Annual Compensation									Long Term Compensation
Name and								Other annual												All other
principal								compensation												compensation
position		Year			Salary ($)			($)*			Awards						Payouts			($)
											Restricted			Securities			LTIP
											stock			underlying			payouts
											award(s)			options/SAR			($)
											($)			(#)
Steven E. Humphries,			2007		$	115,000		$	20,000		$	84,400			-0-		$	-0-		$	-0-
Chief Executive Officer,			2006		$	-0-		$	-0-		$	-0-			666,667		$	-0-		$	-0-
Treasurer and Director
David L. Wange, Chief			2007		$	47,588		$	10,500		$	-0-			-0-		$	-0-		$	-0-
Financial Officer and			2006		$	-0-		$	-0-		$	-0-			-0-		$	-0-		$	-0-
Secretary
David T. Scaturro, Vice			2007		$	45,000		$	1,500		$	-0-			-0-		$	-0-		$	-0-
President Marketing and			2006		$	-0-			-0-			-0-			666,667		$	-0-		$	-0-
Sales
Rajneesh K. Sharma,			2007		$	126,550		$	1,500		$	-0-			-0-		$	-0-		$	-0-
Chief Information Officer			2006		$	50,726			-0-			-0-			666,667		$	-0-		$	-0-

 

* Consists of cash bonuses.

 

-11-

---

 

Equity Compensation Plan Information

 

 

-16-

---

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

3.1	Articles of Incorporation, as amended (1)
3.2	Bylaws (1)
4.1	Form of Securities Purchase Agreement, Callable Secured Convertible Note, Security Agreement, Intellectual Property Security Agreement, Subsidiary Guaranty, Registration Rights Agreement, and Common Stock Purchase Warrant by and among or, issued by the Registrant to, the Investors (2)
23.1	Consent of Paritz & Company, P.A. dated April 15, 2008 (1)
31.1	Certification of Periodic Report - Steven E. Humphries (1)
31.2	Certification of Periodic Report - David L. Wange (1)
32.1	Certifications Pursuant to 18 U.S.C. Section 1350 - Steven E. Humphries (1)
32.2	Certifications Pursuant to 18 U.S.C. Section 1350 - David L. Wange (1)

_____________

 

(1)	Filed herewith.
(2)	Incorporated by reference to the Registrant’s Form 10-QSB filed with the Securities and Exchange Commission on November 22, 2004.

 

-17-

---

 

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.

 

April 14, 2008
	DealerAdvance, Inc.
	By:	/s/Steven E. Humphries
		Steven E. Humphries, Chief Executive
		Officer, President and Director

 

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 dates indicated.

 

April 14, 2008
	By:	/s/ Steven E. Humphries
		Stephen E. Humphries, Chief Executive Officer, President and Director
April 14, 2008
	By:	/s/ David L. Wange
		David L. Wange, Chief Financial Officer, Treasurer and Director (Principal Accounting and Financial Officer)

 

-18-

---

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

 

 

Board of Directors

Dealer Advance, Inc. and subsidiary

 

We have audited the accompanying consolidated balance sheets of Dealer Advance Inc. and Subsidiary as of December 31, 2007 and the related consolidated statements of operations, changes in stockholders’deficit and cash flows for the years ended December 31, 2007 and 2006. These consolidated 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 conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 that our audit provides a reasonable basis for our opinion.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown on the accompanying financial statements, the Company has incurred a net loss of $4,722,436 and has negative cash flows from operations of $2,050,747 and has a working capital deficit of $12,216,247 as of December 31, 2007 and a stockholders’ deficit of $16,950,266 These circumstances, among others, raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dealer Advance Inc. and Subsidiaries as of December 31, 2007, and the results of its operations and its cash flows for the years ended December 31, 2007 and 2006 in conformity with accounting principles generally accepted in the United States.

 

 

/s/ Paritz & Company, P.A.

 

Hackensack, New Jersey

April 11, 2008

 

F-1

---

DEALERADVANCE, INC. AND SUBSIDIARY

formerly Stronghold Technologies, Inc.

 

CONSOLIDATED BALANCE SHEET

 

December 31, 2007
ASSETS
Current Assets
Cash		$	5,809
Accounts receivable			2,700
Notes receivable, related party			40,801
Prepaid expenses			44,544
Total Current Assets			93,854
Property and equipment, net			3,947
		$	97,801
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable		$	464,089
Interest payable, stockholders			1,548,299
Notes payable, stockholders, current portion			875,000
Callable secured convertible notes, current portion			4,446,845
Liquidated damages payable			3,674,740
Accrued expenses and other current liabilities			1,301,128
Total current liabilities			12,310,101
Long-term liabilities
Notes payable, stockholders, convertible debt, net of imputed interest of $585,222			216,765
Callable secured convertible notes, less current portion			4,521,201
Total long term liabilities			4,737,966
Commitments and contingencies
Stockholders' deficit
Preferred stock, Series A, $.0001 par value; authorized 5,000,000 shares, 2,002,750 issued and outstanding (aggregate liquidation preference of $3,004,125) and preferred stock, Series B, $.0001 par value; 2,444,444 shares authorized, issued and outstanding (aggregate liquidation preference $2,200,000) and preferred stock, Series D, $.01 par value; authorized 10,000 shares authorized, issued and outstanding (aggregate liquidation preference $1,989,200)			545
Common stock, $.0001 par value, authorized 8,500,000,000 shares, 237,669,715 issued and outstanding			23,767
Additional paid-in capital			10,910,196
Accumulated deficit			(27,884,774	)
Total stockholders' deficit			(16,950,266	)
		$	97,801

 

F-2

---

 

DEALERADVANCE, INC. AND SUBSIDIARY

formerly Stronghold Technologies, Inc.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Year End			Year End
		December 31, 2007			December 31, 2006
Sales		$	232,079		$	479,474
Cost of sales			34,555			71,333
Gross profit			197,524			408,141
Selling, general and administrative			2,226,751			2,517,383
Research and development			65,930			—
Loss from operations			(2,095,157	)		(2,109,242	)
Interest expense			944,128			911,721
Net loss from Operations			(3,039,285	)		(3,020,963	)
Settlement of Litigation			—			334,294
Liquidated damages			1,683,151			1,088,370
Net loss applicable to common stockholders		$	(4,722,436	)	$	(4,443,627	)
Basic and diluted loss per common share		$	(0.07	)	$	(0.12	)
Weighted average number of common shares outstanding			72,237,234			37,452,451

 

F-3

---

 

DEALERADVANCE, INC. AND SUBSIDIARY

formerly Stronghold Technologies, Inc.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Year End			Year End
		December 31, 2007			December 31, 2006
Cash flows from operating activities
Net loss			($4,722,436	)		($4,443,627	)
Adjustments to reconcile net loss to net cash used in operating activities:
Allowance for returns and doubtful accounts			—			(60,000	)
Depreciation and amortization			11,506			533,971
Accrued interest to notes payable, stockholders			948,675			772,955
Stock issued for services			23,000
Liquidated damages payable			1,683,151			1,088,368
Changes in operating assets and liabilities:
Accounts receivable			3,581			97,156
Inventories			—			18,095
Prepaid expenses			24,565			(42,071	)
Accounts payable			82,837			(126,807	)
Accrued expenses and other current liabilities			(20,061	)		402,843
Deferred Revenue			(94,056	)		(264,676	)
Other Assets			8,491			(16,711	)
Net cash used in operating activities			(2,050,747	)		(2,040,504	)
Proceeds from notes payable, convertible debt			1,950,000			2,080,000
Net cash provided by financing activities			1,950,000			2,080,000
Net increase / (decrease) in cash			(100,747	)		39,496
Cash, beginning of period			106,556			67,060
Cash, end of period		$	5,809		$	106,556

 

F-4

---

 

DEALERADVANCE, INC. AND SUBSIDIARY

formerly Stronghold Technologies, Inc.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

 

Years Ended December 31, 2007 and 2006
		Preferred Stock						Preferred Stock						Preferred Stock												Additional						Total
		Series A						Series B						Series D						Common Stock						Paid-in			Accumulated			Stockholders'
		Shares			Amount			Shares			Amount			Shares			Amount			Shares			Amount			Capital			Deficit			Deficit
Balances, December 31, 2005			2,002,750			201			2,444,444			244			—			—			17,460,222			1,746			8,004,389			(18,718,711	)	$	(10,712,131	)
Warrants issued with debt			—			—			—			—			—			—			—			—			85,884			—		$	85,884
Conversion of convertible notes
to common stock			—			—			—			—			—			—			4,698,600			470			880			—		$	1,350
Conversion of stockholder notes
to preferred stock			—			—			—			—			10,000			100			—			—			1,989,083			—		$	1,989,183
Stock issued for compensation			—			—			—			—			—			—			21,428,571			2,143			147,857			—		$	150,000
Imputed interest from noninterest
bearing notes			—			—			—			—			—			—			—			—			625,182			—		$	625,182
Net loss			—			—			—			—			—			—			—			—			—			(4,443,627	)		(4,443,627	)
Balances, December 31, 2006			2,002,750			201			2,444,444			244			10,000			100			43,587,393			4,359			10,853,275			(23,162,338	)	$	(12,304,159	)
Warrants issued with debt			—			—			—			—			—			—			—			—			—			—		$	—
Conversion of convertible
notes to common stock			—			—			—			—			—			—			178,644,930			17,864			30,543			—		$	48,407
Conversion of stockholder
loan to common stock			—			—			—			—			—			—			1,437,392			144			4,779			—		$	4,922
Stock Issued for interest due			—			—			—			—			—			—			9,000,000			900			14,600			—		$	15,500
Stock Issued for compensation			—			—			—			—			—			—			5,000,000			500			7,000			—		$	7,500
Net loss			—			—			—			—			—			—			—			—			—			(4,722,436	)	$	(4,722,436	)
Balances, December 31, 2007			2,002,750		$	201			2,444,444		$	244			10,000			100			237,669,715		$	23,767		$	10,910,196			(27,884,774	)		(16,950,266	)

 

F-5

---

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.

NATURE OF OPERATIONS

The Company designs, develops, markets, sells and installs a web-based application software and database system that manages the auto dealer-customer relationship. In January 2007, the Company announced the launch of Web DA™, the new web-based version of its DealerAdvance™ software for conventional desktop or laptop computers. The Company began the development of a version of Web DA™ for small hand-held ultra-mobile personal computers (“UMPC’s”) in March 2007. This product will enable any car salesperson to complete the entire sales process from virtually anywhere.

 

2.

GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Since the beginning of the fiscal year, the Company has incurred a net loss of $4,722,436 and has negative cash flows from operations of $2,050,747 and has a working capital deficit of $12,216,247 and a stockholders’ deficit of $16,950,266 as of December 31, 2007. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. During 2007, management of the Company will rely on raising additional capital to fund its future operations. If the Company is unable to generate sufficient revenues or raise sufficient additional capital, there could be a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Property and Equipment

Property and equipment are recorded at cost. Depreciation for equipment, software and furniture is provided for financial reporting and tax purposes using straight-line balance methods.

F-6

---

Maintenance, repairs and minor renewals are charged to expenses when incurred. Replacements and major renewals are capitalized.

Accounts Receivable

The Company carries its accounts receivable at cost. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. Accounts are written off as uncollectible at the discretion of management.

Software Development Costs

Capitalized software development costs, including significant product enhancements, incurred subsequent to establishing technological feasibility in the process of software development and production, are capitalized according to Statement of Financial Accounting Standards (SFAS) No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” Costs incurred prior to the establishment of technological feasibility are charged to research and development expenses. The capitalized software is amortized over a three year period using the straight-line method. As of December 31, 2006, all capitalized software development costs were fully amortized. All subsequent research and development costs during fiscal year 2007 have been immaterial and were expensed as incurred.

 

Fair Value of Financial Instruments

Financial instruments held by the Company include cash, accounts receivable, notes payable and accounts payable. The book value of cash, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The fair values of the notes payable approximate book values primarily because the contractual interest rates approximate prevailing market rates.

 

Impairment of Long-Lived Assets

The Company periodically assesses the recoverability of the carrying amounts of long-lived assets, including intangible assets. A loss is recognized when expected undiscounted future cash flows are less than the carrying amount of the asset. The impairment loss is the difference by which the carrying amount of the asset exceeds its fair value.

 

Retirement Plan

The Company has a retirement plan under Section 401(k) of the Internal Revenue Code (“the Plan”), which covers all eligible employees. The Plan provides for voluntary deduction of the employee’s salary, subject to Internal Revenue Code limitations. The Company can make a matching contribution to the Plan, which is at the discretion of the Company and is determined annually. There were no matching contributions for the years ended December 31, 2007.

 

Income Taxes

The Company complies with SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income

F-7

---

taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Stock-Based Compensation

 In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires all share-based payments to employees and directors, including grants of stock options, to be recognized in the financial statements based on their fair values. We adopted SFAS No. 123(R) on January 1, 2006, under the modified prospective method, in which the requirements of SFAS No. 123(R) are to be applied to new awards and to previously granted awards that are not fully vested on the effective date. The modified prospective method does not require restatement of previous years’ financial statements.

The fair value of the Company’s stock options was estimated using the Black-Scholes option pricing model. Prior to the adoption of SFAS No. 123(R), we accounted for share-based compensation using the intrinsic value-based method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The fair value of issued stock options is estimated on the date of grant using the Black-Scholes option-pricing model including the following assumptions: expected volatility of approximately 50.6%, expected dividend yield rate of 0%, expected life of 10 years, and a risk-free interest rate of 4.49% for the years ended December 31, 2007 and 2007.

No stock options were exercised in 2007.

The President and Chief Executive Officer was awarded 5,000,000 million shares in November 2007.

Revenue Recognition

Since revenue for the WebDA software is based upon either initial set-up fees and monthly subscription fees, revenue is recognized on the accrual basis when earned. In the case of customers that have pre-paid balances from the predecessor company, revenue is recognized as deferred revenue earned, and is recognized monthly as accrued revenue.

All sales agreements with clients do not require significant production, modification, or customization of software, additionally all the functionality of the product is made available upon delivery, therefore the Company recognizes revenue in accordance with Paragraph 8 of 97-2 when:

1.

Persuasive evidence of an arrangement exists as evidenced by a signed contract;

2.

Delivery has occurred, please note that DealerAdvance, Inc. does not recognize revenue prior to delivery;

 

F-8

---

 

3.

The price of either the DA or WebDaA systems are fixed and determinable as evidenced by the contract; and,

4.

Collection of revenues is highly probable.

Deferred Revenue

Deferred revenue was recorded by the predecessor company as a liability when the Company received a three year maintenance contact in an a one-time advance payment. The Company then recognized the revenue from the maintenance portion of the contract on a pro rata basis over the term of the contract.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Loss Per Common Share

Loss per common share is based on the weighted average number of common shares outstanding. The Company complies with SFAS No. 128, “Earnings Per Share,” which requires dual presentation of basic and diluted earnings (loss) per share. Basic earnings (loss) per share exclude dilutions and are computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or

Other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Since the effect of the outstanding options and warrants are anti-dilutive, they have been excluded from the Company’s computation of loss per common share.

Liquidated Damages Payable

Pursuant to the callable secured convertible notes and as a result certain registration rights granted to investors, the Company incurred damages due to its failure to have sufficient issuable shares of common stock registered in accordance with the terms of the agreement. Liquidated damages associated with the Convertible Notes increased from $1,088,370 in the year ended December 31, 2006 to $1,683,151 in the year ended December 31, 2007. The $594,781 increase is due to an approximate $2.4 million increase in Convertible Notes issued and subject to liquidated damages during 2007.

 

Deferred income taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (ASFAS 109") which requires that deferred tax assets and liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective

 

F-9

---

 

tax bases. In addition, SFAS 109 requires recognition of future tax benefits, such as carry forwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax asset will not be realized.

 

At December 31, 2007, the Company had net operating loss carry forward of approximately $21,000,000 which expire between 2009 and 2025.

 

The Company has a deferred tax asset of approximately $7,150,000 resulting from available net operating loss carry forward for which a 100% valuation allowance has been applied.

New Accounting Pronouncements

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” (“FIN 48”), which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. An uncertain tax position will be recognized if it is determined that it is more likely than not to be sustained upon examination. The tax position is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

 

The cumulative effect of applying the provisions of this interpretation is to be reported as a separate adjustment to the opening balance of retained earnings in the year of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The objective of SFAS 157 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material effect on the Company's future reported financial position or results of operations.

 

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115”. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the

 

F-10

---

provision of SFAS No. 157, “Fair Value Measurements”. The adoption of this statement did not have a material effect on the Company's financial statements.

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”. This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS No. 160 affects those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.

 

4.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consist of the following at December 31, 2007:

 

Accrued expenses and other current liabilities:		DealerAdvance, Inc.			Stronghold Technologies, Inc.			Consolidated
Sales Taxes Payable		$	0		$	106,524		$	106,524
Accrued Paid-Time-Off			13,880			0			13,880
Payroll Taxes Payable			12,571			425,037			437,608
Accrued Employee Compensation			0			46,135			46,135
Accrued Commissions			5,191			109,786			114,977
Accrued Officer's Compensation			19,380			0			19,380
Other Accrued Expense			124,127			375,106			499,233
Accrued Interest			0			63,391			63,391
TOTAL		$	175,149		$	1,125,979		$	1,301,128

Payroll Tax Payment Agreement with IRS

On April 30, 2004, the Company’s predecessor, Stronghold Technologies, Inc., (the “Subsidiary”) a New Jersey corporation and a wholly owned subsidiary of Dealer Advance, Inc., entered into an installment agreement with the United States Internal Revenue Service (“IRS”) to pay overdue payroll taxes and penalties of totaling $1,233,101 under the terms of which the Company will pay a minimum of $35,000 each month, commencing June 28, 2004, until it has paid the withholding taxes due in full, to

 

F-11

---

be completed in thirty-six month period by April 30, 2007. If the Subsidiary is unable to fulfill this agreement, the IRS would revert the amount owed to the original unpaid balance and could take possession of the Subsidiary’s assets. The Subsidiary defaulted on the agreement in September, 2006 with an unpaid balance of $388,931.

DealerAdvance, Inc. owes approximately $12,000 in overdue payroll taxes, which were paid in full April 3, 2008.

 

5.

NOTES PAYABLE, STOCKHOLDERS

 

At December 31, 2007, notes payable, stockholders consists of the following:

 

Notes payable, stockholders:
Notes payable bearing interest at 8%		$	875,000
Non-interest bearing convertible notes payable, net of interest imputed at 15% per annum of $593,331			216,765
			1,091,765
Less: current portion			(875,000	)
Long-term portion		$	216,765

 

The 8% interest bearing notes due in May 2007 are currently in default.

 

The convertible notes mature on August 13, 2016 and are convertible at the option of the stockholder at the market price of the company’s common stock on the day of the conversion.

 

Callable Secured Convertible Notes
Callable secured convertible notes bear interest at a rate ranging from 8% to 12% (weighted average 10.93%) and are due at various dates through December 15, 2009. The notes are secured by the company's assets.		$	8,968,046
Less: Current position			4,446,845
Long-term portion		$	4,521,201

The notes are convertible into our common stock, at the investors’ option, at a conversion price, equal to the lower of (i) $0.05 or (ii) 25% of the average of the three lowest intraday trading prices for our common stock during the 20 trading days before, but not including, the conversion date.

On December 15, 2006 the Company entered into an agreement with a group of investors for the sale of $900,000 of callable secured convertible notes and 5,071,833 common stock purchase warrants in 2007. As of December 31, 2007, the Company has sold a total of $1,793,232 of additional notes, issuing an additional 9,594,981 common stock purchase warrants, for a total of $2,693,232 and issued 14,666,814 warrants.

F-12

---

On August 14, 2006, the former company CEO, Mr. Christopher Carey, entered into a Settlement Agreement with the Company pursuant to which Mr. Carey waived of certain rights. In consideration of this waiver, the Company had agreed to pay Mr. Carey $8,000 a month over a period of 15 months, issue Mr. Carey a convertible note in the amount of $661,369 (the "Carey Note") and issue Mr. Carey 5,117 shares of Series D Convertible Preferred Stock with an aggregate stated value of $1,017,899. The Carey Note matures on August 13, 2016, bears no interest and is convertible at the option of Mr. Carey at the market price of the Company's common stock. The shares of Series D Preferred Stock are convertible by dividing the stated value by the closing bid price on the day immediately prior to conversion.

 

6.

STOCK OPTION PLANS

The Company adopted an incentive stock option plan (“Plan”) in 2006 providing for incentive stock options (“ISOs”) for specific employees in 2007. The Company has reserved 3,666,668 shares of common stock for issuance upon the exercise of stock options granted under the Plan. The exercise price of an ISO will not be less than 100% of the fair market value of the Company’s common stock at the date of the grant. The exercise price of an ISO granted to an employee owning greater than 10% of the Company’s common stock will not be less than 110% of the fair market value of the Company’s common stock at the date of the grant. The Plans further provide that the maximum period in which stock options may be exercised will be determined by the board of directors, except that they may not be exercisable after ten years from the date of grant. All of the stock option plans vest when granted, and may be exercised not earlier than one year from the grant date, but will expire 90 days following the termination of an employee with the Company if the options were not exercised. As of the end of fiscal year 2007, no options were exercised. Additionally, 833,333 ISOs expired due to termination, and 666,667 ISOs, for Karen Jackson, were converted to stock options under agreement as a consultant upon her termination with the company with the same terms, except that the exercise price was changed to the market price per share of the company stock as of the close of trading on June 1, 2007, or $.00137 per share.

The remaining ISOs were exercised in January 2008 for issuance of 2,000,001shares of the company stock. The only ISOs remaining unexercised are 166,667 options.

 

7.

BANKRUPTCY OF SUBSIDIARY

 

Until 2006, the Company had a wholly owned subsidiary, Stronghold Technologies, Inc., a New Jersey Corporation, that developed hand held wireless technology for the automotive dealer market. The subsidiary’s business was unsuccessful, it ceased operations and filed for bankruptcy protection under Chapter 7 of the United States Bankruptcy Code. The assets of the subsidiary were liquidated during 2007. The bankruptcy case was closed on January 29, 2008.

 

F-13

---

 

8.

RELATED PARTY TRANSACTIONS

 

Transactions with Officers and Directors of DealerAdvance, Inc.

 

The Company and/or the Company’s director and Chief Executive Officer may be subject to fines, sanctions and/or penalties of an indeterminable nature as a result of violations of the Sarbanes Oxley Act of 2002 in connection with loans made to the Chief Executive Officer and director.

 

The balance of these loans outstanding as of December 31, 2007 are $34,014 related to the Chief Executive Officer and director, and $6,787 related to the company controlled by the Chief Executive Officer and director.

9.

SUBSEQUENT EVENTS

In connection with the callable secured convertible notes (see note 7 above), in February 2008 and in April 2008 the company sold an additional $508,000 of notes and issued 3,286,667 warrants to purchase common stock.

Since the beginning of 2008, we have issued 152,251,400shares of common stock to four investors upon the conversion of convertible notes at an aggregate conversion price of $48,047.

The case related to the wholly owned subsidiary, Stronghold Technologies, Inc., that filed for bankruptcy protection under Chapter 7 of the United States Bankruptcy Code in 2006, was closed as of January 29, 2008. The assets of the subsidiary have been segregated and were liquidated, and its debts discharged, including all court judgments and an arbitration award.

In the first quarter of 2008 the Company also issued 25,000,000 of common shares for legal services and 50,000,000 shares for business development consulting services to two consultants under equity compensation plans. An additional 5,971,541 shares of common stock was issued to two investors upon the conversion of Class D Convertible Preferred Stock that they held, and 75,000,000 common shares for services to our Chief Executive Officer.