**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-KSB**





x
      ANNUAL REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR
      ENDED DECEMBER 31, 2006




Commission
      File No.:  0-29525





**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.)




**707
                Westchester Avenue, Suite L7****White
                Plains, New York**
            
            **10604**(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 Exchange
              on
                Which RegisteredCommon
                Stock, par value $.001 per share****
            
            American
                Stock Exchange




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




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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of Issuer’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB.  x




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




The
      issuer’s revenues for its fiscal year ended December 31, 2006 were
      $98,042.




The
      aggregate market value of the voting and non-voting stock held by non-affiliates
      of the issuer was approximately $20,407,267, based on a closing price of $4.23
      per share on April 12, 2007, as quoted on the American Stock Exchange.




As
      of
      April 12, 2007, 6,675,263 shares of the issuer’s Common Stock were issued and
      outstanding.




Transitional
      Small Business Disclosure Format (check one):  Yes o No x




**Documents
      Incorporated by Reference:** Proxy
      Statement to be filed pursuant to Regulation 14A under the Securities Exchange
      Act of 1934 with respect to the 2007 annual meeting of
      stockholders.










**DEBT
      RESOLVE, INC.**




**2006
      FORM 10-KSB**





**TABLE
      OF CONTENTS**




**PART
      I.**





Item
                1.
            Description
                of business
            2Item
                1A.
            Risk
                factors
            14Item
                2.
            Description
                of property
            23Item
                3.
            Legal
                proceedings
            23Item
                4.
            Submission
                of matters to a vote of security holders
            24**PART
                II.**Item
                5.
            Market
                for common equity, related stockholder matters and small business
                issuer
                purchase of equity securities
            24Item
                6.
            Management’s
                discussion and analysis or plan of operation
            25Item
                7.
            Consolidated
                financial statements
            36Item
                8.
            Changes
                in and disagreements with accountants on accounting and financial
                disclosure
            36Item
                8A.
            Controls
                and procedures
            36Item
                8B.
            Other
                information
            37**PART
                III.**Item
                9.
            Directors,
                executive officers, promoters, control persons and corporate governance;
                compliance with Section 16(a) of the Exchange Act
            37Item
                10.
            Executive
                compensation
            42Item
                11.
            Security
                ownership of certain beneficial owners and management and related
                stockholder matters
            45Item
                12.
            Certain
                relationships and related transactions, and director
                independence
            48Item
                13.
            Exhibits
            48Item
                14.
            Principal
                accountant fees and services
            49Signatures
            51Financial
                Statements
            F-1Exhibits





1





**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 are a development
      stage company providing 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, 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.
      We then bill our client for the applicable fee. The entire resolution process
      is
      accomplished online.





We
      completed development and commenced licensing of our software solution in 2004
      and have generated nominal revenues to date. We currently have written contracts
      in place with, and have begun processing select portfolios for several banks
      and
      collection agencies. Since we have generated nominal DebtResolve system revenues
      to date from these contracts we believe that none of our existing clients is
      more or less critical to us than any other at this stage and, therefore, the
      loss of one or more of these contracts would not have a material adverse impact
      on our business.





Through
      DRV Capital LLC, our wholly-owned subsidiary formed on June 5, 2006, we have
      also entered into the business of purchasing and collecting debt. DRV Capital
      purchases defaulted consumer debt portfolios that we manage and collect through
      our DebtResolve system. This subsidiary is headed by an individual with
      extensive experience in the debt buying and debt collection industries. DRV
      Capital purchases charged-off debt portfolios through its single-purpose
      subsidiary EAR Capital I, LLC, formed in December 2006, using funding provided
      by an investment partner, enabling us to diversify our investment in this sector
      by taking positions in many pools. We, as the parent company, may also earn
      increased revenues from the use of our DebtResolve system by agencies that
      may
      be subcontracted to collect these debts. We expect that revenues earned from
      the
      debt purchase and collection business will develop slowly, over several months,
      beginning from the time we first capitalized the subsidiary, in January
      2007.





2


On
      January 19, 2007, we acquired First Performance Corporation, a privately-owned
      debt collection agency with approximately 100 collectors, revenues of $6 million
      for the year ended December 31, 2006, and offices in Florida and Nevada, which
      we now operate as a wholly-owned subsidiary. We believe that through the use
      of
      our DebtResolve system, our new collection agency and debt buying subsidiaries
      will be able to achieve significant economic advantages over our competitors,
      by
      both reducing collection costs and achieving improved collection returns. In
      addition, we believe the two will serve as test labs to develop “best practices”
for the integration of our DebtResolve system into the accounts receivable
      management environment.





As
      our
      efforts expand into the debt buying and collection agency businesses, we may
      depend less and less on revenues generated by the direct licensing of our
      DebtResolve system.





**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 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 affect 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 and option exercises have brought us to our
      current number of outstanding shares of common stock. Our principal executive
      offices are located at 707 Westchester Avenue, Suite L7, White Plains, New
      York
      10604, and our telephone number is (914) 949-5500. Our website is located at http://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. Through First Performance, our new
                collection agency business, and DRV Capital, our debt-buying business,
                we
                can not only monitor results on multiple types of debt, but also
                build
                best practices for how debtors can be encouraged to go to the website
                and
                how - once there - they can be encouraged to pay. By sharing the
                results
                with our clients and building best practices, we expect to help secure
                sales and improve revenue to us.





3




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 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.





·
            The
                ability to share best practices with our clients due to the collaborative
                efforts of our three complimentary
                businesses.





**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 and began
      marketing 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. As
      of
      December 31, 2006, our subsidiary, DRV Capital LLC, had not yet begun operations
      or recorded any revenue. On
      January 19, 2007, we acquired all of the outstanding shares of First Performance
      Corporation TM 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. We then bill our client for the applicable fee. The entire
      resolution process is accomplished online.





4




Our
      DebtResolve system consists of a suite of modules. These modules include the
      core DR SettleTM module, DR PayTM for online payments, DR ControlTM for system
      administration, DR MailTM as our secure e-mail methodology, DR PreventTM for early
      stage collections treatments and DR-DefaultTM for collection of defaulted
      mortgages and automobile loans. 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 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.




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.




**Debt-Buying
      and Collection Agency Businesses**





***DRV
      Capital LLC***





On
      June
      13, 2006, we formed a wholly-owned subsidiary, DRV Capital LLC, that focuses
      on
      purchasing or investing in defaulted consumer debt portfolios that we can manage
      and collect through our DebtResolve system. This subsidiary is headed by an
      individual with extensive experience in the debt buying and debt collection
      industries.





Our
      mission for DRV Capital is twofold:





·
            First,
                to earn revenue from traditional and opportunistic pools of debt.
                We
                believe that DRV Capital will create a new short and long term revenue
                stream through our management and liquidation of purchased assets.





5


·
            Second,
                to collect data on the effectiveness of our DebtResolve system on
                different portfolio types to foster best practices and enhanced usage.
                Purchased accounts will act as the inventory to prove the power of
                our
                DebtResolve system in a controlled manner.





We
      believe that this strategy will reduce collection costs from historical levels
      to levels that result in “best in class” results for our company and our
      investors. Usage of the DebtResolve system also will enable us to have a
      competitive edge in niche portfolios that current practices make unattractive
      to
      our competition.  In addition, we believe we will be able to better convert
      accounts to more profitable products (e.g. new credit cards, installment loans)
      in an efficient manner.





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 pursuant
      to a Master Loan and Servicing Agreement, dated December 21, 2006, with Sheridan
      Asset Management, LLC, 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
      we
      have been repaid our investment, we and Sheridan Asset Management share the
      residual collections from the debt portfolios, net of servicing fees. 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. New advances for portfolio purchases under
      the
      facility are not available beyond the December 21, 2007 expiration date. We
      were
      required to give Sheridan Asset Management the opportunity to fund all of our
      purchases of distressed consumer debt with advances through December 21,
      2008.





As
      of
      December 31, 2006, we had no commitments with respect to acquisitions of
      defaulted debt. However, in January 2007, we purchased our first two pools
      of
      defaulted debt through DRV Capital’s single-purpose subsidiary, EAR
      Capital.





***First
      Performance Corporation***





We
      purchased First Performance Corporation in January 2007. First Performance
      is a
      collection agency that represents both regional and national credit grantors
      from such diverse industries as retail, bankcard, oil cards, mortgage and auto.
      As of December 2006, First Performance had 113 employees, including 57
      collections personnel in its Ft. Lauderdale, Florida and 52 collections
      personnel in its Las Vegas, Nevada offices, and 29 active clients.





By
      entering this business directly, we have signaled our intention to become a
      significant player in the accounts receivable management industry. We believe
      that through a mixture of both traditional and our innovative,
      technologically-driven collection methods, we will achieve superior returns.
      We
      believe that integrating our DebtResolve system into the collection process
      will
      allow us to:





·
            Earn
                superior returns from opportunistic situations, such as low balance
                debt,
                student debt, and Internet- based debt, all of which lend themselves
                to
                our lower-cost, Internet-based
                solution.





·
            Achieve
                improved collection returns through higher debtor contact, as our
                DebtResolve system taps an expanded debtor base via the Internet-based
                communications delivery system.





·
            Achieve
                improved collection returns, as our online settlement system lends
                itself
                to improved liquidation rates per debtor.





·
            Optimize
                the effective usage of our online system by using First Performance
                as a
                testing “laboratory.”





**Our
      Industry**





According
      to the U.S. Federal Reserve Board, consumer credit has increased from $1.9
      trillion in December 31, 2002, to $2.4 trillion in December 31, 2006. For all
      of
      2006, U.S. consumer credit increased by 4.6 percent, up from a 4.2 percent
      gain
      in 2005. In the final three months of 2006, consumer credit rose at an annual
      rate of 3.7 percent. In parallel, the accounts receivables management (ARM)
      industry accounts for $15 billion in annual revenues according to industry
      analyst Kaulkin Ginsberg.





6




There
      are
      several major collections industry trends:





·
            Profit
                margins are stagnating due to the fixed costs of collections. The
                ACA
                International’s 2005 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
                is being considered by both creditors and third-party collectors,
                but
                there is a concern about the effectiveness of collectors 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 Internety-based collections have the
      ability to positively impact the cost-to-collect by reducing agent
      involvement.





**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 the buyers of their defaulted debt in the
                United
                States, Canada and the United Kingdom. As of December 31, 2006, we
                were
                actively targeting new market segments like telecom and utility companies,
                and new geographic markets, like Asia and other international markets.
                Other markets in the United States may include student loan debt
                and
                automobile loans.




·
            **Expand
                our service offerings.**Using
                statistics developed through our in-house collection agency and debt
                buying activities, we plan to build a scoring model. This scoring
                model
                will identify customers based on their propensity to use the Internet
                versus other channels offered and, we believe, will help both our
                creditor
                clients and ourselves to determine to what degree settlement should
                be
                offered as an option. In addition, 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.





·
            **Grow
                our debt buying business.**With our December 2006 launch of DRV Capital, we have entered the
                debt-buying market, purchasing two portfolios of debt in January
                2007.





·
            **Pursue
                strategic acquisitions.**In
                January 2007, we purchased First Performance. We may seek to make
                additional strategic acquisitions of businesses, assets and technologies
                that complement our business.





·
            **Grow
                our client base.****As
                of December 31, 2006, we had 8 clients. Our clients consist of credit
                issuers, (including banks), collection agencies and collection law
                firms.
                With our suite of online products, and our acquisition of First
                Performance, 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.




7




·
            **Increase
                adoption rates.****Our
                clients typically pay us either usage 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.





·
            **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 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 are focused on United States
      consumer credit issuers, collection agencies and the buyers of defaulted
      consumer debt. 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 and purchasers of
      charged-off debt. In addition we have contracted with fasEo, a United Kingdom
      and European-focused sales and marketing consultancy to introduce our product
      to
      these markets. The fasEo principals have direct experience in the credit card
      industry and will begin their focus on the UK credit card industry and other
      grantors of consumer credit.





The
      economics of an Internet model means that our fixed costs will be relatively
      stable in relation to growth of our business. 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, willing “early adopters,” and from our DRV Capital and First
      Performance portfolios.





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.





8




***DRV
      Capital LLC***





Our
      DRV
      Capital debt-buying business is headed by Howard Knauer, an industry veteran.
      He
      is handling all sales efforts directly, relying strongly on his network of
      industry contacts. We collect on debt that we purchase by contracting
      third-party collection agencies who commit to using the DebtResolve system
      as
      part of their collections techniques.





***First
      Performance Corporation***





First
      Performance has established sales and marketing programs headed by John Tonetti,
      its President and Chief Marketing Officer, who has over 25 years experience
      in
      the credit and collections industry. First Performance sells to the financial,
      prime and sub-prime automotive, retail, and mortgage industries across the
      United States. In addition to debt collection, it also offers related services
      including skip-tracing and litigation referral, as well as lead generation
      for
      mortgage companies. We expect to market our First Performance collection service
      to large banks, credit issuers, and other financial institutions.





**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-chairmen of
      our
      company. We 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. This patent, which expires August 5,
      2018, covers automated and online, double blind-bid systems that generate
      high-speed settlements by matching 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, to be 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.





9




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 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
      is controlled by XL Capital Ltd., one of the world’s largest insurance
      providers, and Mr. Brofman, our co-chairman, is the President and Chief
      Executive Officer of Cybersettle. 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” and “First Performance Corporation” are our trademarks/service
      marks, and we intend to attempt to register them with the U.S. Patent and
      Trademark Office as well.





**Research
      and Development**





We
      have
      devoted a significant portion of our resources to designing and developing
      new
      offerings, maintaining and enhancing existing offerings, expanding and improving
      our core technology and strengthening our technological expertise. In 2003
      and
      2004, we spent $453,301 and $46,022, respectively, on research and development
      of our offerings and services. In January 2004, we substantially completed
      the
      development of, and began marketing, our online service. Commencing February
      2004, costs incurred in connection with the operation, maintenance, modification
      and customization of our software were charged to expense as incurred, and
      are
      not classified as research and development expenses. We have developed
      internally, acquired or licensed the software and services we offer.




**Technology
      and Service Providers**





We
      outsource our web hosting to AT&T Corp. at the rate of $15,000 to $18,000
      per month, based on current volumes. The AT&T hosting facility is located in
      Secaucus, New Jersey. We use servers operated by AT&T to operate our
      proprietary software developed in our facility.




10




**Competition**





***The
      DebtResolve System***





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





Apollo
      Enterprise Solutions, LLC: Apollo is a start-up company with a primary
      investor/CEO whose additional funding has come from private sources. Apollo
      has
      a small team of employees/consultants who 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. In 2005 through
      2006, 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 has tried to replicate our proprietary
      blind bidding system. In January 2007, we filed a patent infringement law suit
      against Apollo. In response to our complaint, Apollo (i) filed a motion to
      dismiss for an alleged lack of personal jurisdiction and, (ii) on January 29,
      2007, filed a mirror lawsuit against us in federal court in the Central District
      of California which seeks a declaratory judgment of non-infringement and
      invalidity with respect to these patents. Management
      believes that we have a reasonable chance of successfully
      asserting the patents-in-suit  against Apollo.  However we
      are unable to predict the outcome of these claims. See
      also
“Item 3: Legal Proceedings” in this report.





Online
      Resources Corp.: Online Resources is an established, publicly-traded, small-cap
      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, 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 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, so this has not yet been a barrier to sales. However, securing an
      agreement and building an interface to a payment processor is on our 2007
      product roadmap. 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.





***DRV
      Capital LLC***





The
      debt-buying industry is highly competitive and fragmented; however, we are
      not
      especially concerned about competition in this business. We believe that we
      will
      create efficiencies through the use of our Internet-based technology that will
      keep us competitive. We believe we will also create secondary gains through
      the
      sale of our technology to agencies who work our purchased debt and the results
      from the DRV Capital portfolios will help support our DebtResolve system sales.





When
      purchasing receivables, we compete primarily on the basis of the price paid
      for
      receivable portfolios, our ability to be a reliable funder of prospective
      portfolio purchases, and the quality of services that we provide. There
      continues to be consolidation of issuers of credit cards, which have been a
      principal source of receivable purchases. This consolidation has limited the
      sellers in the market and has correspondingly given the remaining sellers
      increasing market strength in establishing the price and terms of the sale
      of
      credit card accounts.





11




***First
      Performance Corporation***





The
      consumer credit recovery industry is highly competitive and fragmented. We
      compete with a wide range of collection companies, financial services companies,
      traditional contingency agencies and in-house recovery departments. Competitive
      pressures affect the availability and pricing of receivable portfolios, as
      well
      as the availability and cost of qualified recovery personnel. In addition,
      some
      of our competitors may have signed forward flow contracts under which
      originating institutions have agreed to transfer charged-off receivables to
      them
      in the future, which could restrict those originating institutions from selling
      receivables to us. We believe some of our major competitors, which include
      companies that focus primarily on the purchase of charged-off receivable
      portfolios, have continued to diversify into third-party agency collections
      and
      into offering credit card and other financial services as part of their recovery
      strategy.





**Government
      Regulation**





There
      are
      multiple regulations that govern our debt collection businesses. However, 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.





Our
      DRV
      Capital subsidiary is in the business of buying defaulted consumer debt
      portfolios to process through our DebtResolve system as well as through
      conventional means at agencies with whom we contract. Federal, state, local
      and
      foreign laws may limit our ability to recover and enforce any acquired defaulted
      consumer debt portfolios regardless of any act or omission on our part. Some
      laws and regulations applicable to credit originators may preclude us from
      collecting on defaulted consumer debt portfolios we may purchase if the credit
      originator previously failed to comply with applicable law in generating or
      servicing those consumer debt receivables.





Our
      First
      Performance subsidiary is an accounts receivable management agency that handles
      debt from multiple types of clients. Our agency business is at risk if it does
      not comply with the rules and regulations imposed on third-party
      collectors.





These
      laws and regulations 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 implementing Regulation Z, the federal Fair Credit Reporting Act, and
      state unfair and deceptive acts and practices laws. Collection laws and
      regulations also directly apply to our business, such as the federal Fair Debt
      Collection Practice 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 on any acquired defaulted consumer debt
      portfolios. Finally, federal and state governmental bodies are considering,
      and
      may consider in the future, other legislative proposals that would regulate
      the
      collection of any acquired defaulted consumer debt portfolios, and although
      we
      cannot predict if or how any future legislation would impact this proposed
      expansion of our business, our failure to comply with any current or future
      laws
      or regulations applicable to us could limit our ability to collect on any
      acquired defaulted consumer debt portfolios. If we were to acquire defaulted
      consumer debt portfolios that consist of consumer debt that originated in
      foreign jurisdictions, foreign laws may also limit our ability to recover and
      enforce these portfolios. However, we do not anticipate acquiring defaulted
      consumer debt portfolios that consist of consumer debt that originated in
      foreign jurisdictions at this time, and we have not evaluated the impact of
      any
      applicable foreign laws at this time.





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. Legislation has been introduced in the U.S. Senate that
      would mandate data-security management steps for many businesses and a
      nationwide standard for notifying consumers of security breaches. The
      legislation would require companies that store information on more than 10,000
      people to create a data privacy and protection program, including assessing,
      maintaining and controlling risks to data privacy and security. Businesses
      would
      have to provide employee training, perform vulnerability tests and ensure that
      third-party service providers have adequate security programs. 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.





12




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.





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.
      Local telephone carriers have petitioned the Federal Communications Commission
      to regulate the Internet and to impose access fees. 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 selling our DebtResolve system to prospects in the United Kingdom.
      Since we 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 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. Except for our examination of European and United
      Kingdom law as it applies to our Lloyds TSB contract, we cannot predict how
      foreign laws will impact our ability to expand our business internationally,
      and
      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 116 employees in total, of whom 111 are full-time
      employees. Of our total employees, 18 are based at our corporate headquarters
      in
      White Plains, New York, 48 are based in First Performance’s office in Las Vegas,
      Nevada and 50 are based in First Performance’s office in Ft. Lauderdale,
      Florida. None of our employees is subject to a collective bargaining agreement
      and we believe that our relations with our employees are good.





13





**ITEM
      1A. Risk factors**





**Cautionary
      Statements and Risk Factors**





*Set
      forth below and elsewhere in this Form 10-KSB 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-KSB.*





**Risks
      Related to Our Businesses**





*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
      year ending December 31, 2006, we had substantially no revenues and
      incurred a net loss of $21,695,665.  Cash used in operating and investing
      activities was $5,323,754 for the year ended December 31, 2006. 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.




Management
      is actively pursuing additional debt/equity financing and pursuing strategic
      acquisitions.  In January 2007, we acquired the
      outstanding capital stock of First Performance Corporation, an
      accounts receivable management agency, and accordingly, are no longer in
      the development stage as of the date of the acquisition.  In March
      2007, we entered into a non-binding letter of intent with a financing company
      for a $3 million debt financing.  The exact terms of the financing
      have not been determined, nor has the lender made a binding commitment to the
      financing transaction. The parties are currently performing their respective
      due
      diligence procedures.  Management believes that it will be successful in
      obtaining additional financing and successfully integrate our acquisition to
      a
      level of profitability, however, we cannot assure you that we will be able
      to do
      so.  To the extent that we are  unsuccessful, we may need to curtail
      our operations.




***We
      have a limited operating history 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 and our DRV Capital debt-buying
      business in 2006, therefore your evaluation of our business and prospects will
      be based on the limited operating histories of these businesses. Consequently,
      our historical results of 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 as a
      development stage company in a 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. From
      inception through December 31, 2006, we have incurred accumulated net losses
      of
      $32,680,014. If such losses continue, we may not be able to continue our
      operations.***





We
      incurred a net loss of $21,695,665 for the year ended December 31, 2006 and
      $5,403,542 for the year ended December 31, 2005. From February 2003 to date,
      our
      operations have been funded almost entirely through the proceeds of
      approximately $2,400,000 that we have received from the issuance of our common
      stock in private placements, $2,695,000 that we have received from the issuance
      of our 7% convertible promissory notes in two private financings in 2005,
      $3,481,762 from the issuance of convertible and non-convertible notes in a
      private financing in June 2006 and $12,500,000 in gross proceeds that we
      received from the issuance of our common stock at our initial public offering.
      From inception through December 31, 2006, we incurred accumulated net losses
      of
      $32,680,014. If we continue to experience losses, we may not be able to continue
      our operations.





***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, or from recurring license fees for the
      use of our system 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 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
      successively 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.





14




***If
      we are unable to retain current First Performance clients and attract new
      clients, or if our First Performance clients do not actively submit defaulted
      consumer debt accounts, we will not be able to generate revenues or continue
      our
      First Performance business.***




We
      expect
      that our First Performance revenue will come from taking a success fee equal
      to
      a percentage of defaulted consumer debt accounts that are settled and collected
      by First Performance. 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 and purchasers of
      charged-off debt, to initiate the process by submitting defaulted consumer
      debt
      accounts to First Performance. We cannot be sure that we will be able to retain
      our existing, and enter into new, relationships with First Performance 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,
      or whether First Performance’s collection methods will be effective. If our
      First Performance client base, and their corresponding claims submission, does
      not increase or experience favorable results, we will not be able to generate
      sufficient revenues to continue and sustain our First Performance business.





***We
      may pay too much for, or collect too little on, defaulted consumer debt
      portfolios that we may purchase.***





Through
      DRV Capital, we are actively pursuing the acquisition of defaulted consumer
      debt
      portfolios to process through our DebtResolve system, an area in which we have
      little experience. These are consumer debt portfolios that the credit originator
      has deemed uncollectible and has charged-off, generally after making numerous
      attempts to collect on them. These receivables are difficult to collect, and
      we
      may not be successful in collecting amounts sufficient to cover the costs
      associated with purchasing the receivables and funding our operations. Also,
      our
      inexperience may impair our ability to manage and collect on such consumer
      debt
      portfolios, and we may pay too much for these portfolios and, consequently,
      may
      not generate a profit from these portfolios.





Moreover,
      as we pursue the acquisition of defaulted consumer debt portfolios to process
      through our DebtResolve system, we will: (i), have to expand our operations,
      (ii) face new operational risks that we cannot predict at this time, (iii)
      become subject to increased government regulation and (iv) be subject to
      material changes in our financial statements and financial reporting.
      Specifically:





·
            our
                expansion into this line of business could result in the need to
                enter
                into potentially complex financing arrangements, resulting in the
                need to
                manage those relationships and the potential interest rate risk and
                credit
                risk associated with them,





·
            accounting
                for this activity would require that we become familiar with the
                applicable accounting regulations, with which we are not currently
                familiar,





·
            our
                accounting would also become more complex, requiring combining the
                results
                of our proposed debt-buying subsidiary into our consolidated financial
                statements, and





·
            we
                would incur additional costs associated with the start-up of our
                proposed
                debt-buying subsidiary, including legal, filing fees and other start-up
                costs associated with establishing this potential line of business.





15




In
      addition:





·
            federal,
                state, local and foreign laws may limit our ability to recover and
                enforce
                any acquired defaulted consumer debt portfolios regardless of any
                act or
                omission on our part,





·
            some
                laws and regulations applicable to credit originators may preclude
                us from
                collecting on defaulted consumer debt portfolios we may purchase
                if the
                credit originator previously failed to comply with applicable law
                in
                generating or servicing those consumer debt
                receivables,





·
            collection
                laws and regulations may also directly apply to our debt-buying
                business,





·
            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 on any acquired
                defaulted consumer debt portfolios,
                and





·
            federal
                and state governmental bodies are considering, and may consider in
                the
                future, other legislative proposals that would regulate the collection
                of
                any acquired defaulted consumer debt portfolios, and although we
                cannot
                predict if or how any future legislation would impact this proposed
                expansion of our business, our failure to comply with any current
                or
                future laws or regulations applicable to us could limit our ability
                to
                collect on any acquired defaulted consumer debt portfolios.





If
      any of
      these or similar risks materialize, we may have to scale back or eliminate
      our
      debt portfolio acquisitions and business.





***We
      may not be able to purchase receivables at sufficiently favorable prices or
      terms, or at all.***





The
      market for acquiring receivable portfolios has become more competitive. The
      debt-buying industry has attracted a large amount of investment capital. With
      this inflow of capital, we have seen a significant increase in the pricing
      of
      portfolios to levels that we believe will generate reduced returns on
      investment. Our ability to continue to operate DRV Capital profitably depends
      upon the continued availability of accounts receivable portfolios which meet
      our
      purchasing standards and are cost-effective based upon projected collections
      exceeding our costs. Furthermore, with an increase in market competition, the
      purchase price of portfolios has increased, and the ratio of collections to
      acquisition costs can be expected to decrease, which would negatively affect
      our
      results of operations.





In
      addition to the competitive factors discussed above, the availability and
      purchase of consumer accounts receivable portfolios at favorable prices and
      on
      favorable terms depends on a number of factors, within and outside of our
      control, including:





·
            the
                continuation of the current growth and charge-off trends in consumer
                debt,





·
            the
                continued sale of receivable portfolios by originating
                institutions,





·
            our
                ability to develop and maintain long-term relationships with key
                major
                credit originators,





·
            our
                ability to obtain adequate data from credit originators or portfolio
                resellers to appropriately evaluate the collectibility of, and estimate
                the value of, portfolios, and





·
            changes
                in laws and regulations governing consumer lending.





Ultimately,
      if we are unable to continually purchase and collect on a sufficient volume
      of
      receivables to generate cash collections that exceed our costs, our business
      will be materially adversely affected.





***We
      may be unable to meet our future liquidity requirements.***





We
      depend
      on both internal and external sources of financing to fund our purchases of
      receivable portfolios and our operations. Our need for additional financing
      and
      capital resources increases dramatically as our debt-buying business grows.
      Our
      inability to obtain financing and capital as needed or on terms acceptable
      to us
      would limit our ability to acquire additional receivable portfolios and to
      operate our business.





16




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





We
      recently acquired First Performance Corporation and, although we have no
      definitive agreements in place to do so currently, we may in the future seek
      to
      acquire additional complimentary 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 very little 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,





·
            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, 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
      overdue or defaulted consumer debt accounts generated primarily in the United
      States as well as the United Kingdom. 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-chairmen of our company,
      whose patented technology is now, and is anticipated to continue to be,
      incorporated into our service offerings as a key component.





17




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.





***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-chairmen 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-chairmen 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.





18




As
      of
      December 2006, Messrs. Burchetta and Brofman own approximately 26% 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 are substantially responsible 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.





***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 announced software offerings that may be
      competitive with the DebtResolve system and which may 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.





In
      the
      normal course of our business, we must record and process significant amounts
      of
      data quickly and accurately to properly bid on prospective acquisitions of
      receivable portfolios and to access, maintain and expand the databases we use
      for our collection activities. 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 AT&T in New Jersey, and under the terms of our
      hosting service level agreement with AT&T, they will provide network
      connectivity availability 99.9% of the time from the connection off their
      backbone to our hosted infrastructure.





19




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.





***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 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.





***James
      D. Burchetta and Richard G. Rosa possess specialized knowledge about our
      business and we would be adversely impacted if either one 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
      Chief Executive Officer, and Richard G. Rosa, our President and Chief Technology
      Officer. Mr. Burchetta, who is a licensor of key intellectual property to
      us, has knowledge regarding online debt collection technology and business
      contacts that would be difficult to replace. Mr. Rosa has technical
      expertise regarding our system that our other officers do not possess. If
      Messrs. Burchetta or Rosa were to become unavailable to us, our operations
      would
      be adversely affected. We carry term, “key-man” life insurance for our benefit
      in the amount of $2,000,000 on the life of Mr. Burchetta and $1,000,000 on
      the
      life of Mr. Rosa, but not for any other officer. This insurance may be
      inadequate to compensate us for the loss of either Mr. Burchetta or Mr. Rosa.
      Moreover, we have no insurance to compensate us for the loss of any other of
      our
      named executive officers or key employees.





**Risks
      Related to Our Industry**





***The
      ability of our DebtResolve system clients and First Performance Corporation
      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’ and First
      Performance’s 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, and 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.





20




***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 implementing 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 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, and despite the fact that First Performance is licensed as
      a
      collection agency in most of the jurisdictions in which we currently operate,
      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. Legislation has
      been
      introduced in the U.S. Senate that would mandate data-security management steps
      for many businesses and a nationwide standard for notifying consumers of
      security breaches. The legislation would require companies that store
      information on more than 10,000 people to create a data privacy and protection
      program, including assessing, maintaining and controlling risks to data privacy
      and security. Businesses would have to provide employee training, perform
      vulnerability tests and ensure that third-party service providers have adequate
      security programs. 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 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 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.
      Local telephone carriers have petitioned the Federal Communications Commission
      to regulate the Internet and to impose access fees. 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.





21




***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 development stage 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. 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 pricing of charged-off
      receivable portfolios, as well as the availability and cost of qualified
      recovery personnel. Because there are few significant barriers to entry for
      new
      purchasers of charged-off receivable portfolios, there is a risk that additional
      competitors with greater resources than ours, including competitors that have
      historically focused on the acquisition of different asset types, will enter
      our
      market. 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 access to charged-off receivable portfolios at acceptable prices, which
      could reduce our 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 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.





22




***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.





***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 acquire and/or service
      receivables. We cannot assure you that we will have adequate capital resources
      available.





***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.




**ITEM
      2. Description of property**




We
      lease
      approximately 4,900 square feet of office space at 707 Westchester Avenue,
      Suite
      L7, White Plains, New York 10604. We lease this space for $10,274 per month
      on a
      straight-line basis under a non-cancelable lease through July 2010.




Subsequent
      to December 31, 2006, in conjunction with the acquisition of First Performance
      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 $20,599 per month
      under a non-cancelable lease through July 31, 2014. The Florida facility
      consists of 12,415 square feet at 4901 N.W. 17 th Way,
      Suite 201, Ft. Lauderdale, Florida 33309. We lease this space for $19,224 per
      month under a non-cancelable lease through January 31, 2009.




**ITEM
      3. Legal proceedings**




**Lawsuit
      against Apollo**




On  January
      8, 2007, we filed a patent infringement lawsuit against Apollo Enterprise
      Solutions, LLC (“Apollo”) in federal court in New Jersey.  The suit alleges
      that Apollo’s online debt collection system infringes one or more claims of
      the patents-in-suit, U.S. Patent Nos. 6,330,551 and 6,954,741.  We
      have exclusive rights under these and certain other patents with respect to
      the settlement of consumer debt.  In
      response to our complaint, Apollo (i) filed a motion to dismiss for an alleged
      lack of personal jurisdiction and, (ii) on January 29, 2007, filed a mirror
      lawsuit against us in federal court in the Central District of California which
      seeks a declaratory judgment of non-infringement and invalidity with respect
      to
      these patents. We have filed a motion to dismiss, transfer or stay the
      California case in preference to the first-filed New Jersey case. That motion
      is
      not fully briefed and remains pending. In the New Jersey case, the Court issued
      an order requiring the parties to submit a series of briefs showing why the
      case
      should not be transferred from New Jersey to the District of Delaware, the
      Southern District of New York or the Central District of California. That
      briefing is not yet completed. We have filed a motion in the New Jersey case
      to
      permit us to take discovery on these jurisdictional issues from Apollo in the
      event that the Court declines to find that we have presented a *prima
      facie* case on
      jurisdiction. That motion is not fully briefed and remains pending. Management
      believes that we have a reasonable chance of successfully
      asserting the patents-in-suit  against Apollo, however, we are
      unable to predict the outcome of these claims.




23







**ITEM
      4. Submission of matters to a vote of security holders**




We
      did
      not submit any matters to a vote of security holders in the fourth quarter
      of
      the fiscal year ended December 31, 2006.




**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
      traded on the American Stock Exchange under the symbol DRV.




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:




Year
                    ended December 31,2006
                
                2005Quarter
                
                High
                
                Low
                
                High
                
                LowFirst
                
                
                —
                
                
                —
                
                
                —
                
                
                —Second
                
                
                —
                
                
                —
                
                
                —
                
                
                —Third
                
                
                —
                
                
                —
                
                
                —
                
                
                —Fourth
                
                
                —
                
                
                —
                
                
                —
                
                
                —Fourth
                    (November 2 to December 31, 2006)
                
                $
                4.98
                
                $
                3.50
                
                
                —
                
                
                —





For
      the
      period from January 1, 2007 to April 12, 2007, the high and low closing prices
      for our common stock were $4.40 and $3.53, respectively.




The
      market information for the year ended December 31, 2006 begins
      on
      November 2, 2006, the date of our initial public offering. Prior to such time,
      there was no trading of our shares.




As
      of
      March 27, 2007, there were 787 record holders of our common stock.




24




**Dividends**





We
      have
      not to date and do not expect to pay a dividend on our common stock in the
      foreseeable future.  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**





There
      were no sales of unregistered securities other than as reported in prior reports
      on Forms 10-KSB, 10-QSB or 8-K.





**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, 2006.





**Use
      of Proceeds from Registered Securities**





On
      November 6, 2006, we completed an underwritten initial public offering (“IPO”)
      of 2,500,000 shares of our common stock at an offering price of $5.00 per share.
      We sold 2,500,000 shares of common stock at an aggregate offering price of
      $12.5
      million. The IPO was completed pursuant to a Registration Statement on Form
      SB-2
      (Registration No. 333-135911) (the “Registration Statement”) that the SEC
      declared effective on November 1, 2006. EKN Financial Services, Inc. acted
      as
      the managing underwriter and National Securities Corporation, Joseph Stevens
      & Company, Inc. and Maxim Group LLC acted as co-underwriters. The
      Registration Statement included up to an additional 375,000 shares of our common
      stock to cover the underwriters’ over-allotment option. The underwriters did not
      exercise their over-allotment option and none of the 375,000 shares were sold.
      At the same time we commenced our IPO, we registered for resale by selling
      stockholders 2,483,819 shares of common stock issuable upon conversion of
      convertible notes or exercise of warrants. As of the date of this report, we
      do
      not know how many of the 2,483,819 shares of common stock registered for resale
      by selling stockholders may have been sold. The offering will terminate after
      all the securities registered are sold.





From
      the
      effective date of the Registration Statement through December 31, 2006, we
      incurred $1,309,901 in costs for underwriting discounts and commissions and
      $534,317 in other expenses for a total of $1,844,219 in costs relating to the
      IPO in that period. None of these expenses were direct or indirect payments
      to
      directors, officers or their associates; to persons owning 10% or more of any
      class of our equity securities; or to affiliates of ours. The IPO resulted
      in
      net proceeds to us of $10,655,781.





Through
      December 31, 2006, we used $5,754,838 of the net proceeds of the IPO as follows:
      $3,373,381 for repayment of outstanding promissory notes (including $215,352
      repaid to officers or directors of ours or their affiliates), and $2,381,457
      for
      working capital and general corporate purposes, including expenses associated
      with further developing and marketing our product. We are using the net proceeds
      of the IPO substantially as described in the prospectus.





**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**




We
      are
      development stage company. Since our inception, we have devoted substantially
      all of our efforts to planning, research and development activities, and raising
      capital. In February 2004, we implemented our DebtResolve system on a test
      basis
      with a collection agency. In June and November 2004, we implemented our system
      with our second and third clients, respectively, and began generating nominal
      revenue based on a percentage of the amount of debt collected by these clients.
      To date, we have thirteen clients under contract, seven of which are
      operational.




25




Since
      completing initial product development in early 2004, our primary business
      has
      been providing a software solution to consumer lenders 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 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. 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 insignificant. 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 three
      private financings, short-term borrowings 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, and other sales and marketing
      expenses will grow as we expand our sales, marketing and support capabilities.
      Effective utilization of our system will require a change in thinking on the
      part of the collection industry, but we believe the effort will result in new
      collection benchmarks. We intend to provide detailed advice and hands-on
      assistance to clients to help them make the transition to our system.




Our
      preliminary contracts provide that we will earn revenue based on a percentage
      of
      the amount of debt collected from accounts submitted on our DebtResolve system.
      Although other revenue models have been proposed, most revenue earned to date
      has been determined using this method, and such revenue is recognized when
      the
      settlement amount of debt is collected by our client. For the early adopters
      of
      our system, we waived set-up fees and other transactional fees that we
      anticipate charging on a going-forward basis. While the percent of debt
      collected will continue to be a revenue recognition method going forward, other
      payment models are also being offered to clients and may possibly become our
      preferred revenue model. Most contracts currently in process include provisions
      for set up fees and base revenue on a monthly licensing fee per account, with
      a
      small transaction fee on debt settlement. In addition, with respect to our
      DR
      Prevent TM module, we expect that a licensing 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 reflect that
      knowledge.




We
      have
      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 have begun to buy portfolios of charged-off debts at a significant
      discount to their face value and, through subcontracted, licensed debt
      collectors, attempt to collect on that debt by utilizing both our DebtResolve
      system and also traditional collection methods. We hope that, in addition to
      the
      actual revenues earned from this venture, by buying and settling these debts,
      and especially opportunistic, Internet-related debt, such as debts associated
      with Internet service providers and sellers and lenders over the Internet,
      we
      will 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.




26




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 pursuant
      to a Master Loan and Servicing Agreement, dated 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,
      and
      amounts repaid cannot be re-borrowed. Once the notes are repaid and we have
      been
      repaid our investment, we and Sheridan share the residual collections from
      the
      debt portfolios, net of servicing fees. 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.
      New
      advances for portfolio purchases under the facility are not available beyond
      the
      December 21, 2007 expiration date. Under the terms of the agreement, we are
      required to give Sheridan the opportunity to fund all of our purchases of
      distressed consumer debt with advances through December 21, 2008.





Revenue
      streams associated with this business will include servicing fees earned and
      paid, collections of principal in excess of the price paid, interest earned
      on
      purchased debt and paid to investment partners, and, from time to time, gains
      on
      the resale of remaining balances. We, as the parent company, may also earn
      increased revenues from the use of our DebtResolve system by agencies that
      may
      be subcontracted to collect these debts. We expect that revenues earned from
      the
      debt purchase and collection business will develop slowly, over several months,
      beginning from the time we first capitalized the subsidiary. We have already
      hired experienced staff and incurred certain legal expenses to meet compliance
      requirements for entering this business. Until we achieve certain scale in
      these
      operations, early revenues will at first only cover those costs.




As
      of
      December 31, 2006, we had no commitments in regards to acquisitions of defaulted
      debt. However, in January 2007, we purchased our first two pools of defaulted
      debt through DRV Capital and its single-purpose subsidiary, EAR
      Capital.




In
      January 2007, we purchased First Performance Corporation. First Performance
      is a
      collection agency that represents both regional and national credit grantors
      from such diverse industries as retail, bankcard, oil cards, mortgage and auto.
      As of December 2006, First Performance had 113 employees, including 75
      collections personnel in its Ft. Lauderdale, Florida and Las Vegas, Nevada
      offices, and 29 active clients. By entering this business directly, we have
      signaled our intention to become a significant player in the accounts receivable
      management industry. We believe that through a mixture of both traditional
      and
      our innovative, technologically-driven collection methods, we can achieve
      superior returns.





Our
      financial statements were prepared using principles applicable to a going
      concern, which contemplate the realization of assets and liquidation of
      liabilities in the normal course of business. We had $4,925,571 in cash and
      cash
      equivalents at December 31, 2006. Our working capital at December 31, 2006
      was
      $4,535,480. 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.
      We have entered into a non-binding letter of intent with a financing company
      for
      a $3 million loan to fund the operations of First Performance, which has been
      operating at a loss for the last several years. We have  implemented a
      rigorous restructure of First Performance’s operating procedures and incentive
      plans, and expect that First Performance will become cash-flow positive during
      the year ended December 31, 2007, however, we will need to fund its operating
      expenses until that time. The exact terms of the financing have not been
      determined, nor has the lender made a binding commitment to the financing
      transaction. The parties are currently going through due diligence
      review.




**Results
      of Operations**




***Year
      ended December 31, 2006 Compared to Year Ended December 31, 2005***




**Revenues**




We
      earned
      nominal revenues of $98,042 for the year ended December 31, 2006, an increase
      of
      $74,443 over revenues of $23,599 for the year ended December 31, 2005. Most
      of
      the revenue earned in 2006, as well as all of the revenue earned in 2005, we
      earned based on a percentage of the amount collected from accounts submitted
      on
      our DebtResolve system by our clients. During 2006, we earned $3,600 in set
      up
      fees and $25,000 in licensing fees.




27




Through
      December 2005, all of our contracts provided that we would earn revenue based
      on
      a percentage of the amount of debt collected from accounts submitted on our
      DebtResolve system. All revenue earned through that date was determined using
      this method, and such revenue was recognized when the settlement amount of
      debt
      was collected by our client. For the early adopters of our system, we waived
      set-up fees and other transactional fees that we now charge on a going-forward
      basis. While the percent of debt collected method will continue to be a revenue
      recognition method going forward, other payment models are also being offered
      to
      clients and could possibly become our preferred revenue model. Most contracts
      currently in process include set up fees and base revenue on a monthly licensing
      fee per account with a small transaction fee on settlement.




On
      January 19, 2007, we purchased First Performance Corporation, a collection
      agency with revenues of approximately $6 million during the year ended December
      31, 2006. During 2007, the revenues of First Performance will be earned from
      a
      negotiated percent of debt collected on behalf of First Performance’s clients.
      The percent of debt collected may range from 20% to 35% and is recognized when
      the money is collected from the debtor.




Also
      in
      January of 2007, we initiated operations of our debt buying subsidiary, DRV
      Capital LLC. For the initial months of operation, DRV Capital will recognize
      revenue using the cash recovery method.




**Costs
      and Expenses**




**Payroll
      and related expenses.** Payroll
      and related expenses totaled $5,524,059 for the year ended December 31,
      2006, an increase of $4,007,592 over payroll and related expenses of $1,516,467
      for the year ended December 31, 2005. The increase was due primarily to a charge
      of $2,839,562 for stock-based compensation expense in recognition of options
      granted to employees in conjunction with our initial public offering during
      the
      year ended December 31, 2006. We recorded no expense for employee stock-based
      compensation in the year ended December 31, 2005 because we had not yet
      implemented the accounting provisions of Statement of Financial Accounting
      Standards (“SFAS”) No. 123 - Revised. Salary expense for the year ended December
      31, 2006 was $2,285,029, an increase of $1,055,791 over salary expense of
      $1,229,238 in the year ended December 31, 2005, due primarily to a higher
      average number of employees in the period in addition to bonuses granted at
      the
      time of our initial public offering. Also contributing to the increase was
      employee health insurance for the year ended December 31, 2006, which totaled
      $148,163, an increase of $76,754 over health insurance-related expenses of
      $71,409 for the year ended December 31, 2005, and 401(k) plan expense, which
      totaled $60,443 for the year ended December 31, 2006. We did not offer a 401(k)
      plan in 2005.




As
      of
      December 31, 2006, the number of full-time employees was 15.




**General
      and administrative expenses.** General
      and administrative expenses, including stock-based compensation for option
      grants to consultants, totaled $3,308,634 for the year ended December 31,
      2006, an increase of $1,510,535 compared to general and administrative expenses
      of $1,798,099 for the year ended December 31, 2005. This increase was
      primarily due to $1,468,550 in stock-based compensation expense for options
      and
      warrants granted in payment for consulting services during the year ended
      December 31, 2006, an increase of $834,306 over $634,244 in stock-based
      compensation expense for options and warrants granted in payment for consulting
      services during the year ended December 31, 2005. Legal expenses for the year
      ended December 31, 2006 were $403,285, an increase of $232,537 over legal
      expenses of $170,748 in the year ended December 31, 2005, due primarily to
      legal
      work done on intellectual property, acquisitions and the formation of our
      debt-buying subsidiary, during the year ended December 31, 2006. Consulting
      expenses for the year ended December 31, 2006 were $290,668, an increase of
      $183,125 over consulting expenses of $107,563 in the year ended December 31,
      2005, due primarily to expenses related to securing security certifications
      to
      meet Bank Secrecy Act Security Standards. Audit and accounting fees for the
      year
      ended December 31, 2006 were $222,293, an increase of $31,590 over audit and
      accounting fees of $190,703 in the year ended December 31, 2005, due primarily
      to work performed in connection with our initial public offering.




28




Other
      general and administrative expenses in the year ended December 31, 2006
      consisted of telecommunication expenses including web hosting services of
      $217,193, an increase of $7,683 over telecommunication expenses of $209,510
      in
      the year ended December 31, 2005. Higher volume was offset by a lower negotiated
      rate. Marketing expense for the year ending December 31, 2006 was $153,061,
      an
      increase of $86,245 over marketing expense of $66,816 for the year ended
      December 31, 2005. Travel-related expenses for the year ending December 31,
      2006
      were $223,808 as a result of a larger sales force combined with extensive travel
      to meet analysts and brokers following our initial public offering, an increase
      of $68,873 over travel expense of $154,935 in the year ended December 31, 2005.
      Rent and occupancy expenses for the year ended December 31, 2006 was $141,276,
      an increase of $48,598 over rent and occupancy expenses of $92,678 in the year
      ended December 31, 2005, as we occupied our larger quarters for the twelve
      months of 2006, compared to only 5 months in 2005. Insurance expense for the
      year ended December 31, 2006 was $131,686, an increase of $43,456 over insurance
      expenses of $88,230 in the year ended December 31, 2005, as we increased our
      directors and officers insurance coverage and obtained key man insurance for
      two
      key executives.




**Patent
      licensing expense - related parties.** For
      the
      year ended December 31, 2006, we incurred $6,828,453 in expense for options
      issued to our co-chairmen in payment for licensing rights to their
      patent.




**Terminated
      offering costs.** During
      the year ended December 31, 2005, we incurred $736,037 in costs associated
      with
      our efforts to raise capital in the public equity markets. We withdrew our
      Registration Statement on Form SB-2 on February 10, 2006 and charged the
      accumulated costs to terminated offering costs during the year ended December
      31, 2005.




**Amortization
      of deferred debt discount.** For
      the
      year ended December 31, 2006, we incurred expense of $4,641,985 in the
      amortization of deferred debt discount and beneficial conversion feature of
      convertible notes, and $665,105 in the amortization of deferred financing costs,
      an increase of $3,563,033 over the $1,078,952 in the amortization of deferred
      debt discount and beneficial conversion feature of convertible notes during
      the
      year ended December 31, 2005 and an increase of $516,890 over the $148,215
      in
      the amortization of deferred financing costs in the year ended December 31,
      2005.




**Interest
      expense.** We
      incurred $778,243 in net interest expense for the year ended December 31, 2006,
      an increase of $665,466 over $112,777 in net interest expense for the year
      ended
      December 31, 2005. In the year ended December 31, 2006, net interest expense
      consisted interest expense on convertible notes of $540,316 and $278,618 in
      other, miscellaneous interest related to interest owed on short term notes,
      net
      of interest income of $40,691. In the year ended December 31, 2005, it consisted
      of interest income of $4,538 and interest expense on convertible notes of
      $100,038 and $17,277 in other miscellaneous interest expense items.




**Research
      and development expenses.** Commencing February 2004, costs incurred in connection with the operation,
      maintenance, modification and customization of our DebtResolve system were
      charged to expense as incurred, but were not classified as research and
      development expenses. In January 2004, we substantially completed development
      and began marketing our services. Hence, there were no expenses recorded to
      research and development in the years ended December 31, 2006 and December
      31,
      2005.




**Liquidity
      and Capital Resources**




Our
      financial statements were prepared using principles applicable to a going
      concern, which contemplate the realization of assets and liquidation of
      liabilities in the normal course of business. We had $4,925,571 in cash and
      cash
      equivalents at December 31, 2006. In the year ended December 31, 2006, we used
      $5,244,238 to fund our operations. Our working capital at December 31, 2006
      was
      $4,535,480. 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.
      Primarily as a result of our continuing losses, our independent registered
      public accounting firm has included in its report for the year ended December
      31, 2006 an explanatory paragraph expressing substantial doubt about our ability
      to continue as a going concern. Our ability to continue as a going concern
      is
      contingent upon, among other factors, obtaining financing to support our funding
      of our own and First Performance’s continuing losses. If we are not able to
      obtain alternate financing, we may be forced to cease our operations.




29




We
      have
      funded our development activities and operations 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 three private
      financings, short-term borrowings and the proceeds from the sale of our common
      stock in our initial public offering. Our working capital has come from
      $2,200,000 in proceeds from 2003 and 2004 private placement financings,
      $3,095,000 in private debt financings in 2005, $3,689,750 in the private
      financings in 2006 and $10,655,782 in net proceeds from our 2006 initial public
      offering, as well as limited revenues generated from licensing our
      system.




On
      March
      4, 2005, we entered into a non-binding letter of intent with an investment
      banking firm to explore the possibility of raising additional capital in the
      public equity markets. On January 20, 2006, we entered into an agreement with
      a
      second investment banking firm to be placement agent for a private debt
      financing. Subsequent to that date, this second firm was engaged to be
      co-underwriter for a then-potential initial public offering (“IPO”). On March
      10, 2006, we entered into an agreement with an investment banking firm to serve
      as a co-placement agent for this private financing. On December 31, 2005, we
      filed a Registration Statement on Form SB-2 and, on December 9, 2005, filed
      Amendment No. 1 to the Registration Statement on Form SB-2/A with the Securities
      and Exchange Commission (“SEC”). On February 10, 2006, we withdrew the
      Registration Statement on Form SB-2 and recorded terminated offering costs
      of
      $736,037 for the year ended December 31, 2005. On July 21, 2006, we filed a
      new
      Registration Statement on Form SB-2, and, on September 13, 2006, filed Amendment
      No. 1 to the Registration Statement on Form SB-2/A with the SEC. This
      registration statement was subsequently amended on October 24, 2006, and
      declared effective by the SEC on November 1, 2006.





Effective
      August 24, 2006, we engaged EKN Financial Services, Inc. as the new managing
      underwriter of our then-potential IPO. Maxim Group LLC, the previous managing
      underwriter, agreed to participate as a co-underwriter, underwriting and placing
      up to 50% of the shares offered in our then-potential IPO.





On
      November 6, 2006, we completed an IPO, pursuant to which we sold 2,500,000
      shares of common stock at $5.00 per share, raising gross proceeds of
      $12,500,000. EKN Financial Services, Inc. acted as the managing underwriter
      and
      National Securities Corporation, Joseph Stevens & Company, Inc. and Maxim
      Group LLC acted as co-underwriters. At the same time we commenced its IPO,
      it
      registered for resale by selling stockholders 2,483,819 shares of common stock
      issuable upon conversion of convertible notes or exercise of warrants. We will
      not receive any of the proceeds from the sale of shares of its common stock
      by
      the selling stockholders.





After
      deducting underwriting discounts and expenses and offering-related expenses,
      the
      IPO resulted in net proceeds of approximately $10,655,782. After the repayment
      of approximately $3,650,000 in interest and a portion of the remaining principal
      of our outstanding notes and convertible notes, our net cash received was
      approximately $7,000,000. We also issued to the underwriters an over-allotment
      option to purchase 375,000 shares of common stock at $4.60 per share, which
      was
      not exercised and has now expired. In connection with the IPO, an agreed-upon
      portion of our convertible notes automatically converted into 986,605 shares
      of
      our common stock.





We
      used
      $5,244,238 of cash in funding operating activities during the year ended
      December 31, 2006, as compared to $2,152,949 during the year ended December
      31,
      2005. Our cash needs will grow as we meet our compensation obligations for
      sales, accounting and customer support staff for our core internet operating
      company. Although we expect our recently-acquired collection agency subsidiary
      to generate positive cash flows in the near future, it is a distressed company
      which has lost an aggregate of approximately $6 million in the past two years.
      We believe our management will turn the subsidiary’s operations around, but in
      the near term it may be a drain on cash resources. Of the anticipated operating
      expenses that we expect to incur in both operating areas, more than half will
      be
      salary and compensation expense related to current employees. Also significant
      will be the expense of legal, audit and consulting services to meet the
      requirements of Sarbanes Oxley legislation. While our web hosting arrangements
      include significant excess capacity at this time, as our client base grows,
      we
      may need to add additional web space to accommodate this growth, and incur
      corresponding expense. This additional web hosting expense will not be
      significant; however, we will also have to add to staff to provide our planned
      levels of customer support. In addition, we will incur additional sales and
      marketing expense to grow our customer base as well as travel and other expenses
      to service our customer base.




We
      also
      anticipate additional demands on cash associated with the ramp up of our
      debt-buying subsidiary. Before we begin to recognize revenue from this
      operation, we will need to invest hundreds of thousands of dollars to purchase
      pools of distressed debt.




30




We
      have
      made certain commitments which require us to make payments going forward.
      AT&T Corp. currently provides us with web hosting on a month to month basis.
      Based on current volumes, we expect to incur expenses over the next few months
      of $15,000 to $18,000 per month. While our web hosting arrangements include
      significant excess capacity at this time, as our client base grows, we will
      need
      to add additional web space to accommodate this growth, and will incur
      corresponding expense. This additional web hosting expense will not be
      significant; however, we will also have to add staff to provide our planned
      levels of client support. These increased web hosting and salary expenses are
      expected to be paid by revenues earned from new clients. We have also entered
      into a non-cancelable, five-year operating lease for our office facilities,
      which will be in effect until July 31, 2010. Aggregate minimum lease payments
      over the 60 months of the lease total $616,452, of which we have prepaid $80,000
      as a deposit. We have, in consideration for our technology license agreement,
      issued stock options and made a commitment to issue additional stock options
      to
      purchase shares of our common stock to the licensors, our two co-chairmen.
      This
      will result in the recognition of royalty fee expense over the term of the
      related patent, but this will not be a cash obligation.




We
      also
      anticipate additional increased costs and cash requirements associated with
      the
      start-up of our debt-buying subsidiary, DRV Capital. We will have to make
      significant capital investments to purchase defaulted consumer debt portfolios
      as part of this line of business.




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 pursuant
      to a Master Loan and Servicing Agreement, dated December 21, 2006, with Sheridan
      Asset Management, LLC, 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, and, once repaid, cannot be
      re-borrowed. Once the notes are repaid and we have been repaid our investment,
      we and Sheridan share the residual collections from the debt portfolios, net
      of
      servicing fees. 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. New advances for portfolio
      purchases under the facility are not available beyond the December 21, 2007
      expiration date. Under the terms of the agreement, we are required to give
      Sheridan the opportunity to fund all of our purchases of distressed consumer
      debt with advances through December 21, 2008.





We
      expect
      that revenues earned from the debt purchase and collection business will develop
      slowly, over several months, beginning from the time we first capitalized DRV
      Capital, in January 2007. As of December 31, 2006, we had no commitments with
      respect to acquisitions of defaulted debt. However, in January 2007, we
      purchased our first two pools of defaulted debt, through DRV Capital’s
      single-purpose subsidiary, EAR Capital. The pools total face value was
      $8,057,116, the purchase price was $607,994, and was funded by borrowings from
      Sheridan in the amount of $547,194.




In
      January of 2007, we purchased a collection agency, First Performance
      Corporation. Because the agency was a distressed company, we expect to incur
      additional cash demands associated with bringing the company current on its
      payables and turning the company around before we are able to realize profits
      from this venture.




**Off-** **b** **alance** **S** **heet** **A** **rrangements**




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, 2006 and 2005. We cannot assure
      you
      that future inflation will not have an adverse impact on our operating results
      and financial condition.




31




**Application
      of C** **ritical** **A** **ccounting** **P** **olicies** **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:




*Going
      Concern*




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 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 we be unable to continue as a going
      concern.  For the year ending December 31, 2006, we
      had substantially no revenues and incurred a net loss of $21,695,665. 
Cash used in operating and investing activities was $5,323,754 for the year
      ended December 31, 2006. 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.




Management
      is actively pursuing additional debt/equity financing and pursuing strategic
      acquisitions.  In January 2007, we acquired the
      outstanding capital stock of First Performance Corporation, an
      accounts receivable management agency, and accordingly, are no longer in the
      development stage as of the date of the acquisition.  In February
      2007, we entered into a non-binding letter of intent with a financing company
      for a $3 million debt financing.  The exact terms of the financing
      have not been determined, nor has the lender made a binding commitment to the
      financing transaction. The parties are currently performing their respective
      due
      diligence procedures.  Therefore, there is no assurance that this
      transaction will be successful. Management believes that we will be successful
      in obtaining additional financing and successfully integrate our acquisition
      to
      a level of profitability, however, we cannot assure you that we will be able
      to
      do so.  To the extent that we are  unsuccessful, we may need to
      curtail our operations.




*Research
      and Development*




We
      follow
      the guidelines of SFAS No. 86, “Accounting for the Costs of Computer Software to
      be Sold, Leased, or Otherwise Marketed”, and SFAS No. 2, “Accounting for
      Research and Development Costs.” Research and development expenses in the three
      months ended March 31, 2004 and in the period since inception consisted
      primarily of payroll and related expenses and consulting fees incurred in
      connection with employees and consultants involved in the development of our
      online software product prior to establishing technological feasibility. In
      January 2004, we substantially completed the development of and began marketing
      our online product. In our management’s opinion, the software became available
      for general release concurrent with the establishment of technological
      feasibility. As a result, no software development costs were capitalized.
      Commencing February 2004, costs incurred in connection with the operation,
      maintenance, modification, and customization of our product have been charged
      to
      expense as incurred, and are neither capitalized nor classified as research
      and
      development expenses.




*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.




32




*Income
      Taxes*




In
      accordance with SFAS No. 109, “Accounting for Income Taxes,” we use an asset and
      liability approach for financial accounting and reporting for income taxes.
      The
      basic principles of accounting for income taxes are: (a) a current tax liability
      or asset is recognized for the estimated taxes payable or refundable on tax
      returns for the current year; (b) a deferred tax liability or asset is
      recognized for the estimated future tax effects attributable to temporary
      differences and carryforwards; (c) the measurement of current and deferred
      tax
      liabilities and assets is based on provisions of the enacted tax law and the
      effects of future changes in tax laws or rates are not anticipated; and (d)
      the
      measurement of deferred tax assets is reduced, if necessary, by the amount
      of
      any tax benefits that, based on available evidence, are not expected to be
      realized. We have had net losses since inception and the resulting deferred
      tax
      asset is offset by a corresponding valuation allowance.




*Revenue
      Recognition*




We
      earned
      revenue during 2006 and since inception from several collection agencies and
      lenders that implemented the our online system. Our preliminary contracts
      provide for revenue based on a percentage of the amount of debt collected from
      accounts submitted on our DebtResolve system. Although other revenue models
      have
      been proposed, most revenue earned to date has been determined using this
      method, and such revenue is recognized when the settlement amount of debt is
      collected by the client. For the early adopters of our system, we waived set-up
      fees and other transactional fees that we now charge. 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 licensing
      fees with transaction fees upon debt settlement.




In
      recognition of the principles expressed in Staff Accounting Bulletin 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
      DebtResolve system and/or, for clients under a licensing arrangement, the
      successful availability of our system to the client’s 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, fixed or percentage success fees, monthly maintenance 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 licensing 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 on the income.




Subsequent
      to December 31, 2006, we initiated operations of our debt buying subsidiary,
      DRV
      Capital LLC. DRV Capital engages 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 Staff of Position 103-3 (“SOP
      103-3”), where the timing and amount of cash flows expected to be collected on
      these pools is reasonably estimable, we will 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 only recently entered into this business, however, we will
      use the cost recovery method until we have evaluated the accuracy of our model.
      Revenue will be earned by our debt buying subsidiary under the cost recovery
      method, when the amount of debt collected exceeds the discounted price paid
      for
      the pool of debt. When our management has determined that they are able to
      predict cash flows with some reliability, we will adopt the income accrual
      method, described above, recognizing the deal revenues on a level yield method
      over the expected ownership period of the pool.




33




*Stock-based
      Compensation*




Prior
      to
      January 1, 2006, stock options issued to employees under stock-based
      compensation plans were accounted for under the recognition and measurement
      principles of Accounting Principles Board Opinion No. 25, Accounting for Stock
      Issued to Employees, and Related Interpretations. No stock-based employee
      compensation cost was reflected in the net loss for the year ended December
      31,
      2005, as all options granted under these plans had an exercise price equal
      to
      the market value of the underlying common stock, as determined by the our board
      of directors, on the date of grant. SFAS No. 148, “Accounting for Stock-Based
      Compensation- Transition and Disclosure - an Amendment of Financial Accounting
      Standards Board (“FASB”) Statement No. 123, required the disclosure of the
      effect on net loss and loss per share had we applied the provisions of FASB
      Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based
      employee compensation. Since prior to our initial public offering in November
      2006 there was no public market for our common stock, we did not consider
      volatility in estimating the value of each option; we followed the minimum
      value
      method. The minimum value of each option granted to employees was estimated
      as
      of the grant date using the Black-Scholes option pricing model with the
      following assumptions: dividend yield of 0%, expected volatility of 0%,
      risk-free interest rates for individual options ranging from 1.66% to 4.12%,
      and
      an expected life of each option, ranging from three to ten years. The estimated
      minimum value of the options granted is amortized on a pro forma basis over
      the
      option vesting periods. We accounted for stock-based compensation issued to
      non-employees using the fair value method.




Beginning
      on January 1, 2006, the we account for stock options issued under stock-based
      compensation plans under the recognition and measurement principles of SFAS
      No.
      123 - Revised. We have adopted the modified prospective transition method and
      therefore, have not restated prior periods’ results. Under this transition
      method, there was no impact to the condensed financial statements for the year
      ended December 31, 2006 on net loss or basic and diluted net loss per share
      for
      options granted in previous periods, as all options previously granted to
      employees vested prior to adoption. During the year ended December 31, 2006,
      we
      issued options to purchase 2,668,434 shares of common stock to employees and
      two
      consultants. We also issued 12,000 shares of restricted stock to a consultant.
      Total stock-based compensation expense related to these grants for the year
      ended December 31, 2006 amounted to $11,149,266, of which $2,839,563 related
      to
      options granted to employees, $1,481,250 related to options and stock granted
      to
      consultants and directors, and $6,828,453 related to options granted to our
      co-chairmen in connection with a licensing agreement. 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 with the following assumptions:
      dividend yield of 0%, expected volatility of 97%, risk-free interest rates
      for
      individual options ranging from 4.52% to 4.86%, and an expected life of each
      option, ranging from three to ten years. 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, 2006,
      total unrecognized employee compensation cost amounted to $395,726.




**Recently** **-i** **ssued** **A** **ccounting** **P** **ronouncements**




In
      October 2005, the FASB issued FASB Staff Position (“FSP”) FAS 123(R)-2,
“Practical Accommodation to the Application of Grant Date as Defined in FASB
      Statement No. 123(R)”, which provides clarification of the concept of mutual
      understanding between employer and employee with respect to the grant date
      of a
      share-based payment award. This FSP provides that a mutual understanding of
      the
      key terms and conditions of an award shall be presumed to exist on the date
      the
      award is approved by management if the recipient does not have the ability
      to
      negotiate the key terms and conditions of the award and those key terms and
      conditions will be communicated to the individual recipient within a relatively
      short time period after the date of approval. This guidance was applicable
      upon
      the initial adoption of SFAS 123(R). The adoption of this pronouncement did
      not
      have an impact on our consolidated financial position, results of
      operations, or cash flows.





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments” (“SFAS 155”), which eliminates the exemption from
      applying SFAS 133 to interests in securitized financial assets so that similar
      instruments are accounted for similarly regardless of the form of the
      instruments. SFAS 155 also allows the election of fair value measurement at
      acquisition, at issuance, or when a previously recognized financial instrument
      is subject to a remeasurement event. Adoption is effective for all financial
      instruments acquired or issued after the beginning of the first fiscal year
      that
      begins after September 15, 2006. Early adoption is permitted. The adoption
      of SFAS 155 is not expected to have a material effect on our financial position,
      results of operations or cash flows.





34




In
      March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
      Financial Assets” (“SFAS 156”), which requires all separately recognized
      servicing assets and servicing liabilities be initially measured at fair value.
      SFAS 156 permits, but does not require, the subsequent measurement of servicing
      assets and servicing liabilities at fair value. Adoption is required as of
      the
      beginning of the first fiscal year that begins after September 15, 2006.
      Early adoption is permitted. The adoption of SFAS 156 is not expected to have
      a
      material effect on our financial position, results of operations or cash flows.





In
      July
      2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
      in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
      clarifies the accounting and reporting for uncertainties in income tax law.
      FIN
      48 prescribes a comprehensive model for the financial statement recognition,
      measurement, presentation and disclosure of uncertain tax positions taken or
      expected to be taken in income tax returns. FIN 48 shall be effective for fiscal
      years beginning after December 15, 2006. Earlier adoption is permitted as of
      the
      beginning of an enterprise’s fiscal year, provided the enterprise has not yet
      issued financial statements, including financial statements for any interim
      period for that fiscal year. The cumulative effects, if any, of applying this
      interpretation will be recorded as an adjustment to retained earnings as of
      the
      beginning of the period of adoption. We have commenced the process of evaluating
      the expected effect of FIN 48 on our financial statements and are currently
      not
      yet in a position to determine such effects.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      No. 157”).  SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value and expands disclosure of fair value measurements. 
SFAS No. 157 applies under other accounting pronouncements that require or
      permit fair value measurements and accordingly, does not require any new fair
      value measurements.  SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007.  We are in
      the process of evaluating the impact of the adoption of SFAS No. 157 will have
      on our results of operations and financial condition.





In
      September 2006, the staff of the SEC issued Staff Accounting Bulletin No. 108
      (“SAB 108”) which provides interpretive guidance on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement. SAB 108 is effective for fiscal years
      ending on or after November 15, 2006. Adoption of SAB 108 did not have a
      material impact on our consolidated financial position, results of operations
      or
      cash flows.




In
      November 2006, the EITF reached a final consensus in EITF Issue 06-6 “Debtor’s
      Accounting for a Modification (or Exchange) of Convertible Debt Instruments”
(“EITF 06-6”). EITF 06-6 addresses the modification of a convertible debt
      instrument that changes the fair value of an embedded conversion option and
      the
      subsequent recognition of interest expense for the associated debt instrument
      when the modification does not result in a debt extinguishment pursuant to
      EITF
      96-19 , “Debtor’s Accounting for a Modification or Exchange of Debt
      Instruments”. The consensus should be applied to modifications or exchanges of
      debt instruments occurring in interim or annual periods beginning after November
      29, 2006. We do not expect the adoption of EITF 06-6 to have a material
      impact on our consolidated financial position, results of operations or cash
      flows.




In
      November 2006, the FASB ratified EITF Issue No. 06-7, “Issuer’s Accounting for a
      Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
      the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
      No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF
      06-7”). At the time of issuance, an embedded conversion option in a convertible
      debt instrument may be required to be bifurcated from the debt instrument and
      accounted for separately by the issuer as a derivative under FAS 133, based
      on
      the application of EITF 00-19. Subsequent to the issuance of the convertible
      debt, facts may change and cause the embedded conversion option to no longer
      meet the conditions for separate accounting as a derivative instrument, such
      as
      when the bifurcated instrument meets the conditions of Issue 00-19 to be
      classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion
      option previously accounted for as a derivative under FAS 133 no longer meets
      the bifurcation criteria under that standard, an issuer shall disclose a
      description of the principal changes causing the embedded conversion option
      to
      no longer require bifurcation under FAS 133 and the amount of the liability
      for
      the conversion option reclassified to stockholders’ equity. EITF 06-7 should be
      applied to all previously bifurcated conversion options in convertible debt
      instruments that no longer meet the bifurcation criteria in FAS 133 in interim
      or annual periods beginning after December 15, 2006, regardless of whether
      the
      debt instrument was entered into prior or subsequent to the effective date
      of
      EITF 06-7. Earlier application of EITF 06-7 is permitted in periods for which
      financial statements have not yet been issued. We are currently
      evaluating the impact of this guidance on its consolidated financial position,
      results of operations or cash flows.




35




In
      December 2006, the FASB issued FSP EITF 00-19-2 “Accounting for
      Registration Payment Arrangements” (“FSP EITF 00-19-2”) which specifies that the
      contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement should be separately
      recognized and measured in accordance with FASB Statement No. 5,
“Accounting for Contingencies.”  Adoption of FSP EITF 00-19-2 is required
      for fiscal years beginning after December 15, 2006. We are currently
      evaluating the expected effect of FSP EITF 00-19-2 on our consolidated financial
      statements and are currently not yet in a position to determine such
      effects.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities” (“SFAS 159”), to permit all
      entities to choose to elect, at specified election dates, to measure eligible
      financial instruments at fair value. An entity shall report unrealized gains
      and
      losses on items for which the fair value option has been elected in earnings
      at
      each subsequent reporting date, and recognize upfront costs and fees related
      to
      those items in earnings as incurred and not deferred. SFAS 159 applies to
      fiscal years beginning after November 15, 2007, with early adoption permitted
      for an entity that has also elected to apply the provisions of SFAS 157,
“Fair Value Measurements.” An entity is prohibited from retrospectively applying
      SFAS 159, unless it chooses early adoption. SFAS 159 also applies to eligible
      items existing at November 15, 2007 (or early adoption date).  We are
      currently in the process of evaluating the impact of the adoption of SFAS 159
      on
      our results of operations and financial condition.





**ITEM
      7. Financial statements**




Our
      audited financial statements for the year ended December 31, 2006 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**




**Evaluation
      of 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 effective,
      as of December 31, 2006, 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 SEC 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**




There
      was
      no change in our internal control over financial reporting identified in
      connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of
      the Exchange Act that occurred during the period covered by this report that
      has
      materially affected, or is reasonably likely to materially affect, our internal
      control over financial reporting.





Subsequent
      to December 31, 2006, Debt Resolve acquired First Performance Corporation.
      First
      Performance is a collection agency which operates two branch locations and
      employs approximately 100 people. The books and records of the acquired company
      were 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 will be
      consolidated into ours and included in our Form 10-QSB for the period ended
      March 31, 2007.





36




**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 April 10,
      2007:




**Name**
            
            **Age**
            
            **Position**James
                D. Burchetta
            
            57
            
            Co-Chairman
                of the Board, Chief Executive OfficerCharles
                S. Brofman
            
            50
            
            Co-Chairman
                of the BoardRichard
                G. Rosa
            
            40
            
            President,
                Chief Technology OfficerKatherine
                A. Dering
            
            59
            
            Chief
                Financial Officer, Secretary, TreasurerLawrence
                E. Dwyer, Jr.
            
            63
            
            DirectorWilliam
                M. Mooney
            
            67
            
            DirectorAlan
                M. Silberstein
            
            59
            
            DirectorJeffrey
                Bernstein
            
            47
            
            DirectorMichael
                G. Carey
            
            53
            
            DirectorSandra
                L. Styer
            
            58
            
            Senior
                Vice President and Director of Client ServicesHoward
                C. Knauer
            
            59
            
            Senior
                Vice President and Director of Collection Strategies andPresident
                of our debt-buying subsidiary, DRV Capital LLC





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. Burchetta** has been
      our Co-Chairman of the Board, President and Chief Executive Officer since
      January 2003. Mr. Burchetta 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. Brofman** has been
      our non-executive Co-Chairman of the Board since January 2003. Mr. Brofman
      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. 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.




37




**Richard
      G. Rosa** has been
      our Senior Vice President and Chief Technology Officer since February 2003,
      and
      our President and Chief Technology Officer since December 2006. Mr. Rosa served
      as the Senior Director of Technology for Scholastic Inc.’s Software and Internet
      Group from November 2000 to May 2002. Mr. Rosa was responsible for all
      website-related application development, networking and hosting infrastructure
      and operations. Mr. Rosa was previously Chief Technology Officer of
      BabyGear.com (a Bertelsmann venture capital investment), responsible for the
      technical integration of iBaby.com, as well as improving all facets of
      transaction processing and warehouse data management and fulfillment, from
      July
      to November 2000. Mr. Rosa was also Director of Online Operations at
      1800Flowers.com, where he oversaw all phases of applications development, web
      hosting infrastructure and technical operations, from early 1999 to June 2000.
      Mr. Rosa has been involved with technology and Internet service businesses
      since February 1995, when he founded Netamorphasis Corp., a provider of
      application development and Internet-based infrastructure consulting services.
      Mr. Rosa received a B.A. degree from the City University of New York,
      Queens College.




**Katherine
      A. Dering** has been
      our Chief Financial Officer since April 2005 and our Treasurer and Secretary
      since July 2005. Ms. Dering was, from 1994 to March 2003, Senior Vice President
      and Chief Financial Officer of Provident Bank, where she provided financial
      and
      strategic leadership as part of the bank’s senior management team. Between April
      2003 and April 2005, Ms. Dering was an independent financial consultant. Prior
      to 1994, Ms. Dering was Senior Vice President and Chief Financial Officer at
      Great Country Bank, Vice President and Divisional Controller at First American
      Bank of New York, and First Vice President, Accounting Operations of Dollar
      Dry
      Dock Bank. Ms. Dering received a B.A. degree from Le Moyne College, M.A. degrees
      from the State University of New York at Buffalo and Manhattanville College,
      and
      an M.B.A. from the University of Minnesota with a concentration in accounting
      and economics.




**Lawrence
      E. Dwyer, Jr.** has been
      a member of our board of directors since February 2003. Mr. Dwyer is the former
      President of The Westchester County Association Inc., having served from 1994
      to
      2003, and is active in local, state and national politics. The Westchester
      County Association is a member of the Business Council of New York State and
      its
      membership includes many Fortune 500 companies.  Mr. Dwyer has been the
      Chairman of the Westchester, Nassau & Suffolk Municipal Officials
      Association, New York State Ethics Advisory Board. His other board memberships
      have inclluded  the Lubin School of Business at Pace University, The
      Westchester Land Trust, Westchester Business Accelerator, Transportation
      Management Organization, The Lyndhurst Council, The Westchester Housing Fund
      and
      Westchester Community College Foundation. Mr. Dwyer received an M.A. degree
      in
      education and an M.A. degree in administration from Teachers College, Columbia
      University.




**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 and also serves as a Senior
      Vice
      President at Independence Community Bank. 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 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.




**Alan
      M. Silberstein** has been
      a member of our board of directors since June 2003. Mr. Silberstein served
      as
      our President and Chief Operating Officer from June 2003 until October 2004.
      Mr.
      Silberstein is currently President of Silco Associates, a management advisory
      firm in the financial services industry. Alan has worked in the financial
      services sector for more than 30 years, including as President and Chief
      Executive Officer of Western Union, a subsidiary of First Data Corporation.
      He
      served as Chairman and CEO of Claim Services at Travelers Property Casualty
      Insurance. He headed consumer banking at Midlantic Bank (now PNC) and Chemical
      Bank (now JPMorgan Chase) with executive experience in consumer credit,
      technology, finance and operations. Mr. Silberstein serves as a director of
      Global Payments Inc., and of Capital Access Network, Inc. He also serves on
      numerous university-related advisory boards. He is a member of the Council
      on
      Foreign Relations and also of Business Executives for National Security. He
      holds a B.S. degree in engineering from Columbia University and an M.B.A. from
      Harvard Business School.




38




**Jeffrey
      S. Bernstein** has been
      a member of our board of directors since August 2006. Mr. Bernstein has 28
      years
      of financial services industry experience, currently serving as CEO of Stratagem
      Portfolio Services, Inc., a San Rafael, CA-based analytics, modeling and
      strategy consulting firm that provides industry-leading lifecycle risk and
      collections management capabilities to credit card issuers, consumer and small
      business lenders, retailers, telecommunications and utilities companies, and
      collection agencies and holders of distressed debt portfolios in markets in
      North America, Europe and the Pacific rim. Mr. Bernstein was formerly a Global
      Solutions Leader with MasterCard Worldwide, managing a consulting practice
      that
      specialized in lifecycle risk management and collections. Prior to MasterCard,
      he was the founder and CEO of Acadia Consulting Group, and served in roles
      as a
      senior consultant and strategic alliance manager with Fair Isaac Corporation.
      Mr. Bernstein has also served in a number of senior executive roles within
      banking and financial services. Mr. Bernstein received a B.A. degree from Utica
      College of Syracuse University.




**Michael
      G. Carey** has been
      a member of our board of directors since February 2007. Mr.
      Carey
      is a lawyer, and has over 20 years of experience in economic development,
      finance, banking, and government relations. From January 2005 to the present,
      he
      has served as the Founding Partner of The Carey Group, LLC, a consulting and
      economic development services firm which also provides government relations
      services. In addition, from April 2004 to December 2006, Mr. Carey served as
      Senior Vice President and General Counsel of Cybersettle, Inc. Prior to joining
      Cybersettle, he was a partner at Plunkett & Jaffe, P.C. from September 2002
      to March 2004. Prior to starting The Carey Group, Mr. Carey served as a Special
      Advisor to New York City Mayor Michael R. Bloomberg from January 2002 to August
      2002, focusing on special projects, including New York City’s takeover of the
      Board of Education, as well as overseeing the School Construction Authority.
      From May 1999 to January 2002, Mr. Carey was President of the New York City
      Economic Development Corporation (“EDC”) during the administration of Mayor
      Rudolph W. Giuliani. Mr. Carey also served as the EDC’s First Executive Vice
      President and General Counsel from 1997 to 1999. Mr. Carey oversaw the economic
      development and revitalization of a number of different projects. While at
      the
      EDC, Mr. Carey was also chairman of New York City’s Industrial Development
      Agency from 1999 to 2002, where he assisted hundreds of companies and
      not-for-profit organizations in undertaking capital expansions, through bond
      financing and/or tax benefits. Prior to joining the EDC, Mr. Carey was a
      Managing Director at the investment banking firm Cambridge Partners L.L.C.,
      where he specialized in municipal finance and financial products. Before joining
      Cambridge Partners, he was a partner with the law firm of Whitman Breed Abbott
      & Morgan LLC, where he practiced corporate and commercial litigation. Mr.
      Carey began his career at the law firm of Paul Weiss Rifkind Wharton &
Garrison LLP. Mr. Carey holds a J.D. degree from Fordham University School
      of
      Law and a B.A. degree from the Catholic University of America.




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.




**Key
      Employees**





**Sandra
      L. Styer** **** was
      appointed our Chief Marketing Officer and Director of Consumer Research in
      July
      2003. In September 2005, she was appointed our Senior Vice President and
      Director of Client Services. Ms. Styer has more than 20 years of experience
      in
      management and consumer marketing over a broad range of industries from
      telecommunications to banking.  Between 1999 and April 2002, she served as
      the Director of Marketing for the U.S. branch of MYOB Limited, an international
      software developer, and from May 2002 to June 2003, she was an independent
      marketing consultant.  At American Airlines from 1979 to 1987, she held a
      number of positions in finance and marketing. At American, she led the creation
      of the first Internet reservations and ticket sales service, now known as
      Travelocity. Ms. Styer received a B.A. degree from Indiana University and an
      M.B.A. from Harvard Business School.




**Howard
      C. Knauer** was
      appointed our Senior Vice President and Director of Collection Strategies in
      September 2005 and President of DRV Capital LLC, our debt buying subsidiary,
      in
      June 2006. He previously served as Chairman of our Advisory Board from September
      2004 to August 2005. Mr.
      Knauer served as President and Chief Operating Officer of Receivables Management
      Solutions, Inc. from July 2004 to July 2005.  Prior to that, he managed a
      $2 billion portfolio of purchased debt as a Managing Director for Bear Stearns
      & Co., Inc. from January 2002 to May 2004. Mr. Knauer was a Senior Vice
      President and Collections Manager for Fleet Credit Card Services from April
      1996
      to July 2001.  He was Senior Vice President of Marketing/Operations at
      National Credit Services Corporation from March 1995 to March 1996, and Senior
      Vice President/Credit Policy Manager at Metropolitan Federal Savings Bank in
      St.
      Paul, Minnesota from July 1994 to January 1995.  From 1992 to 1994 he
      served as Vice President for Associated Bureaus, Inc., a national collections
      agency.  Between 1975 and 1989 Mr. Knauer held positions as Vice President,
      Consumer Recovery Manager at Chemical Bank, Vice President, Credit Operations
      at
      American Express Travel Related Services, and Vice President at Citibank,
      N.A.  Mr. Knauer received a B.A. degree from The City College of the City
      University of New York and an M.B.A. in finance from the Barnard M. Baruch
      College of the City of New York.




39




**Additional
      Information about our Board and its Committees**




We
      continue to monitor the rules and regulations of the SEC and the American Stock
      Exchange to ensure that a majority of our board remains composed of
“independent” directors. All of our directors and each of the director nominees,
      except James D. Burchetta, Charles S. Brofman and Alan M. Silberstein are
“independent” as defined in Section 121A of the American Stock Exchange
      Company Guide.




During
      2006, 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 the date of this report consists of Lawrence E. Dwyer, Jr., William
      M. Mooney, Jr., and Jeffrey S. Bernstein, each of whom is an independent
      director under the American Stock Exchange’s listing standards. 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,




·
            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 the date of this report consists of Messrs. Dwyer, Mooney and Bernstein,
      each of whom 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.





40




**Nominations
      and Governance Committee.** In
      June
      2005, we established a nominations and governance committee of the board of
      directors, which as of the date of this report consists of Messrs. Dwyer, Mooney
      and Bernstein, each of whom 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** **E** **xperts
        on** **A** **udit** **C** **ommittee**
  The
        audit
        committee will at all times be composed exclusively of “independent directors”
who are “financially literate” as defined under the American Stock Exchange
        listing standards. The American Stock Exchange listing standards define
“financially literate” as being able to read and understand fundamental
        financial statements, including a company’s balance sheet, income statement and
        cash flow statement.
  In
        addition, we must certify to the American Stock Exchange that 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 American Stock Exchange’s definition of financial
        sophistication and also qualifies as an “audit committee financial expert,” as
        defined under rules and regulations of the SEC.
  **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.
  41
  **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 is presently employed as our Chief Executive
        Officer.
  **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 complied
        with Section 16(a) of the Exchange Act for the year ended December 31,
        2006.
 
 **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 two 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,
        2006:
 Name
                    and Principal Position
                
                Year
                
                Salary
                  ($)
                
                Bonus
                  ($)
                
                Stock
                    Awards
                  ($)
                
                Option
                    Awards
                  ($)
                
                Non-Equity
                    Incentive Plan Compensa-tion
                  (4)
                
                Nonqualified
                    Deferred Compen-sation Earnings
                  ($)
                
                All
                    Other Compen-sation ($)
                
                Total
                    ($)(a)
                
                (b)
                
                (c)
                
                (d)
                
                (e)
                
                (f)
                
                (g)
                
                (h)
                
                (i)
                
                (j)James
                    D. Burchetta
                  
                  Chief
                    Executive Officer, Co-Chairman of the Board (1) (2)
                
                2006
                  
                  2005
                
                250,000
                  
                  224,787
                
                150,000
                  
                  —
                
                —
                  
                  —
                
                —
                  
                  —
                
                —
                  
                  —
                
                —
                  
                  —
                
                8,541
                  
                  —
                
                408,541
                  
                  224,787Katherine
                    A. Dering
                  
                  Chief
                    Financial Officer, Secretary, Treasurer
                
                2006
                  
                  2005
                
                150,000
                  
                  91,450
                
                100,000
                  
                  —
                
                —
                  
                  —
                
                563,000
                  
                  —
                
                —
                  
                  —
                
                —
                  
                  —
                
                7,875
                  
                  15,750
                
                820,875
                  
                  107,200Richard
                    G. Rosa
                  
                  President,
                    Chief Technology Officer
                
                2006
                  
                  2005
                
                200,000
                  
                  193,271
                
                100,000
                  
                  —
                
                —
                  
                  —
                
                1,238,500
                  
                  —
                
                —
                  
                  —
                
                —
                  
                  —
                
                10,000
                  
                  —
                
                1,548,500
                  
                  —
  
 (1)
            Mr.
                Burchetta has an employment agreement with us, and under the terms
                of his
                amended employment agreement, no salary payments were made to Mr.
                Burchetta during the first three months of the year ended December
                31,
                2005. We recorded compensation expense and a capital contribution
                in the
                first quarter of 2005, 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. Beginning April
                1,
                2005, Mr. Burchetta began to draw a salary.  42
  (2)
            This
                table excludes stock options granted to Mr. Burchetta pursuant to
                a
                licensing agreement with him and our other co-chairman. 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.  **Outstanding
        Equity Awards at Fiscal Year-End**
  The
        following table summarizes equity awards outstanding at December 31, 2006
        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
                  
                  Chief
                    Executive Officer, Co-Chairman of the Board (1)
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —Katherine
                    A. Dering
                  
                  Chief
                    Financial Officer, Secretary, Treasurer
                
                50,000
                  100,000
                
                —
                
                —
                
                $5.00
                  $5.00
                
                7/6/2011
                  11/1/2011
                
                —
                
                —
                
                —
                
                —Richard
                    G. Rosa
                  
                  President,
                    Chief Technology Officer (2)
                
                50,000
                  50,000
                  230,000
                
                —
                
                50,000
                    (a)
                
                $5.00
                  $5.00
                  $5.00
                
                12/1/2007
                  8/31/2011
                  11/1/2011
                
                —
                
                —
                
                —
                
                —
 
 (1)
            This
                table excludes stock options granted to Mr. Burchetta pursuant to
                a
                licensing agreement with him and our other co-chairman. 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.  43
 (2)
            Mr.
                Rosa holds stock options to purchase 50,000 shares of our common
                stock
                that vest on August 31, 2007 and expire on August 31, 2011.  **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
        through July 2008. 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 $224,787 and $150,000 for the years ended December 31,
        2005
        and 2004, respectively. However, Mr. Burchetta waived the entire amount of
        his
        compensation during 2004 as well as during 2003.
  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.
  In
        addition to the agreement above, we had entered into employment agreements
        with
        Katherine A. Dering, our Chief Financial Officer, Treasurer and Secretary,
        and
        Richard G. Rosa, our President and Chief Technology Officer. Under the
        employment agreements with Ms. Dering and Mr. Rosa, which had terms that
        expired
        on August 1, 2006 and February 23, 2006, respectively, they received an annual
        salary of $150,000 and $200,000, respectively. The employment agreements
        with
        Ms. Dering and Mr. Rosa require the full-time services of such employees.
        The
        employment agreement with Ms. Dering provides that if her position is eliminated
        due to a merger or other business combination, we will provide her with a
        severance payment equal to one month of compensation and benefits for every
        month of employment with us through the elimination date, up to a maximum
        of 12
        months, and all stock options previously granted to her will immediately
        vest
        and remain exercisable for their full term. The employment agreement with
        Mr.
        Rosa does not have any change of control provisions. Though these employments
        agreements have expired, Ms. Dering and Mr. Rosa continue to serve under
        the
        terms of the agreements under an informal monthly arrangement.
  44
  Each
        of
        the employment agreements with Mr. Burchetta, Ms. Dering and
        Mr. Rosa also contains 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.
 
 Sandra
        L.
        Styer, our Senior Vice President and Director of Client Services, and Howard
        C.
        Knauer, our Senior Vice President and Director of Collection Strategies and
        President of DRV Capital LLC, receive annual salaries of $150,000 and $180,000,
        respectively, as part of our “employee at will” arrangements with each of
        them.
 
 **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, 2006, options to purchase 380,000 shares of stock were
        granted to our directors.
  *Employee
        Director Compensation.* Directors
        who are employees of Debt Resolve, Inc. 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.
 
 **Director
        Compensation**
  Name
                
                Fees
                    Earned or Paid in Cash ($)
                
                Stock
                    Awards
                  ($)
                
                Option
                    Awards
                  ($)
                
                Non-Equity
                    Incentive Plan Compensa-tion
                  ($)
                
                Nonqualified
                    Deferred Compen-sation Earnings
                  ($)
                
                All
                    Other Compen-sation ($)
                
                Total
                    ($)(a)
                
                (b)
                
                (e)
                
                (f)
                
                (g)
                
                (h)
                
                (i)
                
                (j)Charles
                    S. Brofman (1)
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —Jeffrey
                    S. Bernstein
                
                —
                
                —
                
                75,200
                
                —
                
                —
                
                —
                
                75,200Michael
                    G. Carey
                
                —
                
                —
                
                61,600
                
                —
                
                —
                
                —
                
                61,600Lawrence
                    E. Dwyer, Jr.
                
                —
                
                —
                
                188,000
                
                —
                
                —
                
                —
                
                188,000William
                    M. Mooney, Jr.
                
                —
                
                —
                
                1,128,000
                
                —
                
                —
                
                —
                
                1,128,000Alan
                    M. Silberstein
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —
                
                —
  (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.
 **ITEM
        11. Security ownership of certain beneficial owners and
        management**
 
 The
        table
        below sets forth the beneficial ownership of our common stock, as of April
        12,
        2007, by:
 
 ·
            all
                of our directors and executive officers, individually, 
 45
 ·
            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 6,675,263 shares
        of
        our common stock outstanding as of April 12, 2007, 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 April 12, 2007 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.,
        707 Westchester Avenue, Suite L7, White Plains, New York 10604.
 
 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 owned**James
                  D. Burchetta
              
              Co-Chairman
                  of the Board, Chief Executive Officer
              
              1,483,707
              (1)
              
              20.3%Charles
                  S. Brofman
              
              Co-Chairman
                  of the Board
              
              1,833,943
              (2)
              
              25.1%Richard
                  Rosa
              
              President,
                  Chief Technology Officer
              
              380,000
              (3)
              
              5.6%Katherine
                  A. Dering
              
              Chief
                  Financial Officer, Secretary, Treasurer
              
              150,000
              (4)
              
              2.3%Lawrence
                  E. Dwyer, Jr.
              
              Director
              
              132,000
              (5)
              
              2.0%William
                  H. Mooney
              
              Director
              
              477,365
              (6)
              
              6.9%Alan
                  M. Silberstein
              
              Director
              
              302,000
              (7)
              
              4.5%Jeffrey
                  S. Bernstein
              
              Director
              
              10,000
              (8)
              
              *Michael
                  G. Carey
              
              Director
              
              10,000
              (9)
              
              *All
                  directors and executive
                officers
                  as a group (9 persons)
              
              
              
              4,779,515
              
              
              49.8%
 
 *  Denotes
        less than 1%.
  (1)
              Includes
                  52,493 shares of common stock issuable upon the exercise of warrants
                  and
                  stock options to purchase 758,717 shares of common stock.
  (2)
              Includes
                  52,658 shares of common stock issuable upon the exercise of warrants
                  and
                  stock options to purchase 758,717 shares of common stock. Also
                  includes
                  800,000 shares held by Arisean Capital Ltd., a corporation controlled
                  by
                  Mr. Brofman.
  (3)
              Includes
                  stock options to purchase 330,000 shares of common stock. Excludes
                  stock
                  options to purchase 50,000 shares of common stock that vest on
                  August 31,
                  2007.
  46
  (4)
              Consists
                  of stock options to purchase 150,000 shares of common stock.
  (5)
              Includes
                  stock options to purchase 50,000 shares of common stock.
  (6)
              Includes
                  30,717 shares of common stock issuable upon the exercise of warrants
                  and
                  stock options to purchase 403,500 shares of common
                  stock.
  (7)
              Includes
                  stock options to purchase 300,000 shares of common
                  stock.
  (8)
              Consists
                  of stock options to purchase 10,000 shares of common stock. Excludes
                  stock
                  options to purchase 10,000 shares of common stock that vest on
                  August 13,
                  2007.
  (9)
              Consists
                  of stock options to purchase 10,000 shares of common stock. Excludes
                  stock
                  options to purchase 10,000 shares of common stock that vest on
                  February
                  28, 2008.
  **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. Based
        on
        our common stock outstanding as of December 31, 2006, 639,000 stock options
        are
        authorized for issuance under our 2005 Incentive Compensation Plan and as
        of
        December 31, 2006, and there are outstanding stock options to purchase 261,000
        shares of our common stock.
  The
        following table provides information as of December 31, 2006 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
                
                261,000
                
                $5.00
                
                639,000Equity
                    compensation plans not approved by security holders
                
                —
                
                —
                
                —Total
                
                261,000
                
                $5.00
                
                639,000
  In
        reviewing the foregoing please note:
 
 ·
            The
                first column reflects outstanding stock options to purchase
                261,000 shares of common stock pursuant to our 2005 Incentive
                Compensation Plan which has been approved by our stockholders. 
 ·
            The
                third column reflects 639,000 shares remaining for issuance under our
                2005 Incentive Compensation Plan. 
 47
  **ITEM
        12. Certain relationships and related transactions, and director
        independence**
 
 **Related
        Party Transactions**
  On
        November 6, 2006, pursuant to a licensing agreement with our co-chairmen,
        we
        issued stock options to purchase an aggregate of 1,517,434 shares of our
        common
        stock at $5.00 per share to the co-chairmen. The options have an exercise
        period
        of five years, were valued at $6,828,453, and vested upon issuance. These
        option
        grants were outside of our
        2005
        Incentive Compensation Plan. We
        recorded an expense of $6,828,453 during the year ended December 31, 2006
        related to this issuance.
  To
        assist
        in the preparation of our registration statement and other legal matters,
        primarily related to contracts for potential acquisitions, during the year
        ended
        December 31, 2006 we employed as a consultant an attorney who is a relative
        of
        our Co-Chairman and Chief Executive Officer. Over the course of the year
        ended
        December 31, 2006, we paid this individual consulting fees of approximately
        $35,000.
  **Director
        Independence**
 
 Each
        of
        Lawrence E. Dwyer, Jr., William M. Mooney, Jr., Jeffrey S. Bernstein and
        Michael
        G. Carey is an “independent” director, as such term is defined in Rule
        10A-3(b)(1) under the Exchange Act, and Messrs. Dwyer, Mooney and Bernstein
        serve 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)
  48
  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)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 June 30,
                  2006.
  (2)
              Incorporated
                  herein by reference to Registration Statement on Form SB-2 (File
                  No. 333-135911), filed July 21,
                  2006.
  (3)
              Incorporated
                  herein by reference to Amendment No. 1 to Registration Statement
                  on Form
                  SB-2 (File No. 333-135911), filed September 13,
                  2006.
  (4)
              Incorporated
                  herein by reference to Amendment No. 2 to Registration Statement
                  on Form
                  SB-2 (File No. 333-135911), filed October 24,
                  2006.
  (5)
              Incorporated
                  herein by reference to Current Report on Form 8-K, filed December 28,
                  2006.
 
 **ITEM
        14. Principal accountant fees and services**
  Marcum
        & Kliegman LLP served as our independent auditors for the years ended
        December 31, 2006 and 2005. The firm also performed a reaudit of the years
        ended
        2003 and 2004.
  **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-QSB. The aggregate amount of the audit fees billed by Marcum &
Kliegman 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 $315,895 and $220,000,
        respectively.
  **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 Marcum &
Kliegman LLP in 2006 or 2005.
  **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
        & Kliegman LLP in 2006 was $20,705. No tax fees were billed by Marcum &
Kliegman LLP in 2005.
  **All
        Other Fees**
  No
        other
        fees were billed by our independent auditors in 2006 and 2005.
  **Audit
        Committee**
  The
        members of our audit committee are Messrs. Dwyer, Mooney and Bernstein. 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,
        2006
        with our management. In addition, the audit committee has discussed with
        Marcum
& Kliegman 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 Marcum & Kliegman
        LLP with that firm.
  49
  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-KSB for the year ended December 31, 2006.
  **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.
 
 50
  **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:
         April 16, 2007
 **DEBT
                  RESOLVE, INC.**By:
              /s/ JAMES
                D. BURCHETTAJames
                  D. Burchetta
                Co-Chairman,
                    Chief Executive Officer
                  (principal
                      executive officer)
 By:
              /s/ KATHERINE
                A. DERINGKatherine
                  A. Dering
                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
                James
                  D. Burchetta
              
              Chief
                  Executive Officer,
                Co-Chairman
                    of the Board
                  (principal
                      executive officer)
              
              April
                  16, 2007/s/KATHERINE
                  A. DERING
                Katherine
                    A. Dering
              
              Chief
                  Financial Officer,
                Treasurer
                    and Secretary
                  (principal
                      financial and accounting officer)
              
              April
                  16, 2007/s/CHARLES
                  S. BROFMAN
                Charles
                    S. Brofman
              
              Co-Chairman
                  of the Board
              
              April
                  16, 2007/s/LAWRENCE
                  E. DWYER,
                  JR.
                Lawrence E. Dwyer, Jr.
              
              Director
              
              April
                  16, 2007/s/WILLIAM
                  M. MOONEY,
                  JR.
                William
                    M. Mooney, Jr.
              
              Director
              
              April
                  16, 2007/s/ALAN
                  M. SILBERSTEIN
                Alan
                    M. Silberstein
              
              Director
              
              April
                  16, 2007/s/JEFFREY
                  BERNSTEIN
                Jeffrey
                    Bernstein
              
              Director
              
              April
                  16, 2007/s/MICHAEL
                  G. CAREY
                Michael
                    G. Carey
              
              Director
              
              April
                  16, 2007
 
 51
  **DEBT
        RESOLVE, INC. AND SUBSIDIARIES**
  **INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **Consolidated
          Financial Statements for the years ended December 31, 2006 and 2005 and
          Cumulative from Inception (April 21, 1997) to December 31,
          2006**
 Report
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Balance Sheet as of December 31, 2006
              F-3Consolidated
                  Statements of Operations for the Years Ended December 31, 2006
                  and 2005
                  and Cumulative from Inception (April 21, 1997 to December 31,
                  2006)
              F-4Consolidated
                  Statements of Stockholders’ Equity (Deficiency) Cumulative from Inception
                  (April 21, 1997 to December 31, 2006)
              F-5Consolidated
                  Statements of Cash Flows for the Years Ended December 31, 2006
                  and 2005
                  and Cumulative from Inception (April 21, 1997 to December 31,
                  2006)
              F-7Notes
                  to Consolidated Financial Statements
              F-8
  F-1
  REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To
        the
        Audit Committee of the Board of Directors and Shareholders of Debt Resolve,
        Inc.
 
 We
        have
        audited the accompanying consolidated balance sheet of Debt Resolve, Inc
        and
        Subsidiaries (a development stage company) (the “Company”) as of December 31,
        2006, and the related consolidated statements of operations, stockholders’
equity (deficiency), and cash flows for the years ended December 31, 2006
        and
        2005 and for the period from January 1, 2003 to December 31, 2006 (for which
        the
        statements of operations and cash flows are not presented separately herein).
        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 audits. The financial statements of the Company for the period from
        April
        21, 1997 (inception) to December 31, 2002 were audited by other auditors
        whose
        report, dated March 17, 2003, expressed an unqualified opinion on those
        statements and included an explanatory paragraph regarding the Company’s ability
        to continue as a going concern. The statements for the period from April
        21,
        1997 (inception) to December 31, 2002 reflect a deficit accumulated during
        the
        development stage of $5,742. The other auditors’ report has been furnished to
        us, and our opinion, insofar as it related to the amounts included for such
        prior periods, is based solely on the report of such other
        auditors.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). 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 audits 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 audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, based on our audits and the report of the other auditors, the 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, 2006, and the consolidated results of their operations and their
        cash flows for the years ended December 31, 2006 and 2005 and for the period
        from April 21, 1997 (inception) to December 31, 2006 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,
        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 these matters are also described in Note 2. The
        consolidated financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
  /s/
        Marcum & Kliegman LLP
  New
        York,
        New York
  February
        22, 2007
  F-2
  DEBT
        RESOLVE, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 Consolidated
        Balance Sheet
 December
        31, 2006
  Current
                  assets:Cash
                  and cash equivalents
              
              $
              4,925,571Accounts
                  receivable
              
              
              9,577Prepaid
                  expenses and other current assets
              
              
              90,228Total
                  current assets
              
              
              5,025,376Fixed
                  assets, net
              
              
              179,769Deposits
                  and other assets
              
              
              94,545Total
                  assets
              
              $
              5,299,690Current
                  liabilities:Accounts
                  payable
              
              $
              251,359Accrued
                  expenses
              
              
              238,537Total
                  liabilities
              
              
              489,896Commitments
                  and contingenciesStockholders’
                  equity:Preferred
                  stock, 10,000,000 shares authorized, $0.001 par value, none issued
                  and outstanding
              
              
              —Common
                  stock, 100,000,000 shares authorized, $0.001 par value, 6,504,412
                  issued
                  and outstanding
              
              
              6,504Additional
                  paid-in capital
              
              
              37,498,740Deferred
                  compensation
              
              
              (15,436
              )Deficit
                  accumulated during the development stage
              
              
              (32,680,014
              )Total
                  stockholders’ equity
              
              
              4,809,794Total
                  liabilities and stockholders’ equity
              
              $
              5,299,690
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-3
  DEBT
        RESOLVE, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 Consolidated
        Statements of Operations
  Years
                    ended December 31,
                
                Cumulative
                    from inception (April 21, 1997) to December 31,2006
                
                2005
                
                2006Revenues
                
                $
                98,042
                
                $
                23,599
                
                $
                124,427Costs
                    and expenses:Payroll
                    and related expenses (1)
                
                
                5,524,059
                
                
                1,516,467
                
                
                8,689,808General
                    and administrative expenses (2)
                
                
                3,308,634
                
                
                1,798,099
                
                
                7,898,666Patent
                    licensing expense - related parties (3)
                
                
                6,828,453
                
                
                —
                
                
                6,828,453Waived
                    royalty fees - related parties
                
                
                —
                
                
                —
                
                
                600,000Research
                    and development expenses
                
                
                —
                
                
                —
                
                
                499,323Depreciation
                    expenses
                
                
                51,728
                
                
                39,094
                
                
                142,700Total
                    expenses
                
                
                15,712,874
                
                
                3,353,660
                
                
                24,658,950Loss
                    from operations
                
                
                (15,614,832
                )
                
                (3,330,061
                )
                
                (24,534,523
                )Other
                    income and expense:Terminated
                    offering costs
                
                
                —
                
                
                (736,037
                )
                
                (736,037
                )Net
                    interest expense
                
                
                (778,243
                )
                
                (112,777
                )
                
                (882,197
                )Amortization
                    of beneficial conversion feature
                  and
                    deferred debt discount
                
                
                (4,641,985
                )
                
                (1,078,952
                )
                
                (5,720,937
                )Amortization
                    of deferred financing costs
                
                
                (665,105
                )
                
                (148,215
                )
                
                (813,320
                )Other
                    income
                
                
                4,500
                
                
                2,500
                
                
                7,000Total
                    other expense
                
                
                (6,080,833
                )
                
                (2,073,481
                )
                
                (8,145,491
                )Net
                    loss
                
                $
                (21,695,665
                )
                $
                (5,403,542
                )
                $
                (32,680,014
                )Per
                    share data:Basic
                    and diluted net loss per common share (4)
                
                $
                (5.24
                )
                $
                (1.82
                )Basic
                    and diluted weighted average number of
                  common
                    shares outstanding (4)
                
                
                4,143,866
                
                
                2,966,590
 (1)
                  Includes
                      stock based compensation to employees of $2,839,562 for the
                      year ended
                      2006 and since inception. Prior to 2006, no expense was recognized
                      for
                      employee options grants.
 (2)
                  Includes
                      stock based compensation to consultants of $1,468,550 and $634,244
                      for the
                      years ended 2006 and 2005, respectively, and $3,442,148 since
                      inception.
 
 (3)
                  Represents
                      the value of options to purchase 1,517,434 shares of common
                      stock pursuant
                      to a licensing agreement with the Company’s co-chairmen. See Note
                      8.
 
 (4)
                  Weighted
                      average shares outstanding for the year ended December 31,
                      2006 include
                      the underlying shares exercisable with respect to the issuance
                      of
                      1,107,008 warrants exercisable at $0.01 per share. In accordance
                      with SFAS
                      128, Earnings Per Share, the Company has given effect to the
                      issuance of
                      these warrants in computing basic net loss per
                      share.
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-4
 
 DEBT
        RESOLVE, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 Consolidated
        Statements of Stockholders’ Equity (Deficiency)
 From
        Inception (April 21, 1997) to December 31, 2006
 Preferred
                      Stock
                  
                  Common
                      StockNumber
                      of
                    Shares
                  
                  Amount
                  
                  Number
                      of
                    Shares
                  
                  Amount
                  
                  Deferred
                      compensation
                  
                  Additional
                    Paid
                      in
                    Capital
                  
                  Deficit
                      Accumulated During the Development Stage
                  
                  TotalINCEPTION,
                      APRIL 21, 1997
                  
                  
                  —
                  
                  $
                  —
                  
                  
                  —
                  
                  $
                  —
                  
                  
                  
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —Issuance
                      of common stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  50,000
                  
                  
                  50
                  
                  
                  
                  
                  
                  450
                  
                  
                  —
                  
                  
                  500Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  —
                  
                  
                  (330
                  )
                  
                  (330
                  )Balance
                      at December 31, 1997
                  
                  
                  —
                  
                  
                  —
                  
                  
                  50,000
                  
                  
                  50
                  
                  
                  
                  
                  
                  450
                  
                  
                  (330
                  )
                  
                  170Capital
                      contribution
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  20
                  
                  
                  —
                  
                  
                  20Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  —
                  
                  
                  (190
                  )
                  
                  (190
                  )Balance
                      at December 31, 1998
                  
                  
                  —
                  
                  
                  —
                  
                  
                  50,000
                  
                  
                  50
                  
                  
                  
                  
                  
                  470
                  
                  
                  (520
                  )
                  
                  —Capital
                      contribution
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  209
                  
                  
                  —
                  
                  
                  209Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  —
                  
                  
                  (209
                  )
                  
                  (209
                  )Balance
                      at December 31, 1999
                  
                  
                  —
                  
                  
                  —
                  
                  
                  50,000
                  
                  
                  50
                  
                  
                  
                  
                  
                  679
                  
                  
                  (729
                  )
                  
                  —Capital
                      contribution
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  1,387
                  
                  
                  —
                  
                  
                  1,387Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  —
                  
                  
                  (1,387
                  )
                  
                  (1,387
                  )Balance
                      at December 31, 2000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  50,000
                  
                  
                  50
                  
                  
                  
                  
                  
                  2,066
                  
                  
                  (2,116
                  )
                  
                  —Capital
                      contribution
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  1,225
                  
                  
                  —
                  
                  
                  1,225Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  —
                  
                  
                  (1,225
                  )
                  
                  (1,225
                  )Balance
                      at December 31, 2001
                  
                  
                  —
                  
                  
                  —
                  
                  
                  50,000
                  
                  
                  50
                  
                  
                  
                  
                  
                  3,291
                  
                  
                  (3,341
                  )
                  
                  —Capital
                      contribution
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  2,401
                  
                  
                  —
                  
                  
                  2,401Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  —
                  
                  
                  (2,401
                  )
                  
                  (2,401
                  )Balance
                      at December 31, 2002
                  
                  
                  —
                  
                  
                  —
                  
                  
                  50,000
                  
                  
                  50
                  
                  
                  
                  
                  
                  5,692
                  
                  
                  (5,742
                  )
                  
                  —Sales
                      of Common stock to principal stockholders, January, 2003 ($0.01
                      per
                      share)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,250,000
                  
                  
                  2,250
                  
                  
                  
                  
                  
                  20,250
                  
                  
                  —
                  
                  
                  22,500Sales
                      of Common stock January, 2003 ($0.01 per share)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  360,000
                  
                  
                  360
                  
                  
                  
                  
                  
                  3,240
                  
                  
                  —
                  
                  
                  3,600Common
                      stock issued to pay consulting fees, April 2003 ($2.00 per
                      share)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  13,500
                  
                  
                  14
                  
                  
                  
                  
                  
                  26,986
                  
                  
                  —
                  
                  
                  27,000Common
                      stock issued to pay compensation, May 2003 ($2.00 per
                      share)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  14,500
                  
                  
                  15
                  
                  
                  
                  
                  
                  28,985
                  
                  
                  —
                  
                  
                  29,000Conversion
                      of loan into Common stock, April 2003 ($2.00 per share)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  50,000
                  
                  
                  50
                  
                  
                  
                  
                  
                  99,950
                  
                  
                  —
                  
                  
                  100,000Conversion
                      of loan into Common stock, July 2003 ($2.00 per share)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,000
                  
                  
                  5
                  
                  
                  
                  
                  
                  9,995
                  
                  
                  —
                  
                  
                  10,000Rescinded
                      Common stock issued to pay compensation, July 2003 ($2.00 per
                      share)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (14,500
                  )
                  
                  (15
                  )
                  
                  
                  
                  
                  (28,985
                  )
                  
                  —
                  
                  
                  (29,000
                  )Rescinded
                      conversion of loan into Common stock, July 2003 ($2.00 per
                      share)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (5,000
                  )
                  
                  (5
                  )
                  
                  
                  
                  
                  (9,995
                  )
                  
                  —
                  
                  
                  (10,000
                  )Capital
                      contributed from the waiver of accrued compensation and consulting
                      fees
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  853,567
                  
                  
                  —
                  
                  
                  853,567Capital
                      contributed from the waiver of royalty fee
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  600,000
                  
                  
                  —
                  
                  
                  600,000Capital
                      contributed from the grant of stock options to pay for consulting
                      services
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (577,709
                  )
                  
                  577,709
                  
                  
                  —
                  
                  
                  —Amortization
                      of deferred compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  443,164
                  
                  
                  
                  
                  
                  
                  
                  
                  443,164Sales
                      of Common stock in private placement, June 2003 - Dec 2003
                      ($10.00 per
                      share)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  178,500
                  
                  
                  179
                  
                  
                  —
                  
                  
                  1,784,821
                  
                  
                  —
                  
                  
                  1,785,000Offering
                      costs of private placement
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (53,926
                  )
                  
                  —
                  
                  
                  (53,926
                  )
  F-5
  Preferred
                    Stock
                
                Common
                    StockNumber
                    of
                  Shares
                
                Amount
                
                Number
                    of
                  Shares
                
                Amount
                
                Deferred
                    compensation
                
                Additional
                  Paid
                    in
                  Capital
                
                Deficit
                    Accumulated During the Development Stage
                
                TotalNet
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (2,906,067
                )
                
                (2,906,067
                )Balance
                    at December 31, 2003
                
                
                —
                
                
                —
                
                
                2,902,000
                
                $
                2,903
                
                
                (134,545
                )
                $
                3,918,289
                
                $
                (2,911,809
                )
                $
                874,838Common
                    stock issued to pay consulting fees, March 2004 ($10.00 per
                    share)
                
                
                —
                
                
                —
                
                
                900
                
                
                1
                
                
                —
                
                
                8,999
                
                
                —
                
                
                9,000Sales
                    of common stock in private placement, June - December 2004 ($10.00
                    per
                    share)
                
                
                —
                
                
                —
                
                
                45,000
                
                
                45
                
                
                —
                
                
                449,955
                
                
                —
                
                
                450,000Capital
                    contributed from imputed compensation
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                412,500
                
                
                —
                
                
                412,500Capital
                    contributed from the grant of stock options to pay for consulting
                    services
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,051,655
                )
                
                1,051,655
                
                
                —
                
                
                —Amortization
                    of deferred compensation
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                860,190
                
                
                —
                
                
                (2,668,998
                )
                
                860,190
                  (2,668,998
                )Net
                    lossBalance
                    at December 31, 2004
                
                
                
                
                
                
                
                
                2,947,900
                
                $
                2,949
                
                
                (326,010
                )
                $
                5,841,398
                
                $
                (5,580,807
                )
                $
                (62,470
                )Capital
                    contributed from stock issued to pay compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                —
                
                
                84,000
                
                
                
                
                
                84,000Sales
                    of common stock in private placement, January-March 2005 ($10.00
                    per
                    share)
                
                
                —
                
                
                —
                
                
                22,490
                
                
                22
                
                
                —
                
                
                224,878
                
                
                —
                
                
                224,900Reimbursement
                    of offering costs of private placement
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                
                
                
                25,000
                
                
                —
                
                
                25,000Offering
                    costs of private placement
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (44,206
                )
                
                —
                
                
                (44,206
                )Capital
                    contributed from imputed compensation
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                112,500
                
                
                —
                
                
                112,500Capital
                    contributed from deferred debt discount
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                2,097,478
                
                
                —
                
                
                2,097,478Capital
                    contributed from grant of warrants for bridge financings
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                109,414
                
                
                —
                
                
                109,414Capital
                    contributed from the grant of stock options to pay for consulting
                    services
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (496,384
                )
                
                496,384
                
                
                —
                
                
                —Amortization
                    of deferred compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                634,244
                
                
                
                
                
                
                
                
                634,244Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (5,403,542
                )
                
                (5,403,542
                )Balance
                    at December 31, 2005
                
                
                
                
                
                
                
                
                2,970,390
                
                $
                2,971
                
                
                (188,150
                )
                $
                8,946,846
                
                $
                (10,984,349
                )
                $
                (2,222,682
                )Sales
                    of common stock in Novem-
                  ber
                    2006 ($5.00 per share)
                
                
                —
                
                
                —
                
                
                2,500,000
                
                
                2,500
                
                
                —
                
                
                12,497,500
                
                
                —
                
                12,500,000Offering
                    costs of public offering
                
                
                —
                
                
                —
                
                
                
                
                
                
                
                
                —
                
                
                (1,844,219
                )
                
                —
                
                (1,844,219)Issuance
                    of bridge shares upon
                  conversion
                    of notes in
                  November
                    2006 ($2.45 to $3.00
                  per
                    share)
                
                
                —
                
                
                —
                
                
                986,605
                
                
                986
                
                
                —
                
                
                3,173,195
                
                
                —
                
                3,174,181Issuance
                    of common stock to consultants November 2006 ($5.00 per
                    share)
                
                
                —
                
                
                —
                
                
                12,000
                
                
                12
                
                
                
                
                
                59,988
                
                
                
                
                60,000Capital
                    contributed from the beneficial conversion feature of notes
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                2,713,576
                
                
                —
                
                2,713,576Capital
                    contributed from grant of warrants for bridge financings
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                909,883
                
                
                —
                
                909,883Capital
                    contributed from deferred
                  financing
                    costs
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                119,238
                
                
                —
                
                119,238Capital
                    contributed from the grant
                  of
                    stock options to pay for
                  consulting
                    services
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,235,836
                
                
                —
                
                1,235,836Capital
                    contributed from the grant of stock options to pay for patent
                    licensing
                    rights
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                6,828,453
                
                
                —
                
                6,828,453Capital
                    contributed from the grant of stock options to employees
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                2,839,562
                
                
                —
                
                2,839,562Capital
                    contributed from the exercise of options and warrants
                  November-December
                    2006
                
                
                —
                
                
                —
                
                
                35,417
                
                
                35
                
                
                —
                
                
                18,882
                
                
                —
                
                18,917Amortization
                    of deferred compensation
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                172,714
                
                
                —
                
                
                —
                
                172,714Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (21,695,665
                )
                (21,695,665)Balance
                    at December 31, 2006
                
                
                —
                
                $
                —
                
                
                6,504,412
                
                $
                6,504
                
                $
                (15,436
                )
                $
                37,498,740
                
                $
                (32,680,014
                )
                $
                    4,809,794
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  F-6
  DEBT
        RESOLVE, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 Consolidated
        Statements of Cash Flows
  Years
                    ended December 31,
                
                Cumulative
                    from inception (April 21, 1997 to December 31,2006
                
                2005
                
                2006Cash
                    flows from operating activities:Net
                    loss
                
                $
                (21,695,665
                )
                $
                (5,403,542
                )
                $
                (32,680,014
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Non
                    cash stock-based compensation and expenses
                
                
                11,136,565
                
                
                634,244
                
                
                13,110,163Waived
                    and imputed compensation, royalty and consulting fees
                
                
                —
                
                
                112,500
                
                
                1,983,809Amortization
                    of debt discount
                
                
                4,641,985
                
                
                1,078,953
                
                
                5,720,937Amortization
                    of debt financing costs
                
                
                665,105
                
                
                148,215
                
                
                813,320Terminated
                    offering costs
                
                
                —
                
                
                736,037
                
                
                736,037Depreciation
                
                
                51,728
                
                
                39,094
                
                
                142,700Loss
                    on disposal of fixed assets
                
                
                —
                
                
                14,954
                
                
                14,954Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (2,611
                )
                
                (5,747
                )
                
                (9,577
                )Prepaid
                    expenses and other current assets
                
                
                (3,223
                )
                
                (12,514
                )
                
                (46,688
                )Deposits
                    and other assets
                
                
                (940
                )
                
                (74,206
                )
                
                (94,545
                )Accounts
                    payable
                
                
                (320,096
                )
                
                540,634
                
                
                300,558Accrued
                    expenses
                
                
                282,914
                
                
                38,429
                
                
                486,149Net
                    cash used in operating activities
                
                
                (5,244,238
                )
                
                (2,152,949
                )
                
                (9,522,197
                )Cash
                    flows from investing activities:Purchases
                    of fixed assets
                
                
                (79,516
                )
                
                (143,529
                )
                
                (337,422
                )Cash
                    flows from financing activities:Proceeds
                    from issuance of convertible notes
                
                
                2,504,750
                
                
                2,695,000
                
                
                5,199,750Repayment
                    of convertible notes
                
                
                (3,088,381
                )
                
                —
                
                
                (3,088,381
                )Issuance
                    of common stock
                
                
                12,500,000
                
                
                224,900
                
                
                14,932,574Issuance
                    of short term notes
                
                
                1,185,000
                
                
                —
                
                
                1,185,000Repayment
                    of short term notes
                
                
                (660,000
                )
                
                —
                
                
                (660,000
                )Exercise
                    of options and warrants
                
                
                18,917
                
                
                —
                
                
                18,917Proceeds
                    from stockholders’ loans
                
                
                —
                
                
                400,000
                
                
                510,000Repayment
                    of stockholders’ loans
                
                
                (25,000
                )
                
                (60,000
                )
                
                (85,000
                )Stock
                    offering costs
                
                
                (1,844,219
                )
                
                (780,243
                )
                
                (2,668,002
                )Reimbursement
                    of stock offering costs
                
                
                —
                
                
                25,000
                
                
                25,000Deferred
                    financing costs
                
                
                (365,318
                )
                
                (219,350
                )
                
                (584,668
                )Net
                    cash provided by financing activities
                
                
                10,225,749
                
                
                2,285,307
                
                
                14,785,190Net
                    increase (decrease) in cash and cash equivalents
                
                
                4,901,995
                
                
                (11,171
                )
                
                4,925,571Cash
                    and cash equivalents at beginning of period
                
                
                23,576
                
                
                34,747
                
                
                —Cash
                    and cash equivalents at end of period
                
                
                4,925,571
                
                $
                23,576
                
                
                4,925,571Non
                    cash investing and financing activities:Conversion
                    of stockholder’s loan to common stock
                
                $
                —
                
                $
                —
                
                $
                100,000Issuance
                    of common stock for accrued compensation
                
                $
                —
                
                $
                84,000
                
                $
                84,000Issuance
                    of warrants for deferred financing fees
                
                $
                119,238
                
                $
                109,414
                
                $
                228,652Capital
                    contribution from waived royalty fees
                
                $
                —
                
                $
                —
                
                $
                600,000Conversion
                    of loans payable, accounts payable and accrued expenses into
                    convertible
                    notes
                
                $
                977,012
                
                $
                —
                
                $
                977,012Conversion
                    of accrued interest into common stock
                
                $
                85,800
                
                $
                —
                
                $
                85,800Conversion
                    of convertible notes into common stock
                
                $
                3,088,381
                
                $
                —
                
                $
                3,088,381Capital
                    contribution from waived and imputed compensation
                  and
                    consulting fees
                
                $
                —
                
                $
                112,500
                
                $
                1,383,809
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-7
  DEBT
        RESOLVE, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 Notes
        to
        Consolidated Financial Statements
 December
        31, 2006
  NOTE
        1.  ORGANIZATION
        AND DEVELOPMENT STAGE ACTIVITIES:
  Description
        of business
  Debt
        Resolve, Inc. (“Debt Resolve” or the “Company”), is a Delaware corporation
        formed on April 21, 1997. The Company provides banks, lenders, credit card
        issuers, third party collection agencies 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. The Company has
        recently expanded its business to include debt buying and debt collection
        through its debt buying and collection agency subsidiaries, which use its
        patented internet-based collection and settlement process to improve collection
        results. (See Notes 6 and 18.)
  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 Company received
        an aggregate cash payment of $22,500 in consideration for the sale of such
        shares to 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. (See Note 3.)
  Development
        stage activities
  In
        accordance with Statement of Financial Accounting Standards (“SFAS”) No. 7,
        Accounting and Reporting by Development Stage Enterprises, the Company is
        considered to be in the development stage since it is devoting substantially
        all
        of its efforts to establishing a new business and its planned principal
        operations have not produced any significant revenues. During the last several
        years, the Company has devoted substantially all of its efforts to planning
        and
        budgeting, product development, and raising capital. In January 2004, the
        Company substantially completed the development of an online system for the
        settlement of credit card and other consumer debt and began marketing its
        product to banks and other creditors. In February 2004, the Company implemented
        its online system, on a test basis, with a collection agency. In July 2004,
        the
        Company implemented its online system with a second client and began generating
        revenue based on a percentage of the amount of debt collected by this client.
        As
        December 31, 2006, the Company had nine clients under contract. Seven clients
        were operational, however the Company has not earned, nor did it expect to
        generate, significant revenues from these clients during the initial start-up
        periods. Subsequent to December 31, 2006, the Company initiated operations
        of
        its debt buying subsidiary and acquired a collection agency. (See Note
        18.)
  F-8
  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 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, 2006, the Company
        had substantially no revenues and incurred a net loss of $21,695,665. 
Cash used in operating and investing activities was $5,323,754 for the year
        ended December 31, 2006. Based upon projected operating expenses, the Company
        believes that its working capital as of the date of this report may not be
        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.
  Management
        is actively pursuing additional debt/equity financing and pursuing strategic
        acquisitions.  In January 2007, the Company acquired the
        outstanding capital stock of First Performance Corporation, an
        accounts receivable management agency (see Note 18a), and accordingly, is
        no
        longer in the development stage as of the date of the
        acquisition.  In February 2007, the Company entered into a
        non-binding letter of intent with a financing company for a $3 million debt
        financing.  The exact terms of the financing have not been determined, nor
        has the lender made a binding commitment to the financing transaction. The
        parties are currently performing their respective due diligence
        procedures. Therefore, there is no assurance that this transaction will be
        successful. Management believes that it will be successful in obtaining
        additional financing and successfully integrate its acquisition to a level
        of
        profitability, however, no assurance can be provided that the Company will
        be able to do so.  To the extent that the Company is unsuccessful, the
        Company may need to curtail its operations.
  Principles
        of consolidation
 
 The
        accompanying consolidated financial statements include the accounts of DRV
        Capital LLC, a wholly-owned subsidiary, together with its wholly owned
        subsidiary, EAR Capital, LLC, both formed during the year ended December
        31,
        2006. Neither DRV Capital LLC nor EAR Capital, LLC was active during 2006.
        All
        material inter-company balances and transactions have been eliminated in
        consolidation.
 
 Reverse
        stock split
  On
        August
        25, 2006, the Company effected a one-for-ten reverse stock split. All share
        and
        per share information herein have been retroactively restated to give effect
        to
        this reverse stock split.
  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. From time to time, the Company has balances in excess
        of
        the federally insured limit.
  Use
        of
        estimates
  The
        preparation of financial statements in conformity with United States generally
        accepted accounting principles 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.
  Revenue
        recognition
  The
        Company earned revenue during 2006 and since inception from several collection
        agencies and lenders that implemented the Company’s online system. The Company’s
        preliminary contracts provide for revenue based on a percentage of the amount
        of
        debt collected from accounts submitted on the DebtResolve system. Although
        other
        revenue models have been proposed, as of December 31, 2006 most revenue earned
        to date has been determined using this method, and such revenue is recognized
        when the settlement amount of debt is collected by the client. For the early
        adopters of the Company’s product, the Company waived set-up fees and other
        transactional fees that the Company anticipates 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 the Company’s preferred revenue model. Dependent upon the
        structure of future contracts, revenue may be derived from a combination
        of set
        up fees or monthly licensing fees with transaction fees upon debt settlement.
  F-9
  In
        recognition of the principles expressed in Staff Accounting Bulletin 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 the Company uniformly postpones
        recognition of all contingent revenue until its client receives payment from
        the
        debtor. As is required by SAB 104, revenues are considered to have been earned
        when the Company has substantially accomplished the agreed-upon deliverables
        to
        be entitled to payment by the client. For most current active clients, these
        deliverables consist of the successful collection of past due debts using
        its
        system and/or, for clients under a licensing arrangement, the successful
        availability of its 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, fixed or percentage success fees, monthly maintenance 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
        the
        Company has met the associated deliverable, as is required by SAB 104 Topic
        13(A). For new contracts being implemented which include a licensing fee
        per
        account, following the guidance of SAB 104 regarding services being rendered
        continuously over time, the Company 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.
  Subsequent
        to December 31, 2006, the Company initiated operations of its debt buying
        subsidiary, DRV Capital LLC. (See Note 18a.) DRV Capital engages 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, the
        Company will 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 the Company only
        recently entered into this business, it will use the cost recovery method
        until
        it has evaluated the accuracy of its model. 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. When
        management has determined that it is able to predict cash flows with some
        reliability, it will adopt the income accrual method, described above,
        recognizing the revenues on a level yield method over the expected ownership
        period of the pool.
  Imputed
        salary expense
  Under
        the
        terms of employment agreements the Company has had with its Co-Chairman and
        Chief Executive Officer and with its Executive Vice President, General Counsel
        and Secretary during the year ended December 31, 2004 and a portion of the
        year
        ended December 31, 2005, the Company did not pay these officers a salary,
        due to
        certain conditions as specified in the agreements. The Company recorded
        compensation expense and a capital contribution of $112,500 for the year
        ended
        December 31, 2005. This amount is equal to the salaries that would have been
        paid during that period, representing an imputed compensation expense for
        the
        minimum base salary amount under the agreement with them, as if the Company
        had
        met the condition for paying their salaries. For the year ended December
        31,
        2006, no capital contribution for imputed salary was recorded, as the CEO
        received a salary, and the General Counsel was no longer with the Company.
  Research
        and development expenses
  Research
        and development expenses consist primarily of payroll and related expenses
        and
        consulting fees incurred in connection with employees and consultants involved
        in the development of the Company’s online software product. The Company follows
        the guidelines of Statement of Financial Accounting Standards No. 86, Accounting
        for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,
        and Statement of Financial Accounting Standards No. 2, Accounting for Research
        and Development Costs. Since the Company intended and has begun to market
        its
        online product, these costs have been charged to expense as incurred and
        classified as research and development expenses. In January 2004, the Company
        substantially completed the development of and began marketing its online
        product. Commencing February 2004, costs incurred in connection with the
        operation, maintenance, modification and customization of the Company’s product
        have been charged to expense as incurred, but are not classified as research
        and
        development expenses.
  F-10
  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.
  Income
        taxes
  In
        accordance with Statement of Financial Accounting Standards No. 109, Accounting
        for Income Taxes, the Company uses an asset and liability approach for financial
        accounting and reporting for income taxes. The basic principles of accounting
        for income taxes are: (a) a current tax liability or asset is recognized
        for the
        estimated taxes payable or refundable on tax returns for the current year;
        (b) a
        deferred tax liability or asset is recognized for the estimated future tax
        effects attributable to temporary differences and carryforwards; (c) the
        measurement of current and deferred tax liabilities and assets is based on
        provisions of the enacted tax law and the effects of future changes in tax
        laws
        or rates are not anticipated; and (d) the measurement of deferred tax assets
        is
        reduced, if necessary, by the amount of any tax benefits that, based on
        available evidence, are not expected to be realized.
  Stock-based
        compensation
  Prior
        to
        January 1, 2006, stock options issued to employees under stock-based
        compensation plans were accounted for under the recognition and measurement
        principles of Accounting Principles Board Opinion No. 25, Accounting for
        Stock
        Issued to Employees, and Related Interpretations. No stock-based employee
        compensation cost was reflected in the net loss for the year ended December
        31,
        2005, as all options granted under these plans had an exercise price equal
        to
        the market value of the underlying common stock, as determined by the Board
        of
        Directors, on the date of grant. Statement of Financial Accounting Standards
        No.
        148, Accounting for Stock-Based Compensation - Transition and Disclosure
        - an
        Amendment of FASB Statement No. 123, required the disclosure of the effect
        on
        net loss and loss per share had the Company applied the provisions of FASB
        Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
        employee compensation. Prior to the Company’s recently completed initial public
        offering there was no public market for the Company’s stock, the Company did not
        consider volatility in estimating the value of each option, and therefore,
        the
        Company followed the minimum value method. The minimum value of each option
        granted to employees was estimated as of the grant date using the Black-Scholes
        option pricing model with the following assumptions: dividend yield of 0%,
        expected volatility of 0%, risk-free interest rates for individual options
        ranging from 1.66% to 4.12%, and an expected life of each option, ranging
        from
        three to ten years. The estimated minimum value of the options granted is
        amortized on a pro forma basis over the option vesting periods. The Company
        accounted for stock-based compensation issued to non-employees using the
        fair
        value method.
  Beginning
        on January 1, 2006, the Company has accounted for stock options issued under
        stock-based compensation plans under the recognition and measurement principles
        of Statement of Financial Accounting Standards No. 123 - Revised. The Company
        has adopted the modified prospective transition method and therefore, has
        not
        restated prior periods’ results. Under this transition method, there was no
        impact to the financial statements for the year ended December 31, 2006 on
        net
        loss or basic and diluted net loss per share for options granted in previous
        periods, as all options previously granted to employees vested prior to
        adoption. During the year ended December 31, 2006, the Company issued options
        to
        purchase 2,668,434 shares of common stock to employees and consultants. Total
        stock-based compensation expense related to these grants for the year ended
        December 31, 2006 amounted to $11,136,565, of which $2,839,563 related to
        options granted to employees, $1,235,836 related to options granted to
        consultants and directors, and $6,828,453 related to options granted to the
        company’s Co-Chairmen in connection with a licensing agreement. 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 with the following
        assumptions: dividend yield of 0%, expected volatility of 97%, risk-free
        interest rates for individual options ranging from 4.52% to 4.86%, and an
        expected life of each option, ranging from three to ten years. 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, 2006, total unrecognized employee compensation cost amounted
        to
        $395,726.
  F-11


The
      following table illustrates the pro forma effects on net loss and net loss
      per
      common share for the year ended December 31, 2005 and the period from inception
      (April 21, 1997) to December 31, 2006, as if the Company had implemented FASB
      Statement No. 123 and recorded an expense for stock-based compensation issued
      to
      employees prior to January 1, 2006.




Year
                ended
              December
                31, 2005
            
            
            Cumulative
                from
              inception
              (April
                21,1997)
              to
                December 31,
              2006Net
                loss - as reported
            
            $
            (5,403,542
            )
            $
            (32,680,014
            )Deduct:
                Stock based employee compensation expense determined under minimum-value
                based methods for all awards
            
            
            1,842
            
            
            589,220Net
                loss –
                pro forma
            
            $
            (5,405,384
            )
            $
            (33,269,234
            )Basic
                and diluted net loss per common share –
                as
                reported
            
            $
            (1.82
            )Basic
                and diluted net loss per common share - pro forma
            
            $
            (1.82
            )Basic
                and diluted weighted average number of common shares
                outstanding
            
            
            2,966,590




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 securities realizable from
      the
      exercise of options and warrants of 3,408,434 and 984,150, respectively at
      December 31, 2006 and options, warrants and convertible debentures of 853,333,
      450,659 and 634,118, respectively at December 31, 2005, are excluded from the
      computation of diluted net loss per share as their inclusion would be
      antidilutive.




The
      Company’s issued and outstanding common shares as of December 31, 2006 do not
      include the underlying shares exercisable with respect to the remaining
      outstanding 1,107,008 warrants of the 1,160,598 issued in conjunction with
      the
      Company’s June 2006 bridge financing and exercisable at $0.01 per share (see
      Note 4). In accordance with SFAS 128 (“Earnings Per Share”) the Company has
      given effect to the issuance of these warrants in computing basic net loss
      per
      share.




NOTE
      3.
      INITIAL PUBLIC OFFERING





On
      March
      4, 2005, the Company entered into a non-binding letter of intent with an
      investment banking firm to explore the possibility of raising additional capital
      in the public equity markets. On January 20, 2006, the Company entered into
      an
      agreement with a second investment banking firm to be placement agent for a
      private debt financing. Subsequent to that date, this second firm was engaged
      to
      be co-underwriter for a then-potential initial public offering (“IPO”). On March
      10, 2006, the Company entered into an agreement with an investment banking
      firm
      to serve as a co-placement agent for this private financing. On September 30,
      2005, the Company filed a Registration Statement on Form SB-2 and, on December
      9, 2005, filed Amendment No. 1 to the Registration Statement with the Securities
      and Exchange Commission (“SEC”). On February 10, 2006, the Company withdrew the
      Registration Statement and recorded terminated offering costs of $736,037 for
      the year ended December 31, 2005. On July 21, 2006, the Company filed a new
      Registration Statement on Form SB-2, and, on September 13, 2006, filed Amendment
      No. 1 to the Registration Statement. This registration statement was
      subsequently amended on October 24, 2006, and declared effective by the SEC
      on
      November 1, 2006.




F-12





Effective
      August 24, 2006, the Company engaged EKN Financial Services, Inc. as the new
      managing underwriter of the Company’s then-potential IPO. Maxim Group LLC, the
      previous managing underwriter, agreed to participate as a co-underwriter,
      underwriting and placing up to 50% of the shares offered in the Company’s
      then-potential IPO.





On
      August
      31, 2006, in connection with the then-potential IPO, as a result of a decrease
      in stockholder value resulting from a lower per share offering price at the
      time
      of a public offering of the Company’s common stock, the Company issued warrants
      to purchase 304,366 shares of common stock to investors who had participated
      in
      its private placements of common stock at $10.00 per share in 2003, 2004 and
      2005, to purchase common stock at a price of $1.00 per share in order to restore
      some portion of their pre-offering value (“make-whole warrants”). In addition,
      the Company amended 346,500 stock options to purchase common stock to certain
      employees and consultants of the Company in a quantity sufficient to both
      restore some portion of their pre-offering value of their common stock and
      options and to provide ongoing incentive compensation. These “amended options”
are exercisable at a price of $5.00 per share. Both the make-whole warrants
      and
      the amended stock options are exercisable for from three to five years. (See
      Note 9.)





On
      November 6, 2006, the Company completed an IPO, pursuant to which the Company
      sold 2,500,000 shares of common stock at $5.00 per share. EKN Financial
      Services, Inc. acted as the managing underwriter and National Securities
      Corporation, Joseph Stevens & Company, Inc. and Maxim Group LLC acted as
      co-underwriters. At the same time the Company commenced its IPO, it registered
      for resale by selling stockholders 2,483,819 shares of common stock issuable
      upon conversion of convertible notes or exercise of warrants. The Company will
      not receive any of the proceeds from the sale of shares of its common stock
      by
      the selling stockholders.





Gross
      proceeds of the IPO were $12,500,000. After deducting underwriting discounts
      and
      expenses and offering-related expenses, the IPO resulted in net proceeds to
      the
      Company of approximately $10,655,782. After the repayment of approximately
      $3,650,000 in interest and a portion of the remaining principal of the Company’s
      outstanding notes and convertible notes, the Company’s net cash received was
      approximately $7,000,000. The Company also issued to the underwriters a warrant
      to purchase 225,000 shares of the Company’s stock, exercisable at $6.00 per
      share, as well as an over-allotment option to purchase 375,000 shares of common
      stock at $4.60 per share, which was not exercised and expired automatically
      on
      December 15, 2006. In connection with the IPO, an agreed-upon portion of the
      Company’s convertible notes automatically converted into 986,605 shares of the
      Company’s common stock.





In
      connection with its IPO, the Company recorded an expense of $909,883 for the
      beneficial conversion feature of the June 2006 Private Placement, $846,660
      for
      the accelerated amortization of the beneficial conversion feature and related
      deferred financing costs of its convertible notes of the April 2005 Private
      Placement and the June/September 2005 Private Placement, $130,773 in incremental
      interest payable on those financings, $1,240,800 for the recording of stock
      options issued at the close of the IPO.





Also
      in
      connection with the IPO, as well as in connection with a licensing agreement,
      the Company issued to its co-Chairmen an aggregate of 1,517,434 options,
      calculated to be sufficient to bring their ownership to a combined 29.2% of
      the
      total number of outstanding shares of common stock on a fully diluted basis
      as
      of the closing of the IPO, assuming the exercise of such options, valued at
      $6,828,453. (See Note 8.)




NOTE
      4.
      NOTES PAYABLE AND CONVERTIBLE NOTES:




April
      2005 Private Placement





In
      April
      2005, in a private financing that involved the issuance of 7% senior convertible
      promissory notes due one year from the date of issuance, the Company received
      proceeds of $800,000, initially convertible into 188,235 shares of common stock
      (the “April 2005 Private Placement”). The conversion percentage on the April
      2005 Private Placement was 100% upon the completion of the IPO. The notes from
      the April 2005 Private Placement matured on April 21, 2006. However all existing
      April 2005 note holders agreed to extend their notes to October 31, 2006, and
      subsequently further agreed to extend their notes to December 31, 2006.




F-13





The
      April
      2005 Private Placement contained a provision that in the event the Company
      raised $4 million in equity financing, or debt financing convertible to equity,
      the holders of these notes would receive shares based on 115% of the balance
      of
      these notes. As a result of this dilutive calculation, an aggregate of 216,472
      shares of the Company’s common stock were issuable upon the conversion, at a
      conversion price of $4.25 per share, discounted from the IPO price of $5.00
      per
      share, of 115% of the principal balance of the April 2005 Private Placement.
      In
      November 2006, pursuant to the close of the IPO, these notes were converted
      to
      216,472 shares of common stock.





As
      part
      of the April 2005 Private Placement, investors were issued 94,120 warrants
      to
      purchase shares of the Company’s common stock at an exercise price of $4.25 per
      share. As a result of the conversion and exercise price of the notes and
      warrants issued in the June 2006 Private Placement (see below), and in
      connection with certain anti-dilution provisions in the warrant agreement,
      the
      exercise price of these warrants was reduced to $2.45 per share based on the
      IPO
      price of $5.00 per share.





In
      accordance with Emerging Issues Task Force (“EITF”) 98-5 and EITF 00-27, the
      convertible notes from the April 2005 Private Placement were considered to
      have
      an embedded beneficial conversion feature because the conversion price was
      less
      than the fair market value at the issuance date and the contingent conversion
      price was less than the IPO price. See “June/September 2005 Private Placement”
below.





June/September
      2005 Private Placement





In
      June
      2005, the Company received proceeds from an additional private financing of
      7%
      senior convertible promissory notes in the aggregate principal amount of
      $1,250,000, due one year from the date of issuance, initially convertible at
      $4.25 per share into 294,118 shares of common stock. In September 2005, the
      Company received additional proceeds from the private financing of 7% senior
      convertible promissory notes in the aggregate principal amount of $645,000,
      due
      one year from the date of issuance, initially convertible at $4.25 per share
      into 151,765 shares of common stock (the “June/September 2005 Private
      Placement”). The automatic conversion percentage on the June/September 2005
      Private Placement was 50% upon the completion of the IPO. In compliance with
      the
      requirements of the June/September 2005 private financing documents, a majority
      of these note holders approved the June 2006 Private Placement (see below)
      and
      agreed to extend their notes to December 31, 2006.





As
      a
      result of the conversion and exercise price of the notes and warrants issued
      in
      the June 2006 Private Placement (see below), and in connection with certain
      anti-dilution provisions in the note agreement, the exercise price of the
      underlying shares related to the June/September 2005 Private Placement was
      reduced to $2.67 per share based on the IPO price of $5.00 per share.
      Accordingly, an aggregate of 387,014 shares of common stock were issuable upon
      the conversion of 50% of the principal and accrued interest to November 6,
      2006
      (the closing date of the IPO - see Note 3) of the June/September 2005 Private
      Placement. In November 2006, pursuant to the close of the IPO, 50% of the
      principal and accrued interest was converted to 387,014 shares of common stock
      and $1,033,000 was repaid in cash. (See Note 3.)





As
      part
      of the June/September 2005 Private Placement, investors were issued 222,955
      warrants to purchase shares of the Company’s common stock at an exercise price
      of $4.25 per share. As a result of the conversion and exercise price of the
      notes and warrants issued in the June 2006 Private Placement (see below), and
      in
      connection with certain anti-dilution provisions in the warrant agreement,
      the
      exercise price of the warrants related to the June/September 2005 Private
      Placement was reduced to $2.52 per share based on the IPO price of $5.00 per
      share.





In
      accordance with EITF 98-5 and EITF 00-27, the convertible notes from the April
      2005 Private Placement and June/September 2005 Private Placement were considered
      to have an embedded beneficial conversion feature because the conversion price
      was less than the fair market value at the issuance date and the contingent
      conversion price was expected to be less than the IPO price. The Company
      initially recorded a beneficial conversion feature and a deferred debt discount
      in connection with the value of the April 2005 Private Placement and
      June/September 2005 Private Placement notes and related investor warrants in
      the
      amount of $2,097,478, using the fair value method. Due to certain modifications
      in the conversion terms of these notes, the Company recorded an incremental
      beneficial conversion feature in connection with the value of the April 2005
      and
      June/September 2005 notes in the amount of $537,475. Such amount was amortized
      over the life of the respective notes. The Company recorded amortization of
      the
      beneficial conversion feature and debt discount in the amount of $1,352,182
      during the year ended December 31, 2006, $550,273 during the year ended December
      31, 2005, and $2,431,135 since inception. Per the terms of the note agreements,
      the Company agreed that it would use its best efforts to register the underlying
      common stock and warrants in conjunction with the IPO, and the Company did
      do
      this. In accordance with EITF 00-19, “Accounting for Derivative Financial
      Instruments Indexed to and Potentially Settled in, a Company’s Own Stock,”
(“EITF 00-19”) there were no factors that would prohibit equity classification
      relating to the embedded conversion option or the warrants.




F-14




June
      2006 Private Placement





In
      order
      to provide for certain cash requirements, the Company borrowed $525,000 in
      the
      first quarter of 2006 from new investors and existing noteholders of the
      Company, at an interest rate of 2 1/2% per month, with maturity dates from
      April
      30, 2006 to May 17, 2006. During May 2006, these investors agreed to adopt
      the
      terms of the June 2006 Private Placement (see below).





On
      March
      15, 2006, the Company initiated a private placement involving the issuance
      of
      12% convertible promissory notes due one year from the date of issuance (“the
      March 2006 Private Placement Term Sheet”). The Company had raised $300,000 under
      this offering .
      Investors in the March 2006 Private Placement Term Sheet later agreed to
      adopt the terms of a second supplement to the March 2006 Private Placement
      Term
      Sheet, dated May 31, 2006 (“the May 2006 Private Placement Term Sheet
      Supplement”) which became the basis for the Company’s June 2006 Private
      Placement (see below). ****





On
      May
      31, 2006, the Company issued the May 2006 Private Placement Term Sheet
      Supplement with respect to the June 2006 Private Placement. The Company raised
      a
      total of $3,481,762 (the “June 2006 Private Placement”), including $977,012 of
      principal and accrued interest rolled in from existing noteholders. Of this
      total, $800,000 was invested by a lead investor, to which the Company issued
      a
      non-convertible 15% senior secured promissory note, repayable the earlier of
      October 31, 2006 or at the time of the conclusion of the Company’s IPO. The
      remainder of the notes issued in connection with this offering were 15% senior
      secured convertible promissory notes repayable the earlier of October 31, 2006
      or at the time of the Company’s conclusion
      of its IPO .
      Subsequently, the maturity of the 15% non-convertible and 15% convertible notes
      were extended to December 31, 2006. These notes were only convertible contingent
      upon the closing of an IPO. In
      November 2006, pursuant to the close of the IPO, an aggregate of 383,119 shares
      of the Company’s common stock was issued upon the conversion, at a conversion
      price equal to 70% of the IPO price of $5.00 per share, of 50% of the $2,681,762
      principal amount of the convertible notes.




The
      June
      2006 Private Placement promissory notes contained a provision that in the event
      their repayment occurred after August 30, 2006, they were repayable at 107.5%
      of
      the principal amount plus accrued interest to the date of repayment.
      Accordingly, since the notes were still outstanding as of August 30, 2006,
      the
      Company recorded a charge to interest expense of approximately $260,000. Prior
      to the Company’s IPO, one investor and one of the Company’s underwriters
      relinquished 36,923 warrants exercisable at $0.01 per share. Investors in the
      June 2006 Private Placement were also issued 1,160,598 warrants to purchase
      shares of the Company’s stock at $0.01 per share. Certain related parties
      participated in this offering and, in partial exchange for their investment
      of
      $342,014, received 114,005 of such warrants. In November 2006, pursuant to
      the
      close of the IPO, in addition to the 50% of the principal was converted to
      383,119 shares of common stock, $2,533,610 was repaid in cash, representing
      57.5% of the principal amount of the notes. (See Note 3).




The
      Company evaluated the provisions of the aforementioned notes under EITF 00-19
      and EITF 05-4, View A, “The Effect of a Liquidated Damages Clause on a
      Freestanding Financial Instrument” and accordingly classified the aforementioned
      warrants and registration rights agreement as equity. The gross proceeds of
      $3,481,762 associated with the June 2006 Private Placement were recorded net
      of
      a discount of $2,176,101, related to the fair value of the warrants. The debt
      discount of $2,176,101 was accreted until the note matured at the time of the
      IPO. Accordingly, the Company recorded a charge of $2,176,101 for the year
      ended
      December 31, 2006. Upon the close of the IPO on November 6, 2006, based on
      a
      conversion price equal to 70% of the IPO price of $5.00 per share, the Company
      recorded an expense for the beneficial conversion feature of these notes in
      the
      amount of $909,883. (See Note 3.)




F-15





The
      Registration Rights Agreement entered into in connection with the June 2006
      Private Placement required the Company to file a registration statement by
      October 31, 2006. Prior to that date, the filing deadline was extended to
      November 10, 2006. The underlying registration statement was declared effective
      by the SEC on November 1, 2006 (See Note 3.)





On
      June
      26, 2006, as additional collateral pursuant to the June 2006 Private Placement,
      the Company’s co-chairmen pledged the 1,650,000 shares of the Company’s common
      stock that they personally own or control to secure the June 2006 Private
      Placement indebtedness. The stock pledge was a secondary, non-recourse liability
      to be called upon only following the exhaustion of all legal remedies against
      the Company for collection of the indebtedness. The June 2006 Private Placement
      indebtedness was in part repaid and in part converted into shares of the
      Company’s common stock upon the conclusion of the IPO, and the stock pledge was
      released at that time. The June 2006 Private Placement indebtedness was also
      collateralized with a first lien on all of the Company’s assets as well as those
      of any Company’s subsidiaries now existing or that may be formed. This
      collateral was released with the repayment of the private placement. (See Note
      3.)





Short
      Term Borrowings





On
      September 11, 2006, the Company raised $300,000 in a short term borrowing from
      an investor in the Company at an annual interest rate of 15%. The note was
      repayable in full on September 11, 2007, or repayable with a ten percent penalty
      at any date prior to maturity. The borrowing also carried the personal
      guarantees of the co-chairmen. Upon the close of the IPO, 110% of this note
      was
      repaid.





From
      October 30, 2006 to November 1, 2006, the Company received advances from several
      board members, officers, and their family members totaling $360,000. The
      borrowings carried an interest rate of 18%, had maturities of two months to
      one
      year, and were prepayable at any time at the option of the borrower and by
      agreement in the event of a public offering at from 110% to 115% of the amount
      borrowed. Upon the close of the IPO, these notes were repaid. The Company
      recorded approximately $74,000 in financing costs related to these borrowings.





Deferred
      Financing Costs





The
      Company incurred costs in conjunction with the April 2005 private financing,
      the
      June/September 2005 private financing and the June 2006 Private Placement.
      Total
      cash fees associated with the April 2005 and June/September 2005 private
      financings were $219,350. In addition, the placement agent was issued warrants
      to purchase 33,600 shares of common stock first valued at $109,414. Subsequent
      to the June 2006 Private Placement, these warrants were repriced, and the
      Company recorded additional deferred financing costs for the incremental value
      in the amount of $8,621. Maxim Group LLC and Capital Growth Financial (“CGF”)
      acted as the placement agents in the June 2006 Private Placement. Total cash
      fees associated with the June 2006 Private Placement were $365,318. In addition,
      the Company recorded deferred financing costs of $110,617 for the value of
      31,508 placement agent warrants issued in connection with this financing,
      although Maxim Group LLC subsequently relinquished its portion of such warrants,
      or 8,644 warrants. The total of fees and the value of the warrants have been
      recorded as deferred financing costs and were amortized over the life of the
      notes, until their maturity at the IPO. Amortization of deferred financing
      costs
      for the 2006 and 2005 private financings totaled $665,105 and $148,215 for
      the
      years ended December 31, 2006 and 2005, respectively, and $813,320 since
      inception.





NOTE
      5.  FIXED
      ASSETS:




Fixed
      assets consist of the following:




Useful
                life
            
            December
                  31,
              2006Computer
                equipment
            
            
            3-5
                years
            
            $
            123,908Computer
                software
            
            
            3
                years
            
            
            40,919Telecommunications
                equipment
            
            
            5
                years
            
            
            2,685Office
                equipment
            
            
            3
                years
            
            
            6,362Furniture
                and fixtures
            
            
            5
                years
            
            
            103,172Leasehold
                improvements
            
            
            Lease
                term
            
            
            21,081298,127Less:
                accumulated depreciation
            
            (118,358
            )$
            179,769




F-16




Concurrent
      with the Company’s move to new premises on July 29, 2005, certain assets were
      taken out of service and the original cost and related accumulated depreciation
      were removed from the balance sheet. Removing the original cost of $39,296
      and
      the related accumulated depreciation of $24,342 resulted in a net loss on
      disposal of fixed assets of $14,954 for the year ended December 31, 2005.




Depreciation
      expense totaled $51,728 and $39,094 for the years ended December 31, 2006 and
      2005, respectively, and $142,700 since inception.




NOTE
      6.  FORMATION
      OF SUBSIDIARY AND SIGNING OF FUNDING TERM SHEET:




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, 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 December 21, 2006,
      with
      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, and, once repaid, cannot be
      re-borrowed. Once the notes are repaid and the Company has been repaid its
      investment, the Company and Sheridan share the residual collections from the
      debt portfolios, net of servicing fees. 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.
      New
      advances for portfolio purchases under the facility are not available beyond
      the
      December 21, 2007 expiration date. 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
      December 31, 2006, neither DRV Capital nor its subsidiary, EAR Capital, had
      any
      assets or liabilities.




Subsequent
      to December 31, 2006, the Company initiated activity in this subsidiary,
      investing in two debt pools, and drawing down on its financing in order to
      do
      so. (See Note 18a.)




NOTE
      7.  STOCKHOLDERS’
      EQUITY:




During
      the year ended December 31, 2005, the Company issued 22,490 shares of common
      stock through a private placement for a total of $224,900 and incurred expenses
      of the private placement of $44,206. During the year ended December 31, 2005,
      the Company issued warrants to purchase, 100,000 shares of common stock to
      a
      consultant who also invested in this private placement, exercisable at $4.25
      per
      share, valued at $744,245. These warrants are exercisable for three years from
      the date of grant and vested upon issuance.




F-17




During
      the year ended December 31, 2005, two stockholders reimbursed the Company for
      $25,000 of deferred offering costs. Such amount has been credited to additional
      paid-in capital.




During
      the year ended December 31, 2005, the Company recorded imputed compensation
      expense of $112,500 related to salaries for its Co-Chairman and Chief Executive
      Officer and its Executive Vice President, General Counsel and Secretary as
      if
      the Company had met the terms for the payment of their salaries as stipulated
      in
      their employment agreements, and recorded the waived salary as a contribution
      to
      paid-in capital. (See Note 11.)




During
      the year ended December 31, 2006, the Company issued 2,500,000 shares of common
      stock through an initial public offering for gross proceeds of $12,500,000
      and
      incurred expenses of the offering of $1,844,219. (See Note 3.)




During
      the year ended December 31, 2006, the Company issued 12,000 shares of common
      stock to a consultant and recorded an expense of the issuance of $60,000.




During
      the year ended December 31, 2006, the Company issued 986,605 shares of common
      stock in partial repayment of convertible notes issued in 2005 and 2006 and
      accrued interest aggregating $3,174,181.




During
      the year ended December 31, 2006, the Company received cash proceeds of $18,917
      from the exercise of warrants to purchase 35,417 shares of common
      stock.




During
      the years ended December 31, 2006 and 2005, 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 $172,714 and $568,532,
      respectively.




NOTE
      8. 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. 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 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 license usage also includes the creation,
      distribution and sale of software products or solutions for the same purpose
      as
      above and with the same exclusions. 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 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 with the following assumptions: dividend
      yield of 0%, expected volatility of 97%, risk-free interest rate for individual
      options of 4.86%, 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.




F-18




These
      option grants are outside of the 2005 Plan. (See Note 9.) The Company recorded
      an expense of $6,828,453 during the year ended December 31, 2006 related to
      this
      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.




b.
      Legal
      consulting fees




To
        assist
        in the preparation of its registration statement and other legal matters,
        primarily related to contracts for potential acquisitions, during the year
        ended
        December 31, 2006 the Company employed as a consultant an attorney who is
        a
        relative of the Co-Chairman and Chief Executive Officer. Over the course of
        the year ended December 31, 2006, the Company paid this individual consulting
        fees of approximately $35,000.




NOTE
      9.  STOCK
      OPTIONS:




As
      of
      December 31, 2006, the Company had one stock-based employee compensation plan,
      the 2005 Incentive Compensation Plan (the “2005 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.  The 2005 Plan is administered by the Compensation Committee of the
      Board of Directors.  The 2005 Plan provides that the Compensation Committee
      of the Board of Directors may establish stock-based compensation awards for
      officers and other key employees, consultants and directors as recommended
      by
      management over the coming time period. For the year ended December 31, 2006,
      286,000 options have been issued under the 2005 Plan, and 25,000 options were
      subsequently forfeited. There were no options granted under the 2005 Plan during
      2005.





A
      summary
      of option activity within the 2005 Plan as of December 31, 2006 and changes
      during the year ended December 31, 2006 is presented below:




2006
            
            Weighted
              Average
                Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Term
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at January 1,
            
            
            —
            
            
            —
            
            
            —Granted
            
            
            286,000
            
            $
            5.00
            
            
            4.7
                YearsExercised
            
            
            —
            
            
            —
            
            
            —Forfeited
                or Expired
            
            
            (25,000
            )
            $
            5.00
            
            
            4.7
                YearsOutstanding
                at December 31,
            
            
            261,000
            
            $
            5.00
            
            
            4.7
                Years
            
            $
            —Exercisable
                at December 31,
            
            
            143,000
            
            $
            5.00
            
            
            4.7
                Years
            
            $
            —





As
      of
      December 31, 2006, the Company had 118,000 unvested options within the 2005
      Plan.





The
      weighted-average grant-date fair value of options granted during the years
      ended
      December 31, 2006 and 2005 amounted to $4.30 and $3.87 per share,
      respectively.




A
      summary
      of option activity outside the 2005 Plan for the year ended December 31, 2006
      is
      presented below:




2006
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Term
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at January 1,
            
            
            853,333
            
            $
            7.23
            
            
            3.9
                YearsGranted
            
            
            2,357,434
            
            $
            5.00
            
            
            8.9
                YearsExercised
            
            
            —
            
            
            —
            
            
            —Forfeited
                or Expired
            
            
            (63,333
            )
            $
            10.00
            
            
            —Outstanding
                at December 31,
            
            
            3,147,434
            
            $
            4.96
            
            
            6.9
                Years
            
            $
            85,695Exercisable
                at December 31,
            
            
            1,275,000
            
            $
            5.05
            
            
            4.3
                Years
            
            $
            85,695




F-19




As
      of
      January 1, 2006 and December 31, 2006, there were no unvested options outside
      the 2005 Plan.





In
      September 2004, the Company entered into an agreement to issue options to
      purchase 10,000 shares of its common stock at $10.00 per share to a member
      of
      the Company’s advisory board. The options will have an exercise period of three
      years, and will vest at such time as the Company achieves $2,000,000 in revenues
      as a result of the consultant’s efforts. On August 31, 2006, these options were
      repriced to $5.00 per share. As of December 31, 2006, the contingency has not
      been achieved, and the options have not been granted.




In
      September 2005, the Company entered into an agreement to issue options to
      purchase 330,000 shares of its common stock at $5.00 per share to two employees.
      These options have an exercise period of five years from the date of grant.
      These options were issued and vested on November 6, 2006 at the conclusion
      of
      the Company’s IPO. The options were valued at $1,237,500, and were expensed at
      the date of issuance. During the year ended December 31, 2006, the Company
      recorded a compensation charge in the amount of $1,237,500 for these
      options.




On
      July
      5, 2006, the Company issued options to purchase 50,000 shares of its common
      stock at $5.00 per share to the Company’s Chief Financial Officer. The options
      have an exercise period of five years, were valued at $188,000, and will be
      expensed over the vesting period. Half of these options vested upon issuance
      and
      half vested on December 31, 2006. During the year ended December 31, 2006,
      the
      Company recorded a compensation charge in the amount of $188,000 for these
      options.




On
      August
      7, 2006, the Company issued options to purchase 50,000 shares of its common
      stock at $5.00 per share to the Company’s Controller. The options have an
      exercise period of five years and were valued at $188,000. Half of these options
      were to vest on February 7, 2007 and half on the anniversary date. On December
      27, 2006 these options were amended. Half were vested at that date, and the
      remainder were forfeited. During the year ended December 31, 2006, the Company
      recorded a compensation charge in the amount of $133,167 for these
      options.




On
      August
      31, 2006, the Company amended the exercise price of options to purchase 346,500
      shares of its common stock issued to employees and consultants of the Company
      during 2003 and 2004. The repricing included options for 214,000 shares
      previously issued to directors and employees, and options for 132,500 shares
      previously issued to consultants. The exercise price was reduced from $10.00
      per
      share to $5.00 per share, to reflect the expected market value of the stock
      upon
      the effective date of the IPO. The amended options were valued at $204,800
      for
      employees, and $91,125 for consultants, amounting to an aggregate excess option
      value of $295,925, and were expensed at issuance.




On
      August
      31, 2006, the Company issued options to purchase 360,000 shares of its common
      stock at $5.00 per share to employees of the Company. The options have an
      exercise period of five years, and were valued at $1,353,600. 245,000 of these
      options vested upon issuance, and 115,000 will vest on August 31, 2007, and
      will
      be expensed over the vesting period. Of these option grants, 230,000 options
      grants are within the 2005 Plan, and 130,000 are outside of the plan. The
      Company recorded an expense of $1,065,333 during the year ended December 31,
      2006 related to this issuance.




On
      August
      31, 2006, the Company issued options to purchase 310,000 shares of its common
      stock at $5.00 per share to two consultants of the Company. The options have
      an
      exercise period of five years, were valued at $1,165,600, and vested upon
      issuance. These options grants are outside of the 2005 Plan. The Company
      recorded an expense of $1,144,711 during the year ended December 31, 2006
      related to this issuance.




On
      November 1, 2006, the Company issued options to purchase 6,000 shares of its
      common stock at $5.00 per share to an employee and a consultant of the Company.
      The options have an exercise period of five years, were valued at $22,500,
      and
      vested upon issuance. These options grants are within the 2005 Plan. The Company
      recorded an expense of $14,063 during the year ended December 31, 2006 related
      to this issuance.




On
      August
      31, 2006, the Company issued options to purchase 20,000 shares of its common
      stock at $5.00 per share to a consultant of the Company. The options have an
      exercise period of five years, were valued at $75,200, and vested upon issuance.
      These options grants are outside of the 2005 Plan. The Company recorded an
      expense of $9,400 during the year ended December 31, 2006 related to this
      issuance.




F-20




NOTE
      10.
      WARRANTS




A
      summary
      of warrant activity as of December 31, 2006 and changes during the year ended
      December 31, 2006 is presented below:





2006
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Term
                (years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at January 1,
            
            
            450,676
            
            $
            2.88
            
            
            3.4
                Years
            
            
            —Granted
            
            
            1,721,462
            
            $
            1.02
            
            
            4.1
                Years
            
            
            —Exercised
            
            
            (35,417
            )
            $
            0.53
            
            
            —
            
            
            —Forfeited
                or Expired
            
            
            (45,563
            )
            $
            0.01
            
            
            —
            
            
            —Outstanding
                at December 31,
            
            
            2,091,158
            
            $
            1.44
            
            
            3.8
                Years
            
            $
            5,765,425Exercisable
                at December 31,
            
            
            2,091,158
            
            $
            1.44
            
            
            3.8
                Years
            
            $
            5,765,425




As
      of
      January 1, 2006 and December 31, 2006, there were no unvested
      warrants.





The
      following table summarizes information about warrants outstanding at December
      31, 2006:




Warrants
                outstandingExercise
                  Price
            
            
            Number
                of shares
            
            
            Weighted
              Average
              Remaining
              Contractual
              Term
                (years)
            
            
            Exercisable$
                4.25
            
            
            100,000
            
            
            1.2
            
            
            100,000$
                2.45
            
            
            94,120
            
            
            1.3
            
            
            94,120$
                2.52
            
            
            147,064
            
            
            3.5
            
            
            147,064$
                2.41
            
            
            33,601
            
            
            1.6
            
            
            33,601$
                2.52
            
            
            75,891
            
            
            3.7
            
            
            75,891$
                0.01
            
            
            1,107,008
            
            
            4.5
            
            
            1,107,008$
                1.00
            
            
            285,616
            
            
            2.7
            
            
            285,616$
                3.33
            
            
            22,858
            
            
            1.5
            
            
            22,858$
                6.00
            
            
            225,000
            
            
            4.9
            
            
            225,0002,091,158
            
            
            3.8
                years
            
            
            2,091,158




NOTE
      11.  EMPLOYMENT
      AGREEMENTS:




The
      Company has an employment agreement with the Co-Chairman and Chief Executive
      Officer that originally became effective as of April 1, 2005 and was
      subsequently amended.  Under the terms of the agreement, he is paid an
      annual base salary of $250,000 per year, subject to adjustments approved by
      the
      compensation committee of the Company's board of directors. The employment
      term
      extends for five years after the final closing of the June/September 2005
      private financing, or until September 6, 2010.




The
      Company has an employment agreement with the President and Chief Technology
      Officer that became effective December 1, 2003 and remained in effect until
      December 1, 2005. This employment agreement provided for annual compensation
      of
      $200,000 and other considerations. This officer continues to serve under the
      terms of that contract under an informal monthly arrangement.




On
      August
      1, 2005, the Company also entered into an employment agreement with the Chief
      Financial Officer, Treasurer and Secretary. This employment agreement provides
      for annual compensation of $150,000 and other considerations, and remained
      in
      effect until July 31, 2006. This officer continues to serve under the terms
      of
      that contract under an informal monthly arrangement.




F-21




NOTE
      12.  EMPLOYEE
      BENEFIT PLAN:




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. The Company will match
      the first 3% of the employee contribution on a dollar-for-dollar basis. After
      3%, the Company matches an additional 1⁄2% for every 1% that the employee
      contributes up to a maximum match of 4% of the employees’ salary or the maximum
      contribution allowed under Internal Revenue Code. Contributions for the year
      ended December 31, 2006 were $60,443.




NOTE
      13.  OFFICE
      LEASE:




Prior
      to
      July 31, 2005, the Company had leased its office facilities under a
      non-cancelable operating lease through July 2005. Beginning August 1, 2005,
      the
      Company entered into a five year lease which includes annual escalations in
      rent. Since that date, in accordance with SFAS No. 13, “Accounting for Leases,”
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, 2006, accrued rent payable totaled $12,561. Rent
      expense for the years ended December 31, 2006 and 2005 was $123,328 and $82,518,
      respectively.




Future
      minimum rental payments under the above non-cancelable operating leases are
      as
      follows:




For
                the Year EndingDecember
                31,
            
            Amount2007
            
            $
            120,9582008
            
            
            127,3012009
            
            
            130,1642010
            
            
            75,929$
            454,352




Subsequent
      to December 31, 2006, the Company assumed two lease agreements in connection
      with an acquisition. (See Note 18b.)





NOTE
      14.  WEB
      HOSTING COMMITMENT:




On
      October 31, 2003, the Company entered into a two year web hosting agreement
      with
      a large service provider. The agreement became effective in April 2004, when
      the
      Company began to service its first customer, and provided for the purchase
      of
      certain equipment and start-up charges at the time of the agreement and a
      combination of monthly variable expenses, dependent on volumes, going forward.
      Expenses for web hosting services totaled $187,635 and $182,370 for the years
      ended December 31, 2006 and 2005, respectively, and $507,655 since inception.
      The agreement expired on April 1, 2006. The Company continues to receive service
      under the terms of this agreement while alternative possible contractual
      arrangements are discussed. The Company is currently reviewing alternative
      types
      of web hosting structures and carriers.




NOTE
      15:  LITIGATION:




On  January
      8, 2007, the Company filed a patent infringement lawsuit against Apollo
      Enterprise Solutions, LLC (“Apollo”) in federal court in New Jersey.  The
      suit alleges that Apollo’s online debt collection system infringes one or
      more claims of the patents-in-suit, U.S. Patent Nos. 6,330,551 and
      6,954,741.  The Company claims that it has exclusive rights under these and
      certain other patents with respect to the settlement of consumer
      debt.  In
      response to the Company’s complaint, Apollo (i) filed a motion to dismiss for an
      alleged lack of personal jurisdiction and, (ii) on January 29, 2007, filed
      a
      mirror lawsuit against the Company in federal court in the Central District
      of
      California which seeks a declaratory judgment of non-infringement and invalidity
      with respect to these patents. The Company has filed a motion to dismiss,
      transfer or stay the California case in preference to the first-filed New Jersey
      case. That motion is not fully briefed and remains pending. In the New Jersey
      case, the Court issued an order requiring the parties to submit a series of
      briefs showing why the case should not be transferred from New Jersey to the
      District of Delaware, the Southern District of New York or the Central District
      of California. That briefing is not yet completed. The Company has filed a
      motion in the New Jersey case to permit it to take discovery on these
      jurisdictional issues from Apollo in the event that the Court declines to find
      that it has presented a *prima
      facie* case on
      jurisdiction. That motion is not fully briefed and remains pending. Management
      believes that the Company has a reasonable chance of successfully
      asserting the patents-in-suit  against Apollo.  However, the
      Company is unable to predict the outcome of these claims and, accordingly,
      no adjustments have been made in the consolidated financial statements in
      response to these claims.




F-22





NOTE
      16.  INCOME
      TAXES:




The
      reconciliation of the statutory U.S. Federal income tax rate to the Company’s
      effective income tax rate is as follows:




Year
                ended December 31,2006
            
            2005Statutory
                federal income tax rate (benefit)
            
            
            (34.00
            )%
            
            (34.00
            )%Permanent
                differences
            
            
            8.35
            
            
            8.49Increase
                in valuation allowance
            
            
            25.65
            
            
            25.51Effective
                tax rate
            
            
            0.00
            %
            
            0.00
            %





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets for financial reporting purposes and the amount used
      for income tax purposes. The Company’s deferred tax assets are as
      follows:




December
                31,2006
            
            2005Deferred
                tax asset:Deferred
                start up costs
            
            $
            73,631
            
            $
            113,239Stock
                based compensation
            
            
            5,229,665
            
            
            775,039Net
                operating loss carryforward
            
            
            4,349,974
            
            
            2,170,670Deferred
                tax asset
            
            
            9,653,270
            
            
            3,058,948Less:
                valuation allowance
            
            
            (9,653,270
            )
            
            (3,058,948
            )Net
                deferred tax asset
            
            $
            —
            
            $
            —Increase
                in valuation allowance
            
            $
            6,594,322
            
            $
            1,621,538





Due
      to
      the uncertainty surrounding the realization of the benefits of the deferred
      tax
      assets, the Company provided a valuation allowance for the entire amount of
      the
      deferred tax asset at December 31, 2006 and 2005. At December 31, 2006, the
      Company had net operating loss carryforwards of approximately $10,800,000 which
      expire at various dates through 2026. Pursuant to Section 382 of the Internal
      Revenue Code regarding substantial changes in Company ownership, utilization
      of
      this net operating loss carryforward may be limited.




NOTE
      17.  RECENTLY
      ISSUED AND PROPOSED ACCOUNTING PRONOUNCEMENTS:




In
      October 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff Position (“FSP”) FAS 123(R)-2, “Practical Accommodation to the Application
      of Grant Date as Defined in FASB Statement No. 123(R)”, which provides
      clarification of the concept of mutual understanding between employer and
      employee with respect to the grant date of a share-based payment award. This
      FSP
      provides that a mutual understanding of the key terms and conditions of an
      award
      shall be presumed to exist on the date the award is approved by management
      if
      the recipient does not have the ability to negotiate the key terms and
      conditions of the award and those key terms and conditions will be communicated
      to the individual recipient within a relatively short time period after the
      date
      of approval. This guidance was applicable upon the initial adoption of SFAS
      123(R). The adoption of this pronouncement did not have an impact on the
      Company's consolidated financial position, results of operations, or cash
      flows.




F-23





In
      February 2006, the FASB issued Statement of Financial Accounting Standard
      155 - Accounting for Certain Hybrid Financial Instruments (“SFAS 155”), which
      eliminates the exemption from applying SFAS 133 to interests in securitized
      financial assets so that similar instruments are accounted for similarly
      regardless of the form of the instruments. SFAS 155 also allows the election
      of
      fair value measurement at acquisition, at issuance, or when a previously
      recognized financial instrument is subject to a remeasurement event. Adoption
      is
      effective for all financial instruments acquired or issued after the beginning
      of the first fiscal year that begins after September 15, 2006. Early
      adoption is permitted. The adoption of SFAS 155 is not expected to have a
      material effect on the Company’s financial position, results of operations or
      cash flows.





In
      March 2006, the FASB issued Statement of Financial Accounting Standard 156
      - Accounting for Servicing of Financial Assets (“SFAS 156”), which requires all
      separately recognized servicing assets and servicing liabilities be initially
      measured at fair value. SFAS 156 permits, but does not require, the subsequent
      measurement of servicing assets and servicing liabilities at fair value.
      Adoption is required as of the beginning of the first fiscal year that begins
      after September 15, 2006. Early adoption is permitted. The adoption of SFAS
      156 is not expected to have a material effect on the Company’s financial
      position, results of operations or cash flows.





In
      July
      2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
      in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
      clarifies the accounting and reporting for uncertainties in income tax law.
      This
      interpretation prescribes a comprehensive model for the financial statement
      recognition, measurement, presentation and disclosure of uncertain tax positions
      taken or expected to be taken in income tax returns. This interpretation shall
      be effective for fiscal years beginning after December 15, 2006. Earlier
      adoption is permitted as of the beginning of an enterprise’s fiscal year,
      provided the enterprise has not yet issued financial statements, including
      financial statements for any interim period for that fiscal year. The cumulative
      effects, if any, of applying this Interpretation will be recorded as an
      adjustment to retained earnings as of the beginning of the period of adoption.
      The C ompany
      has commenced the process of evaluating the expected effect of FIN 48 on its
      financial statements and is currently not yet in a position to determine such
      effects.





In
      September 2006, the FASB issued Statement of Financial Accounting Standard
      157 -
      Fair Value Measurements (“SFAS No. 157”).  SFAS No. 157 defines fair value,
      establishes a framework for measuring fair value and expands disclosure of
      fair
      value measurements.  SFAS No. 157 applies under other accounting
      pronouncements that require or permit fair value measurements and accordingly,
      does not require any new fair value measurements.  SFAS No. 157 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007.  The Company is in the process of evaluating the
      impact that the adoption of SFAS No. 157 will have on its results of operations
      and financial condition.





In
      September 2006, the staff of the SEC issued Staff Accounting Bulletin No. 108
      (“SAB 108”) which provides interpretive guidance on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement. SAB 108 is effective for fiscal years
      ending on or after November 15, 2006. Adoption of SAB 108 did not have a
      material impact on the Company’s consolidated financial position, results of
      operations or cash flows.




In
      November 2006, the EITF reached a final consensus in EITF Issue 06-6 “Debtor’s
      Accounting for a Modification (or Exchange) of Convertible Debt Instruments”
(“EITF 06-6”). EITF 06-6 addresses the modification of a convertible debt
      instrument that changes the fair value of an embedded conversion option and
      the
      subsequent recognition of interest expense for the associated debt instrument
      when the modification does not result in a debt extinguishment pursuant to
      EITF
      96-19 , “Debtor’s Accounting for a Modification or Exchange of Debt
      Instruments”. The consensus should be applied to modifications or exchanges of
      debt instruments occurring in interim or annual periods beginning after November
      29, 2006. The Company does not expect the adoption of EITF 06-6 to have a
      material impact on its consolidated financial position, results of operations
      or
      cash flows.




In
      November 2006, the FASB ratified EITF Issue No. 06-7, “Issuer’s Accounting for a
      Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
      the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
      No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF
      06-7”). At the time of issuance, an embedded conversion option in a convertible
      debt instrument may be required to be bifurcated from the debt instrument and
      accounted for separately by the issuer as a derivative under FAS 133, based
      on
      the application of EITF 00-19. Subsequent to the issuance of the convertible
      debt, facts may change and cause the embedded conversion option to no longer
      meet the conditions for separate accounting as a derivative instrument, such
      as
      when the bifurcated instrument meets the conditions of Issue 00-19 to be
      classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion
      option previously accounted for as a derivative under FAS 133 no longer meets
      the bifurcation criteria under that standard, an issuer shall disclose a
      description of the principal changes causing the embedded conversion option
      to
      no longer require bifurcation under FAS 133 and the amount of the liability
      for
      the conversion option reclassified to stockholders’ equity. EITF 06-7 should be
      applied to all previously bifurcated conversion options in convertible debt
      instruments that no longer meet the bifurcation criteria in FAS 133 in interim
      or annual periods beginning after December 15, 2006, regardless of whether
      the
      debt instrument was entered into prior or subsequent to the effective date
      of
      EITF 06-7. Earlier application of EITF 06-7 is permitted in periods for which
      financial statements have not yet been issued. The Company
      is currently evaluating the impact of this guidance on its consolidated
      financial position, results of operations or cash flows.




F-24





In
      December 2006, the FASB issued FSP EITF 00-19-2 “Accounting for
      Registration Payment Arrangements” (“FSP EITF 00-19-2”) which specifies that the
      contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement should be separately
      recognized and measured in accordance with FASB Statement No. 5,
“Accounting for Contingencies.”  Adoption of FSP EITF 00-19-2 is required
      for fiscal years beginning after December 15, 2006. The Company
      is currently evaluating the expected effect of FSP EITF 00-19-2 on its
      consolidated financial statements and is currently not yet in a position to
      determine such effects.




In
      February 2007, the FASB issued Statement of Financial Accounting
      Standards No. 159 - The Fair Value Option for Financial Assets and Financial
      Liabilities (“SFAS 159”), to permit all entities to choose to elect, at
      specified election dates, to measure eligible financial instruments at fair
      value. An entity shall report unrealized gains and losses on items for which
      the
      fair value option has been elected in earnings at each subsequent reporting
      date, and recognize upfront costs and fees related to those items in earnings
      as
      incurred and not deferred. SFAS 159 applies to fiscal years beginning after
      November 15, 2007, with early adoption permitted for an entity that has also
      elected to apply the provisions of SFAS 157 - Fair Value Measurements. An
      entity is prohibited from retrospectively applying SFAS 159, unless it chooses
      early adoption. SFAS 159 also applies to eligible items existing at November
      15,
      2007 (or early adoption date).  The Company is currently in the process of
      evaluating the impact of the adoption of SFAS 155 on its results of operations
      and financial condition.





NOTE
      18.  SUBSEQUENT
      EVENTS:




a.
      Inauguration of activity in DRV Capital LLC




In
      January 2007, DRV Capital LLC, through its subsidiary, EAR Capital I, LLC,
      purchased its first two pools of defaulted debt. The pools total face value
      was
      $8,057,116, the purchase price was $607,994, and was funded by borrowings from
      Sheridan in the amount of $547,194. In connection with the first funding under
      this facility, the Company paid Maxim Group LLC a $50,000 introduction fee.




b.
      Acquisition of First Performance Corporation





On
      January 19, 2007, the Company acquired all of the outstanding capital stock
      of
      First Performance Corporation, a Nevada corporation (“First Performance”),
      pursuant to a Stock Purchase Agreement dated January 19, 2007, and accordingly,
      is no longer considered a development stage entity. First Performance is an
      accounts receivable management agency with operations in Las Vegas, Nevada
      and
      Fort Lauderdale, Florida, as well as offshore capabilities. 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 will be 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 has been assigned to trade names and $390,000 has been
      assigned to customer relationships. The amounts of these intangibles have been
      estimated based upon information available to management and are subject to
      change based upon an outside appraisal being completed. The acquired intangibles
      have been assigned definite lives and are subject to amortization, as described
      in the table below.




F-25





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





Intangible
                Asset Category
            
            Amortization
                Period
              in
                YearsTrade
                names
            
            
            10
                yearsCustomer
                relationships
            
            
            4
                years





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





Fair
                ValueRestricted
                cash
            
            $
            157,485Accounts
                receivable
            
            
            419,167Prepaid
                expenses and other current assets
            
            
            103,082Fixed
                assets, net
            
            
            286,229Intangible
                asset - trade names
            
            
            60,000Intangible
                asset - customer relationships
            
            
            390,000Deposits
                and other assets
            
            
            51,999Accounts
                payable
            
            
            (1,573,252
            )Net
                fair values assigned to assets acquired andliabilities
                assumed
            
            
            (105,290
            )Goodwill
            
            
            955,290Total
            
            $
            850,000





The
      following represents a summary of the purchase price consideration:





Cash
            
            $
            500,000Value
                of common stock issued
            
            
            350,000Total
                purchase price consideration
            
            $
            850,000




The
      following table presents the unaudited pro-forma combined results of operations
      of the Company and First Performance for each of the years ended December 31,
      2006 and 2005, respectively, as if First Performance had been acquired at the
      beginning of each of the periods.




For
                the Years Ended December 31,2006
            
            2005(unaudited)
            
            (unaudited)Revenues
            
            $
            6,185,679
            
            $
            8,071,508Net
                loss
            
            $
            (25,685,952
            )
            $
            (6,702,596
            )Pro-forma
                basic and diluted net loss per common share
            
            $
            (6.07
            )
            $
            (2.19
            )Weighted
                average common shares outstanding-
                basic and diluted
            
            
            4,232,429
            
            
            3,055,153





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 2005, nor are they necessarily indicative
      of
      future consolidated results.




F-26





The
      Company has assumed all commitments of First Performance, which includes
      primarily two leases for offices in Florida and Nevada. First
      Performance leases
      an office in Fort Lauderdale, Florida under a non-cancelable operating lease
      that expires January 31, 2009 and calls for monthly payments, net of a $5,000
      abatement, of $17,481. First
      Performance also
      leases an office in Las Vegas, Nevada under a non-cancelable operating lease
      that expires July 31, 2014 and calls for monthly payments of
      $21,644.




F-27