2010, this note has matured and is still outstanding and is in default at this time.  The Company is in discussions with the lender.





On January 25, 2008, an unaffiliated investor loaned the Company $100,000 on an unsecured 18-month note with a maturity date of July 25, 2009.  The note carries interest at a rate of 12% interest per annum, with interest accruing and payable at maturity.  In conjunction with the note, the Company also issued a warrant to purchase 50,000 shares of common stock at an exercise price of $1.00 and an expiration date of January 24, 2013.  The note was recorded net of a deferred debt discount of $20,300, based on the relative fair value of the warrant under the Black-Scholes pricing model. Such discount is being amortized over the term of the note.  During the nine month periods ended September 30, 2010 and 2009, amortization was $0 and $6,768, respectively.  As of September 30, 2010, this note has matured and is still outstanding and is in default at this time.  On October 12, 2010, a payment of $50,000 was made against this note.  The $50,000 balance of the note was converted to stock.  Please see discussion in next paragraph.





On February 26, 2008, an unaffiliated investor loaned the Company an additional $100,000 on an unsecured 18-month note with a maturity date of August 26, 2009.  The note carries interest at a rate of 12% interest per annum, with interest accruing and payable at maturity.  Terms of the loan included a $20,000 service fee on repayment or a $45,000 service fee if repayment occurs more than 31 days after origination.  The outstanding principal and interest may be repaid, in whole or in part, at any time without prepayment penalty.  Accordingly, since the loan remains unpaid, the Company has accrued the service fee of $45,000 as of March 31, 2010.  In conjunction with the note, the Company also issued a warrant to purchase 175,000 shares of common stock at an exercise price of $1.25 and an expiration date of February 26, 2013.  The note was recorded net of a deferred debt discount of $57,400, based on the relative fair value of the warrant under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note.  During the nine month periods ended September 30, 2010 and 2009, amortization was $0 and $22,322, respectively.  As of September 30, 2010, this note has matured and is still outstanding and is in default at this time. On October 12, 2010, the Company paid the $45,000 service fee on this note plus $50,000 on the note in the previous paragraph.  The $50,000 balance of the above note plus the $100,000 balance of this note were then converted to stock, along with $64,899of accrued interest.  For the total remaining balance of $214,899, 2,148,987 shares were issued to the investor, and the note was fully discharged as of October 12, 2010.





On March 7, 2008, the Company borrowed $100,000 from a bank at a variable rate equal to the bank's prime rate (currently 5.25%) for 30 days.  On March 14, 2008, the original loan was repaid, and the Company borrowed $150,000 at the prime rate and due on April 7, 2008.  On May 15, 2008, the loan was repaid and the Company borrowed $250,000 at the prime rate and due on July 1, 2008.  The note was subsequently extended to October 1, 2010 and is outstanding as of September 30, 2010.  The loan is secured by the assets of the Company and is personally guaranteed by Mr. Mooney, a Director of the Company.  On October 15, 2010, this $250,000 loan was repaid by $25,000 in cash and the conversion of the remaining $225,000 balance into a 36 month term loan, with $6,250 in principal due monthly beginning November 2010 plus accrued interest.  This new loan will mature on October 31, 2013.





14





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 8 — SHORT TERM NOTES (continued)





On April 10, 2008, an unaffiliated investor loaned the Company an additional $198,000 on an amendment of the prior unsecured note with a maturity date of June 21, 2009 for the entire balance of the first note plus the amendment ($323,000 total).  The note carries interest at a rate of 12% per annum, with interest accruing and payable at maturity.  The outstanding principal and interest may be repaid, in whole or in part, at any time without prepayment penalty.  In conjunction with the note, the Company also issued a warrant to purchase 99,000 shares of common stock at an exercise price of $2.45 and an expiration date of April 10, 2013.  This warrant has a "cashless" exercise feature.  The note was recorded net of a deferred debt discount of $88,110, based on the relative fair value of the warrant.  The debt discount is being amortized over the term of the note.  During the year December 31, 2008, the Company recorded amortization of the debt discount related to this note with the discount being fully amortized at December 31, 2008 due to the note being in default.  This note is guaranteed by Mr. Burchetta, a Director of the Company.  The amended note maintains the provision requiring repayment of the note upon raising gross proceeds of $500,000 subsequent the issuance of the note.  At September 30, 2008, the Company had raised in excess of $500,000 subsequent to this amended note, and as a result, this note is in default.  The Company also issued 50,000 shares of common stock valued at $122,130 in order to induce the investor to forbear on the note, which is included in expenses.  As of September 30, 2010, this note has matured and is still outstanding and is in default at this time.  On February 12, 2010, the Company converted $74,867 of accrued interest through January 2010 and $65,133 of principal on the note to stock.  The remaining principal balance after the payment is $257,867 (for both notes) plus subsequent accrued interest to date. On August 27, 2010, the Company repaid $80,000 in principal on the note, leaving a remaining balance of $177,867 plus accrued interest due on the note as of September 30, 2010.





On December 4, 2009, an unaffiliated investor and consultant paid the Company's insurance premiums in the amount of $11,697. In compensation for this payment, the investor was repaid $12,750 on January 27, 2010. The investor also received a warrant to purchase 125,000 shares of the common stock of the Company at an exercise price of $0.15 per share. The warrant has a five year exercise period and a "cashless" exercise provision. The note was recorded net of a deferred debt discount of $12,750, based on the relative fair value of the warrant under the Black-Scholes pricing model. Such discount is being amortized over the term of the note. During the nine month periods ended September 30, 2010 and 2009, amortization expense was $12,750 and $0, respectively.





On February 11, 2010, an unaffiliated investor and consultant loaned the Company $100,000 on a 30-day loan to assist in restructuring the balance sheet. The investor received a warrant to purchase 1,000,000 shares of the common stock of the Company at an exercise price of $0.25 per share. The warrant has a five year exercise period and a "cashless" exercise provision. The note was recorded net of a deferred debt discount of $100,000, based on the relative fair value of the warrant under the Black-Scholes pricing model. Such discount is being amortized over the term of the note. During the nine month periods ended September 30, 2010 and 2009, amortization expense was $100,000 and $0, respectively.  In June 2010, this note was sold to two investors who each took $55,000





and $45,000 of the note, respectively, along with 550,000 warrants and 450,000 of the warrants, respectively.  On August 23, 2010, each of these two investors were paid a portion of their note in cash ($6,065 and $7,500 respectively) plus 1⁄2 the accrued interest ($2,000 and $1,636, respectively).  The remaining portion of the notes ($48,935 and $37,500, respectively) was converted to 489, 350 and 375,000 shares of stock, respectively, along with the other 1⁄2 of the accrued interest ($2,000 and $1,637, respectively).





On March 30, 2010, an unaffiliated investor and consultant loaned the Company $20,000 on a 30-day loan to assist with investor relations activities. The investor received a warrant to purchase 200,000 shares of the common stock of the Company at an exercise price of $0.25 per share. The warrant has a five year exercise period and a "cashless" exercise provision. The note was recorded net of a deferred debt discount of $20,000, based on the relative fair value of the warrant under the Black-Scholes pricing model. Such discount is being amortized over the term of the note. During the nine month periods ended September 30, 2010 and 2009, amortization expense was $20,000 and $0, respectively.  On August 23, 2010, the principal on the loan of $20,000 was repaid in full.  In addition, $649 of interest was paid in cash and $650 of interest was converted to 6,500 shares of stock.





On May 12, 2010, an unaffiliated investor and consultant loaned the Company an additional $10,000 on a 30-day loan to pay a vendor.  The investor received a warrant to purchase 100,000 shares of the common stock of the Company at an exercise price of $0.25 per share.  The warrant has a five year exercise period and a "cashless" exercise provision. The note was recorded net of a deferred debt discount of $8,000, based on the relative fair value of the warrant under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note.  During the nine month periods ended September 30, 2010 and 2009, amortization expense was $8,000 and $0, respectively.  On August 23, 2010, the principal on the loan of $10,000 was repaid in full.  The accrued interest was combined with the $20,000 loan above and discharged as described above.





15





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 8 — SHORT TERM NOTES (continued)





On May 14, 2010, an unaffiliated investor loaned the Company $17,870 on a 30-day loan to pay two vendors.  The investor received a warrant to purchase 178,870 shares of the common stock of the Company at an exercise price of $0.25 per share.  The warrant has a five year exercise period and a "cashless" exercise provision. The note was recorded net of a deferred debt discount of $16,083, based on the relative fair value of the warrant under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note.  During the nine month periods ended September 30, 2010 and 2009, amortization expense was $16,083 and $0, respectively.  On August 23, 2010, this loan was repaid in full in the amount of $17,870.  Half of the accrued interest of $1,382 was paid in cash ($691) and half was converted to 6,910 shares of stock.





On May 19, 2010, an unaffiliated investor loaned the Company an additional $25,000 on a 30-day loan.  The investor received a warrant to purchase 250,000 shares of the common stock of the Company at an exercise price of $0.25 per share.  The warrant has a five year exercise period and a "cashless" exercise provision. The note was recorded net of a deferred debt discount of $20,000, based on the relative fair value of the warrant under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note.  During the nine month periods ended September 30, 2010 and 2009, amortization expense was $20,000 and $0, respectively.  On August 23, 2010, the $25,000 principal was repaid in cash.  The interest on the loan was aggregated with the loan above and handled as described in the preceding paragraph.





On May 21, 2010, an unaffiliated investor loaned the Company $12,500 on a 30-day loan.  The investor received a warrant to purchase 125,000 shares of the common stock of the Company at an exercise price of $0.25 per share.  The warrant has a five year exercise period and a "cashless" exercise provision. The note was recorded net of a deferred debt discount of $12,500, based on the relative fair value of the warrant under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note.  During the nine month periods ended September 30, 2010 and 2009, amortization expense was $12,500 and $0, respectively.  On August 13, 2010, the $12,500 was repaid in full and discharged.





NOTE 9 — LINES OF CREDIT RELATED PARTIES





On May 31, 2007, the Company entered into a line of credit agreement with Arisean Capital, Ltd. ("Arisean"), pursuant to which the Company may borrow from time to time up to $500,000 from Arisean to be used by the Company to fund its working capital needs. Arisean is controlled by Charles S. Brofman, the Co-Founder of the Company and a former member of its Board of Directors. Borrowings under the line of credit were secured by the assets of the Company, subject to a subordination agreement, and bear interest at a rate of 12% per annum, with interest payable monthly in cash. The principal balance outstanding could be due at any time upon 30 days written notice, subject to mandatory prepayment (without penalty) of principal and interest, in whole or in part, from the net cash proceeds of any public or private, equity or debt financing completed by the Company. Arisean's obligation to lend such funds to the Company is subject to a number of conditions, including review by Arisean of the proposed use of such funds by the Company. On February 8, 2008, in consideration of the line of credit not being repaid with the later loan proceeds secured subsequent to the date of the agreement, the Company granted options to purchase 350,000 shares of the common stock of the Company at $1.25 per share to Mr. Brofman. The term of the options is three years, and they vested immediately. The option expense of $227,500 was treated as deferred debt discount in association with Mr. Brofman's financing during 2008 and was expensed immediately. On September 25, 2009, the Company repaid the $576,000 outstanding balance on this line of credit and $109,456 in accrued interest by the issuance of 4,569,706 shares of Company common stock that were valued at the closing market price of $0.45 per share. Based on the $2,056,368 value of the shares issued, the Company recognized a $1,370,912 loss on extinguishment of the debt during the year ended December 31, 2009. Additionally, as of September 25, 2009, Arisean released its first lien on the assets of the Company, placing the new 2009 investors in first lien position (see Note 10). Interest expense accrued on this line of credit during 2009 was $50,703. As of September 30, 2010, the outstanding balance on this line of credit was $10,557 in remaining accrued interest.





On August 10, 2007, the Company entered into a line of credit agreement with James D. Burchetta, Debt Resolve's Co-Chairman and Founder, for up to $100,000 to be used to fund the working capital needs of Debt Resolve and First Performance. Borrowings under the line of credit were secured by the assets of the Company and bear interest at a rate of 12% per annum, with interest payable monthly in cash. The principal balance outstanding could be due at any time upon 30 days written notice, subject to mandatory prepayment (without penalty) of principal and interest, in whole or in part, from the net cash proceeds of any public or private, equity or debt financing made by Debt Resolve. On August 27, 2009, the Company repaid the $119,000 outstanding balance on this line of credit and $23,345 in accrued interest by the issuance of 948,970 shares of Company common stock that were valued at the closing market price of $0.25 per share. Based on the $237,242 value of the shares issued, the Company recognized a $94,897 loss on extinguishment of the debt during the year ended December 31, 2009. Interest expense accrued on this line of credit during 2009 was $9,311. As of September 30, 2010, the outstanding balance on this line of credit was $1,017 in remaining accrued interest. The Company also owed $126,803 of accrued expenses and $35,000 of accrued consulting fees to Mr. Burchetta as of September 30, 2010.




16





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 9 — LINES OF CREDIT RELATED PARTIES (continued)





On October 17, 2007, the Company entered into a line of credit agreement with William M. Mooney, a Director of Debt Resolve, for up to $275,000 to be used primarily to fund the working capital needs of First Performance. Borrowings under the line of credit bear interest at 12% per annum, with interest payable monthly in cash. The principal balance outstanding will be due at any time upon 30 days written notice, subject to mandatory prepayment (without penalty) of principal and interest, in whole or in part, from the net cash proceeds of any public or private, equity or debt financing made by Debt Resolve. In conjunction with this line of credit, the Company also issued a warrant to purchase 137,500 shares of common stock at an exercise price of $2.00 per share with an expiration date of October 17, 2012. The liability for borrowings under the line of credit was recorded net of a deferred debt discount of $117,700, based on the relative fair value of the warrant under the Black-Scholes pricing model. The debt discount was fully amortized during the year ended December 31, 2007. Borrowings under this line of credit are guaranteed by Mr. Burchetta and Mr. Brofman. On February 8, 2008, in consideration of the line of credit not being repaid with the later loan proceeds secured subsequent to the date of the agreement, the Company granted Mr. Mooney 350,000 options to purchase common stock at $1.25 per share. This option has a term of three years and vested immediately. The grant was valued at $227,500 under the Black-Scholes pricing model and was expensed immediately as amortization of the deferred debt discount. On August 27, 2009, the Company repaid $343,421 of principal on this line of credit and $64,222 in accrued interest by the issuance of 2,717,616 shares of Company common stock that was valued at the closing market price of $0.25 per share. Based on the $679,404 value of the shares issued, the Company recognized a $271,762 loss on extinguishment of the debt during the year ended December 31, 2009. On September 24, 2009, the Company entered into a short term loan with William M. Mooney, a Director of Debt Resolve, for $150,000 to be used to discharge the bridge loans of another investor. Borrowings under the loan bear interest at 9% per annum, with interest accrued and payable on maturity. The Note was due on November 24, 2009. In conjunction with this line of credit, the Company also issued a warrant to purchase 150,000 shares of common stock at an exercise price of $0.15 per share with an expiration date of September 24, 2014. The Note was recorded net of a deferred debt discount of $15,000, based on the relative fair relative fair value of the warrant under the Black-Scholes pricing model.  Such discount was amortized over the term of the Note.  During the nine month periods ended September 30, 2010 and 2009, amortization was $0.  On April 6, 2010, a partial repayment of $25,000 of principal was paid.  Also, as a result of the delinquent repayment of the note, a penalty of $69,000 was incurred on April 15, 2010.  On August 17, 2010, a partial payment of $50,000 of principal was made on the line of credit.  Interest expense accrued on this loan as of September 30, 2010 was $24,023.  As of September 30, 2010, the outstanding balance on this loan was $151,000.





On July 1, 2008, the Company entered into a line of credit agreement with Kenneth H. Montgomery, a former Chief Executive Officer and Director of Debt Resolve, for up to $315,000 to be used to fund the working capital needs of Debt Resolve. Borrowings under the line of credit would bear interest at 12% per annum, with interest payable monthly in cash. The principal balance outstanding could be due at any time upon 30 days written notice, subject to mandatory prepayment (without penalty) of principal and interest, in whole or in part, from the net cash proceeds of any public or private, equity or debt financing made by Debt Resolve. In conjunction with this line of credit, the Company also issued an option to purchase 350,000 shares of common stock at an exercise price of $1.00 per share on July 15, 2008 with an expiration date of July 15, 2015. The note was recorded net of a deferred debt discount of $262,500, based on the relative fair value of the option. The debt discount was amortized over the term of the note. As of June 30, 2009, the Company has borrowed $158,202 under this line of credit plus $185,681 of Company expenses paid directly by Mr. Montgomery for a total borrowed of $343,883. On August 27, 2009, the Company repaid $158,202 of principal on this line of credit and $24,492 in accrued interest by the issuance of 1,217,966 shares of Company common stock that were valued at the closing market price of $0.25 per share. Based on the $304,491 value of the shares issued, the Company recognized a $121,797 loss on extinguishment of the debt in the year ended December 31, 2009. As of September 30, 2010, the outstanding balance owed to Mr. Montgomery is $214,385 in expenses plus $1,352 in accrued interest on the line of credit that was repaid and terminated.





NOTE 10 — CONVERTIBLE DEBENTURES





From June 2009 to March 2010, unaffiliated investors loaned the Company an aggregate of $1,237,459 on three year Series A Convertible Debentures with an interest rate of 14%.  The interest accrues and is payable at maturity, which range in dates from June 2012 to March 2013.  The conversion price is set at $0.15 per share.  The Debentures carry a first lien security interest.  In addition, the investors received 12,374,590 warrants to purchase the common stock of the Company at an exercise price of $1.00.  On January 21, 2010, the exercise price was reduced to $0.40 due to certain provisions of the warrants.  The exercise period of the warrants is five years.  The notes were recorded net of a deferred debt discount of $1,150,792, based on the relative fair value of the warrants under the Black-Scholes pricing model.  Such discount is being amortized over the term of the notes.  During the nine month periods ended September 30, 2010 and 2009, the Company recorded amortization of the debt discount related to these notes of $395,274 and $464, respectively.  As of September 30, 2010, $400,459 plus accrued interest was converted to stock by the terms of the notes, leaving a balance remaining of $837,000.





17








DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 10 — CONVERTIBLE DEBENTURES (continued)





During the nine months ended September 30, 2010, unaffiliated investors loaned the Company an aggregate of $275,000 on three year Series B Convertible Debentures with an interest rate of 14%.  During the period, $50,000 was repaid in cash, leaving a balance of $225,000 on these debentures at September 30, 2010.  The interest accrues and is payable at maturity.  The conversion price is set at $0.15 per share.  The Debentures carry a first lien security interest with the debentures above.  In addition, at conversion, the investors will receive 900,000 warrants to purchase the common stock of the Company at an exercise price of $0.40 per share.  The warrants are callable when the Company's stock trades above $0.75 per share for 10 consecutive trading days.  The notes were recorded net of a deferred debt discount of $275,000, based on the relative fair value of the warrants under the Black-Scholes pricing model.  Such discount is being amortized over the term of the notes.  During the nine month periods ended September 30, 2010 and 2009, the Company recorded amortization of the debt discount related to these notes of $92,951 and $0, respectively.





During the nine months ended September 30, 2010, unaffiliated investors loaned the Company an aggregate of $260,000 on three year Series C Convertible Debentures with an interest rate of 14%.  The interest accrues and is payable at maturity.  The conversion price is set at $0.15 per share.  The Debentures carry a first lien security interest with the debentures above.  In addition, the investors received 2,566,670 warrants to purchase the common stock of the Company at an exercise price of $0.40 per share.  The series C notes have a “ratchet” provision resetting the conversion price to $0.10 and the warrant exercise price to $0.25 on the first closing of a subsequent offering with those terms.  This “ratchet” was triggered on August 12, 2010 with the completion of the minimum closing of $1,500,000 on a $3,000,000 private placement.  The notes were recorded net of a deferred debt discount of $215,940, based on the relative fair value of the warrants under the Black-Scholes pricing model.  Such discount is being amortized over the term of the notes.  During the nine month periods ended September 30, 2010 and 2009, the Company recorded amortization of the debt discount related to these notes of $17,291 and $0, respectively.





The embedded conversion option related to the Convertible Debentures is accounted for under ASC 815-40. We have determined that the embedded conversion option is a derivative liability. Accordingly, the embedded conversion option will be marked to market through earnings at the end of each reporting period.  The conversion option is valued using the Black-Scholes valuation model.  See derivative liability discussion below.





NOTE 11 - DERIVATIVE LIABILITY





As described in Note 7 and 10 above, the Company's derivative financial instruments consisted of embedded derivatives related to the short term Convertible Debentures and embedded reset provisions contained within Convertible Debentures and related issued warrants.  On August 12, 2010, those financial instruments that contained embedded conversion derivatives and reset provisions were extinguished, therefore, the initial determined fair values of the conversion features and reset provisions of $3,553,062 were reclassified from liability to equity.  As of September 30, 2010, there were no derivative liabilities.





NOTE 12 — STOCKHOLDERS' EQUITY










During the year ended December 31, 2009, the Company issued 617,417 shares upon the exercise of investor warrants.





During the year ended December 31, 2009, the Company issued 5,950,000 shares of common stock as compensation for professional services rendered and 50,000 shares to a Company employee as compensation for his services.





During the year ended December 31, 2009, the Company issued 8,767,398 shares of Company common stock to settle $1,483,709 in liabilities owed to former employees and vendors.





During the year ended December 31, 2009, the Company issued 10,141,885 shares of Company common stock to settle $1,521,282 in notes payable and accrued interest.





During the year ended December 31, 2009, the Company issued 1,576,685 shares of Company common stock to settle $223,275 in principal and accrued interest owed on two notes payable. The $394,171 value of the shares issued, as determined by the closing prices on the dates of issuance, exceeded the $223,275 in liabilities settled, and the Company recorded the difference as a $170,896 loss on extinguishment of the liabilities during the year ended December 31, 2009. The extinguished liabilities consisted of $95,950 in note principal and $127,325 in accrued interest and fees. Of the 1,576,685 shares issued, 450,000 shares were release from treasury. Prior to their release, the Company excluded the 450,000 shares from the number of outstanding shares used to determine its net loss per share.




18





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 12 — STOCKHOLDERS' EQUITY (continued)





In connection with the Company's sale of a $300,000 convertible debenture on September 30, 2008, the Company was to issue 150,000 shares in compensation for the agreement exchanging the original note dated July 31, 2008 for the convertible debenture dated September 30, 2008. The Company issued the shares on September 15, 2009.





During the year ended December 31, 2009, the Company issued a total of 2,250,000 shares to five members of the Company's board of directors as compensation for their services and issued 333,334 shares to the Company's Interim CEO and President in satisfaction of an accrued bonus payable.





During the nine month period ended September 30, 2010, the Company issued 12,144,948 shares of Company common stock to settle $1,822,388 in notes payable and accrued interest. The $1,822,388 value of the shares issued, as determined by the closing prices on the dates of issuance, exceeded the $756,126 in liabilities settled, and the Company recorded the difference of $756,126 as a reduction of the related derivative liability during the nine month period ended September 30, 2010.





During the nine month period ended September 30, 2010, the Company issued 880,000 shares of Company common stock to settle reset provisions contained in a private placement completed in August 2007. The $262,240 value of the shares, as determined by the closing price on the date of issuance, was charged to current period operations for the nine month period ended September 30, 2010.





During the nine month period ended September 30, 2010, the Company issued 2,724,996 shares upon the exercise of warrants; 224,997 for services rendered and on a cashless basis.





During the nine month period September 30, 2010, the Company issued 3,202,000 shares of common stock as compensation for professional services rendered.









NOTE 13-WARRANTS AND OPTIONS





Warrants





The following table summarizes warrants outstanding and related prices for the shares of the Company's common stock issued to shareholders at September 30, 2010:





Exercise Price


Number

Outstanding


Warrants Outstanding

Weighted Average

Remaining

Contractual

Life (years)


Weighted

Average

Exercise price


Number

Exercisable


Warrants Exercisable

Weighted

Average

Exercise Price0.01



60,521



0.73



0.01



60,521



0.010.10



1,850,000



4.86



0.10



1,850,000



0.100.12



275,000



1.12



0.12



275,000



0.120.15



3,933,334



4.35



0.15



3,933,334



0.150.25



23,318,750



4.83



0.25



23,318,750



0.250.40



15,541,259



4.11



0.40



15,541,259



0.401.00



678,000



1.99



1.00



678,000



1.001.07



37,500



2.23



1.07



37,500



1.071.25



350,000



2.33



1.25



350,000



1.251.95



50,000



2.49



1.95



50,000



1.952.00



137,500



2.05



2.00



137,500



2.002.45



99,000



2.53



2.45



99,000



2.456.00



225,000



1.10



6.00



225,000



6.00Total



46,555,864



4.43







46,555,864





19





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 13-WARRANTS AND OPTIONS (continued)





Transactions involving the Company's warrant issuance are summarized as follows:





Number of

Shares


Weighted

Average Price

Per ShareOutstanding at December 31, 2008


3,840,455


$
1.23Issued


37,874,590



0.27Exercised


(617,417
)


0.00000004Canceled or expired


(23,978,740
)


0.00000004Outstanding at December 31, 2009


17,118,888



0.36Issued


33,143,753



0.27Exercised


(2,725,000
)


0.00036Canceled or expired


(981,777
)


2.94Outstanding at September 30, 2010


46,555,864


$
0.34





In conjunction with the issuance of debt and settlement of Payables, the Company issued warrants to purchase an aggregate of 7,380,372 shares of common stock with an exercise price from $0.15 to $0.40 per share expiring five years from the date of issuance. The fair value of the warrants was determined using the Black-Scholes option pricing method.





In conjunction with certain consulting services, the Company issued warrants to purchase an aggregate of 6,313,382 shares of common stock with an exercise prices from $0.15 to $0.40 per share expiring five years from the date of issuance. These warrants contain a "cashless exercise" feature. The fair value of the warrants was determined using the Black-Scholes option pricing method.





In conjunction with the settlement of litigation, the Company issued warrants to purchase 250,000 shares of common stock with an exercise prices from $0.15 per share expiring five years from the date of issuance. The fair value of the warrants was determined using the Black-Scholes option pricing method.





In conjunction with the sale of the Company's common stock, the Company issued warrants to purchase 16,000,000 shares of common stock with an exercise price of $0.25 per share expiring five years from the date of issuance.  Additionally the Company issued warrants to purchase 3,200,000 shares of common stock to placement agents with half of the 5-year placement agent warrants having an exercise price of $0.10 and half having an exercise price of $0.25.








Non-Employee Options





The following table summarizes non employee options outstanding and related prices for the shares of the Company's common stock issued to shareholders at September 30, 2010:





Exercise Price


Number

Outstanding


Option Outstanding

Options Average

Remaining

Contractual

Life (years)


Weighted

Average

Exercise price


Number

Exercisable


Options Exercisable

Weighted

Average

Exercise Price$
0.70



75,000



4.94



0.70



75,000



0.701.84



25,000



4.67



1.84



25,000



1.845.00



3,000



1.09



5.00



3,000



5.00Total



103,000











103,000





20





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 13-WARRANTS AND OPTIONS (continued)





Transactions involving the Company's non employee option issuance are summarized as follows:





Number of

Shares


Weighted

Average Price

Per ShareOutstanding at December 31, 2008


203,000


$
3.02Issued


--



--Exercised


--



--Canceled or expired


(100,000
)

$
5.00Outstanding at December 31, 2009


103,000


$
1.10Issued


--



--Exercised


--



--Canceled or expired


--



--Outstanding at September 30, 2010


103,000


$
1.10





Employee Options





The following table summarizes employee options outstanding and related prices for the shares of the Company's common stock issued to shareholders at September 30, 2010:





Exercise Price


Number

Outstanding


Option Outstanding

Options Average

Remaining

Contractual

Life (years)


Weighted

Average

Exercise price


Number

Exercisable


Options Exercisable

Weighted

Average

Exercise price$
0.13



500,000



6.59


$
0.13



500,000


$
0.130.17



4,500,000



6.52



0.17



4,500,000



0.170.19



1,000,000



5.85



0.19



1,000,000



0.190.20



250,000



2.57



0.20



250,000



0.200.22



175,000



6.50



0.22



100,000



0.220.80



350,000



4.34



0.80



350,000



0.801.00



350,000



4.79



1.00



350,000



1.001.25



1,334,500



1.76



1.25



1,334,500



1.251.40



350,000



4.70



1.40



350,000



1.401.50



887,500



0.96



1.50



887,500



1.501.63



20,000



4.71



1.63



20,000



1.631.84



10,000



4.67



1.84



10,000



1.844.75



203,000



3.57



4.75



203,000



4.755.00



2,326,934



4.88



5.00



2,326,934



5.0010.00



20,000



2.74



10.00



20,000



10.00Total



12,276,934



4.93







12,201,934





21





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER30, 2010








NOTE 13-WARRANTS AND OPTIONS (continued)





Transactions involving the Company's employee option issuance are summarized as follows:





Number of

Shares


Weighted

Average Price

Per ShareOutstanding at December 31, 2008


5,851,934


$
5.89Issued


1,000,000



0.19Exercised


--



--Canceled or expired


--



--Outstanding at December 31, 2009


6,851,934



5.89Issued


5,425,000



0.19Exercised


--



--Canceled or expired


--



--Outstanding at September 30, 2010


12,276,934


$
1.47





The Board granted an aggregate of stock options to purchase 5,425,000 shares of common stock of the Company at an exercise prices from $0.13 to $0.22 with an exercise periods from three to seven years to key employees, officers and a new advisory board member. The grant was valued using the Black-Scholes model and had a value of $995,743; $978,249 was fully expensed during the nine month period ended September 30, 2010.





NOTE 14 -COMMITMENTS AND CONTINGENCIES





Litigation





On July 17, 2008, Dreier LLP, a law firm, filed a complaint in the Supreme Court of New York, County of New York, seeking damages of $311,023 plus interest for legal services allegedly rendered to us. The complaint was answered on August 14, 2008 raising various affirmative defenses. On December 16, 2008, Dreier LLP filed for bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York. The case has been on hold since the bankruptcy filing. On March 18, 2009, the Company filed a counterclaim in the bankruptcy court for legal malpractice and the defenses rose in the previously filed answer. The entire balance in dispute is in the accounts payable of the Company.





On September 17, 2008, Computer Task Group, a vendor, filed a complaint in the Supreme Court of New York, County of Erie, seeking damages of $24,546 plus interest for consulting services rendered to us. On December 3, 2008, judgment was entered in favor of Computer Task Group for $24,546 plus $2,539 in interest and $651 in costs, or a total of $27,735. A restraining order was served on the Company's bank account for the amount of the judgment. On March 10, 2009, a total of $12,839 was removed from our account in partial satisfaction of the judgment, leaving a current total now due of $14,896. This balance payable is in the accounts payable of the Company.





On October 9, 2009, PR Newswire Association filed a complaint in New Jersey Special Civil Court, Hudson County against the Company for unpaid bills in the amount of $7,470. On March 22, 2010, a default judgment in the amount of $8,124 was entered. This balance is in the accounts payable of the Company.





On November 9, 2009, Patriot National Bank, a financial institution, filed a complaint in the Supreme Court of New York, Count of Westchester, seeking damages of $68,993.62 as a result of an overdraft in our bank account resulting from a non-sufficient fund check received from an investor on May 22, 2009. An answer was filed by the Company on December 20, 2009. On February 22, 2010, a motion for summary judgment was filed with the court by Patriot. An amended motion of summary judgment was filed on March 1, 2010 by Patriot.  As of September 30, 2010, the unpaid amount remaining on the overdraft was $14,047. The Company is making monthly payments to reduce the overdraft through an allocated portion of its revenue. The entire amount in dispute is on the balance sheet of the Company under Bank Overdrafts.





22





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 14 -COMMITMENTS AND CONTINGENCIES (continued)





From time to time, the Company is involved in various litigation matters in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations.





Operating leases





The Company currently shares space with a business partner under an agreement from December 2008. The Company and business partner agreed to cross-market the services of each party to their clients. As part of the agreement, the Company was granted certain office space. In July 2009 under a verbal agreement, the Company agreed to pay rent in the amount of $1,000 per month for increased office space.





NOTE 15 — EMPLOYMENT AGREEMENTS





James D. Burchetta





The Company had entered into an employment agreement on January 13, 2003 with James D. Burchetta under which he would devote substantially all of his business and professional time to us and our business development. The employment agreement with Mr. Burchetta was effective until January 13, 2013. The agreement provided Mr. Burchetta with an initial annual base salary of $240,000 and contained provisions for minimum annual increases based on changes in an applicable "cost-of-living" index. The employment agreement with Mr. Burchetta contained provisions under which his annual salary may increase to $600,000 if we achieved specified operating milestones and also provided for additional compensation based on the value of a transaction that results in a change of control, as that term is defined in the agreement. In the event of a change of control, Mr. Burchetta would be entitled to receive 25% of the sum of $250,000 plus 2.5% of the transaction value, as that term is defined in the agreement, between $5,000,000 and $15,000,000 plus 1% of the transaction value above $15,000,000.





The Company amended the employment agreement with Mr. Burchetta in February 2004, agreeing to modify his level of compensation, subject to its meeting specified financial and performance milestones. The employment agreement, as amended, provided that the base salary for Mr. Burchetta would be as follows: (1) if at the date of any salary payment, the aggregate amount of our net cash on hand provided from operating activities and net cash and/or investments on hand provided from financing activities is sufficient to cover our projected cash flow requirements (as established by our board of directors in good faith from time to time) for the following 12 months (the "projected cash requirement"), the annual base salary will be $150,000; and (2) if at the date of any salary payment, our net cash on hand provided from operating activities is sufficient to cover our projected cash requirement, the annual base salary will be $250,000, and increased to $450,000 upon the date upon which we complete the sale or license of our Debt Resolve system with respect to 400,000 consumer credit accounts. Under the terms of the amended employment agreement, no salary payments were made to Mr. Burchetta during 2004. The Company recorded compensation expense and a capital contribution totaling $150,000 in 2004, representing an imputed compensation expense for the minimum base salary amounts under the agreement with Mr. Burchetta, as if we had met the condition for paying his salary.





The Company amended the employment agreement with Mr. Burchetta again in June 2005, agreeing that (1) as of April 1, 2005 the Company will pay Mr. Burchetta an annual base salary of $250,000 per year, and thereafter his base salary will continue at that level, subject to adjustments approved by the compensation committee of our board of directors, and (2) the employment term will extend for five years after the final closing of our June/September 2005 private financing. Compensation expense under the employment agreement with Mr. Burchetta is recorded as payroll and related expenses in the unaudited condensed statement of operations and totaled $0 and $135,417 for the twelve months ended December 31, 2009 and 2008, respectively. On August 27, 2009, the accrued salary from 2008 was converted to stock.





23





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 15 — EMPLOYMENT AGREEMENTS (continued)





On July 15, 2008, the employment agreement was converted to a consulting agreement with all terms otherwise unchanged, as Mr. Burchetta became non-executive Chairman on February 16, 2008. One additional term added was that the Chairman shall always make $25,000 more than the Chief Executive Officer and have comparable benefits. The Board affirmed the effectiveness of the agreement to January 13, 2013. Consulting expense under the consulting agreement with Mr. Burchetta is recorded as general and administrative expenses in the unaudited condensed statement of operations and totaled $30,000 for the three months ended March 31, 2010 and $195,833 for the year ended December 31, 2009. Consulting expense for the year ended December 31, 2008 totaled $114,583. On August 27, 2009, the accrued consulting fees of $242,500 for the period July 2008 through July 2009 were converted to stock. On September 29, 2009 and effective as of August 1, 2009, the Company and Mr. Burchetta amended his consulting agreement from a full-time consulting position to a part-time consulting position. In addition, the monthly consulting fee was reduced from $20,833 per month to $10,000 per month. Finally, Mr. Burchetta waived the condition that his compensation exceeds that of the CEO by at least $25,000 per month and has comparable benefits. In return for the modifications to the contract with a termination date of January 13, 2013, Mr. Burchetta received 1,686,000 shares of stock, which represents the reduction in compensation during the remaining term of the agreement.





As of September 30, 2010, the Company owes Mr. Burchetta an aggregate of $35,000 under the consulting agreement.





David M. Rainey





On May 1, 2007, David M. Rainey joined our company as Chief Financial Officer and Treasurer. Mr. Rainey also became Secretary of the Company in November 2007, President of the Company in January 2008 and Interim Chief Executive Officer on July 15, 2009. Mr. Rainey stepped down as Interim CEO on April 12, 2010. Mr. Rainey has a one year contract that renews automatically unless 90 days notice of intention not to renew is given by the Company. Mr. Rainey's base salary is $200,000, subject to annual increases at the discretion of the board of directors. Mr. Rainey also received a grant of 75,000 options to purchase the common stock of the Company, one third of which vest on the first, second and third anniversaries of the start of employment with the Company. Mr. Rainey is also eligible for a bonus of up to 50% of salary based on performance objectives set by the Chairman and the Board of Directors. Mr. Rainey's contract provides for 12 months of severance for any termination without cause with full benefits. Upon a change in control, Mr. Rainey receives two years severance and bonus with benefits and immediate vesting of all stock options then outstanding. As of September 30, 2010, the Company owes $158,333 in salary under the agreement.





Each of the employment agreements with Mr. Burchetta and Mr. Rainey also contain covenants (a) restricting the employee from engaging in any activities competitive with our business during the term of their employment agreements, (b) prohibiting the employee from disclosure of our confidential information and (c) confirming that all intellectual property developed by the employee and relating to our business constitutes our sole property. In addition, Mr. Rainey's contract provides for a one year non-compete during the term of his severance.





NOTE 16 - RELATED PARTY TRANSACTIONS





During the year ended December 31, 2009, the Company issued 15,841,788 shares of Company common stock to settle $2,560,868 in accrued liabilities and for a contract settlement owed to individuals, or an entity controlled by an individual, who were Company officers or directors or former officers or directors at the time of settlement.  The $4,890,388 value of the shares issued, as determined by the closing prices on the dates of issuance, exceeded the $2,560,868 in liabilities settled, and the Company recorded the difference as a $2,329,521 loss on extinguishment of the liabilities in the three months ended September 30, 2009.  The extinguished liabilities consisted of $900,230 in accrued payroll compensation, $1,196,623 in loans made to the Company, $221,515 in interest accrued thereon, and $242,500 in accounts payable for consulting services rendered.  Related party interest for the nine months ended September 30, 2010 was $10,391.  Related party interest for the year ended December 31, 2009 was $105,109.





During the year ended December 31, 2009, the Company issued a total of 2,250,000 shares to five members of the Company's board of directors as compensation for their services valued at $428,750. Another executive received an option grant of 1,000,000 shares at an exercise price of $0.19 with a seven year life as compensation for services and in recognition of a promotion valued at $190,000.





During the nine months ended September 30, 2010, the Company issued a total of 5,425,000 options to members of the Company's board of directors, new advisory board members, three new employees and an officer as compensation for their services valued at $978,250.





24





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 16 - RELATED PARTY TRANSACTIONS (continued)





Certain Company directors personally guarantee the Company's notes payable and its' bank loan (Note 9).





NOTE 17 - FAIR VALUE MEASUREMENT





The Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments ("ASC 825-10") on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:





Level 1 - Quoted prices in active markets for identical assets or liabilities.





Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.





Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair vale of assets or liabilities.





To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.





Upon adoption of ASC 825-10, there was no cumulative effect adjustment to the beginning retained earnings and no impact on the financial statements.





The carrying value of the Company's cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.





The following table sets forth the Company's financial instruments as of September 30, 2010 which was recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy. As required by ASC 825-10, these are classified based on the lowest level of input that is significant to the fair value measurement:





25





DEBT RESOLVE, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


SEPTEMBER 30, 2010





NOTE 17 - FAIR VALUE MEASUREMENT (continued)





Quoted

Prices in

Active

Markets for

Identical

Instruments

Level 1


Significant

Other

Observable

Inputs

Level 2


Significant

Unobservable

Inputs

Level 3Liabilities:Derivative liability









$
(-0-
)





At September 30, 2010, the carrying amounts of the notes payable approximate fair value because all of the notes have been classified to current maturity.





The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 2010:





Three Months Ended  September 30, 2010Derivative LiabilityBalance, June 30, 2010

$
2,563,324Total (gains) lossesInitial fair value of debt derivative on note issuance


61,751Initial fair values of warrants issued containing reset provisions


72,984-Mark-to-market at September 30, 2010:


-- Embedded debt derivative and warrant liabilities


855,003Transfers in and/or out of Level 3


(3,553,062
)Balance, September 30, 2010

$
-0-Net loss for the period included in earnings relating to the liabilities held at September 30, 2010

$
(855,003
)





NOTE 19 — SUBSEQUENT EVENTS





On October 12, 2010 the Company discharged two investor notes in the aggregate amount of $200,000 in principal,  $64,899 in accrued interest and a $45,000 late repayment fee for the payment in cash of $95,000 and the conversion of the $214,899 remaining total balance into 2,148,987 shares of the Company’s stock.




26





Item 2. Management's Discussion and Analysis or Plan of Operation





Overview





Prior to January 19, 2007, we were a development stage company. On January 19, 2007, we acquired all of the outstanding capital stock of First Performance Corporation, a Nevada corporation ("First Performance"), and its wholly-owned subsidiary, First Performance Recovery Corporation, pursuant to a Stock Purchase Agreement dated January 19, 2007. As a result, we are no longer considered a development stage entity.





Since completing initial product development in early 2004, our primary business has been providing a software solution to consumer lenders or those collecting on those loans based on our proprietary DebtResolve® system, our Internet-based bidding system that facilitates the settlement and collection of delinquent and defaulted consumer debt via the Internet.  We have marketed our service primarily to consumer credit card issuers, collection agencies, collection law firms and the buyers of defaulted debt in the United States, Europe and now Asia.  We intend to market our service to other segments served by the collections industry worldwide.  For example, we believe that our system will be especially valuable for the collection of low balance debt, such as that held by utility companies and online service providers, where the cost of traditionally labor intensive collection efforts may exceed the value collected.  We also intend to pursue past-due Internet-related debt, such as that held by sellers of sales and services online.  We believe that consumers who incurred their debt over the Internet will be likely to respond favorably to an Internet-based collection solution.  In addition, creditors of Internet-related debt usually have access to debtors' e-mail addresses, facilitating the contact of debtors directly by e-mail.  Also, there are significant opportunities for us in healthcare with hospitals and large provider groups.  We believe that expanding to more recently past-due portfolios of such debt will result in higher settlement volumes, improving our clients' profitability by increasing their collections while reducing their cost of collections.  We do not anticipate any material incremental costs associated with developing our capabilities and marketing to these creditors, as our existing DebtResolve system can already handle this type of debt, and we make contact with these creditors in our normal course of business.





We have prepared for our entry into the European and Asian marketplaces by reviewing our mode of business and modifying our contracts to comply with appropriate European and Asian privacy, debtor protection and other applicable regulations. We expect that initially, our expense associated with servicing our United Kingdom and other potential European or Asian clients will be minimal, consisting primarily of travel expense to meet with those clients and additional legal fees, as our European contracts, although already written to conform to European regulations, may require customization.  We may incur additional costs, which we cannot anticipate at this time, if we expand into Canada and other countries.





Our revenues to date have been insufficient to fund our operations.  We have financed our activities to date through our management's contributions of cash, the forgiveness of royalty and consulting fees, the proceeds from sales of our common stock in private placement financings, the proceeds of our convertible promissory notes in six private financings, short-term borrowings from previous investors or related parties and the proceeds from the sale of our common stock in our initial public offering.  In connection with our marketing and client support goals, we expect our operating expenses to grow as we employ additional technicians, sales people and client support representatives. We expect that salaries and other compensation expenses will continue to be our largest category of expense, while travel, legal, audit and other sales and marketing expenses will grow as we expand our sales, marketing and support capabilities.  Effective utilization of our system will require a change in thinking on the part of the collection industry, but we believe the effort will result in new collection benchmarks.  We intend to provide detailed advice and hands-on assistance to clients to help them make the transition to our system.





Our current and former contracts provide that we will earn revenue based on a percentage of the amount of debt collected from accounts submitted on our DebtResolve system, from flat fees per settlement achieved, from flat fees per account placed on the system or a flat monthly fee.  Although other revenue models have been proposed, most revenue earned to date has been determined using these methods, and such revenue is recognized when the settlement amount of debt is collected by our client or at the beginning of each month.  For the early adopters of our system, we waived set-up fees and other transactional fees that we anticipate charging on a going-forward basis. While the percent of debt collected will continue to be a revenue recognition method going forward, other payment models are also being offered to clients and may possibly become our preferred revenue model.  Most contracts currently in process include provisions for set up fees and base revenue on a monthly fee, in the aggregate or per account, with some contracts having a small transaction fee on debt settlement as well.  In addition, with respect to our DR CollectTM module expected to be completed in 2010, which targets the collection agency and collection law firm markets, we expect that a flat monthly fee, and/or the hybrid revenue model which will include both flat fees and transaction fees at settlement, may become the preferred revenue methods.  As we expand our knowledge of the industry, we have become aware that different revenue models may be more appropriate for the individual circumstances of our potential clients, and our expanded choice of revenue models reflects that knowledge.




27





For the nine months ending September 30, 2010 and 2009, we had inadequate revenues and incurred net operating income (losses) of $359,644 and $8,750,733 from continuing operations, respectively.  Cash used in operating activities was $1,345,031 for the nine months ended September 30, 2010. Based upon projected operating expenses of approximately $80,000 per month, we believe that our working capital as of the date of this report may not be sufficient to fund our plan of operations for the next twelve months.  The aforementioned factors raise substantial doubt about our ability to continue as a going concern.





We need to raise additional capital in order to be able to accomplish its business plan objectives. We have historically satisfied its capital needs primarily from the sale of debt and equity securities. Our management is continuing its efforts to secure additional funds through debt and/or equity instruments.  On August 12, 2010, we completed the minimum offering amount of $1,500,000 on a $3,000,000 offering.  Management believes that it will be successful in obtaining additional financing in this placement; however, no assurance can be provided that the Company will be able to do so.  There is no assurance that these funds will be sufficient to enable the Company to attain profitable operations or continue as a going concern.  To the extent that the Company is unsuccessful, the Company may need to curtail its operations and implement a plan to extend payables and reduce overhead until sufficient additional capital is raised to support further operations.  In the alternative, the Company may be forced to seek bankruptcy protection from its creditors.  There can be no assurance that efforts to secure additional funding will be successful.  These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





Results of Operations for the Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009





Revenues





Revenues totaled $32,487 and $18,055 for the three months ended September 30, 2010 and 2009, respectively.  We earned revenue during the three months ended September 30, 2010 from contingency fee income, based on a percent of debt collected, and flat monthly fees.  We earned revenue during the three months ended June 30, 2009 from contingency fee income, based on a percent of debt collected.





Costs and Expenses





Payroll and related expenses.  Payroll and related expenses amounted to $156,394 for the three months ended September 30, 2010, as compared to $963,435 for the three months ended September 30, 2009, a decrease of $807,041.  Employee stock compensation expense decreased to $-0- in the three months ended September 30, 2010 from $840,000 in the three months ended September 30, 2009, as there was a new grant in the 2009 period to new Advisory Board members, new employees and current officers and directors.  Salaries were $120,000 and $98,562 in the three months ended September 30, 2010 and 2009, respectively.  Employee benefits were $24,237 and $19,867 in the three months ended September 30, 2010 and 2009, respectively.   Employment taxes were $12,158 and $5,005 during the three months ended September 30, 2010 and 2009, respectively, as most payrolls were accrued in 2010 and not paid.





General and administrative expenses.  General and administrative expenses amounted to $740,531 for the three months ended September 30, 2010, as compared to $890,279 for the three months ended September 30, 2009, a decrease of $149,748. Service fees were $544,367 and $504,998 for the three months ended September 30, 2010 and 2009, respectively.    Stock compensation to consultants was $352,623 and $85,000 for the three months ended September 30, 2010 and 2009, respectively, primarily due to an increase in consultants in 2010.  Occupancy was $3,000 for each of the three months ended September 30, 2010 and 2009. Telecommunications was $12,993 and $12,574 for the three months ended September 30, 2010 and 2009, respectively.    Accounting decreased to $48,090 for the three months ended September 30, 2010 from $110,910 for the three months ended September 30, 2009 due to a decrease inthe amount of filings.  Travel, marketing, insurance and legal were $11,271, $1,859, $29,936 and $80,524 in the three months ended September 30, 2010 compared with $1,276, $821, $28,259 and $137,872 in the three months ended September 30, 2009.  Miscellaneous general and administrative expenses were $7,498 and $12,493 for the three months ended September 30, 2010 and 2009, respectively.





Depreciation and amortization expense.  For the three months ended September 30, 2010 and 2009, we recorded depreciation expense of $4,967 and $10,897, respectively.  Depreciation expense for the three months ended September 30, 2010 is lower due to the full depreciation of some assets after September 30, 2009.





Interest (expense).  We recorded interest expense of $113,892 for the three months ended September 30, 2010 compared to interest expense of $85,405 for the three months ended September 30, 2009.





Amortization of deferred debt discount.Amortization expense of $102,823 and $43,875 was incurred for the three months ended September 30, 2010 and 2009, respectively, for the amortization of the value of the deferred debt discount associated with certain of our lines of credit and notes payable.  Amortization expense increased due to the issuance of new notes after September 30, 2009.





Gain/(Loss) on derivative liability.We recorded a loss on derivative liability of $(855,003) and a loss of $(2,002,206) for the three months ended September 30, 2010 and 2009, respectively. As of August 12, 2010, we eliminated all derivative liabilities.




28





Other expense.  During the three months ended September 30, 2010, $28,335 of gain on settlement of payables was recorded as compared to a loss of $2,855,985 on conversion and extinguishment of debt in the period ended September 30, 2009.





Results of Operations for the Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009





Revenues





Revenues totaled $92,779 and $56,517 for the nine months ended September 30, 2010 and 2009, respectively.  We earned revenue during the nine months ended September 30, 2010 from contingency fee income, based on a percent of debt collected, and flat monthly fees.  We earned revenue during the nine months ended September 30, 2009 from contingency fee income, based on a percent of debt collected.





Costs and Expenses





Payroll and related expenses.  Payroll and related expenses amounted to $1,378,630 for the nine months ended September 30, 2010, as compared to $1,338,810 for the nine months ended September 30, 2009, an increase of $39,821.  This increase is due to higher stock option expense offset by lower employee count in 2010.  Salaries were $315,227 and $418,562 in the nine months ended September 30, 2010 and 2009, respectively.  Employee benefits were $66,953 and $52,899 in the nine months ended September 30, 2010 and 2009, respectively, due to more employees on health insurance in 2010.  Employee stock compensation expense increased to $978,250 in the nine months ended September 30, 2010 from $857,850 in the nine months ended September 30, 2009, as there was more stock options issued in 2010.  Employment taxes were $18,200 and $9,498 during the nine months ended September 30, 2010 and 2009, respectively, as many payrolls were accrued in 2010 and not paid.  Finally, there were 401k matches of $0 and $756 for the nine months ended September 30, 2010 and 2009, respectively, as the match was suspended after the first quarter of 2009.





General and administrative expenses.  General and administrative expenses amounted to $2,475,923 for the nine months ended September 30, 2010, as compared to $1,223,341 for the nine months ended September 30, 2009, an increase of $1,252,582.  Service fees were $1,820,324 and $797,450 for the nine months ended September 30, 2010 and 2009, respectively.  This increasewas primarily due to increases in service fees related to investment banking, fundraising costs  and consulting fees.  Stock compensation to consultants was $83,400 and $115,000 for the nine months ended September 30, 2010 and 2009, respectively.  Occupancy was $9,000 and ($237,392) for the nine months ended September 30, 2010 and 2009, respectively. We received a one-time credit of ($235,674) on the settlement of our lease in 2009.  Telecommunications was $42,005 and $55,322 for the nine months ended September 30, 2010 and 2009, respectively, as we restructured to a lower cost system in 2009.   Accounting decreased to $135,901 for the nine months ended September 30, 2010 from $159,910 for the nine months ended September 30, 2009 due to a decrease in the number of filings in 2010. Travel, marketing, insurance and legal were $31,209, $10,142, $74,688 and $254,163 in the nine months ended September 30, 2010 compared with $4,513, $2,966, $69,595 and $180,328 in the nine months ended September 30, 2009.  Miscellaneous general and administrative expenses were $15,092 and $75,830 for the nine months ended September 30, 2010 and 2009, respectively, with higher extension fees on outstanding notes in 2009.





Depreciation and amortization expense.  For the nine months ended September 30, 2010 and 2009, we recorded depreciation expense of $24,121 and $35,406, respectively.  Depreciation expense for the nine months ended September 30, 2010 is lower due to the full depreciation of some assets after September 30, 2009.





Interest (expense).  We recorded interest expense of $448,564 for the nine months ended September 30, 2010 compared to interest expense of $264,698 for the nine months ended September 30, 2009.





Amortization of deferred debt discount.Amortization expense of $699,937 and $265,137 was incurred for the nine months ended September 30, 2010 and 2009, respectively, for the amortization of the value of the deferred debt discount associated with certain of our lines of credit and notes payable.  Amortization expense increased due to the issuance of new notes after September 30, 2009.





Gain/(Loss) on derivative liability.We recorded a gain on derivative liability of $4,957,469 and a loss of $(2,823,873) for the nine months ended September 30, 2010 and 2009, respectively, for the revaluation of certain derivatives at September 30, 2010 and 2009.  As of August 12, 2010, we eliminated all derivative liabilities





Other expense. We recorded a gain of $336,572 for the settlement of payables in the nine months ended September 30, 2010 as compared to a loss of $2,855,985 for the loss on conversion and extinguishment of debt in the nine months ended September 30, 2009.




29





Liquidity and Capital Resources





As of September 30, 2010, we had a working capital deficiency in the amount of $2,401,382 from operations and cash and cash equivalents totaling $616,734.  We reported a net income of $359,644 from continuing operations for the nine months ended September 30, 2010.  Net cash used in operating activities was $1,345,031 for the nine months ended September 30, 2010.  Cash flow provided by financing activities was $1,965,396 for the nine months ended September 30, 2010.  As of December 31, 2009, we had a working capital deficiency in the amount of $4,229,322 and cash and cash equivalents totaling $0. We incurred a net loss of $13,115,424 from continuing operations for the year ended December 31, 2009.  Net cash used in operating and investing activities for continuing operations was $956,740 and $-0-, respectively for the year ended December 31, 2009.  Cash flow provided by financing activities for continuing operations was $942,358 for the year ended December 31, 2009.  Our working capital as of the date of this report is negative and is not sufficient to fund our plan of operations for the next year.  The aforementioned factors raise substantial doubt about our ability to continue as a going concern.





We need to raise additional capital in order to be able to accomplish our business plan objectives.  We have historically satisfied our capital needs primarily from the sale of debt and equity securities.  Our management is continuing our efforts to secure additional funds through debt and/or equity instruments.  On August 12, 2010, we closed the minimum round of $1,500,000 on a $3,000,000 private placement.  We have also settled some of our liabilities through issuances of our common stock, and we expect to settle additional liabilities through discounted lump sum payments.  Management believes that it will be successful in obtaining additional financing and settling our liabilities; however, no assurance can be provided that we will be able to do so.  There is no assurance that these funds will be sufficient to enable us to attain profitable operations or continue as a going concern.  To the extent that we are unsuccessful, we may need to curtail its operations and implement a plan to extend payables and reduce overhead until sufficient additional capital is raised to support further operations.  In the alternative, we may have to seek protection fromour creditors in bankruptcy.  There can be no assurance that efforts to raise adequate capital will be successful.  These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





From June 2009 to March 2010, unaffiliated investors loaned the Company an aggregate of $1,312,459 on three year Series A Convertible Debentures with an interest rate of 14%.  The interest accrues and is payable at maturity, which range in dates from June 2012 to March 2013.  The conversion price is set at $0.15 per share.  The Debentures carry a first lien security interest.  In addition, the investors received 13,124,590 warrants to purchase the common stock of the Company at an exercise price of $1.00.  On January 21, 2010, the exercise price was reduced to $0.40 due to certain provisions of the warrants.  The exercise period of the warrants is five years.  The notes were recorded net of a deferred debt discount of $1,150,792, based on the relative fair value of the warrants under the Black-Scholes pricing model.  Such discount is being amortized over the term of the notes.  During the nine month periods ended September 30, 2010 and 2009, the Company recorded amortization of the debt discount related to these notes of $395,274 and $464, respectively.  As of September 30, 2010, $475,459 plus accrued interest was converted to stock by the terms of the notes, leaving a balance remaining of $837,000.





During the nine months ended September 30, 2010, unaffiliated investors loaned the Company an aggregate of $275,000 on three year Series B Convertible Debentures with an interest rate of 14%.  During the period, $50,000 was repaid in cash, leaving a balance of $225,000 on these debentures at September 30, 2010.  The interest accrues and is payable at maturity.  The conversion price is set at $0.15 per share.  The Debentures carry a first lien security interest with the debentures above.  In addition, at conversion, the investors will receive 900,000 warrants to purchase the common stock of the Company at an exercise price of $0.40 per share.  The warrants are callable when the Company's stock trades above $0.75 per share for 10 consecutive trading days.  The notes were recorded net of a deferred debt discount of $275,000, based on the relative fair value of the warrants under the Black-Scholes pricing model.  Such discount is being amortized over the term of the notes.  During the nine month periods ended September 30, 2010 and 2009, the Company recorded amortization of the debt discount related to these notes of $92,951 and $0, respectively.





During the nine months ended September 30, 2010, unaffiliated investors loaned the Company an aggregate of $260,000 on three year Series C Convertible Debentures with an interest rate of 14%.  The interest accrues and is payable at maturity.  The conversion price is set at $0.15 per share.  The Debentures carry a first lien security interest with the debentures above.  In addition, the investors received 2,566,670 warrants to purchase the common stock of the Company at an exercise price of $0.40 per share.  The series C notes have a “ratchet” provision resetting the conversion price to $0.10 and the warrant exercise price to $0.25 on the first closing of a subsequent offering with those terms.  This “ratchet” was triggered on August 12, 2010 with the completion of the minimum closing of $1,500,000 on a $3,000,000 private placement.  The notes were recorded net of a deferred debt discount of $215,941, based on the relative fair value of the warrants under the Black-Scholes pricing model.  Such discount is being amortized over the term of the notes.  During the nine month periods ended September 30, 2010 and 2009, the Company recorded amortization of the debt discount related to these notes of $17,291 and $0, respectively.





On May 12, 2010, an unaffiliated investor and consultant loaned the Company $10,000 on a 30-day loan to pay a vendor.  The investor received a warrant to purchase 100,000 shares of the common stock of the Company at an exercise price of $0.25 per share.  The warrant has a five year exercise period and a "cashless" exercise provision. The note was recorded net of a deferred debt discount of $8,000, based on the relative fair value of the warrant under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note.  During the nine month periods ended September 30, 2010 and 2009, amortization expense was $8,000 and $0, respectively.




30





On May 14, 2010, an unaffiliated investor loaned the Company $17,870 on a 30-day loan to pay two vendors.  The investor received a warrant to purchase 178,870 shares of the common stock of the Company at an exercise price of $0.25 per share.  The warrant has a five year exercise period and a "cashless" exercise provision. The note was recorded net of a deferred debt discount of $16,083, based on the relative fair value of the warrant under the Black- Scholes pricing model.  Such discount is being amortized over the term of the note.  During the nine month periods ended September 30, 2010 and 2009, amortization expense was $16,083 and $0, respectively.





On May 19, 2010, an unaffiliated investor loaned the Company $25,000 on a 30-day loan.  The investor received a warrant to purchase 250,000 shares of the common stock of the Company at an exercise price of $0.25 per share.  The warrant has a five year exercise period and a "cashless" exercise provision. The note was recorded net of a deferred debt discount of $20,000, based on the relative fair value of the warrant under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note.  During the nine month periods ended September 30, 2010 and 2009, amortization expense was $20,000 and $0, respectively.





On May 21, 2010, an unaffiliated investor loaned the Company $12,500 on a 30-day loan.  The investor received a warrant to purchase 125,000 shares of the common stock of the Company at an exercise price of $0.25 per share.  The warrant has a five year exercise period and a "cashless" exercise provision. The note was recorded net of a deferred debt discount of $12,500, based on the relative fair value of the warrant under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note.  During the nine month periods ended September 30, 2010 and 2009, amortization expense was $12,500 and $0, respectively.





Critical Accounting Policies and Estimates





Use of estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. These estimates and assumptions are based on our management's judgment and available information and, consequently, actual results could be different from these estimates.





Stock-based compensation





The Company accounts for stock options issued under the recognition and measurement principles of Accounting Standards Codification subtopic 718-10, Compensation ("ASC 718-10"). Under the provisions of ASC 718-10, the Company is required to measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the award is measured on the grant date and for non-employees, the award is generally re-measured on interim financial reporting dates until the service period is complete, in accordance with ASC 718-10. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Total stock-based compensation expense for the nine months ended September 30, 2010 and 2009 amounted to $978,249 and $857,850, respectively. As of September 30, 2010, we had $0 of unrecognized compensation cost.





The Company accounts for the expected life of share options in accordance with the "simplified" method provisions ASC 718-10.





Recent Accounting Pronouncements





In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.





There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.





31





Statement Relating to Forward-Looking Statements





This report contains forward-looking statements that are based on our beliefs as well as assumptions and information currently available to us. When used in this report, the words "believe," "expect," "anticipate," "estimate," "potential" and similar expressions are intended to identify forward-looking statements. These statements are subject to risks, uncertainties and assumptions, including, without limitation, the risks and uncertainties concerning our recent research and development activities; the risks and uncertainties concerning acceptance of our services and products, if and when fully developed, by our potential customers; our present financial condition and the risks and uncertainties concerning the availability of additional capital as and when required; the risks and uncertainties concerning the Limited License Agreement with Messrs. Brofman and Burchetta; the risks and uncertainties concerning our dependence on our key executives; the risks and uncertainties concerning technological changes and the competition for our services and products; the risks and uncertainties concerning general economic conditions; and the risks and uncertainties described in our Annual Report on Form 10-KSB for the year ended December 31, 2007, filed on April 16, 2008, in the section labeled "Risk Factors." Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you not to place undue reliance on any forward-looking statements, all of which speak only as of the date of this report.





Item 3. Quantitative and Qualitative Disclosures About Market Risk





Not applicable.





Item 4T. Controls and Procedures





Disclosure Controls and Procedures





We evaluated the design and operation of our disclosure controls and procedures to determine whether they are effective in ensuring that we disclose required information in a timely manner and in accordance with the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations promulgated by the SEC. The executive who serves as our President and Chief Financial Officer has participated in such evaluation. Management concluded, based on such review, that our disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q. The ineffectiveness of these disclosure controls is due to the matters described below in "Internal Control over Financial Reporting."





Limitations on the Effectiveness of Controls





We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives and our President and Chief Financial Officer has concluded that such controls and procedures are not effective at the "reasonable assurance" level. The ineffectiveness of these disclosure controls is due to the matters described below in "Internal Control over Financial Reporting."





Internal Control over Financial Reporting





The Company's independent registered public accounting firm has reported to our audit committee certain matters involving internal controls that this firm considered to be reportable conditions and a material weakness, under standards established by Public Company Accounting Oversight Board. The reportable conditions and material weakness relate to a limited segregation of duties at the Company. Segregation of duties within our company is limited due to the small number of employees that are assigned to positions that involve the processing of financial information. Specifically, certain key financial accounting and reporting personnel had an expansive scope of duties that allowed for the creation, review, approval and processing of financial data without independent review and authorization for preparation of consolidation schedules and resulting financial statements and related disclosures. We did not maintain a sufficient depth of personnel with an appropriate level of accounting knowledge, experience and training in the selection and application of Generally Accepted Accounting Principles commensurate with financial reporting requirements. Accordingly, we place undue reliance on the finance team at corporate headquarters, specifically the executive who is our President and Chief Financial Officer. Accordingly, management has determined that this control deficiency constitutes a material weakness. This material weakness could result in material misstatements of significant accounts and disclosures that would result in a material misstatement to our interim or annual consolidated financial statements that would not be prevented or detected. In addition, due to limited staffing, the Company is not always able to detect minor errors or omissions in reporting.




32





Going forward, management anticipates that additional staff will be necessary to mitigate these weaknesses, as well as to implement other planned improvements. Additional staff will enable us to document and apply transactional and periodic controls procedures, permit a better review and approval process and improve quality of financial reporting. However, the potential addition of new staff is contingent on obtaining additional financing, and there is no assurance that the Company will be able to do so.





Management believes that its financial statements for the three months ended June 30, 2010 and 2009 fairly presented, in all material respects, its financial condition and results of operations. During the three months ended June 30, 2010, there were no changes to our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.








PART II. OTHER INFORMATION





Item 1. Legal Proceedings





Lawsuits from vendors





On July 17, 2008, Dreier LLP, a law firm, filed a complaint in the Supreme Court of New York, County of New York, seeking damages of $311,023.32 plus interest for legal services allegedly rendered to us. The complaint was answered on August 14, 2008 raising various affirmative defenses. On December 16, 2008, Dreier LLP filed for bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York. The case has been on hold since the bankruptcy filing. On March 18, 2009, we filed a counterclaim in the bankruptcy court for legal malpractice and the defenses raised in the previously filed answer. The entire balance in dispute is in the accounts payable of the Company.





On September 17, 2008, Computer Task Group, a vendor, filed a complaint in the Supreme Court of New York, County of Erie, seeking damages of $24,545.69 plus interest for consulting services rendered to us. On December 3, 2008, judgment was entered in favor of Computer Task Group for $24,545.69 plus $2,538.54 in interest and $651.00 in costs, or a total of $27,735.23. A restraining order was served on our bank account for the amount of the judgment. On March 10, 2009, a total of $12,839.44 was removed from our account in partial satisfaction of the judgment, leaving a current total now due of $14,895.79. This balance payable is in the accounts payable of the Company.





On December 1, 2008, AT&T, a vendor, filed a complaint in the Supreme Court of New York, County of New York, seeking damages of $62,383.21 plus interest for services allegedly rendered to us. The complaint was answered on February 23, 2009 raising various affirmative defenses. The case was settled for the payment of $28,000 on April 20, 2010 and has been dismissed and closed.





On October 13, 2009, PR Newswire, a vendor, filed a complaint in the Superior Court of New Jersey, Special Civil Part, Hudson County, seeking damages of $7,470 plus interest for services provided to us. On March 22, 2010, a default judgment was entered against us in the amount of $8,124.16, which remains unpaid as of the date of this filing.





On November 9, 2009, Patriot National Bank, a financial institution, filed a complaint in the Supreme Court of New York, Count of Westchester, seeking damages of $68,993.62 as a result of an overdraft in our bank account resulting from non-sufficient funds checks received from an investor on May 22 and May 29, 2009. A motion for summary judgment by the plaintiff is pending in the court. The remaining balance of $14,047 is on the balance sheet as a Cash Overdraft.





From time to time, the Company is involved in various litigation in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations.





Item 1A. Risk Factors





As a "small reporting company" as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.




33





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





On August 12, 2010, we completed the minimum closing of $1,500,000 of a $3,000,000 private placement.  The investors received 15,000,000 shares of stock and 15,000,000 five year warrants to purchase our common stock at an exercise price of $0.25.  On September 30, 2010 we completed a second closing of $100,000 on the private placement.  The investor received 1,000,000 shares of stock and 1,000,000 five year warrants to purchase our common stock at an exercise price of $0.25.  Most of the proceeds will be used to expand sales and marketing efforts and to enlarge our technology infrastructure and complete enhancements to our offerings.





Item 3. Defaults upon Senior Securities





On December 30, 2007, an unaffiliated investor loaned the Company $200,000 on an 18-month note with a maturity date of June 30, 2009. The note carries interest at a rate of 12% per annum, with interest accruing and payable at maturity. In conjunction with this note, the Company also issued a warrant to purchase 100,000 shares of common stock at an exercise price of $1.00 and an expiration date of December 30, 2012. The note was recorded net of a deferred debt discount of $51,600, based on the relative fair value of the warrant under the Black-Scholes pricing model. Such discount was amortized over the term of the note. During the three months ended March 31, 2010 and 2009, the Company recorded amortization of the debt discount related to this note of $0 and $8,600, respectively. This note is guaranteed by Mr. Burchetta, a Company director. As of March 31, 2010, this note has matured and is still outstanding and is in default at this time. The Company is in discussions with the lender.





On January 25, 2008, an unaffiliated investor loaned the Company $100,000 on an unsecured 18-month note with a maturity date of July 25, 2009. The note carries interest at a rate of 12% interest per annum, with interest accruing and payable at maturity. In conjunction with the note, the Company also issued a warrant to purchase 50,000 shares of common stock at an exercise price of $1.00 and an expiration date of January 24, 2013. The note was recorded net of a deferred debt discount of $20,300, based on the relative fair value of the warrant under the Black-Scholes pricing model. Such discount was amortized over the term of the note. During the three months periods ended March 31, 2010 and 2009, amortization was $0 and $3,383, respectively. The investor loaned the Company an additional $100,000 on February 26, 2008. This note was discharged on October 12, 2010.





On February 26, 2008, an unaffiliated investor loaned the Company an additional $100,000 on an 18-month note with a maturity date of August 26, 2009. The note carries interest at a rate of 12% interest per annum, with interest accruing and payable at maturity. Terms of the loan included a $20,000 service fee on repayment or a $45,000 service fee if repayment occurs more than 31 days after origination. The outstanding principal and interest may be repaid, in whole or in part, at any time without prepayment penalty. Accordingly, since the loan remains unpaid, the Company has accrued the service fee of $45,000 as of March 31, 2010. In conjunction with the note, the Company also issued a warrant to purchase 175,000 shares of common stock at an exercise price of $1.25 and an expiration date of February 26, 2013. The note was recorded net of a deferred debt discount of $57,400, based on the relative fair value of the warrant under the Black-Scholes pricing model. Such discount is being amortized over the term of the note. During the three months ended March 31, 2010 and 2009, the Company recorded amortization of the debt discount related to this note of $0 and $9,567, respectively. This note was discharged on October 12, 2010.





Item 4. Removed and Reserved





None





Item 5. Other Information





None





34





Item 6. Exhibits and Filings on Form 8-K





31.1
Certification of Chief Executive Officer required by Rule 13(a)-14(a).





31.2
Certification of Chief Financial Officer required by Rule 13(a)-14(a).





32.1
Certifications required by Rule 13(a)-14(b) and 18 U.S.C. Section 1350.





Form 8-K dated April 4, 2010.





Form 8-K dated April 14, 2010.





Form 8-K dated August 18, 2010.








35





SIGNATURES




In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.





DEBT RESOLVE, INC.Dated:  November 22, 2010
By:
/s/ James G. BrakkeJames G. Brakke

Co-Chairman and Chief Executive Officer

(Principal executive officer)By:
/s/ David M.  RaineyDavid M. Rainey

President and Chief Financial Officer

(Principal financial and accounting officer)








36