UNITED STATES  SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549   FORM 10-K  xANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2009   ̈TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from
 to   Commission File No.:  1-33110   DEBT RESOLVE, INC.  (Exact Name of Registrant as Specified in Its Charter) Delaware
     
     33-0889197(State or other Jurisdiction of
     (I.R.S. Employer Identification No.)Incorporation or Organization)  150 White Plains Road, Suite 108Tarrytown, New York
     10591(Address of principal executive offices)
     (Zip Code)  (914) 949-5500  (Registrants telephone number, including area code)  Securities registered pursuant to Section 12(b) of the Act:  Name of Each Exchange Title of Each Class on Which Registered Common Stock, par value $.001 per share Over-the-Counter Bulletin Board Securities registered pursuant to Section 12(g) of the Act:  None Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.  Yes  [   ]   No [ X ] Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  [   ]   No [ X ]  Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [ X ] No [   ]  Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).   Yes  [   ]   No [ X ]  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.  [   ]      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.  See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



Large accelerated filer  [    ]

Accelerated filer  [    ]

Non-accelerated filer  [    ]

Smaller reporting company  [ X ]

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

The aggregate
market value of the voting and non-voting stock held by non-affiliates of the issuer was approximately $720,777, based on a closing
price of $0.09 per share on June 30, 2009, as quoted on the Pink Sheets.

As of April 12, 2010, 43,502,575 shares of the issuers
Common Stock were issued and outstanding.

Documents Incorporated by Reference:  None











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DEBT RESOLVE, INC.

TABLE OF CONTENTS

PART I.

Item 1.Business3Item 1A.Risk factors12Item 1B.Unresolved staff comments20Item 2.Properties20Item 3.Legal proceedings21Item 4.Reserved22PART  II.Item 5.Market for Registrants common equity, related
stockholder matters and issuer purchases of equity securities23Item 6.Selected Financial Data23Item 7.Managements discussion and analysis of financial condition and results of operations24Item 7A.Quantitative and Qualitative Disclosures about Market Risk32Item 8.Financial statements and supplementary data32Item 9.Changes in and disagreements with accountants on accounting and financial disclosure32Item 9A.Controls and procedures32Item 9B.Other information33PART III.Item 10.Directors, executive officers,
promoters, control persons and corporate governance; compliance with Section 16(a) of the Exchange Act33Item 11.Executive compensation
37Item 12.Security ownership of certain beneficial owners and management and related stockholder matters
41Item 13.Certain relationships and related transactions, and director independence43Item 14.Principal accountant fees and services44Item 15.Exhibits and financial statement schedules45Signatures47Financial StatementsF-1

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PART I.
ITEM 1.  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.  Except as required by federal securities laws, 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, including under Item 1.A. Risk Factors, 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, the Company
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 proprietary DebtResolve® system.  Our Internet-based bidding
system facilitates the settlement and collection of defaulted consumer debt via the Internet.  Our existing and target creditor
clients include banks and other credit originators, credit card issuers and third-party collection agencies and collection law
firms, as well as assignees and buyers of charged-off consumer debt.  We also recently implemented our first client in the
retail sector.  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 or parties who service their credit and consumer
debtors together to resolve defaulted consumer debt online through a series of steps.  The process is initiated when one of our
creditor or servicer clients electronically forwards to us a file of debtor accounts, and sets rules or parameters for handling each
class of accounts.  The client then invites its consumer debtor to visit a client-branded website, developed and hosted by us,
where the consumer is presented with an opportunity to satisfy the defaulted debt through our DebtResolve system. Through our
hosted website, the debtor is allowed to make three or four offers, or select other options to resolve or settle the obligation.
 If the debtor makes an offer acceptable to our creditor client, payment can then be collected directly through the DebtResolve
system and deposited into the clients account.  The entire resolution process is accomplished online.



We completed development and commenced commercial use of our software solution in 2004.
 We currently have a written contract in place with two banks, a collection law firm and a retailer.  The loss of any of
these contracts would have a material adverse impact on our business.



On January 19, 2007, we acquired First Performance Corporation and its subsidiary, First
Performance Recovery Corporation, both privately-owned debt collection agencies with approximately 100 collectors, revenues of $6
million for the year ended December 31, 2006, and offices in Florida and Nevada, which we operated as a wholly-owned subsidiary.
 We spent much of 2007 and the beginning of 2008 restructuring this business (after losing a few key clients) to improve
profitability by reducing costs and declining business that had contributed to prior losses at First Performance, while securing new
clients with better profitability prospects.  In June 2007, we consolidated all business activities of First Performance
Corporation and First Performance Recovery Corporation


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into our Nevada facility and transacted all business through First
Performance Recovery.  In addition, we believed that the agency would serve as a test lab to develop best practices
for the integration of our DebtResolve system into the accounts receivable management environment.  On June 30, 2008, First
Performance Recovery was closed as we decided to refocus entirely on our core internet business and to mitigate ongoing losses from
First Performance.  The corporate charter of First Performance Corp. was legally revoked on August 1, 2009, and the results of
First Performance and First Performance Recovery have been de-consolidated from our results as of this date.


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
an


d 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
convers


ion 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 conversions of notes, interest, payroll and accounts payable and private placements to accredited investors have brought us to our current number of outstanding shares of common stock.  Our principal executive offices are located at 150 White Plains Road, Suite 108, Tarrytown, New York 10591, and our telephone number is (914) 949-5500.  Our website is located 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.  By working with our clients to build best practices, we expect to help secure sales and improve revenue to us.



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



·

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


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·

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.



Development-Stage Activities and Acquisitions



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



Our Core Business



The DebtResolveTM System



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


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



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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.



Collection Agency Business



First Performance Corporation and First Performance Recovery Corporation



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



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



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



One year later, on June 30, 2008, we decided to close First Performance to refocus on our core internet business and to mitigate continuing losses at First Performance.  At that time, we took a charge for the disposal of the remaining fixed assets of $87,402 and expensed the remaining value of the intangible assets in accordance with SFAS 142 with a charge of $176,545.  The corporate charter of First Performance was legally revoked on August 1, 2009, and we have de-consolidated the results of First Performance as of that date.



Our Industry



According to the U.S. Federal Reserve Board, consumer credit has increased from $133.7
billion in 1970 to $2.4 trillion in December 2009, a compound annual growth rate of 8% for the period.  In parallel, the
accounts





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



·

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



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



Our Business Growth Strategy



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



·

Accelerate our marketing efforts and extend target markets for the Internet product.Initially, we have marketed our DebtResolve system to credit issuers, their collection agencies and collection law firms and the buyers of their defaulted debt in the United States, Canada and the United Kingdom.  We also entered the auto collections vertical in 2007 with the addition of several clients in this area.  In 2010 we implemented our first client in the retail sector.  As of December 31, 2009, we were actively targeting new market segments like healthcare companies, and new geographic markets, like Asia and other international markets.  Other markets in the United States may include student loan debt, utilities and Internet/payday lending.



·

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



·

Grow our client base. As of December 31, 2009, we had 4 clients.  Our clients consist of credit issuers (including banks).  With our suite of online products, we believe we can expand our client base by offering a broader range of services.  We believe that our clients can benefit from our patented, cost-effective technology and other services, and we intend to continue to market and sell our services to them under long-term recurring revenue contracts.



·

Increase adoption rates. Our clients typically pay us either usage fees
per settlement or license fees based on their number of end-users and volume of transactions.  Registered end-users using
account




7


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.


Sales and Marketing

The DebtResolve System

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


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


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

Technology License and Proprietary Technology

At the core of our DebtResolve system is a patent-protected bidding methodology co-invented
by James D. Burchetta and Charles S. Brofman, the co-founders of our company.  We originally entered into a license agreement
in February 2003with Messrs. Burchetta and Brofman for the licensed usage of the intellectual property rights



8


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

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

In addition, we have developed our own software based on the licensed intellectual property
rights.  We regard our software as proprietary and rely primarily on a combination of copyright, trademark and trade secret
laws of general applicability, employee confidentiality and invention assignment agreements and other intellectual property
protection methods to safeguard our technology and software.  We have not applied for patents on any of our own technology.
 We have obtained through the U.S. Patent and Trademark Office a registered trademark for




9


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.

Technology and Service Providers

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

Competition

The DebtResolve System

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

Apollo Enterprise Solutions, LLC is a company with a primary
investor/CEO whose additional funding has come from private sources.  Apollo has a mixed team of employees/consultants who are
located at their facility in Irvine, CA or are geographically dispersed.  Their marketing and sales efforts are focused on
high-end banks and some large agencies, both in the United States and the United Kingdom, as well as healthcare providers.  In
2005 through 2008, we believe Apollo spent more than their competitors on advertising and trade show sponsorships.  Their sales
strategy has been to be the lowest-cost provider.  In terms of product positioning, Apollo emphasizes their technology 
especially their rules engine that allows a client to set treatment strategies, and the ability to process real-time credit scores
for inclusion in the debtor treatment strategy.  Overall, Apollo has a feature set similar to our Debt Resolve 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.
 Apollo has very long implementation periods with its clients.

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 has been able
to reap some advantages from the integration of online bill payment capabilities with their online collections.

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.  Instead, we partner with a major payment processing provider to
offer competitive rates on this service.  Many potential clients already have a processing system, and we can provide an
interface to that system.  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


Government Regulation

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

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

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

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

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

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






11


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

As of the date of this report, we have 5 employees in total, of which 4 are full-time
employees.  Our employees are based at our corporate headquarters in Tarrytown, New York and our office in Newport Beach,
California.  None of our employees is subject to a collective bargaining agreement, and we believe that our relations with our
employees are good.


ITEM 1A.  Risk Factors

Cautionary Statements and Risk Factors

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

Risks Related to Our Business

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

For the years ended December 31, 2009 and 2008, we had inadequate revenues and incurred net losses from continuing operations of $13,115,424 and $7,358,702, respectively.  Cash used in operating activities for continuing operations was $956,740 and $3,582,047 for the years ended December 31, 2009 and 2008, respectively.  Based upon projected operating expenses, we believe that our working capital as of the date of this report may not be sufficient to fund our plan of operations for the next twelve months.  The aforementioned factors raise substantial doubt about our ability to continue as a going concern.
The Company needs to raise additional capital in order to be
able to accomplish its business plan objectives.  The Company has historically satisfied its capital needs primarily from the
sale of debt and equity securities.  Management of the Company is continuing its efforts to secure additional funds through
debt and/or equity instruments.  Management believes that it will be successful in obtaining additional financing; however, no
assurance can be provided that the Company will be able to do so.  There is no assurance that these funds will be sufficient to
enable the Company to attain profitable operations or continue as a going concern.  To the extent that the Company is
unsuccessful, the Company may need to curtail its operations and implement a plan to extend payables and reduce overhead until
sufficient additional capital is raised to support further operations.  At this time, there is also a significant risk of
bankruptcy unless additional funding is secured.  There can be no assurance that any plan to raise additional funding will be
successful.  These consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Subsequent to December 31, 2009, the Company has secured
additional financing from eight parties in the aggregate amount of $452,500 net of undeposited funds.





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 2008 and
2009, we have incurred total net losses from continuing operations for these two years of $20,474,126.  If such losses
continue, we may not be able to continue our operations.

We incurred a net loss from continuing operations of $13,115,424 for the year ended December
31, 2009 and $7,358,702 for the year ended December 31, 2008.  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, from a private financing in 2007
and various individual private placements and shareholder loans in 2007, 2008 and 2009.  If we continue to experience losses,
we may not be able to continue our operations or may have to declare bankruptcy.

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

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

We may be unable to meet our future liquidity requirements.

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

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

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



13


·
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.

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

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

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






14


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.

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 December 2009, 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.



15


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

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

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

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

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

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

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

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

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




16


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

We could issue blank check preferred stock without stockholder
approval with the effect of diluting then current stockholder interests and impairing their voting rights, and provisions in our
charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable. Our certificate of incorporation authorizes the issuance of up to
10,000,000 shares of blank check preferred stock with designations, rights and preferences as may be determined from
time to time by our board of directors.  Accordingly, our board of directors is empowered, without stockholder approval, to
issue a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of,
or impair the voting power of, our common stockholders.  The issuance of a series of preferred stock could be used as a method
of discouraging, delaying or preventing a change in control.  For example, it would be possible for our board of directors to
issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of
our company.  In addition, advanced notice is required prior to stockholder proposals. Delaware law also could make it more difficult for a third party to acquire us.
 Specifically, Section 203 of the Delaware General Corporation Law may have an anti-takeover effect with respect to
transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over
the market price for the shares of common stock held by our stockholders.
Risks Related to Our Industry

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

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

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

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






17


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

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

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

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

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

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

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

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




18


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

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

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

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

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

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

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

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

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

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

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

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

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





19


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 our Common Stock

Our stock is thinly traded.

The daily volume in our stock varies widely and is limited at times.  At this time, it is not possible to liquidate a significant position in a relatively short time period.  In addition, because we are not traded on a national exchange, there are additional restrictions on the purchase or sale of our common stock.

Risks Related to the Economy

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

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

ITEM 1B.  Unresolved Staff Comments

Not applicable.

ITEM 2.  Properties
We leased approximately 4,900 square feet of office space at 707 Westchester Avenue, Suite L-7, White Plains, New York 10604.  We leased this space for $10,274 per month on a straight-line basis under a non-cancelable lease through July 2010.  We have entered into a stipulation to terminate this lease, which requires a cash payment and the removal of our furniture by May 15, 2009.  We have made the payment and removed our furniture and have received a satisfaction of judgment dismissing this matter.
We currently share office space with a business partner at 150 White Plains Rd., Suite 108, Tarrytown, NY 10591 under a partnership agreement.  We cross-market each others services, and we get some office space for our use.  In July 2009, we verbally modified the agreement to allow us to take additional space for a rent payment of $1,000 per month.
In conjunction with the acquisition of First Performance
Corporation and its subsidiary, First Performance Recovery Corporation, we assumed responsibility for the existing First Performance
leases in Nevada and Florida.  The Nevada facility consists of 13,708 square feet at 600 Pilot Road, Las Vegas, Nevada 89119.
 We lease this space for $19,225 per month under a non-cancelable lease through July 31, 2014.  The Florida facility
consisted of 12,415 square feet at 4901 N.W. 17th Way, Suite 201, Ft. Lauderdale, Florida 33309.   We leased
this space for $22,481 per month (less a $5,000 abatement in effect in early 2007) under a non-cancelable lease through January 31,
2009.  However, on May 31, 2007, we ceased operations in Florida and relinquished the space on June 30, 2007.  An
agreement was reached with the landlord to permit cancellation of the lease for payment of three months rent.  We completed
these payments on September 30, 2007.  First Performance subsequently closed on June 30, 2008 and vacated the Nevada space
shortly thereafter.  The Nevada landlord has filed suit seeking the balance of the rent due to the end of the lease from First
Performance, which is a total liability of almost $1.4 million.  This liability was accrued at June 30, 2008.  Debt
Resolve is not a party to the lease or the suit.  As of August 1, 2009, the corporate charter of First Performance was revoked,
and it no longer legally exists.



20


ITEM 3.  Legal Proceedings
Lawsuits from vendors
On July 17, 2008, Dreier LLP, a law firm, filed a complaint in the Supreme Court of New York, County of New York, seeking damages of $311,023.32 plus interest for legal services allegedly rendered to us.  The complaint was answered on August 14, 2008 raising various affirmative defenses.  On December 16, 2008, Dreier LLP filed for bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York.  The case has been on hold since the bankruptcy filing.  On March 18, 2009, we filed a counterclaim in the bankruptcy court for legal malpractice and the defenses raised in the previously filed answer.  The full amount in dispute is included in the Companys accounts payable.
On September 17, 2008, Computer Task Group, a vendor, filed a complaint in the Supreme Court of New York, County of Erie, seeking damages of $24,545.69 plus interest for consulting services rendered to us.  On December 3, 2008, judgment was entered in favor of Computer Task Group for $24,545.69 plus $2,538.54 in interest and $651.00 in costs, or a total of $27,735.23.  A restraining order was served on our bank account for the amount of the judgment.  On March 10, 2009, a total of $12,839.44 was removed from our account in partial satisfaction of the judgment, leaving a current total now due of $14,895.79.  The full amount still outstanding is included in the Companys accounts payable. Computer Task Group still has a hold on one of our bank accounts.
On December 1, 2008, AT&T, a vendor, filed a complaint in the Supreme Court of New York, County of New York, seeking damages of $62,383.21 plus interest for services allegedly rendered to us.  The complaint was answered on February 23, 2009 raising various affirmative defenses.  The action is currently in the discovery phase.  The full amount in dispute is included in the Companys accounts payable.  On April 8, 2010, this lawsuit was settled for the payment of $28,000, and final settlement paperwork is pending.
On October 9, 2009, PR Newswire Association secured a default judgment in Hudson County New Jersey Special Civil Court against the Company for unpaid bills in the amount of $7,470.  This balance is in the accounts payable of the Company.

On November 9, 2009, Patriot National Bank, a financial institution, filed a complaint in the Supreme Court of New York, Count of Westchester, seeking damages of $68,993.62 as a result of an overdraft in our bank account resulting from a non-sufficient fund check received from an investor on May 22, 2009.  An answer was filed by the Company on December 20, 2009.  On February 22, 2010, a motion for summary judgment was filed with the court by Patriot.  An amended motion of summary judgment was filed on March 1, 2010 by Patriot.  As of December 31, 2009, the unpaid amount remaining on the overdraft was $62,727.  The Company is making monthly payments to reduce the overdraft through an allocated portion of its revenue.  The entire amount in dispute is on the balance sheet of the Company under Bank Overdrafts.
Lawsuits from landlords
On May 7, 2008, we received a three-day demand for rent due in
the amount of $72,932.30 for the period December 1, 2007 through May 1, 2008.  On May 20, 2008, a petition for hearing was
filed in the White Plains New York City Court, County of Westchester demanding payment of $88,497.45.  On May 27, 2008, we
signed a stipulation of settlement in the amount of $88,747.45 including attorneys fees, with equal payments of this amount
due on June 13, 2008 and June 30, 2008.  On June 11, 2008, we signed an amended stipulation of settlement in the amount of
$100,999.92, with a payment of $56,626.20 due on June 20, 2008 and a payment of $44,373.72 due on June 30, 2008.  On July 16,
2008, we received a five day notice to pay the agreed payments or face eviction.  On October 1, 2008, we were evicted from our
leased premises.  On December 29, 2008, a complaint was filed in the Supreme Court of New York, County of Nassau seeking an
additional $58,345.50 plus interest and attorneys fees for rent for the period August 1 to December 1, 2008, which was not
part of the previous stipulation and judgment.  On December 16, 2008, a restraining order was served on our bank account for
the amount of the judgment.  On March 12, 2009, we signed a new stipulation of settlement settling the matter upon completion
of three events.  First, we immediately forfeited our security deposit of $79,799.53 plus interest.  Second, we must make
an additional payment of $50,000 by April 15, 2009.  Third, we must then remove all of our furniture by April 22, 2009.
 An amended stipulation of settlement was signed on April 15, 2009, changing the due date of the payment to May 15, 2009 and
increasing the payment by $10,000 to $60,000.  We must then remove the furniture within seven




21


days of making the payment.
 If all three conditions are met, the parties fully release each other from any further claims.  If all three of these
conditions are not met, judgment is entered for $135,356.38, the amount of rent due for the period July 1, 2008 to May 1, 2009,
which is in addition to the previous judgment for rent of $100,999.92 for the period December 1, 2007 to June 1, 2008.  At
December 31, 2008, the Company accrued the balance of its obligation under the lease in the amount of $227,787 on the balance sheet.
 On May 18, 2009, the Company paid the required $60,000 payment.  The Company subsequently removed its furniture from the
premises.  On June 4, 2009, the Company received a Satisfaction of Judgment and Release from any further liability in this
matter, and it is now settled.  The accrual was reversed in the second quarter reflecting the settlement.

On February 2, 2009, a complaint was filed in the District Court of
Clark County, Nevada against Debt Resolve, First Performance Corp. and the former owners of First Performance, Pacific USA Holdings
and Clearlight Mortgage Corp., seeking $315,916.72 for unpaid rent due as of January 31, 2009.  First Performance had vacated
the premises as of June 30, 2008 with the closing of its business.  Debt Resolve has been dismissed from the suit at this time,
as it was not a signatory to the lease or guarantor of the lease.  The case continues against First Performance Corp. and its
former owners, with an answer due by First Performance shortly.  The full amount in dispute is included in the accrued expenses
of First Performance.  The guarantor on the lease filed a cross-claim against Debt Resolve and First Performance under the
lease.  The guarantor won summary judgment discharging its guarantee, and the cross-claim against Debt Resolve and First
Performance was vacated at that time.  The corporate charter of First Performance was revoked on August 1, 2009.  There is
no further action with regard to First Performance expected on this matter, and Debt Resolve has been fully dismissed from this
action.
Lawsuits from former employees
On April 18, 2007, we received a letter from a law firm stating
that a claim with the EEOC and a lawsuit would be filed charging sexual discrimination in the wrongful termination of a manager of
the First Performance Florida facility.  The facility was subsequently closed on June 30, 2007 as a cost reduction measure.
 The First Performance employment practices insurance carrier defended the matter against the U.S. EEOC and the Broward County
Civil Rights Division.  On March 18, 2008, a settlement was reached in the amount of $24,500.  However, due to First
Performances financial problems which led to its closure on June 30, 2008, the settlement was not paid.  Because of the
non-payment, final judgment was entered against First Performance Recovery Corp. in the amount of $103,004.99 plus $5,293.00 in
attorneys fees on October 11, 2008.  On December 17, 2008, final judgment was entered against First Performance Corp. and
Debt Resolve in the amount of $35,286.82.  On April 13, 2009, agreement was reached to settle the case for $15,000 if payment
is made by May 15, 2009.  On May 19, 2009, the Company made the required payment under the settlement and received a
Satisfaction of Judgment and Release on this matter, which is now closed.
Lawsuit related to financing
On December 24, 2008, we negotiated a settlement of pending litigation with Compass Bank in Texas, from whom we had received a fraudulent wire transfer letter in connection with the Harmonie International investment that was never funded by the investor.  We received a cash payment of $50,000 to settle all claims against Compass Bank.  We have also referred all of the matters surrounding the Harmonie transaction to the appropriate authorities.
From time to time, the Company is involved in various litigation in the ordinary course of business.  In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Companys financial position or results of operations.

ITEM 4.  Reserved


22


PART II.
ITEM 5.  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our shares of common stock are currently traded on the Over-the-Counter Bulletin Board under the symbol DRSV.OB.
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 (through October 1, 2008), on the Over-the-Counter Bulletin Board from October 2, 2008 through May 15, 2009 and from December 30, 2009 to present, and the Over-the-Counter Pink Sheets from May 16, 2009 through December 29, 2009:
QuarterYear ended December 31,20092008HighLowHighLowFirst$       0.05$      0.002$       2.38$      0.77Second$       0.51$      0.01$       2.55$      0.86Third$       0.51$      0.082$       1.40$      0.20Fourth$       0.28$      0.05$       0.35$      0.01
For the period from January 1, 2010 to April 12, 2010, the high and low closing prices for our common stock were $0.50 and $0.10, respectively.
As of March 31, 2010, there were approximately 1,000 record holders of our common stock.  We believe that a significant number of beneficial owners of our common stock hold shares in nominee or street name.
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

From June 1 to December 31, 2009, convertible debentures were issued to twenty accredited investors for cash proceeds of $984,959.  The debentures carry a 14% interest rate and have a three year term, maturing between June and December, 2012.  Interest accrues to and is payable at maturity.  The investor has the option to convert either principal or interest due at a fixed conversion price of $0.15 per share.  Warrants to purchase 9,849,590 of common stock of the Company were issued to the investors with a five-year exercise period and an exercise price of $1.00 per share.

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, 2009.

ITEM  6.  Selected Financial Data

Not applicable.




23


ITEM  7.  Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included in this report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors,  our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
Prior to January 19, 2007, we were a development stage company.  On January 19, 2007, we acquired all of the outstanding capital stock of First Performance Corporation, a Nevada corporation (First Performance), and its wholly-owned subsidiary, First Performance Recovery Corporation, pursuant to a Stock Purchase Agreement dated January 19, 2007.  As a result, we are no longer considered a development stage entity.

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

We have prepared for our entry into the European marketplace by
reviewing our mode of business and modifying our contracts to comply with appropriate European privacy, debtor protection and other
applicable regulations.  We expect that initially, our expense associated with servicing our United Kingdom and other potential
European clients will be minimal, consisting primarily of travel expense to meet with those clients and additional legal fees, as
our European contracts, although already written to conform to European regulations, may require customization.  We have begun
investigation of, and negotiations with, companies who may provide local, outsourced European customer service support for us on an
as needed basis, the expense of which will be variable with the level of business activity.  We may incur additional costs,
which we cannot anticipate at this time, if we expand into Canada and other countries.

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

Our current and former contracts provide that we will earn
revenue based on a percentage of the amount of debt collected from accounts submitted on our DebtResolve system, from flat fees per
settlement achieved, from flat fees per account placed or a flat monthly fee.  Although other revenue models have been
proposed, most revenue earned to date has been determined using these methods, and such revenue is recognized when the settlement
24


amount of debt is collected by our client or at the beginning of each month.  For the early adopters of our system, we waived
set-up fees and other transactional fees that we anticipate charging on a going-forward basis.  While the percent of debt
collected will continue to be a revenue recognition method going forward, other payment models are also being offered to clients and
may possibly become our preferred revenue model.  Most contracts currently in process include provisions for set up fees and
base revenue on a flat monthly fee, in the aggregate or per account, with some contracts having a small transaction fee on debt
settlement as well.  In addition, with respect to our DR Prevent TM module expected to be completed in 2010, which settles
consumer debt at earlier stages, we expect that a fee per account on our system, and/or the hybrid revenue model which will include
both fees per account and transaction fees at settlement, may become the preferred revenue methods.  We expect to launch a new
application, DR Collect, which will target collection agencies and collection law firms on a flat monthly fee basis in the next two
months.  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.

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


Revenue streams associated with this business included
contingency fee revenue on recovery of past due consumer debt and non-sufficient funds fees on returned checks.  On June 30,
2008, we closed the remaining operations of First Performance in order to focus on our core internet business and to mitigate the
continuing losses from First Performance.  At that time, we took charges for the disposal of the remaining fixed assets of
$87,402 and for the impairment of the remaining intangible assets of $176,545.  The results of operations for First Performance
have been treated as discontinued operations in the financial statements for the years ending December 31, 2008 and 2007.  On
August 1, 2009, the state of Nevada revoked the corporation charter of First Performance Corp.  As a result, First Performance
Corp. was de-incorporated and is no longer included in our financial statements as of that date.  The net remaining liabilities
were credited to Additional Paid-in Capital on the revocation date.  The wholly-owned subsidiary of First Performance Corp.
called First Performance Recovery Corp. was legally dissolved by its Board on March 3, 2010.

For the years ending December 31, 2009 and 2008, we had
inadequate revenues and incurred a net loss of $13,115,424 and $7,358,702, respectively, from continuing operations.  Cash used
in operating and investing activities of continuing operations was $956,740 and $0, respectively for the year ended December 31,
2009.  Cash used in operating and investing activities of continuing operations was $3,582,047 and $835,951, respectively for
the year ended December 31, 2008.  Based upon projected operating expenses, we believe that our working capital as of the
date of this report may not be sufficient to fund our plan of operations for the next twelve months.  The aforementioned
factors raise substantial doubt about our ability to continue as a going concern.

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




25


Subsequent to December 31, 2009, the Company has secured
additional financing from eight parties in the  aggregate amount of $452,500 net of undeposited funds.
Results of Continuing Operations
Year ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues
Revenues totaled $74,045 and $165,969 for the years ended
December 31, 2009 and 2008, respectively.  We earned revenue during the year ended December 31, 2009 as a percent of debt
collected at two banks that implemented our online system.  Of the revenue earned during the year ended December 31, 2008, we
earned contingency fee income, based on a percentage of the amount of debt collected, from accounts placed on our online system or
as a flat monthly settlement fees or a flat monthly fee with some clients.  The lower revenue in 2009 was due to the loss of
one larger client.
Costs and Expenses

Payroll and related expenses.  Payroll and related
expenses totaled $1,449,976 for the year ended December 31, 2009, a decrease of $1,580,530 over payroll and related expenses of
$3,030,506 for the year ended December 31, 2008.  This decrease was due to continued cost reductions.  The reduction
occurred primarily in salary expense and stock compensation expenses.  Salaries were reduced to $502,312 for the year ended
December 31, 2009 from $1,047,747 for the year ended December 31, 2008, a decrease of $545,434 or 52%.  Stock-based
compensation expense to employees was $857,850 for the year ended December 31, 2009, a decrease of $1,069,181 from expense of
$1,927,031 for the year ended December 31, 2008.  In addition, the staffing decrease related to the reduction in headcount and
the accrual rather than payment of many payrolls resulted in payroll tax expense of $15,610 for the year ended December 31, 2009, a
decrease of $29,693 over payroll tax expense of $45,303 for the year ended December 31, 2008.  We also experienced a decrease
in health insurance expense to $73,447 for the year ended December 31, 2009 from $93,806 in the year ended December 31, 2008, a
decrease of $20,359 due to headcount reductions.  Severance expense was $0 and $2,083 for the years ended December 31, 2009 and
2008, respectively.  Other miscellaneous salary related expenses were $756 in payroll expenses for the year ended December 31,
2009 as compared with ($85,464) for the year ended December 31, 2008, due to the elimination of salary allocations on the closure of
First Performance on June 30, 2008.

General and
administrative expenses.  General and administrative expenses for the internet business (Debt Resolve) amounted to
$5,148,336 for the year ended December 31, 2009, as compared to $4,041,671 for the year ended December 31, 2008, an increase of
$1,106,665 primarily due to the issuance of stock for our 2009 balance sheet restructuring.  For most items, cost control
measures implemented between July 1, 2007 and October 1, 2008 reduced expenses.  The expense for stock based compensation for
warrants and stock options granted to consultants for the year ended December 31, 2009 was $754,998, as compared with stock based
compensation in the amount of $2,200,833 for the year ended December 31, 2008 due to fewer options granted to consultants in lieu of
cash payment during 2009.  Also, for the year ended December 31, 2009, service and consulting fees totaled $3,818,362, as
compared with $621,461 in service and consulting fees for the year ended December 31, 2008, primarily related to $3,190,177 in costs
related to converting legacy liabilities to stock, a process which removed over $4 million from our current liabilities.  Legal
fees increased by $27,236 to $227,868 for the year ended December 31, 2009 from $200,632 for the year ended December 31, 2008,
primarily due to the retention of specialized counsel to assist in the balance sheet restructuring.  The expenses for
occupancy, telecommunications, travel and office supplies in the year ended December 31, 2009 were ($231,392), $84,547, $9,827 and
$2,248, respectively, as compared with expenses of $333,780, $79,343, $60,437 and $10,539 for occupancy, telecommunications, travel
and office supplies, respectively, for the year ended December 31, 2008, all reductions due to the closure of our old corporate
office and cessation of travel due to very limited cash availability in 2009.  Occupancy increased in 2008 due to the accrual
of $227,787 for the balance of the lease at our old office after we moved out.  This accrual was reversed in 2009 upon
settlement and discharge of the lease obligation.  Marketing expenses decreased by $111,556 to $26,851 during the year ended
December 31, 2009 from $138,407 for the year ended December 31, 2008, primarily due to limited cash availability.  Other
general operating costs for the year ended December 31, 2009, including insurance and accounting expenses, amounted to $455,028, as
compared with $396,238 for the year ended December 31, 2008, primarily due to the elimination of cost allocations after 2008 due to
the closure of First Performance.



26


Depreciation and
amortization expense.  For the years ended December 31, 2009 and 2008, we recorded depreciation expense of $46,302 and
$57,610, respectively, due to the disposal of some fixed assets upon the closure of our former corporate office.

Interest expense.  We recorded interest expense, net
of interest income, of $338,199 from continuing operations for the year ended December 31, 2009, compared to net interest expense of
$299,207 for the year ended December 31, 2008 due to the issuance of debt to fund operations in 2008 and 2009.  Interest
expense for the years ended December 31, 2009 and 2008 includes interest on our related party lines of credit, short term notes, and
convertible debentures.

Amortization of deferred debt discount.Amortization expense of $430,657 and $928,283 was incurred for the years ended December 31, 2009 and 2008, respectively,
for the amortization of the beneficial conversion feature and deferred debt discount of our lines of credit and note offerings.

Gain (loss) on derivative liability.  We recorded a
loss of $5,775,998 for derivative liability on our convertible notes, warrants and non-employee options during the year ended
December 31, 2009.  We recorded a gain of $851,348 for derivative liability on convertible notes during the year ended December
31, 2008.  The loss in 2009 in derivative liability was due to our rising stock price during 2009.

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

Liquidity and Capital
Resources

As of December 31, 2009, we had a working capital deficiency in
the amount of $4,229,322, on continuing operations and cash totaling $0.  We incurred a net loss of $13,115,424 for continuing
operations for the year ended December 31, 2009.  Net cash used in operating and investing activities for continuing operations
was $956,740 and $0, respectively for the year ended December 31, 2009.  Cash flow provided by financing activities for
continuing operations was $942,358 for the year ended December 31, 2009.  Cash of $18,169 was used by the discontinued
operations of our former subsidiary First Performance during 2009.  Our working capital as of the date of this report is
negative and is not sufficient to fund our plan of operations for the next year.  The aforementioned factors raise substantial
doubt about our ability to continue as a going concern.

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

Subsequent to December 31, 2009, the Company has secured additional financing from eight investors in the amount of $452,500, net of undeposited funds.

Throughout the year ended December 31, 2008, we reduced overhead and extended payables.
Discontinued Operations

On June 30, 2008, we reclassified the results of First Performance Corporation and its
wholly-owned subsidiary, First Performance Recovery Corp., as discontinued operations.  We purchased First Performance on
January 19, 2007.  First Performance had revenue of $300,742 for the year ended December 31, 2008.  It also had payroll
and related expenses of $603,924 for the year ended December 31, 2008.  General and administrative expenses were $743,327 for
the year ended December 31, 2008.  On June 30, 2008, First Performance booked a charge of $1,364,458 for the balance of all
payments due under the lease for the Las Vegas, NV facility, which was




27


closed on that date and vacated.  First Performance had
disposal of fixed asset charges of $87,402 for the year ended December 31, 2008 for the closure in 2008 of the Las Vegas office.
 In accordance with SFAS 142, First Performance booked charges of $176,545 for the impairment of intangibles and goodwill
during 2008, as clients were lost and facilities were closed down.  First Performance had charges for amortization of
intangibles of $32,304 during the year ended December 31, 2008.  First Performance also had depreciation of $38,235 in the year
ended December 31, 2008.  Finally, First Performance had interest expense of $9,236 for the year ended December 31, 2008.
 On August 1, 2009, the state of Nevada revoked the corporation charter of First Performance Corp., which formally dissolved
it.  As a result, the results of First Performance are no longer included in our reports as of that date.  Subsequently,
the Board of First Performance Recovery Corp., the wholly-owned subsidiary of First Performance Corp., voted to dissolve First
Performance Recovery as of March 3, 2010.  The difference between the net assets and net liabilities of First Performance Corp.
and First Performance Recovery Corp. were booked to Additional Paid-in Capital of Debt Resolve as of August 1, 2009, the date of
revocation (see Note 3 in the financial statements).

Off-Balance Sheet Arrangements
As of the date of this report, we have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
Impact of Inflation
We believe that inflation has not had a material impact on our results of operations for the years ended December 31, 2009 and 2008.  We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.
Application of Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes.  These estimates and assumptions are based on our managements judgment and available information and, consequently, actual results could be different from these estimates.  The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are as follows:
Principles of Consolidation

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

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



We extend credit to large, mid-size and small companies for collection services.  We
have concentrations of credit risk as 100% of the balance of accounts receivable at December 31, 2009 consists of only two
customers.  At December 31, 2009, accounts receivable from the two accounts amounted to approximately $8,753 (78%) and $2,500
(22%), 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


28


evaluated for
collectibility and the allowance for doubtful accounts is adjusted accordingly.  Our management determines collectibility based
on their experience and knowledge of the customers.


Accounts Payable and Accrued Liabilities
Included in accounts payable and accrued liabilities as of December 31, 2009 are accrued professional fees of $1,325,784.  We owed 12 vendors a total of $1,750,129 at December 31, 2009, each of whom was individually owed in excess of 10% of total Company assets.
Business Combinations

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

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

Derivative Financial Instruments

The Companys derivative financial instruments
consist of embedded derivatives related to Convertible Debentures. These embedded derivatives include certain conversion features.
 The accounting treatment of derivative financial instruments requires that the Company records the derivatives and related
warrants at their fair values as of the inception date of the Convertible Debenture Agreement and at fair value as of each
subsequent balance sheet date.  In addition, under the provisions of Accounting Standards Codification subtopic 815-40,
Derivatives and Hedging; Contracts in Entitys Own Equity (ASC 815-40) as a result of entering into the Debentures,
the Company is required to classify all other non-employee stock options and warrants as derivative liabilities and mark them to
market at each reporting date.  Any change in fair value inclusive of modifications of terms will be recorded as non-operating,
non-cash income or expense at each reporting date.  If the fair value of the derivatives is higher at the subsequent balance
sheet date, the Company will record a non-operating, non-cash charge.  If the fair value of the derivatives is lower at the
subsequent balance sheet date, the Company will record non-operating, non-cash income. As of December 31, 2009, conversion-related
derivatives and the warrants were valued using the Black-Scholes Option Pricing Model with the following assumptions:  dividend
yield of 0%; annual volatility of 402.31%; and risk free interest rate from 0.20% to 2.69%.  The derivatives are classified as
long term liabilities.


Goodwill and Intangible Assets

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



29


accordance with SFAS 142 as of June
30, 2007 and determined that an impairment charge was necessary.  We performed a further analysis of our intangible assets as
of September 30, 2007 and determined that an additional impairment charge was necessary.  We performed our annual impairment
test at December 31, 2007 and determined that no additional impairment was necessary.  On June 30, 2008, a final impairment
charge was necessary to fully impair the intangible assets as we closed First Performance on that date.
Revenue Recognition
We earned revenue during 2008 and 2007 from several collection
agencies, collection law firms and lenders that implemented our online system.  Our current contracts provide for revenue based
on a percentage of the amount of debt collected, a flat fee per settlement from accounts submitted on the DebtResolve system or
through a flat monthly fee.  Although other revenue models have been proposed, most revenue earned to date has been determined
using these methods, and such revenue is recognized when the settlement amount of debt is collected by the client or at the
beginning of the month for a monthly fee.  For the early adopters of our product, we waived set-up fees and other transactional
fees that we anticipate charging in the future.  While the percent of debt collected will continue to be a revenue recognition
method going forward, other payment models are also being offered to clients and may possibly become our preferred revenue model.
 Dependent upon the structure of future contracts, revenue may be derived from a combination of set up fees or monthly fees
with transaction fees upon debt settlement.
In recognition of the principles expressed in Staff Accounting Bulletin (SAB) 104 (SAB 104), that revenue should not be recognized until it is realized or realizable and earned, and given the element of doubt associated with collectability of an agreed settlement on past due debt, at this time we uniformly postpone recognition of all contingent revenue until our client receives payment from the debtor.  As is required by SAB 104, revenues are considered to have been earned when we have substantially accomplished the agreed-upon deliverables to be entitled to payment by the client.  For most current active clients, these deliverables consist of the successful collection of past due debts using our system and/or, for clients under a licensing arrangement, the successful availability of our system to its customers.
In addition, in accordance with Emerging Issues Task Force (EITF) Issue 00-21, revenue is recognized and identified according to the deliverable provided.  Set-up fees, percentage contingent collection fees, fixed settlement fees, flat monthly fees, etc. are identified separately.
Recently signed contracts and contracts under negotiation call for multiple deliverables, and each component of revenue will be considered to have been earned when we have met the associated deliverable, as is required by SAB 104 Topic 13(A).  For new contracts being implemented which include a fee per account, following the guidance of SAB 104 regarding services being rendered continuously over time, we will recognize revenue based on contractual prices established in advance and will recognize income over the contractual time periods.  Where some doubt exists on the collectability of the revenues, a valuation reserve will be established or the income charged to losses, based on managements opinion regarding the collectability of those revenues.
In January 2007, we initiated operations of our debt buying
subsidiary, DRV Capital LLC.  DRV Capital and its wholly-owned subsidiary, EAR Capital I, LLC, engaged in the acquisition of
pools of past due debt at a deeply discounted price, for the purpose of collecting on those debts.  In recognition of the
principles expressed in Statement of Position 03-3 (SOP 03-3), where the timing and amount of cash flows expected to be
collected on these pools is reasonably estimable, we would recognize the excess of all cash flows expected at acquisition over the
initial investment in the pools of debt as interest income on a level-yield basis over the life of the pool (accretable yield).
 Because we exited this business, we will use the cost recovery method.  Revenue will be earned by this debt buying
subsidiary under the cost recovery method when the amount of debt collected exceeds the discounted price paid for the pool of debt.
 As of October 15, 2007, we ceased operation of DRV Capital, sold all remaining portfolios and repaid all outstanding
indebtedness.

On January 19, 2007, we completed the
acquisition of First Performance, a collection agency, and its wholly-owned subsidiary First Performance Recovery Corporation.
 In recognition of the principles expressed in SAB 104, that revenue should not be recognized until it is realized or
realizable and earned, and given the element of doubt associated with collectability of an agreed settlement on past due debt, at
this time we uniformly postpone recognition of all contingent revenue until the cash payment is received from the debtor.  At
the time we remit



30


recoveries collected to our clients, we accrue the portion of those fees that the client contractually owes or
retain our fees and remit the net difference.  As is required by SAB 104, revenues are considered to have been earned when we
have substantially accomplished the agreed-upon deliverables to be entitled to payment by the client.  For most current active
clients, hese deliverables consist of the successful collection of past due debts.  First Performance was closed on June 30,
2008 and discontinued operations.
Stock-based Compensation
Beginning on January 1, 2006, we account for stock options issued under stock-based compensation plans under the recognition and measurement principles of SFAS No. 123  Revised.  We adopted the modified prospective transition method and therefore, did not restate prior periods results.  Total stock-based compensation expense related to these issuances and other stock-based grants for the year ended December 31, 2009 amounted to $1,235,350 and for the year ended December 31, 2008 amounted to $4,127,864.
The determination of the fair value of stock-based awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables.  These variables include the price of the underlying stock, our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and the expected annual dividend yield on the underlying shares.
If actual results differ significantly from these estimates or different key assumptions were used, there could be a material effect on our financial statements.  The future impact of the cost of stock-based compensation on our results of operations, including net income/(loss) and earnings/(loss) per diluted share, will depend on, among other factors, the level of equity awards as well as the market price of our common stock at the time of the award as well as various other assumptions used in valuing such awards.  We will periodically evaluate these estimates.
Recently-issued Accounting Pronouncements
In February 2010, the FASB issued Update No. 2010-09 Subsequent Events (Topic 855) (2010-09).  2010-09 clarifies the interaction of Accounting Standards Codification 855 Subsequent Events (Topic 855) with guidance issued by the Securities and Exchange Commission (the SEC) as well as the intended breadth of the reissuance disclosure provision related to subsequent events found in paragraph 855-10-50-4 in Topic 855.  This update is effective for annual or interim periods ending after June 15, 2010.  Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.
In February 2010, the FASB issued Update No. 2010-08 Technical Corrections to Various Topics (2010-08). 2010-08 represents technical corrections to SEC paragraphs within various sections of the Codification. Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.
In January 2010, the FASB issued Update No. 2010-06 Fair Value Measurements and DisclosuresImproving Disclosures about Fair Value Measurements (2010-06).  2010-06 requires new disclosures regarding significant transfers between Level 1 and Level 2 fair value measurements, and disclosures regarding purchases, sales, issuances and settlements, on a gross basis, for Level 3 fair value measurements.  2010-06 also calls for further disaggregation of all assets and liabilities based on line items shown in the statement of financial position.  This amendment is effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years.  The Company is currently evaluating whether adoption of this standard will have a material impact on its financial position, results of operations or cash flows.
In January 2010, the FASB issued Update No. 2010-05 CompensationStock CompensationEscrowed Share Arrangements and Presumption of Compensation (2010-05).  2010-05 re-asserts that the Staff of the Securities Exchange Commission (the SEC Staff) has stated the presumption that for certain shareholders escrowed shares represent a compensatory arrangement.  2010-05 further clarifies the criteria required to be met to establish a position different from the SEC Staffs position.  The Company does not believe this pronouncement will have any material impact on its financial position, results of operations or cash flows.

In January 2010, the FASB issued Update No. 2010-04
Accounting for Various TopicsTechnical Corrections to SEC Paragraphs (2010-04).  2010-04
represents technical corrections to SEC paragraphs within



31


various sections of the Codification.  Management is currently
evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.

In January 2010, the FASB issued Update No. 2010-02 Accounting and Reporting for Decreases in Ownership of a Subsidiarya Scope Clarification (2010-02) an update of ASC 810 Consolidation.  2010-02 clarifies the scope of ASC 810 with respect to decreases in ownership in a subsidiary to those of a:  subsidiary or group of assets that are a business or nonprofit, a subsidiary that is transferred to an equity method investee or joint venture, and an exchange of a group of assets that constitutes a business or nonprofit activity to a non-controlling interest including an equity method investee or a joint venture.  Management does not expect adoption of this standard to have any material impact on its financial position, results of operations or operating cash flows.  Management does not intend to decrease its ownership in any of its wholly-owned subsidiaries.
In January 2010, the FASB issued Update No. 2010-01 Accounting for Distributions to Shareholders with Components of Stock and Casha consensus of the FASB Emerging Issues Task Force (2010-03) an update of ASC 505 Equity.  2010-03 clarifies the treatment of stock distributions as dividends to shareholders and their effect on the computation of earnings per shares.  Management does not expect adoption of this standard to have any material impact on its financial position, results of operations or operating cash flows.

ITEM 7A.  Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

ITEM 8.  Financial Statements and Supplementary Data
Our audited financial statements for the year ended December 31, 2009 are included as a separate section of this report beginning on page F-1.
ITEM 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

ITEM 9A.  Controls and Procedures
Managements report on internal control over financial reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting for our company.  In order to evaluate the effectiveness of internal control
over financial reporting, our management has conducted an assessment using the criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Our
companys internal control over financial reporting, as defined in rule 13a-15(f) under the Securities Exchange Act of 1934
(Exchange Act), is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Based on our assessment, under the criteria established in
Internal Control  Integrated Framework, issued by COSO, our management has concluded that our company has a material
weakness in internal control over financial reporting as of December 31, 2009.  The weakness exists with regard to segregation
of duties, in that one employee does the accounting, accounts payable and banking transactions.  As a result, our internal
controls were not effective at December 31, 2009.

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



32


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, 2009, 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 at December 31, 2009, our management believes that the design and operation of the consolidated companys disclosure controls and procedures are not effective, as discussed above.


ITEM 9B.  Other Information
None.

PART III.
ITEM 10.  Directors, Executive Officers, and Corporate Governance
The following table shows the positions held by our board of directors and executive officers, as well a key employee, and their ages, as of April 12, 2010:
NameAgePositionJames D. Burchetta60Co-Chairman  and FounderJames G. Brakke67Co-Chairman and Chief Executive OfficerWilliam M. Mooney70DirectorDavid M. Rainey50President, Chief Financial Officer, Secretary and TreasurerRene A. Samson31Vice President Technology
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.




33


James G. Brakke has been a member of our board of directors since October 2009.  Mr. Brakke also
became the Co-Chairman and Chief Executive Officer effective April 8, 2010.  Mr. Brakke is a Director of First Foundation Bank and Mission Hospital Foundation.  Mr. Brakke was Founder and President of
Brakke-Schafnitz Insurance Brokers, a multi-line commercial brokerage and consulting firm he co-founded in 1971 and which manages in
excess of $250 million of insurance premiums with both domestic and international insurers.  Mr. Brakke stepped down as
President of Brakke-Schafnitz in 2009.  He is a former member of the board of advisors for Pepperdine University's Graziadio
School of Business, Orange County Sheriffs and the Orange County YMCA and has served as director on the boards of Denticare, Pacific
National Bank, Commercial Capital Bank, The Busch Firm, National Health Care Services and E-Funds.  He currently also serves as
a board member of a number of for-profit and non-profit institutions including Keller Financial Group, Cal Spas and Maury Microwave.
 Mr. Brakke is a graduate of Colorado State University with a Bachelor of Science in Business and Finance.

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.

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

Key Employees

René A. Samsonhas been our Vice President of Technology since July 2009.Mr. Samson has worked as a software developer for more than 8 years. He has experience working on projects for multinationals as well as startup companies.  Mr. Samson joined Debt Resolve as a senior software developer in 2005, and was an integral part of the team that developed the DebtResolve application.  As Vice President of Technology Mr. Samson is now responsible for the entire IT department of Debt Resolve.


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

Additional Information about our Board and its Committees


We continue to monitor the rules and regulations of the SEC regarding independent directors.  Only William M. Mooney, Jr. is independent as defined by New York Stock Exchange rules.



During 2009, 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



34


directors has formed an audit committee, compensation committee and a nominations and
governance committee, all of which operate under written charters.  The charters for the audit committee, the nominations and
governance committee and the compensation committee were included as exhibits to the form SB-2 registration statement filed with the
SEC on September 30, 2005.



Committees of the Board

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

·

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

·

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

·

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

·

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

·

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

·

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


·

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

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



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



·

establishing criteria for the selection of new directors,
·

considering stockholder proposals of director nominations,
·

committee selection and composition,
·

considering the adequacy of our corporate governance,
·

overseeing and approving management continuity planning process, and




35


·

reporting regularly to the board with respect to the committees duties.
Financial Experts on Audit Committee
The audit committee will at all times be composed exclusively of independent directors who are financially literate.  Financially literate is defined as being able to read and understand fundamental financial statements, including a companys balance sheet, income statement and cash flow statement.
The committee has, and will continue to have, at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individuals financial sophistication.  The board of directors believes that Mr. Mooney satisfies the definition of financial sophistication and also qualifies as an audit committee financial expert, as defined under rules and regulations of the SEC.
Indebtedness of Directors and Executive Officers
None of our directors or executive officers or their respective associates or affiliates is indebted to us.
Family Relationships
There are no family relationships among our directors and executive officers.
Legal Proceedings
As of the date of this report, there is no material proceeding to which any of our directors, executive officers, affiliates or stockholders is a party adverse to us.
Code of Ethics
In May 2003, we adopted a Code of Ethics and Business Conduct that applies to all of our executive officers, directors and employees.  The Code of Ethics and Business Conduct codifies the business and ethical principles that govern all aspects of our business.  Our Code of Ethics and Business Conduct is posted on our website at http://www.debtresolve.com/ and we will provide a copy without charge to any stockholder who makes a written request for a copy.
Committee Interlocks and Insider Participation


No member of our board of directors is employed by Debt Resolve or our subsidiaries, except for James G. Brakke, who became our Co-Chairman and Chief Executive Officer effective April 8, 2010.


Section 16(a) Beneficial Ownership Reporting Compliance

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


Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to us during our most recent fiscal year, and any written representations provided to us, we believe that all of the officers, directors, and owners of more than ten percent of the outstanding shares of our common stock did comply with Section 16(a) of the Exchange Act for the year ended December 31, 2009.






36


ITEM 11.  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 $100,000 during the stated period and any individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as an executive officer as at December 31, 2009:
Name and Principal PositionYearSalary
($)



(5)Bonus
($)Stock Awards
($)Option Awards
($)Non-Equity Incentive Plan Compen-
sation
($)Non-qualified Deferred Compensa-tion Earnings
($)All Other Compen-sation ($)Total ($)(a)(b)(c)(d)(e)(f)(g)(h)(i)(j)James D. Burchetta
Co-Chairman of the Board  and Founder(1)2009
2008--
135,417--
--95,000
----
322,000--
----
----
--95,000
457,417Kenneth H. Montgomery
Former Chief Executive Officer and Director (2)2009
2008112,500
196,875--
--95,000
40,000--
210,000--
----
----
(4) 262,500207,500
709,375David M. Rainey
President, Chief Financial Officer, Secretary, Treasurer (3)2008
2008200,000
200,000--
50,000--
--190,000
579,984--
----
----
--390,000
829,984________________
(1)
Mr. Burchetta is Co-Chairman and Founder effective April 8, 2010.  He was Chairman of the Board and Founder from February 2008 to April 2009.  Mr. Burchetta was our Co-Chairman and Chief Executive Officer from January 2003 to February 2008.
(2)
Mr. Montgomery joined our company and became our Chief Executive Officer in February 2008.  He became a Director in November 2008.  He left the Company effective July 1, 2009.
(3)
Mr. Rainey joined our company and became our Chief Financial Officer and Treasurer in May 2007.  He became Secretary in November 2007 and President in January 2008.  From July 2009 to April 2010, he served as Interim Chief Executive Officer.
(4)
Mr. Montgomery was issued 350,000 options to purchase the common stock of the Company at an exercise price of $1.00 with a seven year exercise period as consideration for funding the company $343,883 during 2008.  The options were valued at $262,500 and were expensed immediately.
(5)

Significant amounts of the executive salaries listed were
accrued but not paid during 2009 and 2008 due to severe cash flow limitations.  Specifically, for Mr. Burchetta, $41,667 was
paid and $93,750 was accrued in




37


2008.  Mr. Burchetta went off salary beginning July 16, 2008 and became a consultant.  For
Mr. Montgomery, his entire salary of $112,500 was accrued for 2009.  In addition, $46,875 was paid in 2008 and $150,000 was
accrued.  For Mr. Rainey, $133,333 was paid and $66,667 was accrued for 2009.  Also for Mr. Rainey, $116,667 was paid and
$83,333 was accrued in 2008.  The accrued payrolls for Mssrs. Burchetta and Montgomery were paid by conversion to stock on
August 27, 2009.

Outstanding Equity Awards at Fiscal Year-End


The following table summarizes equity awards outstanding at December 31, 2009 for each of the executive officers named in the Summary Compensation Table above:

Option AwardsStock AwardsNameNumber
of
Securities Underlying Unexercised Options
(#)
ExercisableNumber of Securities Underlying Unexercised Options
(#)
UnexercisableEquity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
(#)Option Exercise Price
($)Option Expiration DateNumber of Shares or Units of Stock That Have Not Vested
(#)Market Value of Shares or Units of Stock That Have Not Vested
($)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
Co-Chairman of the Board and Founder (1)350,000----$1.252/8/2015--------Kenneth H. Montgomery
Former Chief Executive Officer and Director (2)350,000
350,000--
----
--$0.80
$1.001/24/2015
7/15/2015--
----
----
----
--David M. Rainey
President, Chief Financial Officer, Secretary, Treasurer (3)50,000
150,000
350,000
1,000,00025,000
--
--
----
--
--
--$1.50
$1.25
$1.40
$0.194/27/2014
2/8/2015
6/12/2015
8/7/2016--
--
--
----
--
--
----
--
--
----
--
--
--
(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.
(2)
Mr. Montgomery holds stock options to purchase 350,000 shares of our common stock, one half of which vest on January 24, 2008 and one half of which vest on July 24, 2008, all of which expire on January 24, 2015.  Mr. Montgomery also holds stock options to purchase 350,000 shares of our common stock, all of which vested immediately and which expire on July 15, 2015.
(3)

Mr. Rainey holds stock options to purchase 75,000 shares of our
common stock, one third of which vest on April 27, 2008, one third of which vest on April 27. 2009 and one third of which vest on
April 27, 2010, all



38


of which expire on April 27, 2014.  Mr. Rainey also holds stock options to purchase 150,000 shares of our
common stock, one third of which vest on February 8, 2008, one third of which vest on April 27, 2008 and on third of which vest on
April 27, 2009, all of which expire on February 8, 2015.  Mr. Rainey also holds stock options to purchase 350,000 shares of our
common stock, all of which vested immediately and expire on June 12, 2015.  Finally, Mr. Rainey holds stock options to purchase
1,000,000 shares of our common stock, all of which vested immediately and which expire on August 7, 2016.



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. 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.  Compensation expense under the agreement with Mr. Burchetta totaled $135,417 for the year ended December 31, 2008.
On July 15, 2008, the employment agreement was converted to a consulting agreement with all terms otherwise unchanged, as Mr. Burchetta became non-executive Chairman on February 16, 2008 and became non-executive Co-Chairman on April 8, 2010.  One additional term added was that the Chairman shall always make $25,000 more than the Chief Executive Officer and have comparable benefits.  The Board affirmed the effectiveness of the agreement to January 13, 2013.  On September 28, 2009, the consulting agreement was amended to reduce the monthly compensation from $20,833 to $10,000 per month and to remove the clause granting the Chairman higher pay than the Chief Executive Officer.  Mr. Burchetta received 1,686,000 shares as compensation for the amendment of his consulting agreement.
On May 1, 2007, David M. Rainey joined our company as Chief
Financial Officer and Treasurer.  Mr. Rainey also became Secretary of the Company in November 2007 and President of the Company
in January 2008.  Mr. Rainey has a one year contract that renews automatically unless 90 days notice of intention not to renew
is given by the company.  Mr. Raineys base salary is $200,000, subject to annual increases at the discretion of the board
of directors.  Mr. Rainey also received a grant of 75,000 options to purchase the common stock of the company, one third of
which vest on the first, second and third anniversaries of the start of employment with the company.  Mr. Rainey is also
eligible for a bonus of up to 50% of salary based on performance objectives set by the Chairman and
39


the Board of Directors.
 Mr. Raineys contract provides for 12 months of severance for any termination without cause with benefits.  Upon a
change in control, Mr. Rainey receives two years severance and bonus with benefits and immediate vesting of all stock options then
outstanding.
On February 16, 2008, the Company entered into an employment agreement with Mr. Kenneth H. Montgomery to serve as its Chief Executive Officer.  The agreement has a one year, automatically renewable term unless the Company provides 90 days written notice of its intention not to renew prior to the anniversary date.  Mr. Montgomerys salary is $225,000 annually, with a bonus of up to 75% of salary based on performance of objectives set by the Chairman and the Board of Directors.  Mr. Montgomery also received 50,000 shares of restricted stock and 350,000 options to purchase the common stock of the Company at an exercise price of $0.80, the closing price on his date of approval by the Board.  Effective July 1, 2009, Mr. Montgomery is no longer with the Company.
On April 8, 2010, the Company entered into an employment agreement with James G. Brakke.  Mr. Brakke receives an annual salary of $120,000, which is deferred and accruing until the Company completes a financing of at least $1,000,000 in one transaction, to become the Companys Chief Executive Officer and Co-Chairman of the Board.  Mr. Brakke also is eligible for standard employee benefits including medical and dental and can take cash compensation in lieu of these benefits.  Mr. Brakke received 1,500,000 options to purchase the common stock of the Company at an exercise price of $0.17, the prior days closing price. Mr. Brakke had previously received 250,000 shares upon joining the Board on October 28, 2009.
Each of the employment agreements with Mr. Burchetta, Mr. Brakke 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, the contracts provide for a non-compete during the term of the executives 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, 2009, no options to purchase shares of stock were granted to the non-employee directors for their service on the Board.  On August 7, 2009, the three current and one just departing director received grants of 500,000 restricted shares each for their service on the Board.

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, 2009.
Director Compensation
NameFees 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)James G. Brakke (1)--48,750--------48,750William M. Mooney, Jr. (2)--95,000--------95,000Charles S. Brofman (3)--95,000--------95,000
40


(1)
Mr. Brakke joined the Board on October 29, 2009.  He received a grant of 250,000 restricted shares upon joining the Board.  Mr. Brakke became Co-Chairman and Chief Executive Officer on April 8, 2010.
(2)
Mr. Mooney serves as the sole member of the Audit, Compensation and Nominating Committees.  He received a grant of 500,000 shares of restricted stock for his service for 2009 along with Mssrs.  Brofman, Burchetta and Montgomery.
(3)
This table excludes stock options granted to Mr. Brofman pursuant to a licensing agreement with him and our other co-chairman.  Pursuant to that licensing agreement, we issued to Mr. Brofman, stock options to purchase an aggregate of 758,717 shares of our common stock at $5.00 per share. The stock options have an exercise period of ten years, were valued at $3,414,217, and vested upon issuance.
ITEM 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The table below sets forth the beneficial ownership of our common stock, as of April 12, 2010, 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 76,716,445 fully diluted shares (as if all outstanding options and warrants were exercised) of our common stock
outstanding as of April 12, 2009, according to the record ownership listings as of that date and the verifications we solicited and
received from each director and executive officer and approximations of the outside large owner.  The SEC has defined
beneficial ownership to mean more than ownership in the usual sense.  For example, a person has beneficial
ownership of a share not only if he owns it in the usual sense, but also if he has the power to vote, sell or otherwise dispose of
the share.  Beneficial ownership also includes the number of shares that a person has the right to acquire within 60 days
of April 12, 2010 pursuant to the exercise of options or warrants or the conversion of notes, debentures or other indebtedness, but
excludes stock appreciation rights.  Two or more persons might count as beneficial owners of the same share.  Unless
otherwise noted, the address of the following persons listed below is c/o Debt Resolve, Inc., 150 White Plains Road, Suite 108,
Tarrytown, New York 10591.


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


41


Name
     
     
     
     Position
     
     Shares of stock beneficially owned
     
     Percent of common stock beneficially
ownedJames D.
Burchetta
     
     
     
     Co-Chairman of
the Board and Founder
     
     
     8,469,373
     (1)
     
     
     11.0
     %Charles S.
Brofman
     
     
     
     Former Director
and Co-Founder
     
     
     6,209,899
     (2)
     
     
     8.1
     %Douglas R.
Denhart
     
     
     
     Investor and
consultant
     
     
     5,315,000
     (3)
     
     
     6.9
     %William H.
Mooney
     
     
     
     Director
     
     
     5,255,855
     (4)
     
     
     6.9
     %Kenneth H.
Montgomery
     
     
     
     Former Chief
Executive Officer
     
     
     4,415,264
     (5)
     
     
     5.8
     %David M.
Rainey
     
     
     
     President, Chief
Financial Officer, Treasurer, Secretary
     
     
     2,858,419
     (6)
     
     
     3.7
     %James G.
Brakke
     
     
     
     Co-Chairman and
Chief Executive Officer
     
     
     1,750,000
     (7)
     
     
     2.3
     %All directors and
executive officers and control persons as a group (7 persons)
     
     
     
     
     
     
     34,273,810
     
     
     
     44.7
     %
 _________________


On August 7, 2009, the Board awarded restricted shares of 500,000 each to James Burchetta, Charles Brofman, William Mooney and Kenneth Montgomery for service to the Board during 2008 and 2009.  In addition, the Board awarded David Rainey 1,000,000 seven-year options at an exercise price of $0.19 upon becoming Interim CEO.
On April 8, 2010, the Board awarded James Brakke 1,500,000 seven-year options at an exercise price of $0.17 as part of his employment agreement to become Chief Executive Officer.  In addition, the Board awarded 1,000,000 seven-year options each to James Burchetta for becoming Co-Chairman with James Brakke, to William Mooney for Board service and to David Rainey for his service as Interim CEO upon the election of James Brakke as CEO.
All of these grants are reflected in the number above.



(1)
Includes stock options to purchase 2,108,717 shares of common stock.
(2)
Includes stock options to purchase 1,108,717 shares of common stock.  Also includes 800,000 shares held by Arisean Capital Ltd., a corporation controlled by Mr. Brofman.
(3)
Includes 290,000 shares held by the wife of Mr. Denhart.  The address of Mr. Denhart is 18 Asilomar, Laguna Niguel, CA 92677.
(4)
Includes 296,354 shares of common stock issuable upon the exercise of warrants and stock options to purchase 1,694,500 shares of common stock.
(5)
Includes stock options to purchase 700,000 shares of common stock and 12,500 shares of common stock issuable upon the exercise of warrants.
(6)
Includes stock options to purchase 2,525,000 shares of common stock.  Excludes stock options to purchase 25,000 shares of common stock, with 25,000 vesting on April 27, 2010.
(7)
Includes stock options to purchase 1,500,000 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-K.



42


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, 2009, 35,000 stock options are available for issuance under our 2005 Incentive Compensation Plan, and there were outstanding stock options to purchase 865,000 shares of our common stock.
The following table provides information as of December 31, 2009 with respect to the shares of common stock that may be issued under our existing equity compensation plan:
Equity Compensation Plan Information

Plan categoryNumber 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 holders865,000$2.9935,000Equity compensation plans not approved by security holders6,089,934$2.41UnrestrictedTotal6,954,934$2.4835,000


Defined Contribution (401k) Plan

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



ITEM 13.  Certain Relationships and Related Transactions, and Director Independence

Related Party Transactions
In May 2007, our non-executive co-founder provided the company with a line of credit for up to $500,000 in financing, all of which was drawn.  He also provided the company with $76,000 in short term loans in November, 2007.  On September 25, 2009, the entire $576,000 outstanding on the line of credit plus accrued interest of $109,456 was converted to 4,569,706 shares of our common stock.
In August 2007, our Co-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.  On August 27, 2009, the remaining balance of $119,000 plus accrued interest of $23,345 was converted to shares of our common stock.  In addition, the Co-Chairman converted $377,917 of accrued payroll and consulting fees to shares of our common stock.  The total shares issued for all of these conversions was 3,468,416.

In October 2007, a director and stockholder provided us with a line of credit for $275,000, all of which was drawn.  The director provided an additional $25,000 in short term funding in November 2007 and an additional $50,421 during 2008.  Finally, in September 2009 this director provided an additional $150,000 in short term funding.  On August 27, 2009, $343,421 outstanding on the line of credit plus accrued interest of $64,222 was converted to 2,717,616 shares of our common stock.

Between February and July 2008, our Chief Executive Officer provided us with $343,883 in loans and expenses paid on our behalf.  On August 27, 2009, the balance of $158,202 on a credit line plus accrued interest of $24,493 was converted to shares of our common stock.  In addition, the former Chief Executive Officer converted $277,313 of accrued payroll to shares of our common stock.  The total shares issued for all of these conversions was 3,066,716.



43


Director Independence

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

ITEM 14.  Principal Accountant Fees and Services
RBSM LLP has served as our independent auditors for the year ended December 31, 2009, for the quarters ended June 30 and September 30, 2008 and for the period ended December 31, 2008.
Audit Fees
Audit fees are those fees billed for professional services rendered for the audit of the annual financial statements and review of the financial statements included in Form 10-Q.  The aggregate amount of the audit fees billed by RBSM LLP in 2009 were $233,922.

Audit-related Fees
No audit related fees were billed by RBSM LLP in 2009 or 2008.
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.  Our tax returns for 2007, 2008 and 2009 have not been filed at this date due to our severe cash limitations.
All Other Fees
No other fees were billed by our independent auditors in 2009 or 2008.
Audit Committee
The member of our audit committee is Mr. Mooney.  Our board of directors and audit committee approved the services rendered and fees charged by our independent auditors.  The audit committee has reviewed and discussed our audited financial statements for the year ended December 31, 2008 with our management.  In addition, the audit committee has discussed with RBSM LLP, our independent registered public accountants, the matters required to be discussed by Statement of Auditing Standards No. 61 (Communications with Audit Committee).  The audit committee also has received the written disclosures and the letter from as required by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and the audit committee has discussed the independence of RBSM LLP with that firm.
Based on the audit committees review of the matters noted above and its discussions with our independent auditors and our management, the audit committee recommended to the board of directors that the audited financial statements be included in our annual report on Form 10-K for the year ended December 31, 2009.
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




44


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.

ITEM 15.  Exhibits and Financial Statement Schedules

(a)  Exhibits

Exhibit No.Description3.1Certificate of Amendment of the Certificate of Incorporation, dated August 16, 2006. (3)3.2Certificate of Amendment of the Certificate of Incorporation, dated August 24, 2006. (3)4.1Form of 15% Secured Convertible Promissory Note of Debt Resolve, Inc. for June 26, 2006 private placement.(1)4.2Form of 15% Secured Promissory Note of Debt Resolve, Inc. for June 26, 2006 private placement.(1)4.3Form of Warrant to Purchase Common Stock of Debt Resolve, Inc. for June 26, 2006 private placement.(1)4.4Form of Purchase Warrant granted to Underwriters in November 2006 initial public offering.(4)10.1Securities Purchase Agreement, dated as of June 26, 2006, among Debt Resolve, Inc. and each of the private placement subscribers.(1)10.2Registration Rights Agreement, dated as of June 26, 2006, among Debt Resolve, Inc. and each of the private placement subscribers.(1)10.3Security Agreement, dated as of June 26, 2006, among Debt Resolve, Inc. and each of the private placement subscribers.(1)10.4Stock Pledge Agreement, dated as of June 26, 2006, among Debt Resolve, Inc. and each of the private placement subscribers.(1)10.5Form of investor lock-up agreement for June 26, 2006 private placement.(1)10.6Hosting Agreement with AT&T Corp.(2)10.7Master 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)10.8Form of Secured Promissory Note, dated December 21, 2006, made by EAR Capital I, LLC to Sheridan Asset Management, LLC.(5)10.9Security Agreement, dated as of December 21, 2006, between EAR Capital I, LLC, as obligor, and Sheridan Asset Management, LLC, as secured party.(5)21.1Subsidiaries of Debt Resolve, Inc.31.1Certification of Chief Executive Officer required by Rule 13(a)-14(a).31.2Certification of Chief Financial Officer required by Rule 13(a)-14(a).32.1Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002._________________
(1)
Incorporated herein by reference to Current Report on Form 8-K, filed July 20, 2009.
(2)
Incorporated herein by reference to Current Report on Form 8-K, filed August 19, 2009.


45


(3)
Incorporated herein by reference to Current Report on Form 8-K, filed October 8, 2009.
(4)
Incorporated herein by reference to Current Report on Form 8-K, filed October 21, 2009.
(5)
Incorporated herein by reference to Current Report on Form 8-K/A, filed October 22, 2009.
(6)
Incorporated herein by reference to Current Report on Form 8-K, filed October 30, 2009.
(7)
Incorporated herein by reference to Current Report on Form 8-K, filed December 9, 2009.


46

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated:  April 15, 2010
DEBT RESOLVE, INC.By: /s/DAVID M. RAINEYDavid M. RaineyInterim Chief Executive Officer, President, Chief Financial Officer, Treasurer and Secretary(principal executive and 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.

SignatureTitleDate/s/JAMES D. BURCHETTACo-Chairman of the Board and FounderApril 15, 2010James D. Burchetta/s/DAVID M. RAINEYInterim Chief Executive Officer, PresidentApril 15, 2010David M. Raineyand Chief Financial Officer, Treasurer and Secretary(principal executive officer and financial and accounting officer)/s/JAMES G. BRAKKECo-Chairman and Chief Executive OfficerApril 15, 2010James G. Brakke/s/WILLIAM M. MOONEY, JR.DirectorApril 15, 2010William M. Mooney, Jr.

47

DEBT RESOLVE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements for the Years Ended December 31, 2009 and 2008Reports of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2009 and 2008F-3Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008F-4Consolidated Statements of Stockholders Equity (Deficiency) for the Years Ended December 31, 2009 and 2008F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008F-6Notes to Consolidated Financial StatementsF-7

F-1



RBSM LLP

CERTIFIED PUBLIC ACCOUNTANTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of Debt Resolve, Inc. and its wholly owned subsidiaries the Company), Company as of December 31, 2009 and 2008, and the related consolidated statements of operation, stockholders (deficit) and cash flows for each of the two years in the period ended December 31, 2009 and 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Debt Resolve, Inc.  at  December 31, 2009 and 2008 and the results of its operations  and its cash flow for the each of the two years  in the period ended  December 31, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared after taking effect of discontinued operations as a result of a deconsolidation. As discussed in Note 3 to the consolidated financials statements, the company has deconsolidated First Performance Corporation and its subsidiary First Performance Recovery Corporation as a result of First Performances charter being revoked by the state of Nevada. The liabilities of these entities exceeded its assets as of the date of revocation, with this amount being treated as a capital transaction.
As discussed in Note 20 to the financial statements, certain errors to correct the accounting treatment of the Companys common stock issuances, recording of beneficial conversion feature to additional paid in capital instead of derivative liability and recording of change in fair value of warrants and debt, resulting in an overstating of net loss by $353,468 previously reported for the year ended December 31, 2008  were discovered by management of the Company during the current year..
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company has incurred significant losses since inception. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans, with respect to these matters are also described in Note 4 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

/s/ RBSM LLP
RBSM LLP
Certified Public Accountants
New York, New York
April 14, 2010




F-2


DEBT RESOLVE, INC. CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31, 2009 AND 2008

2009
     
     2008ASSETS
     
     
     
     
     
     RestatedCurrent
assets:Cash
     
     
     
     $
     
     
     
     $
     32,551Accounts
receivable, net
     
     
     
     
     11,253
     
     
     
     11,582Prepaid and
other current assets
     
     
     
     
     187,562
     
     
     
     77,220Current
assets of discontinued operations
     
     
     
     
     
     
     
     
     5,582Total current
assets
     
     
     
     
     198,815
     
     
     
     126,935Fixed assets,
net
     
     
     
     
     37,968
     
     
     
     84,271Deposits and
other assets
     
     
     
     
     35,000
     
     
     
     94,855Total
assets
     
     
     
     $
     271,783
     
     
     $
     306,061LIABILITIES
AND STOCKHOLDERS DEFICIENCYCurrent
liabilities:Bank
overdraft
     
     
     
     $
     62,306
     
     
     $
     Accounts
payable and other accrued liabilities
     
     
     
     
     2,761,556
     
     
     
     3,525,849Convertible
debentures, net of deferred debt discount of $-0- and $162,750 as of December 31, 2009 and 2008, respectively
     
     
     
     
     320,050
     
     
     
     188,250Short term
notes
     
     
     
     
     304,225
     
     
     
     487,000Current
maturities on long-term debt, net of deferred debt discount of $-0- and $69,556 as of December 31, 2009 and 2008, respectively
     
     
     
     
     823,000
     
     
     
     753,444Lines of
credit, related parties
     
     
     
     
     157,000
     
     
     
     1,203,623Current
liabilities of discontinued operations
     
     
     
     
     
     
     
     
     2,330,912Total current
liabilities
     
     
     
     
     4,428,137
     
     
     
     8,489,078Long term
debt:Convertible
long-term notes, net of deferred debt discount of $714,940 and $-0- as of December 31, 2009 and 2008, respectively
     
     
     
     
     169,560
     
     
     
     Derivative
liability
     
     
     
     
     7,518,056
     
     
     
     331,268Total
liabilities
     
     
     
     
     12,115,753
     
     
     
     8,820,346COMMITMENTS
AND CONTINGENCIESStockholders deficiency:Preferred
stock, $0.001 par value; 10,000,000 shares authorized, none issued and outstanding
     
     
     
     
     
     
     
     
     Common stock,
$0.001 par value, 100,000,000 shares authorized; 39,898,584 and 10,061,865 shares issued and outstanding as of December 31, 2009 and 2008,
respectively
     
     
     
     
     39,899
     
     
     
     10,512Additional
paid in capital
     
     
     
     
     56,610,021
     
     
     
     46,809,318Shares to be
issued
     
     
     
     
     
     
     
     
     47,970Shares held
in escrow (450,000 shares as of December 31, 2008)
     
     
     
     
     
     
     
     
     (450
     )Accumulated
deficit
     
     
     
     
     (68,493,890
     )
     
     
     (55,381,635
     )Total
stockholders deficiency
     
     
     
     
     (11,843,970
     )
     
     
     (8,514,285
     )Total
liabilities and stockholders deficiency
     
     
     
     $
     271,783
     
     
     $
     306,061
 See accompanying notes are an integral part of these
consolidated financial statements.


F-3


DEBT RESOLVE, INC. CONSOLIDATED STATEMENTS OF
OPERATIONS YEARS ENDED DECEMBER 31, 2009 AND 2008

2009
     
     2008RestatedREVENUES:
     
     
     
     $
     74,045
     
     
     $
     165,969Costs and
expenses:Payroll and
related expenses
     
     
     
     
     1,449,976
     
     
     
     3,030,506Selling,
general and administrative expenses
     
     
     
     
     5,148,336
     
     
     
     4,041,671Depreciation
and amortization
     
     
     
     
     46,302
     
     
     
     57,610Total costs
and expenses
     
     
     
     
     6,644,614
     
     
     
     7,129,787Net loss from
operations
     
     
     
     
     (6,570,570
     )
     
     
     (6,963,818
     )Other income
(expense):Interest
income
     
     
     
     
     873
     
     
     
     190Interest
expense
     
     
     
     
     (333,898
     )
     
     
     (161,772
     )Interest
expense, related party
     
     
     
     
     (5,174
     )
     
     
     (137,625
     )Amortization
of debt discounts
     
     
     
     
     (430,657
     )
     
     
     (928,283
     )(Loss) gain
on change in fair value of derivative liability
     
     
     
     
     (5,775,998
     )
     
     
     851,348Loss on
disposal of fixed assets
     
     
     
     
     
     
     
     
     (15,576
     )Other income
(expense)
     
     
     
     
     
     
     
     
     (3,166
     )Net loss
before provision for income taxes
     
     
     
     
     (13,115,424
     )
     
     
     (7,358,702
     )Income tax
(benefit)
     
     
     
     
     
     
     
     
     Net loss from
continuing operations
     
     
     
     
     (13,115,424
     )
     
     
     (7,358,702
     )Income (loss)
from discontinued operations
     
     
     
     
     3,169
     
     
     
     (2,747,002
     )Net
loss
     
     
     
     $
     (13,112,255
     )
     
     $
     (10,105,704
     )Net loss per
common share (basic and diluted):Continuing
operations
     
     
     
     $
     (0.52
     )
     
     $
     (0.77
     )Discontinued
operations
     
     
     
     $
     0.00
     
     
     $
     (0.29
     )Total
     
     
     
     $
     (0.52
     )
     
     $
     (1.06
     )Weighted
average number of common shares outstanding, basic and diluted
     
     
     
     
     25,049,133
     
     
     
     9,549,435
 See accompanying notes are an integral part of these
consolidated financial statements.


F-4


DEBT RESOLVE, INC. CONSOLIDATED STATEMENT OF
SHAREHOLDERS DEFICIENCY YEARS ENDED DECEMBER 31, 2009 AND 2008
Preferred stock
     
     Common stock
     
     AdditionalPaid In
     
     CommonStock to
     
     SharesHeldUnder
     
     AccumulatedShares
     
     Amount
     
     Shares
     
     Amount
     
     Capital
     
     be issued
     
     Escrow
     
     Deficit
     
     TotalBalance,
January 1, 2008
     
     
     
     
     
     
     
     $
     
     
     
     
     8,474,364
     
     
     $
     8,474
     
     
     $
     42,501,655
     
     
     $
     
     
     
     $
     
     
     
     $
     (45,275,931
     )
     
     $
     (2,765,802
     )Issuance of
common stock in exchange for options and warrants exercised
     
     
     
     
     
     
     
     
     
     
     
     
     37,501
     
     
     
     38
     
     
     
     337
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     375Capital
contributed from the grant of stock and options to employees
     
     
     
     
     
     
     
     
     
     
     
     
     50,000
     
     
     
     50
     
     
     
     2,381,980
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     2,382,030Capital
contributed from the grant of stock options to consultants for services
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     153,333
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     153,333Sale of
common stock
     
     
     
     
     
     
     
     
     
     
     
     
     100,000
     
     
     
     100
     
     
     
     24,900
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     25,000Common stock
issued for fundraising costs
     
     
     
     
     
     
     
     
     
     
     
     
     900,000
     
     
     
     900
     
     
     
     2,033,730
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     2,034,630Common stock
issued for services rendered
     
     
     
     
     
     
     
     
     
     
     
     
     500,000
     
     
     
     500
     
     
     
     167,500
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     168,000Common stock
issued to escrow for financing
     
     
     
     
     
     
     
     
     
     
     
     
     450,000
     
     
     
     450
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     450Accrual of
150,000 shares not issued in conjunction with fund raising costs
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     47,970
     
     
     
     
     
     
     
     
     
     
     
     47,970Capital
contributed from deferred debt discount
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     254,215
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     254,215Reclassify
warrants and non employee options as derivative liability
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     (708,332
     )
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     (708,332
     )Common stock
issued under escrow as collateral on convertible debt
     
     
     
     
     
     
     
     
     
     
     
     
     (450,000
     )
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     (450
     )
     
     
     
     
     
     
     (450
     )Net
loss
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     (10,105,704
     )
     
     
     (10,105,704
     )Balance,
December 31, 2008 (restated)
     
     
     
     
     
     
     
     
     
     
     
     
     10,061,865
     
     
     
     10,512
     
     
     
     46,809,318
     
     
     
     47,970
     
     
     
     (450
     )
     
     
     (55,381,635
     )
     
     
     (8,514,285
     )Capital
contributed from the grant of stock and options to employees
     
     
     
     
     
     
     
     
     
     
     
     
     50,000
     
     
     
     50
     
     
     
     230,300
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     230,350Common stock
issued for services rendered
     
     
     
     
     
     
     
     
     
     
     
     
     5,950,000
     
     
     
     5,950
     
     
     
     461,550
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     467,500Common stock
issued to employees and directors to convert notes and accrued interest and payroll
     
     
     
     
     
     
     
     
     
     
     
     
     15,462,830
     
     
     
     15,463
     
     
     
     4,764,185
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     4,779,648Common stock
issued to vendors for accrued payables
     
     
     
     
     
     
     
     
     
     
     
     
     1,406,160
     
     
     
     1,406
     
     
     
     434,382
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     435,788Common stock
issued in settlement of convertible notes and accrued interest
     
     
     
     
     
     
     
     
     
     
     
     
     1,814,312
     
     
     
     1,815
     
     
     
     417,383
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     419,198Common stock
issued to directors for services rendered and for a director consultant contract modification
     
     
     
     
     
     
     
     
     
     
     
     
     3,936,000
     
     
     
     3,936
     
     
     
     846,314
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     850,250Issuance of
150,000 shares accrued in 2008
     
     
     
     
     
     
     
     
     
     
     
     
     150,000
     
     
     
     150
     
     
     
     47,820
     
     
     
     (47,970
     )
     
     
     
     
     
     
     
     
     
     
     Issuance of
common stock in exchange for options and warrants exercised
     
     
     
     
     
     
     
     
     
     
     
     
     617,417
     
     
     
     617
     
     
     
     179,557
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     180,174Release of
shares held in escrow
     
     
     
     
     
     
     
     
     
     
     
     
     450,000
     
     
     
     
     
     
     
     112,050
     
     
     
     
     
     
     
     450
     
     
     
     
     
     
     
     112,500De-incorporation of discontinued operations
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     2,307,162
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     2,307,162Net
loss
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     (13,112,255
     )
     
     
     (13,112,255
     )Balance,
December 31, 2009
     
     
     
     
     
     
     
     $
     
     
     
     
     39,898,584
     
     
     $
     39,899
     
     
     $
     56,610,021
     
     
     $
     
     
     
     $
     
     
     
     $
     (68,493,890
     )
     
     $
     (11,843,970
     )
 See accompanying notes are an integral part of these
consolidated financial statements.


F-5


DEBT RESOLVE, INC.CONSOLIDATED STATEMENT OF CASH FLOWS YEARS
ENDED DECEMBER 31, 2009 AND 2008

2009
     
     2008RestatedCASH FLOWS
FROM OPERATING ACTIVITIES:Net loss from
continuing operations
     
     
     
     $
     (13,115,425
     )
     
     $
     (7,358,702
     )Net income
(loss) from discontinued operations
     
     
     
     
     3,169
     
     
     
     (2,747,002
     )Adjustments
to reconcile net loss to net cash used in operating activities:Depreciation
and amortization
     
     
     
     
     46,303
     
     
     
     57,610Loss on
disposal of fixed assets
     
     
     
     
     
     
     
     
     15,576Amortization
of debt discounts
     
     
     
     
     430,658
     
     
     
     473,286Convertible
note issued for services rendered
     
     
     
     
     
     
     
     
     51,000Common stock
issued in settlement of payables
     
     
     
     
     1,463,734
     
     
     
     Loss on debt
conversion on extinguishment of debt
     
     
     
     
     2,890,213
     
     
     
     Fair value of stock, option and warrant issued for services
     
     
     
     
     2,225,751
     
     
     
     4,909,699Loss (gain)
in change in fair value of derivative liability
     
     
     
     
     5,775,998
     
     
     
     (851,348
     )Net
(increase) decrease in:Accounts
receivable
     
     
     
     
     75,329
     
     
     
     7,625Prepaid and
other assets
     
     
     
     
     (50,487
     )
     
     
     25,650Net increase
(decrease) in:Accounts
payable and accrued expenses
     
     
     
     
     (764,289
     )
     
     
     1,834,559Bank
overdraft
     
     
     
     
     62,306
     
     
     
     Net cash used
in continuing operations
     
     
     
     
     (956,740
     )
     
     
     (3,582,047
     )Net cash
provided by discontinued operations
     
     
     
     
     (18,169
     )
     
     
     2,012,106Net cash used
in operating activities
     
     
     
     
     (974,909
     )
     
     
     (1,569,941
     )CASH FLOWS
FROM INVESTING ACTIVITIES:Investment in
subsidiaries
     
     
     
     
     
     
     
     
     (835,951
     )Net cash used
in continuing investing activities
     
     
     
     
     
     
     
     
     (835,951
     )Net cash
provided by discontinued investing activities
     
     
     
     
     
     
     
     
     835,895Net cash used
in investing activities
     
     
     
     
     
     
     
     
     (56
     )CASH FLOWS
FROM FINANCING ACTIVITIES:Proceeds from
issuance of convertible notes
     
     
     
     
     
     
     
     
     300,000Proceeds from
issuance of notes payable
     
     
     
     
     
     
     
     
     698,000Proceeds from
issuance of short term notes
     
     
     
     
     
     
     
     
     497,000Repayment of
short term notes
     
     
     
     
     (117,775
     )
     
     
     (110,000
     )Proceeds from
long term notes
     
     
     
     
     909,959
     
     
     
     Proceeds from
lines of credit, related parties
     
     
     
     
     150,000
     
     
     
     309,623Repayment of
lines of credit, related parties
     
     
     
     
     
     
     
     
     (16,000
     )Proceeds from
sale of common stock
     
     
     
     
     
     
     
     
     25,000Proceeds from
exercise of options and warrants
     
     
     
     
     174
     
     
     
     375Stock placed
in escrow
     
     
     
     
     
     
     
     
     (450
     )Net cash
provided by continuing financing activities
     
     
     
     
     942,358
     
     
     
     1,703,548Net cash used
by discontinued financing activities
     
     
     
     
     
     
     
     
     (101,000
     )Net cash
provided by financing operations
     
     
     
     
     942,358
     
     
     
     1,602,548Net
(decrease) increase in cash and cash equivalents
     
     
     
     
     (32,551
     )
     
     
     32,551Cash and cash
equivalents at beginning of period
     
     
     
     
     32,551
     
     
     
     Cash and cash
equivalents at end of period
     
     
     
     $
     
     
     
     $
     32,551Supplemental
Disclosures of Cash Flow Information:Cash paid
during period for interest
     
     
     
     $
     
     
     
     $
     -Cash paid
during period for taxes
     
     
     
     $
     
     
     
     $
     Non-cash
financing transactions:Common stock
issued in exchange for previously incurred debt
     
     
     
     $
     1,463,734
     
     
     $
     Convertible
note issued for services
     
     
     
     $
     
     
     
     $
     51,000
 See accompanying notes are an integral part of these
consolidated financial statements.




F-6


DEBT RESOLVE, INC.
NOTES TO CONDOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009


NOTE 1 BASIS AND BUSINESS PRESENTATON

Debt Resolve, Inc. and subsidiaries (the Company) was incorporated under the laws of the State of Delaware in April 21, 1997. The Company offers its service as an Application Service Provider (ASP) model, enabling clients to introduce this collection option with no modifications to their existing collections computer systems.  Its products capitalize on using the Internet as a tool for communication, resolution, settlement and payment of delinquent debt.  To date, the Company has had minimal sales revenues, has incurred expenses and has sustained substantial losses.  Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise.  For the period from inception through December 31, 2009, the Company has accumulated a deficit through its development stage of $68,493,890.

The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary DRV Capital LLC, (DRV Capital), together with its wholly-owned subsidiary, EAR Capital, LLC (EAR) for the year ended December 31, 2009, and First Performance Corporation (First Performance) together with its wholly owned subsidiary First Performance Recovery Corporation (First Performance Recovery) thru August 1, 2009 (See Note 3).  All significant intercompany balances and transactions have been eliminated in consolidation.

During the year ended December 31, 2009, the corporation charter of First Performance Corporation was revoked (de-incorporated).  As a result, First Performance Corp. and its wholly-owned subsidiary, First Performance Recovery Corp., are no longer included in the financial statements of the Company.  Prior to 2009, the results of all subsidiaries, including DRV Capital, EAR, First Performance and First Performance Recovery were shown as discontinued operations in the financial statements.

NOTE 2  SIGNIFICANT ACCOUNTING POLICIES

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

Estimates

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

Reclassification

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

Revenue Recognition

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



F-7


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

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

Accounts Receivable

The Company extends credit to large, mid-size and small companies for collection services.  The Company has a concentration of credit risk as almost 100% of the balance of accounts receivable at December 31, 2009 and 2008 consists of only one customer.  We do not generally require collateral or other security to support customer receivables.  Accounts receivable are carried at their estimated collectible amounts.  Accounts receivable are periodically evaluated for collectability and the allowance for doubtful accounts is adjusted accordingly. Management determines collectability based on their experience and knowledge of the customers.  As of December 31, 2009 and 2008, no allowance for doubtful accounts has been booked.

Cash and Cash Equivalents

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

Fair Values

In the first quarter of fiscal year 2008, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (ASC 820-10).  ASC 820-10 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure.  ASC 820-10 delays, until the first quarter of fiscal year 2009, the effective date for ASC 820-10 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The adoption of ASC 820-10 did not have a material impact on the Companys financial position or operations.  Refer to Footnote 18 for further discussion regarding fair valuation.

Property and Equipment

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

Long-Lived Assets

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





F-8


Income Taxes

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

Comprehensive Income

The Company does not have any items of comprehensive income in any of the periods presented.

Net Loss per Share

The Company has adopted Accounting Standards Codification subtopic 260-10, Earnings Per Share (ASC 260-10) specifying the computation, presentation and disclosure requirements of earnings per share information.  Basic loss per share has been calculated based upon the weighted average number of common shares outstanding.  Stock options and warrants have been excluded as common stock equivalents in the diluted loss per share because there effect is anti-dilutive on the computation.  Fully diluted shares outstanding were 63,972,406 and 20,407,254 for the years ended December 31, 2009 and 2008, respectively.

Stock-based compensation

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

Total stock-based compensation expense for the year ended December 31, 2009 and 2008 amounted to $2,225,751 and $4,909,699, respectively.


Defined Contribution (401k) Plan

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



Reliance on Key Personnel and Consultants
The Company has only 2 full-time employees and no part-time employees.  Additionally, there are approximately 12 consultants performing various specialized services.  The Company is heavily dependent on the continued active participation of the President and key consultants.  The loss of the President or key consultants could significantly and negatively impact the business until adequate replacements can be identified and put in place.

Derivative Financial Instruments
The Companys derivative financial instruments consist of
embedded derivatives related to Convertible Debentures. These embedded derivatives include certain conversion features.  The
accounting treatment of derivative financial instruments requires that the Company record the derivatives and related warrants at
their fair values as of the inception date of the Convertible Debenture Agreement and at fair value as of each subsequent balance
sheet date.  In addition, under the provisions of Accounting Standards Codification subtopic 815-40, Derivatives and Hedging;
Contracts in Entitys Own Equity (ASC 815-40) as a result of entering into the Debentures, the Company is required
to classify all other non-employee stock options and warrants as derivative liabilities and mark them to market at each reporting
date.  Any change in fair value inclusive of modifications of terms will be recorded as non-operating, non-cash income or
expense at each reporting date.  If the fair value of the derivatives is higher at the subsequent balance sheet date, the
Company will record a non-operating, non-cash charge.  If the fair value of the derivatives is lower at the subsequent balance
sheet date, the Company will record non-operating, non-cash income. As of December 31, 2009, conversion-related derivatives and the
warrants were valued using the Black-Scholes Option Pricing Model with the following assumptions:  dividend yield of 0%; annual
volatility of 402.31%; and risk free interest rate from 0.20% to 2.69%.  The derivative liabilities are classified as long term
liabilities.




F-9


Recent accounting pronouncements

In February 2010, the FASB issued Update No. 2010-09 Subsequent Events (Topic 855) (2010-09).  2010-09 clarifies the interaction of Accounting Standards Codification 855 Subsequent Events (Topic 855) with guidance issued by the Securities and Exchange Commission (the SEC) as well as the intended breadth of the reissuance disclosure provision related to subsequent events found in paragraph 855-10-50-4 in Topic 855.  This update is effective for annual or interim periods ending after June 15, 2010.  Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.

In February 2010, the FASB issued Update No. 2010-08 Technical Corrections to Various Topics (2010-08). 2010-08 represents technical corrections to SEC paragraphs within various sections of the Codification. Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.

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

In January 2010, the FASB issued Update No. 2010-05 CompensationStock CompensationEscrowed Share Arrangements and Presumption of Compensation (2010-05).  2010-05 re-asserts that the Staff of the Securities Exchange Commission (the SEC Staff) has stated the presumption that for certain shareholders escrowed shares represent a compensatory arrangement.  2010-05 further clarifies the criteria required to be met to establish a position different from the SEC Staffs position.  The Company does not believe this pronouncement will have any material impact on its financial position, results of operations or cash flows.

In January 2010, the FASB issued Update No. 2010-04 Accounting for Various TopicsTechnical Corrections to SEC Paragraphs (2010-04).  2010-04 represents technical corrections to SEC paragraphs within various sections of the Codification.  Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.

In January 2010, the FASB issued Update No. 2010-02 Accounting and Reporting for Decreases in Ownership of a Subsidiarya Scope Clarification (2010-02) an update of ASC 810 Consolidation.  2010-02 clarifies the scope of ASC 810 with respect to decreases in ownership in a subsidiary to those of a:  subsidiary or group of assets that are a business or nonprofit, a subsidiary that is transferred to an equity method investee or joint venture, and an exchange of a group of assets that constitutes a business or nonprofit activity to a non-controlling interest including an equity method investee or a joint venture.  Management does not expect adoption of this standard to have any material impact on its financial position, results of operations or operating cash flows.  Management does not intend to decrease its ownership in any of its wholly-owned subsidiaries.

In January 2010, the FASB issued Update No. 2010-01 Accounting for Distributions to Shareholders with Components of Stock and Casha consensus of the FASB Emerging Issues Task Force (2010-03) an update of ASC 505 Equity.  2010-03 clarifies the treatment of stock distributions as dividends to shareholders and their effect on the computation of earnings per shares.  Management does not expect adoption of this standard to have any material impact on its financial position, results of operations or operating cash flows.

NOTE 3 DISCONTINUED OPERATONS AND DISSOLUTION OF SUBSIDIARIES

On August 1, 2009, the companys wholly owned subsidiary, First
Performance Corporations (FPC) charter was revoked by the state of Nevada.  FPC was the owner of 100% of the outstanding
shares of First Performance Recovery Corporation (FPRC).  On March 3, 2010, the Board of FPRC further dissolved FPRC also with
the state of Nevada.  As a result of these actions, the Company terminated its involvement in the activities of FPC and FPRC.
 All operations of FPC and FPRC had previously ceased as of June 30, 2008.  As of August 1, 2009, the Company
deconsolidated these subsidiaries in that it no longer will have control of the entities.  Management determined after
obtaining an opinion from counsel that the Company is not liable for any debt or entitled to any assets of FPC and FPRC after the
revocation (dissolution) of the corporate entities in each of the subsidiaries state of incorporation.  As shown below, the
liabilities exceeded the assets of the entities on August 1, 2009.  However, since this was a non-reciprocal transaction in the
control of management and shareholders, no gain or loss has been recognized.  A credit




F-10


to additional paid in capital has been
recognized for the excess of the liabilities relieved over the assets of the two entities.  The consolidated FPC and FPRC
operations primarily served the fifty United States.  The FPRC operations had 2009 and 2008 sales of approximately $0 and
$300,472, respectively and accounted for approximately 0% and 64% of the 2009 and 2008 sales of the Company.  The results of
operations were reclassified as discontinued operations during the second quarter of 2008 as the FPC and FPRC operations met all the
criteria for discontinued operations.

The following results of operations for this business have been treated as discontinued operations for all periods presented.

Year ended December 31,2009
     
     2008Revenue
     
     
     
     $
     
     
     
     $
     300,742Payroll and
related expenses
     
     
     
     
     
     
     
     
     603,924General and
administrative expenses
     
     
     
     
     7,556
     
     
     
     743,327Accrual for
closing costs
     
     
     
     
     
     
     
     
     1,364,458Goodwill
& intangible impairment
     
     
     
     
     
     
     
     
     176,545Disposal of
Fixed Assets
     
     
     
     
     
     
     
     
     87,402Amortization
of intangibles
     
     
     
     
     
     
     
     
     32,304Depreciation
Expense
     
     
     
     
     
     
     
     
     38,235Total
expenses
     
     
     
     
     7,556
     
     
     
     3,046,195Loss from
operations
     
     
     
     
     (7,556
     )
     
     
     (2,745,453
     )Interest
expense
     
     
     
     
     ()
     
     
     
     (9,236
     )Other income
(expense)
     
     
     
     
     10,725
     
     
     
     7,687Net income
(loss) from discontinued operations
     
     
     
     $
     3,169
     
     
     $
     (2,747,002
     )
 
The following presentation shows the assets and liabilities of discontinued operations as of August 1, 2009 (date of dissolution):

2009Assets:Cash
     
     
     
     $
     209Prepaid expenses
     
     
     
     
     4,281Total assets, discontinued operations
     
     
     
     $
     4,491Liabilities:Accounts
payable
     
     
     
     $
     951,023Accrued
payroll
     
     
     
     
     9,699Accrued expense
     
     
     
     
     1,350,931Total
liabilities, discontinued operations
     
     
     
     $
     2,311,653
 The excess of liabilities over assets of $2,307,162 was credited to additional paid in capital as of August 1, 2009.

As of December 31, 2009, there were noassets or liabilities remaining from the divestiture of FPC and FPRC.



F-11


NOTE 4 - GOING CONCERN MATTERS

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.  As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $13,112,255 and $10,105,704 for the years ended December 31, 2009 and 2008, respectively.  Additionally, the Company has negative working capital of $4,229,322 as of December 31, 2009.  These factors among others raise substantial doubt about the Companys ability to continue as a going concern.

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

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

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

NOTE 5  PREPAID AND OTHER CURRENT ASSETS

Prepaid and other current assets as of December 31, 2009 and 2008 are comprised of the following:


2009
     
     2008Employee
advances
     
     
     
     $
     26,500
     
     
     $
     Undeposited
funds
     
     
     
     
     75,000
     
     
     
     Other prepaid
expenses
     
     
     
     
     86,062
     
     
     
     77,220Total
     
     
     
     $
     187,562
     
     
     $
     77,220
 NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2009 and 2008 are comprised of the following:


2009
     
     2008Computer
equipment
     
     
     
     $
     106,917
     
     
     $
     140,322Software
     
     
     
     
     42,170
     
     
     
     42,170Telecommunication equipment
     
     
     
     
     3,165
     
     
     
     3,165Office
equipment
     
     
     
     
     3,067
     
     
     
     3,067Furniture and
fixtures
     
     
     
     
     106,436
     
     
     
     106,436Total
     
     
     
     
     261,755
     
     
     
     295,160Less
accumulated depreciation
     
     
     
     
     (223,787
     )
     
     
     (210,889
     )Total
     
     
     
     $
     37,968
     
     
     $
     84,271
 
The Company uses the straight line method of depreciation over 3 to 5 years.  During the years ended December 31, 2009 and 2008, depreciation expense charged to operations was $46,302 and $57,610, respectively.




F-12


NOTE 7  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities as of December 31, 2009 and 2008 are comprised of the following:





2009
     
     2008Accounts
payable and accrued expenses
     
     
     
     $
     2,091,045
     
     
     $
     2,610,438Accrued
interest
     
     
     
     
     272,685
     
     
     
     244,494Payroll and
related accruals
     
     
     
     
     397,826
     
     
     
     670,915Total
     
     
     
     $
     2,761,556
     
     
     $
     3,525,847
 
NOTE 8 - CONVERTIBLE NOTES, SHORT TERM

On September 30, 2008, an unaffiliated investor loaned the
Company $300,000 on a 6-month unsecured convertible debenture with a maturity date of March 31, 2009.  This convertible
debenture replaced a note issued on July 31, 2008 in the same amount of $300,000 with a maturity date of January 31, 2009.  The
debenture carries interest at a rate of 15% per annum, with $22,500 (6 months) of interest payable in advance from the proceeds of
the original loan on July 31, 2008.  Thereafter, interest is payable monthly in cash or stock.  The outstanding principal
and interest may be repaid, in whole or in part, at any time without prepayment penalty.  The Exchange Agreement called for the
lender to receive 150,000 shares of the common stock of the company in consideration for the exchange of the original note for the
convertible debenture, which were issued during the year ended December 31, 2009.  In accordance with Accounting Standards
Codification subtopic 470-50, Debt-Modifications and Extinguishments (ASC 470-50), the exchange was determined to be an
extinguishment of debt, and extinguishment accounting was applied.  The debenture was secured by an escrow of 450,000 shares of
the common stock of the Company, which was held in escrow at the lenders attorneys office.  These shares were
released from escrow during the year ended December 31, 2009 in payment of the interest accrued through July 31, 2009 and a partial
payment of the principal (see below). At any time on or after the Issue Date and prior to the time the Debenture is paid in full in
accordance with its terms (including, without limitation, after the occurrence of an Event of Default, or, if the Debenture is not
fully paid or converted after the Maturity Date), the Holder of this Debenture is entitled, at its option, to convert this Debenture
at any time into shares of Common Stock, $0.001 par value (Common Stock), of the Company at the Conversion Price.
 Conversion Price means (i) the average VWAP for the 20 Trading Days ending on the Trading Day immediately before the
relevant Conversion Date, multiplied by (ii) fifty percent (50%).  The debenture was recorded net of a beneficial conversion
feature of $252,030, based on the relative fair value of the conversion feature.  The beneficial conversion feature is being
amortized over the term of the debenture.  The debenture was also recorded net of a deferred debt discount of $47,970 as shares
to be issued based on the relative fair value of the Exchange Shares.  The deferred debt discount is being amortized over the
term of the debenture.  During the years ended December 2009 and 2008, the Company recorded amortization of the beneficial
conversion feature and deferred debt discount related to this debenture of $150,000 each period.  On August 31, 2009, the
Company repaid $30,950 in note principal and $23,322 in accrued interest by the issuance of 450,000 shares of Company common stock
from treasury that were valued at the closing market price of $0.25 per share.  Based on the $112,500 value of the shares
issued, the Company recognized a $58,228 loss on extinguishment of the debt during the year ended December 31, 2009.  As of
December 31, 2009, the outstanding balance on this convertible was $269,050.  At the date of this report, the debenture is in
default, and the Company is working with the lender to restructure the debenture.


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






F-13


The beneficial conversion feature is being amortized over the term of the debenture.  During the year
ended December 31, 2009 and 2008, the Company recorded amortization of the beneficial conversion feature related to this debenture
of $12,750 and $38,250, respectively.  As a result of the default on this debenture, the Company negotiated a settlement with
the attorney to discharge the debenture, its accrued interest and old outstanding legal bills to the attorney for $75,000 paid
$5,000 per month beginning August 1, 2009.  The Company has made the required monthly payments from August through December.
 The payments from January to March 2010 have not yet been made.


The Company has identified embedded derivatives related to the above notes.  These embedded derivatives included certain conversion features and default provisions.  The accounting treatment of derivative financial instruments requires that the Company determine fair value of the derivatives as of the inception date of the notes and to fair value them as of each subsequent balance sheet date.

NOTE 9  SHORT TERM NOTES

On November 30, 2007, an unaffiliated investor loaned the Company
$100,000 on an unsecured 90-day short term note. The note carries 12% interest per annum, with interest payable monthly in cash.
 The principal balance outstanding will be due at any time upon 30 days written notice, subject to mandatory prepayment
(without penalty) of principal and interest, in whole or in part, from the net cash proceeds of any public or private, equity or
debt financing made by Debt Resolve.  The note matured on February 28, 2008 and was extended to July 31, 2009 for aggregate
extension fees of $85,000.  In conjunction with the note the Company also issued a warrant to purchase 100,000 shares of common
stock at an exercise price of $1.25 per share with an expiration date of November 30, 2012.  The note was recorded net of a
debt discount of $44,100, based on the relative fair value of the warrant under the Black-Scholes pricing model.  The debt
discount was amortized over the initial term of the note and was fully amortized by March 2008.  This note is guaranteed by
Mssrs. Mooney and Burchetta, two Directors of the Company.  On August 27, 2009, the Company repaid $65,000 of the outstanding
balance on this note, the $85,000 of accrued extension fees and $19,003 in accrued interest by the issuance of 1,126,685 shares of
Company common stock that were valued at the closing market price of $0.25 per share.  Based on the $281,671 value of the
shares issued, the Company recognized an $112,668 loss on extinguishment of the debt during the year ended December 31, 2009.
 As of December 31, 2009, the outstanding balance on this note was $35,000. The note is in default.


On December 21, 2007, an unaffiliated investor loaned the Company
$125,000 on an unsecured 18-month note with a maturity date of June 21, 2009.  The note has a provision requiring repayment
once the Company has raised an aggregate of $500,000 following issuance of this note.  As a result, this note is currently in
default as it has not been repaid and the Company reached the $500,000 threshold in September, 2008.  The note carries interest
at a rate of 12% per annum, with interest accruing and payable at maturity.  In conjunction with the note, the Company granted
to the investor a warrant to purchase 37,500 shares of common stock at an exercise price of $1.07 and an expiration date of December
21, 2012.  The note was recorded net of a deferred debt discount of $19,375, based on the relative fair value of the warrant
under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note and was fully amortized in
2008.  This note is guaranteed by Mr. Burchetta, a Company director.  As of December 31, 2009, this note has matured and
is still outstanding and is in default at this time.  The Company is in continuing discussions with the lender. On December 30, 2007, an unaffiliated investor loaned the
Company $200,000 on an unsecured 18-month note with a maturity date of June 30, 2009.  The note carries interest at a rate of
12% per annum, with interest accruing and payable at maturity.  In conjunction with this note, the Company also issued a
warrant to purchase 100,000 shares of common stock at an exercise price of $1.00 and an expiration date of December 30, 2012.
 The note was recorded net of a deferred debt discount of $51,600, based on the relative fair value of the warrant under the
Black-Scholes pricing model.  Such discount is being amortized over the term of the note.  During the years ended December
31, 2009 and 2008, the amortization expense was $17,200 and $34,400, respectively.  This note is guaranteed by Mr. Burchetta, a
Company director.  As of December 31, 2009, this note has matured and is still outstanding and is in default at this time.
 The Company is in discussions with the lender.


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



F-14


2009 and 2008, amortization was $7,894 and $12,406, respectively.  As of December 31, 2009, this note has matured and is
still outstanding and is in default at this time.  The Company is in discussions with the lender.


Between January 2008 and June 2009, an unaffiliated investor loaned the Company $79,000 on a short term basis. The interest rate is 12% per annum, and the loan is repayable on demand.  As of December 31, 2009, the remaining outstanding balance on the loan is $6,475.

On February 26, 2008, an unaffiliated investor loaned the Company
an additional $100,000 on an unsecured 18-month note with a maturity date of August 26, 2009.  The note carries interest at a
rate of 12% interest per annum, with interest accruing and payable at maturity.  Terms of the loan included a $20,000 service
fee on repayment or a $45,000 service fee if repayment occurs more than 31 days after origination.  The outstanding principal
and interest may be repaid, in whole or in part, at any time without prepayment penalty.  Accordingly, since the loan remains
unpaid, the Company has accrued the service fee of $45,000 as of December 31, 2009.  In conjunction with the note, the Company
also issued a warrant to purchase 175,000 shares of common stock at an exercise price of $1.25 and an expiration date of February
26, 2013.  The note was recorded net of a deferred debt discount of $57,400, based on the relative fair value of the warrant
under the Black-Scholes pricing model.  Such discount is being amortized over the term of the note.  During the years
ended December 31, 2009 and 2008 amortization was $25,511 and $31,889, respectively.  As of December 31, 2009, this note has
matured and is still outstanding and is in default at this time. The Company is in discussions with the lender.

On March 7, 2008, the Company borrowed $100,000 from a bank at a variable rate equal to the banks prime rate (currently 5.25%) for 30 days.  On March 14, 2008, the original loan was repaid, and the Company borrowed $150,000 at the prime rate and due on April 7, 2008.  On May 15, 2008, the loan was repaid and the Company borrowed $250,000 at the prime rate and due on July 1, 2008.  The note was subsequently extended to July 1, 2010 and is outstanding as of December 31, 2009.  The loan is secured by the assets of the Company and is personally guaranteed by Mr. Mooney, a Director of the Company.

On March 27, 2008, an unaffiliated investor loaned the Company
$100,000 on an unsecured 18-month note with a maturity date of September 27, 2009.  The note carries interest at a rate of 12%
interest per annum, with interest accruing and payable at maturity.  The outstanding principal and interest may be repaid, in
whole or in part, at any time without prepayment penalty.  In conjunction with the note, the Company also issued a warrant to
purchase 50,000 shares of common stock at an exercise price of $1.95 and an expiration date of March 27, 2013.  The note was
recorded net of a deferred debt discount of $37,900, based on the relative fair value of the warrant under the Black-Scholes pricing
model.  Such discount is being amortized over the term of the note.  During the years ended December 31, 2009 and 2008
amortization was $18,950 and $18,950, respectively.  As of December 31, 2009, this note had matured and was in default at that
time.  On February 11, 2010, the note and accrued interest were fully discharged through conversion to stock.


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



On November 14, 2008, an unaffiliated investor loaned the Company
$107,000 on short term note with a maturity date of December 31, 2008 (the November Note).  The Company received
net proceeds of $100,000, and the



F-15


$7,000 was treated as prepaid interest on the November Note to the original maturity date. The
maturity date was subsequently extended to March 30, 2009 for additional interest on the note of $8,000, and the face amount of the
November Note was now $115,000 at maturity.  Interim extensions from March 31, 2009 to July 31, 2009 are discussed in the
February note discussion below.  On July 31, 2009, the maturity date was extended to August 26, 2009 and later to September 25,
2009.   The November Note carried a default rate of interest of 22% per annum after the maturity date.  The Company
had a thirty (30) day grace period after the maturity date to repay the November Note with interest.  The outstanding principal
and interest may be repaid, in whole or in part, at any time without prepayment penalty.  The November Note was secured by a
first lien on the assets of the Company as evidenced by a UCC-1 filing.  Arisean Capital subordinated its first lien position
on its $576,000 outstanding loan to the extent of the November Note.  In conjunction with the November Note, the Company issued
a warrant to purchase 1,000,000 shares of common stock at an exercise price of $0.12 and an expiration date of November 14, 2013.
 This warrant has a cashless exercise feature.  The November Note was recorded net of a deferred debt discount
of $50,504, based on the relative fair value of the warrant and was fully amortized in 2008 over the term of the note.  On
February 13, 2009, in conjunction with the February Note discussed below, the warrant for 1,000,000 shares was cancelled and
replaced by a new five year warrant to purchase 25,750,000 shares of Company common stock at a total exercise price of $1.00.
 Upon repayment of amounts borrowed from the investor on or before maturity, as extended, the Company may reduce the warrant by
23,750,000 warrants.  The final two extensions granted to the investor another 1,000,000 warrants, for an aggregate total of
3,000,000 warrants.  The Company now had the right to reduce the 25,750,000 warrant by 22,750,000 warrants upon payment.
 During the three months ended September 30, 2009, the investor exercised the first 600,000 warrants, leaving a remaining
unexercised total of 2,400,000 warrants.  On September 25, 2009, the November Note was paid in full in the amount of $115,000,
and the lien on the Companys assets was released.


On February 26, 2009, the holder of the November Note loaned the
Company an additional $82,500 with a maturity date of March 30, 2009 (the February Note). The Company received net
proceeds of $70,000, and the $7,500 was treated as prepaid interest on the February Note and the $5,000 was expensed as
attorneys fees.  Through a series of amendments, the maturity dates of the November Note and the February Note were
extended to September 25, 2009 for additional interest of $12,500, with the face amount of the February Note now $95,000 at
maturity.  In addition, aggregate additional legal fees of $5,000 were expensed as a result of the extensions and were to be
repaid at maturity, making the total amount due to the investor $215,000.  The holder received the right, in the event of a
Company default on either Note, to return to the Company any of the holders 3,000,000 warrants not yet exercised in exchange
for the Company's cash payment equal to $0.023 per warrant share.  Interest applies at a default rate of 26% interest per annum
after maturity.  The February Note was secured by a first lien on the assets of the Company as evidenced by a UCC-1
filing.  Arisean Capital further subordinated its first lien position on its $576,000 outstanding loan to the extent of the
November and February Notes.  On September 25, 2009, the February Note was paid in full in the amount of $95,000, and the lien
on the Companys assets was released.  The $5,000 of accrued legal fees was also paid, for a total to the investor,
including the two notes and legal fees, of $215,000.


On December 4, 2009, an unaffiliated investor and consultant paid the Companys insurance premiums in the amount of $11,697.  In compensation for this payment, the investor was repaid $12,750 on January 27, 2010.  The investor also received a warrant to purchase 125,000 shares of the common stock of the Company at an exercise price of $0.15 per share.  The warrant has a five year exercise period and a cashless exercise provision.


NOTE 10  LINES OF CREDIT RELATED PARTIES

On May 31, 2007, the Company entered into a line of credit agreement
with Arisean Capital, Ltd. (Arisean), pursuant to which the Company may borrow from time to time up to $500,000 from
Arisean to be used by the Company to fund its working capital needs.  Arisean is controlled by Charles S. Brofman, the
Co-Founder of the Company and a former member of its Board of Directors.  Borrowings under the line of credit were secured by
the assets of the Company, subject to a subordination agreement, and bear interest at a rate of 12% per annum, with interest payable
monthly in cash.  The principal balance outstanding could be due at any time upon 30 days written notice, subject to mandatory
prepayment (without penalty) of principal and interest, in whole or in part, from the net cash proceeds of any public or private,
equity or debt financing completed by the Company.  Ariseans obligation to lend such funds to the Company is subject to a
number of conditions, including review by Arisean of the proposed use of such funds by the Company.  On February 8, 2008, in
consideration of the line of credit not being repaid with the later loan proceeds secured subsequent to the date of the agreement,
the Company granted options to purchase 350,000 shares of the common stock of the Company at $1.25 per share to Mr. Brofman.
 The term of the options is three years, and they vested immediately.  The option expense of $227,500 was treated as
deferred debt discount in





F-16


association with Mr. Brofmans financing during 2008 and was expensed immediately.  On September
25, 2009, the Company repaid the $576,000 outstanding balance on this line of credit and $109,456 in accrued interest by the
issuance of 4,569,706 shares of Company common stock that were valued at the closing market price of $0.45 per share.  Based on
the $2,056,368 value of the shares issued, the Company recognized a $1,370,912 loss on extinguishment of the debt during the year
ended December 31, 2009.  Additionally, as of September 25, 2009, Arisean released its first lien on the assets of the Company,
placing the new 2009 investors in first lien position (see Note 9). Interest expense accrued on this line of credit during 2009 was $50,703. As of December 31, 2009, the outstanding balance on this
line of credit was $10,557 in remaining accrued interest.


On August 10, 2007, the Company entered into a line of credit
agreement with James D. Burchetta, Debt Resolves Co-Chairman and Founder, for up to $100,000 to be used to fund the working
capital needs of Debt Resolve and First Performance.  Borrowings under the line of credit were secured by the assets of the
Company and bear interest at a rate of 12% per annum, with interest payable monthly in cash.  The principal balance outstanding
could be due at any time upon 30 days written notice, subject to mandatory prepayment (without penalty) of principal and interest,
in whole or in part, from the net cash proceeds of any public or private, equity or debt financing made by Debt Resolve.  On
August 27, 2009, the Company repaid the $119,000 outstanding balance on this line of credit and $23,345 in accrued interest by the
issuance of 948,970 shares of Company common stock that were valued at the closing market price of $0.25 per share.  Based on
the $237,242 value of the shares issued, the Company recognized a $94,897 loss on extinguishment of the debt during the year ended
December 31, 2009. Interest expense accrued on this line of credit during 2009 was $9,311. As of December 31, 2009, the outstanding balance on this line of credit was $1,017 in remaining accrued
interest.  The Company also owed $122,749 of accrued expenses to Mr. Burchetta as of December 31, 2009.


On October 17, 2007, the Company entered into a line of credit
agreement with William M. Mooney, a Director of Debt Resolve, for up to $275,000 to be used primarily to fund the working capital
needs of First Performance. Borrowings under the line of credit bear interest at 12% per annum, with interest payable monthly in
cash.  The principal balance outstanding will be due at any time upon 30 days written notice, subject to mandatory prepayment
(without penalty) of principal and interest, in whole or in part, from the net cash proceeds of any public or private, equity or
debt financing made by Debt Resolve.  In conjunction with this line of credit, the Company also issued a warrant to purchase
137,500 shares of common stock at an exercise price of $2.00 per share with an expiration date of October 17, 2012.  The
liability for borrowings under the line of credit was recorded net of a deferred debt discount of $117,700, based on the relative
fair value of the warrant under the Black-Scholes pricing model.  The debt discount was fully amortized during the year ended
December 31, 2007.  Borrowings under this line of credit are guaranteed by Mr. Burchetta and Mr. Brofman.  On February 8,
2008, in consideration of the line of credit not being repaid with the later loan proceeds secured subsequent to the date of the
agreement, the Company granted Mr. Mooney 350,000 options to purchase common stock at $1.25 per share.  This option has a term
of three years and vested immediately.  The grant was valued at $227,500 under the Black-Scholes pricing model and was expensed
immediately as amortization of the deferred debt discount.  On August 27, 2009, the Company repaid $343,421 of principal on
this line of credit and $64,222 in accrued interest by the issuance of 2,717,616 shares of Company common stock that was valued at
the closing market price of $0.25 per share.  Based on the $679,404 value of the shares issued, the Company recognized a
$271,762 loss on extinguishment of the debt during the year ended December 31, 2009. On September 24, 2009, the Company entered into
a line of credit agreement with William M. Mooney, a Director of Debt Resolve, for $150,000 to be used primarily to fund the working
capital needs of First Performance.  Borrowings under the line of credit bear interest at 9% per annum, with interest accrued
and payable on maturity.  The Note is due on November 24, 2009. In conjunction with this line of credit, the Company also
issued a warrant to purchase 150,000 shares of common stock at an exercise price of $0.15 per share with an expiration date of
September 24, 2014. The Note was recorded net of a deferred debt discount of $15,000, based on the relative fair relative fair value
of the warrant under the Black-Scholes pricing model. Such discount is being amortized over the term of the Note. During the year
ended December 31, 2009 and 2008 amortization was $15,000 and $0, respectively. Interest expense accrued on this line of credit during 2009 was $32,716.
As of December 31, 2009, the outstanding
balance on this line of credit was $157,000 in principal and $8,292 in accrued interest.


On July 1, 2008, the Company entered into a line of credit
agreement with Kenneth H. Montgomery, a former Chief Executive Officer and Director of Debt Resolve, for up to $315,000 to be used
to fund the working capital needs of Debt Resolve.  Borrowings under the line of credit would bear interest at 12% per annum,
with interest payable monthly in cash.  The principal balance outstanding could be due at any time upon 30 days written notice,
subject to mandatory prepayment (without penalty) of principal and interest, in whole or in part, from the net cash proceeds of any
public or private, equity or debt financing made by Debt Resolve.  In conjunction with this line of credit, the Company also
issued an option to purchase 350,000 shares of common stock at an exercise price of $1.00 per share




F-17


on July 15, 2008 with an
expiration date of July 15, 2015.  The note was recorded net of a deferred debt discount of $262,500, based on the relative
fair value of the option.  The debt discount was amortized over the term of the note. As of June 30, 2009, the Company has
borrowed $158,202 under this line of credit plus $185,681 of Company expenses paid directly by Mr. Montgomery for a total borrowed
of $343,883.  On August 27, 2009, the Company repaid $158,202 of principal on this line of credit and $24,492 in accrued
interest by the issuance of 1,217,966 shares of Company common stock that were valued at the closing market price of $0.25 per
share.  Based on the $304,491 value of the shares issued, the Company recognized a $121,797 loss on extinguishment of the debt
in the year ended December 31, 2009. Interest expense accrued on this line of credit during 2009 was $12,379. As of December 31, 2009, the outstanding balance owed to Mr. Montgomery is $214,385 in
expenses plus $1,352 in accrued interest on the line of credit that was repaid and terminated.

NOTE 11  CONVERTIBLE DEBENTURES

During the year ended December 31, 2009, unaffiliated investors
loaned the Company an aggregate of $984,959 on three year Convertible Debentures with an interest rate of 14%.  Of this total,
$75,000 was shown under un-deposited funds under other current assets.  The interest accrues and is payable at maturity, which
range in dates from July 22, 2012 to December 15, 2012. The conversion price is set at $0.15 per share.  The Debentures carry a
first lien security interest.  In addition, the investors received 9,849,590 warrants to purchase the common stock of the
Company at an exercise price of $1.00.  On January 21, 2010, the exercise price was reduced to $0.40 due to certain provisions
of the warrants.  The exercise period of the warrants is five years.  The notes were recorded net of a deferred debt
discount of $902,768, based on the relative fair value of the warrants under the Black-Scholes pricing model.  Such discount is
being amortized over the term of the notes.  During the year ended December 31, 2009, the Company recorded amortization of the
debt discount related to these notes of $187,828.  During the year ended December 31, 2009, $100,459 plus accrued interest was
converted to stock by the terms of the notes, leaving a balance remaining of $884,500.

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

NOTE 12 - DERIVATIVE LIABILITY

As described in Note 6 above, the Companys derivative financial
instruments consist of embedded derivatives related to the short term Convertible Debentures.  These embedded derivatives
include certain conversion features indexed to the Companys common stock.  The accounting treatment of derivative
financial instruments requires that the Company record the derivatives and related items at their fair values as of the inception
date of the Convertible Debenture Agreement and at fair value as of each subsequent balance sheet date.  In addition, under the
provisions of Accounting Standards Codification subtopic 815-40, Derivatives and Hedging; Contracts in Entitys Own Equity
(ASC 815-40), as a result of entering into the Debentures, the Company is required to classify all other non-employee
stock options and warrants as derivative liabilities and mark them to market at each reporting date.  Any change in fair value
inclusive of modifications of terms will be recorded as non-operating, non-cash income or expense at each reporting date.  If
the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash
charge.  If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record
non-operating, non-cash income.  As of December 31, 2009, conversion-related derivatives fair value of $2,728,451 and the
warrants and option fair values of $4,789,605 were determined using the Black-Scholes Option Pricing Model with the following
assumptions:  dividend yield of 0%; annual volatility of 402.31%; and risk free interest rate from 0.20% to 2.69%.  The
derivative liabilities are classified as long term liabilities.

As of the date of the financial statements, the Company believes an event under the contract that would create an obligation to settle in cash or other current assets is remote and has classified the obligation as a long term liability.

NOTE 13  STOCKHOLDERS EQUITY

Preferred Stock


At December 31, 2009 and 2008, the Company has authorized 10,000,000 shares of
preferred stock, par value $0.001, of which none are issued and outstanding.



F-18


Common stock

At December 31, 2009 and 2008, the Company has authorized 100,000,000 shares of common stock, par value $0.001, of which 39,898,584 and 10,061,865 are issued and outstanding, respectively.

During the year ended December 31, 2008, the Company issued an aggregate of 1,900,000 shares of its common stock in exchange for services rendered.  The value of the services of $2,243,080 did not differ materially from the value of the underlying shares.

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

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

During the year ended December 31, 2009, the Company issued 8,767,398 shares of Company common stock to settle $1,483,709 in liabilities owed to former employees and vendors.  The $2,276,099 value of the shares issued, as determined by the closing prices on the dates of issuance, exceeded the $1,483,709 in liabilities settled, and the Company recorded the difference as a $792,388 loss on extinguishment of the liabilities during the year ended December 31, 2009.

During the year ended December 31, 2009, the Company issued 10,141,885 shares of Company common stock to settle $1,521,282 in notes payable and accrued interest.  The $3,415,029 value of the shares issued, as determined by the closing prices on the dates of issuance, exceeded the $1,521,282 in liabilities settled, and the Company recorded the difference as a $1,893,749 loss on extinguishment of the liabilities during the year ended December 31, 2009.

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

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

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


F-19


NOTE 14-WARRANTS AND OPTIONS
Warrants

The following table summarizes warrants outstanding and related prices for the shares of the Companys common stock issued to shareholders at December 31, 2009:


Exercise Price
     
     
     
     Number Outstanding
     
     Warrants Outstanding Weighted Average
Remaining Contractual Life (years)
     
     WeightedAverageExercise price
     
     NumberExercisable
     
     Warrants Exercisable Weighted
AverageExercise Price$ 0.00000004
     
     
     
     
     2,400,000
     
     
     
     4.12
     
     
     
     0.00000004
     
     
     
     2,400,000
     
     
     $
     0.000000040.000004
     
     
     
     
     225,000
     
     
     
     3.89
     
     
     
     0.000004
     
     
     
     225,000
     
     
     
     0.0000040.01
     
     
     
     
     160,521
     
     
     
     1.50
     
     
     
     0.01
     
     
     
     160,521
     
     
     
     0.010.12
     
     
     
     
     275,000
     
     
     
     3.87
     
     
     
     0.12
     
     
     
     275,000
     
     
     
     0.120.15
     
     
     
     
     2,125,000
     
     
     
     4.96
     
     
     
     0.15
     
     
     
     2,125,000
     
     
     
     0.150.25
     
     
     
     
     125,000
     
     
     
     3.78
     
     
     
     0.25
     
     
     
     125,000
     
     
     
     0.251.00
     
     
     
     
     10,149,590
     
     
     
     4.68
     
     
     
     1.00
     
     
     
     10,149,590
     
     
     
     1.001.07
     
     
     
     
     37,500
     
     
     
     3.00
     
     
     
     1.07
     
     
     
     37,500
     
     
     
     1.071.25
     
     
     
     
     350,000
     
     
     
     3.10
     
     
     
     1.25
     
     
     
     350,000
     
     
     
     1.251.95
     
     
     
     
     50,000
     
     
     
     3.24
     
     
     
     1.95
     
     
     
     50,000
     
     
     
     1.952.00
     
     
     
     
     665,500
     
     
     
     2.68
     
     
     
     2.00
     
     
     
     655,500
     
     
     
     2.002.45
     
     
     
     
     99,000
     
     
     
     3.30
     
     
     
     2.45
     
     
     
     99,000
     
     
     
     2.452.52
     
     
     
     
     181,777
     
     
     
     0.60
     
     
     
     2.52
     
     
     
     181,777
     
     
     
     2.523.85
     
     
     
     
     50,000
     
     
     
     0.16
     
     
     
     3.85
     
     
     
     50,000
     
     
     
     3.856.00
     
     
     
     
     225,000
     
     
     
     1.85
     
     
     
     6.00
     
     
     
     225,000
     
     
     
     6.00Total
     
     
     
     
     17,118,888
     
     
     
     4.2
     
     
     
     
     
     
     
     17,118,888
 
Transactions involving the Companys warrant issuance are summarized as follows:


Number of Shares
     
     Weighted Average Price Per ShareOutstanding
at December 31, 2007
     
     
     
     
     2,042,770
     
     
     $
     1.60Issued
     
     
     
     
     2,074,000
     
     
     
     0.43Exercised
     
     
     
     
     (37,501
     )
     
     
     0.01Canceled or
expired
     
     
     
     
     (238,814
     )
     
     
     3.28Outstanding
at December 31, 2008
     
     
     
     
     3,840,455
     
     
     
     1.23Issued
     
     
     
     
     37,874,590
     
     
     
     0.27Exercised
     
     
     
     
     (617,417
     )
     
     
     0.00000004Canceled or
expired
     
     
     
     
     (23,978,740
     )
     
     
     0.00000004Outstanding
at December 31, 2009
     
     
     
     
     17,118,888
     
     
     $
     0.36
 In conjunction with a November 2008 Note, the Company
issued a warrant to purchase 1,000,000 shares of common stock at an exercise price of $0.12 and an expiration date of November 14,
2013.  On February 13, 2009, the warrant for 1,000,000 shares was cancelled and replaced by a new five year warrant to purchase
25,750,000 shares of Company common stock at a total exercise price of $1.00.  Upon repayment of the November and February
Notes on or before maturity, as extended to September 25, 2009, the Company may reduce the warrant by 22,750,000 shares, which were
canceled on September 25, 2009 upon full repayment of the notes.  The investor retained a total of 3,000,000 warrants.
 The warrant holder received the right, in the event of a Company default on either Note, to return to the Company any of the
holders 3,000,000 warrants not yet exercised in exchange for the Companys cash payment equal to $0.023 per warrant
share.  This right expired upon repayment of the notes. During the fourth quarter of 2009, 600,000 of the 3,000,000 remaining
warrants were exercised.



F-20


In conjunction with the issuance of convertible notes, the Company issued warrants to purchase an aggregate of 9,849,590 shares of common stock with an exercise price of $1.00 per share expiring five years from the date of issuance.  The fair value of the warrants were determined using the Black-Scholes option pricing method and were recorded as a derivative liability at the date of issuance.

In conjunction with certain consulting services, the Company issued warrants to purchase an aggregate of 2,125,000 shares of common stock with an exercise price of $0.15 per share expiring five years from the date of issuance.  These warrants contain a cashless exercise feature.  The fair value of the warrants were determined using the Black-Scholes option pricing method and were recorded as a derivative liability at the date of issuance.

In conjunction with a short-term loan from a director on September 24, 2009, the Company issued a warrant to purchase 150,000 shares of common stock with an exercise price of $0.15 per share expiring five years from the date of issuance.  The fair value of the warrants were determined using the Black-Scholes option pricing method and were recorded as a derivative liability at the date of issuance.

Non-Employee Options

The following table summarizes non employee options outstanding and related prices for the shares of the Companys common stock issued to shareholders at December 31, 2009:


Exercise Price
     
     
     
     NumberOutstanding
     
     Option Outstanding Options
AverageRemainingContractualLife (years)
     
     WeightedAverageExercise price
     
     NumberExercisable
     
     Options Exercisable Weighted Average
Exercise Price$ 0.70
     
     
     
     
     75,000
     
     
     
     5.69
     
     
     
     0.70
     
     
     
     75,000
     
     
     
     0.701.84
     
     
     
     
     25,000
     
     
     
     5.42
     
     
     
     1.84
     
     
     
     25,000
     
     
     
     1.845.00
     
     
     
     
     3,000
     
     
     
     1.84
     
     
     
     5.00
     
     
     
     3,000
     
     
     
     5.00Total
     
     
     
     
     103,000
     
     
     
     
     
     
     
     
     
     
     
     103,000
 
Transactions involving the Companys non employee option issuance are summarized as follows:


Number of Shares
     
     Weighted Average Price Per ShareOutstanding
at December 31, 2007
     
     
     
     
     203,000
     
     
     $
     3.02IssuedExercisedCanceled or
expiredOutstanding
at December 31, 2008
     
     
     
     
     203,000
     
     
     $
     3.02IssuedExercisedCanceled or
expired
     
     
     
     
     (100,000
     )
     
     
     5.00Outstanding
at December 31, 2009
     
     
     
     
     103,000
     
     
     $
     1.10
 
F-21


Employee Options

The following table summarizes employee options outstanding and related prices for the shares of the Companys common stock issued to shareholders at December 31, 2009:


Exercise Price
     
     
     
     NumberOutstanding
     
     Option Outstanding Options
AverageRemainingContractualLife (years)
     
     WeightedAverageExercise price
     
     NumberExercisable
     
     Options Exercisable Weighted AverageExercise
price$ 0.19
     
     
     
     
     1,000,000
     
     
     
     6.60
     
     
     $
     0.19
     
     
     
     1,000,000
     
     
     $
     0.190.80
     
     
     
     
     350,000
     
     
     
     5.09
     
     
     
     0.80
     
     
     
     350,000
     
     
     
     0.801.00
     
     
     
     
     350,000
     
     
     
     5.54
     
     
     
     1.00
     
     
     
     350,000
     
     
     
     1.001.25
     
     
     
     
     1,334,500
     
     
     
     2.51
     
     
     
     1.25
     
     
     
     1,334,500
     
     
     
     1.251.40
     
     
     
     
     350,000
     
     
     
     5.45
     
     
     
     1.40
     
     
     
     350,000
     
     
     
     1.401.50
     
     
     
     
     887,500
     
     
     
     1.71
     
     
     
     1.50
     
     
     
     862,500
     
     
     
     1.501.63
     
     
     
     
     20,000
     
     
     
     5.46
     
     
     
     1.63
     
     
     
     20,000
     
     
     
     1.631.84
     
     
     
     
     10,000
     
     
     
     5.42
     
     
     
     1.84
     
     
     
     10,000
     
     
     
     1.844.75
     
     
     
     
     203,000
     
     
     
     4.32
     
     
     
     4.75
     
     
     
     203,000
     
     
     
     4.755.00
     
     
     
     
     2,326,934
     
     
     
     5.63
     
     
     
     5.00
     
     
     
     2,326,934
     
     
     
     5.0010.00
     
     
     
     
     20,000
     
     
     
     3.74
     
     
     
     10.00
     
     
     
     20,000
     
     
     
     3.74Total
     
     
     
     
     6,851,934
     
     
     
     3.23
     
     
     
     
     
     
     
     6,826,934
 
Transactions involving the Companys employee option issuance are summarized as follows:


Number of Shares
     
     Weighted Average Price Per ShareOutstanding
at December 31, 2007
     
     
     
     
     3,768,429
     
     
     $
     4.97Issued
     
     
     
     
     2,311,500
     
     
     
     1.18ExercisedCanceled or
expired
     
     
     
     
     (313,000
     )
     
     
     4.60Outstanding
at December 31, 2008
     
     
     
     
     5,766,929
     
     
     
     5.89Issued
     
     
     
     
     1,000,000
     
     
     
     0.19ExercisedCanceled or
expiredOutstanding
at December 31, 2009
     
     
     
     
     6,851,934
     
     
     $
     2.50
 
The Board granted stock options to purchase 1,000,000 shares of
common stock of the Company at an exercise price $0.19, the closing price on the day of grant, with an exercise period of seven
years to the President of the Company. The grant was valued using the Black-Scholes model and had a value of $190,000, which was
fully expensed during the year ended December 31, 2009.


NOTE 15 -COMMITMENTS AND CONTINGENCIES


Litigation


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


On September 17, 2008, Computer Task Group, a vendor, filed a
complaint in the Supreme Court of New York, County of Erie, seeking damages of $24,546 plus interest for consulting services
rendered to us. On December 3,



F-22


2008, judgment was entered in favor of Computer Task Group for $24,546 plus $2,539 in interest and
$651 in costs, or a total of $27,735. A restraining order was served on the Companys bank account for the amount of the
judgment. On March 10, 2009, a total of $12,839 was removed from our account in partial satisfaction of the judgment, leaving a
current total now due of $14,896. This balance payable is in the accounts payable of the Company.  Computer Task Group still
has a hold on one of the Companys bank accounts.


On December 1, 2008, AT&T, a vendor, filed a complaint in the
Supreme Court of New York, County of New York, seeking damages of $62,383 plus interest for services allegedly rendered to us.
 The complaint was answered on February 23, 2009 raising various affirmative defenses.  On April 8, 2010, the settlement
payment of $28,000 was sent, and formal dismissal is pending.


On October 9, 2009, PR Newswire Association secured a default
judgment in Hudson County New Jersey Special Civil Court against the Company for unpaid bills in the amount of $7,470.  This
balance is in the accounts payable of the Company.


On November 9, 2009, Patriot National Bank, a financial
institution, filed a complaint in the Supreme Court of New York, Count of Westchester, seeking damages of $68,993.62 as a result of
an overdraft in our bank account resulting from a non-sufficient fund check received from an investor on May 22, 2009.  An
answer was filed by the Company on December 20, 2009.  On February 22, 2010, a motion for summary judgment was filed with the
court by Patriot.  An amended motion of summary judgment was filed on March 1, 2010 by Patriot.  As of December 31, 2009,
the unpaid amount remaining on the overdraft was $62,727.  The Company is making monthly payments to reduce the overdraft
through an allocated portion of its revenue.  The entire amount in dispute is on the balance sheet of the Company under Bank
Overdrafts.


On May 7, 2008, the Company received a three-day demand for rent
due in the amount of $72,932 for the period December 1, 2007 through May 1, 2008.  On May 20, 2008, a petition for hearing was
filed in the White Plains, New York City Court, County of Westchester demanding payment of $88,497.  On May 27, 2008, the
Company signed a stipulation of settlement in the amount of $88,747, including attorneys fees, with equal payments of this
amount due on June 13, 2008 and June 30, 2008.  On June 11, 2008, the Company signed an amended stipulation of settlement in
the amount of $101,000, with a payment of $56,626 due on June 20, 2008 and a payment of $44,373 due on June 30, 2008.  On July
16, 2008, the Company received a five day notice to pay the agreed payments or face eviction.  On October 1, 2008, the Company
was evicted from its leased premises.  On December 29, 2008, a complaint was filed in the Supreme Court of New York, County of
Nassau seeking an additional $58,346 plus interest and attorneys fees for rent for the period August 1 to December 1, 2008,
which was not part of the previous stipulation and judgment.  On December 16, 2008, a restraining order was served on the
Companys bank account for the amount of the judgment original judgment of $101,000.  On March 12, 2009, the Company
signed a new stipulation of settlement settling the matter upon completion of three events.  First, the Company immediately
forfeited its security deposit of $79,800 plus interest.  Second, the Company must make an additional payment of $50,000 by
April 15, 2009.  Third, the Company must then remove all of its furniture by April 22, 2009.  An amended stipulation of
settlement was signed on April 15, 2009, changing the due date of the payment to May 15, 2009 and increasing the payment by $10,000
to $60,000.  The Company must then remove the furniture within seven days of making the payment.  If all three conditions
are met, the parties fully release each other from any further claims.  If all three of these conditions are not met, judgment
is entered for $135,356, the amount of rent due for the period July 1, 2008 to May 1, 2009, which is in addition to the previous
judgment for rent of $101,000 for the period December 1, 2007 to June 1, 2008.  At December 31, 2008, the Company accrued the
balance of its obligation under the lease in the amount of $227,787 on the balance sheet.  On May 18, 2009, the Company paid
the required $60,000 payment.  The Company subsequently removed its furniture from the premises.  On June 4, 2009, the
Company received a Satisfaction of Judgment and Release from any further liability in this matter, and it is now settled.  The
remaining accrual was reversed in the second quarter of 2009 as a result of the settlement.


On February 2, 2009, a complaint was filed in the District Court
of Clark County, Nevada against Debt Resolve, First Performance Corp. and the former owners of First Performance, Pacific USA
Holdings and Clearlight Mortgage Corp., seeking $315,917 for unpaid rent due as of January 31, 2009.  First Performance had
vacated the premises as of June 30, 2008 with the closing of its business.  Debt Resolve has been dismissed from the suit at
this time, as it was not a signatory to the lease or guarantor of the lease.  The case continued against First Performance
Corp. and its former owners.  The entire amount of the amount in dispute is accrued on the books of First Performance.
 The corporate charter of First Performance was revoked on August 1, 2009.  As a result, First Performance no longer
legally exists (see Note 3).  A cross-claim was filed by the guarantor against First Performance and Debt Resolve.  The
guarantor won summary judgment against the plaintiff on its guarantee, and as a result the guarantors cross-claims against
First Performance and Debt Resolve have been dismissed.




F-23


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


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


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


Operating leases


On August 1, 2005, the Company entered into a five year lease for
its corporate headquarters which includes annual escalations in rent.  In accordance with Accounting Standards Codification
subtopic 840-20, Leases-Operating Leases (ASC 840-20) 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.  On October 1, 2008, the
Company was evicted from its office for non-payment of rent.  An amended stipulation of settlement has been signed to resolve
the balance of the lease.  At December 31, 2008, the Company accrued the balance of its obligation under the lease in the
amount of $227,787 on the balance sheet.  On May 18, 2009, the Company paid a required $60,000 payment.  On June 4, 2009,
the Company received a Satisfaction of Judgment and Release from any further liability in this matter, and it is now settled.
 The remaining accrual was reversed in the second quarter of 2009 reflecting the settlement.  (See Lawsuits from Landlords
above.)


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

The Companys First Performance subsidiary also leased an office in Las Vegas, Nevada under a non-cancelable operating lease that expires July 31, 2014 and calls for annual escalations in rent of $19,225.  On June 30, 2008, First Performance was closed, and the premises were abandoned.  A complaint has been filed against First Performance in Clark County, Nevada court.  On August 1, 2009, the corporate charter of First Performance was revoked (see Note 3).  As a result, First Performance no longer legally exists.  (See Lawsuits from Landlords above.)

Rent expense for the year ended December 31, 2009 and 2008 was approximately ($231,392) and $1,600,886, respectively.  The credit in 2009 was due to the Company settling its rental obligation on its corporate headquarters and reversing the accrued obligation recorded in 2008.  (See Operating leases above).  The large expense in 2008 was the result of First Performance accruing the remaining balance of $1,350,931 on its lease obligation.

NOTE 16  EMPLOYMENT AGREEMENTS

James D. Burchetta


The Company had entered into an employment agreement on January
13, 2003 with James D. Burchetta under which he would devote substantially all of his business and professional time to us and our
business development.  The employment agreement with Mr. Burchetta was effective until January 13, 2013.  The agreement
provided Mr.




F-24


Burchetta with an initial annual base salary of $240,000 and contained provisions for minimum annual increases based on
changes in an applicable cost-of-living index.  The employment agreement with Mr. Burchetta contained provisions
under which his annual salary may increase to $600,000 if we achieved specified operating milestones and also provided for
additional compensation based on the value of a transaction that results in a change of control, as that term is defined in the
agreement.  In the event of a change of control, Mr. Burchetta would be entitled to receive 25% of the sum of $250,000 plus
2.5% of the transaction value, as that term is defined in the agreement, between $5,000,000 and $15,000,000 plus 1% of the
transaction value above $15,000,000.


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

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

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

As of December 31, 2009, the Company owes Mr. Burchetta an aggregate of $40,000 under the consulting agreement.

David M. Rainey


On May 1, 2007, David M. Rainey joined our company as Chief
Financial Officer and Treasurer.  Mr. Rainey also became Secretary of the Company in November 2007, President of the Company in
January 2008 and Interim Chief Executive Officer on July 15, 2009.  Mr. Rainey stepped down as Interim CEO on April 12, 2010.
 Mr. Rainey has a one year contract that renews automatically unless 90 days notice of intention not to renew is given by the
Company.  Mr. Raineys base salary is $200,000, subject to annual increases at the discretion of the board of directors.
 Mr. Rainey also received a grant of 75,000 options to purchase the common stock of the Company, one third of which vest on the
first, second and third anniversaries of the start of employment with the Company.  Mr.



F-25


Rainey is also eligible for a bonus of
up to 50% of salary based on performance objectives set by the Chairman and the Board of Directors.  Mr. Raineys contract
provides for 12 months of severance for any termination without cause with full benefits.  Upon a change in control, Mr. Rainey
receives two years severance and bonus with benefits and immediate vesting of all stock options then outstanding.  As of
December 31, 2009, the Company owes $158,333 in salary under the agreement.


Kenneth H. Montgomery

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 had 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 was $225,000 annually, with a bonus of up to 75% of salary based on performance of objectives set by the Chairman and the Board of Directors.  Mr. Montgomery also received 50,000 shares of restricted stock and 350,000 options to purchase the common stock of the Company at an exercise price of $0.80, the closing price on his date of approval by the Board.  Mr. Montgomerys employment ceased on July 1, 2009.  On August 27, 2009, $262,500 in accrued salary under the agreement was converted to stock.

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

NOTE 17 - RELATED PARTY TRANSACTIONS

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

During the year ended December 31, 2008, an entity owned by a former Director performed consulting services for the Company in the amount of $25,984.  Such amount is reflected in Accounts Payable and Accrued Liabilities as of December 31, 2009.

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

Certain Company directors and a former officer personally guarantee the Companys notes payable and its bank loan (Note 9).

NOTE 18 - FAIR VALUE MEASUREMENT

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




F-26


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

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

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

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

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

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

The following table sets forth the Companys financial instruments as of December 31, 2009 which was recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy.  As required by ASC 825-10, these are classified based on the lowest level of input that is significant to the fair value measurement:


Quoted Prices in Active Markets for
Identical Instruments Level 1
     
     Significant Other Observable Inputs
Level 2
     
     Significant Unobservable Inputs Level 3Liabilities:Derivative
liability
     
     
     
     $
     
     $
     
     $(7,518,056)
 
At December 31, 2009, the carrying amounts of the notes payable approximate fair value because all of the notes have been classified to current maturity.

NOTE 19  INCOME TAXES


The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (ASC
740-10) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statement or tax returns.  Under this method, deferred tax liabilities and
assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.  Temporary differences between taxable income
reported for financial reporting purposes and income tax purposes are insignificant.



F-27


At December 31, 2009, the Company has available for federal income tax purposes a net operating loss carry-forward of approximately $68,400,000, expiring in the year 2028, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company; it is more likely than not that the benefits will not be realized.  Due to possible significant changes in the Company's ownership, the future use of its existing net operating losses may be limited.  All or portion of the remaining valuation allowance may be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits.

At December 31, 2009, the significant components of the deferred tax assets (liabilities) are summarized below:


Net operating
loss carry forwards expiring in 2028
     
     
     
     $
     29,777,000Tax
Asset
     
     
     
     
     20,543,000Less
valuation allowance
     
     
     
     
     (20,543,000
     )Balance
     
     
     
     $
     
 
The $29,777,000 based on the 2006 tax return and an estimate for 2007-2009 as summarized below:


Net operating
loss carry forwards 2007 and prior
     
     
     
     $
     20,291,000Net operating
loss carry forwards 2008 (estimate)
     
     
     
     
     4,756,000Net operating
loss carry forwards 2009 (estimate)
     
     
     
     
     4,730,000Balance
     
     
     
     $
     29,777,000
 
The primary components of the differences between the book losses to date of $64.8 million and the tax NOL of $29.8 million are timing differences which primarily include stock compensation and other equity-related non-cash charges, capitalized financing, deferred debt discount and derivative liability costs and certain accruals.

NOTE 20 - RESTATEMENT:

The accompanying consolidated Statement of Operations and
Statement of Cash Flows for the year ended December 31, 2008 have been restated to correct the accounting treatment of Company
common stock issuances in the three months ended June 30, 2008, consisting of the recording of (i) wrongly recording of 150,000
common stock to Able as expenses , (ii) the recording of a 50,000 share issuance for fundraising costs that was originally recorded
at lower value, (iii) the recording of a 400,000 share issuance on April 1, 2008 for fundraising costs that was originally recorded
using a valuation date of May 29, 2008, (iv) recording of beneficial conversion feature to additional paid in capital instead of
derivative liability, (v) recording of change in fair value of warrants and debt on market date as a gain (loss) on derivative
liability instead of under general and administrative expense and (vi) proper amortization of beneficial conversion features over
the period of the note.

The effect of the adjustment is a decrease in net loss of $353,468 for the year ended December 31, 2008.  There was no effect on cash flows from operations, investing or financing for either period.


The following tables summarize the effects of these adjustments
on the Companys consolidated statement of operations and consolidated statement of cash flows for the year ended December 31,
2008.



F-28


Condensed Consolidated Statement of Operations
For the Year Ended December 31, 2008
As Previously Reported
     
     Adjustment
     
     Reference
     
     As RestatedRevenue
     
     
     
     $
     165,969
     
     
     $
     
     
     
     
     
     
     
     $
     165,969Payroll and
related expenses
     
     
     
     
     3,030,506
     
     
     
     
     
     
     
     
     
     
     
     3,030,506General and
administrative expenses
     
     
     
     
     3,983,771
     
     
     
     (57,900
     )
     
     
     (a)(d)
     
     
     
     4,041,671Depreciation
and amortization expense
     
     
     
     
     57,610
     
     
     
     
     
     
     
     
     
     
     
     57,610Total
expenses
     
     
     
     
     7,071,887
     
     
     
     (57,900
     )
     
     
     
     
     
     
     6,963,818Loss from
operations
     
     
     
     
     (6,905,918
     )
     
     
     (57,900
     )
     
     
     
     
     
     
     (6,963,818
     )Other
(expense) income:Interest
income
     
     
     
     
     190
     
     
     
     
     
     
     
     
     
     
     
     190Interest
expense
     
     
     
     
     (161,772
     )
     
     
     
     
     
     
     
     
     
     
     (161,772
     )Interest
expense  related parties
     
     
     
     
     (137,625
     )
     
     
     
     
     
     
     
     
     
     
     (137,625
     )Amortization
of deferred debt discount
     
     
     
     
     (918,721
     )
     
     
     (9,562
     )
     
     
     (c)
     
     
     
     (928,283
     )Gain (loss)
on derivative liability
     
     
     
     
     430,418
     
     
     
     420,930
     
     
     
     (b)
     
     
     
     851,348Other
expense
     
     
     
     
     (18,742
     )
     
     
     
     
     
     
     
     
     
     
     (18,742
     )Total other
expense
     
     
     
     
     (806,252
     )
     
     
     411,368
     
     
     
     
     
     
     
     (394,884
     )Loss from
continuing operations
     
     
     
     
     (7,712,170
     )
     
     
     353,468
     
     
     
     
     
     
     
     (7,358,702
     )Loss from
discontinued operations
     
     
     
     
     (2,747,002
     )
     
     
     
     
     
     
     
     
     
     
     (2,747,002
     )Net
loss
     
     
     
     $
     (10,459,172
     )
     
     $
     353,468
     
     
     
     
     
     
     $
     (10,105,704
     )Net loss per
common share: basic and dilutedContinuing
operations
     
     
     
     $
     (0.81
     )
     
     $
     0.04
     
     
     
     
     
     
     $
     (0.77
     )Discontinued
operations
     
     
     
     $
     (0.29
     )
     
     $
     
     
     
     
     
     
     
     $
     (0.29
     )Total
     
     
     
     $
     (1.10
     )
     
     $
     0.04
     
     
     
     
     
     
     $
     (1.06
     )Basic and
diluted weighted average number of common shares outstanding
     
     
     
     
     9,549,435
     
     
     
     
     
     
     
     
     
     
     
     9,549,435
 
F-29


Condensed Consolidated Statement of Cash Flows
For the Year Ended December 31, 2008

As Previously Reported
     
     Adjustment
     
     Reference
     
     As RestatedCash flows
from operating activities:Net
loss
     
     
     
     $
     (7,712,170
     )
     
     $
     353,468
     
     
     
     a, b, c,d
     
     
     $
     (7,358,702
     )Adjustments
to reconcile net loss to net cash used in operating activities:Non cash
stock based compensation
     
     
     
     
     4,851,799
     
     
     
     57,900
     
     
     
     a,d
     
     
     
     4,909,699Issuance of
common stock for funding and servicesConvertible
note issued for services
     
     
     
     
     51,000
     
     
     
     
     
     
     
     
     
     
     
     51,000Amortization
of deferred debt discount
     
     
     
     
     463,722
     
     
     
     9,564
     
     
     
     c
     
     
     
     473,286Gain on
derivative liability
     
     
     
     
     (430,418
     )
     
     
     (420,930
     )
     
     
     b
     
     
     
     (851,348
     )Depreciation
and amortization
     
     
     
     
     57,610
     
     
     
     
     
     
     
     
     
     
     
     57,610Loss on
disposal of fixed assets
     
     
     
     
     15,576
     
     
     
     
     
     
     
     
     
     
     
     15,576(Increase)
decrease in:Accounts
receivable
     
     
     
     
     7,625
     
     
     
     
     
     
     
     
     
     
     
     7,625Prepaid
expenses and other current assets
     
     
     
     
     25,650
     
     
     
     
     
     
     
     
     
     
     
     25,650Accounts
payable and accrued expenses
     
     
     
     
     1,834,561
     
     
     
     2
     
     
     
     
     
     
     
     1,834,559Net cash used
in continuing operating activities
     
     
     
     
     (835,045
     )
     
     
     
     
     
     
     
     
     
     
     (835,045
     )Cash flows
from investing activities: Investment in subsidiaries
     
     
     
     
     (835,951
     )
     
     
     
     
     
     
     
     
     
     
     (835,951
     )Net cash used
in continuing investing activities
     
     
     
     
     (835,951
     )
     
     
     
     
     
     
     
     
     
     
     (835,951
     )Cash flows
from financing activities:Proceeds from
long term loans
     
     
     
     
     698,000
     
     
     
     
     
     
     
     
     
     
     
     698,000Proceeds from
issuance of short term notes
     
     
     
     
     497,000
     
     
     
     
     
     
     
     
     
     
     
     497,000Proceeds from
convertible debenture
     
     
     
     
     300,000
     
     
     
     
     
     
     
     
     
     
     
     300,000Proceeds from
of line of credit
     
     
     
     
     309,623
     
     
     
     
     
     
     
     
     
     
     
     309,623Repayment of
short term notes
     
     
     
     
     (110,000
     )
     
     
     
     
     
     
     
     
     
     
     (110,000
     )Repayment of
line of credit
     
     
     
     
     (16,000
     )
     
     
     
     
     
     
     
     
     
     
     (16,000
     )Proceeds from
issuance of common stock
     
     
     
     
     25,000
     
     
     
     
     
     
     
     
     
     
     
     25,000Proceeds from
exercise of warrants
     
     
     
     
     375
     
     
     
     
     
     
     
     
     
     
     
     375Stock placed
in escrow
     
     
     
     
     (450
     )
     
     
     
     
     
     
     
     
     
     
     (450
     )Net cash
provided by continuing financing activities
     
     
     
     
     1,703,548
     
     
     
     
     
     
     
     
     
     
     
     1,703,548
 
F-30


Condensed Consolidated Statement of Cash Flows (Continued)
For the Year Ended December 31, 2008
As Previously Reported
     
     Adjustment
     
     Reference
     
     As RestatedCash flows
from discontinued operations:Net cash used
in operating activities
     
     
     
     
     (734,896
     )
     
     
     1
     
     
     
     
     
     
     
     (734,895
     )Net cash
provided by investing activities
     
     
     
     
     835,895
     
     
     
     
     
     
     
     
     
     
     
     835,895Net cash used
in financing activities
     
     
     
     
     (101,000
     )
     
     
     
     
     
     
     
     
     
     
     (101,000
     )Net cash used
in discontinued operations
     
     
     
     
     (1
     )
     
     
     1
     
     
     
     
     
     
     
     Net increase
in cash and cash equivalents
     
     
     
     
     32,551
     
     
     
     
     
     
     
     
     
     
     
     32,551Cash and cash
equivalents at beginning of period
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     Cash and cash
equivalents at end of period  continuing operations
     
     
     
     $
     32,551
     
     
     $
     
     
     
     
     
     
     
     $
     32,551
 
F-31


(a)The issuance of 150,000 shares to an investor was shown as $60,000 in expenses instead of beneficial conversion feature.(b)To record the $420,930 as gain (loss) on derivative liability resulting from the embedded conversion option associated with a convertible debenture issued on September 30, 2008 and from the Companys outstanding options and warrants. The embedded conversion option related to the convertible debenture is accounted for under EITF issue No. 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock. We have determined that the embedded conversion option is a derivative liability and causes the Companys outstanding warrants and options to become derivative liabilities.(c)To correctly amortize the debt discount, i.e., a difference of $9,524 was under amortized earlier.(d)$117,900 of the change in value of derivative liability was previously shown under general and administrative expenses.
F-32


Consolidated Balance Sheet
For the Year Ended December 31, 2008

Assets
     
     
     
     As Previously Reported
     Adjustment
     
     Reference
     
     As RestatedCurrent
assets:Cash
     
     
     
     $
     32,551
     $
     
     
     
     $
     32,551Accounts
receivable
     
     
     
     
     11,582
     
     
     
     
     
     11,582Prepaid
expenses and other current assets
     
     
     
     
     77,220
     
     
     
     
     
     77,220Current
assets of discontinued operations
     
     
     
     
     5,582
     
     
     
     
     
     5,582Total current
assets
     
     
     
     
     126,935
     
     
     
     
     
     126,935Fixed assets,
net
     
     
     
     
     84,271
     
     
     
     
     
     84,271Deposits and
other assets
     
     
     
     
     94,855
     
     
     
     
     
     94,855Total
assets
     
     
     
     $
     306,061
     
     
     
     
$
     306,061Liabilities and Shareholders DeficiencyCurrent
liabilities:Accounts
payable and accrued liabilities
     
     
     
     $
     3,525,849
     $
     
     
     
$
     3,525,849Convertible
debentures (net of deferred debt discount of $159,562 at December 31, 2008)
     
     
     
     
     191,438
     
     (3,188)
     
     a
     
     188,250Short term
notes
     
     
     
     
     487,000
     
     
     
     
     
     487,000Current
maturities of long term debt (net of deferred debt discount of $69,556 at December 31, 2008)
     
     
     
     
     753,444
     
     
     
     
     
     753,444Lines of
credit  related parties
     
     
     
     
     1,203,623
     
     
     
     
     
     1,203,623Derivative
liability
     
     
     
     
     331,268
     
     
     
     
     
     331,268Current
liabilities of discontinued operations
     
     
     
     
     2,330,912
     
     
     
     
     
     2,330,912Total current
liabilities
     
     
     
     
     8,823,534
     
     (3,188)
     
     
     
     8,820,346
 
F-33


Consolidated Balance Sheet (Continued)
For the Year Ended December 31, 2008


Commitments
and contingenciesStockholders deficiency:Preferred
stock, 10,000,000 shares authorized, $0.001 par value, none issued and outstanding at December 31, 2008
     
     
     
     
     
     
     
     
     
     
     Common stock,
100,000,000 shares authorized, $0.001 par value, 10,511,865 issued and 10,061,865 outstanding at December 31, 2008
     
     
     
     
     10,512
     
     
     
     
     
     10,512Additional
paid-in capital
     
     
     
     
     47,207,568
     
     (398,250)
     
     b
     
     46,809,318Shares to be
issued
     
     
     
     
     
     
     47,970
     
     c
     
     47,970Shares held
under escrow (450,000 shares)
     
     
     
     
     (450
     )
     
     
     
     
     (450)Accumulated
deficit
     
     
     
     
     (55,735,103
     )
     353,468
     
     b
     
     (55,381,635)Total
stockholders deficiency
     
     
     
     
     (8,517,473
     )
     3,188
     
     
     
     (8,514,285)Total
liabilities and stockholders deficiency
     
     
     
     $
     306,061
     $
     
     
     
$
     306,061
 
(a)
Correction of deferred debt discount.

(b)
Correction of earlier debt discount of $338,250 shown as credited to Additional paid-in capital instead of Derivative liability.

(c)
Correction of issuance of 150,000 shares to investor for $60,000 shown as expenses and credited to Additional paid-in capital, now rectified and shown as beneficial conversion feature.  These shares are shown as shares to be issued.



NOTE 21  DEFINED CONTRIBUTION PLAN
The Company has a defined contribution (401k) plan for its employees.  Under the plan, employees are eligible for a Company match of 100% of the first 3% of pre-tax salary contributed to the plan and a 50% match on the next 3% of their contribution.  Due to the cash flow limitations of the Company, the match was suspended for 2009 and will only be re-instated when business conditions improve and reinstatement is warranted.



NOTE 22  SUBSEQUENT EVENTS
Subsequent to December 31, 2009, the Company has secured additional financing from eight parties in the aggregate amount of $452,500 net of undeposited funds.

Subsequent to December 31, 2009, the Company issued 224,997 shares of common stock for the cashless exercise of an investor warrant.

Subsequent to December 31, 2009, the Company issued 3,078,994 shares of common stock for the conversion of notes and accrued interest.

Subsequent to December 31, 2009, the Company issued 300,000 shares of common stock to a consultant for services rendered.

On April 8, 2010, James G. Brakke was appointed to the positions of Co-Chairman and Chief Executive Officer of the Company.

Subsequent events have been evaluated through April 14, 2010, the date that the financial statements were issued.







F-34