**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, 2007




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




For
      the
      transition period from  to





Commission
      File No.:  0-29525





**DEBT
      RESOLVE, INC.**


(Name
      of
      small business issuer in its charter)




**Delaware**
            
            **33-0889197**(State
                or other jurisdiction of
            
            (I.R.S.
                Employer Identification No.)incorporation
                or organization)**707
                Westchester Avenue, Suite L-7****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:




Name
                of Each ExchangeTitle
                of Each Class
            
            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 xNo 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 oNo x




The
      issuer’s revenues for its fiscal year ended December 31, 2007 were
      $2,845,823.




The
      aggregate market value of the voting and non-voting stock held by non-affiliates
      of the issuer was approximately $15,302,923, based on a closing price of $2.35
      per share on April 11, 2008, as quoted on the American Stock Exchange.




As
      of
      April 11, 2008, 8,478,530 shares of the issuer’s Common Stock were issued and
      outstanding.




Transitional
      Small Business Disclosure Format (check one):  Yes oNo x




**Documents
      Incorporated by Reference:** None













**DEBT
      RESOLVE, INC.**





**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
            
            47Item
                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 provide a patented
      software solution to consumer lenders based on our licensed, proprietary
      DebtResolve ® system.
      Our Internet-based bidding system facilitates the settlement and collection
      of
      defaulted consumer debt via the Internet. Our existing and target creditor
      clients include banks and other credit originators, credit card issuers and
      third-party collection agencies, 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.
      We currently have written contracts in place with and have begun processing
      select portfolios for several banks, collection agencies and collection law
      firms. The loss of one or more of these contracts would have a material adverse
      impact on our business.





Through
      DRV Capital LLC, our wholly-owned subsidiary formed on June 5, 2006, we also
      entered into the business of purchasing and collecting debt. However, on October
      15, 2007, we discontinued the activities of DRV Capital and sold all remaining
      portfolios. DRV Capital purchased defaulted consumer debt portfolios that were
      managed and collected through our DebtResolve system and traditional collection
      agencies. DRV Capital purchased charged-off debt portfolios through its
      single-purpose subsidiary EAR Capital I, LLC, formed in December 2006 and used
      funding provided by an investment partner. The investment partner was repaid,
      and the agreement expired by its terms on December 21, 2007. Our decision to
      discontinue DRV Capital was based on the decision that it was a non-core
      asset.




2





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





**Corporate
      Information**




We
      were
      incorporated as a Delaware corporation in April 1997 under our former name,
      Lombardia Acquisition Corp. In 2000, we filed a registration statement on Form
      10-SB with the U.S. Securities and Exchange Commission, or SEC, and became
      a
      reporting, non-trading public company. Through February 24, 2003, we were
      inactive and had no significant assets, liabilities or operations. On February
      24, 2003, James D. Burchetta and Charles S. Brofman, directors of our company,
      and Michael S. Harris, a former director of our company, purchased 2,250,000
      newly-issued shares of our common stock, representing 84.6% of the then
      outstanding shares. We received an aggregate cash payment of $22,500 in
      consideration for the sale of such shares to Messrs. Burchetta, Brofman and
      Harris. Our board of directors was then reconstituted and we began our current
      business and product development. On May 7, 2003, following approvals by our
      board of directors and holders of a majority of our outstanding shares of common
      stock, our certificate of incorporation was amended to change our corporate
      name
      to Debt Resolve, Inc. and to increase the number of our authorized shares of
      common stock from 20,000,000 to 50,000,000 shares. On August 16, 2006, following
      approvals by our board of directors and holders of a majority of our outstanding
      shares of common stock, our certificate of incorporation was amended to increase
      the number of our authorized shares of common stock from 50,000,000 to
      100,000,000 shares. On August 25, 2006, following approvals by our board of
      directors and holders of a majority of our outstanding shares of common stock,
      our certificate of incorporation was amended to effect a 1-for-10 reverse stock
      split of our outstanding shares of common stock, which reduced our outstanding
      shares of common stock from 29,703,900 to 2,970,390 shares. On November 6,
      2006,
      we completed an initial public offering which, in conjunction with the
      conversion of convertible bridge notes into shares of our common stock,
      increased the number of outstanding shares of common stock to 6,456,696.
      Subsequent common stock grants, option exercises, the acquisition of First
      Performance, warrant grants and private placements have brought us to our
      current number of outstanding shares of common stock. Our principal executive
      offices are located at 707 Westchester Avenue, Suite L-7, 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, 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 complementary
                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 solution and
      began marketing it to banks, collection agencies, debt buyers and other
      creditors. In February 2004, we implemented our DebtResolve system, on a test
      basis, with a collection agency. From that time forward, we have implemented
      our
      system with additional clients, but have not earned, nor did we expect to
      generate, significant revenues from these clients during the initial start-up
      periods. During the last quarter of 2007, Internet revenue began to increase
      over the first three quarters of 2007, and we expect it to accelerate in 2008.
      On January 19, 2007, we acquired all of the outstanding shares of First
      Performance Corporation for a combination of cash and shares of our common
      stock.





**Our
      Core Business**





***The
      DebtResolve System***





Our
      DebtResolve system brings creditors and consumer debtors together to resolve
      defaulted consumer debt through a series of steps. The process is initiated
      when
      one of our clients electronically forwards to us a file of debtor accounts
      and
      sets rules or parameters for handling each class of accounts. The client then
      invites its customer (the consumer debtor) to visit a client-branded website,
      developed and hosted by us, where the consumer debtor is presented with an
      opportunity to satisfy the defaulted debt through the DebtResolve system.
      Through the website, the consumer debtor is allowed to make three or four
      offers, or select other options, to resolve or settle the obligation. If the
      consumer debtor makes an offer acceptable to our creditor client, payment can
      then be collected directly through the DebtResolve system and deposited into
      the
      client’s own account. 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
      collection law firms and debt buyers. The means by which collections have
      traditionally been pursued, by phone and mail, are, we believe, perceived by
      debtors as intrusive and intimidating. In addition, the general trend in the
      collections industry is moving towards outsourcing of collections efforts to
      third parties.




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. Through DRV
      Capital, we entered into the business of purchasing and collecting debt.
      However, on October 15, 2007, we discontinued the activities of DRV Capital
      and
      sold all remaining portfolios. DRV Capital purchased defaulted consumer debt
      portfolios that were managed and collected through our DebtResolve system and
      traditional collection agencies. DRV Capital purchased charged-off debt
      portfolios through its single-purpose subsidiary EAR Capital I, LLC, formed
      in
      December 2006 and used funding provided by an investment partner. The investment
      partner was repaid, and the agreement expired by its terms on December 21,
      2007.
      We decided to exit this business to focus more attention of our core
      business.





5





***First
      Performance Corporation***





We
      purchased First Performance Corporation and its subsidiary, First Performance
      Recovery Corporation, in January 2007. First Performance is a collection agency
      that represents both regional and national credit grantors and debt buyers
      from
      such diverse industries as retail, bankcard, oil cards, mortgage and auto.
      As of
      December 2007, First Performance Recovery had 20 full-time employees, all of
      whom are located at its Las Vegas, Nevada offices, and 13 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.”


Due
        to
        the loss of four major clients at First Performance during the first nine
        months
        of 2007, we performed two interim impairment analyses in accordance with
        SFAS
        142. As a result of these analyses, we recorded impairment charges aggregating
        $1,206,335 during the year ended December 31, 2007.


**Our
      Industry**





According
      to the U.S. Federal Reserve Board, consumer credit has increased from $133.7
      billion in 1970 to $2.5 trillion in December 2007, a compound annual growth
      rate
      of 8.2% for the period. For January 2008, U.S. consumer credit increased at
      an
      annual rate of 3.25%, revolving credit increased at an annual rate of 7%, and
      non-revolving credit increased at an annual rate of 1%. In parallel, the
      accounts receivables management (ARM) industry accounts for $15 billion in
      annual revenues according to industry analyst Kaulkin Ginsberg.





There
      are
      several major collections industry trends:





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





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





·
            Off-shoring
                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 Internet-based collections have the
      ability to positively impact the cost-to-collect by reducing agent involvement,
      while analytics focuses agent time on the accounts with the highest potential
      to
      collect.




6





**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. We also entered the auto
                collections vertical in 2007 with the addition of several clients
                in this
                area. As of December 31, 2007, we were actively targeting new market
                segments like healthcare and 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
                Internet/payday lending. Our new CEO, Kenneth Montgomery, has very
                strong
                sales, marketing and senior management experience and is working
                to
                accelerate our revenue growth.




·
            **Expand
                our service offerings.**Using
                statistics developed through our in-house collection agency, 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. We may work by ourselves
                or
                with partners to provide one-stop shopping to our clients for a broad
                array of collection related
                services.





·
            **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, 2007, 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.





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





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





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





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




7




**Sales
      and Marketing**





***The
      DebtResolve System***





Our
      current sales efforts for our core business are focused on United States and
      United Kingdom 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. We obtained our first UK client, a top collection
      agency, in 2007 and completed implementation of their system in early
      2008.





We
      also
      formed a partnership with ODC Tools in the Netherlands to market our system
      in
      the Benelux countries. We have a number of prospects and expect to make steady
      progress in attracting new clients on the European continent. We also have
      a
      number of other partnerships being implemented or negotiated in other areas
      around the globe.





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





***First
      Performance Recovery Corporation***





First
      Performance was restructured in 2007 with new management, new technology and
      new
      clients. First Performance sells to the financial, prime and sub-prime
      automotive, retail, healthcare 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 and other credit issuers, debt buyers, healthcare institutions and other
      financial institutions focused on consumer mortgages.




8





**Technology
      License and Proprietary Technology**





At
      the
      core of our DebtResolve system is a patent-protected bidding methodology
      co-invented by James D. Burchetta and Charles S. Brofman, the co-founders of
      our
      company. We originally entered into a license agreement in February
      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, which were granted as follows:





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





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





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





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





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





The
      term
      of the license agreement extends until the expiration of the last-to-expire
      patents licensed hereunder (now 7 patents) and is not terminable by Messrs.
      Burchetta and Brofman, the licensors. The license agreement also provides that
      we will have the right to control the ability to enforce the patent rights
      licensed to us against infringers and defend against any third-party
      infringement actions brought with respect to the patent rights licensed to
      us
      subject, in the case of pleadings and settlements, to the reasonable consent
      of
      Messrs. Burchetta and Brofman. The terms of the license agreement, including
      the
      exercise price and number of stock options granted under the agreement, were
      negotiated in an arm’s-length transaction between Messrs. Burchetta and Brofman,
      on the one hand, and our independent directors, on the other hand.





Cybersettle,
      Inc. also licenses and utilizes the patent-protected bidding methodology
      co-invented by Messrs. Burchetta and Brofman, exclusive to the settlement of
      personal injury, property and worker’s compensation claims between claimants and
      insurance companies, self-insured corporations and municipalities. Cybersettle
      is controlled by XL Capital Ltd., one of the world’s largest insurance
      providers, and Mr. Brofman 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,” “First Performance Corporation,” and “First Performance Recovery
      Corporation” are our trademarks/service marks, and we intend to attempt to
      register them with the U.S. Patent and Trademark Office as well.




9





**Technology
      and Service Providers**





In
      2007,
      we outsource our web hosting to Cervalis LLC and replaced AT&T for
      significant cost savings, while maintaining our security in a SAS 70 certified
      environment. The Cervalis hosting facility is located in Wappingers Falls,
      New
      York. We use our own servers in Cervalis’ environment to operate our proprietary
      software developed in our White Plains, New York facility.





**Competition**





***The
      DebtResolve System***





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





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




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





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





10





***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
      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.
      First Performance is licensed by the states where it does business (virtually
      all) to conduct collection activities in these states.





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 implementation of Regulation Z, the federal Fair Credit Reporting Act,
      and state unfair and deceptive acts and practices laws. Collection laws and
      regulations also directly apply to our business, such as the federal Fair Debt
      Collection Practices Act and state law counterparts. Additional consumer
      protection and privacy protection laws may be enacted that would impose
      additional requirements on the enforcement of and collection on defaulted
      consumer debt, and any new laws, rules or regulations that may be adopted,
      as
      well as existing consumer protection and privacy protection laws, may adversely
      affect our ability to collect, particularly at our First Performance subsidiary.
      Finally, federal and state governmental bodies are considering, and may consider
      in the future, other legislative proposals that would regulate the collection
      of
      consumer debt, and although we cannot predict if or how any future legislation
      would impact this expansion of our business into traditional collections, our
      failure to comply with any current or future laws or regulations applicable
      to
      us could limit our ability to collect on any consumer debt.





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





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




11





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





We
      are
      actively licensing our DebtResolve system to prospects in the United Kingdom
      and
      have obtained our first client there. Since we host client account data on
      our
      system, we are 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. We
      cannot predict how foreign laws will impact our ability to expand our business
      internationally or affect the cost of such expansion. We will evaluate
      applicable foreign laws as our efforts to expand our business into other foreign
      jurisdictions warrant.





**Employees**





As
      of the
      date of this report, we have 33 employees in total, of which 30 are full-time
      employees. Of our total employees, 11 are based at our corporate headquarters
      in
      White Plains, New York and 22 are based in First Performance’s office in Las
      Vegas, Nevada. None of our employees is subject to a collective bargaining
      agreement, and we believe that our relations with our employees are good.








**ITEM
      1A. Risk Factors**





**Cautionary
      Statements and Risk Factors**





*Set
      forth below and elsewhere in this Form 10-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 ended December 31, 2007, we had inadequate revenues and incurred a net
        loss from continuing operations of $12,143,832.  Cash used in operating and
        investing activities for continuing operations was $7,517,851 for the year
        ended
        December 31, 2007. Based upon projected operating expenses, we believe
        that our working capital as of the date of this report may not be
        sufficient to fund our plan of operations for the next twelve months.  The
        aforementioned factors raise substantial doubt about our ability to continue
        as
        a going concern.
  The
          Company needs to raise additional capital in order to be able to accomplish
          its
          business plan objectives.  The Company has historically satisfied its
          capital needs primarily from the sale of debt and equity securities.
 Management of the Company is continuing its efforts to secure additional
          funds through debt and/or equity instruments. Management believes that
          it will
          be successful in obtaining additional financing; however, no assurance
          can be
          provided that the Company will be able to do so. There is no assurance
          that
          these funds will be sufficient to enable the Company to attain profitable
          operations or continue as a going concern.  To the extent that the Company
          is unsuccessful, the Company may need to curtail its operations and implement
          a
          plan to extend payables and reduce overhead until sufficient additional
          capital
          is raised to support further operations. There can be no assurance that
          such a
          plan will be successful. These consolidated financial statements do not
          include
          any adjustments that might result from the outcome of this uncertainty.
  Subsequent
          to December 31, 2007, the Company has secured additional financing from
          three
          related parties in the aggregate amount of $167,000.  In addition, the
          Company has also entered into various notes payable with a bank and other
          investors in the aggregate amount of $848,000.  On March 31, 2008, the
          Company entered into a private placement agreement with Harmonie International
          LLC (“Harmonie”) for $7,000,000.  As of April 14, 2008, funds under this
          agreement have not been received and there is no assurance that the Company
          will
          receive such proceeds.


12




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





We
      began
      our Internet technology operations in 2003, therefore your evaluation of our
      business and prospects will be based on the limited operating history of this
      business. Consequently, our historical results of operations may not give an
      accurate indication of our future results of operations or prospects. You must
      consider our business and prospects in light of the risks and difficulties
      we
      will encounter in a relatively new and rapidly evolving market. We may not
      be
      able to address these risks and difficulties, which make it difficult to
      evaluate our future prospects and the viability of our business.




***We
        have experienced significant and continuing losses from operations. In fiscal
        years 2006 and 2007, we have incurred total net losses for these two years
        of
        $33,785,918. If such losses continue, we may not be able to continue our
        operations.***
 
 We
        incurred a net loss from continuing operations of $12,143,832 for the year
        ended
        December 31, 2007 and $21,642,086 for the year ended December 31, 2006. From
        February 2003 to date, our operations have been funded almost entirely through
        the proceeds that we have received from the issuance of our common stock
        in
        private placements, the issuance of our 7% convertible promissory notes in
        two
        private financings in 2005, the issuance of convertible and non-convertible
        notes in a private financing in June 2006, the issuance of our common stock
        at
        our initial public offering, and from a private financing in 2007 and various
        individual private placements and shareholder loans . 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, from a flat fee per settlement or from
      recurring license fees for the use of our system, potentially coupled with
      success or other transaction fees. We depend on our creditor clients, who
      include but are not limited to first-party creditors such as banks, lenders,
      credit card issuers, telecoms and utilities, third-party collection agencies
      and
      purchasers of charged-off debt, to initiate the process by submitting defaulted
      consumer debt accounts on our system along with the settlement offers. We cannot
      be sure that we will be able to retain our existing, and enter into new,
      relationships with creditor clients in the future. In addition, we cannot be
      certain that we will be able to establish these creditor client relationships
      on
      favorable economic terms. Finally, we cannot control the number of accounts
      that
      our clients will submit on our system, how successfully they will promote access
      to the website, or whether the use of our system will result in any increase
      in
      recovery over traditional collection methods. If our client base, and their
      corresponding claims submission, does not increase significantly or experience
      favorable results, we will not be able to generate sufficient revenues to
      continue and sustain our DebtResolve system business.





***If
      we are unable to retain current First Performance Recovery 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 Recovery 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.




13





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





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





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





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





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





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





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





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








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





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





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





14





***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.





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-founders of our company, whose patented technology is now, and is anticipated
      to continue to be, incorporated into our service offerings as a key component.
      This license agreement limits usage of the technology to the creation of
      software and other code enabling an automated system used solely for the
      settlement and collection of credit card receivables and other consumer debt
      and
      specifically excludes the settlement and collection of insurance claims, tax
      and
      other municipal fees of all types. These limitations on usage of the licensed
      technology could constrain the expansion of our business by limiting the
      different types of debt for which our DebtResolve system can potentially be
      used, and limiting the potential clients that we could service.




15





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





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





As
      of
      April 2008, Messrs. Burchetta and Brofman own approximately 29% of our
      outstanding shares of common stock. They have controlled our company since
      its
      inception. Under the terms of our license agreement, Messrs. Burchetta and
      Brofman will be entitled to receive stock options to purchase shares of our
      common stock if and to the extent the licensed technology produces specific
      levels of revenue for us. They will not be entitled receive any stock options
      for other debt collection activities such as off-line settlements. Messrs.
      Burchetta and Brofman have substantial influence for selecting the business
      direction we take, the products and services we may develop and the mix of
      businesses we may pursue. The license agreement may present Messrs. Burchetta
      and Brofman with conflicts of interest.





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





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





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





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





In
      the
      normal course of our business, we must record and process significant amounts
      of
      data quickly and accurately 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 Cervalis
      in
      New York, and under the terms of our hosting service level agreement with
      Cervalis, they will provide network connectivity availability 99.9% of the
      time
      from the connection off their backbone to our hosted infrastructure.




16





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





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





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





We
      believe that our ability to execute our business strategy will depend to a
      significant extent upon the efforts and abilities of James D. Burchetta, our
      Chairman and co-founder. Mr. Burchetta, who is a licensor of key
      intellectual property to us, has knowledge regarding online debt collection
      technology and business contacts that would be difficult to replace. If Mr.
      Burchetta were to become unavailable to us, our operations would be adversely
      affected. We carry term, “key-man” life insurance for our benefit in the amount
      of $1,000,000 on the life of Mr. Burchetta, but not for any other officer.
      This
      insurance may be inadequate to compensate us for the loss of Mr. Burchetta.
      Moreover, we have no insurance to compensate us for the loss of any other of
      our
      named executive officers or key employees.





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




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




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




17




**Risks
      Related to Our Industry**





***The
      ability of our DebtResolve system clients and First Performance Recovery
      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 or the cost of such expansion. Our failure to comply with any
      current or future applicable laws or regulations could limit our ability to
      settle defaulted consumer debt claims on behalf of our clients, which could
      adversely affect our revenues.





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





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





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




18





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





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





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





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





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





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





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





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




19





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





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





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





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





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





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





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





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





**Risks
      Related to the Economy**





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





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





20




**ITEM
      2. Description of Property**




We
      lease
      approximately 4,900 square feet of office space at 707 Westchester Avenue,
      Suite
      L-7, 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.




In
      conjunction with the acquisition of First Performance Corporation and its
      subsidiary, First Performance Recovery Corporation, we assumed responsibility
      for the existing First Performance leases in Nevada and Florida. The Nevada
      facility consists of 13,708 square feet at 600 Pilot Road, Las Vegas, Nevada
      89119. We lease this space for $20,599 per month under a non-cancelable lease
      through July 31, 2014. The Florida facility consisted of 12,415 square feet
      at
      4901 N.W. 17 th Way,
      Suite 201, Ft. Lauderdale, Florida 33309. We leased this space for $22,481
      per
      month (less a $5,000 abatement in effect in early 2007) under a non-cancelable
      lease through January 31, 2009. However, on May 31, 2007, we ceased operations
      in Florida and relinquished the space on June 30, 2007. An agreement was reached
      with the landlord to permit cancellation of the lease for payment of three
      months rent. We completed these payments on September 30, 2007.




**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 alleged
      that Apollo’s online debt collection system infringed 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.




On
      November, 5, 2007, Debt Resolve and Apollo jointly announced that they had
      reached a settlement of the pending patent infringement lawsuit. The parties
      came to agreement that Apollo’s system, as represented by Apollo, does not
      infringe on Debt Resolve’s United States Patents: Nos. 6,330,551 and 6,954,741,
      both entitled Computerized Dispute Resolution System and Method. The parties
      further agreed to respect each other’s intellectual property to the extent it is
      validly patent protected with the parties reserving all of their legal
      rights.




**ITEM
      4. Submission of Matters to a Vote of Security Holders**




We
      did
      not submit any matters to a vote of security holders during the fourth quarter
      of the fiscal year ended December 31, 2007.




21


**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 31,2007
            
            2006Quarter
            
            High
            
            Low
            
            High
            
            LowFirst
            
            $
            4.40
            
            $
            3.53
            
            
            —
            
            
            —Second
            
            $
            5.05
            
            $
            2.48
            
            
            —
            
            
            —Third
            
            $
            3.61
            
            $
            1.76
            
            
            —
            
            
            —Fourth
            
            $
            2.50
            
            $
            0.84
            
            
            —
            
            
            —Fourth
                (beginning November 2, 2006)
            
            
            —
            
            
            —
            
            $
            4.98
            
            $
            3.50





For
      the
      period from January 1, 2008 to April 11, 2008, the high and low closing prices
      for our common stock were $2.44 and $0.77, 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
      April 11, 2008, there were approximately 1,000 record holders of our common
      stock.




On
      January 7, 2008, we received a deficiency letter from the American Stock
      Exchange stating that we were not in compliance with specific provisions of
      the
      American Stock Exchange continued listing standards in that we are not in
      compliance with Section 1003(a)(iv) of the American Stock Exchange Company
      Guide. We are working to address this deficiency. We presented a 90-day plan
      that the Exchange accepted and continued our listing pending completion of
      the
      plan. We have until Friday, April 18, 2008 to complete our plan, which is
      principally based on securing the funding committed by Harmonie International
      on
      March 31, 2008. To date, we have not yet received the funding.




**Dividends**





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




**Recent
      Sales of Unregistered Securities**





There
      were no sales of our unregistered securities, other than as reported in prior
      reports on Forms 10-KSB, 10-QSB or 8-K, for the three years ended December
      31,
      2007.





**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, 2007.





**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.*




22




**Overview**




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





Since
      completing initial product development in early 2004, our primary business
      has
      been providing a software solution to consumer lenders or those collecting
      on
      those loans based on our proprietary DebtResolve system, our Internet-based
      bidding system that facilitates the settlement and collection of defaulted
      consumer debt via the Internet. We have marketed our service primarily to
      consumer credit card issuers, collection agencies, collection law firms and
      the
      buyers of defaulted debt in the United States and Europe. We intend to market
      our service to other segments served by the collections industry worldwide.
      For
      example, we believe that our system will be especially valuable for the
      collection of low balance debt, such as that held by utility companies and
      online service providers, where the cost of traditionally labor intensive
      collection efforts may exceed the value collected. We also intend to pursue
      past-due Internet-related debt, such as that held by sellers of sales and
      services online. We believe that consumers who incurred their debt over the
      Internet will be likely to respond favorably to an Internet-based collection
      solution. In addition, creditors of Internet-related debt usually have access
      to
      debtors’ e-mail addresses, facilitating the contact of debtors directly by
      e-mail. 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. In the United Kingdom, we have engaged an agent
      to
      represent us for sales and customer service for a flat monthly fee. We recently
      announced the signing of our first European customer, a U.K.-based large
      collection agency. We may incur additional costs, which we cannot anticipate
      at
      this time, if we expand into Canada and other countries.




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




Our
      current contracts provide that we will earn revenue based on a percentage of
      the
      amount of debt collected from accounts submitted on our DebtResolve system,
      from
      flat fees per settlement achieved or a flat monthly license fee. Although other
      revenue models have been proposed, most revenue earned to date has been
      determined using these methods, and such revenue is recognized when the
      settlement amount of debt is collected by our client. 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, in the aggregate
      or
      per account, with some contracts having a small transaction fee on debt
      settlement as well. In addition, with respect to our DR Prevent TM module, which
      settles consumer debt at earlier stages, 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 reflects that knowledge.




23




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




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




In
      January 2007, we purchased the outstanding common stock of First Performance
      Corporation and, as a result, we are no longer in the development stage as
      of
      the date of the acquisition.. First Performance Corporation and its subsidiary,
      First Performance Recovery Corp., are collection agencies that represent both
      regional and national credit grantors from such diverse industries as retail,
      bankcard, oil cards, mortgage and auto. 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. Due to the loss of four major clients at First
      Performance during the first nine months of 2007, we performed two interim
      impairment analyses in accordance with SFAS 142. As a result of these analyses,
      we recorded impairment charges aggregating $1,206,335 during the year ended
      December 31, 2007.





Revenue
      streams associated with this business include contingency fee revenue on
      recovery of past due consumer debt and non-sufficient funds fees on returned
      checks.





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





For
      the
      year ending December 31, 2007, we had inadequate revenues and incurred a
      net loss of $12,143,842 from continuing operations.  Cash used in operating
      and investing activities of continuing operations was $7,517,851 for the year
      ended December 31, 2007. 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.




24




The
        Company needs to raise additional capital in order to be able to accomplish
        its
        business plan objectives.  The Company has historically satisfied its
        capital needs primarily from the sale of debt and equity securities.
 Management of the Company is continuing its efforts to secure additional
        funds through debt and/or equity instruments. Management believes that it
        will
        be successful in obtaining additional financing; however, no assurance can
        be
        provided that the Company will be able to do so. There is no assurance that
        these funds will be sufficient to enable the Company to attain profitable
        operations or continue as a going concern.  To the extent that the Company
        is unsuccessful, the Company may need to curtail its operations and implement
        a
        plan to extend payables and reduce overhead until sufficient additional capital
        is raised to support further operations. There can be no assurance that such
        a
        plan will be successful. These consolidated financial statements do not include
        any adjustments that might result from the outcome of this uncertainty.
  Subsequent
        to December 31, 2007, the Company has secured additional financing from three
        related parties in the aggregate amount of $167,000.  In addition, the
        Company has also entered into various notes payable with a bank and other
        investors in the aggregate amount of $848,000.  On March 31, 2008, the
        Company entered into a private placement agreement with Harmonie International
        LLC (“Harmonie”) for $7,000,000.  As of April 14, 2008, funds under this
        agreement have not been received and there is no assurance that the Company
        will
        receive such proceeds.


**Results
      of Operations**




***Year
      ended December 31, 2007 Compared to Year Ended December 31, 2006***




**Revenues**




Revenues
      totaled $2,845,823 and $98,042 for the years ended December 31, 2007 and 2006,
      respectively. We earned revenue during the year ended December 31, 2007 from
      percentage fees earned on debt collected by our collection agency, as a percent
      of debt collected at collection agencies, collection law firms, a lender and
      two
      banks that implemented our online system, and as a flat fee per settlement
      with
      some clients. Of the revenue earned during the year ended December 31, 2007,
      $2,778,374 was earned as fees on debt collected at our collection agency,
      $59,949 was contingency fee income, based on a percentage of the amount of
      debt
      collected from accounts placed on our online system or settlement fees, and
      $7,500 was start up fee income. Of the revenue earned during the year ended
      December 31, 2006, $25,000 was earned for fees charged to license our software
      for the period, $3,600 was start up fee income and $69,442 was contingency
      fee
      income, based on a percentage of the amount of debt collected from accounts
      placed on our online system.




**Costs
      and Expenses**




**Payroll
      and related expenses.** Payroll
      and related expenses totaled $7,038,243 for the year ended December 31, 2007,
      an
      increase of $1,514,184 over payroll and related expenses of $5,524,059 for
      the
      year ended December 31, 2006. This increase was due to payroll and related
      expenses for our First Performance subsidiary acquired in 2007, which totaled
      $3,128,655 for the twelve month period. Internet (Debt Resolve) payroll and
      related expenses were reduced to $3,909,589 for the year ended December 31,
      2007
      from $5,524,059 for the year ended December 31, 2006, a reduction of $1,614,470.
      The reduction occurred primarily in non-cash stock based compensation expense
      of
      $2,207,950 for the year ended December 31, 2007 and $2,839,562 for the year
      ended December 31, 2006, a decrease of $631,612, reflecting fewer grants to
      employees in 2007, and allocations in 2007 from Debt Resolve to both First
      Performance and our discontinued subsidiary DRV Capital of $680,525 in 2007,
      with none in 2006. Importantly, salaries also decreased in 2007 to $1,891,928
      from $2,284,092 in 2006, a savings of $392,464 as a result of aggressive cost
      management in the fourth quarter of 2007. Internet business cash (excluding
      non-cash stock based compensation and inter-company allocations) payroll and
      related expenses for the years ended December 31, 2007 and 2006 were $2,382,164
      and $2,684,497, respectively, an decrease of $302,333, or 11.3% due to staff
      reductions. Salary and commission expenses were $4,168,460 for the year ended
      December 31, 2007, an increase of $1,882,196 over salary and commission expenses
      of $2,286,264 for the year ended December 31, 2006, entirely due to the addition
      of First Performance. In addition, the staffing increase related to the First
      Performance acquisition resulted in payroll tax expense of $355,682 for the
      year
      ended December 31, 2007, an increase of $232,600 over payroll tax expense of
      $123,082 for the year ended December 31, 2006 and an increase in health
      insurance expense to $334,972 for the year ended December 31, 2007 from $148,163
      in the year ended December 31, 2006, an increase of $186,809. Other
      miscellaneous salary related expenses were $178,833 in payroll expenses for
      the
      year ended December 31, 2007 as compared with $124,765 for the year ended
      December 31, 2006, an increase of $54,068 due to an increase in severance
      expenses as cost reduction accelerated in 2007.




25




**General
      and administrative expenses.** General
      and administrative expenses amounted to $5,395,224 for the year ended December
      31, 2007, as compared to $3,308,634 for the year ended December 31, 2006, an
      increase of $2,086,590. This increase was primarily due to the acquisition
      of
      First Performance, which added $2,114,472 to general and administrative expenses
      for the twelve month period. In addition, a charge of $68,329 for disposal
      of
      fixed assets was incurred by First Performance. Internet (Debt Resolve) general
      and administrative expenses decreased by $151,867 due to cost savings measures
      taken in the third and fourth quarters of 2007. The expense for stock based
      compensation for stock options granted to consultants for the year ended
      December 31, 2007 was $271,230, as compared with stock based compensation in
      the
      amount of $1,468,550 for the year ended December 31, 2006. Also, for the year
      ended December 31, 2007, consulting fees totaled $842,680, as compared with
      $244,294 in consulting fees for the year ended December 31, 2006, resulting
      in
      an increase of $598,386, primarily related to hiring outside consultants to
      assist in selling the DebtResolve system in the United States and the United
      Kingdom, and to assist in the integration and management of our new First
      Performance subsidiary, as well as costs related to the August 2007 private
      placement. Legal fees increased by $488,105 to $860,161 for the year ended
      December 31, 2007 from $372,056 for the year ended December 31, 2006, primarily
      due to the patent litigation against Apollo Enterprise Solutions. The expenses
      for occupancy, telecommunications, travel and office supplies in the year ended
      December 31, 2007 were $509,725, $532,566, $284,921 and $201,411, respectively,
      as compared with expenses of $123,328, $217,193, $222,419 and $20,891 for
      occupancy, telecommunications, travel and office supplies, respectively, for
      the
      year ended December 31, 2006, all due almost exclusively to the addition of
      First Performance and additional travel in support of the Creditors Interchange
      acquisition. Marketing expenses increased by $162,410 to $313,596 during the
      year ended December 31, 2007 from $151,186 for the year ended December 31,
      2006,
      primarily due to our expanded efforts to market the DebtResolve system. Direct
      collection costs of First Performance were $513,323 during the year ended
      December 31, 2007 and $0 for the year ended December 31, 2006, as First
      Performance began operations with us in January, 2007. Other general operating
      costs for the year ended December 31, 2007, including insurance and accounting
      expenses, amounted to $1,030,931, as compared with $435,139 for the year ended
      December 31, 2006, primarily due to the acquisition of First
      Performance.




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




**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-founders in payment for licensing rights to their
      patent.




**Impairment
      of goodwill and intangibles.** For the
      year ended December 31, 2007, an expense of $1,206,335 was recorded related
      to
      the impairment of purchased intangibles and goodwill at First
      Performance.




**Depreciation
      and amortization expense** .
      For the
      year ended December 31, 2007, we recorded depreciation expense of $150,038
      and
      an expense of $77,022 for the amortization of intangibles recorded in connection
      with the acquisition of First Performance Corporation in January 2007. For
      the
      year ended December 31, 2006 we had no amortization expense, but recorded
      depreciation expense of $51,728.




**Interest
      expense.** We
      recorded interest expense,
      net of
      interest incomeof $22,466 from continuing operations for the year ended
      December 31, 2007, compared to interest expense of $778,243 for the year ended
      December 31, 2006. Interest expense for the year ended December 31, 2007
      includes interest on our lines of credit, one short term note and one long
      term
      note, and interest expense for the year ended December 31, 2006 includes
      interest accrued on our 7% convertible notes and other short term
      notes.




**Amortization
        of deferred debt discount.** Amortization
        expense of $132,400 was incurred for the year ended December 31, 2007 for
        the
        amortization of the beneficial conversion feature of our line of credit and
        note
        offerings. Amortization expense of $4,641,985 was incurred for the year ended
        December 31, 2006 for the amortization of the value of the beneficial conversion
        feature and deferred debt discount associated with our convertible note
        offerings. These convertible note offerings were repaid during 2006 and the
        related deferred debt discount was fully amortized.


**Amortization
      of deferred financing costs.** Amortization
      expense of $665,105 was incurred for the year ended December 31, 2006 for the
      amortization of deferred financing costs associated with our convertible note
      offerings. These convertible note offerings were repaid in 2006 and the related
      deferred financing costs were fully amortized.




26




**Liquidity
      and Capital Resources**




As
        of
        December 31, 2007, we had a working capital deficiency in the amount of
        $3,112,500, and cash and cash equivalents totaling $0. We incurred a net
        loss of
        $12,143,832 for continuing operations for the year ended December 31, 2007.
        Net
        cash used in operating and investing activities for continuing operations
        was
        $7,517,851 for the year ended December 31, 2007. Cash flow provided by financing
        activities for continuing operations was $3,044,365 for the year ended December
        31, 2007. Our working capital as of the date of this report is negative and
        is
        not sufficient to fund our plan of operations for the next year.  The
        aforementioned factors raise substantial doubt about our ability to continue
        as
        a going concern.
  The
        Company needs to raise additional capital in order to be able to accomplish
        its
        business plan objectives.  The Company has historically satisfied its
        capital needs primarily from the sale of debt and equity securities.
 Management of the Company is continuing its efforts to secure additional
        funds through debt and/or equity instruments. Management believes that it
        will
        be successful in obtaining additional financing; however, no assurance can
        be
        provided that the Company will be able to do so. There is no assurance that
        these funds will be sufficient to enable the Company to attain profitable
        operations or continue as a going concern.  To the extent that the Company
        is unsuccessful, the Company may need to curtail its operations and implement
        a
        plan to extend payables and reduce overhead until sufficient additional capital
        is raised to support further operations. There can be no assurance that such
        a
        plan will be successful. These consolidated financial statements do not include
        any adjustments that might result from the outcome of this uncertainty.
  Subsequent
        to December 31, 2007, the Company has secured additional financing from three
        related parties in the aggregate amount of $167,000.  In addition, the
        Company has also entered into various notes payable with a bank and other
        investors in the aggregate amount of $848,000.  On March 31, 2008, the
        Company entered into a private placement agreement with Harmonie International
        LLC (“Harmonie”) for $7,000,000.  As of April 14, 2008, funds under this
        agreement have not been received and there is no assurance that the Company
        will
        receive such proceeds.


In
      the
      second and fourth quarters of 2007 and the first quarter of 2008, we reduced
      overhead and extended payables.




On
      April
      4, 2008, we filed a Form 8-K announcing the closing of a financing transaction
      for $7,000,000 with Harmonie International LLC for the purchase of common stock
      and warrants in a private placement. The shares and warrants were valued at
      $2.36 per share, a premium to the market on the day of closing, March 31, 2008.
      In addition, we agreed to take our best efforts to cause William Donahue,
      President and CEO of Harmonie, to become a Director of Debt Resolve at the
      next
      meeting of the Board of Directors. As of April 14, 2008, we have not received
      any proceeds from this transaction.




**Discontinued
      Operations**




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




**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, 2007 and 2006. We cannot assure
      you
      that future inflation will not have an adverse impact on our operating results
      and financial condition.




27




**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:




*Accounts
      Receivable*




We
      extend
      credit to large and mid-size companies for collection services. We have
      concentrations of credit risk as 76% of the balance of accounts receivable
      at
      December 31, 2007 consists of only three customers. At December 31, 2007,
      accounts receivable from the three largest accounts amounted to approximately
      $34,633 (41%), $16,277 (19%) and $13,340 (16%), respectively. We do not
      generally require collateral or other security to support customer receivables.
      Accounts receivable are carried at their estimated collectible amounts. Accounts
      receivable are periodically evaluated for collectibility and the allowance
      for
      doubtful accounts is adjusted accordingly. Our management determines
      collectibility based on their experience and knowledge of the
      customers.





*Business
      Combinations*




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





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





*Goodwill
      and Intangible Assets*




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




*Income
      Taxes*




Effective
      January 1, 2007, we adopted the provisions of Financial Accounting Standards
      Board (“FASB”) Interpretation Number 48, “Accounting for Uncertainty in Income
      Taxes, an interpretation of FASB Statement No. 109,” (“FIN 48”). FIN 48
      prescribes a recognition threshold and a measurement attribute for the financial
      statement recognition and measurement of tax positions taken or expected to
      be
      taken in a tax return. For those benefits to be recognized, a tax position
      must
      be more likely than not to be sustained upon examination by taxing authorities.
      Differences between tax positions taken or expected to be taken in a tax return
      and the benefit recognized and measured pursuant to the interpretation are
      referred to as “unrecognized benefits.” A liability is recognized (or amount of
      net operating loss carry forward or amount of tax refundable is reduced) for
      an
      unrecognized tax benefit because it represents an enterprise’s potential future
      obligation to the taxing authority for a tax position that was not recognized
      as
      a result of applying the provisions of FIN 48.




28





In
      accordance with FIN 48, interest costs related to unrecognized tax benefits
      are
      required to be calculated (if applicable) and would be classified as “Interest
      expense, net” in the consolidated statements of operations. Penalties would be
      recognized as a component of “General and administrative expenses.”





In
      many
      cases, our tax positions are related to tax years that remain subject to
      examination by relevant tax authorities. We file income tax returns in the
      United States (federal) and in various state and local jurisdictions. In most
      instances, we are no longer subject to federal, state and local income tax
      examinations by tax authorities for years prior to 2003.





The
      adoption of the provisions of FIN 48 did not have a material impact on our
      consolidated financial position and results of operations. As of December 31,
      2007, no liability for unrecognized tax benefits was required to be
      recorded.




The
      ultimate realization of deferred tax assets is dependent upon the generation
      of
      future taxable income during the periods in which those temporary differences
      become deductible. We consider projected future taxable income and tax planning
      strategies in making this assessment. At present, we do not have a sufficient
      history of income to conclude that it is more likely than not that we will
      be
      able to realize all of our tax benefits in the near future and therefore a
      valuation allowance was established in the full value of the deferred tax
      asset.




At December
        31, 2007 ,
        the
        Company had federal net operating loss (“NOL”) carry forwards for income tax
        purposes of approximately $19,800,000. These NOL carry forwards expire through
        2027 but are limited due to Section 382 of the Internal Revenue Code (the
“382
        Limitation”) which states that the NOL of any corporation for any year after a
        greater than 50% change in control has occurred shall not exceed certain
        prescribed limitations. As a result of the Initial Public Offering described
        in
        Note 3 Debt Resolve’s NOL carry forwards are subject to the 382 Limitation which
        limits the utilization of those NOL carry forwards to approximately $650,000
        per
        year. The remaining federal NOL carry forwards may be used by the Company
        to
        offset future taxable income prior to their expiration. For First Performance,
        Section 382 will limit their pre-acquisition NOL’s to approximately $35,000 per
        year, due to the acquisition described in Note 5.  The remaining federal
        NOL carry forwards may be used by the Company to offset future taxable income
        prior to their expiration.  For the year ended December 31, 2007 the
        difference between the Federal statutory rate and the effective rate was
        due
        primarily to State taxes, non-deductibility of goodwill from the First
        Performance acquisition and change in the valuation allowance of approximately
        $4.2 million .


A
      valuation allowance will be maintained until sufficient positive evidence exists
      to support the reversal of any portion or all of the valuation allowance net
      of
      appropriate reserves. Should we continue to be profitable in future periods
      with
      a supportable trend, the valuation allowance will be reversed
      accordingly.




*Revenue
      Recognition*




We
      earned
      revenue during 2007 and 2006 from several collection agencies, collection law
      firms and lenders that implemented our online system. Our current contracts
      provide for revenue based on a percentage of the amount of debt collected,
      a
      flat fee per settlement from accounts submitted on the DebtResolve system or
      through a flat monthly license fee. Although other revenue models have been
      proposed, most revenue earned to date has been determined using these methods,
      and such revenue is recognized when the settlement amount of debt is collected
      by the client. For the early adopters of our product, we waived set-up fees
      and
      other transactional fees that we anticipate charging in the future. While the
      percent of debt collected will continue to be a revenue recognition method
      going
      forward, other payment models are also being offered to clients and may possibly
      become our preferred revenue model. Dependent upon the structure of future
      contracts, revenue may be derived from a combination of set up fees or monthly
      licensing fees with transaction fees upon debt settlement.




In
      recognition of the principles expressed in Staff Accounting Bulletin (“SAB”) 104
      (“SAB 104”), that revenue should not be recognized until it is realized or
      realizable and earned, and given the element of doubt associated with
      collectability of an agreed settlement on past due debt, at this time we
      uniformly postpone recognition of all contingent revenue until our client
      receives payment from the debtor. As is required by SAB 104, revenues are
      considered to have been earned when we have substantially accomplished the
      agreed-upon deliverables to be entitled to payment by the client. For most
      current active clients, these deliverables consist of the successful collection
      of past due debts using our system and/or, for clients under a licensing
      arrangement, the successful availability of our system to its
      customers.




In
      addition, in accordance with Emerging Issues Task Force (“EITF”) Issue 00-21,
      revenue is recognized and identified according to the deliverable provided.
      Set-up fees, percentage contingent collection fees, fixed settlement fees,
      monthly license 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 or the income charged to losses, based on management’s opinion
      regarding the collectability of those revenues.




29




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




On
      January 19, 2007, we completed the acquisition of First Performance, a
      collection agency, and its wholly-owned subsidiary First Performance Recovery
      Corporation. In recognition of the principles expressed in SAB 104, that revenue
      should not be recognized until it is realized or realizable and earned, and
      given the element of doubt associated with collectability of an agreed
      settlement on past due debt, at this time we uniformly postpone recognition
      of
      all contingent revenue until the cash payment is received from the debtor.
      At
      the time we remit fees collected to our clients, we accrue the portion of those
      fees that the client contractually owes or retain our fees and remit the net
      difference. As is required by SAB 104, revenues are considered to have been
      earned when we have substantially accomplished the agreed-upon deliverables
      to
      be entitled to payment by the client. For most current active clients, these
      deliverables consist of the successful collection of past due
      debts.




*Stock-based
      Compensation*




Beginning
      on January 1, 2006, we account for stock options issued under stock-based
      compensation plans under the recognition and measurement principles of SFAS
      No.
      123 - Revised. We adopted the modified prospective transition method and
      therefore, did not restate prior periods’ results. Total stock-based
      compensation expense related to these issuances and other stock-based grants
      for
      the year ended December 31, 2007 amounted to $2,494,616 and for the year ended
      December 31, 2006 amounted to $11,136,566.




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




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




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




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
      provisions of SFAS 155 were adopted as of January 1, 2007 and did not have
      a
      material effect on our financial position, results of operations or cash flows.




30





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 provisions of SFAS 156 were adopted as of
      January 1, 2007 and did not have a material effect on our financial position,
      results of operations or cash flows.





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 do not
      expect that the adoption of SFAS No. 157 will have a material impact on our
      results of operations and financial condition.





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 adoption of EITF 06-6 as of January 1, 2007 did not 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.  The adoption of EITF 06-7
      as of January 1, 2007 did not have a material impact on our consolidated
      financial position, results of operations or cash flows.




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 adoption of FSP
      EITF 00-19-2 as of January 1, 2007 did not have a material impact on our
      consolidated financial position, results of operations or cash
      flows.





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 do not
      expect that the adoption of SFAS 159 will have a material impact on our results
      of operations and financial condition.




31





In
      December 2007, the FASB issued SFAS No. 141R (Revised 2007), “Business
      Combinations” (“SFAS 141R”), which replaces SFAS No. 141, “Business
      Combinations.” SFAS 141R establishes principles and requirements for determining
      how an enterprise recognizes and measures the fair value of certain assets
      and
      liabilities acquired in a business combination, including noncontrolling
      interests, contingent consideration and certain acquired contingencies. SFAS
      141R also requires acquisition-related transaction expenses and restructuring
      costs be expensed as incurred rather than capitalized as a component of the
      business combination. SFAS 141R applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. SFAS
      141R
      would have an impact on accounting for any businesses acquired after the
      effective date of this pronouncement.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS 160”), to
      improve the relevance, comparability and transparency of the information that
      a
      reporting entity provides in its consolidated financial statements by (1)
      requiring the ownership interests in subsidiaries held by parties other than
      the
      parent to be clearly identified, labeled and presented in the consolidated
      statement of financial position within equity, but separate from the parent’s
      equity, (2) requiring that the amount of consolidated net income attributable
      to
      the parent and to the noncontrolling interest be clearly identified and
      presented on the face of the consolidated statement of income, (3) requiring
      that changes in a parent’s ownership interest while the parent retains its
      controlling financial interest in its subsidiary be accounted for consistently,
      (4) by requiring that when a subsidiary is deconsolidated, any retained
      noncontrolling equity investment in the former subsidiary be initially measured
      at fair value and (5) requiring that entities provide sufficient disclosures
      that clearly identify and distinguish between the interests of the parent and
      the interests of the noncontrolling owners. SFAS 160 is effective for fiscal
      years, and interim periods within those fiscal years, beginning on or after
      December 15, 2008. Earlier adoption is prohibited. SFAS 160 is effective in
      tandem with SFAS 141R. We are currently in the process of evaluation the impact
      of the adoption of SFAS 160 on our results of operations and financial
      condition.





In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS 161”), to
      require enhanced disclosures about an entity’s derivative and hedging activities
      and thereby improves the transparency of financial reporting. SFAS 161 is
      effective for financial statements issued for fiscal years and interim periods
      beginning after November 15, 2008, with early adoption encouraged. We are
      currently in the process of evaluation the impact of the adoption of SFAS 161
      on
      our results of operations and financial condition.





**ITEM
      7. Financial Statements**




Our
      audited financial statements for the year ended December 31, 2007 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(T). Controls and Procedures**




**Management’s
      report on internal control over financial reporting**




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




32




Based
      on
      our assessment, under the criteria established in Internal Control - Integrated
      Framework, issued by COSO, our management has concluded that our company has
      a
      material weakness in internal control over financial reporting as of December
      31, 2007. The weakness exists with regard to segregation of duties, in that
      one
      employee does the accounting, accounts payable and banking
      transactions.




This
      annual report does not include an attestation report of our company’s registered
      public accounting firm regarding internal control over financial reporting.
      Our
      management’s report was not subject to attestation by our company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit us to provide only our management’s report in
      this annual report.




**Evaluation
      of the company’s disclosure controls and procedures**




We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and our Chief Financial
      Officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
      the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon
      that evaluation, our Chief Executive Officer and Chief Financial Officer
      concluded that our company’s disclosure controls and procedures are not
      effective, as of December 31, 2007, in ensuring that material information
      relating to us required to be disclosed by us in reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in the Securities Exchange Commission rules and
      forms. Disclosure controls and procedures include, without limitation, controls
      and procedures designed to ensure that information required to be disclosed
      by
      an issuer in reports it files or submits under the Exchange Act is accumulated
      and communicated to management, including its principal executive officer or
      officers and principal financial officer or officers, or persons performing
      similar functions, as appropriate to allow timely decisions regarding required
      disclosure.




**Changes
      in Internal Control over Financial Reporting**




For
      the
      year ended December 31, 2007, our internal controls over financial reporting
      were materially impacted by our acquisition of First Performance, which took
      place on January 19, 2007. First Performance is a collection agency which
      employs approximately 25 people. The books and records of the acquired company
      were moved to our White Plains location, and the controller of First Performance
      currently works under the supervision of our Chief Financial Officer. We are
      currently in the process of reviewing and formalizing controls in place over
      the
      preparation of First Performance’s financial statements, which have been
      consolidated and included in this report. Based on review and assessment, our
      management believes that the design and operation of the consolidated company’s
      disclosure controls and procedures are not effective, as discussed
      above.





**ITEM
      8B. Other Information**




None.




33





**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 11,
      2008:




**Name**
            
            **Age**
            
            **Position**James
                D. Burchetta
            
            58
            
            Chairman
                and FounderCharles
                S. Brofman
            
            51
            
            Director
                and Co-FounderKenneth
                H. Montgomery
            
            57
            
            Chief
                Executive OfficerDavid
                M. Rainey
            
            48
            
            President,
                Chief Financial Officer, Secretary and TreasurerLawrence
                E. Dwyer, Jr.
            
            64
            
            DirectorWilliam
                M. Mooney
            
            68
            
            DirectorMichael
                G. Carey
            
            54
            
            DirectorSandra
                L. Styer
            
            59
            
            Senior
                Vice President, Director of Client
                Services





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




**Charles
      S. Brofman** has been
      a member of our board of directors since February 2008. Prior to February 2008,
      Mr. Brofman was our non-executive Co-Chairman of the Board since January 2003.
      Mr. Brofman is a co-founder of our company and was the co-founder of Cybersettle
      and has served as a director and its President and Co-Chief Executive Officer
      since 1997, becoming its Chief Executive Officer in August 2000. 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.




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





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




34





**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, and New York State Ethics Advisory Board. His other board
      memberships have included 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. 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.




**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.




35




**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.




**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 and Charles S. Brofman, are “independent” as defined
      in Section 121A of the American Stock Exchange Company Guide.




During
      2007, all of our directors attended at least 75% of all meetings during the
      periods for which they served on our board, and all of the meetings held by
      committees of the board on which they serve. The board of directors has formed
      an audit committee, compensation committee and a nominations and governance
      committee, all of which operate under written charters. The charters for the
      audit committee, the nominations and governance committee and the compensation
      committee were included as exhibits to the form SB-2 registration statement
      filed with the SEC on September 30, 2005.





**Committees
      of the Board**




**Audit
      Committee.** In
      September 2004, we established an audit committee of the board of directors,
      which as of December 31, 2007 consisted of Lawrence E. Dwyer, Jr., William
      M.
      Mooney, Jr., and Jeffrey S. Bernstein (who is no longer a director of our
      company or a member of the committee), 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.




36




**Compensation
      Committee.** In
      May
      2004, we established a compensation committee of the board of directors, which
      as of December 31, 2007 consisted of Messrs. Dwyer, Mooney and Bernstein (who
      is
      no longer a director of our company or a member of the committee), 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.





**Nominations
      and Governance Committee.** In
      June
      2005, we established a nominations and governance committee of the board of
      directors, which as of December 31, 2007 consisted of Messrs. Dwyer and Mooney,
      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.




37




**Committee
      Interlocks and Insider Participation**





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





**Section
      16(a) Beneficial Ownership Reporting Compliance**




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




Based
      solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished
      to us during our most recent fiscal year, and any written representations
      provided to us, we believe that all of the officers, directors, and owners
      of
      more than ten percent of the outstanding shares of our common stock complied
      with Section 16(a) of the Exchange Act for the year ended December 31,
      2007.




38





**ITEM
      10. Executive Compensation**





**Summary
      Compensation Table**





The
      following table sets forth, for the most recent fiscal year, all cash
      compensation paid, distributed or accrued, including salary and bonus amounts,
      for services rendered to us by our Chief Executive Officer and four other
      executive officers in such year who received or are entitled to receive
      remuneration in excess of $100,000 during the stated period and any individuals
      for whom disclosure would have been made in this table but for the fact that
      the
      individual was not serving as an executive officer as at December 31,
      2007:




Name
                and Principal Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
                Awards
              ($)
            
            Option
                Awards
              ($)
            
            Non-Equity
                Incentive Plan Compen-
              sation
              (4)
            
            Non-qualified
                Deferred Compensa-tion Earnings
              ($)
            
            All
                Other Compen-sation ($)
            
            Total
                ($)(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)
            
            (j)James
                D. Burchetta
              Chairman
                of the Board and Founder(1) (2)
            
            
            2007
              2006
            
            
            250,000
              250,000
            
            
            —150,000
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —
            
            
            —
              8,541
            
            
            250,000
              408,541Kenneth
                H. Montgomery
              Chief
                Executive Officer (3)
            
            
            2007
              2006
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —David
                M. Rainey
              President,
                Chief Financial Officer, Secretary, Treasurer (4)
            
            
            2007
              2006
            
            
            124,231
              —
            
            
            —
              —
            
            
            —
              —
            
            
            180,500
              —
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —
            
            
            304,731
              —Richard
                G. Rosa
              former
                President, Chief Technology Officer (5)
            
            
            2007
              2006
            
            
            182,277
              200,000
            
            
            —
              100,000
            
            
            —
              —
            
            
            794,500
              1,238,500
            
            
            —
              —
            
            
            —
              —
            
            
            —
              10,000
            
            
            976,777
              1,548,500Katherine
                A. Dering
              former
                Chief Financial Officer, Secretary, Treasurer , Senior Vice President,
                Finance (6)
            
            
            2007
              2006
            
            
            105,706
              150,000
            
            
            —
              100,000
            
            
            —
              —
            
            
            180,500
              563,000
            
            
            —
              —
            
            
            —
              —
            
            
            —
              7,875
            
            
            286,206
              820,875Howard
                C. Knauer
              former
                Senior Vice President and President, DRV Capital LLC (7)
            
            
            2007
              2006
            
            
            157,327
              187,490
            
            
            —
              —
            
            
            —
              —
            
            
            58,000
              125,332
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —
            
            
            215,327
              312,822





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




(2)
            This
                table excludes stock options granted to Mr. Burchetta pursuant to
                a
                licensing agreement with him and our other co-founder. Pursuant to
                that
                licensing agreement, we issued to Mr. Burchetta stock options to
                purchase
                an aggregate of 758,717 shares of our common stock at $5.00 per share.
                The
                stock options have an exercise period of ten years, were valued at
                $3,414,217, and vested upon issuance.




(3)
            Mr.
                Montgomery joined our company and became of Chief Executive Officer
                in
                February 2008.




(4)
            Mr.
                Rainey joined our company and became an officer in May
                2007.




(5)
            Mr.
                Rosa left our company effective December 31,
                2007.




(6)
            Ms.
                Dering retired from our company effective September 1,
                2007.




(7)
            Mr.
                Knauer left our company effective October 15,
                2007.




39




**Outstanding
      Equity Awards at Fiscal Year-End**





The
      following table summarizes equity awards outstanding at December 31, 2007
      for each of the executive officers named in the Summary Compensation Table
      above:




Option
                Awards
            
            Stock
                AwardsName
            
            Number
              of
              Securities
                Underlying Unexercised Options
              (#)
              Exercisable
            
            Number
                of Securities Underlying Unexercised Options
              (#)
              Unexercisable
            
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options
              (#)
            
            Option
                Exercise Price
              ($)
            
            Option
                Expiration Date
            
            Number
                of Shares or Units of Stock That Have Not Vested
              (#)
            
            Market
                Value of Shares or Units of Stock That Have Not Vested
              ($)
            
            Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested
              (#)
            
            Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested
              ($)(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)
            
            (j)James
                D. Burchetta
              Chairman
                of the Board and Founder (1)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Kenneth
                H. Montgomery
              Chief
                Executive Officer
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —David
                M. Rainey
              President,
                Chief Financial Officer,
              Secretary,
                Treasurer, (2)
            
            
            —
            
            
            75,000
            
            
            —
            
            $
            4.75
            
            
            4/27/2014
            
            
            —
            
            
            —
            
            
            —
            
            
            —Richard
                G. Rosa
              former
                President,
              Chief
                Technology Officer (3)
            
            
            100,000
              230,000
              200,000
              25,000
            
            
            —
              —
              —
              25,000
            
            
            —
              —
              —
              —
            
            $
              $
              $
              $
            5.00
              5.00
              5.00
              4.75
            
            
            8/31/2011
              11/1/2011
              4/27/2014
              4/27/2014
            
            
            —
              —
              —
              —
            
            
            —
              —
              —
              —
            
            
            —
              —
              —
              —
            
            
            —
              —
              —
              —Katherine
                A. Dering
              former
                Chief Financial Officer, Secretary, Treasurer, Senior Vice President,
                Finance
            
            
            50,000
              100,000
              50,000
            
            
            —
              —
              —
            
            
            —
              —
              —
            
            $
              $
              $
            5.00
              5.00
              4.75
            
            
            7/6/2011
              11/1/2011
              4/27/2014
            
            
            —
              —
              —
            
            
            —
              —
              —
            
            
            —
              —
              —
            
            
            —
              —
              —Howard
                C. Knauer
              former
                Senior Vice President and President, DRV Capital LLC
            
            
            50,000
              20,000
            
            
            —
              —
            
            
            —
              —
            
            $
              $
            5.00
              5.00
            
            
            1/15/2008
              1/15/2008
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —





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




40




(2)
            Mr.
                Rainey holds stock options to purchase 75,000 shares of our common
                stock,
                1/3 of which vest on April 27, 2008, one third of which vest on April
                27.
                2009 and one third of which vest on April 27, 2010, all of which
                expire on
                April 27, 2014.




(3)
            Mr.
                Rosa holds stock options to purchase 25,000 shares of our common
                stock
                which vest on December 2, 2008 and expire on April 27,
                2014.




**Employment
      Agreements**





We
      have
      entered into an employment agreement with James D. Burchetta under which he
      will
      devote substantially all of his business and professional time to us and our
      business development. The employment agreement with Mr. Burchetta is effective
      until January 13, 2013. The agreement provided Mr. Burchetta with an initial
      annual base salary of $240,000 and contains provisions for minimum annual
      increases based on changes in an applicable “cost-of-living” index. The
      employment agreement with Mr. Burchetta contains provisions under which his
      annual salary may increase to $600,000 if we achieve specified operating
      milestones and also provides for additional compensation based on the value
      of a
      transaction that results in a change of control, as that term is defined in
      the
      agreement. In the event of a change of control, Mr. Burchetta would be entitled
      to receive 25% of the sum of $250,000 plus 2.5% of the transaction value, as
      that term is defined in the agreement, between $5,000,000 and $15,000,000 plus
      1% of the transaction value above $15,000,000. Compensation expense under the
      agreement with Mr. Burchetta totaled $250,000 and $408,541 for the years ended
      December 31, 2007 and 2006, respectively.




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




We
      amended the employment agreement with Mr. Burchetta again in June 2005, agreeing
      that (1) as of April 1, 2005 we will pay Mr. Burchetta an annual base salary
      of
      $250,000 per year, and thereafter his base salary will continue at that level,
      subject to adjustments approved by the compensation committee of our board
      of
      directors, and (2) the employment term will extend for five years after the
      final closing of our June/September 2005 private financing.




On
      May 1,
      2007, David M. Rainey joined our company as Chief Financial Officer and
      Treasurer on the planned retirement of Katherine A. Dering. Mr. Rainey has
      a one
      year contract that renews automatically unless 90 days notice of intention
      not
      to renew is given by the company. Mr. Rainey’s base salary is $200,000, subject
      to annual increases at the discretion of the board of directors. Mr. Rainey
      also
      received a grant of 75,000 options to purchase the common stock of the company,
      one third of which vest on the first, second and third anniversaries of the
      start of employment with the company. Mr. Rainey’s contract provides for one
      month of severance and benefits per month of service up to 12 months for any
      termination without cause. Upon a change in control, Mr. Rainey receives one
      year severance and bonus with benefits and immediate vesting of all stock
      options then outstanding.




41




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





**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, 2007, options to purchase 20,000 shares of stock were granted
      to a new director.




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





The
      table
      below summarizes the compensation we paid to non-employee directors for the
      fiscal year ended December 31, 2007.





**Director
      Compensation**




Name
            
            Fees
                Earned or Paid in Cash ($)
            
            Stock
                Awards
              ($)
            
            Option
                Awards
              ($)
            
            Non-Equity
                Incentive Plan Compen-
              sation
              ($)
            
            Nonqualified
                Deferred Compen-sation Earnings
              ($)
            
            All
                Other Compen-sation ($)
            
            Total
                ($)(a)
            
            (b)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)
            
            (j)Charles
                S. Brofman (1)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Jeffrey
                S. Bernstein (2)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Michael
                G. Carey
            
            
            —
            
            
            —
            
            
            56,467
            
            
            —
            
            
            —
            
            
            —
            
            
            56,467Lawrence
                E. Dwyer, Jr.
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —William
                M. Mooney, Jr.
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Alan
                M. Silberstein (3)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —





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




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




(3)
            Mr.
                Silberstein resigned from the board effective December 31, 2007 to
                pursue
                other interests.




42




**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
      11,
      2008, by:





·
            all
                of our directors and executive officers, individually,





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





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





The
      beneficial ownership of each person was calculated based on 8,478,530 shares
      of
      our common stock outstanding as of April 11, 2008, 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 11, 2008 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
            
            
            Chairman
                of the Board and Founder
            
            
            1,814,957
            (1)
            
            11.5
            %Charles
                S. Brofman
            
            
            Director
                and Co-Founder
            
            
            2,190,193
            (2)
            
            13.9
            %Kenneth
                H. Montgomery
            
            
            Chief
                Executive Officer
            
            
            312,000
            (3)
            
            3.6
            %David
                M. Rainey
            
            
            President,
                Chief Financial Officer, Treasurer, Secretary
            
            
            50,050
            (4)
            
            *Lawrence
                E. Dwyer, Jr.
            
            
            Director
            
            
            162,500
            (5)
            
            1.0
            %William
                H. Mooney
            
            
            Director
            
            
            829,602
            (6)
            
            5.3
            %Michael
                G. Carey
            
            
            Director
            
            
            50,000
            (7)
            
            *All
                directors and executive officers as a group (7 persons)
            
            
            
            
            
            5,409,302
            
            
            48.5
            %





*  Denotes
      less than 1%.




(1)
            Includes
                stock options to purchase 758,717 shares of common stock.




(2)
            Includes
                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 175,000 shares of common stock and 12,500
                shares
                of common stock issuable upon the exercise of warrants. Excludes
                additional stock options to purchase 175,000 shares of common stock
                vesting on July 24, 2008 .




43




(4)
            Includes
                stock options to purchase 50,000 shares of common stock. Excludes
                stock
                options to purchase 75,000 shares of common stock, with 25,000 vesting
                on
                May 1, 2008, 25,000 vesting on May 1, 2009 and 25,000 vesting on
                May 1,
                2010. Excludes additional stock options to purchase 100,000 shares
                of
                common stock, with 50,000 vesting on May 1, 2008 and 50,000 vesting
                on May
                1, 2009.




(5)
            Includes
                stock options to purchase 80,500 shares of common stock.




(6)
            Includes
                30,717 shares of common stock issuable upon the exercise of warrants
                and
                stock options to purchase 754,500 shares of common
                stock.




(7)
            Consists
                of stock options to purchase 50,000 shares of common stock.




**Change
      in Control**




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




**Equity
      Compensation Plan Information**




The
      issuance of stock incentive awards for an aggregate of 900,000 shares of common
      stock is authorized under our 2005 Incentive Compensation Plan. As
      of
      December 31, 2007, 80,000 stock options are available for issuance under our
      2005 Incentive Compensation Plan and there were outstanding stock options to
      purchase 820,000 shares of our common stock.




The
      following table provides information as of December 31, 2007 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
            
            
            820,000
            
            $
            4.78
            
            
            80,000Equity
                compensation plans not approved by security holders
            
            
            3,033,434
            
            $
            4.97
            
            
            UnrestrictedTotal
            
            
            3,853,434
            
            $
            4.93
            
            
            80,000




**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-founders, 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-founders. 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.




44




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 Chairman and Founder.  Over the course of the year ended
      December 31, 2006, we paid this individual consulting fees of approximately
      $35,000.





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





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





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





**Director
      Independence**





Each
      of
      Lawrence E. Dwyer, Jr., William M. Mooney, Jr., 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 and Mooney 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)




45




10.7
            
            Master
                Loan and Servicing Agreement, dated as of December 21, 2006, by and
                among
                EAR Capital I, LLC, as borrower, DRV Capital LLC, as servicer, Debt
                Resolve, Inc., as parent, and Sheridan Asset Management, LLC, as
                lender.(5)10.8
            
            Form
                of Secured Promissory Note, dated December 21, 2006, made by EAR
                Capital
                I, LLC to Sheridan Asset Management, LLC.(5)10.9
            
            Security
                Agreement, dated as of December 21, 2006, between EAR Capital I,
                LLC, as
                obligor, and Sheridan Asset Management, LLC, as secured
                party.(5)21.1
            
            Subsidiaries
                of Debt Resolve, Inc.31.1
            
            Certification
                of Chief Executive Officer required by Rule
                13(a)-14(a).31.2
            
            Certification
                of Chief Financial Officer required by Rule
                13(a)-14(a).32.1
            
            Certifications
                pursuant to Sec. 906





(1)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed January 24,
                2007.




(2)
            Incorporated
                herein by reference to Current Report on Form 8-K/A, filed April
                4,
                2007.




(3)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed May 3,
                2007.




(4)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed May 4,
                2007.




(5)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed May 14,
                2007.




(6)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed June 6,
                2007.




(7)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed August 8,
                2007.




(8)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed August 31,
                2007.




(9)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed September 5,
                2007.




(10)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed September
                25, 2007.




(11)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed October 23,
                2007.




(12)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed December 17,
                2007.




(13)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed December 18,
                2007.




**ITEM
      14. Principal Accountant Fees and Services**




Marcum
      & Kliegman LLP served as our independent auditors for the years ended
      December 31, 2007, 2006 and 2005. The firm also performed a reaudit of the
      years
      ended 2004 and 2003.




**Audit
      Fees**




Audit
      fees are those fees billed for professional services rendered for the audit
      of
      the annual financial statements and review of the financial statements included
      in Form 10-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 $201,522 for 2007, $315,895 for 2006 and $220,000
      for 2005.




46




**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 2007, 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 was $10,351 in 2007 and $20,705 in 2006. No tax fees were
      billed by Marcum & Kliegman LLP in 2005.




**All
      Other Fees**




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




**Audit
      Committee**




The
      members of our audit committee are Messrs. Dwyer and Mooney. Our board of
      directors and audit committee approved the services rendered and fees charged
      by
      our independent auditors. The audit committee has reviewed and discussed our
      audited financial statements for the year ended December 31, 2007 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.




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, 2007.




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





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





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





47


**SIGNATURES**




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




Dated:
       April 15, 2008


**DEBT
                RESOLVE, INC.**By:
            /s/
              James
              D. BurchettaJames
                D. BurchettaChairman
                and Founder
              (principal
                  executive officer)




By:
            /s/
              David
              M. RaineyDavid
                M. RaineyPresident,
                Chief Financial Officer, Treasurer and Secretary(principal
                financial and accounting officer)




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




Signature
            
            Title
            
            Date/s/James
                D. Burchetta
            
            Chairman
                of the Board and Founder
            
            April
                15, 2008James
                D. Burchetta
            
            (principal
                executive officer)/s/Kenneth
                M. Montgomery
            
            Chief
                Executive Officer
            
            April
                15, 2008Kenneth
                M. Montgomery/s/David
                M. Rainey
            
            President
                and Chief Financial Officer,
            
            April
                15, 2008David
                M. Rainey
            
            Treasurer
                and Secretary(principal
                financial and accounting officer)/s/Charles
                S. Brofman
            
            Director
            
            April
                15, 2008Charles
                S. Brofman/s/Lawrence
                E. Dwyer, Jr.
            
            Director
            
            April
                15, 2008Lawrence
                E. Dwyer, Jr./s/William
                M. Mooney, Jr.
            
            Director
            
            April
                15, 2008William
                M. Mooney, Jr./s/Michael
                G. Carey
            
            Director
            
            April
                15, 2008Michael
                G. Carey





48




**DEBT
      RESOLVE, INC. AND SUBSIDIARIES**




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**Consolidated
        Financial Statements for the Years Ended December 31, 2007 and
        2006**


Report
                of Independent Registered Public Accounting Firm
            
            
            F-2Consolidated
                Balance Sheet as of December 31, 2007
            
            
            F-3Consolidated
                Statements of Operations for the Years Ended December 31, 2007 and
                2006
            
            
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficiency) for the Years Ended
                December 31, 2007 and 2006
            
            
            F-5Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2007 and
                2006
            
            
            F-8Notes
                to Consolidated Financial Statements
            
            
            F-10




F-1




REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





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





We
      have
      audited the accompanying consolidated balance sheet of Debt Resolve, Inc and
      Subsidiaries (the “Company”) as of December 31, 2007, and the related
      consolidated statements of operations, stockholders’ equity (deficiency), and
      cash flows for the years ended December 31, 2007 and 2006. 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.




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, 2007, and the consolidated results of their operations and their
      cash flows for the years ended December 31, 2007 and 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.




As
      described in Note 2, during the year ended December 31, 2006, the Company
      changed its method of accounting for stock-based compensation in accordance
      with
      Statement of Financial Accounting Standard No. 123R, “Share-Based
      Payment.”




/s/
      Marcum & Kliegman LLP




New
      York,
      New York




April
      14,
      2008


F-2


DEBT
      RESOLVE, INC. and SUBSIDIARIES


Consolidated
      Balance Sheet


December
      31, 2007




AssetsCurrent
                  assets:Restricted
                  cash
              
              $
              67,818Accounts
                  receivable
              
              
              84,013Other
                  receivable
              
              
              200,000Prepaid
                  expenses and other current assets
              
              
              108,189Total
                  current assets
              
              
              460,020Fixed
                  assets, net
              
              
              283,095Deposits
                  and other assets
              
              
              108,780Intangible
                  assets, net
              
              
              208,848Total
                  assets
              
              $
              1,060,743Liabilities
                  and Stockholders’ DeficiencyCurrent
                  liabilities:Accounts
                  payable and accrued liabilities
              
              $
              2,448,314Collections
                  payable
              
              
              42,606Short-term
                  note (net of deferred debt discount of $29,400)
              
              
              70,600Lines
                  of credit - related parties
              
              
              1,011,000Total
                  current liabilities
              
              
              3,572,520Notes
                  payable (net of deferred debt discount of $70,975)
              
              
              254,025Total
                  liabilities
              
              
              3,826,545Commitments
                  and contingenciesStockholders’
                  deficiency: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, 8,474,363
                  issued
                  and outstanding
              
              
              8,474Additional
                  paid-in capital
              
              
              42,501,655Accumulated
                  deficit
              
              
              (45,275,931
              )Total
                  stockholders’ deficiency
              
              
              (2,765,802
              )Total
                  liabilities and stockholders’ deficiency
              
              $
              1,060,743




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


F-3




DEBT
      RESOLVE, INC. and SUBSIDIARIES


Consolidated
      Statements of Operations




Years
                Ended December 31,2007
            
            2006Revenues
            
            $
            2,845,823
            
            $
            98,042Costs
                and expenses:Payroll
                and related expenses
            
            
            7,038,243
            
            
            5,524,059General
                and administrative expenses
            
            
            5,395,224
            
            
            3,255,055Terminated
                acquisition costs
            
            
            959,811
            
            
            —Patent
                licensing expense - related parties
            
            
            —
            
            
            6,828,453Impairment
                of goodwill and intangible assets
            
            
            1,206,335
            
            
            —Depreciation
                and amortization expense
            
            
            227,060
            
            
            51,728Total
                expenses
            
            
            14,826,673
            
            
            15,659,295Loss
                from operations
            
            
            (11,980,850
            )
            
            (15,561,253
            )Other
                (expense) income:Interest
                income
            
            
            41,946
            
            
            —Interest
                expense
            
            
            (18,042
            )
            
            (778,243
            )Interest
                expense - related party
            
            
            (46,370
            )
            
            —Amortization
                of deferred debt discount
            
            
            (132,400
            )
            
            (4,641,985
            )Amortization
                of deferred financing costs
            
            
            —
            
            
            (665,105
            )Other
                income (expense)
            
            
            (8,116
            )
            
            4,500Total
                other expense
            
            
            (162,982
            )
            
            (6,080,833
            )Loss
                from continuing operations
            
            
            (12,143,832
            )
            
            (21,642,086
            )Loss
                from discontinued operations
            
            
            (452,085
            )
            
            (53,579
            )Net
                loss
            
            $
            (12,595,917
            )
            $
            (21,695,665
            )Net
                loss per common share:basic
                and diluted (see Note 2)-
                Continuing operations
            
            $
            (1.51
            )
            $
            (5.23
            )-
                Discontinued operations
            
            $
            (0.06
            )
            $
            (0.01
            )-
                Total
            
            $
            (1.57
            )
            $
            (5.24
            )Weighted
                average number of common shares outstanding - basic and diluted (see
                Note
                2)
            
            
            8,033,348
            
            
            4,143,866





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




F-4




DEBT
      RESOLVE, INC. and SUBSIDIARIES


Consolidated
      Statements of Stockholders’ Equity (Deficiency)


For
      the
      Years Ended December 31, 2007 and 2006




Preferred
                Stock
            
            Common
                Stock
            
            
            
            
            
            Deficit
                AccumulatedNumber
                of
              Shares
            
            Amount
            
            Number
                of
              Shares
            
            Amount
            
            Deferred
                compensation
            
            Additional
              Paid
                in
              Capital
            
            During
                the  Development Stage
            
            TotalBalance
                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
              November
                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 uponconversion
                of notes on
              November
                2006 ($2.45 to $3.00per
                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 warrantsNovember-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
            )
            $
            4,809,794Issuance
                of common stock to purchase First Performance Corporation
            
            
            
            
            
            
            
            
            88,563
            
            
            89
            
            
            
            
            
            349,911
            
            
            
            
            
            350,000Capital
                contributed from the exercise of options and warrants
            
            
            
            
            
            
            
            
            1,001,388
            
            
            1,001
            
            
            
            
            
            197,384
            
            
            
            
            
            198,385Capital
                contributed from the grant of stock options to employees
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,207,950
            
            
            
            
            
            2,207,950Capital
                contributed from the grant of stock options to pay for consulting
                services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            255,795
            
            
            
            
            
            255,795Sales
                of common stock for cash
            
            
            
            
            
            
            
            
            880,000
            
            
            880
            
            
            
            
            
            1,759,100
            
            
            
            
            
            1,759,980Amortization
                of deferred compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,436
            
            
            
            
            
            
            
            
            15,436Capital
                contributed from the beneficial conversion feature of
                notes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            232,775
            
            
            
            
            
            232,775Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (12,595,917
            )
            
            (12,595,917
            )Balance
                at December 31, 2007
            
            
            
            
            
            
            
            
            8,474,363
            
            $
            8,474
            
            $
            —
            
            $
            42,531,655
            
            $
            (45,275,931
            )
            $
            (2,765,802
            )





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




F-5




DEBT
      RESOLVE, INC. and SUBSIDIARIES


Consolidated
      Statements of Cash Flows




Years
                  ended December 31,2007
              
              2006CASH
                  FLOWS FROM CONTINUING OPERATING ACTIVITIESNet
                  loss
              
              $
              (12,143,832
              )
              $
              (21,642,086
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Non
                  cash stock-based compensation
              
              
              2,479,181
              
              
              11,136,565Amortization
                  of deferred debt discount
              
              
              132,400
              
              
              4,641,985Amortization
                  of deferred financing costs
              
              
              --
              
              
              665,105Impairment
                  of goodwill and intangible assets
              
              
              1,206,335
              
              
              --Loss
                  on disposal of fixed assets
              
              
              68,330
              
              
              --Depreciation
                  and amortization
              
              
              227,060
              
              
              51,728Changes
                  in operating assets and liabilities:Increase
                  in restricted cash
              
              
              89,667
              
              
              --Accounts
                  receivable
              
              
              344,731
              
              
              (2,611
              )Prepaid
                  expenses and other current assets
              
              
              85,122
              
              
              (3,223
              )Deposits
                  and other assets
              
              
              37,763
              
              
              (940
              )Accounts
                  payable and accrued expenses
              
              
              692,650
              
              
              282,914Collections
                  payable
              
              
              (114,879
              )
              
              --Net
                  cash used in continuing operating activities
              
              
              (6,895,472
              )
              
              (5,244,238
              )CASH
                  FLOWS FROM CONTINUING INVESTING ACTIVITIESPurchase
                  of First Performance Co., including direct expenses
              
              
              (586,915
              )
              
              --Purchases
                  of fixed assets
              
              
              (35,464
              )
              
              (79,516
              )Net
                  cash used in continuing investing activities
              
              
              (622,379
              )
              
              (79,516
              )CASH
                  FLOWS FROM CONTINUING FINANCING ACTIVITIESProceeds
                  from issuance of notes and convertible notes
              
              
              --
              
              
              2,504,750Repayment
                  of notes and convertible notes
              
              
              --
              
              
              (3,088,381
              )Proceeds
                  from notes payable
              
              
              225,000
              
              
              --Proceeds
                  from issuance of short term notes
              
              
              --
              
              
              1,185,000Repayment
                  of short term notes
              
              
              --
              
              
              (660,000
              )Proceeds
                  from lines of credit
              
              
              1,011,000
              
              
              --Repayment
                  of line of credit
              
              
              (150,000
              )
              
              --Proceeds
                  from issuance of common stock
              
              
              1,759,980
              
              
              12,500,000Proceeds
                  from exercise of options and warrants
              
              
              198,385
              
              
              18,916Repayment
                  of stockholders’ loans
              
              
              --
              
              
              (25,000
              )Stock
                  offering costs
              
              
              --
              
              
              (1,844,219
              )Deferred
                  financing costs
              
              
              --
              
              
              (365,318
              )Net
                  cash provided by continuing financing activities
              
              
              3,044,365
              
              
              10,225,749CASH
                  FLOWS OF DISCONTINUED OPERATIONSNet
                  cash used in operating activities
              
              
              (377,165
              )
              
              (53,579
              )Net
                  cash used in investing activities
              
              
              (74,920
              )
              
              --Net
                  cash used in financing activities
              
              
              --
              
              
              --Net
                  cash used in discontinued operations
              
              
              (452,085
              )
              
              (53,579
              )Net
                  (decrease) increase in cash and cash equivalents
              
              
              (4,925,571
              )
              
              4,901,995Cash
                  and cash equivalents at beginning of period
              
              
              4,925,571
              
              
              23,576Cash
                  and cash equivalents at end of period
              
              
              --
              
              
              4,925,571Cash
                  paid for income taxes
              
              $
              --
              
              $
              --Cash
                  paid for interest
              
              $
              20,441
              
              $
              814,435**Non
                  cash investing and financing activities:**Issuance
                  of unfunded long term note payable
              
              $
              200,000
              
              $
              --Conversion
                  of convertible notes to common stock
              
              $
              --
              
              $
              3,088,381Conversion
                  of loans payable, accounts payable and accrued expenses into convertible
                  notes
              
              $
              --
              
              $
              977,012Issuance
                  of warrants for deferred financing fees
              
              $
              --
              
              $
              119,238Conversion
                  of accrued interest into common stock
              
              $
              --
              
              $
              85,800**Supplemental
                  investing and financing activities:**Current
                  assets acquired
              
              $
              679,734
              
              $
              --Property
                  and equipment acquired
              
              
              286,229
              
              
              --Security
                  deposits acquired
              
              
              51,999
              
              
              --Intangible
                  assets acquired
              
              
              450,000
              
              
              --Goodwill
                  recognized on purchase business combination
              
              
              1,042,205
              
              
              --Accrued
                  liabilities assumed in the acquisition
              
              
              (1,573,252
              )
              
              --Non-cash
                  consideration to seller
              
              
              (350,000
              )
              
              --Cash
                  paid to acquire business
              
              $
              500,000
              
              $
              --




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




F-6




DEBT
      RESOLVE, INC. and SUBSIDIARIES


Notes
      to
      Consolidated Financial Statements


December
      31, 2007




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 collection law firms and purchasers
      of charged-off debt an Internet-based online system (“the DebtResolve System”)
      for the collection of past due consumer debt. The Company offers its service
      as
      an Application Service Provider (“ASP”) model, enabling clients to introduce
      this collection option with no modifications to their existing collections
      computer systems. Its products capitalize on using the Internet as a tool for
      communication, resolution, settlement and payment of delinquent debts. The
      DebtResolve system features, at its core, a patented online bidding system.
      In
      2007, the Company expanded its business to include debt buying and debt
      collection and acquired a collection agency, which use its patented
      Internet-based collection and settlement process to improve collection results.
      However, on October 15, 2007, the Company exited the debt buying business (See
      Note 11.)




Organization




Until
      February 24, 2003, the Company, formerly named Lombardia Acquisition Corp.,
      was
      inactive and had no significant assets, liabilities or operations. On February
      24, 2003, James D. Burchetta, Charles S. Brofman, and Michael S. Harris
      (collectively, the “Principal Stockholders”) purchased 2,250,000 newly-issued
      shares of the Company’s common stock, representing 84.6% of the then outstanding
      shares, pursuant to a Stock Purchase Agreement effective January 13, 2003
      between the Company and each of the Principal Stockholders. The Board of
      Directors was then reconstituted. On May 7, 2003, following approvals by the
      Board of Directors and holders of a majority of the Company’s common stock, the
      Company’s Certificate of Incorporation was amended to change the Company’s
      corporate name to Debt Resolve, Inc. and increase the number of the Company’s
      authorized shares of common stock from 20,000,000 to 50,000,000 shares. On
      May
      8, 2006, the Board of Directors and holders of a majority of the Company’s
      common stock approved amending the Company’s Certificate of Incorporation to
      increase the number of the Company’s authorized shares of common stock from
      50,000,000 to 100,000,000 shares. On August 25, 2006, following approvals by
      the
      Board of Directors and holders of a majority of the Company’s outstanding shares
      of common stock, the Company’s Certificate of Incorporation was amended to
      effect a reverse one-for-ten reverse split, which reduced the number of
      outstanding shares of common stock from 29,703,900 to 2,970,390. On November
      6,
      2006, the Company completed an initial public offering consisting of 2,500,000
      shares of common stock. (See Note 3.)




Development
      stage activities




In
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 7,
      Accounting and Reporting by Development Stage Enterprises, from inception to
      January 2007, the Company was considered to be in the development stage since
      it
      devoted substantially all of its efforts to establishing a new business. In
      January 2007, the Company initiated operations of its debt buying subsidiary
      and
      purchased the outstanding capital stock of First Performance Corporation, an
      accounts receivable management agency and was no longer considered a development
      stage entity. The Company ceased operations of the debt buying subsidiary on
      October 15, 2007. (See Note 3.)




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, 2007, the Company
        had inadequate revenues and incurred a net loss of $12,143,832 from
        continuing operations.  Cash used in operating and investing activities of
        continuing operations was $7,517,851 for the year ended December 31, 2007.
        In
        addition, the Company has a working capital deficiency of $3,112,500 as of
        December 31, 2007. Based upon projected operating expenses, the Company believes
        that its working capital as of the date of this report is not sufficient to
        fund its plan of operations for the next twelve months.  The aforementioned
        factors raise substantial doubt about the Company’s ability to continue as a
        going concern.


F-7




The
        Company needs to raise additional capital in order to be able to accomplish
        its
        business plan objectives.  The Company has historically satisfied its
        capital needs primarily from the sale of debt and equity securities.
 Management of the Company is continuing its efforts to secure additional
        funds through debt and/or equity instruments. Management believes that it
        will
        be successful in obtaining additional financing; however, no assurance can
        be
        provided that the Company will be able to do so. There is no assurance that
        these funds will be sufficient to enable the Company to attain profitable
        operations or continue as a going concern.  To the extent that the Company
        is unsuccessful, the Company may need to curtail its operations and implement
        a
        plan to extend payables and reduce overhead until sufficient additional capital
        is raised to support further operations. There can be no assurance that such
        a
        plan will be successful. These consolidated financial statements do not include
        any adjustments that might result from the outcome of this uncertainty.
  Subsequent
        to December 31, 2007, the Company has secured additional financing from three
        related parties in the aggregate amount of $167,000.  In addition, the
        Company has also entered into various notes payable with a bank and other
        investors in the aggregate amount of $848,000.  On March 31, 2008, the
        Company entered into a private placement agreement with Harmonie International
        LLC (“Harmonie”) for $7,000,000.  As of April 14, 2008, funds under this
        agreement have not been received and there is no assurance that the Company
        will
        receive such proceeds.


Principles
      of Consolidation





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




Reclassifications




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




Reverse
      Stock Split




On
      August
      25, 2006, the Company effected a one-for-ten reverse stock split. All share
      and
      per share information herein has been retroactively restated to give effect
      to
      this reverse stock split.




Fair
      Value of Financial Instruments




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





Cash
      and
      cash equivalents





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




F-8




Restricted
      Cash





The
      Company typically receives cash collected on behalf of its clients. Such cash
      is
      held in trust for the clients, and is not available to the Company for general
      corporate purposes. As such, it is segregated from Cash and Cash Equivalents.
      The Company takes its fee from the recovery for the client if the client is
      a
“net” client, such that the fee is netted from the amount collected before
      remittance. Therefore, restricted cash may exceed the balance in Collections
      Payable by the amount of fees retained from recoveries.




Accounts
      Receivable




The
      Company extends credit to large and mid-size companies for collection services.
      The Company has concentrations of credit risk as 76% of the balance of accounts
      receivable at December 31, 2007 consists of only three customers. At December
      31, 2007, accounts receivable from the three largest accounts amounted to
      approximately $34,633 (41%), $16,277 (19%) and $13,340 (16%), respectively.
      The
      Company does not generally require collateral or other security to support
      customer receivables. Accounts receivable are carried at their estimated
      collectible amounts. Accounts receivable are periodically evaluated for
      collectibility and the allowance for doubtful accounts is adjusted accordingly.
      Management determines collectibility based on their experience and knowledge
      of
      the customers.





Fixed
      Assets




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




Business
      Combinations




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




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





Goodwill
      and Intangible Assets




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






F-9





Use
      of
      Estimates




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




Accounts
      Payable and Accrued Liabilities




Included
      in accounts payable and accrued liabilities as of December 31, 2007 are accrued
      professional fees of $1,003,550 and a bank overdraft of $53,454.




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.




Effective
      January 1, 2007, the Company adopted the provisions of FASB Interpretation
      Number 48, “Accounting for Uncertainty in Income Taxes, an interpretation of
      FASB Statement No. 109,” (“FIN 48”). FIN 48 prescribes a recognition threshold
      and a measurement attribute for the financial statement recognition and
      measurement of tax positions taken or expected to be taken in a tax return.
      For
      those benefits to be recognized, a tax position must be more likely than not
      to
      be sustained upon examination by taxing authorities. Differences between tax
      positions taken or expected to be taken in a tax return and the benefit
      recognized and measured pursuant to the interpretation are referred to as
“unrecognized benefits”. A liability is recognized (or amount of net operating
      loss carry forward or amount of tax refundable is reduced) for an unrecognized
      tax benefit because it represents an enterprise’s potential future obligation to
      the taxing authority for a tax position that was not recognized as a result
      of
      applying the provisions of FIN 48.




In
      accordance with FIN 48, interest costs related to unrecognized tax benefits
      are
      required to be calculated (if applicable) and would be classified as “Interest
      expense” in the consolidated statements of operations. Penalties would be
      recognized as a component of “General and administrative expenses.”





In
      many
      cases, the Company’s tax positions are related to tax years that remain subject
      to examination by relevant tax authorities. The Company files income tax returns
      in the United States (federal) and in various state and local jurisdictions.
      In
      most instances, the Company is not subject to federal, state and local income
      tax examinations by tax authorities for years prior to 2004.





The
      adoption of the provisions of FIN 48 did not have a material impact on the
      Company’s consolidated financial position and results of operations. As of
      December 31, 2007, no liability for unrecognized tax benefits was required
      to be
      recorded.




The
        ultimate realization of deferred tax assets is dependent upon the generation
        of
        future taxable income during the periods in which those temporary differences
        become deductible. The Company considers projected future taxable income
        and tax
        planning strategies in making this assessment. At present, the Company does
        not
        have a sufficient history of income to conclude that it is more likely than
        not
        that the Company will be able to realize all of its tax benefits in the near
        future and therefore a valuation allowance was established for the full value
        of
        the deferred tax asset.


F-10




At December
        31, 2007 ,
        the
        Company had federal net operating loss (“NOL”) carry forwards for income tax
        purposes of approximately $19,800,000. These NOL carry forwards expire through
        2027 but are limited due to section 382 of the Internal Revenue Code (the
“382
        Limitation”) which states that the NOL of any corporation for any year after a
        greater than 50% change in control has occurred shall not exceed certain
        prescribed limitations. As a result of the Initial Public Offering described
        in
        Note 3 Debt Resolve’s NOL carry forwards are subject to the 382 Limitation which
        limits the utilization of those NOL carry forwards to approximately $650,000
        per
        year. The remaining federal NOL carry forwards may be used by the Company
        to
        offset future taxable income prior to their expiration. For First Performance,
        Section 382 will limit their pre-acquisition NOL’s to approximately $35,000 per
        year, due to the acquisition described in Note 5.  The remaining federal
        NOL carry forwards may be used by the Company to offset future taxable income
        prior to their expiration.  For the year ended December 31, 2007 the
        difference between the Federal statutory rate and the effective rate was
        due
        primarily to State taxes, non-deductibility of goodwill from the First
        Performance acquisition and change in the valuation allowance of approximately
        $4.2 million .


A
      valuation allowance will be maintained until sufficient positive evidence exists
      to support the reversal of any portion or all of the valuation allowance net
      of
      appropriate reserves. Should the Company continue to be profitable in future
      periods with a supportable trend, the valuation allowance will be reversed
      accordingly.




Revenue
      Recognition




The
      Company earned revenue during 2007 and 2006 from several collection agencies,
      collection law firms and lenders that implemented the Company’s online system.
      The Company’s current contracts provide for revenue based on a percentage of the
      amount of debt collected, a flat fee per settlement from accounts submitted
      on
      the DebtResolve system or through a flat monthly license fee. Although other
      revenue models have been proposed, most revenue earned to date has been
      determined using these methods, and such revenue is recognized when the
      settlement amount of debt is collected by the client. 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.




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 the 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, percentage contingent collection fees, fixed settlement fees,
      monthly license fees, etc. are identified separately.




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.




In
      January 2007, the Company initiated operations of its debt buying subsidiary,
      DRV Capital. DRV Capital and its wholly-owned subsidiary, EAR Capital I, LLC,
      engaged in the acquisition of pools of past due debt at a deeply discounted
      price, for the purpose of collecting on those debts. Revenue was earned by
      this
      subsidiary under the cost recovery method when the amount of debt collected
      exceeded the discounted price paid for the pool of debt. The activities of
      DRV
      Capital ceased as of October 15, 2007 and are reflected as discontinued
      operations in the accompanying consolidated financial statements.




On
      January 19, 2007, the Company completed the acquisition of First Performance
      Corporation, a collection agency, and its wholly-owned subsidiary First
      Performance Recovery Corporation. First Performance follows the requirements
      of
      SAB 104 as does Debt Resolve. 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.




F-11




Stock-based
      compensation




Beginning
      on January 1, 2006, the Company accounts for stock options issued under
      stock-based compensation plans under the recognition and measurement principles
      of SFAS No. 123(R) (“Share Based Payment”). The Company adopted the modified
      prospective transition method and therefore, did not restate prior periods’
results. Total stock-based compensation expense related to these and other
      stock-based grants for the year ended December 31, 2007 amounted to $2,479,180
      and for the year ended December 31, 2006 amounted to $11,136,565.




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





**Years
                ended**
              **December
                31,****2007**
            
            **2006**Risk
                free interest rate range
            
            4.52-4.84%
            
            4.52-4.86%Dividend
                yield
            
            0%
            
            0%Expected
                volatility
            
            81.1%-96.7%
            
            96.7%Expected
                life in years
            
            3-7
            
            3-10




The
      fair
      value of each option granted to employees and non-employees is estimated as
      of
      the grant date using the Black-Scholes option pricing model. The estimated
      fair
      value of the options granted is recognized as an expense over the requisite
      service period of the award, which is generally the option vesting period.
      As of
      December 31, 2007, total unrecognized compensation cost for these and prior
      grants amounted to $211,782, all of which is expected to be recognized in
      2008.




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 3,853,434 and 2,042,770, respectively at
      December 31, 2007, are excluded from the computation of diluted net loss per
      share as their inclusion would be anti-dilutive.




The
      Company’s issued and outstanding common shares as of December 31, 2007 do not
      include the underlying shares exercisable with respect to the issuance of
      215,439 warrants as of December 31, 2007, exercisable at $0.01 per share related
      to a financing completed in June 2006. In accordance with SFAS No. 128 “Earnings
      Per Share”, the Company has given effect to the issuance of these warrants in
      computing basic net loss per share.




NOTE
      3.
      INITIAL PUBLIC OFFERING





On
      November 6, 2006, the Company completed an Initial Public Offering (“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.




F-12




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. 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 and approximately $1,235,000 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
        23.)
  NOTE
      4.  FIXED
      ASSETS:




Fixed
      assets consist of the following:




September
                30,Useful
                life
            
            2007Computer
                equipment
            
            
            3-5
                years
            
            $
            493,731Computer
                software
            
            
            3
                years
            
            
            67,641Telecommunications
                equipment
            
            
            5
                years
            
            
            3,165Office
                equipment
            
            
            3
                years
            
            
            6,361Furniture
                and fixtures
            
            
            5
                years
            
            
            137,865Leasehold
                improvements
            
            
            Lease
                term
            
            
            21,081Less:
                accumulated depreciation
            
            
            
            
            
            729,844(446,749
            )$
            283,095




Depreciation
      expense totaled $150,038 and $51,728 for the years ended December 31, 2007
      and
      2006, respectively.




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




NOTE
      5.  ACQUISITION
      OF FIRST PERFORMANCE CORPORATION:





As
      discussed in Note 1, on January 19, 2007, the Company acquired all of the
      outstanding capital stock of First Performance Corporation, a Nevada corporation
      (“First Performance”), and its wholly-owned subsidiary, First Performance
      Recovery Corporation, pursuant to a Stock Purchase Agreement. First Performance
      is an accounts receivable management agency with operations in Las Vegas, Nevada
      and formerly in Fort Lauderdale, Florida. The aggregate purchase price of
      $850,000 included $500,000 of cash and $350,000 of the Company’s common stock,
      consisting of 88,563 shares at $3.95 per share.




The
      assets and liabilities of First Performance have been recorded in the Company’s
      consolidated balance sheet at their fair values at the date of acquisition.
      As
      part of the purchase of First Performance, the Company acquired identifiable
      intangible assets of approximately $450,000. Of the identifiable intangibles
      acquired, $60,000 was assigned to trade names and $390,000 was assigned to
      customer relationships. In accordance with SFAS 142, based on certain changes
      in
      the operations of First Performance, including the loss of four of its major
      clients, the Company performed an interim impairment analysis at June
      30, 2007 and at September 30, 2007. After analysis, no additional impairment
      charge was needed at the annual assessment on December 31, 2007. See Note 7.
      The
      amounts of these intangibles have been estimated based upon information
      available to management upon an outside appraisal. The acquired intangibles
      have
      been assigned definite lives and are subject to amortization, as described
      in
      the table below.




F-13




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





Intangible
                Asset
            
            Amortization
                PeriodTrade
                names
            
            10
                yearsCustomer
                relationships
            
            4
                years




The
      following table details the 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
            )Direct
                costs of acquisition
            
            
            (86,915
            )Goodwill
            
            
            1,042,205Total
            
            $
            850,000




The
      following represents a summary of the purchase price consideration:





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




First
      Performance was purchased on January 19, 2007, and therefore only its operations
      from January 19, 2007 through December 31, 2007 are included in the Company’s
      consolidated financial statements. The following table presents the Company’s
      unaudited pro forma combined results of operations for the years ended December
      31, 2007 and 2006, respectively, as if First Performance had been acquired
      at
      the beginning of each of the periods.




For
                the years ended
              December
                31,2007
            
            2006(unaudited)
            
            (unaudited)Revenues
            
            $
            2,938,541
            
            $
            6,185,681Net
                loss
            
            $
            (12,312,034
            )
            $
            (26,926,711
            )Pro-forma
                basic and diluted net loss per common share
            
            $
            (1.53
            )
            $
            (6.36
            )Weighted
                average common shares outstanding - basic and diluted
            
            
            8,040,385
            
            
            4,232,429





F-14




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 2006, nor are they necessarily indicative
      of
      future consolidated results.





NOTE
      6.  SECURITIES
      PURCHASE AGREEMENT - CREDITORS INTERCHANGE:




Securities
      Purchase Agreement





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





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





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





Employment
      Agreements





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




F-15





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





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





NOTE
      7.  IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS





The
      Company recorded $1,042,205 of goodwill in connection with its acquisition
      of
      First Performance (See Note 5). It also recorded $450,000 in intangible assets
      related to First Performance’s trade names and customer relationships (See Note
      8). The amounts of goodwill that the
      Company recorded in connection with this
      acquisition was  determined by comparing the
      aggregate amount of the purchase price plus related transaction costs
      to the fair value of the net tangible and identifiable
      intangible assets acquired.





In
      accordance with SFAS 142, based on certain changes in the operations of First
      Performance, including the loss of four of its major clients, the
      Company performed an interim impairment analysis at June 30, 2007 and
      at September 30, 2007. As a result of these analyses, the Company determined
      that the entire amount of goodwill with respect to First Performance was
      deemed to be impaired. In addition, the other intangible assets subject to
      amortization were also found to be impaired, and were revalued at $270,000,
      as
      of June 30, 2007.  Accordingly, the Company recorded a
      goodwill and intangibles impairment charge in the amount of $1,179,080 as
      of June 30, 2007. The Company recorded an additional $27,255 charge at September
      30, 2007, revaluing the intangible assets to $225,000.  The Company
      completed its annual impairment analysis as of December 31, 2007 and
      determined that no additional impairment charge was needed.





Making
      estimates about the carrying value of goodwill requires management to exercise
      significant judgment. It is reasonably possible that the estimate of the
      effect on the financial statements of a condition, situation, or set
      of circumstances that existed at the date of the financial statements,
      which management considered in formulating its estimate could change in the
      near
      term due to one or more future confirming events. 
Accordingly, the actual results regarding estimates of the
      carrying value of these intangibles could differ materially from the Company's
      estimates.





NOTE
      8.  INTANGIBLE
      ASSETS:




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





The
      components of intangible assets as of December 31, 2007 are set forth in the
      following table:








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





F-16




The
      amortization of intangibles will result in the following additional expense
      by
      year:


Years
                  Ended December 31:
              
              Amount2008
              
              $
              64,6072009
              
              
              64,6072010
              
              
              64,6072011
              
              
              6,8572012
              
              
              1,607Thereafter
              
              
              6,561Total
              
              $
              208,848




Amortization
      expense totaled $77,022 for the year ended December 31, 2007.




The
      weighted average amortization period for amortizable intangibles is 3.5 years
      and has no residual value.




NOTE
      9.
      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
      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.





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.)




F-17





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.




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).




F-18




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.)


Other
        Borrowings
 
 On
        November 30, 2007, an unaffiliated investor loaned the Company $100,000 on
        a
        90-day short term note. The note carries 12% interest per annum, with interest
        payable monthly in cash. The principal balance outstanding will be due at
        any
        time upon 30 days written notice, subject to mandatory prepayment (without
        penalty) of principal and interest, in whole or in part, from the net cash
        proceeds of any public or private, equity or debt financing made by Debt
        Resolve. As of December 31, 2007, there were 59 days left to maturity on
        the
        note. The note matured on February 28, 2008 and was extended to March 31,
        2008
        for an extension fee of $5,000. On March 31, 2008, the note was amended again
        to
        extend the term of the note to April 30, 2008 for another extension fee of
        $5,000. In conjunction with the note the Company also issued a warrant to
        purchase 100,000 shares of common stock at an exercise price of $1.25 per
        share
        with an expiration date of November 30, 2012. The note was recorded net of
        a
        debt discount of $44,100, based on the relative fair value of the warrant.
        The
        debt discount is being amortized over the term of the note. During the year
        ended December 31, 2007, the Company recorded amortization of the debt discount
        related to this note of $14,700. This note is guaranteed by Mssrs. Mooney
        and
        Burchetta.
 
 On
        December 21, 2007, an unaffiliated investor introduced to the Company by
        The
        Resolution Group of Newport Beach, California loaned the Company $125,000
        on an
        18 month note with a maturity date of June 21, 2009. The note carries interest
        at a rate of 12% per annum, with interest accruing and payable at maturity.
        The
        outstanding principal and interest may be repaid, in whole or in part, at
        any
        time without prepayment penalty. The note is secured by the assets of the
        Company. In conjunction with the note, a warrant to purchase 37,500 shares
        of
        common stock was granted at an exercise price of $1.07 and an expiration
        date of
        December 21, 2012. The note was recorded net of a deferred debt discount
        of
        $19,375, based on the relative fair value of the warrant. The debt discount
        is
        being amortized over the term of the note. This note is guaranteed by Mr.
        Burchetta.
 
 On
        December 30, 2007, an unaffiliated investor introduced to the Company by
        The
        Resolution Group of Newport Beach, California loaned the Company $200,000 on an
        18 month note with a maturity date of June 30, 2009. The note carries interest
        at a rate of 12% per annum, with interest accruing and payable at maturity.
        The
        outstanding principal and interest may be repaid, in whole or in part, at
        any
        time without prepayment penalty. The note is secured by the assets of the
        Company. In conjunction with this note, the Company also issued a warrant
        to
        purchase 100,000 shares of common stock at an exercise price of $1.00 and
        an
        expiration date of December 30, 2012. The note was recorded net of a deferred
        debt discount of $51,600, based on the relative fair value of the warrant.
        The
        debt discount is being amortized over the term of the note. This note is
        guaranteed by Mr. Burchetta.




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 re-priced, 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 for the year ended
      December 31, 2006.




F-19





NOTE
      10.  LINES
      OF
      CREDIT:





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





On
      May
      31, 2007, the Company entered into a line of credit agreement with Arisean
      Capital, Ltd. (“Arisean”), pursuant to which the Company may borrow from time to
      time up to $500,000 from Arisean to be used by the Company to fund its working
      capital needs. Borrowings under the line of credit are secured by the assets
      of
      the Company and bear interest at a rate of 12% per annum, with interest payable
      monthly in cash. The principal balance outstanding will be due at any time
      upon
      30 days written notice, subject to mandatory prepayment (without penalty) of
      principal and interest, in whole or in part, from the net cash proceeds of
      any
      public or private, equity or debt financing completed by the Company. Arisean’s
      obligation to lend such funds to the Company is subject to a number of
      conditions, including review by Arisean of the proposed use of such funds by
      the
      Company. Arisean is controlled by Charles S. Brofman, the Co-Chairman of the
      Company and a member of its Board of Directors. As of December 31, 2007, the
      outstanding balance on this line of credit was $576,000. The Company incurred
      interest expense related to this line of credit of $34,492 during the year
      ended
      December 31, 2007.





On
      August
      10, 2007, the Company entered into a line of credit agreement with James D.
      Burchetta, Debt Resolve’s CEO and Co-Chairman, for up to $100,000 to be used to
      fund the working capital needs of Debt Resolve and First Performance. Borrowings
      under the line of credit bear interest at 12% per annum, with interest payable
      monthly in cash. The principal balance outstanding will be due at any time
      upon
      30 days written notice, subject to mandatory prepayment (without penalty) of
      principal and interest, in whole or in part, from the net cash proceeds of
      any
      public or private, equity or debt financing made by Debt Resolve. As of December
      31, 2007, the Company has borrowed $135,000 under this line of credit. The
      Company incurred interest expense related to this line of credit of $6,207
      during the year ended December 31, 2007.




On
        October 17, 2007, the Company entered into a line of credit agreement with
        William M. Mooney, a Director of Debt Resolve, for up to $275,000 to be used
        primarily to fund the working capital needs of First Performance. Borrowings
        under the line of credit will bear interest at 12% per annum, with interest
        payable monthly in cash. The principal balance outstanding will be due at
        any
        time upon 30 days written notice, subject to mandatory prepayment (without
        penalty) of principal and interest, in whole or in part, from the net cash
        proceeds of any public or private, equity or debt financing made by Debt
        Resolve. In conjunction with this line of credit, the Company also issued
        a
        warrant to purchase 137,500
        shares of
        common stock at an exercise price of $2.00 per share with an expiration date
        of
        October 17, 2012. The note was recorded net of a deferred debt discount of
        $117,700, based on the relative fair value of the warrant. The debt discount
        is
        being amortized over the term of the note. During the year ended December
        31,
        2007, the Company recorded amortization of $117,700 of the debt discount
        related
        to this note. As of December 31, 2007, the Company has borrowed $300,000
        under
        this line of credit. This note is guaranteed by Mr. Burchetta and Mr.
        Brofman.





NOTE
      11.
      DRV CAPITAL
      LLC - DISCONTINUED OPERATIONS: (See Note 21)





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




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




F-20





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




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




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




NOTE
      12.  STOCKHOLDERS’
      DEFICIENCY




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.




F-21




During
      the years ended December 31, 2007 and 2006, the Company recorded compensation
      expense representing the amortized amount of the fair value of options granted
      to advisory board members in 2003, 2004 and 2005, of $15,436 and $172,714,
      respectively.




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




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




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




NOTE
      13.  STOCK
      OPTIONS:




As
      of
      December 31, 2007, the Company has one stock-based employee compensation
      plan.  The 2005 Incentive Compensation Plan (the “2005 Plan”) was approved
      by the stockholders on June 14, 2005 and provides for the issuance of options
      and restricted stock grants to officers, directors, key employees and
      consultants of the Company to purchase up to 900,000 shares of common
      stock.





A
      summary
      of option activity within the 2005 Plan during the year ended December 31,
      2007
      is presented below:


WeightedWeighted
              
              AverageAverage
              
              Remaining
              
              AggregateExercise
              
              Contractual
              
              Intrinsic2007
              
              Price
              
              Term
              
              ValueOutstanding
                  at January 1, 2007
              
              
              261,000
              
              $
              5.00
              
              
              3.9
                  Years
              
              $
              —Granted
              
              
              632,000
              
              $
              4.63
              
              
              4.7
                  Years
              
              $
              —Exercised
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Forfeited
                  or expired
              
              
              (73,000
              )
              $
              4.20
              
              
              —
              
              $
              —Outstanding
                  at December 31, 2007
              
              
              820,000
              
              $
              4.79
              
              
              4.2
                  Years
              
              $
              —Exercisable
                  at December 31, 2007
              
              
              679,000
              
              $
              4.78
              
              
              4.0
                  Years
              
              $
              —




As
      of
      December 31, 2007, the Company had 141,000 unvested options within the 2005
      Plan.





On
      February 1, 2007, the Company issued options to purchase 30,000 shares of its
      common stock exercisable
      at $4.04 per share to a
      new
      employee .
      The stock options
      have an exercise period of five years and vest 30% at issuance, 30% in nine
      months and 40% on the anniversary of issuance. The grant was valued at
      $91,200 ,
      is
      being expensed over the vesting period and resulted in an expense during the
      year ended December 31, 2007 of $81,067. Due to a reduction in force, the
      employee left the Company on November 30, 2007 and forfeited the final vesting
      of the options (10,000).




On
      February 28, 2007, the Company issued options to purchase 20,000 shares of
      its
      common stock exercisable
      at $4.10 per share to a
      new
      board member .
      The stock options
      have an exercise period of five years, vest 50% at issuance and 50% on the
      anniversary of issuance, were valued at $61,600 ,
      are
      being expensed over the vesting period and resulted in an expense during the
      year ended December 31, 2007 of $56,467.




On
      April
      4, 2007, the Company issued options to purchase 75,000 shares of its common
      stock exercisable at $3.70 per share to a new employee. The stock options have
      an exercise period of seven years and vest 25% at issuance, 25% at six months,
      25% at eighteen months and 25% at thirty months after the grant date. The grant
      was valued at $210,750, will be expensed over the one year employment contract
      term and resulted in expense during the year ended December 31, 2007 of
      $149,281. On November 15, 2007, the employee left the Company to pursue other
      interests and forfeited the final two vestings of the options
      (37,500).




F-22




On
      April
      27, 2007, the Company issued options to purchase 75,000 shares of its common
      stock exercisable at $4.75 per share to a new employee. The stock options have
      an exercise period of seven years and vest 33% on the first, second and third
      anniversary of the grant date. The grant was valued at $270,750, is being
      expensed over the one year employment contract term and resulted in expense
      during the year ended December 31, 2007 of $180,500.




On
        April
        27, 2007, the Company issued options to purchase 278,000 shares of its common
        stock exercisable at $4.75 per share to four current employees. The stock
        options have an exercise period of seven years. Of the grant, 276,500 options
        vest immediately and 1,500 options vest on the first anniversary of the grant
        date. The grant was valued at $1,003,580, were expensed immediately except
        for
        the grant vesting over the first year and resulted in expense during the
        year
        ended December 31, 2007 of $1,001,775.


On
      April
      27, 2007, the Company issued options to purchase 154,000 shares of its common
      stock exercisable at $5.00 per share to six current employees as an extension
      of
      expiring three year non-plan options. The stock options have an exercise period
      of four years, providing the grantees with the equivalent of a seven year grant,
      as all new options granted now have a seven year term. Of the grant, options
      to
      purchase 77,000 shares vest immediately and options to purchase the remaining
      77,000 shares vest on the first anniversary of the grant date. The grant was
      valued at $446,600, the expense associated with the first 77,000 shares were
      expensed immediately and the remainder are being expensed over the one year
      vesting period and resulted in a charge during the year ended December 31,
      2007
      of $318,122.




A
      summary
      of stock option activity outside the 2005 Plan during the year ended December
      31, 2007 is presented below:


WeightedWeighted
              
              AverageAverage
              
              Remaining
              
              AggregateExercise
              
              Contractual
              
              Intrinsic2007
              
              Price
              
              Term
              
              ValueOutstanding
                  at January 1, 2007
              
              
              3,147,434
              
              $
              4.96
              
              
              6.4
                  Years
              
              $
              —Granted
              
              
              50,000
              
              $
              4.75
              
              
              6.3
                  Years
              
              $
              —Exercised
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Forfeited
                  or Expired
              
              
              (164,000
              )
              $
              5.30
              
              
              —
              
              $
              —Outstanding
                  at December 31, 2007
              
              
              3,033,434
              
              $
              4.97
              
              
              6.3
                  Years
              
              $
              —Exercisable
                  at December 31, 2007
              
              
              3,033,434
              
              $
              4.78
              
              
              6.3
                  Years
              
              $
              —




On
      April
      27, 2007, the Company issued options to purchase 50,000 shares of its common
      stock exercisable at $4.75 per share to a current employee. The stock options
      vest immediately and have an exercise period of seven years. The grant was
      valued at $180,500 and was expensed immediately.





As
      of
      December 31, 2007, the Company had no unvested stock options outside the 2005
      Plan.





The
      Company recorded stock based compensation expense representing the amortized
      amount of the fair value of options granted in 2006 in the amount of $361,461
      during the year ended December 31, 2007.




Stock
      based compensation for the years ended December 31, 2007 and 2006 was recorded
      in the consolidated statements of operations as follows:


2007
              
              2006Payroll
                  and related expenses
              
              $
              2,223,387
              
              $
              2,839,562General
                  and administrative expenses
              
              $
              255,794
              
              $
              1,235,836




F-23




NOTE
      14.  WARRANTS:




A
      summary
      of warrant activity as of January 1, 2007 and changes during the year ended
      December 31, 2007 is presented below:


WeightedWeighted
              
              AverageAverage
              
              Remaining
              
              AggregateExercise
              
              Contractual
              
              Intrinsic2007
              
              Price
              
              Term
              
              ValueOutstanding
                  at January 1, 2007
              
              
              2,091,158
              
              $
              1.44
              
              
              3.1
                  Years
              
              
              —Granted
              
              
              1,003,000
              
              $
              1.70
              
              
              4.6
                  Years
              
              
              —Exercised
              
              
              (1,001,388
              )
              $
              0.20
              
              
              —
              
              
              —Forfeited
                  or Expired
              
              
              (50,000
              )
              $
              3.85
              
              
              —
              
              
              —Outstanding
                  at December 31, 2007
              
              
              2,042,770
              
              $
              1.60
              
              
              3.0
                  Years
              
              $
              235,052Exercisable
                  at December 31, 2007
              
              
              1,817,770
              
              $
              1.79
              
              
              3.3
                  Years
              
              $
              235,052




As
      of
      December 31, 2007, there were 225,000 unvested warrants to purchase shares
      of
      common stock.





On
      March
      1, 2007 the Company issued a warrant to purchase 100,000 shares of its common
      stock exercisable at $3.85 per share to a consultant. The warrant has an
      exercise period of three years, which vests 25% at issuance and 25% at three,
      nine and nine months from issuance. The warrant was valued at $240,000. On
      June
      30, 2007, warrants for 50,000 shares of common stock were cancelled due to
      termination of the consultant’s services. During the year ended December 31,
      2007, the Company recognized an expense relating to this grant of
      $134,571.




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.  A change
      of venue moved the suit to the Southern District of New York.





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 filed a motion to dismiss, transfer
      or stay the California case in preference to the first-filed New Jersey case.
      That motion has
      been
      granted by the court, and the California case has been stayed in preference
      to
      the New Jersey case .
      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. The New Jersey Court subsequently denied Apollo’s motion
      to transfer the case to California and granted the Company’s request in the
      alternative that the case be heard in New York if the Court decided it should
      not stay in New Jersey. The case was transferred to federal court in the
      Southern District of New York where it remains pending at a preliminary stage.
      The mirror action that Apollo filed against the Company in California has been
      dismissed without prejudice by the parties. On November, 5, 2007, the Company
      and Apollo jointly announced that they had reached a settlement of the pending
      patent infringement lawsuit. The parties came to agreement that Apollo’s system,
      as represented by Apollo, does not infringe on United States Patents Nos.
      6,330,551 and 6,954,741, both entitled Computerized Dispute Resolution System
      and Method. The parties further agreed to respect each other’s intellectual
      property to the extent it is validly patent protected with the parties reserving
      all of their legal rights.





Our
      First
      Performance subsidiary received an action under the Texas Fair Debt Collection
      Practices Act and the Telephone Act. The plaintiff is seeking $10,000 in
      damages. The Company is vigorously defending this matter as it believes that
      the
      claim has no merit.




F-24




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




NOTE
      16.  INCOME
      TAXES:




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




Year
                ended December 31,2007
            
            2006Tax
                benefit at statutory rate
            
            
            (34.00
            )%
            
            (34.00
            )%State
                and local income taxes net of federal
            
            
            (5.00
            )
            
            (5.00
            )Non-deductible
                expenses
            
            
            0.10
            
            
            —Impairment
                of goodwill
            
            
            3.76Amortization
                of intangibles
            
            
            0.24
            
            
            —Change
                in estimate of prior year tax provision
            
            
            0.87
            
            
            —Increase
                in valuation allowance
            
            
            34.03
            
            
            25.84Effective
                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
                31,2007
            
            2006Deferred
                tax asset:Accrued
                expenses
            
            $
            89,314
            
            $
            130,454Other
            
            
            —
            
            
            14,536Stock
                based compensation
            
            
            6,037,328
            
            
            5,229,645Net
                operating loss carryforward
            
            
            7,725,032
            
            
            4,219,468Deferred
                tax asset
            
            
            13,851,674
            
            
            9,594,124Less:
                valuation allowance
            
            
            (13,851,674
            )
            
            (9,594,124
            )Net
                deferred tax asset
            
            $
            —
            
            $
            —Increase
                in valuation allowance
            
            $
            4,257,550
            
            $
            6,615,860





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, 2007 and 2006. At December 31, 2007, the
      Company had net operating loss carryforwards of approximately $19,452,000 which
      expire at various dates through 2027.




At December
        31, 2007 ,
        the
        Company had federal net operating loss (“NOL”) carry forwards for income tax
        purposes of approximately $19,800,000. These NOL carry forwards expire through
        2027 but are limited due to section 382 of the Internal Revenue Code (the
“382
        Limitation”) which states that the NOL of any corporation for any year after a
        greater than 50% change in control has occurred shall not exceed certain
        prescribed limitations. As a result of the Initial Public Offering described
        in
        Note 3 Debt Resolve’s NOL carry forwards are subject to the 382 Limitation which
        limits the utilization of those NOL carry forwards to approximately $650,000
        per
        year. The remaining federal NOL carry forwards may be used by the Company
        to
        offset future taxable income prior to their expiration. For First Performance,
        Section 382 will limit their pre-acquisition NOL’s to approximately $35,000 per
        year, due to the acquisition described in note 5.  The remaining federal
        NOL carry forwards may be used by the Company to offset future taxable income
        prior to their expiration.  For the year ended December 31, 2007 the
        difference between the Federal statutory rate and the effective rate was
        due
        primarily to State taxes, non-deductibility of goodwill from the First
        Performance acquisition and change in the valuation allowance of approximately
        $4.2 million .


NOTE
      17.  OPERATING
      LEASES:




On
      August
      1, 2005, the Company entered into a five year lease for its corporate
      headquarters which includes annual escalations in rent. Since that date, in
      accordance with SFAS No. 13, “Accounting for Leases,” (“SFAS 13”) the Company
      accounts for rent expense using the straight line method of accounting, accruing
      the difference between actual rent due and the straight line amount. At December
      31, 2007, accrued rent payable totaled $14,894.





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





The
      Company continues to lease an office in Las Vegas, Nevada under a non-cancelable
      operating lease that expires July 31, 2014 and calls for escalating monthly
      payments of $21,644. At December 31, 2007, accrued rent payable related to
      this
      lease totaled $21,172.




F-25





Rent
      expense for the years ended December 31, 2007 and 2006 was $530,897 and
      $123,328, respectively.





As
      of
      December 31, 2007, future minimum rental payments under the above non-cancelable
      operating leases are as follows:









For
                the Years EndingDecember
                31,
            
            **Amount**2008
            
            $
            387,0292009
            
            
            389,8922010
            
            
            335,6572011
            
            
            259,7282012
            
            
            259,728Thereafter
            
            
            411,236$
            2,043,270




NOTE
      18.  EMPLOYMENT
      AGREEMENTS:




The
      Company is party to an employment agreement with Mr. Burchetta as of April
      1,
      2005. Under the terms of the agreement, the Company will pay Mr. Burchetta
      an
      annual base salary of $250,000 per year, and thereafter his base salary will
      continue at that level, subject to adjustments approved by the compensation
      committee of the 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, the Company 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. Ms. Dering’s
      contract was amended on May 1, 2007 to appoint her to the position of Senior
      Vice President, Finance upon David M. Rainey becoming the Chief Financial
      Officer. Ms. Dering retired effective September 1, 2007. On May 20, 2006, Mr.
      Rosa’s contract was extended to August 1, 2007. Mr. Rosa remained with the
      Company subsequent to August 1, 2007 on an informal arrangement continuing
      the
      terms of his contract. Mr. Rosa resigned from the Company effective December
      31,
      2007 to pursue other opportunities.




On
      April
      23, 2007, Anthony P. Canale was appointed to the position of General Counsel
      of
      the Company. Mr. Canale’s employment agreement provides for a base salary of
      $175,000 with certain bonus provisions. Mr. Canale was also awarded 75,000
      options vesting 25% on the date of hire, 25% in six months, 25% in eighteen
      months and 25% in 30 months. The employment agreement has a one year renewable
      term. On November 15, 2007, Mr. Canale resigned from the Company. The final
      two
      vestings of the options were forfeited at the time of resignation.




On
      May 1,
      2007, David M. Rainey joined the company as Chief Financial Officer and
      Treasurer on the planned retirement of Ms. Dering. Mr. Rainey has a one year
      contract that renews automatically unless 90 days notice of intention not to
      renew is given by the Company. Mr. Rainey’s base salary is $200,000, subject to
      annual increases at the discretion of the board of directors. Mr. Rainey also
      received a grant of 75,000 options to purchase the common stock of the company,
      one third of which vest on the first, second and third anniversaries of the
      start of employment with the Company. The value of the options on the date
      of
      grant was $270,750, which are being expensed over the one year term of Mr.
      Rainey’s contract. Mr. Rainey’s contract also provides for one month of
      severance and benefits per month of service up to 12 months for any termination
      without cause. Upon a change in control, Mr. Rainey receives one year severance
      and bonus with benefits and immediate vesting of all stock options then
      outstanding.




F-26




NOTE
      19.  EMPLOYEE
      BENEFIT PLANS:




Beginning
      January 1, 2006, the Company sponsors an employee savings plan designed to
      qualify under Section 401K of the Internal Revenue Code. This plan is for all
      employees who were employed by the Company at December 31, 2005 or who have
      completed 1,000 hours of service. Company contributions are made in the form
      of
      the employee’s investment choices and vest immediately. Matching contributions
      by the Company for the years ended December 31, 2007 and 2006 were $36,839
      and
      $60,443, respectively.




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





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




NOTE
      20.  SEGMENT
      DATA:




Prior
      to January
      2007 ,
      the
      Company had minimal revenue through the DebtResolve System.  As discussed
      in Note 1, on January
      19, 2007 ,
      the
      Company acquired First Performance, an accounts receivable management
      agency.  Also, in January
      2007 ,
      the
      Company initiated operations of its debt buying subsidiary.  Accordingly,
      as of January
      2007 ,
      the
      Company is no longer considered a development stage entity, and operated in
      three segments:  Internet Services (internet debt resolution software and
      services offered to creditors and collection agencies), Debt Buying (defaulted
      consumer debt buying), and a Collection Agency (consumer debt
      collections).  On October
      15, 2007 ,
      the
      Company ceased its operations of the Debt Buying segment (Note 21) and now
      operates its Internet Services and Collection Agency segments. 
Accordingly, the following table summarizes financial information about the
      Company’s business segments as of December
      31, 2007 :








**Year
                Ended December 31, 2007****Internet****Services**
            
            **Collection****Agency**
            
            **Corporate**
            
            **Consolidated**Revenues
            
            $
            67,449
            
            $
            2,778,374
            
            $
            —
            
            $
            2,845,823Loss
                from operations
            
            $
            (7,150,522
            )
            $
            (3,965,194
            )
            $
            (865,134
            )
            $
            (11,980,850
            )Depreciation
                and amortization
            
            $
            56,938
            
            $
            170,122
            
            $
            —
            
            $
            227,060Goodwill
                & intangibles impairment charge
            
            $
            —
            
            $
            (1,206,335
            )
            $
            —
            
            $
            (1,206,335
            )Interest
                expense,
                net of interest income
            
            $
            (16,426
            )
            $
            (6,040
            )
            $
            —
            
            $
            (22,466
            )Capital
                expenditures
            
            $
            35,463
            
            $
            —
            
            $
            —
            
            $
            35,463Total
                assets
            
            $
            774,389
            
            $
            486,354
            
            $
            —
            
            $
            1,060,743




NOTE
      21.  DISCONTINUED
      OPERATIONS




On
      October 15, 2007, the Company ceased operations of DRV Capital, and
      EAR.




F-27




In
      accordance with SFAS 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets” (“SFAS 144”), the Company has reported these subsidiaries’
results for the years ended December 31, 2007 and 2006 as discontinued
      operations because the operations and cash flows have been eliminated from
      the
      Company’s continuing operations.




Components
      of discontinued operations are as follows:


Year
                  ended
                December
                  31,
              
              Year
                  ended
                December
                  31,2007
              
              2006Revenue
              
              $
              3,334
              
              $
              —Payroll
                  and related expenses
              
              
              207,654
              
              
              —General
                  and administrative expense s
              
              
              209,302
              
              
              53,579Total
                  expenses
              
              
              416,956
              
              
              53,579Loss
                  from operations
              
              
              (413,622
              )
              
              (53,579
              )Interest
                  expense
              
              
              (38,463
              )
              
              —Net
                  loss from discontinued operations
              
              $
              (452,085
              )
              $
              (53,579
              )




NOTE
      22.  RECENTLY
      ISSUED AND PROPOSED ACCOUNTING PRONOUNCEMENTS:




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 did not 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
      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 does not expect that the adoption of
      SFAS No. 157 will have a material impact on its results of operations and
      financial condition.




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 adoption of EITF 06-6 did not have a material impact on the
      Company’s 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 adoption of EITF 06-7
      did not have a material impact on the Company’s consolidated financial position,
      results of operations or cash flows.




F-28




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 futu re
      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 adoption of FSP EITF 00-19-2 did not have a material impact 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 does not expect the adoption of
      SFAS 159 to have a material impact on its results of operations and financial
      condition.





In
      December 2007, the FASB issued SFAS No. 141R (Revised 2007), “Business
      Combinations” (“SFAS 141R”), which replaces SFAS No. 141, “Business
      Combinations.” SFAS 141R establishes principles and requirements for determining
      how an enterprise recognizes and measures the fair value of certain assets
      and
      liabilities acquired in a business combination, including noncontrolling
      interests, contingent consideration and certain acquired contingencies. SFAS
      141R also requires acquisition-related transaction expenses and restructuring
      costs be expensed as incurred rather than capitalized as a component of the
      business combination. SFAS 141R applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. SFAS
      141R
      would have an impact on accounting for any businesses acquired after the
      effective date of this pronouncement.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS 160”), to
      improve the relevance, comparability and transparency of the information that
      a
      reporting entity provides in its consolidated financial statements by (1)
      requiring the ownership interests in subsidiaries held by parties other than
      the
      parent to be clearly identified, labeled and presented in the consolidated
      statement of financial position within equity, but separate from the parent’s
      equity, (2) requiring that the amount of consolidated net income attributable
      to
      the parent and to the noncontrolling interest be clearly identified and
      presented on the face of the consolidated statement of income, (3) requiring
      that changes in a parent’s ownership interest while the parent retains its
      controlling financial interest in its subsidiary be accounted for consistently,
      (4) by requiring that when a subsidiary is deconsolidated, any retained
      noncontrolling equity investment in the former subsidiary be initially measured
      at fair value and (5) requiring that entities provide sufficient disclosures
      that clearly identify and distinguish between the interests of the parent and
      the interests of the noncontrolling owners. SFAS 160 is effective for fiscal
      years, and interim periods within those fiscal years, beginning on or after
      December 15, 2008. Earlier adoption is prohibited. This SFAS is effective in
      tandem with SFAS 141R. The Company is currently in the process of evaluation
      the
      impact of the adoption of SFAS 160 on its results of operations and financial
      condition .




F-29




In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS 161”), to
      require enhanced disclosures about an entity’s derivative and hedging activities
      and thereby improves the transparency of financial reporting. SFAS 161 is
      effective for financial statements issued for fiscal years and interim periods
      beginning after November 15, 2008, with early adoption encouraged. The Company
      is currently in the process of evaluation the impact of the adoption of SFAS
      161
      on its results of operations and financial condition.





NOTE
      23.  RELATED
      PARTIES:




a.  Patent
      licensing




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




On
      June
      29, 2005, the Company granted to each of Messrs. Burchetta and Brofman a stock
      option for up to such number of shares of common stock such that the stock
      option, when added to the number of shares of common stock owned by each of
      Messrs. Burchetta and Brofman, and in combination with any shares owned by
      any
      of their respective immediate family members and affiliates, will equal 14.6%
      of
      the total number of outstanding shares of common stock on a fully-diluted basis
      as of the closing of a potential public offering of the Company’s common stock,
      assuming the exercise of such stock option.




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




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




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




b.  Legal
      fees




In
      2006,
      the Company employed an attorney who is a relative of the Chairman and
      Founder.  During the year ended December 31, 2006, the Company
      paid this individual consulting fees of approximately
      $35,000.




F-30




c. Consulting
          fees





During
      the year ended 2007, an entity owned by one of our Directors performed
      consulting services for the Company related to the acquisition of First
      Performance Corporation in the amount of $18,122.




NOTE
      24.  SUBSEQUENT
      EVENTS:




a.  Warrant
      Exercises




Subsequent
      to December 31, 2007, the Company issued 4,167 shares of common stock in
      connection with the exercise of warrants for cash proceeds of $42.




b.  New
      Officers




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




On
      February 16, 2008, Mr. James D. Burchetta resigned from the Chief Executive
      Officer role and was appointed to the position of executive Chairman and Founder
      by the Board.




On
      January 24, 2008, following the resignation of the Company’s President, Richard
      Rosa, on December 31, 2007, the Board elected David M. Rainey to be President,
      as well as Chief Financial Officer, Treasurer and Secretary of the
      Corporation.




c.  Additional
      Financing




On
      January 25, 2008, an unaffiliated investor through TRG loaned the Company
      $100,000 at 12% interest per annum for a term of 18 months. In conjunction
      with
      the note, the investor received 50,000 warrants to purchase the common stock
      of
      the Company at an exercise price of $1.00.




On
      February 8, 2008, the CEO of TRG loaned the Company $55,000 on a short term
      basis. The interest rate is 12% per annum, and the loan is repayable on demand.
      As of April 14, 2008, the remaining outstanding balance on the loan is
      $10,000.




Between
      February 21, 2008 and March 20, 2008, an officer of the Company loaned to the
      Company a total of $80,000. The interest rate is 12% per annum, and the loan
      is
      repayable on demand.




On
      February 26, 2008, an unaffiliated investor loaned the Company an additional
      $100,000 at 12% interest per annum. Terms of the loan included a $20,000 service
      fee on repayment or a $45,000 service fee if repayment occurs 31+ days after
      origination and a maturity period of 18 months. In conjunction with the note,
      the investor received 175,000 warrants to purchase the common stock of the
      Company at an exercise price of $1.25.




On
      March
      7, 2008, the Company borrowed $100,000 from a bank at the prime rate for 30
      days. On March 14, 2008, the original loan was repaid, and the Company borrowed
      $150,000 at the prime rate and due in 30 days.


F-31




On
      March
      27, 2008, an unaffiliated investor loaned the Company $100,000 at 12% interest
      per annum with a term of 18 months. In conjunction with the note, the investor
      received 50,000 warrants to purchase the common stock of the Company at an
      exercise price of $1.95.




On
      April
      10, 2008, an unaffiliated investor loaned the Company an additional $198,000
      at
      12% interest per annum with a term of 18 months. In conjunction with the note,
      the investor received 99,000 warrants to purchase the common stock of the
      Company at an exercise price of $2.45.




d.
        American Stock Exchange deficiency letter
 
 On
        January 7, 2008, the Company received a deficiency letter from the American
        Stock Exchange stating that we were not in compliance with specific provisions
        of the American Stock Exchange continued listing standards The Company has
        indicated that it is currently working to address this
        deficiency.




F-32