UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



x
        ANNUAL REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2008



o
        TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period fromto



Commission File No.:  1-33110



DEBT RESOLVE, INC.

(Name of small business issuer 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) |                                     



Securities registered under Section 12(b) of the Exchange Act:

|Title of Each Class                     |  | Name of Each Exchangeon Which Registered
|--------------------------------------- |  | ----------------------------------------
|Common Stock, par value $.001 per share |  | Over-the-Counter Pink Sheets            







Securities registered under Section 12(g) of the Exchange Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  [   ]   No [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  [   ]   No [ X ]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

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  [   ]
        
        Accelerated filer  [   ]


Non-accelerated filer  [   ]
        
        Smaller reporting company  [ X ]







Indicate by check mark whether the registrant is a shell company (as defined in rule 12 b-2 of the Act).  Yes  [   ]   No [ X ]

The aggregate market value of the voting and non-voting stock held by non-affiliates of the issuer was approximately $15,302,923, based on a closing price of $1.40 per share on June 30, 2008, as quoted on the American Stock Exchange.

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.  [    ] Yes  [    ]  No



As
  of August 19, 2009, 10,061,865 shares of the issuers Common Stock were
  issued and outstanding.

Documents Incorporated by Reference:None

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DEBT RESOLVE, INC.



TABLE OF CONTENTS



PART I.



Item 1.
        Description of business
        2Item 1A.
        Risk factors
        11Item 2.
        Description of property
        19Item 3.
        Legal proceedings
        19Item 4.
        Submission of matters to a vote of security holders
        21PART  II.Item 5.
        Market for common equity, related stockholder matters and small business issuer purchase of equity securities
        22Item 6.
        Managements discussion and analysis or plan of operation
        23Item 7.
        Consolidated financial statements
        33Item 8.
        Changes in and disagreements with accountants on accounting and financial disclosure
        33Item 8A.
        Controls and procedures
        33Item 8B.
        Other information
        34PART III.Item 9.
        Directors, executive officers, promoters, control persons and corporate governance; compliance with Section 16(a) of the Exchange Act
        34Item 10.
        Executive compensation
        38Item 11.
        Security ownership of certain beneficial owners and management and related stockholder matters
        43Item 12.
        Certain relationships and related transactions, and director independence
        45Item 13.
        Exhibits
        45Item 14.
        Principal accountant fees and services
        46Signatures
        49Financial Statements
        F-1Exhibits






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PART I.

ITEM 1.  Description of Business

This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects.  Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report.  Additionally, statements concerning future matters such as the development or regulatory approval of new products, enhancements of existing products or technologies, revenue and expense levels and other statements regarding matters that are not historical are forward-looking statements.

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us.  Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements.  Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading Risk Factors below, as well as those discussed elsewhere in this report.  Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.  We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this report.  Readers are urged to carefully review and consider the various disclosures made in this report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Overview

Debt Resolve, Inc. (we, our, us and similar phrases refer to Debt Resolve, Inc.), is a Delaware corporation formed on April 21, 1997.  We provide a patented software solution to consumer lenders based on our licensed, proprietary DebtResolve® system.  Our Internet-based bidding system facilitates the settlement and collection of defaulted consumer debt via the Internet.  Our existing and target creditor clients include banks and other credit originators, credit card issuers and third-party collection agencies and collection law firms, as well as assignees and buyers of charged-off consumer debt.  We believe that our system, which uses a client-branded user-friendly web interface, provides our clients with a less intrusive, less expensive, more secure and more efficient way of pursuing delinquent debts than traditional labor-intensive methods.



Our DebtResolve system brings creditors and consumer debtors together to resolve defaulted consumer debt online through a series of steps.  The process is initiated when one of our creditor clients electronically forwards to us a file of debtor accounts, and sets rules or parameters for handling each class of accounts.  The client then invites its consumer debtor to visit a client-branded website, developed and hosted by us, where the consumer is presented with an opportunity to satisfy the defaulted debt through our DebtResolve system.  Through our hosted website, the debtor is allowed to make three or four offers, or select other options to resolve or settle the obligation.  If the debtor makes an offer acceptable to our creditor client, payment can then be collected directly through the DebtResolve system and deposited into the clients account.  The entire resolution process is
accomplished online.



We completed development and commenced commercial use of our software solution in 2004.  We currently have a written contract in place with a bank and a hospital.  The loss of these contracts would have a material adverse impact on our business.



On January 19, 2007, we acquired First Performance Corporation and its subsidiary, First Performance Recovery Corporation, both privately-owned debt collection agencies with approximately 100 collectors, revenues of $6 million for the year ended December 31, 2006, and offices in Florida and Nevada, which we operated as a wholly-owned subsidiary.  We spent much of 2007 and the beginning of 2008 restructuring this business (after losing a few key clients) to improve profitability by reducing costs and declining business that had contributed to prior losses at First Performance, while securing new clients with better profitability prospects.  In June 2007, we consolidated all business activities of First Performance Corporation and First Performance Recovery Corporation into our Nevada facility and transacted all business through First Performance Recovery.  In addition, we believed that the
agency would serve as a test lab to develop best practices for the integration of our DebtResolve system into the accounts receivable management environment.  On June 30, 2008, First Performance Recovery was closed



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as we decided to refocus entirely on our core internet business and to mitigate ongoing losses from First Performance.



Corporate Information

We were incorporated as a Delaware corporation in April 1997 under our former name, Lombardia Acquisition Corp.  In 2000, we filed a registration statement on Form 10-SB with the U.S. Securities and Exchange Commission, or SEC, and became a reporting, non-trading public company.  Through February 24, 2003, we were inactive and had no significant assets, liabilities or operations.  On February 24, 2003, James D. Burchetta and Charles S. Brofman, directors of our company, and Michael S. Harris, a former director of our company, purchased 2,250,000 newly-issued shares of our common stock, representing 84.6% of the then outstanding shares.  We received an aggregate cash payment of $22,500 in consideration for the sale of such shares to Messrs. Burchetta, Brofman and Harris.  Our board of directors was then reconstituted, and we began our current business and product development.  On May 7, 2003,
following approvals by our board of directors and holders of a majority of our outstanding shares of common stock, our certificate of incorporation was amended to change our corporate name to Debt Resolve, Inc. and to increase the number of our authorized shares of common stock from 20,000,000 to 50,000,000 shares.  On August 16, 2006, following approvals by our board of directors and holders of a majority of our outstanding shares of common stock, our certificate of incorporation was amended to increase the number of our authorized shares of common stock from 50,000,000 to 100,000,000 shares.  On August 25, 2006, following approvals by our board of directors and holders of a majority of our outstanding shares of common stock, our certificate of incorporation was amended to effect a 1-for-10 reverse stock split of our outstanding shares of common stock, which reduced our outstanding shares of common stock from 29,703,900 to 2,970,390 shares.  On November 6, 2006, we completed an
initial public offering which, in conjunction with the conversion of convertible bridge notes into shares of our common stock, increased the number of outstanding shares of common stock to 6,456,696.  Subsequent common stock grants, option exercises, the acquisition of First Performance, warrant grants and private placements have brought us to our current number of outstanding shares of common stock.  Our principal executive offices are located at 150 White Plains Road, Suite 108, Tarrytown, New York 10591, and our telephone number is (914) 949-5500.  Our website is located athttp://www.debtresolve.com.  Information contained in our website is not part of this report.



Our Strengths


Through formal focus groups and one-on-one user studies conducted by us with consumer debtors who would be potential candidates to use the DebtResolve system, we designed the system to be user-friendly and easily navigated.



We believe our DebtResolve system has two key features that make it unique and valuable:




        It utilizes a blind-bidding system for settling debt  This feature is the subject of patent protection and, to date, has resulted in settlements and payments that average above the floor set by our clients.





        It facilitates best practices  The collections industry is very results-driven.  To adopt new techniques or technology, participants want to know exactly what kind of benefits to expect.  We recognize this and also know that Internet-based collection is a new technology, and there is room to improve its performance.  By working with our clients to build best practices, we expect to help secure sales and improve revenue to us.




The main advantages to consumer debtors in using our DebtResolve system are:




        A greater feeling of dignity and control over the debt collection process.





        Confidentiality, security, ease-of-use and 24-hour access.





        A less threatening experience than dealing directly with debt collectors.




Despite these advantages, neither we nor any other company has established a firm foothold in the potential new market for online debt collection.  Effective utilization of our system will require a change in thinking on the



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part of the debt collection industry, and the market for online collection of defaulted consumer debt may never develop to the extent that we envision or that is required for our Internet product to become a viable, stand-alone business.  However, we intend to continuously enhance and extend our offerings and develop significant expertise in consumer behavior with respect to online debt payment to remain ahead of potential competitors.  We believe we have the following key competitive advantages:




        To our knowledge, we are the first to market an integrated set of Internet-based consumer debt collection tools.





        As the first to market, we have developed early expertise which we expect will allow us to keep our technology on the leading edge and develop related offerings and services to meet our clients needs.





        The patent license to the Internet bidding process protects the DebtResolve systems key methodology and limits what future competitors may develop.





        The effectiveness of the Internet bidding model to settle claims has already been shown in the insurance industry by Cybersettle, Inc. (with respect to insurance claims) and our first clients.





        The industry reputation of our management team and the extensive consumer debt research we have conducted provide us with credibility with potential clients.




Development-Stage Activities and Acquisitions



During the last several years, we have devoted substantially all of our efforts to planning and budgeting, product development, and raising capital.  In January 2004, we substantially completed the development of our online solution and began marketing it to banks, collection agencies, debt buyers and other creditors.  In February 2004, we implemented our DebtResolve system, on a test basis, with a collection agency.  From that time forward, we have implemented our system with additional clients, but have not earned, nor did we expect to generate, significant revenues from these clients during the initial start-up periods.  We have now refined our pricing model for future business to facilitate the acquisition of new clients.  On January 19, 2007, we acquired all of the outstanding shares of First Performance Corporation for a combination of cash and shares of our common stock.



Our Core Business



The DebtResolve System



Our DebtResolve system brings creditors and consumer debtors together to resolve defaulted consumer debt through a series of steps.  The process is initiated when one of our clients electronically forwards to us a file of debtor accounts and sets rules or parameters for handling each class of accounts.  The client then invites its customer (the consumer debtor) to visit a client-branded website, developed and hosted by us, where the consumer debtor is presented with an opportunity to satisfy the defaulted debt through the DebtResolve system.  Through the website, the consumer debtor is allowed to make three or four offers, or select other options, to resolve or settle the obligation.  If the consumer debtor makes an offer acceptable to our creditor client, payment can then be collected directly through the DebtResolve system and deposited into the clients own account.  The entire
resolution process is accomplished online.



Our DebtResolve system consists of a suite of modules.  These modules include the core DR Settle module, DR Pay for online payments, DR Control for system administration, and DR Mail as our secure e-mail methodology.  Our DebtResolve system is centered on our online bidding module, DR Settle, which allows debtors to make offers, or bids, setting forth what they can pay against their total overdue balances.



We believe that our DebtResolve system can be a highly effective collections tool at all stages and with each class of potential DebtResolve system users we have identified, including credit originators, outside collection agencies and collection law firms and debt buyers.  The means by which collections have traditionally been pursued, by phone and mail, are, we believe, perceived by debtors as intrusive and intimidating.  In addition, the general trend in the collections industry is moving towards outsourcing of collections efforts to third parties.





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Our DebtResolve system offers significant benefits to our creditor clients:




        Enabling them to reduce the cost of collecting defaulted consumer debt,





        Minimizing the need for collectors on the phone,





        Updating consumer debtor contact and other information,





        Achieving real time settlements with consumer debtors,





        Adding a new and cost-effective communication channel,





        Appealing to new segments of debtors who do not respond to traditional collection techniques,





        Easily implementing and testing different collection strategies to potentially increase current rates of return on defaulted consumer debt,





        Improving compliance with applicable federal and state debt collection laws and regulations through the use of a controlled script, and





        Preserving and enhancing their brand name by providing a positive tool for communicating with consumers.




Collection Agency Business



First Performance Corporation and First Performance Recovery Corporation



We purchased First Performance Corporation and its subsidiary, First Performance Recovery Corporation, in January 2007.  First Performance was a collection agency that represented both regional and national credit grantors and debt buyers from such diverse industries as retail, bankcard, oil cards, mortgage and auto.



By entering this business directly, we signaled our intention to become a significant player in the accounts receivable management industry.  We believed that through a mixture of both traditional and our innovative, technologically-driven collection methods, we would achieve superior returns.



Due to the loss of four major clients at First Performance during the first nine months of 2007, we performed two interim impairment analyses in accordance with SFAS 142.  As a result of these analyses, we recorded impairment charges aggregating $1,206,335 during the year ended December 31, 2007.  We also took a charge for the disposal of fixed assets at the June 30, 2007 closing of First Performances Florida facility of $68,329.



One year later, on June 30, 2008, we decided to close First Performance to refocus on our core internet business and to mitigate continuing losses at First Performance.  At that time, we took a charge for the disposal of the remaining fixed assets of $87,402 and expensed the remaining value of the intangible assets in accordance with SFAS 142 with a charge of $176,545.



Our Industry



According to the U.S. Federal Reserve Board, consumer credit has increased from $133.7 billion in 1970 to $2.6 trillion in December 2008, a compound annual growth rate of 8% for the period.  For January 2009, U.S. consumer credit increased at an annual rate of 0.8%, revolving credit increased at an annual rate of 1.2%, and non-revolving credit increased at an annual rate of 0.6%.  In parallel, the accounts receivables management (ARM) industry accounts for $15 billion in annual revenues according to industry analyst Kaulkin Ginsberg.







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There are several major collections industry trends:




        Profit margins are stagnating or declining due to the fixed costs of collections.  In addition, the worsening economy means more delinquencies to collect but a higher inability on the part of debtors to pay.  Thus, costs increase to generate the same level of revenue.  The ACA Internationals 2008 Benchmarking & Agency Operations Survey shows that more than 50% of the operating costs are directly related to the cost of the collections agents, making the business difficult to scale using traditional staffing and collections methods.





        Small to mid-size agencies will need to offer competitive pricing and more services to compete with larger agencies, as well as focus on niche areas that require specialized expertise.





        Off-shoring has been used by both creditors and third-party collectors, but their results were less that expected due to cultural differences.





        Debt buyers may start collecting more debt themselves while agencies may start buying more debt, creating more competitiveness within the ARM industry.




The collections industry has always been driven by letters and agent calls to debtors.  In the early 1990s dialer technology created an improvement in calling efficiency.  However, it was not until about a decade later that any new technologies were introduced.  These new technologies include analytics, interactive voice response systems and Internet-based collections.  Of these, interactive voice response systems and Internet-based collections have the ability to positively impact the cost-to-collect by reducing agent involvement, while analytics focuses agent time on the accounts with the highest potential to collect.



Our Business Growth Strategy



Our goal is to become a significant player in the ARM industry by making our DebtResolve system a key collection tool at all stages of delinquency across all categories of consumer debt.  The key elements of our business growth strategy are to:




        Accelerate our marketing efforts and extend target markets for the Internet product.Initially, we have marketed our DebtResolve system to credit issuers, their collection agencies and collection law firms and the buyers of their defaulted debt in the United States, Canada and the United Kingdom.  We also entered the auto collections vertical in 2007 with the addition of several clients in this area.  As of December 31, 2008, we were actively targeting new market segments like healthcare companies, and new geographic markets, like Asia and other international markets.  Other markets in the United States may include student loan debt, utilities and Internet/payday lending.





        Expand our service offerings.We will continue to pursue opportunities, either through software licensing, acquisition or product extension, to enter related markets well-suited for our proprietary technology and other services.  We may work by ourselves or with partners to provide one-stop shopping to our clients for a broad array of collection related services, including payment processing, analytics and other technology.





        Grow our client base.As of December 31,
                  2008, we had 2 clients. Our clients consist of credit issuers
                  (including banks). With our suite of online products, we believe
                  we can expand our client base by offering a broader range of
                  services. We believe that our clients can benefit from our
                  patented, cost-effective technology and other services, and
                  we intend to continue to market and sell our services to them
            under long-term recurring revenue contracts.





        Increase adoption rates.Our
                clients typically pay us either usage fees per settlement or
                license fees based on their number of end-users and volume of
                transactions. Registered end-users using account presentation
                and payments services are the major drivers of our recurring
                revenues. Using our proprietary technology and our marketing
                processes, we will continue to assist our clients in growing
            the adoption rates for our services.




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
        Provide additional products and services to our installed client base.We intend to continue to leverage our installed client base by expanding the range of new products and services available to our clients, through internal development, partnerships and alliances.





        Maintain and leverage technological leadership.Our technology and integration expertise has enabled us to be among the first to introduce an online method for the resolution of consumer debt, and we believe we have pioneered the online collection technology space.  We believe the scope and speed of integration of our technology-based services gives us a competitive advantage and with our efforts on continued research and development, we intend to continue to maintain our technological leadership.





        Facilitate and leverage growth.We believe our growth will be facilitated by the fact that we have already established proof of concept of our system with our initial national clients, as well as from the increasing level of consumer debt both in the United States and internationally, the significant level of charge-offs by consumer debt originators and recent major changes in consumer bankruptcy laws.  The Bankruptcy Abuse Prevention and Consumer Protection Act, which became effective in October 2005, significantly limits the availability of relief under Chapter 7 of the U.S. Bankruptcy Code, where consumer debts can be discharged without any effort at repayment.  Under this new law, consumer debtors with some ability to repay their debts are either barred from bankruptcy relief or forced into repayment plans
under Chapter 13 of the U.S. Bankruptcy Code.  In addition, this law imposes mandatory budget and credit counseling as a precondition to filing bankruptcy.  We expect that these more stringent requirements will make bankruptcy a much less attractive option for most consumer debtors to resolve outstanding debt and will increase the pool of accounts suitable for our DebtResolve system and potentially lead more creditors to utilize our system.




Sales and Marketing



The DebtResolve System



Our current sales efforts for our core business is focused on United States consumer credit issuers, collection agencies and collection law firms, the buyers of defaulted consumer debt and healthcare entities.  Our primary targets are the major companies in each of these segments: credit card issuers, auto loan grantors, telecoms, utilities as well as the most significant outside collection agencies or collection law firms, purchasers of charged-off debt, hospitals and large provider groups.



The economics of an Internet model means that our fixed costs will be relatively stable in relation to growth of our business, thereby improving margins over time.  It is our intention to base pricing on the value gained by clients rather than on our direct costs.  In general, we believe that if our services are priced at a reasonable discount to the relative cost of traditional collections, the economic advantages will be sufficiently compelling to persuade clients to offer the DebtResolve system to a majority of their target debtors as a preferred or alternate channel.  A key part of our sales strategy is to build a proof-of-concept by sub-market.  This involves tracking results by each sub-market on the percentage of debtors that use our online system, the number that pay, and the amount paid compared to the settlement floor that our clients desire.  These results form the
basis for the business case and are key to closing sales.  Results will come from existing clients, new partnerships and from our current business partners or contacts.



Our marketing efforts will focus on strengthening our image versus that of our competition, refining our message by market, and re-introducing our company as a financially-sound, growing enterprise.



Technology License and Proprietary Technology



At the core of our DebtResolve system is a patent-protected bidding methodology co-invented by James D. Burchetta and Charles S. Brofman, the co-founders of our company.  We originally entered into a license agreement in February 2003with Messrs. Burchetta and Brofman for the licensed usage of the intellectual property rights relating to U.S. Patent No. 6,330,551 issued by the U.S. Patent and Trademark Office on December 11, 2001 for Computerized Dispute and Resolution System and Method worldwide.  This patent, which expires August 5, 2018, covers automated and online, double blind-bid systems that generate high-speed settlements by matching



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offers and demands in rounds.  In June 2005, we amended and restated the license agreement in its entirety.  The licensed usage is limited to the creation of software and other code enabling an automated system used solely for the settlement and collection of delinquent, defaulted and other types of credit card receivables and other consumer debt and specifically excludes the settlement and collection of insurance claims, tax and other municipal fees of all types.  The licensed usage also includes the creation, distribution and sale of software products or solutions for the same aim as above and with the same exclusions.  In lieu of cash royalty fees, Messrs. Burchetta and Brofman have agreed to accept stock options to purchase shares of our common stock, which were granted as follows:




        initially, we granted to each of Messrs. Burchetta and Brofman a stock option for up to such number of shares of our common stock such that the stock option, when added to the number of shares of our common stock owned by each of Messrs. Burchetta and Brofman, and in combination with any shares owned by any of their respective immediate family members and affiliates, would equal 14.6% of the total number of our outstanding shares of common stock on a fully-diluted basis as of the closing of our then-potential initial public offering, assuming the exercise of such stock option (at the close of our initial public offering in November 2006, we issued to each of Messrs. Brofman and Burchetta stock options for the purchase of up to 758,717 shares of our common stock),





        if, and upon, our reaching (in combination with any subsidiaries and other sub-licensees)  $10,000,000 in gross revenues derived from the licensed usage in any given fiscal year, we will grant each of Messrs. Burchetta and Brofman such additional number of stock options as will equal 1% of our total number of outstanding shares of common stock on a fully-diluted basis at such time,





        if, and upon, our reaching (in combination with any subsidiaries and other sub-licensees)  $15,000,000 in gross revenues derived from the licensed usage in any given fiscal year, we will grant each of Messrs. Burchetta and Brofman such additional number of stock options as will equal 1.5% of our total number of outstanding shares of common stock on a fully-diluted basis at such time, and





        if, and upon, our reaching (in combination with any subsidiaries and other sub-licensees)  $20,000,000 in gross revenues derived from the licensed usage in any given fiscal year, we will grant each of Messrs. Burchetta and Brofman such additional number of stock options as will equal 2% of our total number of outstanding shares of common stock on a fully-diluted basis at such time.




The stock options granted to Messrs. Burchetta and Brofman pursuant to the license agreement have an exercise price of $5.00 per share and are exercisable for ten years from the date of grant.



The term of the license agreement extends until the expiration of the last-to-expire patents licensed hereunder (now 5 patents) and is not terminable by Messrs. Burchetta and Brofman, the licensors.  The license agreement also provides that we will have the right to control the ability to enforce the patent rights licensed to us against infringers and defend against any third-party infringement actions brought with respect to the patent rights licensed to us subject, in the case of pleadings and settlements, to the reasonable consent of Messrs. Burchetta and Brofman.  The terms of the license agreement, including the exercise price and number of stock options granted under the agreement, were negotiated in an arms-length transaction between Messrs. Burchetta and Brofman, on the one hand, and our independent directors, on the other hand.



Cybersettle, Inc. also licenses and utilizes the patent-protected bidding methodology co-invented by Messrs. Burchetta and Brofman, exclusive to the settlement of personal injury, property and workers compensation claims between claimants and insurance companies, self-insured corporations and municipalities.  Cybersettle (the operating company) and CyberSettle Holdings (the current holder of the patents) are controlled by Spencer Trask, a private equity firm.  Cybersettle is not affiliated with us.



In addition, we have developed our own software based on the licensed intellectual property rights.  We regard our software as proprietary and rely primarily on a combination of copyright, trademark and trade secret laws of general applicability, employee confidentiality and invention assignment agreements and other intellectual property protection methods to safeguard our technology and software.  We have not applied for patents on any of our own technology.  We have obtained through the U.S. Patent and Trademark Office a registered trademark for our DebtResolve corporate and system name as well as our slogan Debt Resolve  Settlement with Dignity.  DR Settle, DR Pay, DR Control, DR Mail, DR Prevent, Debt Resolve  Resolved. With Dignity, Connect. Resolve. Collect.,
DR-Default, First Performance Corporation, and First Performance Recovery Corporation



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are our trademarks/service marks, and we intend to attempt to register them with the U.S. Patent and Trademark Office as well.



Technology and Service Providers



In 2007, we outsourced our web hosting to Cervalis LLC and replaced AT&T for significant cost savings, while maintaining our security in a SAS 70 certified environment.  The Cervalis hosting facility is located in Wappingers Falls, New York.  We use our own servers in Cervalis environment to operate our proprietary software developed in our Tarrytown, New York facility.



Competition



The DebtResolve System



Internet-based technology was introduced to the collections industry in 2004 and has three primary participants: us, Apollo Enterprise Solutions, LLC and Online Resources Corp.



Apollo Enterprise Solutions, LLC is a company with a primary investor/CEO whose additional funding has come from private sources.  Apollo has a mixed team of employees/consultants who are located at their facility in Irvine, CA or are geographically dispersed.  Their marketing and sales efforts are focused on high-end banks and some large agencies, both in the United States and the United Kingdom, as well as healthcare providers.  In 2005 through 2008, we believe Apollo spent more than their competitors on advertising and trade show sponsorships.  Their sales strategy has been to be the lowest-cost provider.  In terms of product positioning, Apollo emphasizes their technology  especially their rules engine that allows a client to set treatment strategies, and the ability to process real-time credit scores for inclusion in the debtor treatment strategy.  Overall, Apollo has a feature
set similar to our DebtResolve system  including the rules engine  and appeared to replicate our proprietary blind bidding system.  In January 2007, we filed a patent infringement law suit against Apollo.  On November 5, 2007, Debt Resolve and Apollo jointly announced that they had reached a settlement of the pending patent infringement lawsuit.  The parties came to agreement that Apollos system, as represented by Apollo, does not infringe on Debt Resolves United States Patents:  Nos. 6,330,551 and 6,954,741, both entitled Computerized Dispute Resolution System and Method.  The parties further agreed to respect each others intellectual property to the extent it is validly patent protected with the parties reserving all of their legal rights.

Online Resources Corp. is an established, publicly-traded company whose primary businesses are online banking and online payments.  Their online collections product was built by Incurrent Solutions, Inc., a company that Online Resources acquired in late 2004.  Incurrent had a small base of credit card issuers as clients of their self-service website product line.  Their online collections product has been initially sold to large U.S. card issuers (top 25) but Online Resources has begun sales efforts to agencies.  Online Resources has documented results from a top card issuer, but their product is not as complete as either Apollos or ours.  However, their recent partnering with Intelligent Results to provide rules engine technology shows that Online Resources is addressing product deficiencies.  From a sales and marketing perspective, they have benefited from being a stable, relatively
large-sized company.  Online Resources may be able to reap some advantages from the integration of online bill payment capabilities with their online collections, but the product line is only a small piece of the overall company which could impact marketing and development resources.  In addition, their product has the slowest implementation time of the three competitors and, consequently, higher up-front fees.



The DebtResolve system has a client tool that makes setting up treatment programs as flexible as those offered by Apollo and Online Resources, but we believe is especially easy for our clients to use.  Its implementation time is guaranteed at 30-days maximum, and we have a track record that supports this claim.  Our DebtResolve system does not have an in-house payment processing system.  Many potential clients already have a processing system, and we can provide an interface to that system.  In 2007, we integrated to one payment processor that is very active in the ARM industry and began discussions with another.  In addition, although Apollo plays up its ability to handle real-time credit scores as a key differentiator, we have not found any evidence that this is a requirement in the industry.  However, we believe that matching that feature, if it becomes an issue, is a fairly straightforward process.





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Government Regulation



We believe that our Internet technology business is not subject to any regulations by governmental agencies other than that routinely imposed on corporate and Internet-based businesses.  We believe it is unlikely that state or foreign regulators would take the position that our DebtResolve system effectively constitutes the collection of debts that is subject to licensing and other laws regulating the activities of collection agencies.



Existing laws and regulations for traditional collection agencies like First Performance would include applicable state revolving credit, credit card or usury laws, state consumer plain English and disclosure laws, the Uniform Consumer Credit Code, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the U.S. Bankruptcy Code, the Health Insurance Portability and Accountability Act, the Gramm-Leach-Bliley Act, the federal Truth in Lending Act (including the Fair Credit Billing Act amendments) and the Federal Reserve Boards implementation of Regulation Z, the federal Fair Credit Reporting Act, and state unfair and deceptive acts and practices laws.  Collection laws and regulations also directly applied to First Performances business, such as the federal Fair Debt Collection Practices Act and state law counterparts.  Additional consumer protection and privacy
protection laws may be enacted that would impose additional requirements on the enforcement of and collection on defaulted consumer debt, and any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to collect.  Finally, federal and state governmental bodies are considering, and may consider in the future, other legislative proposals that would regulate the collection of consumer debt, and although we cannot predict if or how any future legislation would impact this expansion of our business into traditional collections, our failure to comply with any current or future laws or regulations applicable to us could limit our ability to collect on any consumer debt.



For our Internet technology business, any penetration of our network security or other misappropriation of consumers personal information could subject us to liability.  Other potential misuses of personal information, such as for unauthorized marketing purposes, could also result in claims against us.  These claims could result in litigation.  In addition, the Federal Trade Commission and several states have investigated the use by certain Internet companies of personal information.



In addition, pursuant to the Gramm-Leach-Bliley Act, our financial institution clients must require us to include in their contracts with us that we have appropriate data security standards in place.  The Gramm-Leach-Bliley Act stipulates that we must protect against unauthorized access to, or use of, consumer debtor information that could result in detrimental use against or substantial inconvenience to any consumer debtor.  Detrimental use or substantial inconvenience is most likely to result from improper access to sensitive consumer debtor information because this type of information is most likely to be misused, as in the commission of identity theft.  We believe we have adequate policies and procedures in place to protect this information; however, if we experience a data security breach that results in any penetration of our network security or other misappropriation of
consumers personal information, or if we have an inadequate data security program in place, our financial institution clients may consider us to be in breach of our agreements with them, and we may be subject to litigation.



The laws and regulations applicable to the Internet and our services are evolving and unclear and could damage our business.  Due to the increasing popularity and use of the Internet, it is possible that laws and regulations may be adopted, covering issues such as user privacy, pricing, taxation, content regulation, quality of products and services, and intellectual property ownership and infringement.  This legislation could expose us to substantial liability or require us to incur significant expenses in complying with any new regulations.  Increased regulation or the imposition of access fees could substantially increase the costs of communicating on the Internet, potentially decreasing the demand for our services.  A number of proposals have been made at the federal, state and local level and in foreign countries that would impose additional taxes on the sale of goods and services over
the Internet.  Such proposals, if adopted, could adversely affect us.  Moreover, the applicability to the Internet of existing laws governing issues such as personal privacy is uncertain.  We may be subject to claims that our services violate such laws.  Any new legislation or regulation in the United States or abroad or the application of existing laws and regulations to the Internet could adversely affect our business.



We are actively pursuing partnering prospects for our DebtResolve system in the United Kingdom and Europe.  Since we would host client account data on our system, we would be subject to European data protection law that derives from the Data Protection Directive (Directive 95/46/EC) of the European Commission, which has been implemented in the United Kingdom under the Data Protection Act 1998.  Under the Data Protection Act, we are categorized as a data processor.  As a data processor, we are required to agree to take steps, including technical



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and organizational security measures, to ensure that personal data which may identify a living individual that may be passed to our DebtResolve system by our creditor client in the course of our business is protected.  In addition, the Consumer Credit Act 1974 of the United Kingdom and various regulations made under it governs the consumer finance market in the United Kingdom and provides that our creditor client must hold a license to carry on a consumer credit business.  Under the Consumer Credit Act, all activities conducted through our DebtResolve system must be by, and in the name of, the creditor client.  We cannot predict how foreign laws will impact our ability to expand our business internationally or affect the cost of such expansion.  We will evaluate applicable foreign laws as our efforts to expand our business into other foreign jurisdictions warrant.



Employees



As of the date of this report, we have 5 employees in total, of which 3 are full-time employees.  All of our employees are based at our corporate headquarters in Tarrytown, New York.  None of our employees is subject to a collective bargaining agreement, and we believe that our relations with our employees are good.



ITEM 1A.  Risk Factors



Cautionary Statements and Risk Factors



Set forth below and elsewhere in this Form 10-K and in other documents we file with the SEC are important risks and uncertainties that could cause our actual results of operations, business and financial condition to differ materially from the results contemplated by the forward looking statements contained in this Form 10-K.



Risks Related to Our Business



Our independent registered public accounting firms report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern.



For
  the years ended December 31, 2008 and 2007, we had inadequate revenues
  and incurred net losses from continuing operations of $7,712,170 and $8,154,302,
  respectively.  Cash used in operating activities for continuing operations
  was $835,045 and $4,306,975 for the years ended December 31, 2008 and 2007,
  respectively. Based upon projected operating expenses, 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.

The Company needs to raise additional capital in order to be able to accomplish its business plan objectives.  The Company has historically satisfied its capital needs primarily from the sale of debt and equity securities.  Management of the Company is continuing its efforts to secure additional funds through debt and/or equity instruments.  Management believes that it will be successful in obtaining additional financing; 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.  At
this time, there is also a significant risk of bankruptcy unless additional funding is secured.  There can be no assurance that any plan to raise additional funding will be successful.  These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Subsequent
  to December 31, 2008, the Company has secured additional financing from seven
  parties in the aggregate amount of $512,500.



We have a limited operating history at the Internet business on which to evaluate our potential for executing our business strategy.  This makes it difficult to evaluate our future prospects and the risk of success or failure of our business.



We began our Internet technology operations in 2003, therefore your evaluation of our business and prospects will be based on the limited operating history of this business.  Consequently, our historical results of



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operations may not give an accurate indication of our future results of operations or prospects.  You must consider our business and prospects in light of the risks and difficulties we will encounter in a relatively new and rapidly evolving market.  We may not be able to address these risks and difficulties, which make it difficult to evaluate our future prospects and the viability of our business.



We
  have experienced significant and continuing losses from operations. In fiscal
  years 2007 and 2008, we have incurred total net losses from continuing operations
  for these two years of $15,866,472. If such losses continue, we may not be able
  to continue our operations.



We
  incurred a net loss from continuing operations of $7,712,170 for the year ended
  December 31, 2008 and $8,154,302 for the year ended December 31, 2007. From
  February 2003 to date, our operations have been funded almost entirely through
  the proceeds that we have received from the issuance of our common stock in
  private placements, the issuance of our 7% convertible promissory notes in two
  private financings in 2005, the issuance of convertible and non-convertible
  notes in a private financing in June 2006, the issuance of our common stock
  at our initial public offering, and from a private financing in 2007 and various
  individual private placements and shareholder loans in 2007 and 2008. If we
  continue to experience losses, we may not be able to continue our operations
  or may have to declare bankruptcy.



If we are unable to retain current DebtResolve system clients and attract new clients, or if our clients do not actively submit defaulted consumer debt accounts on our DebtResolve system or successfully promote access to the website, we will not be able to generate revenues or continue our DebtResolve system business.



We
  expect that our DebtResolve system revenue will come from taking a success fee
  equal to a percentage of defaulted consumer debt accounts that are settled and
  collected through our online DebtResolve system, from a flat fee per settlement
  or from recurring monthly fees for the use of our system, potentially coupled
  with success or other transaction fees. We depend on our creditor clients, who
  include but are not limited to first-party creditors such as banks, lenders,
  credit card issuers, telecoms and utilities, third-party collection agencies
  or collection law firms and purchasers of charged-off debt, to initiate the
  process by submitting defaulted consumer debt accounts on our system along with
  the settlement offers. We cannot be sure that we will be able to retain our
  existing, and enter into new, relationships with creditor clients in the future.
  In addition, we cannot be certain that we will be able to establish these creditor
  client relationships on favorable economic terms. Finally, we cannot control
  the number of accounts that our clients will submit on our system, how successfully
  they will promote access to the website, or whether the use of our system will
  result in any increase in recovery over traditional collection methods. If our
  client base, and their corresponding claims submission, does not increase significantly
  or experience favorable results, we will not be able to generate sufficient
  revenues to continue and sustain our DebtResolve system business.



We may be unable to meet our future liquidity requirements.



We depend on both internal and external sources of financing to fund our operations.  Our inability to obtain financing and capital as needed or on terms acceptable to us would limit our ability to operate our business or cause us to seek bankruptcy protection from our creditors.



We may fail to successfully integrate acquisitions and reduce our operating expenses.



Although we have no definitive agreements in place to do so currently, we may in the future seek to acquire additional complementary businesses, assets or technologies.  The integration of the businesses, assets and technologies we have acquired or may acquire will be critical.  Integrating the management and operations of these businesses, assets and technologies is time consuming, and we cannot guarantee we will achieve any of the anticipated synergies and other benefits expected to be realized from acquisitions.  We currently have limited experience with making acquisitions and we expect to face one or more of the following difficulties:




        integrating the products, services, financial, operational and administrative functions of acquired businesses, especially those larger than us,





        delays in realizing the benefits of our strategies for an acquired business which fails to perform in accordance with expectations,




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
        diversion of our managements attention from our existing operations since acquisitions often require substantial management time, and





        acquisition of businesses with unknown liabilities, software bugs or adverse litigation and claims.




If we are unable to implement our marketing program or if we are unable to build positive brand awareness for our company and our services, demand for our services will be limited, and we will not be able to grow our client base and generate revenues.



We believe that building brand awareness of our DebtResolve system and marketing our services in order to grow our client base and generate revenues is crucial to the viability of our business.  Furthermore, we believe that brand awareness is a key differentiating factor among providers of online services, and given this, we believe that brand awareness will become increasingly important as competition is introduced in our target markets.  In order to increase brand awareness, we must devote significant time and resources in our marketing efforts, provide high-quality client support and increase the number of creditors and consumers using our services.  While we may maintain a Powered by Debt Resolve logo on each screen that consumers view when they log on to the DebtResolve system, this logo may be inadequate to build brand awareness among consumers.  If initial clients do
not perceive our services to be of high quality, the value of our brand could be diluted, which could decrease the attractiveness of our services to creditors and consumers.  If we fail to promote and maintain our brand, our ability to generate revenues could be negatively affected.  Moreover, if we incur significant expenses in promoting our brand and are unable to generate a corresponding increase in revenue as a result of our branding efforts, our operating results would be negatively impacted.



Currently, we are targeting our marketing efforts towards the collection and settlement of overdue or defaulted consumer debt accounts generated primarily in the United States as well as Europe.  To grow our business, we will have to achieve market penetration in this segment and expand our service offerings and client base to include other segments and international creditor clients.  We have limited previous experience marketing our services and may not be able to implement our sales and marketing initiatives.  We may be unable to hire, retain, integrate and motivate sales and marketing personnel.  Any new sales and marketing personnel may also require a substantial period of time to become effective.  There can be no assurance that our marketing efforts will result in our obtaining new creditor clients or that we will be able to grow the base of creditors and consumers who use our services.



We may not be able to protect the intellectual property rights upon which our business relies, including our licensed patents, trademarks, domain name, proprietary technology and confidential information, which could result in our inability to utilize our technology platform, licensed patents or domain name, without which we may not be able to provide our services.



Our ability to compete in our sector depends in part upon the strength of our proprietary rights in our technologies.  We consider our intellectual property to be critical to our viability.  We do not hold patents on our consumer debt-related product, but rather license technology for our DebtResolve system from James D. Burchetta and Charles S. Brofman, the co-founders of our company, whose patented technology is now, and is anticipated to continue to be, incorporated into our service offerings as a key component.



Unauthorized use by others of our proprietary technology could result in an increase in competing products and a reduction in our sales.  We rely on patent, trademark, trade secret and copyright laws to protect our licensed and proprietary technology and other intellectual property.  We cannot be certain, however, that the steps that we have taken to protect our proprietary rights to date will provide meaningful protection from unauthorized use by others.  We have initiated litigation and could pursue additional litigation in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. However, we may not prevail in these efforts, and we could incur substantial expenditures and divert valuable resources in the process.  In addition, many foreign countries laws may not protect us from
improper use of our proprietary technologies.  Consequently, we may not have adequate remedies if our proprietary rights are breached or our trade secrets are disclosed.



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In the future, we may be subject to intellectual property rights claims, which are costly to defend, could require us to pay damages and which could limit our ability to use certain technologies in the future and thereby result in loss of clients and revenue.



Litigation regarding intellectual property rights is common in the Internet and technology industries.  We expect that Internet technologies and software products and services may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products and services in different industry segments overlaps.  Under our license agreement, we have the right and obligation to control and defend against third-party infringement claims against us with respect to the patent rights that we license.  Any claims relating to our services or intellectual property could result in costly litigation and be time consuming to defend, divert managements attention and resources, cause delays in releasing new or upgrading existing products and services or require us to enter into royalty or licensing agreements.  Royalty or
licensing agreements, if required, may not be available on acceptable terms, if at all.  There can be no assurance that our services or intellectual property rights do not infringe the intellectual property rights of third parties.  A successful claim of infringement against us and our failure or inability to license the infringed or similar technology or content could prevent us from continuing our business.



The intellectual property rights that we license from our co-founders are limited in industry scope, and it is possible these limits could constrain the expansion of our business.



We do not hold patents on our consumer debt-related product, but rather license technology for our DebtResolve system from James D. Burchetta and Charles S. Brofman, the co-founders of our company, whose patented technology is now, and is anticipated to continue to be, incorporated into our service offerings as a key component.  This license agreement limits usage of the technology to the creation of software and other code enabling an automated system used solely for the settlement and collection of credit card receivables and other consumer debt and specifically excludes the settlement and collection of insurance claims, tax and other municipal fees of all types.  These limitations on usage of the licensed technology could constrain the expansion of our business by limiting the different types of debt for which our DebtResolve system can potentially be used, and limiting the potential
clients that we could service.



Potential conflicts of interest exist with respect to the intellectual property rights that we license from our co-founders, and it is possible our interests and their interests may diverge.



We do not hold patents on our consumer debt-related product, but rather license technology for our DebtResolve system from James D. Burchetta and Charles S. Brofman, the co-founders of our company, whose patented technology is now, and is anticipated to continue to be, incorporated into our service offerings as a key component.  This license agreement presents the possibility of a conflict of interest in the event that issues arise with respect to the licensed intellectual property rights, including the prosecution or defense of intellectual property infringement actions, where our interests may diverge from those of Messrs. Burchetta and Brofman.  The license agreement provides that we will have the right to control and defend or prosecute, as the case may require, the patent rights licensed to us subject, in the case of pleadings and settlements, to the reasonable consent of Messrs.
Burchetta and Brofman.  Our interests with respect to such pleadings and settlements may be at odds with those of Messrs. Burchetta and Brofman, requiring them to recuse themselves from our decisions relating to such pleadings and settlements, or even from further involvement with our company.



As
  of August 2009, Messrs. Burchetta and Brofman own approximately 20% of our outstanding
  shares of common stock. They have controlled our company since its inception.
  Under the terms of our license agreement, Messrs. Burchetta and Brofman will
  be entitled to receive stock options to purchase shares of our common stock
  if and to the extent the licensed technology produces specific levels of revenue
  for us. They will not be entitled receive any stock options for other debt collection
  activities such as off-line settlements. Messrs. Burchetta and Brofman have
  substantial influence for selecting the business direction we take, the products
  and services we may develop and the mix of businesses we may pursue. The license
  agreement may present Messrs. Burchetta and Brofman with conflicts of interest.



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If we cannot compete against competitors that enter our market, demand for our services will be limited, which would likely result in our inability to continue our business.



We are aware of two companies that have software offerings that are competitive with the DebtResolve system and which compete with us for market share.  Incurrent Solutions, Inc., a division of Online Resources Corp., announced a collection offering in fall 2004, and Apollo Enterprises Solutions, LLC announced an online collection offering in fall 2004.  Additional competitors could emerge in the online defaulted consumer debt market.  These and other possible new competitors may have substantially greater financial, personnel and other resources, greater adaptability to changing market needs, longer operating histories and more established relationships in the banking industry than we currently have.  In the future, we may not have the resources or ability to compete.  As there are few significant barriers for entry to new providers of defaulted consumer debt services, there can be no
assurance that additional competitors with greater resources than ours will not enter our market.  Moreover, there can be no assurance that our existing or potential creditor clients will continue to use our services on an increasing basis, or at all.  If we are unable to develop and expand our business or adapt to changing market needs as well as our competitors are able to do, now or in the future, we may not be able to continue our business.



We are dependent upon maintaining and expanding our computer and communications systems.  Failure to do so could result in interruptions and failures of our services.  This could have an adverse effect on our operations which would make our services less attractive to consumers, and therefore subject us to a loss of revenue as a result of a possible loss of creditor clients.



Our ability to provide high-quality client support largely depends on the efficient and uninterrupted operation of our computer and communications systems to accommodate our creditor clients and the consumers who use our system.  In the terms and conditions of our standard form of licensing agreement with our clients, we agree to make commercially reasonable efforts to maintain uninterrupted operation of our DebtResolve system 99.99% of the time, except for scheduled system maintenance.  In the normal course of our business, we must record and process significant amounts of data quickly and accurately to access, maintain and expand our DebtResolve system.



The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty, operating malfunction, software virus, or service provider failure, could disrupt our operations.  Any failure of our information systems, software or backup systems would interrupt our operations and could cause us to lose clients. We are exposed to the risk of network and Internet failure, both through our own systems and those of our service providers.  While our utilization of redundant transmission systems can improve our networks reliability, we cannot be certain that our network will avoid downtime.  Substantially all of our computer and communications hardware systems are hosted in leased facilities with Cervalis in New York, and under the terms of our hosting service level agreement with Cervalis, they will provide network connectivity availability 99.9% of
the time from the connection off their backbone to our hosted infrastructure.



Our disaster recovery plan may not be adequate and our business interruption insurance may not adequately compensate us for losses that could occur as a result of a network-related business interruption.  The occurrence of a natural disaster or unanticipated problems at our facilities or those of our service providers could cause interruptions or delays in use of our DebtResolve system and loss of data.  Additionally, we rely on third parties to facilitate network transmissions and telecommunications.  We cannot assure you that these transmissions and telecommunications will remain either reliable or secure.  Any transmission or telecommunications problems, including computer viruses and other cyber attacks and simultaneous failure of our information systems and their backup systems, particularly if those problems persist or recur frequently, could result in lost business from creditor
clients and consumers.  Network failures of any sort could seriously affect our client relations, potentially causing clients to cancel or not renew contracts with us.



Furthermore, our business depends heavily on services provided by various local and long-distance telephone companies.  A significant increase in telephone service costs or any significant interruption in telephone services could negatively affect our operating results or disrupt our operations.



James D. Burchetta possesses specialized knowledge about our business, and we would be adversely impacted if he were to become unavailable to us.



We believe that our ability to execute our business strategy will depend to a significant extent upon the efforts and abilities of James D. Burchetta, our Chairman and co-founder.  Mr. Burchetta, who is a licensor of key



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intellectual property to us, has knowledge regarding online debt collection technology and business contacts that would be difficult to replace.  If Mr. Burchetta were to become unavailable to us, our operations would be adversely affected.  We have no insurance to compensate us for the loss of any of our named executive officers or key employees.



In addition, we could issue blank check preferred stock without stockholder approval with the effect of diluting then current stockholder interests and impairing their voting rights, and provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.

Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of blank check preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors.  Accordingly, our board of directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders.  The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control.  For example, it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our company.  In addition, advanced notice is required prior to
stockholder proposals.

Delaware law also could make it more difficult for a third party to acquire us.  Specifically, Section 203 of the Delaware General Corporation Law may have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by our stockholders.

Risks Related to Our Industry



The ability of our DebtResolve system clients to recover and enforce defaulted consumer debt may be limited under federal, state, local and foreign laws, which would negatively impact our revenues.



Federal, state, local and foreign laws may limit our creditor clients ability to recover and enforce defaulted consumer debt.  Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement and collection of consumer debt.  Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to settle defaulted consumer debt accounts on behalf of our clients and could result in decreased revenues to us.  We cannot predict if or how any future legislation would impact our business or our clients.  In addition, we cannot predict how foreign laws will impact our ability to expand our business internationally or the cost of such expansion.  Our failure to comply with any current or future applicable laws or regulations could limit
our ability to settle defaulted consumer debt claims on behalf of our clients, which could adversely affect our revenues.



For all of our businesses, government regulation and legal uncertainties regarding consumer credit and debt collection practices may require us to incur significant expenses in complying with any new regulations.



A number of our existing and potential creditor clients, such as banks and credit card issuers, operate in highly regulated industries.  We are impacted by consumer credit and debt collection practices laws, both in the United States and abroad.  The relationship of a consumer and a creditor is extensively regulated by federal, state, local and foreign consumer credit and protection laws and regulations.  Governing laws include consumer plain English and disclosure laws, the Uniform Consumer Credit Code, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the U.S. Bankruptcy Code, the Health Insurance Portability and Accountability Act, the Gramm-Leach-Bliley Act, the Federal Truth in Lending Act (including the Fair Credit Billing Act amendments), the Fair Debt Collection Practices Act and state law counterparts, the Federal Reserve Boards implementation of Regulation
Z, the federal Fair Credit Reporting Act, and state unfair and deceptive acts and practices laws.  Failure of these parties to comply with applicable federal, state, local and foreign laws and regulations could have a negative impact on us.  For example, applicable laws and regulations may limit our ability to collect amounts owing with respect to defaulted consumer debt accounts, regardless of any act or omission on our part.  We cannot assure you that any indemnities received from the financial institutions which originated the consumer debt account will be adequate to protect us from liability to consumers.  Any new laws or rulings that may be adopted, and existing consumer credit and protection laws, may adversely affect our ability to collect and settle defaulted consumer debt accounts.  In addition, any failure on our part to comply with such requirements could adversely affect our ability to settle defaulted consumer debt accounts and result in liability.  In addition, state or
foreign regulators may take the



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position that our DebtResolve system effectively constitutes the collection of debts that is subject to licensing and other laws regulating the activities of collection agencies.  If so, we may need to obtain licenses from such states, or such foreign countries where we may engage in our DebtResolve system business.  Until licensed, we will not be able to lawfully deal with consumers in such states or foreign countries.  Moreover, we will likely have to incur expenses in obtaining licenses, including applications fees and post statutorily required bonds for each license.



We face potential liability that arises from our handling and storage of personal consumer information concerning disputed claims and other privacy concerns.



Any penetration of our network security or other misappropriation of consumers personal information could subject us to liability.  Other potential misuses of personal information, such as for unauthorized marketing purposes, could also result in claims against us.  These claims could result in litigation.  In addition, the Federal Trade Commission and several states have investigated the use by certain Internet companies of personal information.  We could incur unanticipated expenses, especially in connection with our settlement database, if and when new regulations regarding the use of personal information are enacted.



In addition, pursuant to the Gramm-Leach-Bliley Act, our financial institution clients are required to include in their contracts with us that we have appropriate data security standards in place.  The Gramm-Leach-Bliley Act stipulates that we must protect against unauthorized access to, or use of, consumer debtor information that could be detrimentally used against or result in substantial inconvenience to any consumer debtor.  Detrimental use or substantial inconvenience is most likely to result from improper access to sensitive consumer debtor information because this type of information is most likely to be misused, as in the commission of identity theft.  We believe we have adequate policies and procedures in place to protect this information; however, if we experience a data security breach that results in any penetration of our network security or other misappropriation of
consumers personal information, or if we have an inadequate data security program in place, our financial institution clients may consider us to be in breach of our agreements with them.



Government regulation and legal uncertainties regarding the Internet may require us to incur significant expenses in complying with any new regulations.



The laws and regulations applicable to the Internet and our services are evolving and unclear and could damage our business.  Due to the increasing popularity and use of the Internet, it is possible that laws and regulations may be adopted, covering issues such as user privacy, pricing, taxation, content regulation, quality of products and services, and intellectual property ownership and infringement.  This legislation could expose us to substantial liability or require us to incur significant expenses in complying with any new regulations.  Increased regulation or the imposition of access fees could substantially increase the costs of communicating on the Internet, potentially decreasing the demand for our services.  A number of proposals have been made at the federal, state and local level and in foreign countries that would impose additional taxes on the sale of goods and services over
the Internet.  Such proposals, if adopted, could adversely affect us.  Moreover, the applicability to the Internet of existing laws governing issues such as personal privacy is uncertain.  We may be subject to claims that our services violate such laws.  Any new legislation or regulation in the United States or abroad or the application of existing laws and regulations to the Internet could adversely affect our business.



Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses, which as a smaller public company may be disproportionately high.



Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, new SEC regulations and stock market rules, are creating uncertainty for small capitalization companies like us.  These new and changing laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.  As a result, our efforts to comply with evolving laws, regulations and standards will likely result in increased general and administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities.  In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act and the related regulations regarding our required assessment of our internal controls over financial reporting and our independent registered public accounting firms audit of that assessment will require the commitment of significant financial and managerial resources.  In addition, recent pronouncements by the Financial



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Accounting Standards Board will require a significant commitment of resources.  We expect these efforts to require the continued commitment of significant resources.



Our industry is highly competitive, and we may be unable to continue to compete successfully with businesses that may have greater resources than we have.



We face competition from a wide range of collection and financial services companies that may have substantially greater financial, personnel and other resources, greater adaptability to changing market needs and more established relationships in our industry than we currently have.  We also compete with traditional contingency collection agencies and in-house recovery departments.  Competitive pressures adversely affect the availability and cost of qualified recovery personnel.  If we are unable to develop and expand our business or adapt to changing market needs as well as our current or future competitors, we may experience reduced profitability.



We are subject to ongoing risks of litigation, including individual and class actions under consumer credit, collections, employment, securities and other laws.



We operate in an extremely litigious climate, and we are currently and may in the future be named as defendants in litigation, including individual and class actions under consumer credit, collections, employment, securities and other laws.



In the past, securities class-action litigation has often been filed against a company after a period of volatility in the market price of its stock.  Defending a lawsuit, regardless of its merit, could be costly and divert managements attention from the operation of our business.  The use of certain collection strategies could be restricted if class-action plaintiffs were to prevail in their claims.  In addition, insurance costs continue to increase significantly and policy deductibles also have increased.  All of these factors could have an adverse effect on our consolidated financial condition and results of operations.



We may not be able to hire and retain enough sufficiently trained employees to support our operations, and/or we may experience high rates of personnel turnover.



Our industry is very labor-intensive, and companies in our industry typically experience a high rate of employee turnover.  We generally compete for qualified personnel with companies in our business and in the collection agency, teleservices and telemarketing industries.  We will not be able to service our clients receivables effectively, continue our growth or operate profitably if we cannot hire and retain qualified collection personnel. Further, high turnover rate among our employees increases our recruiting and training costs and may limit the number of experienced collection personnel available to service our receivables.  Our newer employees tend to be less productive and generally produce the greatest rate of personnel turnover.  If the turnover rate among our employees increases, we will have fewer experienced employees available to service our receivables, which could reduce
collections and therefore result in lower revenues and earnings.  Our employee retention and turnover has also been significantly impacted by our lack of cash or access to significant funding.



We may not be able to successfully anticipate, invest in or adopt technological advances within our industry.



Our business relies on computer and telecommunications technologies, and our ability to integrate new technologies into our business is essential to our competitive position and our success.  We may not be successful in anticipating, managing, or adopting technological changes on a timely basis.  Computer and telecommunications technologies are evolving rapidly and are characterized by short product life cycles.



While we believe that our existing information systems are sufficient to meet our current and foreseeable demands and continued expansion, our future growth may require additional investment in these systems.  We depend on having the capital resources necessary to invest in new technologies to service receivables.  We cannot assure you that we will have adequate capital resources available.



We may not be able to anticipate, manage or adopt technological advances within our industry, which could result in our services becoming obsolete and no longer in demand.



Our business relies on computer and telecommunications technologies.  Our ability to integrate these technologies into our business is essential to our competitive position and our ability to execute our business



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strategy.  Computer and telecommunications technologies are evolving rapidly and are characterized by short product life cycles.  We may not be able to anticipate, manage or adopt technological changes on a timely basis.  While we believe that our existing information systems are sufficient to meet our current demands and continued expansion, our future growth may require additional investment in these systems so we are not left with obsolete computer and telecommunications technologies.  We depend on having the capital resources necessary to invest in new technologies for our business.  We cannot assure you that adequate capital resources will be available to us at the appropriate time.



Risks Related to the Economy



A poor performance by the economy may adversely impact our business.



When economic conditions deteriorated, more borrowers became delinquent on their consumer debt.  However, while volumes of debt to settle have risen, borrowers have less ability in a downturn to make payment arrangements to pay their delinquent or defaulted debt.  As a result, our revenues may decline, or it may be more costly to generate the same revenue levels, resulting in reduced earnings.  A poor economy may also slow borrowing or may curb lenders willingness to provide credit, which results in lower business levels.



ITEM 2.  Description of Property

We leased approximately 4,900 square feet of office space at 707 Westchester Avenue, Suite L-7, White Plains, New York 10604.  We leased this space for $10,274 per month on a straight-line basis under a non-cancelable lease through July 2010.  We have entered into a stipulation to terminate this lease, which requires a cash payment and the removal of our furniture by May 15, 2009.  We have made the payment and removed our furniture and have received a satisfaction of judgment dismissing this matter.

In conjunction with the acquisition of First Performance Corporation and its subsidiary, First Performance Recovery Corporation, we assumed responsibility for the existing First Performance leases in Nevada and Florida.  The Nevada facility consists of 13,708 square feet at 600 Pilot Road, Las Vegas, Nevada 89119.  We lease this space for $19,225 per month under a non-cancelable lease through July 31, 2014.  The Florida facility consisted of 12,415 square feet at 4901 N.W. 17th Way, Suite 201, Ft. Lauderdale, Florida 33309.   We leased this space for $22,481 per month (less a $5,000 abatement in effect in early 2007) under a non-cancelable lease through January 31, 2009.  However, on May 31, 2007, we ceased operations in Florida and relinquished the space on June 30, 2007.  An agreement was reached with the landlord to permit cancellation of the lease for payment of three months
rent.  We completed these payments on September 30, 2007.  First Performance subsequently closed on June 30, 2008 and vacated the Nevada space shortly thereafter.  The Nevada landlord has filed suit seeking the balance of the rent due to the end of the lease from First Performance, which is a total liability of almost $1.4 million.  This liability was accrued at June 30, 2008.  Debt Resolve is not a party to the lease or the suit.

ITEM 3.  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 full amount in dispute is included in the Company’s accounts payable.

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. The full amount still outstanding is included in the Company’s accounts payable.



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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 action is currently in the discovery phase. The full amount in dispute is included in the Company’s accounts payable.

Lawsuits from landlords

On May 7, 2008, we received a three-day demand for rent due in the amount of $72,932.30 for the period December 1, 2007 through May 1, 2008.  On May 20, 2008, a petition for hearing was filed in the White Plains New York City Court, County of Westchester demanding payment of $88,497.45.  On May 27, 2008, we signed a stipulation of settlement in the amount of $88,747.45 including attorneys fees, with equal payments of this amount due on June 13, 2008 and June 30, 2008.  On June 11, 2008, we signed an amended stipulation of settlement in the amount of $100,999.92, with a payment of $56,626.20 due on June 20, 2008 and a payment of $44,373.72 due on June 30, 2008.  On July 16, 2008, we received a five day notice to pay the agreed payments or face eviction.  On October 1, 2008, we were evicted from our leased premises.  On December 29,
2008, a complaint was filed in the Supreme Court of New York, County of Nassau seeking an additional $58,345.50 plus interest and attorneys fees for rent for the period August 1 to December 1, 2008, which was not part of the previous stipulation and judgment.  On December 16, 2008, a restraining order was served on our bank account for the amount of the judgment.  On March 12, 2009, we signed a new stipulation of settlement settling the matter upon completion of three events.  First, we immediately forfeited our security deposit of $79,799.53 plus interest.  Second, we must make an additional payment of $50,000 by April 15, 2009.  Third, we must then remove all of our furniture by April 22, 2009.  An amended stipulation of settlement was signed on April 15, 2009, changing the due date of the payment to May 15, 2009 and increasing the payment by $10,000 to $60,000.  We must then remove the furniture within seven days of making the payment.  If all three conditions are met, the
parties fully release each other from any further claims.  If all three of these conditions are not met, judgment is entered for $135,356.38, the amount of rent due for the period July 1, 2008 to May 1, 2009, which is in addition to the previous judgment for rent of $100,999.92 for the period December 1, 2007 to June 1, 2008.  At December 31, 2008, the Company accrued the balance of its obligation under the lease in the amount of $227,787 on the balance sheet.  On May 18, 2009, the Company paid the required $60,000 payment.  The Company subsequently removed its furniture from the premises.  On June 4, 2009, the Company received a Satisfaction of Judgment and Release from any further liability in this matter, and it is now settled.  The accrual will be reversed in the second quarter reflecting the settlement.

On February 2, 2009, a complaint was filed in the District Court of Clark County, Nevada against Debt Resolve, First Performance Corp. and the former owners of First Performance, Pacific USA Holdings and Clearlight Mortgage Corp., seeking $315,916.72 for unpaid rent due as of January 31, 2009.  First Performance had vacated the premises as of June 30, 2008 with the closing of its business.  Debt Resolve has been dismissed from the suit at this time, as it was not a signatory to the lease or guarantor of the lease.  The case continues against First Performance Corp. and its former owners, with an answer due by First Performance shortly. The full amount in dispute is included in the accrued expenses of First Performance.

Lawsuits from former employees

On April 18, 2007, we received a letter from a law firm stating that a claim with the EEOC and a lawsuit would be filed charging sexual discrimination in the wrongful termination of a manager of the First Performance Florida facility.  The facility was subsequently closed on June 30, 2007 as a cost reduction measure.  The First Performance employment practices insurance carrier defended the matter against the U.S. EEOC and the Broward County Civil Rights Division.  On March 18, 2008, a settlement was reached in the amount of $24,500.  However, due to First Performances financial problems which led to its closure on June 30, 2008, the settlement was not paid.  Because of the non-payment, final judgment was entered against First Performance Recovery Corp. in the amount of $103,004.99 plus $5,293.00 in attorneys fees on October
11, 2008.  On December 17, 2008, final judgment was entered against First Performance Corp. and Debt Resolve in the amount of $35,286.82.  On April 13, 2009, agreement was reached to settle the case for $15,000 if payment is made by May 15, 2009.  On May 19, 2009, the Company made the required payment under the settlement and received a Satisfaction of Judgment and Release on this matter, which is now closed.

Lawsuit related to financing

On December 24, 2008, we negotiated a settlement of pending litigation with Compass Bank in Texas, from whom we had received a fraudulent wire transfer letter in connection with the Harmonie International



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investment that was never funded by the investor.  We received a cash payment of $50,000 to settle all claims against Compass Bank.  We have also referred all of the matters surrounding the Harmonie transaction to the appropriate authorities.

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 4.  Submission of Matters to a Vote of Security Holders

We did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2008.



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PART II.

ITEM 5.  Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

Market Information

Our shares of common stock are currently traded on the Pink Sheets under the symbol DRSV.PK.

The following table sets forth the high and low closing prices for our common stock for the periods indicated as reported by the American Stock Exchange (to October 1, 2008) or the Over-the-Counter Bulletin Board:



Quarter
        Year ended December 31,2008
        2007High
        Low
        High
        LowFirst

      $       2.38

      $      0.77

      $       4.40

      $      3.53Second
        $       2.55
        $      0.86
        $       5.05
        $      2.48Third

      $       1.40

      $      0.20

      $       3.61

      $      1.76Fourth
        $       0.35
        $      0.01
        $       2.50
        $      0.84




For
  the period from January 1, 2009 to August 12, 2009, the high and low closing
  prices for our common stock were $0.35 and $0.01, respectively.

As of March 31, 2009, there were approximately 1,000 record holders of our common stock.

Dividends



We have not to date, nor do we expect to pay in the future, a dividend on our common stock.  The payment of dividends on our common stock is within the discretion of our board of directors, subject to our certificate of incorporation.  We intend to retain any earnings for use in our operations and the expansion of our business.  Payment of dividends in the future will depend on our future earnings, future capital needs and our operating and financial condition, among other factors.

Recent Sales of Unregistered Securities



On September 30, 2008, a convertible debenture was issued to an accredited investor for cash proceeds of $300,000.  The debenture carries a 15% interest rate and has a six month term, maturing on March 31, 2009.  Interest was prepaid to January 31, 2009, and the remaining interest is payable monthly in arrears in cash.  The investor has the option to convert either principal or interest due at the average of the three lowest bid prices of the most recent 20 day volume weighted average price.  The note has matured and is now in default.  We are working with the investor to cure the default.



On October 10, 2008, a sale of 100,000 shares of our common stock was made to an accredited investor for cash proceeds of $25,000.  The investor also received warrants to purchase 125,000 shares of our common stock at an exercise price of $0.25 and an exercise period of five years.



On November 14, 2008, a senior secured note was issued to an investor with a face value of $107,000.  Cash proceeds of $100,000 was received, and the remaining $7,000 serves as accruing interest.  The note was initially due on December 31, 2008 but was subsequently extended to February 15, 2009.  The investor was granted first lien position by Arisean Capital, which subordinated its $576,000 line of credit to this new note.  The investor was granted warrants to purchase 1,000,000 shares of our common stock at an exercise price of $0.12 per share.  The warrants expire on November 14, 2013.  The note was later extended to March 31, 2009 for an additional $8,000 payment at maturity, which makes the total due on the note at maturity now $115,000.  Finally, the note has now been extended to August 15, 2009.  A default interest rate of 22% applies after the maturity date, with a 30 day grace
period to re-pay the balance due of $115,000.



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Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers



We did not repurchase any shares of our common stock in the fourth quarter of the year ended December 31, 2008.



ITEM  6.  Managements Discussion and Analysis or Plan of Operation

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included in this report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors,  our actual results may differ materially from those anticipated in these forward-looking statements.

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 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 and Europe.  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.  In addition, 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 marketplace by reviewing our mode of business and modifying our contracts to comply with appropriate European privacy, debtor protection and other applicable regulations.  We expect that initially, our expense associated with servicing our United Kingdom and other potential European 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 have begun investigation of, and negotiations with, companies who may provide local, outsourced European customer service support for us on an as needed basis, the expense of which will be variable with the level of business activity.  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 four 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



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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 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 flat 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 Prevent  module expected
  to be completed in 2009, which settles consumer debt at earlier stages, we expect
  that a fee per account on our system, and/or the hybrid revenue model
  which will include both fees per account 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.

We also entered into the business of purchasing and collecting debt.  Through our subsidiary, DRV Capital LLC, and its single-purpose subsidiary, EAR Capital I, LLC, we bought two portfolios of charged-off debt at a significant discount to their face value and, through subcontracted, licensed debt collectors, attempted to collect on that debt by utilizing traditional collection methods.  On December 22, 2006, we, EAR Capital I, LLC, as borrower, and DRV Capital LLC, as servicer, entered into a $20.0 million secured debt financing facility with Sheridan Asset Management, LLC, (Sheridan) as lender, to finance the purchase of these and other distressed consumer debt portfolios from time to time.  We purchased the portfolios in an effort to develop a new paradigm for the collection of such debts as well as develop best practice usage methods, which we can then share with
our core clients, in addition to the actual revenues earned from this venture by buying and settling these debts.  On October 15, 2007, we notified our debt buying business partners that we would no longer be buying portfolios of debt on the open market, since many of our current and future partners are debt buyers.  As of December 31, 2007, all loans have been repaid to Sheridan, and the agreement expired according to its terms on December 21, 2007.  In the future, we may use our DRV Capital entity to participate with one or more of our debt buying customers in purchasing a percentage of their portfolio, for the purpose of getting a larger percentage of the portfolio to collect and to enhance the introduction of our DebtResolve system to new debt buying clients.  We have no plans at the present time to engage in this activity.

Revenue streams associated with this business for 2007 included servicing fees earned and paid, interest earned on purchased debt and paid to investment partners, and any losses on the resale of the remaining balances.  The results of operations for DRV Capital have been treated as discontinued operations in the financial statements for the year ending December 31, 2007.

In January 2007, we purchased the outstanding common stock of First Performance Corporation and, as a result, we are no longer in the development stage as of the date of the acquisition..  First Performance Corporation and its subsidiary, First Performance Recovery Corp., were collection agencies that represented both regional and national credit grantors from such diverse industries as retail, bankcard, oil cards, mortgage and auto.  By entering this business directly, we signaled our intention to become a significant player in the accounts receivable management industry.  We believed that through a mixture of both traditional and our innovative, technologically-driven collection methods, we could achieve superior returns.  Due to the loss of four major clients at First Performance during the first nine months of 2007, we performed two interim impairment analyses in accordance with SFAS
142.  As a result of these analyses, we recorded impairment charges aggregating $1,206,335 during the year ended December 31, 2007.  We also recorded a charge for the disposal of the Florida fixed assets of $68,329 upon the closure of the Florida office during the year ended December 31, 2007.



Revenue streams associated with this business included contingency fee revenue on recovery of past due consumer debt and non-sufficient funds fees on returned checks.  On June 30, 2008, we closed the remaining operations of First Performance in order to focus on our core internet business and to mitigate the continuing losses from First Performance.  At that time, we took charges for the disposal of the remaining fixed assets of $87,402 and for the impairment of the remaining intangible assets of $176,545.  The results of operations for First Performance



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have been treated as discontinued operations in the financial statements for the years ending December 31, 2008 and 2007.

On April 30, 2007, we, Credint Holdings, LLC (Credint Holdings) and the holders of all of the limited liability membership interests of Credint Holdings entered into a securities purchase agreement (the Purchase Agreement) for us to acquire 100% of the outstanding limited liability company membership interests of Creditors Interchange Receivables Management, LLC (Creditors Interchange), an accounts receivable management agency and wholly-owned subsidiary of Credint Holdings.  Prior to this agreement, an agreement with Creditors Interchange for the use by Creditors Interchange of our DebtResolve system, and a management services agreement pursuant to which Creditors Interchange provided management consulting services to First Performance were in place.  On September 24, 2007, we and the other parties terminated the Purchase Agreement.  During the year ended
December 31, 2007, we charged $959,811 to terminated acquisition costs as a result of not completing this transaction.



For
  the year ending December 31, 2008, we had inadequate revenues and incurred
  a net loss of $7,712,170 from continuing operations.  Cash used in operating
  and investing activities of continuing operations was $835,045 and $835,951,
  respectively for the year ended December 31, 2008. Based upon projected operating
  expenses, 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.

The Company needs to raise additional capital in order to be able to accomplish its business plan objectives.  The Company has historically satisfied its capital needs primarily from the sale of debt and equity securities.  Management of the Company is continuing its efforts to secure additional funds through debt and/or equity instruments.  Management believes that it will be successful in obtaining additional financing; 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.

Subsequent
  to December 31, 2008, the Company has secured additional financing from seven
  parties in the aggregate amount of $512,500.

Results of Continuing Operations

Year ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenues

Revenues
  totaled $165,969 and $67,449 for the years ended December 31, 2008 and 2007,
  respectively. We earned revenue during the year ended December 31, 2008 as a
  percent of debt collected at collection agencies, collection law firms, a lender
  and two banks that implemented our online system, and as a flat fee per settlement
  or a flat monthly fee with some clients. Of the revenue earned during the year
  ended December 31, 2007, we earned contingency fee income, based on a percentage
  of the amount of debt collected from accounts placed on our online system or
  settlement fees and start up fee income.

Costs and Expenses

Payroll and related expenses.Payroll and related expenses totaled $3,030,506 for the year ended December 31, 2008, a decrease of $879,083 over payroll and related expenses of $3,909,589 for the year ended December 31, 2007.  This decrease was due to continued cost reductions in the internet business.  The reduction in the internet business occurred primarily in net salary expense reduction to $938,135 for the year ended December 31, 2008 from $1,211,103 for the year ended December 31, 2007, a decrease of $272,968 or 22.5%.  Stock-based compensation expense to employees was $2,342,031 for the year ended December 31, 2008, an increase of $134,081 from expense of $2,207,950 for the year ended December 31, 2007.  In addition, the staffing decrease related to the reduction in internet headcount and the accrual rather than payment of many payrolls resulted in payroll tax expense



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of $45,303 for the year ended December 31, 2008, a decrease of $93,182 over payroll tax expense of $138,485 for the year ended December 31, 2007.  We also experienced a decrease in health insurance expense to $93,806 for the year ended December 31, 2008 from $171,808 in the year ended December 31, 2007, a decrease of $78,002 due to headcount reductions.  Severance expense was $2,083 for the year ended December 31, 2008, down from $127,064 for the year ended December 31, 2007, a reduction of $124,981, as most layoffs occurred in 2007.  Other miscellaneous salary related expenses were $24,148 in payroll expenses for the year ended December 31, 2008 as compared with $53,179 for the year ended December 31, 2007, a decrease of $29,031 due to a decrease in 401k matching expense due to lower headcount.

General
  and administrative expenses.General and administrative
  expenses for the internet business (Debt Resolve) amounted to $3,983,771 for
  the year ended December 31, 2008, as compared to $3,156,767 for the year ended
  December 31, 2007, an increase of $827,004 primarily due to the issuance of
  stock for services. For most items, cost control measures implemented between
  July 1, 2007 and October 1, 2008 reduced expenses. The expense for stock based compensation for
  warrants and stock options granted to consultants for the year ended December
  31, 2008 was $2,313,319, as compared with stock based compensation in the amount
  of $271,230 for the year ended December 31, 2007 due to options granted to consultants
  in lieu of cash payment during 2008 due to limited cash on hand. Also, for the
  year ended December 31, 2008, service and consulting fees totaled $448,931,
  as compared with $808,713 in service and consulting fees for the year ended
  December 31, 2007, resulting in a decrease of $419,782, primarily related to
  terminating outside consultants who were assisting in selling the DebtResolve
  system in the United States and the United Kingdom, and who were assisting in
  the integration and management of our closed First Performance subsidiary, as
  well as costs related to the August 2007 private placement. Legal fees decreased
  by $619,752 to $200,632 for the year ended December 31, 2008 from $820,384 for
  the year ended December 31, 2007, primarily due to the end of the patent litigation
  against Apollo Enterprise Solutions in December, 2007. The expenses for occupancy,
  telecommunications, travel and office supplies in the year ended December 31,
  2008 were $333,780, $79,343, $60,437 and $10,539, respectively, as compared
  with expenses of $123,350, $182,635, $232,633 and $34,823 for occupancy, telecommunications,
  travel and office supplies, respectively, for the year ended December 31, 2007,
  all reductions due to the closure of First Performance and cessation of the
  additional travel required in support of the Creditors Interchange acquisition
  during 2007 but not in 2008. Occupancy increased in 2008 due to the accrual
  of $227,787 for the balance of the lease at our old office after we moved out.
  Marketing expenses decreased by $172,339 to $140,552 during the year ended December
  31, 2008 from $312,891 for the year ended December 31, 2007, primarily due to
  our continued cost cutting efforts and the termination of marketing consultants
  during the second half of 2007. Other general operating costs for the year ended
  December 31, 2008, including insurance and accounting expenses, amounted to
  $396,238, as compared with $370,110 for the year ended December 31, 2007, primarily
  due to inflation.

Terminated acquisition costs.During the year ended December 31, 2007, we incurred $959,811 in costs associated with our efforts to acquire Creditors Interchange.  We terminated our Securities Purchase Agreement on September 24, 2007 and charged the accumulated costs to terminated acquisition costs during the year ended December 31, 2007.

Depreciation and amortization expense.  For the years ended December 31, 2008 and 2007, we recorded depreciation expense of $57,610 and $56,938, respectively.

Interest expense.We recorded interest expense, net of interest income, of $299,207 from continuing operations for the year ended December 31, 2008, compared to net interest expense of $16,426 for the year ended December 31, 2007 due to the issuance of debt to fund operations in late 2007 and the first half of 2008.  Interest expense for the years ended December 31, 2008 and 2007 includes interest on our related party lines of credit, short term notes, convertible debenture and long term notes.

Amortization of deferred debt discount.Amortization expense of $918,721 and $132,400 was incurred for the years ended December 31, 2008 and 2007, respectively, for the amortization of the beneficial conversion feature and deferred debt discount of our lines of credit and note offerings.

Gain on derivative liability.We recorded a gain of $430,418 for derivative liability on convertible notes during the year ended December 31, 2008.



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Loss on disposal of fixed assets.We recorded a charge of $15,576 for the disposal of fixed assets when we vacated our old office during the year ended December 31, 2008.

Liquidity and Capital Resources

As
  of December 31, 2008, we had a working capital deficiency in the amount of $6,371,269,
  on continuing operations and cash totaling $32,551. We
  incurred a net loss of $7,712,170 for continuing operations for the year ended
  December 31, 2008. Net cash used in operating and investing activities for continuing
  operations was $835,045 and $835,951, respectively for the year ended December
  31, 2008. Cash flow provided by financing activities for continuing operations
  was $1,703,548 for the year ended December 31, 2008. Cash of $1,301 was provided
  by the discontinued operations of our former subsidiary First Performance during
  2008. 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.

The Company needs to raise additional capital in order to be able to accomplish its business plan objectives.  The Company has historically satisfied its capital needs primarily from the sale of debt and equity securities.  Management of the Company is continuing its efforts to secure additional funds through debt and/or equity instruments.  Management believes that it will be successful in obtaining additional financing; 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 have to seek protection from its 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.

Subsequent
  to December 31, 2008, the Company has secured additional financing from seven
  investors in the amount of $512,500.

In the second and fourth quarters of 2007 and throughout the year ended 2008, we reduced overhead and extended payables.

Discontinued Operations

On December 31, 2007, we treated the results of DRV Capital and its wholly-owned subsidiary, EAR Capital I, LLC as discontinued operations.  DRV Capital purchased its first two portfolios in January, 2007.  On October 15, 2007, we ceased operations of DRV Capital, sold all remaining portfolios and repaid all outstanding portfolio related indebtedness.  DRV Capital had revenue of $3,334 for the year ended December 31, 2007.  It also had payroll and related expenses of $207,654 and general and administrative expense of $209,302 for the year ended December 31, 2007.  In addition, DRV Capital incurred interest expense of $38,463 for the year ended December 31, 2007.  We have no plans at this time to reenter the debt buying business.



On June 30, 2008, we reclassified the results of First Performance Corporation and its wholly-owned subsidiary, First Performance Recovery Corp., as discontinued operations.  We purchased First Performance on January 19, 2007.  First Performance had revenue of $300,742 and $2,778,374 for the years ended December 31, 2008 and 2007, respectively.  It also had payroll and related expenses of $603,924 and $3,128,654 for the years ended December 31, 2008 and 2007, respectively.  General and administrative expenses were $743,327 and $2,170,128 for the years ended December 31, 2008 and 2007, respectively.  On June 30, 2008, First Performance booked a charge of $1,364,458 for the balance of all payments due under the lease for the Las Vegas, NV facility, which was closed on that date and vacated.  First Performance had disposal of fixed asset charges of $87,402 and $68,329 for the years ended
December 31, 2008 and 2007, respectively, for the closure in 2008 of the Las Vegas office and the closure in 2007 of the Florida office.  In accordance with SFAS 142, First Performance booked charges of $176,545 and $1,206,335 for the impairment of intangibles and goodwill during 2008 and 2007, respectively, as clients were lost and facilities were closed down.  First Performance had charges for amortization of

 intangibles of $32,304 and $77,022 during the years ended December 31, 2008 and 2007, respectively.  First Performance also had depreciation of $38,235 and $93,100 in the years ended December 31, 2008 and 2007, respectively.  Finally, First Performance had interest expense of $9,236 and $6,040 for the years ended December 31, 2008 and 2007, respectively.



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Off-Balance Sheet Arrangements

As of the date of this report, we have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.

Impact of Inflation

We believe that inflation has not had a material impact on our results of operations for the years ended December 31, 2008 and 2007.  We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.

Application of Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.  The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are as follows:

Principles of Consolidation



The accompanying audited consolidated financial statements include the accounts of First Performance Corporation, a wholly-owned subsidiary, together with its wholly-owned subsidiary, First Performance Recovery Corporation, and DRV Capital LLC, a wholly-owned subsidiary (DRV Capital), together with its wholly-owned subsidiary, EAR Capital, LLC (EAR).  The results of all subsidiaries, including DRV Capital, EAR, First Performance and First Performance Recovery are shown as discontinued operations in the financial statements.  All material inter-company balances and transactions have been eliminated in consolidation.



Reclassifications

Certain accounts in the prior period financial statements have been reclassified for comparison purposes to conform to the presentation of the current period financial statements.  These reclassifications had no effect on the previously reported loss.

Accounts Receivable



We extend credit to large, mid-size and small companies for collection services.  We have concentrations of credit risk as 100% of the balance of accounts receivable at December 31, 2008 consists of only two customers.  At December 31, 2008, accounts receivable from the two accounts amounted to approximately $11,170 (96%) and $412 (4%), respectively.  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 collectibility and the allowance for doubtful accounts is adjusted accordingly.  Our management determines collectibility based on their experience and knowledge of the customers.



Accounts Payable and Accrued Liabilities



Included in accounts payable and accrued liabilities as of December 31, 2008 are accrued professional fees of $1,332,828 and accrued closing costs for First Performance of $1,350,931.  We owed 19 vendors a total of $2,449,091 at December 31, 2008, each of whom was individually owed in excess of 10% of total Company assets.

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Business Combinations



In accordance with business combination accounting, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values.  We engaged a third-party appraisal firm to assist our management in determining the fair values of First Performance.  Such a valuation requires our management to make significant estimates and assumptions, especially with respect to intangible assets.



Our management makes estimates of fair values based upon assumptions believed to be reasonable.  These estimates are based on historical experience and information obtained from the management of the acquired companies.  Critical estimates in valuing certain of the intangible assets include but are not limited to:  future expected cash flows from customer relationships and market position, as well as assumptions about the period of time the acquired trade names will continue to be used in the combined company's product portfolio; and discount rates.  These estimates are inherently uncertain and unpredictable.  Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.



Derivative Financial Instruments



Our derivative financial instruments consist of embedded derivatives related to Convertible Debentures. These embedded derivatives include certain conversion features. The accounting treatment of derivative financial instruments requires that we record the derivatives and related warrants at their fair values as of the inception date of the Convertible Debenture Agreement and at fair value as of each subsequent balance sheet date.  In addition, under the provisions of EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," as a result of entering into the Debentures, we are required to classify all other non-employee stock options and warrants as derivative liabilities and mark them to market at each reporting date.  Any change in fair value inclusive of modifications of terms will be recorded as non-operating,
non-cash income or expense at each reporting date.  If the fair value of the derivatives is higher at the subsequent balance sheet date, we will record a non-operating, non-cash charge.  If the fair value of the derivatives is lower at the subsequent balance sheet date, we will record non-operating, non-cash income.  Conversion-related derivatives were valued using the intrinsic method and the warrants using the Black Scholes Option Pricing Model with the following assumptions: dividend yield of 0%; annual volatility of 286%; and risk free interest rate from 0.11% to 3.38%.  The derivatives are classified as short term liabilities.



Goodwill and Intangible Assets



We account for goodwill and intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations (SFAS 141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142).  Under SFAS 142, goodwill and intangibles that are deemed to have indefinite lives are no longer amortized but, instead, are to be reviewed at least annually for impairment.  Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value.  Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions.  Changes in these estimates
and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.  Intangible assets will be amortized over their estimated useful lives.  We performed an analysis of our goodwill and intangible assets in accordance with SFAS 142 as of June 30, 2007 and determined that an impairment charge was necessary.  We performed a further analysis of our intangible assets as of September 30, 2007 and determined that an additional impairment charge was necessary.  We performed our annual impairment test at December 31, 2007 and determined that no additional impairment was necessary.  On June 30, 2008, a final impairment charge was necessary to fully impair the intangible assets as we closed First Performance on that date.



Revenue Recognition



We
    earned revenue during 2008 and 2007 from several collection agencies, collection
    law firms and lenders that implemented our online system. Our current contracts
    provide for revenue based on a percentage of the amount of debt collected,
    a flat fee per settlement from accounts submitted on the DebtResolve system
    or through a



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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 fee. For the early
    adopters of our product, we 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 monthly fees
with transaction fees upon debt settlement.

In recognition of the principles expressed in Staff Accounting Bulletin (SAB) 104 (SAB 104), 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, at this time we uniformly postpone recognition of all contingent revenue until our client receives payment from the debtor.  As is required by SAB 104, revenues are considered to have been earned when we have 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 our system and/or, for clients under a licensing arrangement, the successful availability of our system to its customers.

In addition, in accordance with Emerging Issues Task Force (EITF) Issue 00-21, revenue is recognized and identified according to the deliverable provided.  Set-up fees, percentage contingent collection fees, fixed settlement fees, flat monthly fees, etc. are identified separately.

Recently signed contracts and contracts under negotiation call for multiple deliverables, and each component of revenue will be considered to have been earned when we have met the associated deliverable, as is required by SAB 104 Topic 13(A).  For new contracts being implemented which include a fee per account, following the guidance of SAB 104 regarding services being rendered continuously over time, we will recognize revenue based on contractual prices established in advance and will recognize income over the contractual time periods.  Where some doubt exists on the collectability of the revenues, a valuation reserve will be established or the income charged to losses, based on managements opinion regarding the collectability of those revenues.

In January 2007, we initiated operations of our debt buying subsidiary, DRV Capital LLC.  DRV Capital and its wholly-owned subsidiary, EAR Capital I, LLC, engaged in the acquisition of pools of past due debt at a deeply discounted price, for the purpose of collecting on those debts.  In recognition of the principles expressed in Statement of Position 03-3 (SOP 03-3), where the timing and amount of cash flows expected to be collected on these pools is reasonably estimable, we would recognize the excess of all cash flows expected at acquisition over the initial investment in the pools of debt as interest income on a level-yield basis over the life of the pool (accretable yield).  Because we exited this business, we will use the cost recovery method.  Revenue will be earned by this debt buying subsidiary under the cost recovery method when the amount of debt collected exceeds the
discounted price paid for the pool of debt.  As of October 15, 2007, we ceased operation of DRV Capital, sold all remaining portfolios and repaid all outstanding indebtedness.

On January 19, 2007, we completed the acquisition of First Performance, a collection agency, and its wholly-owned subsidiary First Performance Recovery Corporation.  In recognition of the principles expressed in SAB 104, 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, at this time we uniformly postpone recognition of all contingent revenue until the cash payment is received from the debtor.  At the time we remit recoveries collected to our clients, we accrue the portion of those fees that the client contractually owes or retain our fees and remit the net difference.  As is required by SAB 104, revenues are considered to have been earned when we have 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.  First Performance was closed on June 30, 2008 and discontinued operations.

Stock-based
      Compensation

Beginning
    on January 1, 2006, we account for stock options issued under stock-based
    compensation plans under the recognition and measurement principles of SFAS
    No. 123  Revised. We adopted the modified prospective transition method
    and therefore, did not restate prior periods results. Total stock-based
    compensation



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expense
    related to these issuances and other stock-based grants for the year ended
    December 31, 2008 amounted to $2,535,364 and for the year ended December
31, 2007 amounted to $2,479,181.

The determination of the fair value of stock-based awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables.  These variables include the price of the underlying stock, our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and the expected annual dividend yield on the underlying shares.

If actual results differ significantly from these estimates or different key assumptions were used, there could be a material effect on our financial statements.  The future impact of the cost of stock-based compensation on our results of operations, including net income/(loss) and earnings/(loss) per diluted share, will depend on, among other factors, the level of equity awards as well as the market price of our common stock at the time of the award as well as various other assumptions used in valuing such awards.  We will periodically evaluate these estimates.

Recently-issued Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159) including an amendment of FASB Statement No. 115.  SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value.  The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings.  The Company adopted SFAS 159 beginning in the first quarter of 2008, without material effect on the Companys consolidated financial position or results of operations.



In June 2007, the Accounting Standards Executive Committee issued Statement of Position 07-1, "Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies" ("SOP 07-1"). SOP 07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies (the "Audit Guide"). SOP 07-1 was originally determined to be effective for fiscal years beginning on or after December 15, 2007, however, on February 6, 2008, FASB issued a final Staff Position indefinitely deferring the effective date and prohibiting early adoption of SOP 07-1 while addressing implementation issues.



In December 2007, the FASB issued SFAS No. 141(R),"Business Combinations" ("SFAS No. 141(R)"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141(R) is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited and the Company is currently evaluating the effect, if any, that the adoption will have on its consolidated financial position, results of operations or cash flows.



In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, which is an amendment of Accounting Research Bulletin (ARB) No. 51.  This statement clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the non-controlling interest.  This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Based on current conditions, the Company does not expect the adoption of SFAS 160 to
have a significant impact on its results of operations or financial position.



In December 2007, the FASB ratified the consensus in EITF Issue No. 07-1, "Accounting for Collaborative Arrangements" (EITF 07-1). EITF 07-1 defines collaborative arrangements and requires collaborators to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) the other collaborators based on other applicable authoritative accounting literature, and in the absence of other applicable authoritative literature, on a reasonable, rational and consistent accounting policy is to be elected. EITF 07-1 also provides for disclosures regarding the nature and purpose of the arrangement, the entity's rights and obligations, the accounting policy for the arrangement and the income statement classification and amounts arising



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from
    the agreement. EITF 07-1 will be effective for fiscal years beginning after
    December 15, 2008, and will be applied as a change in accounting principle
    retrospectively for all collaborative arrangements existing as of the effective
    date. The Company has not yet evaluated the potential impact of adopting
    EITF 07-1 on its consolidated financial position, results of operations or
cash flows.



In February 2008, the FASB issued Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2) that defers the effective date of applying the provisions of SFAS 157 to the fair value measurement of 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 (or at least annually), until fiscal years beginning after November 15, 2008.

The Company is currently evaluating the effect that the adoption of FSP 157-2 will have on its consolidated results of operations and financial condition, but does not expect it to have a material impact.



In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.  This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows.  Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of consolidated operations or financial position.



In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets.   The Company is required to adopt FSP 142-3 on January 1, 2009.  The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption.  The Company is currently evaluating the impact of FSP 142-3 on its consolidated financial position, results of operations or cash flows.



In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles.  This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).  This Statement will not have an impact on the Companys consolidated financial statements.



In May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1").  FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate.  FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis.  The Company is currently evaluating the potential impact, if any, of the adoption of FSP APB 14-1 on its consolidated financial position, results of operations or cash flows.



In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.  The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee insurance contracts that are derivative
 instruments
    included within the scope of FASB Statement No. 133, Accounting for
    Derivative Instruments and Hedging Activities. This Statement will
not have an impact on the Companys consolidated financial statements.



In
    June 2008, the FASB ratified EITF No. 07-5, Determining Whether
    an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock (EITF
    No. 07-5). EITF No. 07-5 provides that an entity should use a two-step
    approach to evaluate whether an equity-linked financial instrument (or embedded
    feature) is indexed to



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its own stock, including evaluating the instruments contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF No. 07-5 is effective for fiscal years beginning after December 15, 2008. We adopted EITF No. 07-5 effective on January 1,
2009 and the adoption had no material effect on our consolidated financial position,
results of operations or cash flows



ITEM 7.  Financial Statements

Our audited financial statements for the year ended December 31, 2008 are included as a separate section of this report beginning on page F-1.

ITEM 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.



ITEM 8A.  Controls and Procedures

Managements report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company.  In order to evaluate the effectiveness of internal control over financial reporting, our management has conducted an assessment using the criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Our companys internal control over financial reporting, as defined in rule 13a-15(f) under the Securities Exchange Act of 1934 (Exchange Act), is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Based on our assessment, under the criteria established in Internal Control  Integrated Framework, issued by COSO, our management has concluded that our company has a material weakness in internal control over financial reporting as of December 31, 2008.  The weakness exists with regard to segregation of duties, in that one employee does the accounting, accounts payable and banking transactions.  As a result, our internal controls were not effective at December 31, 2008.

Evaluation of the companys disclosure controls and procedures



We
    carried out an evaluation, under the supervision and with the participation
    of our management, including our Chief Executive Officer and our Chief Financial
    Officer, of the effectiveness of the design and operation of our disclosure
    controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
    under the Securities Exchange Act of 1934, as amended (the Exchange
    Act). Based upon that evaluation, our Chief Executive Officer and Chief
    Financial Officer concluded that our companys disclosure controls and
    procedures are not effective, as of December 31, 2008, in ensuring that material
    information relating to us required to be disclosed by us in reports that
    we file or submit under the Exchange Act is recorded, processed, summarized
    and reported within the time periods specified in the Securities Exchange
    Commission rules and forms. Disclosure controls and procedures include, without
    limitation, controls and procedures designed to ensure that information required
    to be disclosed by an issuer in reports it files or submits under the Exchange
    Act is accumulated and communicated to management, including its principal
    executive officer or officers and principal financial officer or officers,
    or persons performing similar functions, as appropriate to allow timely decisions
    regarding required disclosure.



Changes
      in Internal Control over Financial Reporting



For
    the year ended December 31, 2007, our internal controls over financial reporting
    were materially impacted by our acquisition of First Performance, which took
    place on January 19, 2007. First Performance is a collection agency which
    employs approximately 25 people. The books and records of the acquired company
    were





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moved
    to our White Plains location, and the controller of First Performance currently
    works under the supervision of our Chief Financial Officer. We are currently
    in the process of reviewing and formalizing controls in place over the preparation
of First Performances financial statements, which have been consolidated and included in this report.  Based on review and assessment at December 31, 2008, our management believes that the design and operation of the consolidated companys disclosure controls and procedures are not effective, as discussed above.



ITEM 8B.  Other Information

None.



PART III.

ITEM 9.  Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act

The
  following table shows the positions held by our board of directors and executive
  officers, as well as certain key employees, and their ages, as of August 12,
  2009:

Name
        Age
        PositionJames D. Burchetta
        59
        Chairman  and FounderCharles S. Brofman

      52

      Director and Co-FounderWilliam M. Mooney
        69
        DirectorKenneth H. Montgomery

      59

      Former Chief Executive Officer and DirectorDavid M. Rainey
        49
        Interim Chief Executive Officer, President, Chief Financial Officer, Secretary and Treasurer




The principal occupations for the past five years (and, in some instances, for prior years) of each of our directors and executive officers are as follows:

James D. Burchettahas been our Chairman of the Board and Founder since February 2008.  Prior to February 2008, he was our Co-Chairman of the Board and Chief Executive Officer since December 2006.  Prior to December 2006, he was our Co-Chairman of the Board, Chief Executive Officer and President since January 2003.  Mr. Burchetta is a co-founder of our company and was the co-founder of Cybersettle, Inc., which settles insurance claims over the Internet, and served as its Chairman of the Board and Co-Chief Executive Officer from 1997 to August 2000 and as its Vice Chairman from August 2000 to February 2002.  Prior to founding Cybersettle, Mr. Burchetta was a Senior Partner in the New York law firm of Burchetta, Brofman, Collins & Hanley, LLP, where he
 practiced
    insurance and corporate finance law. Mr. Burchetta received a B.A. degree
    from Villanova University and a J.D. degree from Fordham University Law School
    and is a member of the New York State Bar. Mr. Burchetta is a frequent speaker
at industry conferences.

Charles
  S. Brofmanhas been a member of our board of directors
  since February 2008. Prior to February 2008, Mr. Brofman was our non-executive
  Co-Chairman of the Board since January 2003. Mr. Brofman is a co-founder of
  our company and was the co-founder of Cybersettle and has served as a director
  and its President and Co-Chief Executive Officer since 1997, becoming its Chief
  Executive Officer in August 2000. On July 31, 2008, Mr. Brofman resigned as
  President and CEO of Cybersettle Holdings, Inc. but has continued as its Chairman
  of the Board of Directors. Prior to founding Cybersettle, Mr. Brofman was a
  Senior Partner in the New York law firm of Burchetta, Brofman, Collins &
  Hanley, LLP and, prior to that, was an Assistant District Attorney in New York.
  Mr. Brofman received a B.S. degree from Brooklyn College, City University of
  New York and a J.D. degree from Fordham University Law School and is a member
  of the New York State Bar.

William
      M. Mooney, Jr.has been a member of our board of
      directors since April 2003. Mr. Mooney is currently President of The Westchester
      County Association. Mr. Mooney has been involved in the banking sector
      in an executive capacity for more than 30 years. Prior to joining Independence
      Community Bank, he served for four years as an Executive Vice President
      and member of the management committee of Union State Bank, responsible
      for retail banking, branch banking and all marketing activity. Mr. Mooney
      also spent 23 years at Chemical Bank



34


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and,
    following its merger with Chase Manhattan Bank, he was a Senior Vice President
    with responsibilities including oversight of all retail business. Mr. Mooney
    was the President of the Westchester Partnership for Economic Development.
    He also held the position of Chairman for the Westchester County Association,
    past Chairman of the United Way Westchester and Chairman of St. Thomas Aquinas
    College. He has served on the board of trustees for New York Medical College,
    St. Agnes Hospital, the Board of Dominican Sisters and the Hispanic Chamber
    of Commerce. Mr. Mooney received a B.A. degree in business administration
    from Manhattan College. He also attended the Harvard Management Program and
the Darden Graduate School at the University of Virginia.



Kenneth H. Montgomeryhas been our Chief Executive Officer since February 2008.  Previously, Mr. Montgomery was Chief Executive Officer and President of Pentegra Retirement Services, a retirement services company, from 2003-2006.  Mr. Montgomery was Senior Vice President of Sales and Business Development for CIGNA Retirement Services from 2001-2003, and Chief Executive Officer and President of Prudential Retirement Services from 1998-2001.  Previously, Mr. Montgomery spent three years at Putnam Investments as a Managing Director, 10 years in senior positions with Chemical Bank and 15 years with the IBM Company in Sales and Marketing.  Mr. Montgomery received a B.S. in Accounting from the University of Tennessee and a Masters of Science in Management as a Sloan Fellow at Stanford University.  Mr. Montgomery left the Company effective July 1, 2009.



David M. Rainey has been our President and Chief Financial Officer, Treasurer and Secretary since January 2008.  Mr. Rainey is also currently Interim Chief Executive Officer.  Prior to January 2008, Mr. Rainey was our Chief Financial Officer and Treasurer since joining the company in May 2007, and also became our Secretary in November 2007.  Previously, Mr. Rainey was Chief Financial Officer and Treasurer of Hudson Scenic Studio during 2006.  Mr. Rainey was Vice President, Finance and CFO of Star Gas Propane from 2002-2005.  Earlier in his career, Mr. Rainey spent over thirteen years with Westvaco Corporation in a variety of financial roles of progressive responsibility, including Controller of the Western Region of a division of the company.  Mr. Rainey received his B.A. in Political Science
from the University of California, Santa Barbara and his law degree and MBA in Finance from Vanderbilt University.  Mr. Rainey is a member of the Tennessee bar.



All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors.  Officers are elected annually by our board of directors and serve at the discretion of the board, subject to their contracts.

Additional Information about our Board and its Committees



We continue to monitor the rules and regulations of the SEC regarding independent directors.  Only William M. Mooney, Jr. is independent as defined in Section 121A of the American Stock Exchange Company Guide.



During
    2008, all of our directors attended at least 75% of all meetings during the
    periods for which they served on our board, and all of the meetings held
    by committees of the board on which they serve. The board of directors has
    formed an audit committee, compensation committee and a nominations and governance
    committee, all of which operate under written charters. The charters for
    the audit committee, the nominations and governance committee and the compensation
    committee were included as exhibits to the form SB-2 registration statement
    filed with the SEC on September 30, 2005.



Committees
      of the Board

Audit
      Committee.In September 2004, we established an
      audit committee of the board of directors, which as of December 31, 2008
      consisted of William M. Mooney, Jr., who is an independent director. The
      audit committees duties, which are specified in our Audit Committee
      Charter, include, but are not limited to:


      reviewing
            and discussing with management and the independent accountants our
            annual and quarterly financial statements,



      directly
            appointing, compensating, retaining, and overseeing the work of the
            independent auditor,


35


---

| |  | approving, in advance, the provision by the independent auditor of all audit and permissible non-audit services,
| | - | ----------------------------------------------------------------------------------------------------------------


        establishing procedures for the receipt, retention, and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing matters and the confidential, anonymous submissions by our employees of concerns regarding questionable accounting or auditing matters,



        the right to engage and obtain assistance from outside legal and other advisors as the audit committee deems necessary to carry out its duties,



        the right to receive appropriate funding from us to compensate the independent auditor and any outside advisors engaged by the committee and to pay the ordinary administrative expenses of the audit committee that are necessary or appropriate to carrying out its duties, and



        reviewing and approving all related party transactions unless the task is assigned to a comparable committee or group of independent directors.


Compensation Committee.In May 2004, we established a compensation committee of the board of directors, which as of December 31, 2008 consisted of Mr. Mooney, who is an independent director.  The compensation committee reviews and approves our salary and benefits policies, including compensation of executive officers.  The compensation committee also administers our incentive compensation plan, and recommends and approves grants of stock options and restricted stock grants under that plan.



Nominations and Governance Committee.In June 2005, we established a nominations and governance committee of the board of directors, which as of December 31, 2008 consisted of Mr. Mooney, who is an independent director.  The purpose of the nominations and governance committee is to select, or recommend for our entire boards selection, the individuals to stand for election as directors at the annual meeting of stockholders and to oversee the selection and composition of committees of our board.  The nominations and governance committees duties, which are specified in our Nominating/Corporate Governance Committee Charter, include, but are not limited to:




        establishing criteria for the selection of new directors,



        considering stockholder proposals of director nominations,



        committee selection and composition,



        considering the adequacy of our corporate governance,



        overseeing and approving management continuity planning process, and



        reporting regularly to the board with respect to the committees duties.


Financial Experts on Audit Committee

The audit committee will at all times be composed exclusively of independent directors who are financially literate.  Financially literate is defined as being able to read and understand fundamental financial statements, including a companys balance sheet, income statement and cash flow statement.

The
  committee has, and will continue to have, at least one member who has past employment
  experience in finance or accounting, requisite professional certification in
  accounting, or other comparable experience or background that results in the
  individuals financial sophistication. The board of directors believes
  that Mr. Mooney satisfies the definition of financial sophistication and also
  qualifies as an audit committee financial expert, as defined under
  rules and regulations of the SEC.



36


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Indebtedness of Directors and Executive Officers

None of our directors or executive officers or their respective associates or affiliates is indebted to us.

Family Relationships

There are no family relationships among our directors and executive officers.

Legal Proceedings

As of the date of this report, there is no material proceeding to which any of our directors, executive officers, affiliates or stockholders is a party adverse to us.

Code of Ethics

In May 2003, we adopted a Code of Ethics and Business Conduct that applies to all of our executive officers, directors and employees.  The Code of Ethics and Business Conduct codifies the business and ethical principles that govern all aspects of our business.  Our Code of Ethics and Business Conduct is posted on our website at http://www.debtresolve.com/ and we will provide a copy without charge to any stockholder who makes a written request for a copy.

Committee Interlocks and Insider Participation





No
  member of our board of directors is employed by Debt Resolve or our subsidiaries,
  except for James D. Burchetta, who currently serves as non-executive Chairman
  of the Board and Founder.





Section 16(a) Beneficial Ownership Reporting Compliance



Rules adopted by the SEC under Section 16(a) of the Exchange Act, require our officers and directors, and persons who own more than 10% of the issued and outstanding shares of our equity securities, to file reports of their ownership, and changes in ownership, of such securities with the SEC on Forms 3, 4 or 5, as appropriate.  Such persons are required by the regulations of the SEC to furnish us with copies of all forms they file pursuant to Section 16(a).





Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to us during our most recent fiscal year, and any written representations provided to us, we believe that all of the officers, directors, and owners of more than ten percent of the outstanding shares of our common stock did not comply with Section 16(a) of the Exchange Act for the year ended December 31, 2008.



On February 8, 2008, grants of options were given to the directors and officers which were not timely filed on Forms 4 but were disclosed on Forms 5 filed on February 17, 2009.  For the directors, forms were not timely filed for James D. Burchetta, Charles S. Brofman, William M. Mooney, Jr., Lawrence E. Dwyer, Michael Carey and Jeffrey Bernstein for one filing with one transaction each.  For the officers, Kenneth H. Montgomery and David M. Rainey did not timely file forms for one filing and one transaction each on that same date.  In addition, Kenneth H. Montgomery did not timely file a Form 4 for a separate grant on July 15, 2008, and David M. Rainey did not timely file a Form 4 for a separate grant on June 12, 2008.  Mssrs. Montgomery and Rainey missed one filing with one transaction each on these later filing dates.



In addition, the Form 5 for Kenneth Montgomery due February 17, 2009 has not yet been filed due to outstanding bills with a vendor possessing his filing data.

37


---





ITEM 10.  Executive Compensation



Summary Compensation Table





The following table sets forth, for the most recent fiscal year, all cash compensation paid, distributed or accrued, including salary and bonus amounts, for services rendered to us by our Chief Executive Officer and four other executive officers in such year who received or are entitled to receive remuneration in excess of $100,000 during the stated period and any individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as an executive officer as at December 31, 2008:

Name and Principal Position
        Year
        Salary
($)



(8)
        Bonus
($)
        Stock Awards
($)
        Option Awards
($)
        Non-Equity Incentive Plan Compen-
sation
($)
        Non-qualified Deferred Compensa-tion Earnings
($)
        All Other Compen-sation ($)
        Total ($)(a)
        (b)
        (c)
        (d)
        (e)
        (f)
        (g)
        (h)
        (i)
        (j)James D. Burchetta
Chairman of the Board  and Founder(1)

      2008
2007

      135,417
250,000

      --
--

      --
--

      322,000
--

      --
--

      --
--

      --
--

      457,417
250,000Kenneth H. Montgomery
Former Chief Executive Officer (2)
        2008
2007
        196,875
--
        --
--
        40,000
--
        210,000
--
        --
--
        --
--
        (7) 262,500
--
        709,375
--David M. Rainey
President, Chief Financial Officer, Secretary, Treasurer (3)

      2008
2007

      200,000
124,231

      50,000
--

      --
--

      579,984
180,500

      --
--

      --
--

      --
--

      829,984
304,731Richard G. Rosa
Former President, Chief Technology Officer (4)
        2008
2007
        --
182,277
        --
--
        --
--
        --
794,500
        --
--
        --
--
        --
--
        --
976,777Katherine A. Dering
Former Chief Financial Officer, Secretary, Treasurer, Senior Vice President, Finance (5)

      2008
2007

      --
105,706

      --
--

      --
--

      --
180,500

      --
--

      --
--

      --
--

      --
286,206Howard C. Knauer
Former Senior Vice President and  President, DRV Capital LLC (6)
        2008
2007
        --
157,327
        --
--
        --
--
        --
58,000
        --
--
        --
--
        --
--
        --
215,327






38


---





________________

(1)
        Prior to becoming  of Chairman of the Board and Founder in February 2008, Mr. Burchetta was our Co-Chairman and Chief Executive Officer since December 2006.


(2)
        Mr. Montgomery joined our company and became our Chief Executive Officer in February 2008. He left the Company effective July 1, 2009.


(3)
        Mr. Rainey joined our company and became our Chief Financial Officer in May 2007.


(4)
        Mr. Rosa left our company effective December 31, 2007.


(5)
        Ms. Dering retired from our company effective September 1, 2007.


(6)
        Mr. Knauer left our company effective October 15, 2007.


(7)
        Mr. Montgomery was issued 350,000 options to purchase the common stock of the Company at an exercise price of $1.00 with a seven year exercise period as consideration for funding the company $343,883 during 2008.  The options were valued at $262,500 and were expensed immediately.


(8)
        Significant amounts of the executive salaries listed were accrued but not paid during 2008 due to severe cash flow limitations.  Specifically, for Mr. Burchetta, $41,667 was paid in 2008 and $93,750 was accrued. Mr. Burchetta went off salary beginning July 16, 2008 and became a consultant.  For Mr. Montgomery, $46,875 was paid in 2008 and $150,000 was accrued.  For Mr. Rainey, $116,667 was paid in 2008 and $83,333 was accrued.


















39


---



Outstanding Equity Awards at Fiscal Year-End





The following table summarizes equity awards outstanding at December 31, 2008 for each of the executive officers named in the Summary Compensation Table above:





Option Awards
        Stock AwardsName
        Number
of
Securities Underlying Unexercised Options
(#)
Exercisable
        Number of Securities Underlying Unexercised Options
(#)
Unexercisable
        Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
(#)Option Exercise Price
($)
        Option Expiration Date
        Number of Shares or Units of Stock That Have Not Vested
(#)Market Value of Shares or Units of Stock That Have Not Vested
($)
        Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#)Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($)(a)
        (b)
        (c)
        (d)
        (e)
        (f)
        (g)
        (h)
        (i)
        (j)James D. Burchetta
Chairman of the Board and Founder (1)

      350,000

      --

      --

      $1.25

      2/8/2015

      --

      --

      --

      --Kenneth H. Montgomery
Former Chief Executive Officer
        350,000
350,000
        --
--
        --
--
        $0.80
$1.00
        1/24/2015
7/15/2015
        --
--
        --
--
        --
--
        --
--David M. Rainey
President, Chief Financial Officer, Secretary, Treasurer (2)

      25,000
100,000
350,000

      50,000
50,000
--

      --
--
--

      $1.50
$1.25
$1.40

      4/27/2014
2/8/2015
6/12/2015

      --
--
--

      --
--
--

      --
--
--

      --
--
--Richard
          G. Rosa
Former President,  Chief Technology Officer
        100,000
230,000
200,000
50,000
        --
--
--
--
        --
--
--
--
        $5.00
$5.00
$5.00
$4.75
        8/31/2011
11/1/2011
4/27/2014
4/27/2014
        --
--
--
--
        --
--
--
--
        --
--
--
--
        --
--
--
--Katherine A. Dering
Former Chief Financial Officer, Secretary, Treasurer, Senior Vice President, Finance

      50,000
100,000
50,000

      --
--
--

      --
--
--

      $1.50
$1.50
$1.50

      7/6/2011
11/1/2011
4/27/2014

      --
--
--

      --
--
--

      --
--
--

      --
--
--




(1)
        This table excludes stock options granted to Mr. Burchetta pursuant to a licensing agreement with him and our other co-founder.  Pursuant to that licensing agreement, we issued to Mr. Burchetta stock options to purchase an aggregate of 758,717 shares of our common stock at $5.00 per share.  The stock options have an exercise period of ten years, were valued at $3,414,217, and vested upon issuance.







40


---

(2)
      Mr.
            Rainey holds stock options to purchase 75,000 shares of our common
            stock, one third of which vest on April 27, 2008, one third of which
            vest on April 27. 2009 and one third of which vest on April 27, 2010,
            all of which expire on April 27, 2014. Mr. Rainey also holds stock
            options to purchase 150,000 shares of our common stock, one third
            of which vest on February 8, 2008, one third of which vest on April
            27, 2008 and on third of which vest on April 27, 2009, all of which
            expire on February 8, 2015.


Employment Agreements



We have entered into an employment agreement with James D. Burchetta under which he will devote substantially all of his business and professional time to us and our business development.  The employment agreement with Mr. Burchetta is effective until January 13, 2013.  The agreement provided Mr. Burchetta with an initial annual base salary of $240,000 and contains provisions for minimum annual increases based on changes in an applicable cost-of-living index.  The employment agreement with Mr. Burchetta contains provisions under which his annual salary may increase to $600,000 if we achieve specified operating milestones and also provides 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.  Compensation expense under the agreement with Mr. Burchetta totaled $135,417 and $250,000 for the years ended December 31, 2008 and 2007, respectively.

We amended the employment agreement with Mr. Burchetta in February 2004, agreeing to modify his level of compensation, subject to our meeting specified financial and performance milestones.  The employment agreement, as amended, provided that the base salary for Mr. Burchetta will 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.  We 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.

We amended the employment agreement with Mr. Burchetta again in June 2005, agreeing that (1) as of April 1, 2005 we 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.

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.

On May 1, 2007, David M. Rainey joined our company as Chief Financial Officer and Treasurer on the planned retirement of Katherine A. Dering.  Mr. Rainey also became Secretary of the Company in November 2007 and President of the Company in January 2008.  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 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.





41


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On
    February 16, 2008, the Company entered into an employment agreement with
    Mr. Kenneth H. Montgomery to serve as its Chief Executive Officer. The agreement
    has a one year, automatically renewable term unless the Company provides
    90 days written notice of its intention not to renew prior to the anniversary
    date. Mr. Montgomerys salary is $225,000 annually, with a bonus of
    up to 75% of salary based on performance of objectives set by the Chairman
    and the Board of Directors. Mr. Montgomery also received 50,000 shares of
    restricted stock and 350,000 options to purchase the common stock of the
    Company at an exercise price of $0.80, the closing price on his date of approval
    by the Board. Effective July 1, 2009, Mr. Montgomery is no longer with the
Company.



Each
      of the employment agreements with Mr. Burchetta, Mr. Montgomery 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.



Director Compensation



Non-employee Director Compensation.  Non-employee directors currently receive no cash compensation for serving on our board of directors other than reimbursement of all reasonable expenses for attendance at board and board committee meetings.  Under our 2005 Incentive Compensation Plan, non-employee directors are entitled to receive stock options to purchase shares of common stock or restricted stock grants.  During the year ended December 31, 2008, options to purchase 111,500 shares of stock were granted to the non-employee directors for their service on the Board.  Additional options to purchase 700,000 shares of stock were granted to two non-employee directors to forbear and extend the maturity of their respective financings to the Company.





Employee Director Compensation.Directors who are employees of ours receive no compensation for services provided in that capacity, but are reimbursed for out-of-pocket expenses in connection with attendance at meetings of our board and its committees.



The table below summarizes the compensation we paid to non-employee directors for the fiscal year ended December 31, 2008.

Director Compensation

Name
        Fees Earned or Paid in Cash ($)
        Stock Awards
($)
        Option Awards
($)
        Non-Equity Incentive Plan Compen-
sation
($)
        Nonqualified Deferred Compen-sation Earnings
($)
        All Other Compen-sation ($)
        Total ($)(a)
        (b)
        (e)
        (f)
        (g)
        (h)
        (i)
        (j)Charles S. Brofman (1)

      --

      --

      --

      --

      --

      227,500

      227,500Jeffrey S. Bernstein (2)
        --
        --
        40,500
        --
        --
        --
        40,500Michael G. Carey (3)

      --

      --

      24,300

      --

      --

      --

      24,300Lawrence E. Dwyer, Jr. (3)
        --
        --
        24,705
        --
        --
        --
        24,705William M. Mooney, Jr.

      --

      --

      810

      --

      --

      227,500

      228,310








42


---

(1)
        This table excludes stock options granted to Mr. Brofman pursuant to a licensing agreement with him and our other co-chairman.  Pursuant to that licensing agreement, we issued to Mr. Brofman, stock options to purchase an aggregate of 758,717 shares of our common stock at $5.00 per share. The stock options have an exercise period of ten years, were valued at $3,414,217, and vested upon issuance.


(2)
        Mr. Bernstein resigned from the board effective January 24, 2008 to become a consultant to the company.


(3)
        Mr. Carey and Mr. Dwyer resigned from the board effective September 26, 2008 to pursue other interests.


ITEM 11.  Security ownership of certain beneficial owners and management and related stockholder matters



The
  table below sets forth the beneficial ownership of our common stock, as of August
  12, 2009, by:




        all of our directors and executive officers, individually,





        all of our directors and executive officers, as a group, and





        all persons who beneficially owned more than 5% of our outstanding common stock.




The beneficial ownership of each person was calculated based on 10,061,865 shares of our common stock outstanding as of
August 18, 2009, according to the record ownership listings as of that date and the verifications we solicited and received from each director and executive officer.  The SEC has defined beneficial
ownership to mean more than ownership in the usual sense.  For example, a person has beneficial ownership of a share not only if he owns it in the usual sense, but also if he has the power to vote,
sell or otherwise dispose of the share.  Beneficial ownership also includes the number of shares that a person has the right to acquire within 60 days of August 4, 2009 pursuant to the exercise of
options or warrants or the conversion of notes, debentures or other indebtedness, but excludes stock appreciation rights.  Two or more persons might count as beneficial owners
of the same share.  Unless otherwise noted, the address of the following persons listed below is c/o Debt Resolve, Inc., 150 White Plains Road, Suite 108, Tarrytown, New York 10591.



Unless otherwise indicated, we believe that all persons named in the table below have sole voting and investment power with respect to all shares of common stock beneficially owned by them.

Name
        Position
        Shares of stock beneficially owned
        Percent of common stock beneficially ownedJames D. Burchetta

      Chairman of the Board and Founder

      1,814,957

      (1)

      9.1%Charles S. Brofman
        Director and Co-Founder
        2,190,193
        (2)
        11.0%Kenneth H. Montgomery

      Former Chief Executive Officer

      848,548

      (3)

      4.3%David M. Rainey
        President, Chief Financial Officer, Treasurer, Secretary
        475,085
        (4)
        2.4%William H. Mooney

      Director

      910,102

      (5)

      4.6%All directors and executive officers as a group (5 persons)
        
        6,238,885
        
        31.4%




*
        Denotes less than 1%.


(1)
        Includes stock options to purchase 1,108,717 shares of common stock.


(2)
        Includes stock options to purchase 1,108,717 shares of common stock.  Also includes 800,000 shares held by Arisean Capital Ltd., a corporation controlled by Mr. Brofman.




43


---

(3)
        Includes stock options to purchase 700,000 shares of common stock and 12,500 shares of common stock issuable upon the exercise of warrants.


(4)
        Includes stock options to purchase 475,000 shares of common stock.  Excludes stock options to purchase 50,000 shares of common stock, with 25,000 vesting on April 27, 2009 and 25,000 vesting on April 27, 2010.  Excludes additional stock options to purchase 50,000 shares of common stock, with 50,000 vesting on April 27, 2009.(5)
        Includes 168,217 shares of common stock issuable upon the exercise of warrants and stock options to purchase 694,500 shares of common stock.


Change in Control

There are no arrangements currently in effect which may result in our change in control, as that term is defined by the provisions of Item 403(c) of Regulation S-B.

Equity Compensation Plan Information

The issuance of stock incentive awards for an aggregate of 900,000 shares of common stock is authorized under our 2005 Incentive Compensation Plan.  As of December 31, 2008, 35,000 stock options are available for issuance under our 2005 Incentive Compensation Plan, and there were outstanding stock options to purchase 865,000 shares of our common stock.

The following table provides information as of December 31, 2008 with respect to the shares of common stock that may be issued under our existing equity compensation plan:



Equity Compensation Plan Information



Plan category
        Number of shares of common stock to be issued upon exercise of outstanding options, warrants and rights
(a)
        Weighted-average exercise price of outstanding options, warrants and rights
(b)
        Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)Equity compensation plans approved by security holders

      865,000

      $2.99

      35,000Equity compensation plans not approved by security holders
        5,189,934
        $2.89
        UnrestrictedTotal

      6,054,934

      $2.90

      35,000










44


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ITEM
      12. Certain Relationships and Related Transactions, and Director Independence



Related
      Party Transactions



In
    May 2007, our non-executive co-founder provided the company with a line of
    credit for up to $500,000 in financing, all of which was drawn. He also provided
    the company with $76,000 in short term loans in November, 2007.



In
    August 2007, our Chairman and Founder provided us with a $100,000 line of
    credit, all of which was drawn. In December 2007, he provided an additional
    $35,000 in short term loans to us.



In October 2007, a director and stockholder provided us with a line of credit for $275,000, all of which was drawn.  The director provided an additional $25,000 in short term funding in November 2007 and an additional $50,421 during 2008.



Between February and July 2008, our Chief Executive Officer provided us with $343,883 in loans and expenses paid on our behalf.



Director Independence



William M. Mooney, Jr. is an independent director, as such term is defined in Rule 10A-3(b)(1) under the Exchange Act, and Mr. Mooney serves on each of our Audit, Compensation, and Nominations and Governance Committees.  See Item 9, Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act for more information on the independence of our directors.



ITEM 13.  Exhibits



(a)  Exhibits



Exhibit No.
        Description3.1

      Certificate of Amendment of the Certificate of Incorporation, dated August 16, 2006. (3)3.2
        Certificate of Amendment of the Certificate of Incorporation, dated August 24, 2006. (3)4.1

      Form of 15% Secured Convertible Promissory Note of Debt Resolve, Inc. for June 26, 2006 private placement.(1)4.2
        Form of 15% Secured Promissory Note of Debt Resolve, Inc. for June 26, 2006 private placement.(1)4.3

      Form of Warrant to Purchase Common Stock of Debt Resolve, Inc. for June 26, 2006 private placement.(1)4.4
        Form of Purchase Warrant granted to Underwriters in November 2006 initial public offering.(4)10.1

      Securities Purchase Agreement, dated as of June 26, 2006, among Debt Resolve, Inc. and each of the private placement subscribers.(1)10.2
        Registration Rights Agreement, dated as of June 26, 2006, among Debt Resolve, Inc. and each of the private placement subscribers.(1)10.3

      Security Agreement, dated as of June 26, 2006, among Debt Resolve, Inc. and each of the private placement subscribers.(1)10.4
        Stock Pledge Agreement, dated as of June 26, 2006, among Debt Resolve, Inc. and each of the private placement subscribers.(1)10.5

      Form of investor lock-up agreement for June 26, 2006 private placement.(1)10.6
        Hosting Agreement with AT&T Corp.(2)10.7

      Master Loan and Servicing Agreement, dated as of December 21, 2006, by and among EAR Capital I, LLC, as borrower, DRV Capital LLC, as servicer, Debt Resolve, Inc., as parent, and Sheridan Asset Management, LLC, as lender.(5)10.8
        Form of Secured Promissory Note, dated December 21, 2006, made by EAR Capital I, LLC to Sheridan Asset Management, LLC.(5)10.9

      Security Agreement, dated as of December 21, 2006, between EAR Capital I, LLC, as obligor, and Sheridan Asset Management, LLC, as secured party.(5)






45


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21.1
        Subsidiaries of Debt Resolve, Inc.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 pursuant to Sec. 906


_________________

(1)
        Incorporated herein by reference to Current Report on Form 8-K, filed January 7, 2008.


(2)
        Incorporated herein by reference to Current Report on Form 8-K, filed January 14, 2008.


(3)
        Incorporated herein by reference to Current Report on Form 8-K, filed January 29, 2008.


(4)
        Incorporated herein by reference to Current Report on Form 8-K, filed January 30, 2008.


(5)
        Incorporated herein by reference to Current Report on Form 8-K, filed April 4, 2008.


(6)
        Incorporated herein by reference to Current Report on Form 8-K, filed May 16, 2008.


(7)
        Incorporated herein by reference to Current Report on Form 8-K, filed May 30, 2008.


(8)
        Incorporated herein by reference to Current Report on Form 8-K, filed June 10, 2008.


(9)
        Incorporated herein by reference to Form 425, filed on June 10, 2008.


(10)
        Incorporated herein by reference to Current Report on Form 8-K, filed June 23, 2008.


(11)
        Incorporated herein by reference to Current Report on Form 8-K, filed August 8, 2008.


(12)
        Incorporated herein by reference to Current Report on Form 8-K/A, filed August 20, 2008.


(13)
        Incorporated herein by reference to Current Report on Form 8-K/A, filed August 20, 2008.


(14)
        Incorporated herein by reference to Current Report on Form 8-K/A, filed October 1, 2008.


(15)
        Incorporated herein by reference to Form 25-NSE, filed October 6, 2008.


(16)
        Incorporated herein by reference to Form 425, filed on November 12, 2008.


(17)
        Incorporated herein by reference to Current Report on Form 8-K, filed November 12, 2008.




ITEM 14.  Principal Accountant Fees and Services

RBSM LLP has served as our independent auditors beginning with our 10-Qs for the three months ended June 30, 2008,
September 30, 2008 and the 10-K for the year ended December 31, 2008.  Marcum LLP (formerly Marcum & Kliegman LLP) (Marcum LLP) served as our independent auditors for the 10-Q for the three months ended March 31, 2008 and for the years ended December 31, 2007,
2006 and 2005.  Marcum LLP also performed a re-audit of the years ended 2004 and 2003.

Audit Fees

Audit fees are those fees billed for professional services rendered for the audit of the annual financial statements and review of the financial statements included in Form 10-Q.  The aggregate amount of the audit fees billed by RBSM LLP in 2008 were $14,000.  The aggregate amount of the audit fees billed by Marcum LLP related to the audit of our financial statements, including the review of our IPO offering statement on Form SB-2 and responses to related SEC comments in 2006 and 2005, was $157,900 for 2008, $201,522 for 2007, $315,895 for 2006 and $220,000 for 2005.

Audit-related Fees

Audit related fees are fees billed for professional services other than the audit of our financial statements.  No audit related fees were billed by RBSM LLP in 2008 or Marcum LLP in 2008, 2007, 2006 or 2005.



46


---

Tax
Fees

Tax
    fees are those fees billed for professional services rendered for tax compliance,
    including preparation of corporate federal and state income tax returns,
    tax advice and tax planning. The aggregate amount of the tax fees billed
    by Marcum LLP was $10,351 in 2007 and $20,705 in 2006. No
    tax fees were billed by Marcum LLP in 2008 or 2005.  Our tax returns for 2007 have not been filed at this date due to our severe cash limitations.

All Other Fees

No other fees were billed by our independent auditors in 2008. 2007, 2006 and 2005.

Audit Committee

The member of our audit committee is Mr. Mooney.  Our board of directors and audit committee approved the services rendered and fees charged by our independent auditors.  The audit committee has reviewed and discussed our audited financial statements for the year ended December 31, 2008 with our management.  In addition, the audit committee has discussed with RBSM LLP, our independent registered public accountants, the matters required to be discussed by Statement of Auditing Standards No. 61 (Communications with Audit Committee).  The audit committee also has received the written disclosures and the letter from as required by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and the audit committee has discussed the independence of RBSM LLP with that firm.

Based on the audit committees review of the matters noted above and its discussions with our independent auditors and our management, the audit committee recommended to the board of directors that the audited financial statements be included in our annual report on Form 10-K for the year ended December 31, 2008.

Policy for Pre-Approval of Audit and Non-Audit Services



The audit committees policy is to pre-approve all audit services and all non-audit services that our independent auditor is permitted to perform for us under applicable federal securities regulations.  As permitted by the applicable regulations, the audit committees policy utilizes a combination of specific pre-approval on a case-by-case basis of individual engagements of the independent auditor and general pre-approval of certain categories of engagements up to predetermined dollar thresholds that are reviewed annually by the audit committee.  Specific pre-approval is mandatory for the annual financial statement audit engagement, among others.



The pre-approval policy was implemented effective as of September 2004.  All engagements of the independent auditor to perform any audit services and non-audit services since that date have been pre-approved by the audit committee in accordance with the pre-approval policy.  The policy has not been waived in any instance.  All engagements of the independent auditor to perform any audit services and non-audit services prior to the date the pre-approval policy was implemented were approved by the audit committee in accordance its normal functions.



47


---

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.

Dated:
   August 19, 2009

DEBT RESOLVE, INC.By:/s/DAVID M. RAINEYDavid M. RaineyInterim Chief Executive Officer(principal executive officer)By:/s/DAVID M. RAINEYDavid M. RaineyPresident, Chief Financial Officer, Treasurer and Secretary(principal financial and accounting officer)




Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



Signature
      Title
      Date/s/JAMES D. BURCHETTA
      Chairman
          of the Board and Founder
      August
          19, 2009James
          D. Burchetta/s/DAVID M. RAINEY
      Interim
          Chief Executive Officer, President and Chief
          Financial Officer,
      August
          19, 2009David
          M. Rainey
      Treasurer and Secretary(principal
        executive and financial and accounting officer)/s/CHARLES S. BROFMAN
      Director
      August
          19, 2009Charles
          S. Brofman/s/WILLIAM M. MOONEY,
          JR.
      Director
      August
          19, 2009William
          M. Mooney, Jr.






48


---

DEBT RESOLVE, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                            |          
|----------------------------------------------------------------------------------------------------------- | ---------
|Consolidated Financial Statements for the Years Ended December 31, 2008 and 2007                            |          
|Report of Independent Registered Public Accounting Firm                                                     | F-2 - F-3
|Consolidated Balance Sheets as of December 31, 2008 and 2007                                                | F-4      
|Consolidated Statements of Operations for the Years Ended December 31, 2008 and 2007                        | F-5      
|Consolidated Statements of Stockholders Equity (Deficiency) for the Years Ended December 31, 2008 and 2007 | F-6      
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and 2007                        | F-7      
|Notes to Consolidated Financial Statements                                                                  | F-9      



F-1



---





RBSM LLP



CERTIFIED PUBLIC ACCOUNTANTS



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Audit Committee of the Board of Directors and Stockholders of Debt Resolve, Inc.



We have audited the accompanying consolidated balance sheet of Debt Resolve, Inc. and its wholly owned subsidiaries
the Company), Company as of December 31, 2008, and the related consolidated statements of operation, stockholders (deficit) and cash flows for the year in
the period ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit.



We have conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board
(United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance   about whether the financial   statements
are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit
 provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Debt Resolve, Inc.  at  December 31, 2008 and the results of its operations  and its cash flow for the year  in the period
ended  December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.



The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred significant losses since inception. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans, with respect to these matters are also described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.



/s/ RBSM LLP

RBSM LLP

Certified Public Accountants



New York, New York

August  19, 2009



F-2



---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Audit Committee of the Board of Directors and Stockholders of Debt Resolve, Inc.



We have audited the accompanying  consolidated balance sheet of Debt Resolve,  Inc. and Subsidiaries (the “Company”) as of December 31,
2007, and the related  consolidated  statements of operations,  stockholders’  deficiency and cash flows for the year then ended. These
consolidated  financial statements are the responsibility of the Company’s  management.  Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company  Accounting  Oversight  Board  (placecountry-regionUnited
States).  Those standards  require that we plan and perform the audit to obtain  reasonable  assurance about whether the  consolidated
financial  statements  are free of material  misstatement.  The Company is not  required to have,  nor were we engaged to perform,  an
audit of its internal control over financial reporting.  Our audit included  consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the  circumstances,  but not for the purpose of expressing an opinion
on the effectiveness of the Company’s  internal control over financial  reporting.  Accordingly,  we express no such opinion. An audit
also includes examining,  on a test basis, evidence supporting the amounts and disclosures in the financial  statements,  assessing the
accounting  principles  used and  significant  estimates made by  management,  as well as evaluating  the overall  financial  statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion,  based on our audit, the consolidated  financial statements referred to above present fairly, in all material respects,
the consolidated  financial  position of Debt Resolve,  Inc. and Subsidiaries as of December 31, 2007, and the consolidated  results of
their  operations  and their cash  flows for the year then  ended in  conformity  with  United  States  generally  accepted  accounting
principles.

The accompanying  consolidated  financial  statements have been prepared assuming that the Company will continue as a going concern. As
more fully described in Note 2 to the consolidated  financial statements,  the Company has incurred significant losses since inception,
which  raise  substantial  doubt about the  Company’s  ability to continue  as a going  concern.  Management’s  plans in regard to this
matter are also described in Note 2 to the consolidated  financial  statements.  The consolidated  financial  statements do not include
any adjustments that might result should the Company be unable to continue as a going concern.

/s/ Marcum LLP(Formerly Marcum & Kliegman LLP)New York, New YorkApril 14, 2008



F-3



---





DEBT RESOLVE, INC. and SUBSIDIARIES 
Consolidated Balance Sheet



|                                                                                                                                                                                                              |                                    |  |                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- |  | -------------------------------
|Assets                                                                                                                                                                                                        | December
        31,              
|                                                                                                                                                                                                              | 2008                               |  | 2007                           
|Current assets:                                                                                                                                                                                               |                                    |  |                                
|Cash                                                                                                                                                                                                          | $                    32,551        |  | $                            --
|Accounts
        receivable                                                                                                                                                                                   | 11,582                             |  | 19,207                         
|Other
        receivable                                                                                                                                                                                      | --                                 |  | 200,000                        
|Prepaid
        expenses and other current assets                                                                                                                                                             | 77,220                             |  | 102,870                        
|Current assets of discontinued operations                                                                                                                                                                     | 5,582                              |  | 137,943                        
|Total
        current assets                                                                                                                                                                                  | 126,935                            |  | 460,020                        
|                                                                                                                                                                                                              |                                    |  |                                
|Fixed assets, net                                                                                                                                                                                             | 84,271                             |  | 157,457                        
|                                                                                                                                                                                                              |                                    |  |                                
|Deposits and other assets                                                                                                                                                                                     | 94,855                             |  | 94,855                         
|Assets of discontinued operations                                                                                                                                                                             | --                                 |  | 348,411                        
|                                                                                                                                                                                                              |                                    |  |                                
|Total assets                                                                                                                                                                                                  | $
                         306,061 |  | $                1,060,743     
|                                                                                                                                                                                                              |                                    |  |                                
|Liabilities
        and Stockholders Deficiency                                                                                                                                                              |                                    |  |                                
|                                                                                                                                                                                                              |                                    |  |                                
|Current liabilities:                                                                                                                                                                                          |                                    |  |                                
|Accounts
        payable and accrued liabilities                                                                                                                                                              | $               3,525,849          |  | $                1,691,285     
|Convertible
        debenture (net of deferred debt discount of $159,562 and $0 as of December
        31, 2008 and 2007, respectively)                                                                       | 191,438                            |  | --                             
|Short-term
        notes (net of deferred debt discount of $0 and $29,400 as of December
        31, 2008 and 2007, respectively)                                                                             | 487,000                            |  | 70,600                         
|Current
        maturities of long-term debt (net of deferred debt discount of $69,556
        and $0 as of December 31, 2008 and 2007, respectively)                                                         | 753,444                            |  | --                             
|Lines
        of credit  related parties                                                                                                                                                                     | 1,203,623                          |  | 910,000                        
|Derivative
        liability                                                                                                                                                                                  | 331,268                            |  | --                             
|Current liabilities of discounted operations                                                                                                                                                                  | 2,330,912                          |  | 900,635                        
|Total
        current liabilities                                                                                                                                                                             | 8,823,534                          |  | 3,572,520                      
|                                                                                                                                                                                                              |                                    |  |                                
|Notes
        payable (net of deferred debt discount of $0 and $70,975 as of
        December 31, 2008 and 2007, respectively)                                                                                | --                                 |  | 254,025                        
|Total
        liabilities                                                                                                                                                                                     | 8,823,534                          |  | 3,826,545                      
|                                                                                                                                                                                                              |                                    |  |                                
|Commitments and contingencies                                                                                                                                                                                 |                                    |  |                                
|                                                                                                                                                                                                              |                                    |  |                                
|Stockholders deficiency:                                                                                                                                                                                     |                                    |  |                                
|Preferred
        stock, 10,000,000 shares authorized, $0.001 par value, none issued
        and outstanding as of December 31, 2008 and 2007                                                                 | --                                 |  | --                             
|Common stock,
        100,000,000 shares authorized, $0.001 par value, 10,511,865 issued and 10,061,865 outstanding at December 31, 2008 and 8,474,364
        issued and outstanding as of December 31, 2007 | 10,512                             |  | 8,474                          
|Additional paid-in capital                                                                                                                                                                                    | 47,207,568                         |  | 42,501,655                     
|Shares held under escrow (450,000 shares)                                                                                                                                                                     | (450)                              |  | --                             
|Accumulated
        deficit                                                                                                                                                                                   | (55,735,103)                       |  | (45,275,931)                   
|Total
        stockholders deficiency                                                                                                                                                                        | (8,517,473)                        |  | (2,765,802)                    
|                                                                                                                                                                                                              |                                    |  |                                
|Total
        liabilities and stockholders deficiency                                                                                                                                                        | $                  306,061         |  | $                 1,060,743    
|                                                                                                                                                                                                              |                                    |  |                                



The accompanying notes are an integral part of these consolidated financial statements.



F-4



---





DEBT RESOLVE, INC. and SUBSIDIARIES
 Consolidated Statements of Operations

|                                                                                                      |                                       |  |                                      
|----------------------------------------------------------------------------------------------------- | ------------------------------------- |  | -------------------------------------
|                                                                                                      | Years
        Ended December 31,     
|                                                                                                      | 2008                                  |  | 2007                                 
|                                                                                                      |                                       |  |                                      
|Revenues                                                                                              | $                  165,969            |  | $                    67,449          
|                                                                                                      |                                       |  |                                      
|Costs
        and expenses:                                                                           |                                       |  |                                      
|Payroll
        and related expenses                                                                  | 3,030,506                             |  | 3,909,589                            
|General
        and administrative expenses                                                           | 3,983,771                             |  | 3,156,767                            
|Terminated
        acquisition costs                                                                  | --                                    |  | 959,811                              
|Depreciation
        and amortization expense                                                         | 57,610                                |  | 56,938                               
|                                                                                                      |                                       |  |                                      
|Total
        expenses                                                                                | 7,071,887                             |  | 8,083,105                            
|                                                                                                      |                                       |  |                                      
|Loss
        from operations                                                                          | (6,905,918)                           |  | (8,015,656)                          
|                                                                                                      |                                       |  |                                      
|Other
        (expense) income:                                                                       |                                       |  |                                      
|Interest
        income                                                                               | 190                                   |  | 41,946                               
|Interest
        expense                                                                              | (161,772)                             |  | (16,275)                             
|Interest
        expense  related party                                                              | (137,625)                             |  | (42,097)                             
|Amortization
        of deferred debt discount and beneficial   conversion feature                    | (918,721)                             |  | (132,400)                            
|Amortization
        of beneficial conversion feature                                                 | (229,192)                             |  | --                                   
|Gain
        on derivative liability                                                                  | 430,418                               |  | --                                   
|Loss
        on disposal of fixed assets                                                              | (15,576)                              |  | --                                   
|Other
        (expense) income                                                                        | (3,166)                               |  | 10,180                               
|Total
        other expense                                                                           | (806,252)                             |  | (138,646)                            
|                                                                                                      |                                       |  |                                      
|Loss
        from continuing operations                                                               | (7,712,170)                           |  | (8,154,302)                          
|                                                                                                      |                                       |  |                                      
|Loss
        from discontinued operations                                                             | (2,747,002)                           |  | (4,441,615)                          
|                                                                                                      |                                       |  |                                      
|Net
        loss                                                                                      | $
                  (10,459,172)      |  | $           (12,595,917)             
|                                                                                                      |                                       |  |                                      
|Net
        loss per common share:                                                                    |                                       |  |                                      
|basic
        and diluted (see Note 2)                                                                |                                       |  |                                      
|-
             Continuing operations                                                                  | $            
                 (0.81) |  | $
                             (1.02)
|-
             Discontinued operations                                                                | $                      (0.29)         |  | $                      (0.55)        
|-
             Total                                                                                  | $
                             (1.10) |  | $            
                 (1.57)
|                                                                                                      |                                       |  |                                      
|Weighted
        average number of common shares outstanding  basic and diluted (see
        Note 2) | 9,549,435                             |  | 8,033,348                            
|                                                                                                      |                                       |  |                                      



The accompanying notes are an integral part of these consolidated financial statements.



F-5



---





DEBT RESOLVE, INC. and SUBSIDIARIES
Consolidated Statements of Stockholders Equity (Deficiency)
For the Years Ended December 31, 2008 and 2007

|                                                                                   |                  |                       |                  |                         |                            |                            |                          |                            |                       |  | 
|---------------------------------------------------------------------------------- | ---------------- | --------------------- | ---------------- | ----------------------- | -------------------------- | -------------------------- | ------------------------ | -------------------------- | --------------------- |  | 
|                                                                                   | Preferred Stock  | Common Stock          |                  |                         |                            |                            |                         
|                                                                                   | Number of
Shares | Amount                | Number of
Shares | Amount                  | Deferred compensation      | Additional
Paid in
Capital | Shares
held under
escrow | Accumulated Deficit        | Total                
|Balance at December 31, 2006                                                       | --               | $
                 -- | 6,504,412        | $          6,504        | $       (15,436)           | $   37,498,740             | $
                     - | $    (32,680,014)          | $
          4,809,794
|Issuance of common stock to purchase First Performance Corporation                 | -                | -                     | 88,563           | 89                      | -                          | 349,911                    | -                        | -                          | 350,000              
|Capital contributed from the exercise of options and warrants                      | -                | --                    | 1,001,389        | 1,001                   | -                          | 197,384                    | -                        | -                          | 198,385              
|Capital contributed from the grant of stock options to employees                   | -                | -                     | -                | -                       | -                          | 2,207,950                  | -                        | -                          | 2,207,950            
|Capital contributed from the grant of stock options to pay for consulting services | -                | -                     | -                | -                       | -                          | 255,795                    | -                        | -                          | 255,795              
|Sales of common stock for cash                                                     | -                | -                     | 880,000          | 880                     | -                          | 1,759,100                  | -                        | -                          | 1,759,980            
|Amortization of deferred compensation                                              | -                | -                     | -                | -                       | 15,436                     | -                          | -                        | -                          | 15,436               
|Capital contributed from the beneficial conversion feature of notes                | -                | -                     | -                | -                       | -                          | 232,775                    | -                        | -                          | 232,775              
|Net loss                                                                           | -                | -                     | -                | -                       | -                          | -                          | -                        | (12,595,917)               | (12,595,917)         
|Balance at December 31, 2007                                                       | -                | $
                  - | 8,474,364        | $          8,474        | $
                      -- | 42,501,655                 | $               -        | $     (45,275,931)         | $  (2,765,802)       
|Capital contributed from the exercise of options and warrants                      | -                | -                     | 37,501           | 38                      | -                          | 337                        | -                        | -                          | 375                  
|Capital contributed from the grant of stock options to employees                   | -                | -                     | -                | -                       | -                          | 2,342,031                  | -                        | -                          | 2,342,031            
|Capital contributed from the grant of stock options to pay for consulting services | -                | -                     | -                | -                       | -                          | 153,333                    | -                        | -                          | 153,333              
|Sales of common stock for cash                                                     | -                | -                     | 100,000          | 100                     | -                          | 24,900                     | -                        | -                          | 25,000               
|Capital contributed from the issuance of restricted stock to employees             | -                | -                     | 50,000           | 50                      | -                          | 39,950                     | -                        | -                          | 40,000               
|Issuance of common stock for services and fundraising costs                        | -                | -                     | 1,850,000        | 1,850                   | -                          | 2,201,230                  | -                        | -                          | 2,203,080            
|Accrual of 150,000 shares not issued in conjunction with fundraising costs         | -                | -                     | -                | -                       | -                          | 60,000                     | -                        | -                          | 60,000               
|Capital contributed from the deferred debt discount of notes                       | -                | -                     | -                | -                       | -                          | 304,214                    | -                        | -                          | 304,214              
|Capital contributed from the beneficial conversion feature of notes                | -                | -                     | -                | -                       | -                          | 288,250                    | -                        | -                          | 288,250              
|Reclassify derivative liability  warrants and consultant options                  | -                | -                     | -                | -                       | -                          | (708,332)                  | -                        | -                          | (708,332)            
|Issuance of shares under escrow to secure convertible debenture                    | -                | -                     | (450,000)        | -                       | -                          | -                          | (450)                    | -                          | (450)                
|Net loss                                                                           | -                | -                     | -                | -                       | -                          | -                          | -                        | (10,459,172)               | (10,459,172)         
|Balance at December 31, 2008                                                       | -                | $          -          | 10,061,865       | $
               10,512 | $
                      -- | $
           47,207,568    | $       (450)            | $
            (55,735,103) | $ (8,517,473)        



The accompanying notes are an integral part of these consolidated financial statements.



F-6



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DEBT RESOLVE, INC. and SUBSIDIARIES
 Consolidated Statements of Cash Flows

|                                                                                    |                                  |  |                            
|----------------------------------------------------------------------------------- | -------------------------------- |  | ---------------------------
|                                                                                    | Years
        ended December 31,
|                                                                                    | 2008                             |  | 2007                       
|CASH
        FLOWS FROM CONTINUING OPERATING ACTIVITIES                             |                                  |  |                            
|Net loss                                                                            | $       (7,712,170)              |  | $        (8,154,302)       
|Adjustments
        to reconcile net loss to net cash used in operating activities: |                                  |  |                            
|Non
        cash stock-based compensation                                           | 2,535,364                        |  | 2,479,181                  
|Warrants
        issued in exchange for services rendered                           | 53,355                           |  | --                         
|Shares
        issued in exchange for services and fund raising                     | 2,263,080                        |  | --                         
|Convertible debenture issued for fundraising costs                                  | 51,000                           |  | --                         
|Amortization
        of deferred debt discount                                      | 463,722                          |  | 132,400                    
|Derivative
        liability                                                        | (430,418)                        |  | --                         
|Loss
        on disposal of fixed assets                                            | 15,576                           |  | --                         
|Depreciation
        and amortization                                               | 57,610                           |  | 56,938                     
|Changes in operating
        assets and liabilities:                                |                                  |  |                            
|Accounts
        receivable                                                         | 7,625                            |  | (9,630)                    
|Prepaid
        expenses and other current assets                                   | 25,650                           |  | (12,642)                   
|Deposits
        and other assets                                                   | --                               |  | (310)                      
|Accounts
        payable and accrued expenses                                       | 1,834,561                        |  | 1,201,390                  
|Net
        cash used in continuing operating activities                            | (835,045)                        |  | (4,306,975)                
|                                                                                    |                                  |  |                            
|CASH
        FLOWS FROM CONTINUING INVESTING ACTIVITIES                             |                                  |  |                            
|Purchase
        of First Performance Co., including direct expenses                | --                               |  | (586,915)                  
|Investment
        in subsidiaries                                                  | (835,951)                        |  | (3,090,419)                
|Purchases
        of fixed assets                                                   | --                               |  | (34,626)                   
|Net
        cash used in continuing investing activities                            | (835,951)                        |  | (3,711,960)                
|                                                                                    |                                  |  |                            
|CASH
        FLOWS FROM CONTINUING FINANCING ACTIVITIES                             |                                  |  |                            
|Proceeds
        from issuance of convertible notes                                 | 300,000                          |  | --                         
|Proceeds
        from notes payable                                                 | 698,000                          |  | 125,000                    
|Proceeds
        from issuance of short term notes                                  | 497,000                          |  | 100,000                    
|Repayment
        of short term notes                                               | (110,000)                        |  | --                         
|Proceeds
        from lines of credit  related parties                             | 309,623                          |  | 910,000                    
|Repayment
        of line of credit  related parties                               | (16,000)                         |  | --                         
|Proceeds
        from issuance of common stock                                      | 25,000                           |  | 1,759,980                  
|Proceeds
        from exercise of options and warrants                              | 375                              |  | 198,385                    
|Stock
        placed in escrow                                                      | (450)                            |  | --                         
|Net
        cash provided by continuing financing activities                        | 1,703,548                        |  | 3,093,365                  
|                                                                                    |                                  |  |                            
|CASH FLOWS OF DISCONTINUED
        OPERATIONS                                       |                                  |  |                            
|Net
        cash used in operating activities                                       | (734,896)                        |  | (2,965,719)                
|Net
        cash provided by investing activities                                   | 835,895                          |  | 3,014,718                  
|Net
        cash used in financing activities                                       | (101,000)                        |  | (49,000)                   
|Net
        cash provided by discontinued operations                                | --                               |  | (1)                        
|Net increase (decrease)
        in cash and cash equivalents                        | 32,551                           |  | (4,925,571)                
|Cash and cash equivalents
        at beginning of period                            | --                               |  | 4,925,571                  
|Cash and cash equivalents
        at end of period - continuing operations          | $               32,551           |  | $                        --

F-7



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DEBT RESOLVE, INC. and SUBSIDIARIES
 Consolidated Statements of Cash Flows

|                                                             |                 |  |                       
|------------------------------------------------------------ | --------------- |  | ----------------------
|Non cash investing
        and financing activities:         |                 |  |                       
|Issuance
        of unfunded long term note payable          | $            -- |  | $              200,000
|                                                             |                 |  |                       
|Supplemental investing
        and financing activities:     |                 |  |                       
|Current
        assets acquired                              | $            -- |  | $              679,734
|Property
        and equipment acquired                      | --              |  | 286,229               
|Security
        deposits acquired                           | --              |  | 51,999                
|Intangible
        assets acquired                           | --              |  | 450,000               
|Goodwill
        recognized on purchase business combination | --              |  | 1,042,205             
|Accrued
        liabilities assumed in the acquisition       | --              |  | (1,573,252)           
|Non-cash
        consideration to seller                     | --              |  | (350,000)             
|Cash
        paid to acquire business                        | $            -- |  | $              500,000
|                                                             |                 |  |                       

The accompanying notes are an integral part of these consolidated financial statements.



F-8



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DEBT RESOLVE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements

December 31, 2008

NOTE 1.

ORGANIZATION AND DEVELOPMENT STAGE ACTIVITIES:

Description of business

Debt Resolve, Inc. (Debt Resolve or the Company, “we”, “us”, “our”), is a Delaware
corporation formed on April 21, 1997.  The Company provides banks, lenders, credit card issuers, third party collection agencies and collection law firms and purchasers of charged-off debt an Internet-based
online system (the DebtResolve System) for the collection of past due consumer debt.  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 debts.  The DebtResolve system features, at its core, a patented online bidding system.  In 2007, the Company expanded its business to include debt buying and debt collection and acquired a
collection agency, which used its patented Internet-based collection and settlement process to improve collection results.  However, on October 15, 2007, the Company exited the debt buying business (See Note 10),
and on June 30, 2008, the Company exited the collection agency business. (See Note 18.) Since the June 30, 2008 closure of our First Performance Corp. business, the Company has re-focused on its
core internet business. The Company has continued to refine its software-as-a-service offerings to provide enhanced functionality and automation. The Company is completing a recapitalization to
enable improvements in its finances, its customer service and to streamline its operations. The Company is actively on-boarding new clients at this time in the banking and healthcare sectors.

Organization

Until February 24, 2003, the Company, formerly named Lombardia Acquisition Corp., was inactive and had no significant assets, liabilities or operations.  On February 24, 2003, James D.  Burchetta, Charles S.  Brofman, and Michael S. Harris (collectively, the Principal Stockholders) purchased 2,250,000 newly-issued shares of the Companys common stock, representing 84.6% of the then outstanding shares, pursuant to a Stock Purchase Agreement effective January 13, 2003 between the Company and each of the Principal Stockholders.  The Board of Directors was then reconstituted.  On May 7, 2003, following approvals by the Board of Directors and holders of a majority of the Companys common stock, the Companys Certificate of Incorporation was amended to change the Companys corporate name to Debt Resolve, Inc. and increase the number of the Companys authorized shares of common stock
from 20,000,000 to 50,000,000 shares.  On May 8, 2006, the Board of Directors and holders of a majority of the Companys common stock approved amending the Companys Certificate of Incorporation to increase the number of the Companys authorized shares of common stock from 50,000,000 to 100,000,000 shares.  On August 25, 2006, following approvals by the Board of Directors and holders of a majority of the Companys outstanding shares of common stock, the Companys Certificate of Incorporation was amended to effect a reverse one-for-ten reverse split, which reduced the number of outstanding shares of common stock from 29,703,900 to 2,970,390.  On November 6, 2006, the Company completed an initial public offering consisting of 2,500,000 shares of common stock.

Development stage activities

In accordance with Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises, from inception to January 2007, the Company was considered to be in the development stage since it devoted substantially all of its efforts to establishing a new business.  In January 2007, the Company initiated operations of its debt buying subsidiary and purchased the outstanding capital stock of First Performance Corporation, an accounts receivable management agency and was no longer considered a development stage entity.  The Company ceased operations of the debt buying subsidiary on October 15, 2007.  (See Note 10.)  The Company also ceased operations of the collection agency subsidiary on June 30, 2008.  (See Note 18.)

NOTE 2.   GOING CONCERN AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Going concern and managements liquidity plans

The accompanying consolidated 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.  The



F-9



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consolidated
  financial statements do not include any adjustments relating to the recoverability
  and classification of asset amounts or the classification of liabilities that
  might be necessary should the Company be unable to continue as a going concern.  For
  the year ending December 31, 2008, the Company had incurred a net loss
  of $7,712,170 from continuing operations.  Cash used in operating and investing
  activities of continuing operations was $1,670,997 for the year ended December
  31, 2008.  In addition, the Company has a working capital deficiency of
  $8,696,599 as of December 31, 2008.  Based upon projected operating expenses,
  the Company believes that its working capital as of the date of this report
  is not sufficient to fund its plan of operations for the next twelve months. 
  The aforementioned factors raise substantial doubt about the Companys
  ability to continue as a going concern.

The Company needs to raise additional capital in order to be able to accomplish its business plan objectives.  The Company has historically satisfied its capital needs primarily from the sale of debt and equity securities.  Management of the Company is continuing its efforts to secure additional funds through debt and/or equity instruments. Management believes that it will be successful in obtaining additional financing; 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. There can be no assurance that such a plan will be
successful.  In the alternative, the Company may be required to file for bankruptcy.  These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Subsequent
  to December 31, 2008, the Company has secured additional financing in the aggregate amount of $512,500.

Principles of Consolidation

The accompanying
  consolidated financial statements include the accounts of its wholly-owned
  subsidaries, First Performance Corporation,  First Performance Recovery
  Corporation, DRV Capital LLC, (DRV Capital) and EAR Capital,
  LLC (EAR).  All material inter-company balances and transactions
  have been eliminated in consolidation.

Reclassifications

Certain accounts in the prior period financial statements have been reclassified for comparison purposes to conform with the presentation of the current period financial statements.  These reclassifications had no effect on the previously reported loss.

Fair Value of Financial Instruments



The reported amounts of the Companys financial instruments, including accounts payable and accrued liabilities, approximate their fair value due to their short maturities.  The carrying amounts of debt approximate fair value because the debt agreements provide for interest rates that approximate market.

Cash and cash equivalents



For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.  Cash equivalents consist of money market funds and demand deposits. From time to time, the Company has balances in excess of the federally insured limit.

Restricted Cash



The Company typically receives cash collected on behalf of its First Performance clients.  Such cash is held in trust for the clients, and is not available to the Company for general corporate purposes.  As such, it is segregated from Cash.  First Performance takes its fee from the recovery for the client if the client is a



F-10



---



net client, such that the fee is netted from the amount collected before remittance.  Therefore, restricted cash may exceed the balance in Collections Payable by the amount of fees retained from recoveries.

Accounts Receivable

We extend credit to large, mid-size and small companies for collection services.  We have concentrations of credit risk as 100% of the balance of accounts receivable at December 31, 2008 consists of only two customers.  At December 31, 2008, accounts receivable from the two accounts amounted to approximately $11,170 (96%) and $412 (4%), respectively. At December 31, 2007, accounts receivable from the three largest accounts amounted to approximately $34,633 (41%), $16,277 (19%) and $13,340 (16%), respectively.   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 collectibility and the allowance for doubtful accounts is adjusted accordingly.  Our management determines collectibility based on their experience and knowledge of the customers, as of
Decem

ber 31, 2008 and 2007 no allowance for doubtful accounts has been booked.

Fixed Assets

Fixed assets are stated at cost, less accumulated depreciation.  Depreciation is provided over the estimated useful life of each class of assets using the straight-line method.  Expenditures for maintenance and repairs are charged to expense as incurred.  Additions and betterments that substantially extend the useful life of the asset are capitalized.  Upon the sale, retirement, or other disposition of property and equipment, the cost and related accumulated depreciation are removed from the balance sheet, and any gain or loss on the transaction is included in the statement of operations.

Business Combinations



In accordance with business combination accounting, the Company allocates the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The Company engaged a third-party appraisal firm to assist management in determining the fair values of First Performance Corporation.  Such a valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets.



Management makes estimates of fair values based upon assumptions believed to be reasonable.  These estimates are based on historical experience and information obtained from the management of the acquired companies.  Critical estimates in valuing certain of the intangible assets include but are not limited to:  future expected cash flows from customer relationships and market position, as well as assumptions about the period of time the acquired trade names will continue to be used in the combined company's product portfolio; and discount rates. These estimates are inherently uncertain and unpredictable.  Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.  (See Note 7.)



Derivative Financial Instruments



The Companys derivative financial instruments consist of embedded derivatives related to Convertible Debentures.  These embedded derivatives include certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company records the derivatives and related warrants at their fair values as of the inception date of the Convertible Debenture Agreement and at fair value as of each subsequent balance sheet date.  In addition, under the provisions of EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," as a result of entering into the Debentures, the Company is required to classify all other non-employee stock options and warrants as derivative liabilities and mark them to market at each reporting date.  Any change in fair value inclusive of modifications of terms will be recorded as non-operating, non-cash income























or expense at each reporting date.  If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge.  If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income.  Conversion-related derivatives were valued using the intrinsic method and the warrants using the Black Scholes Option Pricing Model with the following assumptions: dividend yield of 0%; annual volatility of 286%; and risk free interest rate from 0.11% to 3.38%.  The derivatives are classified as short term liabilities.



F-11



---



Goodwill and Intangible Assets



We account for goodwill and intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations (SFAS 141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142).  Under SFAS 142, goodwill and intangibles that are deemed to have indefinite lives are no longer amortized but, instead, are to be reviewed at least annually for impairment.  Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value.  Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions.  Changes in these estimates and assumptions could
materially affect the determination of fair value and/or goodwill impairment for each reporting unit.  Intangible assets will be amortized over their estimated useful lives.  We performed an analysis of our goodwill and intangible assets in accordance with SFAS 142 as of June 30, 2007 and determined that an impairment charge was necessary.  We performed a further analysis of our intangible assets as of September 30, 2007 and determined that an additional impairment charge was necessary.  We performed our annual impairment test at December 31, 2007 and determined that no additional impairment was necessary.  On June 30, 2008, a final impairment charge was necessary to fully impair the intangible assets as we closed First Performance on that date.  (See Note 7.)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires 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 managements judgment and available information and, consequently, actual results could be different from these estimates.

Accounts Payable and Accrued Liabilities

Included in accounts payable and accrued liabilities as of December 31, 2008 are accrued professional fees of $1,332,828 and accrued closing costs for First Performance of $1,350,931.  The Company owed 19 vendors a total of $2,449,091 at December 31, 2008, each of whom was individually owed in excess of 10% of total Company assets. Included in accounts payable and  accrued liabilities as of December 31, 2007 are accrued professional fees of $1,003,550 and a bank overdraft of $53,454.

Revenue Recognition

We earned
  revenue during 2008 and 2007 from several collection agencies, collection law
  firms and lenders that implemented our online system.  Our current contracts
  provide for revenue based on a percentage of the amount of debt collected, a
  flat fee per settlement from accounts submitted on the DebtResolve system 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 monthly fee.  For the early
  adopters of our product, we 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 monthly fees with transaction
  fees upon debt settlement.

In recognition of the principles expressed in Staff Accounting Bulletin (SAB) 104 (SAB 104), 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, at this time we uniformly postpone recognition of all contingent revenue until our client receives payment from the debtor.  As is required by SAB 104, revenues are considered to have been earned when we have 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 our system and/or, for clients under a licensing arrangement, the successful availability of our system to its customers.



F-12



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In addition,
  in accordance with Emerging Issues Task Force (EITF) Issue 00-21,
  revenue is recognized and identified according to the deliverable provided.
   Set-up fees, percentage contingent collection fees, fixed settlement fees,
  flat monthly fees, etc. are identified separately.

Recently signed
  contracts and contracts under negotiation call for multiple deliverables, and
  each component of revenue will be considered to have been earned when we have
  met the associated deliverable, as is required by SAB 104 Topic 13(A).  For
  new contracts being implemented which include a fee per account, following the
  guidance of SAB 104 regarding services being rendered continuously over time,
  we will recognize revenue based on contractual prices established in advance
  and will recognize income over the contractual time periods.  Where some
  doubt exists on the collectability of the revenues, a valuation reserve will
  be established or the income charged to losses, based on managements opinion
  regarding the collectability of those revenues.

In January 2007, we initiated operations of our debt buying subsidiary, DRV Capital LLC.  DRV Capital and its wholly-owned subsidiary, EAR Capital I, LLC, engaged in the acquisition of pools of past due debt at a deeply discounted price, for the purpose of collecting on those debts.  In recognition of the principles expressed in Statement of Position 03-3 (SOP 03-3), where the timing and amount of cash flows expected to be collected on these pools is reasonably estimable, we would recognize the excess of all cash flows expected at acquisition over the initial investment in the pools of debt as interest income on a level-yield basis over the life of the pool (accretable yield).  Because we exited this business, we will use the cost recovery method.  Revenue will be earned by this debt buying subsidiary under the cost recovery method when the amount of debt collected exceeds the discounted price paid for the
pool of debt.  As of October 15, 2007, we ceased operation of DRV Capital, sold all remaining portfolios and repaid all outstanding indebtedness.

On January 19, 2007, we completed the acquisition of First Performance, a collection agency, and its wholly-owned subsidiary First Performance Recovery Corporation.  In recognition of the principles expressed in SAB 104, 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, at this time we uniformly postpone recognition of all contingent revenue until the cash payment is received from the debtor.  At the time we remit recoveries collected to our clients, we accrue the portion of those fees that the client contractually owes or retain our fees and remit the net difference.  As is required by SAB 104, revenues are considered to have been earned when we have 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.  First Performance was closed on June 30, 2008 and discontinued operations.

Stock-based compensation

Beginning on January 1, 2006, the Company accounts for stock options issued under stock-based compensation plans under the recognition and measurement principles of SFAS No. 123(R) (Share Based Payment).  The Company adopted the modified prospective transition method and therefore, did not restate prior periods results.  Total stock-based compensation expense related to these and other stock-based grants for the year ended December 31, 2008 amounted to $2,535,364 and for the year ended December 31, 2007 amounted to  $2,479,181.



The fair value of share-based payment awards granted during the periods was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values as follows:



F-13



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|                              |                          |            
|----------------------------- | ------------------------ | -----------
|                              | Years ended
December 31,
|                              | 2008                     | 2007       
|Risk free interest rate range | 2.10-3.50%               | 4.52-4.84% 
|Dividend yield                | 0%                       | 0%         
|Expected volatility           | 81.1%                    | 81.1%-96.7%
|Expected life in years        | 3-7                      | 3-7        



The fair value of each option granted to employees and non-employees is estimated as of the grant date using the Black-Scholes option pricing model.  The estimated fair value of the options granted is recognized as an expense over the requisite service period of the award, which is generally the option vesting period.  As of December 31, 2008, total unrecognized compensation cost for these and prior grants amounted to $17,859, all of which is expected to be recognized in 2009.

Net loss per share of common stock

Basic net
  loss per share excludes dilution for potentially dilutive securities and is
  computed by dividing net loss attributable to common stockholders by the weighted
  average number of common shares outstanding during the period.  Diluted
  net loss per share reflects the potential dilution that could occur if securities
  or other instruments to issue common stock were exercised or converted into
  common stock.  Potentially dilutive shares of common stock realizable from
  the conversion of our convertible debentures of 45,207,824 exercise of options
  and warrants of 6,054,934 and 3,437,517, respectively at December 31, 2008,
  are excluded from the computation of diluted net loss per share as their inclusion
  would be anti-dilutive.

The Companys
  issued and outstanding common shares as of December 31, 2008 do not include
  the underlying shares exercisable with respect to the issuance of 402,939 warrants
  as of December 31, 2008, exercisable at $0.01 per share related to a financing
  completed in June 2006.  In accordance with SFAS No. 128 Earnings
  Per Share, the Company has given effect to the issuance of these warrants
  in computing basic net loss per share.

Recently issued and proposed accounting pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
159) including an amendment of FASB Statement No. 115. SFAS 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the
fair value option has been elected be reported in earnings. The Company adopted SFAS 159 beginning in the first quarter of 2008,
without material effect on the Companys consolidated financial position or results of operations.

In June 2007, the Accounting Standards Executive Committee issued Statement of Position 07-1, Clarification of the Scope of
the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in
Investment Companies (SOP 07-1). SOP 07-1 provides guidance for determining whether an entity is within the scope of the
AICPA Audit and Accounting Guide Investment Companies (the Audit Guide). SOP 07-1 was originally determined to be effective for
fiscal years beginning on or after December 15, 2007, however, on February 6, 2008, FASB issued a final Staff Position indefinitely
deferring the effective date and prohibiting early adoption of SOP 07-1 while addressing implementation issues.

In December 2007, the FASB issued SFAS No. 141(R),Business Combinations (SFAS No. 141(R)), which establishes
principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired
in a business combination. SFAS No. 141(R) is effective as of the beginning of the first fiscal year beginning on or after December
15, 2008. Earlier adoption is



F-14



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prohibited and the Company is currently evaluating the effect, if any, that the adoption will have on
its consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, which is an
amendment of Accounting Research Bulletin (ARB) No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This
statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at
amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the
fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions,
the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position.

In December 2007, the FASB ratified the consensus in EITF Issue No. 07-1, Accounting for Collaborative Arrangements (EITF
07-1). EITF 07-1 defines collaborative arrangements and requires collaborators to present the result of activities for which they act
as the principal on a gross basis and report any payments received from (made to) the other collaborators based on other applicable
authoritative accounting literature, and in the absence of other applicable authoritative literature, on a reasonable, rational and
consistent accounting policy is to be elected. EITF 07-1 also provides for disclosures regarding the nature and purpose of the
arrangement, the entitys rights and obligations, the accounting policy for the arrangement and the income statement classification
and amounts arising from the agreement. EITF 07-1 will be effective for fiscal years beginning after December 15, 2008, and will be
applied as a change in accounting principle retrospectively for all collaborative arrangements existing as of the effective date. The
Company has not yet evaluated the potential impact of adopting EITF 07-1 on its consolidated financial position, results of
operations or cash flows.

In February 2008, the FASB issued Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2) that
defers the effective date of applying the provisions of SFAS 157 to the fair value measurement of 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 (or at least annually), until fiscal years beginning after November 15, 2008. The Company is currently evaluating the effect that the
adoption of FSP 157-2 will have on its consolidated results of operations and financial condition, but does not expect it to have a material
impact.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment
of FASB Statement No. 133. This Statement changes the disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. Based on current
conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its consolidated results of
operations or financial position.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. This FSP amends
the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The Company is required to adopt FSP 142-3
on January 1, 2009. The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied
prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all
intangible assets recognized as of, and subsequent to, adoption. The Company is currently evaluating the impact of FSP 142-3 on its
consolidated financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement
identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles
(GAAP) in the United States (the GAAP hierarchy). This Statement will not have an impact on the Companys consolidated financial
statements.

In May 2008, the FASB issued FSP Accounting Principles Board (APB) 14-1 Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)



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(FSP APB 14-1). FSP APB 14-1 requires the issuer of
certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the
liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuers non-convertible
debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The
Company is currently evaluating the potential impact, if any, of the adoption of FSP APB 14-1 on its consolidated financial position,
results of operations or cash flows.

In June 2008, the FASB ratified EITF No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entitys Own Stock (EITF No. 07-5). EITF No. 07-5 provides that an entity should use a two-step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instruments
contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and
market-based employee stock option valuation instruments on the evaluation. EITF No. 07-5 is effective for fiscal years beginning
after December 15, 2008. We adopted EITF No. 07-5 effective on January 1, 2009. The Company is currently evaluating the potential
impact, if any, of the adoption of EITF No. 07-5 on its consolidated financial position, results of operations or cash flows.

NOTE 3.

FIXED ASSETS:

Fixed assets consist of the following:

|                                |                     |                         
|------------------------------- | ------------------- | ------------------------
|                                |                     | December 31,            
|                                | Useful
        life | 2008                    
|Computer equipment              | 3-5 years           | $       140,322         
|Computer software               | 3 years             | 42,170                  
|Telecommunications equipment    | 5 years             | 3,165                   
|Office equipment                | 3 years             | 3,067                   
|Furniture and fixtures          | 5 years             | 106,436                 
|Leasehold improvements          | Lease term          | -                       
|                                |                     |                         
|Less:  accumulated depreciation |                     | (210,889)               
|                                |                     | $
                84,271



Depreciation expense from continuing operations totaled $57,610 and $56,938 for the years ended December 31, 2008 and 2007, respectively.

On August 31, 2007, certain First Performance assets were abandoned due to the closure of the Florida office.  Accordingly, the Company included a charge to General and Administrative Expenses in the amount of $68,329 related to the disposal of these assets.  On June 30, 2008, the remaining First Performance assets were abandoned due to the closure of the Nevada office.  Accordingly, the Company included a charge to General and



F-16



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Administrative Expenses in the amount of $87,402 related to the disposal of these assets.  These charges appear in the Discontinued Operations section of the Statement of Operations.  (See Note 18.)

On December 31, 2008, certain Debt Resolve assets were abandoned due to vacating our old office in White Plains, NY.  Accordingly, the Company included a charge to Other Expense in the amount of $15,576 related to the disposal of these assets.

NOTE 4.

ACQUISITION OF FIRST PERFORMANCE CORPORATION:



As discussed in Note 1, on January 19, 2007, the Company 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.  First Performance was an accounts receivable management agency formerly with operations in Las Vegas, Nevada and in Fort Lauderdale, Florida.  The aggregate purchase price of $850,000 included $500,000 of cash and $350,000 of the Companys common stock, consisting of 88,563 shares at $3.95 per share.

The assets and liabilities of First Performance have been recorded in the Companys consolidated balance sheet at their fair values at the date of acquisition.  As part of the purchase of First Performance, the Company acquired identifiable intangible assets of approximately $450,000.  Of the identifiable intangibles acquired, $60,000 was assigned to trade names and $390,000 was assigned to customer relationships.  In accordance with SFAS 142, based on certain changes in the operations of First Performance, including the loss of four of its major clients, the Company performed an interim impairment analysis at June 30, 2007 and at September 30, 2007.  After analysis, no additional impairment charge was needed at the annual assessment on December 31, 2007.  On June 30, 2008, upon the closure of First Performance, the balance of the intangible assets was written off in the amount of $176,545.  (See












Note 6.) Also at closure, the results of First Performance have been reclassified to Discountinued Operations. (See Note 18.)  The amounts of these intangibles have been estimated based upon information available to management upon an outside appraisal.  The acquired intangibles have been assigned definite lives and are subject to amortization, as described in the table below.



The following table details amortization periods for the identifiable, amortizable intangibles:



|                       |                    
|---------------------- | -------------------
|Intangible Asset       | Amortization Period
|Trade names            | 10 years           
|Customer relationships | 4 years            



The following table details the allocation of the purchase price for the acquisition of First Performance:



|                                                |                           
|----------------------------------------------- | --------------------------
|                                                | Fair Value                
|                                                |                           
|Restricted cash                                 | $     157,485             
|Accounts receivable                             | 419,167                   
|Prepaid expenses and other current assets       | 103,082                   
|Fixed assets, net                               | 286,229                   
|Intangible asset - trade names                  | 60,000                    
|Intangible asset - customer relationships       | 390,000                   
|Deposits and other assets                       | 51,999                    
|Accounts payable                                | (1,573,252)               
|Net fair values assigned to assets acquired and |                           
|liabilities assumed                             | (105,290)                 
|Direct costs of acquisition                     | (86,915)                  
|Goodwill                                        | 1,042,205                 
|Total                                           | $
                 850,000





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The following represents a summary of the purchase price consideration:



|                                   |  |   |        
|---------------------------------- |  | - | -------
|Cash                               |  | $ | 500,000
|Value of common stock issued       |  |   | 350,000
|Total purchase price paid          |  | $ | 850,000
|Direct acquisition costs           |  |   | 86,915 
|Total purchase price consideration |  | $ | 936,915



First Performance was purchased on January 19, 2007, and therefore only its operations from January 19, 2007 through December 31, 2007 are included in the Companys consolidated financial statements.  The following table presents the Companys unaudited pro forma combined results of operations for the year ended December 31, 2007, as if First Performance had been acquired at the beginning of the period.



|                                                                       |                   
|---------------------------------------------------------------------- | ------------------
|For the year ended December 31,                                       
|                                                                       | 2007              
|                                                                       | (unaudited)       
|                                                                       |                   
|Revenues                                                               | $     2,938,541   
|                                                                       |                   
|Net loss                                                               | $ (12,312,034)    
|                                                                       |                   
|Pro-forma basic and diluted
        net loss per 
        common share | $           (1.53)
|                                                                       |                   
|Weighted average common shares outstanding   basic and diluted        | 8,040,385         



The pro forma combined results are not necessarily indicative of the results that actually would have occurred if the First Performance acquisition had been completed as of the beginning of 2007, nor are they necessarily indicative of future consolidated results.



NOTE 5.

SECURITIES PURCHASE AGREEMENT  CREDITORS INTERCHANGE:

Securities Purchase Agreement



On April 30, 2007, the Company, Credint Holdings, and the holders of all of the limited liability membership interests of Credint Holdings entered into a securities purchase agreement for the Company to acquire 100% of the outstanding limited liability company membership interests of Creditors Interchange, an accounts receivable management agency and wholly-owned subsidiary of Credint Holdings.  Prior to this agreement, an agreement with Creditors Interchange for the use by Creditors Interchange of the Companys DebtResolve system, and a management services agreement pursuant to which Creditors Interchange provides management consulting services to First Performance were in place.



The total consideration for the acquisition was to consist of (a) 840,337 shares of the Companys common stock, and (b) $60,000,000 in cash less the sum, as of the date the acquisition is consummated, of all principal, accrued interest, prepayment penalties and other charges in respect of Creditors Interchanges outstanding indebtedness.  The closing date in the original agreement was June 30, 2007, and was extended to August 31, 2007.  On August 31, 2007 the total consideration was reduced to $54 million with a further extension of the closing date to September 14, 2007.  On September 24, 2007, the Company terminated the Securities Purchase Agreement based on certain terms in the Purchase Agreement.  As a result, $959,811 was charged to terminated acquisition costs reflecting expenses directly associated with the proposed transaction.



F-18



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In connection with the financing of the transaction, as well as to provide additional working capital and to fund operations, the Company signed an engagement letter with investment banks to explore financing alternatives.  In 2007, the Company secured financing commitments for up to $40 million in debt, consisting of $25 million of senior secured debt and $15 million of mezzanine debt.  The Company also procured financing commitments for the balance of the cash portion of the reduced total consideration as equity financing and had completed a financing package for the transaction.  However, the Company terminated the securities purchase agreement due to a material adverse change in the financial condition of Creditors Interchange, and the financing commitments lapsed at termination of the transaction.



Employment Agreements



In connection with the Purchase Agreement, the Company entered into employment agreements with Bruce Gray and John Farinacci.  Pursuant to his employment agreement, Mr. Gray was to serve as Executive Vice President of the Company and President and Chief Executive Officer of Creditors Interchange.  Mr. Gray was also to be nominated to join the Board of Directors of the Company.  Mr. Gray was to receive a base salary of $400,000 and options to purchase up to 400,000 shares of the Companys common stock.  Mr. Gray was also eligible for an annual bonus based on certain performance criteria.



Pursuant to his employment agreement with the Company, Mr. Farinacci was to serve as President of First Performance Corporation, and Executive Vice President-Operations of Creditors Interchange.  Mr. Farinacci was also to serve as a Senior Vice President of the Company.  Mr. Farinacci was to receive a base salary of $300,000 and options to purchase up to 400,000 shares of the Companys Common Stock.  Mr. Farinacci was also eligible for an annual bonus based on certain performance criteria.



While the employment agreements with Messrs. Gray and Farinacci were executed on April 30, 2007, both employment agreements would only be declared effective as of the closing of the transactions contemplated by the Purchase Agreement and automatically terminate should the transaction not occur.  The agreements terminated on September 24, 2007, in conjunction with the termination of the Securities Purchase Agreement.



NOTE 6.

IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

In 2007, the Company recorded $1,042,205 of goodwill in connection with its acquisition of First Performance (See Note 4).   It also recorded $450,000 in intangible assets related to First Performances trade names and customer relationships (See Note 7).  The amounts of goodwill that the Company recorded in connection with this acquisition was determined by comparing the aggregate amount of the purchase price plus related transaction costs to the fair value of the net tangible and identifiable intangible assets acquired.
In accordance with SFAS 142, based on certain changes in the operations of First Performance, including the loss of four of its major clients, the Company performed an interim impairment analysis at June 30, 2007 and at September 30, 2007.  As a result of these analyses, the Company determined that the entire amount of goodwill with respect to First Performance was deemed to be impaired.  In addition, the other intangible assets subject to amortization were also found to be impaired, and were revalued at $270,000, as of June 30, 2007.  Accordingly, the Company recorded a goodwill and intangibles impairment charge in the amount of $1,179,080 as of June 30, 2007.  The Company recorded an additional $27,255 charge at September 30, 2007, revaluing the intangible assets to $225,000.  The Company completed its annual impairment analysis as of December 31, 2007 and determined that no additional impairment charge was needed.  On June 30, 2008, upon the
closure of First Performance, a final impairment charge of $176,545 was taken to reduce the value of the intangibles to $0.  All of these charges are now in discontinued operations.
Making estimates about the carrying value of goodwill requires management to exercise significant judgment.  It is reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events.  Accordingly, the actual results regarding estimates of the carrying value of these intangibles could differ materially from the Company's estimates.



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NOTE 7.

INTANGIBLE ASSETS:

Intangible assets consist exclusively of amounts related to the acquisition of First Performance.



The components of intangible assets as of December 31, 2008 and 2007 are set forth in the following tables, respectively:





|                       |             |                 |              |            |                      
|---------------------- | ----------- | --------------- | ------------ | ---------- | ---------------------
|                       | Useful life | Original amount | Amortization | Impairment | December 31,
2008    
|Trade names            | 10 years    | $       60,000  | (4,358)      | (55,642)   | $                   -
|Customer relationships | 4 years     | $     390,000   | (104,968)    | (285,032)  | $                   -
|                       |             | $     450,000   | (109,326)    | (340,674)  | $                   -

|                       |             |                 |              |            |                  
|---------------------- | ----------- | --------------- | ------------ | ---------- | -----------------
|                       | Useful life | Original amount | Amortization | Impairment | December 31,
2007
|Trade names            | 10 years    | $       60,000  | (3,554)      | (41,848)   | $         14,598 
|                       |             |                 |              |            |                  
|Customer relationships | 4 years     | $     390,000   | (73,468)     | (122,282)  | $       194,250  
|                       |             | $     450,000   | (77,022)     | (164,130)  | $       208,848  



Amortization expense totaled $32,304 and $77,022 for the years ended December 31, 2008 and 2007, respectively. There is no amortization expense in the next five years as these assets have been written off.

NOTE 8. NOTES PAYABLE AND CONVERTIBLE NOTES:

Convertible Debentures



On September 30, 2008, an unaffiliated
  investor loaned the Company $300,000 on a 6 month 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.  The outstanding principal and interest may be
  repaid, in whole or in part, at any time without prepayment penalty.   The
  Exchange Agreement calls 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. In accordance with EITF 96-19, the exchange was determined
to be an extinguishment of debt, and extinguishment accounting was applied. A loss on extinguishment of $60,000 was booked
to general and administrative expense. As of the date of this report, the shares
  have not been issued.  The debenture is secured by an escrow of 450,000
  shares of the common stock of the Company, which is held in escrow at the lenders
  attorneys office.  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 the
  (i) the average of the lowest three bid prices 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 $300,000, 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 year ended December 31, 2008, the Company
  recorded amortization of the beneficial conversion feature related to this debenture
  of $150,000.  At the date of this report, the debenture is in default,
  and the Company is working with the lender to restructure the debenture.



On July 31, 2008, the Company agreed to give 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 September 30, 2008, due to the inability of the Company to pay the interest on the note, the note was exchanged for a 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 the (i) the average of the lowest three bid prices 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 $38,250, 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 year ended December 31, 2008, the Company recorded amortization of the beneficial conversion feature related to this debenture of
$28,688.


As a result of the lowest three bid prices default on



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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 embedded conversion option related to the Convertible Debentures is accounted for under EITF issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock".  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.  For the year ended December 31, 2008, the Company reflected a gain of $430,418 representing the change in the value of the embedded conversion option.



Short and Long Term Notes



On November 30, 2007, an unaffiliated investor loaned the Company $100,000 on a 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 March 31, 2008 for an extension fee of $5,000.  The note was extended each month from April 1 to December 31, 2008 at an extension fee of $5,000 per month.  On December 31, 2008, aggregate extension fees totaled $50,000.  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.  The debt discount is being amortized over the term of the note.  During the years ended December 31, 2008 and 2007, the Company recorded amortization of the debt discount related to this note of $29,400 and $14,700, respectively.  This note is guaranteed by Mssrs. Mooney and Burchetta.



On December 21, 2007, an unaffiliated investor loaned the Company $125,000 on an 18 month note with a maturity date of June 21, 2009.  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.   The note is secured by the assets of the Company.  In conjunction with the note, a warrant to purchase 37,500 shares of common stock was granted at an exercise price of $1.07 and an expiration date of December 21, 2012.  This warrant has a cashless exercise feature.  The note was recorded net of a deferred debt discount of $19,375, based on the relative fair value of the warrant.  The debt discount is being amortized over the term of the note.  During the year ended December 31, 2008, the Company recorded amortization of the debt discount related to this note of
$19,375 due to the note being in default.  This note is guaranteed by Mr. Burchetta.  The note has a provision requiring repayment of the note upon raising gross proceeds of $500,000 subsequent the issuance of the note.  At December 31, 2008, the Company had raised in excess of $500,000 subsequent to this note, and as a result, this note is in default.  The note holder has requested repayment of the note, but the note is still outstanding.



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.  The outstanding principal and interest may be repaid, in whole or in part, at any time without prepayment penalty.   The note is secured by the assets of the Company.  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.  The debt discount is being amortized over the term of the note.  During the year ended December 31, 2008, the Company recorded amortization of the debt discount related to this note of $34,400.  This note is guaranteed by Mr.
Burchetta.



On January 25, 2008, an unaffiliated investor loaned the Company $100,000 on an 18 month note with a maturity date of July 25, 2009.  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.  The note is secured by the assets of the Company.  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 25, 2013.  The note was recorded net of a deferred debt discount of $20,300, based on the relative fair value of the warrant.  The debt discount is being amortized over the term of the note.  During the year ended December 31, 2008, the Company recorded amortization of the debt discount related to this note of $12,406.



F-21



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Between January
  15, 2008 and February 8, 2008, an unaffiliated investor loaned the Company $75,000
  on a short term basis.  The interest rate is 12% per annum, and the loan
  is repayable on demand.  As of August 12, 2009, the remaining outstanding
  balance on the loan is $22,500.

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% 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 31+ days after origination.  The Company accrued the $45,000 service fee during the year ended December 31, 2008.  The outstanding principal and interest may be repaid, in whole or in part, at any time without prepayment penalty.  The note is secured by the assets of the Company.  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.  The debt discount is being amortized over the term of the note.  During the year ended December 31, 2008, the Company recorded amortization of the debt discount related to this note of $31,889.

On March 7, 2008, the Company borrowed $100,000 from a bank at the prime rate for 30 days.  On March 14, 2008, the original loan was repaid, and the Company borrowed $150,000 at the prime rate and due in 30 days.  On May 15, 2008, the second loan was repaid, and the Company borrowed $250,000 at the prime rate and due on July 1, 2008.  The note has subsequently been extended several times with a current due date of October 1, 2009.  The note is guaranteed by Mssrs. Mooney and Montgomery.

On March 27, 2008, an unaffiliated investor loaned the Company $100,000 on an 18 month note with a maturity date of September 27, 2009.  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.  The note is secured by the assets of the Company.  In conjunction with the note, the Company also issued a warrant to purchase 50,000 shares of common stock at an exercise price of $1.95 and an expiration date of March 27, 2013.  The note was recorded net of a deferred debt discount of $37,900, based on the relative fair value of the warrant.  The debt discount is being amortized over the term of the note.  During the year ended December 31, 2008, the Company recorded amortization of the debt discount related to this note of $18,950.

On April 10, 2008, an unaffiliated investor loaned the Company an additional $198,000 on an amendment of the prior 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.   The note is secured by the assets of the Company.  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 ended December 31, 2008,
the Company recorded amortization of the debt discount related to this note of $88,110 due to the note being in default.  This note is guaranteed by Mr. Burchetta.  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 December 31, 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. The note holder
has requested repayment of the note, but the note is still outstanding.



On November 14, 2008, an unaffiliated investor loaned the Company $107,000 on short term note with a maturity date of December 31, 2008.  The Company
received net proceeds of $100,000, and the $7,000 was treated as prepaid interest on the note to the original maturity date.  The maturity date was subsequently extended to March 31, 2009 for
additional interest on the note of $8,000, and the face amount of the loan is now $115,000 at maturity.  The note carries a default rate of interest of 22% per annum after the maturity date.  The
Company has a thirty (30) day grace period after the maturity date to repay the note with interest.  The outstanding principal and interest may be repaid, in whole or in part, at any time without
prepayment penalty.   The note is secured by a first lien on the assets of the Company as evidenced by a UCC-1 filing.  Arisean Capital subordinated its first lien position on its $576,000
outstanding loan to the extent of this loan and a second loan by the same investor of $82,500 discussed in the Subsequent Events note.  (See Note 21)  In conjunction with the note, the Company also
issued a warrant to purchase 1,000,000 shares of common stock at an exercise price of $0.12 and an expiration date of November 14,



F-22



---



2013.  This warrant has a cashless exercise feature.  The warrant was subsequently cancelled and replaced by a new warrant
at the time of the second loan also discussed in the Subsequent Events note.  (See Note 21)  The note was recorded net of a deferred debt discount of $50,504, based on the relative fair value of the warrant.  The debt discount is being amortized over the term of the note.  During the year ended December 31, 2008, the Company recorded amortization of the debt discount related to this note of $50,504.



NOTE 9.

LINES OF CREDIT  RELATED PARTIES:



First Performance had a line of credit on the date of the Companys acquisition.  The outstanding balance as of January 19, 2007 of $150,000 was repaid during the year ended December 31, 2007, and the line of credit was terminated.



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.  Borrowings under the line of credit are 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 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 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.  Arisean is controlled by Charles S. Brofman, a
Director and co-founder of the Company.  On February 8, 2008, Mr. Brofman was awarded non-plan options to purchase 350,000 shares of common stock at an exercise price of $1.25 per share with an expiration date of February 8, 2011.  The options were awarded in consideration of Mr. Brofman waiving the mandatory prepayment of the line of credit from the funds received from the private placements completed in late 2007 and early 2008.  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.  As of December 31, 2008, the outstanding balance on this line of credit was $576,000.  The Company accrued interest expense related to this line of credit of $69,309 during the year ended December 31, 2008 but did not pay this interest during 2008.



On August 10, 2007, the Company entered into a line of credit agreement with James D. Burchetta, Debt Resolves 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 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.  As of December 31, 2008, the Company has borrowed $119,000 under this line of credit.  The Company accrued interest expense related to this line of credit of $15,051 during the year ended December 31, 2008 but did not pay this interest during 2008.



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 to fund the working capital needs of Debt Resolve and First Performance.  Borrowings under the line of credit will 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 note was recorded net of a deferred debt discount of $117,700, based on the relative fair value of the warrant.
 The debt discount is being amortized over the term of the note.  During the year ended December 31, 2007, the Company recorded amortization of $117,700 of the debt discount related to this note.  On February 8, 2008, Mr. Mooney was awarded non-plan options to purchase 350,000 shares of common stock at an exercise price of $1.25 per share with an expiration date of February 8, 2011.  The options were awarded in consideration of Mr. Mooney funding additional loans during 2008 and for waiving the mandatory prepayment of the line of credit from the funds received from the private placements completed in late 2007 and early 2008.  The option expense of $227,500 was treated as deferred debt discount in association with Mr. Mooneys financing during 2008 and was expensed immediately.  As of December 31, 2008, the Company has borrowed $350,421 under this line of credit.  This note is guaranteed by Mr. Burchetta and Mr. Brofman.  The Company accrued interest expense
related to this line of credit of $39,797 during the year ended December 31, 2008 but did not pay this interest during 2008.



F-23



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On July 1, 2008, the Company entered into a line of credit agreement with Kenneth H. Montgomery, the Chief Executive Officer and a Director of Debt Resolve, for up to $315,000 to be used to fund the working capital needs of Debt Resolve.  Mr. Montgomery subsequently left the Company effective July 1, 2009.  Borrowings under the line of credit will 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 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 is being amortized over the term of the note.  During the year ended December 31, 2008, the Company recorded amortization of $262,500 of the debt discount related to this note.  As of December 31, 2008, 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.  The Company accrued interest expense related to this line of credit of $13,466 during the year ended December 31, 2008 but did not pay this interest during 2008.



NOTE 10.

DRV CAPITAL LLC  DISCONTINUED OPERATIONS:  (See Note 18)



On June 5, 2006, the Company formed a wholly-owned subsidiary, DRV Capital LLC.  This subsidiary was formed to potentially purchase portfolios of defaulted consumer debt and attempt to collect on that debt, but at December 31, 2006 was not yet operational.  In December 2006, the Company formed a wholly-owned subsidiary of DRV Capital, EAR Capital I, LLC, for the limited purpose of purchasing and holding pools of debt funded in part by borrowings from Sheridan Asset Management, LLC (Sheridan).

On December 22, 2006, the Company and its wholly-owned subsidiaries, EAR Capital I, LLC, as borrower, and DRV Capital, LLC, as servicer, entered into a $20.0 million secured debt financing facility pursuant to a Master Loan and Servicing Agreement, dated as of December 21, 2006, with Sheridan Asset Management, LLC (Sheridan), as lender, to finance the purchase of distressed consumer debt portfolios from time to time.  The facility generally provides for a 90.0% advance rate with respect to each qualified debt portfolio purchased.  Interest accrues at 12% per annum and is payable monthly.  Notes issued under the facility are collateralized by the distressed consumer debt portfolios that are purchased with the proceeds of the loans.  Each note has a maturity date not to exceed a maximum of 24 months after the borrowing date.  Once the notes are repaid and the Company has been repaid its investment (generally
10% of the purchase price), the Company and Sheridan share the residual collections from the debt portfolios, net of servicing fees, as per the terms specified in each acquisition agreement.  The sharing in residual cash flows continues for the entire economic life of the debt portfolios financed using this facility and will extend beyond the expiration date of the facility.  The Company is required to give Sheridan the opportunity to fund all of its purchases of distressed consumer debt with advances through December 21, 2008.  As of October 15, 2007, DRV Capital operations were suspended, and all remaining portfolios were sold.  During the year ended December 31, 2007, the Company performed a revaluation of the remaining receivables and recorded a decline in value of $74,920.  Management of the Company made a strategic decision in October 2007 to suspend the purchase of debt portfolios on the open market in order to focus on the Companys core business.  As a result, the























operations of DRV Capital have been classified as discontinued operations in the accompanying consolidated financial statements.

The following tables represent the activity with respect to purchased receivables and financings for those receivables for the year ended December 31, 2007.





F-24



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|                                    |                 
|----------------------------------- | ----------------
|Purchased Accounts Receivable       |                 
|Beginning balance - January 1, 2007 | $             --
|Purchases                           | 607,994         
|Liquidations                        | (123,753)       
|Sale of pools                       | (409,321)       
|Write downs                         | (74,920)        
|Ending balance - December 31, 2007  | $             --
|                                    |                 



|                                    |                 
|----------------------------------- | ----------------
|Portfolio Loans Payable:            |                 
|Beginning balance - January 1, 2007 | $             --
|Borrowings                          | 547,195         
|Repayments                          | (547,195)       
|Ending balance - December 31, 2007  | $             --
|                                    |                 



NOTE 11.

STOCKHOLDERS DEFICIENCY

During the year ended December 31, 2007, the Company
 recorded compensation expense representing the amortized amount of the fair value of options granted to advisory board
members in 2003, 2004 and 2005, of $15,436.

During the year ended December 31, 2007, the Company
 issued 88,563 shares of common stock valued at $350,000 as part of the consideration for the purchase of First Performance Corporation.

During the year ended December 31, 2007, the Company
 completed a private placement for gross proceeds approximating $1,760,000 for the sale of 880,000 shares of common stock.
 In conjunction with this transaction, the Company issued an aggregate of 440,000 warrants to purchase common stock
to the investors and 88,000 warrants to purchase common stock to the placement agent.  Each warrant is exercisable at
$2.00 per share for a term of five years.  The common stock and warrants have piggy-back registration rights
 on the Companys next registration statement if the required private placement holding period has not previously
elapsed.  Subsequent to the offering, the private placements holding period elapsed.

During the year ended December 31, 2007, the Company
 received cash proceeds of $198,385 from the exercise of warrants to purchase 1,001,388 shares of common stock.

During the year ended December 31, 2008, the
Company issued 450,000 shares held in escrow in conjunction with the issuance of the $300,000
convertible debenture.  (See Note 8).  The Company does not consider these shares as outstanding and as
such does not include them in the calculation of Earnings per Share.

During the year ended December 31, 2008, the Company
 also accrued for later issuance 150,000 shares to be issued in conjunction with the issuance of the $300,000 convertible
 debenture. (See Note 8). As of the date of this report, the shares have not been issued.

During the year ended December 31, 2008, the Company completed a private placement for gross proceeds approximating $25,000 for the sale of 100,000 shares of common stock.  In conjunction with this transaction, the Company issued an aggregate of 125,000 warrants to purchase common stock to the investor.  Each warrant is exercisable at $0.25 per share for a term of five years.

During the year ended December 31, 2008, the Company issued a new employee 50,000 shares of the common stock of the Company valued at $40,000.

During the
  year ended December 31, 2008, the Company issued 1,850,000 shares of the common
  stock of the Company to consultants for services or to agents for fundraising
  activities.  The value of these shares is $2,203,080.  (See Note 8.)

During the year ended December 31, 2008, the Company received cash proceeds of $375 from the exercise of warrants to purchase 37,501 shares of common stock.

F-25



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NOTE 12.

STOCK OPTIONS:

As of December 31, 2008, the Company has one stock-based employee compensation plan.  The 2005 Incentive Compensation Plan (the 2005 Plan) was approved by the stockholders on June 14, 2005 and provides for the issuance of options and restricted stock grants to officers, directors, key employees and consultants of the Company to purchase up to 900,000 shares of common stock.



A summary of option activity within the 2005 Plan during the year ended December 31, 2008 is presented below:



|                                             |           |              |             |             
|-------------------------------------------- | --------- | ------------ | ----------- | ------------
|                                             |           |              | Weighted    |             
|                                             |           | Weighted     | Average     |             
|                                             |           | Average      | Remaining   | Aggregate   
|                                             |           | Exercise     | Contractual | Intrinsic   
|                                             | 2008      | Price        | Term        | Value       
|Outstanding at January
            1, 2008   | 820,000   | $    4.79    | 4.2 Years   | $         --
|Granted                                      | 203,000   | $    1.32    | 6.2 Years   | $         --
|Exercised                                    | --        | $         -- | --          | $         --
|Forfeited or expired                         | (158,000) | $    4.57    | --          | $         --
|Outstanding at December
            31, 2008 | 865,000   | $    2.99    | 4.5 Years   | $         --
|Exercisable at December
            31, 2008 | 755,000   | $    3.22    | 4.3 Years   | $         --
|                                             |           |              |             |             



As of December 31, 2008, the Company had 110,000 unvested options within the 2005 Plan.



On February 8, 2008, the Company issued options to purchase 150,000 shares of its common stock exercisable at $1.25 per share toan employee.  Thestockoptions have an exercise period of seven years and vest 33% at issuance, 33% on the first anniversary of the employee and 34% on the second anniversary of the employee.  The grant was valued at $138,000, is being expensed over the vesting period and resulted in an expense during the year ended December 31, 2008 of $125,734.

On February 8, 2008, the Company issued options to purchase 20,000 shares of its common stock exercisable at $1.25 per share toan employee.  Thestockoptions have an exercise period of seven years, vested immediately and were valued at $18,400, resulting in expense during the year ended December 31, 2008 of $18,400.

On February 8, 2008, the Company issued options to purchase 3,000 shares of its common stock exercisable at $1.25 per share to an employee.  The stock options have an exercise period of seven years and vested on the anniversary date of the employee.  The grant was valued at $2,760 and was expensed shortly after the date of grant and resulted in expense during the year ended December 31, 2008 of $2,760.

On February 8, 2008, the Company re-priced the options of all current employees to an exercise price of $1.50 per share from exercise prices ranging from $4.04 to $5.00 per share.  The re-pricing was valued at $266,765, and was expensed over the remaining vesting periods and resulted in expense during the year ended December 31, 2008 of $266,765.

On June 3, 2008, the Company issued options to purchase 10,000 shares of its common stock exercisable at $1.84 per share to an employee.  The stock options have an exercise period of seven years.  The grant vested immediately, was valued at $13,800 and was expensed immediately.

On June 16, 2008, the Company issued options to purchase 20,000 shares of its common stock exercisable at $1.63 per share to an employee.  The stock options have an exercise period of seven years.  Of the grant, options to purchase 10,000 shares vest on the six month anniversary of the grant and the remaining 10,000 shares vest on the first anniversary of the grant date.  The grant was valued at $24,400, is being expensed over the one year vesting period and resulted in a charge during the year ended December 31, 2008 of $18,808.



F-26



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A summary of stock option activity outside the 2005 Plan during the year ended December 31, 2008 is presented below:



|                                           |           |             |             |             
|------------------------------------------ | --------- | ----------- | ----------- | ------------
|                                           |           |             | Weighted    |             
|                                           |           | Weighted    | Average     |             
|                                           |           | Average     | Remaining   | Aggregate   
|                                           |           | Exercise    | Contractual | Intrinsic   
|                                           | 2008      | Price       | Term        | Value       
|Outstanding at January
          1, 2008   | 3,033,434 | $    4.97   | 6.3 Years   | $         --
|Granted                                    | 2,311,500 | $    1.18   | 4.9 Years   | $         --
|Exercised                                  | --        | $        -- | --          | $         --
|Forfeited or Expired                       | (155,000) | $    4.66   | --          | $         --
|Outstanding at December
          31, 2008 | 5,189,934 | $    2.89   | 5.3 Years   | $         --
|Exercisable at December
          31, 2008 | 5,189,934 | $    2.89   | 5.3 Years   | $         --



On January 24, 2008, the Company issued options to purchase 350,000 shares of its common stock exercisable at $0.80 per share to a new employee.  The stock options vested 50% immediately and 50% on the six month anniversary of the employee.  The options have an exercise period of seven years.  The grant was valued at $210,000, was expensed during the vesting period and resulted in a charge during the year ended December 31, 2008 of $210,000.



On February 8, 2008, the Company issued options to purchase 111,500 shares of its common stock exercisable at $1.25 per share to four directors.  The stock options vested immediately and have an exercise period of five years.  The grants were valued at $90,315 and were expensed immediately.



On February 8, 2008, the Company issued options to purchase 350,000 shares of its common stock exercisable at $1.25 per share to an employee and director.  The stock options vested immediately and have an exercise period of seven years.  The grant was valued at $322,000 and was expensed immediately.



As of December 31, 2008, the Company had no unvested stock options outside the 2005 Plan.



The Company recorded stock based compensation expense representing the amortized amount of the fair value of options granted in 2006 and 2007 in the amount of $31,333 and $180,449, respectively, during the year ended December 31, 2008.

Stock based compensation for the years ended December 31, 2008 and 2007 was recorded in the consolidated statements of operations as follows:



|                                    |              |              |  |  | 
|----------------------------------- | ------------ | ------------ |  |  | 
|                                    | 2008         | 2007        
|Payroll and related expenses        | $ 2,342,031  | $ 2,223,387 
|General and administrative expenses | $    153,333 | $    255,794



NOTE 13.

WARRANTS:

A summary of warrant activity during the year ended December 31, 2008 is presented below:



|                                           |           |          |                     |             
|------------------------------------------ | --------- | -------- | ------------------- | ------------
|                                           |           |          | Weighted            |             
|                                           |           | Weighted | Average             |             
|                                           |           | Average  | Remaining           | Aggregate   
|                                           |           | Exercise | Contractual         | Intrinsic   
|                                           | 2008      | Price    | Term                | Value       
|Outstanding at January
          1, 2008   | 2,042,770 | $1.60    | 3.0 Years           | --          
|Granted                                    | 2,074,000 | $0.43    | 4.5
          Years | --          
|
|Exercised                                  | (37,501)  | $0.01    | --                  | --          
|Forfeited or Expired                       | (238,814) | $3.28    | --                  | --          
|
|Outstanding at December
          31, 2008 | 3,840,455 | $1.23    | 3.7 Years           | $         --
|Exercisable at December
          31, 2008 | 3,840,455 | $1.23    | 3.7 Years           | $         --
|                                           |           |          |                     |             





F-27



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As of December 31, 2008, there were no unvested warrants to purchase shares of common stock.



On February 8, 2008, the Company issued warrants to purchase 71,250 and 3,750 shares of its common stock, respectively, exercisable at $1.25 per share, to two individuals who introduced the new Chief Executive Officer of the Company to the Company.  The warrants have an exercise period of five years and vested immediately.  The warrants were valued at $60,000 and were expensed immediately.

On October 9, 2008, the Company sold 100,000 shares of stock in a private placement for cash proceeds of $25,000.  In conjunction with the private placement, the Company issued a warrant to purchase 125,000 shares of its common stock exercisable at $0.25 per share.  The warrants have an exercise period of five years and vested immediately.

On November 11, 2008, the Company issued warrants to purchase 275,000 shares of common stock of the Company at an exercise price of $0.12 per share in conjunction with a marketing agreement with a new business partner.  The warrants have a cashless exercise feature and a three year exercise period.  The warrants were issued along with 275,000 restricted shares which were granted at the same time to the business partner. The warrants were valued at $30,855 and were expensed immediately

On November 20, 2008, the Company issued warrants to purchase 225,000 shares of common stock of the Company at a total exercise price of $1.00 as
part of a consulting agreement.  The warrants have a cashless exercise feature and a five year exercise period. The warrants were valued at $22,500 and were expensed immediately

NOTE 14.

LITIGATION:

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 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 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 $24,546 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 $2,538.54 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,
$12,839 was paid in partial satisfaction of the judgment, leaving a balance payable of $14,896. 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 plus interest for services allegedly rendered to us.  The complaint was answered on February 23, 2009 raising various affirmative defenses.  The action is currently in the discovery phase. The entire amount in dispute is in the accounts payable of the Company.

Lawsuits from landlords

On May 7, 2008, the Company received a three-day demand for rent due in the amount of $72,932 for the period December 1, 2007 through May 1, 2008.  On May 20, 2008, a petition for hearing was filed in the White Plains New York City Court, County of Westchester demanding payment of $88,497.  On May 27, 2008, the Company signed a stipulation of settlement in the amount of $88,747 including attorneys fees, with equal payments



F-28



---



of this amount due on June 13, 2008 and June 30, 2008.  On June 11, 2008, the Company signed an amended stipulation of settlement in the amount of $101,000, with a payment of $56,626 due on June 20, 2008 and a payment of $44,374 due on June 30, 2008.  On July 16, 2008, the Company received a five day notice to pay the agreed payments or face eviction.  On October 1, 2008, the Company was evicted from its leased premises.  On December 29, 2008, a complaint was filed in the Supreme Court of New York, County of Nassau seeking an additional $58,346 plus interest and attorneys fees for rent for the period August 1 to December 1, 2008, which was not part of the previous stipulation and judgment.  On December 16, 2008, a restraining order was served on the Companys bank account for the amount of the judgment original judgment of $101,000.  On March 12, 2009, the Company signed a new stipulation of
settlement settling the matter upon completion of three events.  First, the Company immediately forfeited its security deposit of $79,800 plus interest.  Second, the Company must make an additional payment of $50,000 by April 15, 2009.  Third, the Company must then remove all of its furniture by April 22, 2009.  An amended stipulation of settlement was signed on April 15, 2009, changing the due date of the payment to May 15, 2009 and increasing the payment by $10,000 to $60,000.  The Company must then remove the furniture within seven days of making the payment.  If all three conditions are met, the parties fully release each other from any further claims.  If all three of these conditions are not met, judgment is entered for $135,356., the amount of rent due for the period July 1, 2008 to May 1, 2009, which is in addition to the previous judgment for rent of $101,000 for the period December 1, 2007 to June 1, 2008.  At December 31, 2008, the Company accrued the
balance of its obligation under the lease in the amount of $227,787 on the balance sheet.  On May 18, 2009, the Company paid the required $60,000 payment.  The Company subsequently removed its furniture from the premises.  On June 4, 2009, the Company received a Satisfaction of Judgment and Release from any further liability in this matter, and it is now settled.  The accrual will be reversed in the second quarter reflecting the settlement.

On February 2, 2009, a complaint was filed in the District Court of Clark County, Nevada against Debt Resolve, First Performance Corp. and the former owners of First Performance, Pacific USA Holdings and Clearlight Mortgage Corp., seeking $315,917 for unpaid rent due as of January 31, 2009.  First Performance had vacated the premises as of June 30, 2008 with the closing of its business.  Debt Resolve has been dismissed from the suit at this time, as it was not a signatory to the lease or guarantor of the lease.  The case continues against First Performance Corp. and its former owners, with an answer due by First Performance shortly. The entire amount of the amount in dispute is accrued on the books of First Performance.

Lawsuits from former employees

On April 18, 2007, the Company received a letter from a law firm stating that a claim with the EEOC and a lawsuit would be filed charging sexual discrimination in the wrongful termination of a manager of the First Performance Florida facility.  The facility was subsequently closed on June 30, 2007 as a cost reduction measure.  The First Performance employment practices insurance carrier defended the matter against the U.S. EEOC and the Broward County Civil Rights Division.  On March 18, 2008, a settlement was reached in the amount of $24,500.  However, due to First Performances financial problems which led to its closure on June 30, 2008, the settlement was not paid.  Because of the non-payment, final judgment was entered against First Performance Recovery Corp. in the amount of $103,005 plus $5,293 in attorneys fees on October 11, 2008.  On December 17, 2008, final judgment was entered against
First Performance Corp. and Debt Resolve in the amount of $35,287.  On April 13, 2009, agreement was reached to settle the case for $15,000 if payment is made by May 15, 2009.  On May 19, 2009, the Company made the required payment under the settlement and received a Satisfaction of Judgment and Release on this matter, which is now closed.

Lawsuit related to financing

On December 24, 2008, the Company negotiated a settlement of pending litigation with Compass Bank in Texas, from whom the Company had received a fraudulent wire transfer letter in connection with the Harmonie International investment that was never funded by the investor.  The Company received a cash payment of $50,000 to settle all claims against Compass Bank that was credited to legal expense.  The Company has also referred all of the matters surrounding the Harmonie transaction to the appropriate authorities.

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.



F-29



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NOTE 15.

OPERATING LEASES:

On August 1, 2005, the Company entered into a five year lease for its corporate headquarters which includes annual escalations in rent.  Since that date, in accordance with SFAS No. 13, Accounting for Leases, (SFAS 13) the Company accounts for rent expense using the straight line method of accounting, accruing the difference between actual rent due and the straight line amount.  At December 31, 2008, accrued rent payable totaled $10,883.  On October 1, 2008, the Company was evicted from its office for non-payment of rent.  An amended stipulation of settlement has been signed to resolve the balance of the lease.  (See Note 14.)



The Company also leased an office in Fort Lauderdale, Florida under a non-cancelable operating lease that expires January 31, 2009 and called for monthly payments of $22,481.  Until August 31, 2007, the monthly payment has been reduced by a $5,000 abatement to $17,481 per month.  In July 2007, the Company negotiated an early cancellation of the Florida lease whereby the rent obligation terminated on September 30, 2007.



The Company leased an office in Las Vegas, Nevada under a non-cancelable operating lease that expires July 31, 2014 and calls for escalating monthly payments of $19,225.  On June 30, 2008, First Performance was closed, and the premises were abandoned.  A complaint has been filed against First Performance in Clark County, Nevada court.  (See Note 14.)



Rent expense for continuing operations for the years ended December 31, 2008 and 2007 was $105,993 and $123,350, respectively.  A charge of $1,394,929 was taken on June 30, 2008 upon closure of First Performance and appears in the Statement of Operations discontinued operations section and is on the balance sheet.



As of December 31, 2008, future minimum rental payments under Debt Resolves non-cancelable operating lease were as follows:



|                                 |                 
|-------------------------------- | ----------------
|For the Years EndingDecember 31, | Amount          
|2009                             | 130,164         
|2010                             | 75,929          
|                                 | $        206,093
|                                 |                 





NOTE 16.

EMPLOYMENT AGREEMENTS:

The Company has entered into an employment agreement with James D. Burchetta under which he will devote substantially all of his business and professional time to us and our business development.  The employment agreement with Mr. Burchetta is effective until January 13, 2013.  The agreement provided Mr. Burchetta with an initial annual base salary of $240,000 and contains provisions for minimum annual increases based on changes in an applicable cost-of-living index.  The employment agreement with Mr. Burchetta contains provisions under which his annual salary may increase to $600,000 if we achieve specified operating milestones and also provides 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.  Compensation expense under the agreement with Mr. Burchetta totaled $135,417 and $250,000 for the years ended December 31, 2008 and 2007, respectively.

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 will 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



F-30



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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 we 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.

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.

On May 1, 2007, David M. Rainey joined our company as Chief Financial Officer and Treasurer on the planned retirement of Katherine A. Dering.  Mr. Rainey also became Secretary of the Company in November 2007 and President of the Company in January 2008.  Mr. Rainey also became Interim Chief Executive Officer effective July 15, 2009.  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 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.

On February 16, 2008, the Company entered into an employment agreement with Mr. Kenneth H. Montgomery to serve as its Chief Executive Officer.  The agreement has a one year, automatically renewable term unless the Company provides 90 days written notice of its intention not to renew prior to the anniversary date.  Mr. Montgomerys salary is $225,000 annually, with a bonus of up to 75% of salary based on performance of objectives set by the Chairman and the Board of Directors.  Mr. Montgomery also received 50,000 shares of restricted stock and 350,000 options to purchase the common stock of the Company at an exercise price of $0.80, the closing price on his date of approval by the Board.  Mr. Montgomery left the Company and the Board effective July 1, 2009.

Each of the employment agreements with Mr. Burchetta, Mr. Montgomery 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 17.

EMPLOYEE BENEFIT PLANS:

Beginning January 1, 2006, the Company sponsors an employee savings plan designed to qualify under Section 401K of the Internal Revenue Code.  This plan is for all employees who were employed by the Company at December 31, 2005 or who have completed 1,000 hours of service.  Company contributions are made in the form of the employees investment choices and vest immediately.  Matching contributions that were expensed by the Company for the years ended December 31, 2008 and 2007 were $11,305 and $36,839, respectively.

Effective with the acquisition of First Performance on January 19, 2007, the Company also sponsors the First Performance employee savings plan, for all employees of First Performance who have completed 1,000 hours of service.  During 2007, this plan terminated and did not include a company matching contribution.



F-31



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In February 2008, the Company merged this plan and its existing 401(k) plan into a new safe harbor plan, giving First Performance employees a company match.  The plan provides for a one year vesting period for all employees.  Company contributions are made in the form of the employees investment choices and vest over the first six years of the employees service to the Company.

NOTE 18.

DISCONTINUED OPERATIONS

On October 15, 2007, the Company ceased operations of DRV Capital, and EAR.  On June 30, 2008, the Company closed First Performance and First Performance Recovery.

In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), the Company has reported these subsidiaries results for the years ended December 31, 2008 and 2007 as discontinued operations because the operations and cash flows have been eliminated from the Companys continuing operations.



The consolidated liabilities
of DRV Capital and EAR are as follows:







|                          |  |  |  | Year ended December 31, 2008 |   | Year ended December 31, 2007
|------------------------- |  |  |  | ---------------------------- | - | ----------------------------
|Liabilities:              |  |  |  |                              |   |                             
|Accounts
payable          |  |  |  | $                            |  |                             
|Total
current liabilities |  |  |  | $                            |  |                             

Components of discontinued operations for DRV Capital and EAR are as follows:



|                                              |                                   |                                   |  |  | 
|--------------------------------------------- | --------------------------------- | --------------------------------- |  |  | 
|                                              | Year ended December
          31, | Year ended December
          31,
|                                              | 2008                              | 2007                             
|Revenue                                       | $                 --              | $            3,334               
|                                              |                                   |                                  
|Payroll and related
          expenses        | --                                | 207,654                          
|General and administrative
          expenses | --                                | 209,302                          
|Total expenses                                | --                                | 416,956                          
|                                              |                                   |                                  
|Loss from operations                          | --                                | --                               
|Interest expense                              | --                                | --                               
|                                              |                                   |                                  
|Net loss from discontinued operations         | $                  --             | $       (452,085)                








The consolidated assets and liabilities
of First Performance and First Performance Recovery are as follows:







|                                      |  |  |  | Year ended December 31, 2008 |           | Year ended December 31, 2007
|------------------------------------- |  |  |  | ---------------------------- | --------- | ----------------------------
|Current
assets:                       |  |  |  |                              |           |                             
|Cash                                  |  |  |  | $                            | 1,301     |                             
|Restricted
cash                       |  |  |  |                              |          |                             
|Accounts
receivable                   |  |  |  |                              |          |                             
|Prepaid
expenses & other              |  |  |  |                              | 4,281     |                             
|Total current
assets                  |  |  |  |                              | 5,582     |                             
|Fixed assets,
net                     |  |  |  |                              |          |                             
|Other
assets:                         |  |  |  |                              |           |                             
|Deposits and
other assets             |  |  |  |                              |          |                             
|Intangible
assets, net                |  |  |  |                              |          |                             
|Total
assets                          |  |  |  | $                            | 5,582     |                             
|Current
liabilities:                  |  |  |  |                              |           |                             
|Accounts
payable and accrued expenses |  |  |  | $                            | 2,330,912 |                             
|Collections
payable                   |  |  |  |                              |          |                             
|Lines of credit  related parties     |  |  |  |                              |          |                             
|Total current
liabilities             |  |  |  | $                            | 2,330,912 |                             



Components of discontinued operations for First Performance and First Performance Recovery are as follows:



|                                              |                                   |                                   |  |  | 
|--------------------------------------------- | --------------------------------- | --------------------------------- |  |  | 
|                                              | Year ended December
          31, | Year ended December
          31,
|                                              | 2008                              | 2007                             
|Revenue                                       | $        300,742                  | $     2,778,374                  
|                                              |                                   |                                  
|Payroll and related
          expenses        | 603,924                           | 3,128,654                        
|General and administrative
          expenses | 743,327                           | 2,170,128                        
|Accrual for closing
          costs           | 1,364,458                         | --                               
|Goodwill &
          intangible impairment    | 176,545                           | 1,206,335                        
|Disposal of Fixed
          Assets            | 87,402                            | 68,329                           
|Amortization of
          intangibles         | 32,304                            | 77,022                           
|Depreciation Expense                          | 38,235                            | 93,100                           
|Total expenses                                | 3,046,195                         | 6,743,568                        
|Loss from operations                          | (2,745,453)                       | (3,965,194)                      
|                                              |                                   |                                  
|Interest expense                              | (9,236)                           | (6,040)                          
|Other income (expense)                        | 7,687                             | (18,296)                         
|                                              |                                   |                                  
|Net loss from discontinued operations         | $   (2,747,002)                   | $    (3,989,530)                 



F-32



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NOTE 19.

FAIR VALUE MEASUREMENT



The Company adopted the provisions of SFAS No. 157, Fair Value Measurements on January 1, 2008.  SFAS No. 157 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.  SFAS No. 157 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.  SFAS No. 157 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 value 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 SFAS No. 157, there was no cumulative effect adjustment to the beginning retained earnings and no impact on the consolidated 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 consolidated 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 short investments as of December 31, 2008 which are measured at fair value on a recurring basis by level within the fair value hierarchy.  As required by SFAS No. 157, these are classified based on the lowest level of input that is significant to the fair value measurement:



|                                |  |                                                                   |  |  |                                             |   |             |                                         |  |   |                      |   |  |   |            |  
|------------------------------- |  | ----------------------------------------------------------------- |  |  | ------------------------------------------- | - | ----------- | --------------------------------------- |  | - | -------------------- | - |  | - | ---------- | -
|                                |  | Quoted
Prices in
Active
Markets for
Identical
Instruments
Level 1 |  |  | Significant
Other
Observable
Inputs
Level 2 |   |             | Significant
Unobservable
Inputs
Level 3 |  |   | Assets at
Fair Value |  
|Liabilities:                    |  |                                                                   |  |  |                                             |   |             |                                         |  |   |                      |   |  |   |            |  
|Derivative liability            |  | $                                                                 |  |  |                                             | $ |             |                                         |  | $ | (331,268             | ) |  | $ | (331,268   | )
|Convertible notes               |  | $                                                                 |  |  |                                             | $ |             |                                         |  | $ | (351,000             | ) |  | $ | (351,000   | )
|Short-term notes                |  | $                                                                 |  |  |                                             | $ | (487,000)   |                                         |  | $ |                      |   |  | $ | (487,000   | )
|Long-term debt                  |  | $                                                                 |  |  |                                             | $ | (823,000)   |                                         |  | $ |                      |   |  | $ | (823,000   | )
|Lines of credit-related parties |  | $                                                                 |  |  |                                             | $ | (1,203,623) |                                         |  | $ |                      |   |  | $ | (1,203,623 | )



At December 31, 2008, the carrying amounts of the notes payable approximate fair value because the entire note had been classified to current maturity.



NOTE 20.

RELATED PARTIES:

a.

Patent licensing

The Company originally entered into a license agreement in February 2003 with Messrs. Burchetta and Brofman for the licensed usage of the intellectual property rights relating to U.S. Patent No. 6,330,551 issued by the
U.S. Patent and Trademark Office on December 11, 2001 for Computerized Dispute and Resolution System and Method worldwide.  In June 2005, subsequent to an interim amendment in February 2004, the Company amended and restated the license agreement in its entirety.  In lieu of cash royalty fees, Messrs. Burchetta and Brofman have agreed to accept stock options for the Companys common stock as follows:

On June 29, 2005, the Company granted to each of Messrs. Burchetta and Brofman a stock option for up to such number of shares of common stock such that the stock option, when added to the number of shares of common



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stock owned by each of Messrs. Burchetta and Brofman, and in combination with any shares owned by any of their respective immediate family members and affiliates, will equal 14.6% of the total number of outstanding shares of common stock on a fully-diluted basis as of the closing of a potential public offering of the Companys common stock, assuming the exercise of such stock option.

If, and upon, the Company reaching (in combination with any subsidiaries and other sub-licensees) $10,000,000, $15,000,000, and $20,000,000 in gross revenues derived from the licensed usage in any given fiscal year, the Company will grant each of Messrs. Burchetta and Brofman such additional number of stock options as will equal 1%, 1.5%, and 2%, respectively, of the total number of outstanding shares of common stock on a fully-diluted basis at such time.

On November 6, 2006, pursuant to this licensing agreement and the closing of the IPO, the Company issued stock options to the Companys co-chairmen to purchase an aggregate of 1,517,434 shares of its common stock at $5.00 per share, with a term of ten years from grant date, and vesting upon issuance.  The fair value of each option granted to the co-chairmen was estimated as of the grant date using the Black-Scholes option pricing model  and an expected life of ten years.  Using these assumptions, these options were valued at $6,828,453, and the full value was expensed at issuance.

The term of the license agreement extends until the expiration of the last-to-expire patents licensed thereunder and is not terminable by Messrs. Burchetta and Brofman, the licensors.  The license agreement also provides that the Company will have the right to control the ability to enforce the patent rights licensed to the Company against infringers and defend against any third-party infringement actions brought with respect to the patent rights licensed to the Company, subject, in the case of pleadings and settlements, to the reasonable consent of Messrs. Burchetta and Brofman.

NOTE 21.

SUBSEQUENT EVENTS:

a.

Additional Financing

On February 26, 2009, an unaffiliated investor loaned the Company an additional $82,500.  The note had a maturity date of March 31, 2009, which was subsequently extended to April 10, 2009.  Later the maturity date was extended to July 1, 2009 for an additional payment of $12,500.  At maturity, the Company has a thirty (30) day grace period to repay the note.  Prepaid interest of $7,500 and attorneys fees of $5,000 were deducted from the gross proceeds of the note.  Interest applies at a default rate of 26% interest per annum after maturity.  In conjunction with the note, the investor received 750,000 warrants to purchase the common stock of the Company at an exercise price of $1.00.  As security for the loan and for the prior loan of $115,000, a contingent warrant of 25,000,000 shares at an exercise price of $1.00 was given to the investor.  This contingent warrant vests upon default but can be
canceled by payment in full of the outstanding obligations of $210,000.

On May 29,
  2009, an unaffiliated investor loaned the Company $100,000 on a three year Convertible
  Debenture 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
  Debenture carries a first lien security interest following the discharge of
  the $210,000 note above.  In addition, the investor received 1,000,000
  warrants to purchase the common stock of the Company at an exercise price of
  $1.00 per share.  The exercise period of the warrant is five years.

On July 22,
  2009, an unaffiliated investor loaned the Company $75,000 on a three year Convertible
  Debenture 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
  Debenture carries a first lien security interest following the discharge of
  the $210,000 note above.  In addition, the investor received 750,000 warrants
  to purchase the common stock of the Company at an exercise price of $1.00 per
  share.  The exercise period of the warrant is five years.



F-34



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On July 29,
  2009, an unaffiliated investor loaned the Company an additional $25,000 on a
  three year Convertible Debenture 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 Debenture carries a first lien security interest following
  the discharge of the $210,000 note above.  In addition, the investor received
  250,000 warrants to purchase the common stock of the Company at an exercise
  price of $1.00 per share.  The exercise period of the warrant is five years.

On August
  4, 2009, an unaffiliated investor loaned the Company $100,000 on a three year
  Convertible Debenture 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 Debenture carries a first lien security interest following the discharge
  of the $210,000 note above.  In addition, the investor received 1,000,000
  warrants to purchase the common stock of the Company at an exercise price of
  $1.00 per share.  The exercise period of the warrant is five years.

On August 7, 2009, the Board of Directors at its
regular meeting awarded each of the four Directors who were active as of December 31, 2008 restricted
shares of 500,000 each at the closing price of trading on that day, which was $0.19.  The shares were
granted in recognition of service from January 1, 2008 to June 30, 2009, for the Board members agreeing
to convert over $2 million of their notes, accrued interest and accrued payroll to stock at a conversion
rate of $0.15 per share, and for the considerable risks and challenges which the Company faced during
the period referenced above.  In addition, the Board awarded the new Interim CEO 1,000,000 options to
purchase the stock of the Company at the same closing price of $0.19 per share.  The options were
granted in recognition of the very demanding workload placed in the past and in the future on the
Interim CEO as the Company restructures.  The options have a seven year exercise period.  Finally, the
Board authorized the re-pricing of the options of all directors and employees who were active as of
December 31, 2008 to the closing price of the stock that day, or $0.19.  In total, seven employees were
affected.  The re-pricing was done due to the need by the Company to accrue most pay during the second
half of 2008 and during 2009, a period during which the employees were largely not getting paid.

On August
  7, 2009, an unaffiliated investor loaned the Company $5,000 on a three year
  Convertible Debenture 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 Debenture carries a first lien security interest following the discharge
  of the $210,000 note above.  In addition, the investor received 50,000
  warrants to purchase the common stock of the Company at an exercise price of
  $1.00 per share.  The exercise period of the warrant is five years.

On August
  14, 2009, an unaffiliated investor loaned the Company $12,500 on a three year
  Convertible Debenture 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 Debenture carries a first lien security interest following the discharge
  of the $210,000 note above.  In addition, the investor received 125,000
  warrants to purchase the common stock of the Company at an exercise price of
  $1.00 per share.  The exercise period of the warrant is five years.

On August
  14, 2009, an unaffiliated investor loaned the Company $12,500 on a three year
  Convertible Debenture 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 Debenture carries a first lien security interest following the discharge
  of the $210,000 note above.  In addition, the investor received 125,000
  warrants to purchase the common stock of the Company at an exercise price of
  $1.00 per share.  The exercise period of the warrant is five years.

On August
  14, 2009, an unaffiliated investor loaned the Company $100,000 on a three year
  Convertible Debenture 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 Debenture carries a first lien security interest following the discharge
  of the $210,000 note above.  In addition, the investor received 1,000,000
  warrants to purchase the common stock of the Company at an exercise price of
  $1.00 per share.  The exercise period of the warrant is five years.



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