**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-QSB**




(Mark
      One)




x
            QUARTERLY REPORT UNDER SECTION 13 OR
              15(d) OF
              THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
              SEPTEMBER 30, 2006o
            TRANSITION REPORT PURSUANT TO SECTION
              13 OR
              15(d) OF THE SECURITIES EXCHANGE ACT OF
              1934




For
      the
      Transition Period from ________ to ___________




**Commission
      File No.:  0-29525**




**DEBT
                  RESOLVE,
                  INC.**(Name
                  of small business issuer in its
                  charter)
  **Delaware**
              
              **33-0889197**(State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              (I.R.S.
                  Employer
                Identification
                  No.)**707
                  Westchester Avenue, Suite
                  L7****White
                  Plains, New York**
              
              **10604**(Address
                  of principal executive offices)
              
              (Zip
                  Code)




**(914)
      949-5500**


(Issuer’s
      telephone number)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.  Yes xNo o




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




As
      of
      November 14, 2006, 5,470,390 shares of the issuer’s Common Stock were issued and
      outstanding.




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










**DEBT
        RESOLVE, INC.**


(A
      Development Stage Company)




**TABLE
      OF CONTENTS**


Page**PART
                    I. Financial Information**Item
                    1. Condensed Financial Statements (Unaudited)Condensed
                    Balance Sheet at September 30, 2006
                3Condensed
                    Statements of Operations for the ThreeMonths and Nine Months ended September 30, 2005 and 2006
                  andCumulative
                    from Inception (April 21, 1997)to
                    September 30, 2006
                4Condensed
                    Statements of Cash Flows for the Nine Months ended September
                    30, 2005 and
                    2006 and Cumulative
                  fromInception
                    (April 21, 1997) to September 30, 2006
                5Notes
                    to Condensed Financial Statements
                6Item
                    2. Management’s Discussion and Analysis or Plan of
                    Operation
                18Item
                    3. Controls and Procedures
                24**PART
                    II. Other Information**Item
                    1. Legal Proceedings
                27Item
                    2. Unregistered Sales of Equity Securities and Use of
                    Proceeds
                27Item
                    3. Defaults Upon Senior Securities
                27Item
                    4. Submission of Matters to a Vote of Security Holders
                27Item
                    5. Other Information
                27Item
                    6. Exhibits and Reports on Form 8-K
                27Signatures
                28Certifications
                29
  
 2




**PART
      I: FINANCIAL INFORMATION**




**Item
      1. Condensed Financial Statements (Unaudited)**







**DEBT
      RESOLVE, INC.**


**(A
      Development Stage Company)**




**Condensed
      Balance Sheet**


**September
      30, 2006**


**(Unaudited)**





ASSETSCurrent
                  assets:Cash
              
              $
              15,944Accounts
                  receivable, net
              
              
              32,422Prepaid
                  expenses
              
              
              27,297Total
                  current assets
              
              
              75,663Fixed
                  assets, net
              
              
              116,663Other
                  assets:Deferred
                  offering costs
              
              
              271,584Deferred
                  financing costs
              
              
              132,502Deposits
                  and other assets
              
              
              93,605Total
                  other assets
              
              
              497,691Total
                  assets
              
              $
              690,017LIABILITIES
                  AND STOCKHOLDERS’ DEFICIENCYCurrent
                  liabilities:Accounts
                  payable
              
              $
              871,692Accrued
                  expenses
              
              
              779,219Convertible
                  notes, net of deferred debt discount of $612,850
              
              
              4,763,912Notes
                  payable, net of deferred debt discount of $101,308
              
              
              698,692Notes
                  payable
              
              
              300,000Total
                  liabilities
              
              
              7,413,515Commitments
                  and contingenciesStockholders’
                  deficiency:Preferred
                  stock, 10,000,000 shares authorized, $.001 par
                  value, none issued and outstanding
              
              
              —Common
                  stock, 100,000,000 shares authorized, $.001 par value, 2,970,390
                  shares
                  issued and outstanding
              
              
              2,970Additional
                  paid-in capital
              
              
              14,306,457Deficit
                  accumulated during the development stage
              
              
              (21,032,925
              )Total
                  stockholders’ deficiency
              
              
              (6,723,498
              )Total
                  liabilities and stockholders’ deficiency
              
              $
              690,017




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


3


**DEBT
      RESOLVE, INC.**


**(A
      Development Stage Company)**




**Condensed
      Statements of Operations**


**(Unaudited)**




Three
                Monthsended
                September 30,
            
            
            Nine
                Monthsended
                September 30,
            
            Cumulative
                from
                Inception(April 21, 1997)to September 30,2005
            
            
            2006
            
            
            2005
            
            
            2006
            
            
            2006Revenues
            
            $
            7,306
            
            $
            30,617
            
            $
            9,833
            
            $
            84,908
            
            $
            111,293Costs
                and expenses:Payroll
                and related expenses (A)
            
            
            405,658
            
            
            1,921,778
            
            
            942,785
            
            
            3,123,518
            
            
            7,417,267General
                and administrative expenses (B)
            
            
            415,491
            
            
            1,644,887
            
            
            1,331,951
            
            
            2,762,100
            
            
            6,224,132Waived
                royalty fees - related parties
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            600,000Research
                and development expenses
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            499,323Depreciation
                and amortization expenses
            
            
            10,855
            
            
            12,020
            
            
            25,794
            
            
            39,487
            
            
            130,459Total
                expenses
            
            
            832,004
            
            
            3,578,685
            
            
            2,300,530
            
            
            5,925,105
            
            
            14,871,181Loss
                from operations
            
            
            (824,698
            )
            
            (3,548,068
            )
            
            (2,290,697
            )
            
            (5,840,197
            )
            
            (14,759,888
            )Other
                income (expense):Terminated
                offering costs
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (736,037
            )Net
                interest expense
            
            
            (35,643
            )
            
            (443,269
            )
            
            (64,321
            )
            
            (662,332
            )
            
            (766,286
            )Amortization
                of deferred debt discount
            
            
            (432,732
            )
            
            (2,119,810
            )
            
            (550,273
            )
            
            (3,017,944
            )
            
            (4,096,897
            )Amortization
                of deferred financing costs
            
            
            (64,354
            )
            
            (393,232
            )
            
            (65,348
            )
            
            (532,603
            )
            
            (680,817
            )Other
                income
            
            
            1,000
            
            
            1,500
            
            
            1,000
            
            
            4,500
            
            
            7,000Total
                other expense
            
            
            (531,729
            )
            
            (2,954,811
            )
            
            (678,942
            )
            
            (4,208,379
            )
            
            (6,273,037
            )Net
                loss
            
            $
            (1,356,427
            )
            $
            (6,502,879
            )
            $
            (2,969,639
            )
            $
            (10,048,576
            )
            $
            (21,032,925
            )Per
                share data:Basic
                and diluted net loss per common share (See Note 2)
            
            $
            (0.46
            )
            $
            (1.57
            )
            $
            (1.00
            )
            $
            (2.95
            )Basic
                and diluted weighted average number of common shares
                outstanding
              (See
                Note 2)
            
            
            2,970,390
            
            
            4,130,978
            
            
            2,965,310
            
            
            3,403,906Pro
                forma per share data:Basic
                and diluted net loss per common share (See Note 2)
            
            
            
            
            $
            (0.85
            )
            
            
            
            $
            (1.45
            )Basic
                and diluted weighted average number of common shares outstanding
                (C) (See
                Note 2)
            
            
            
            
            
            7,617,583
            
            
            
            
            
            6,890,511








(A)
            Includes stock based compensation to employees and
              directors totaling $1,334,366 in the three and nine months ended September
              30, 2006, and since inception. (B)
            Includes
                stock based compensation to non-employees totaling $70,360 and $568,532
                in
                the three and nine months ended September 30, 2005, respectively,
                and
                $1,267,768 and $1,380,580 in the three and nine months ended September
                30,
                2006, respectively, and $3,354,178 since inception.


(C)
            Pro
                forma weighted average shares outstanding include 986,605 shares
                of common
                stock being issued to convertible note holders following the completion
                of
                the Company’s public offering and 2,500,000 shares of common stock issued
                in the public offering (See Note 11
                c).





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




4


**DEBT
      RESOLVE, INC.**


**(A
      Development Stage Company)**




**Condensed
      Statements of Cash Flows**


**(Unaudited)**




Nine
                Months
              ended
                September 30,
            
            Cumulative
                from Inception (April 21, 1997) to September
                30,2005
            
            2006
            
            2006**Cash
                flows from operating activities:**Net
                loss
            
            $
            (2,969,639
            )
            $
            (10,048,576
            )
            $
            (21,032,925
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Non
                cash stock based compensation
            
            
            568,532
            
            
            2,714,946
            
            
            4,688,544Waived
                and imputed compensation, royalty and consulting fees
            
            
            112,500
            
            
            —
            
            
            1,983,809Amortization
                of deferred debt discount
            
            
            550,273
            
            
            3,017,944
            
            
            4,096,897Amortization
                of deferred financing costs
            
            
            65,348
            
            
            532,603
            
            
            680,818Terminated
                offering costs
            
            
            —
            
            
            —
            
            
            736,037Depreciation
                and amortization
            
            
            25,794
            
            
            39,487
            
            
            130,458Loss
                on disposal of fixed assets
            
            
            14,954
            
            
            —
            
            
            14,954Changes
                in operating assets & liabilitiesAccounts
                receivable
            
            
            (5,997
            )
            
            (25,456
            )
            
            (32,422
            )Prepaid
                expenses
            
            
            (50,894
            )
            
            59,708
            
            
            16,243Deposits
                and other assets
            
            
            (74,206
            )
            
            —
            
            
            (93,605
            )Accounts
                payable
            
            
            263,192
            
            
            300,237
            
            
            920,890Accrued
                expenses
            
            
            43,414
            
            
            737,796
            
            
            941,032Net
                cash used in operating activities
            
            
            (1,456,729
            )
            
            (2,671,311
            )
            
            (6,949,270
            )**Cash
                flows from investing activities:**Purchases
                of fixed assets
            
            
            (137,291
            )
            
            (4,170
            )
            
            (262,076
            )**Cash
                flows from financing activities:**Proceeds
                from issuance of notes and convertible notes
            
            
            2,695,000
            
            
            2,504,750
            
            
            5,199,750Proceeds
                from issuance of common stock
            
            
            224,900
            
            
            —
            
            
            2,432,574Proceeds
                from loans-other
            
            
            —
            
            
            525,000
            
            
            525,000Proceeds
                from issuance of short term notes
            
            
            —
            
            
            300,000
            
            
            300,000Proceeds
                from stockholders’ loans
            
            
            —
            
            
            —
            
            
            510,000Repayment
                of stockholders’ loans
            
            
            (10,000
            )
            
            (25,000
            )
            
            (85,000
            )Stock
                offering costs
            
            
            (517,063
            )
            
            (271,584
            )
            
            (1,095,367
            )Reimbursement
                of stock offering costs
            
            
            25,000
            
            
            —
            
            
            25,000Deferred
                financing costs
            
            
            (219,350
            )
            
            (365,317
            )
            
            (584,667
            )Net
                cash provided by financing activities
            
            
            2,198,487
            
            
            2,667,849
            
            
            7,227,290Net
                increase (decrease) in cash
            
            
            604,467
            
            
            (7,632
            )
            
            15,944Cash
                at beginning of period
            
            
            34,747
            
            
            23,576
            
            
            —Cash
                at end of period
            
            $
            639,214
            
            $
            15,944
            
            $
            15,944Non
                cash investing and financing activities:Conversion
                of stockholder’s loan to common stock
            
            $
            —
            
            $
            —
            
            $
            100,000Conversion
                of liabilities to convertible notes
            
            $
            —
            
            $
            977,012
            
            $
            977,012Issuance
                of options for accrued compensation
            
            $
            84,000
            
            $
            —
            
            $
            84,000Issuance
                of warrants for deferred financing fees
            
            $
            109,414
            
            $
            119,238
            
            $
            237,625Capital
                contribution from waived royalty fees
            
            $
            —
            
            
            
            
            $
            $600,000Capital
                contribution from waived and imputed compensation
            
            $
            112,500
            
            $
            —
            
            $
            1,383,809







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


5


**DEBT
      RESOLVE, INC.**


**(A
      Development Stage Company)**




**Notes
      to Condensed Financial Statements**


**September
      30, 2006**


**(Unaudited)**









NOTE
      1.  ORGANIZATION
      AND DEVELOPMENT STAGE ACTIVITIES:




Description
      of business





Debt
      Resolve, Inc. (“Debt Resolve” or the “Company”), is a Delaware corporation
      formed on April 21, 1997. The Company provides banks, lenders, credit card
      issuers, third party collection agencies and purchasers of charged-off debt
      an
      Internet-based online system (“the DebtResolve system”) for the collection of
      past due consumer debt. The Company offers its service as an Application Service
      Provider (“ASP”) model, enabling clients to introduce this collection option
      with no modifications to their existing collections computer systems. Its
      products capitalize on using the Internet as a tool for communication,
      resolution, settlement and payment of delinquent debts. The DebtResolve system
      features, at its core, a patented online bidding system.




Organization





Until
      February 24, 2003, the Company, formerly named Lombardia Acquisition Corp.,
      was
      inactive and had no significant assets, liabilities or operations. On February
      24, 2003, James D. Burchetta, Charles S. Brofman, and Michael S. Harris
      (collectively, the “Principal Stockholders”) purchased 2,250,000 newly-issued
      shares of the Company’s common stock, representing 84.6% of the then outstanding
      shares, pursuant to a Stock Purchase Agreement effective January 13, 2003
      between the Company and each of the Principal Stockholders. The Company received
      an aggregate cash payment of $22,500 in consideration for the sale of such
      shares to the Principal Stockholders. The Board of Directors was then
      reconstituted. On May 7, 2003, following approvals by the Board of Directors
      and
      holders of a majority of the Company’s common stock, the Company’s Certificate
      of Incorporation was amended to change the Company’s corporate name to Debt
      Resolve, Inc. and increase the number of the Company’s authorized shares of
      common stock from 20,000,000 to 50,000,000 shares. On May 8, 2006, the Board
      of
      Directors and holders of a majority of the Company’s common stock approved
      amending the Company’s Certificate of Incorporation to increase the number of
      the Company’s authorized shares of common stock from 50,000,000 to 100,000,000
      shares (see Note 5). On August 25, 2006, following approvals by the Board of
      Directors and holders of a majority of the Company’s outstanding shares of
      common stock, the Company’s Certificate of Incorporation was amended to effect a
      reverse one-for-ten reverse split, which reduced the number of outstanding
      shares from 29,703,900 to 2,970,390 (See Note 5). On November 6, 2006, the
      Company completed an initial public offering (“IPO”) consisting of 2,500,000
      shares of common stock (see Note 11c).




Development
      stage activities





In
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 7,
      Accounting and Reporting by Development Stage Enterprises, the Company is
      considered to be in the development stage since it is devoting substantially
      all
      of its efforts to establishing a new business and its planned principal
      operations have not produced any significant revenues. Since February 24, 2003,
      the Company has devoted substantially all of its efforts to planning and
      budgeting, research and development activities, and raising capital. In January
      2004, the Company substantially completed the development of an online system
      for the settlement of credit card and other consumer debt and began marketing
      its product to banks and other creditors. In February 2004, the Company
      implemented its online system, on a test basis, with a collection agency. In
      July 2004, the Company implemented its online system with a second client and
      began generating revenue based on a percentage of the amount of debt collected
      by this client. As of September 30, 2006, the Company had fourteen clients
      under
      contract. Ten clients were operational, however the Company has not earned,
      nor
      did it expect to generate, significant revenues from these clients during the
      initial start-up periods.




6


NOTE
      2.  MANAGEMENT’S
      PLANS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:





Management’s
      liquidity plans





As
      of
      September 30, 2006, the Company had a working capital deficit in the amount
      of
      $7,337,852, and cash and cash equivalents totaling $15,944. The Company incurred
      a net loss of $6,502,879 and $10,048,576 for the three and nine months ended
      September 30, 2006, respectively, and $21,032,925 since inception. Cash flow
      used in operating and investing activities was $2,671,311 and $4,170,
      respectively, for the nine months ended September 30, 2006. Cash flow provided
      by financing activities was $2,667,849.





On
      November 6, 2006, the Company completed an IPO. The Company sold 2,500,000
      shares of common stock at $5.00 per share pursuant to the IPO. After deducting
      underwriting discounts and expenses and offering-related expenses, the IPO
      resulted in net proceeds to the Company of approximately $10,680,000. After
      the
      repayment of approximately $3,650,000 in interest and a portion of the remaining
      principal of the Company’s outstanding notes and convertible notes, the
      Company’s net proceeds were approximately $7,100,000. After the Company repaid
      approximately $660,000 in principal repayment and $74,000 in associated finance
      charges related to short term borrowings, cash would have been approximately
      $6,300,000. Based upon projected operating expenses, the Company believes it
      has
      sufficient working capital to finance its operations for the next twelve months.
      (See Note 11).





Reverse
      stock split





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




Interim
      periods




The
      accompanying unaudited condensed financial statements have been prepared in
      accordance with accounting principles generally accepted in the United States
      of
      America for interim financial information. Accordingly, they do not include
      all
      of the information required by accounting principles generally accepted in
      the
      United States of America for complete financial statements. In the opinion
      of
      management, all adjustments (consisting of normal recurring adjustments)
      considered necessary for a fair presentation have been included. Operating
      results for the three and nine months ended September 30, 2006 are not
      necessarily indicative of the results that may be expected for the year ending
      December 31, 2006 or for any other interim period. These financial statements
      should be read in conjunction with the Company’s annual report on Form 10-KSB
      for the year ended December 31, 2005 filed with the Securities and Exchange
      Commission on April 14, 2006.




Prior
      period adjustments/restatement




Effective
      August 16, 2005, the Company corrected two errors, (1) relating to stock based
      compensation expense for options granted to consultants and advisory board
      members for which the Company did not record a compensation charge during fiscal
      2003 and 2004 and the nine months ended September 30, 2005, and (2) relating
      to
      reimbursement for deferred offering costs which had been improperly credited
      against general and administrative expenses rather than additional paid in
      capital.  In addition, the Company made a number of reclassifications
      within the various statements. The Company subsequently corrected the
      methodology it used to calculate the value of non-employee options to include
      a
      volatility figure derived from an index of comparable companies in accordance
      with SFAS No. 123. Amounts reflected herein for the three and nine months ended
      September 30, 2005 represent the restated quarterly financial information
      included in the Form 10-KSB which was filed with the Securities and Exchange
      Commission on April 14, 2006.




Reclassifications




Certain
      amounts in the financial statements for the three and nine months ended
      September 30, 2005 have been reclassified for comparative purposes to conform
      to
      the presentation in the financial statements for the three and nine months
      ended
      September 30, 2006.




7


Use
      of
      estimates




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




Revenue
      recognition




The
      Company earned revenue during 2006 and since inception from several collection
      agencies and lenders that implemented the Company’s online system. The Company’s
      preliminary contracts provide for revenue based on a percentage of the amount
      of
      debt collected from accounts submitted on the DebtResolve system. Although
      other
      revenue models have been proposed, most revenue earned to date has been
      determined using this method, and such revenue is recognized when the settlement
      amount of debt is collected by the client. For the early adopters of the
      Company’s product, the Company waived set-up fees and other transactional fees
      that the Company anticipates charging in the future. While the percent of debt
      collected will continue to be a revenue recognition method going forward, other
      payment models are also being offered to clients and may possibly become the
      Company’s preferred revenue model. Dependent upon the structure of future
      contracts, revenue may be derived from a combination of set up fees or monthly
      licensing fees with transaction fees upon debt settlement.




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




In
      addition, in accordance with Emerging Issues Task Force (“EITF”) Issue 00-21,
      revenue is recognized and identified according to the deliverable provided.
      Set-up fees, fixed or percentage success fees, monthly maintenance fees, etc.
      are identified separately.




Recently
      signed contracts and contracts under negotiation call for multiple deliverables,
      and each component of revenue will be considered to have been earned when Debt
      Resolve has met the associated deliverable, as is required by SAB 104 Topic
      13(A). For new contracts being implemented which include a licensing fee per
      account, following the guidance of SAB 104 regarding services being rendered
      continuously over time, Debt Resolve 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.




Stock-based
      compensation




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




8


Beginning
      on January 1, 2006, the Company accounts for stock options issued under
      stock-based compensation plans under the recognition and measurement principles
      of Statement of Financial Accounting Standards No. 123 - Revised. The Company
      has adopted the modified prospective transition method and therefore, has not
      restated prior periods’ results. Under this transition method, there was no
      impact to the condensed financial statements for the three and nine months
      ended
      September 30, 2006 on net loss or basic and diluted net loss per share for
      options granted in previous periods, as all options previously granted to
      employees vested prior to adoption. During the nine months ended September
      30,
      2006, the Company issued options to purchase 770,000 shares of common stock
      to
      employees and two consultants. Total stock-based compensation expense related
      to
      this grant for the nine months ended September 30, 2006 amounted to $2,261,744.
      The fair value of each option granted to employees and non-employees is
      estimated as of the grant date using the Black-Scholes option pricing model.
      The
      estimated fair value of the options granted is recognized as an expense over
      the
      requisite service period of the award, which is generally the option vesting
      period. As of September 30, 2006, total unrecognized compensation cost amounted
      to $633,456.




The
      following table illustrates the pro forma effects on net loss and net loss
      per
      common share for the three and nine months ended September 30, 2005 and the
      period from inception (April 21, 1997) to September 30, 2006, as if the Company
      had implemented FASB Statement No. 123 and recorded an expense for stock-based
      compensation issued to employees prior to January 1, 2006.









Three
                months ended September 30, 2005
            
            Nine
                months ended September 30, 2005
            
            Cumulative
                frominception
              (April
                21, 1997)
              to
                September 30, 2006Net
                loss - as reported
            
            $
            (1,356,427
            )
            $
            (2,969,639
            )
            $
            (21,032,925
            )Deduct:
                Stock based employee compensation expense determined under
              minimum-valuebased
                methods for all awards
            
            
            —
            
            
            1,842
            
            
            589,220Net
                loss - pro forma
            
            $
            (1,356,427
            )
            $
            (2,971,481
            )
            $
            (21,622,145
            )Basic
                and diluted net loss per common share - as reported
            
            $
            (0.46
            )
            $
            (1.00
            )Basic
                and diluted net loss per common share - pro forma
            
            $
            (0.46
            )
            $
            (1.00
            )Basic
                and diluted weighted average number of common shares
                outstanding
            
            
            2,970,390
            
            
            2,965,310








Net
      loss
      per share of common stock





Basic
      net
      loss per share excludes dilution for potentially dilutive securities and is
      computed by dividing net loss attributable to common stockholders by the
      weighted average number of common shares outstanding during the period. Diluted
      net loss per share reflects the potential dilution that could occur if
      securities or other instruments to issue common stock were exercised or
      converted into common stock. Potentially dilutive securities realizable from
      the
      exercise of options, warrants and convertible debentures of 1,580,000, 1,947,138
      and 1,309,327, respectively at September 30, 2006 and 853,333, 450,659 and
      634,118, respectively at September 30, 2005, are excluded from the computation
      of diluted net loss per share as their inclusion would be antidilutive.
      Potentially dilutive securities noted above exclude options being issued under
      the amended and restated licensing agreement (see Note 3).




The
      Company’s issued and outstanding common shares as of September 30, 2006 do not
      include the underlying shares exercisable with respect to the issuance of
      1,160,598 warrants as of September 30, 2006, exercisable at $0.01 per share
      (see
      Note 4). In accordance with SFAS 128 (“Earnings Per Share”) the Company has
      given effect to the issuance of these warrants in computing basic net loss
      per
      share. Subsequent to September 30, 2006, in connection with the completion
      of
      the Company’s IPO, one investor and one of the Company’s underwriters
      relinquished 36,923 warrants exercisable at $0.01 per share (See Note
      11c).




9


NOTE
      3.  LETTER
      OF
      INTENT AND REGISTRATION STATEMENT ON FORM SB-2:




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





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





On
      August
      31, 2006, in connection with this IPO, as a result of a decrease in stockholder
      value resulting from a lower per share offering price at the time of a public
      offering of the Company’s common stock, the Company issued warrants to purchase
      304,366 shares of common stock to investors who had participated in its private
      placements of common stock at $10.00 per share in 2003, 2004 and 2005, to
      purchase common stock at a price of $1.00 per share in order to restore some
      portion of their pre-offering value (“make-whole warrants”). In addition, the
      Company amended 346,500 stock options to purchase common stock to certain
      employees and consultants of the Company in a quantity sufficient to both
      restore some portion of their pre-offering value of their common stock and
      options and to provide ongoing incentive compensation. These “amended options”
are exercisable at a price of $5.00 per share. Both the make-whole warrants
      and
      the amended stock options are exercisable for from three to five years. (See
      Note 8).





Also
      in
      connection with this IPO, as well as in connection with a licensing agreement,
      the Company is in the process of issuing to the Co-Chairmen of the Company
      options sufficient to bring their ownership to a combined 29.2% of the total
      number of outstanding shares of common stock on a fully diluted basis as of
      the
      closing of the IPO, assuming the exercise of such options. (See Note
      11c).




NOTE
      4.  NOTES
      PAYABLE AND CONVERTIBLE NOTES:




April
      2005 Private Placement





In
      April
      2005, in a private financing that involved the issuance of 7% senior convertible
      promissory notes due one year from the date of issuance, the Company received
      proceeds of $800,000, initially convertible into 188,235 shares of common stock
      (the “April 2005 Private Placement”). The conversion percentage on the April
      2005 Private Placement is 100% upon the completion of the IPO. The notes from
      the April 2005 Private Placement matured on April 21, 2006. However all existing
      April 2005 note holders agreed to extend their notes to October 31, 2006, and
      subsequent to September 30, 2006 further agreed to extend their notes to
      December 31, 2006.





The
      April
      2005 Private Placement contains a provision that in the event the Company raises
      $4 million in equity financing, or debt financing convertible to equity, the
      holders of these notes will receive shares based on 115% of the balance of
      these
      notes. As a result of this dilutive calculation, an aggregate of 216,472 shares
      of the Company’s common stock are issuable upon the conversion, at a conversion
      price of $4.25 per share, discounted from an assumed IPO price of $5.00 per
      share, of 115% of the principal balance of the April 2005 Private Placement.
      Subsequent to the completion of the IPO, these notes were converted to 216,472
      shares of common stock. (See Note 11c).





10


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





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





June/September
      2005 Private Placement





In
      June
      2005, the Company received proceeds from an additional private financing of
      7%
      senior convertible promissory notes in the aggregate principal amount of
      $1,250,000, due one year from the date of issuance, initially convertible at
      $4.25 per share into 294,118 shares of common stock. In September 2005, the
      Company received additional proceeds from the private financing of 7% senior
      convertible promissory notes in the aggregate principal amount of $645,000,
      due
      one year from the date of issuance, initially convertible at $4.25 per share
      into 151,765 shares of common stock (the “June/September Private Placement”).
      The automatic conversion percentage on the June/September 2005 Private Placement
      is 50% upon the completion of the IPO. In compliance with the requirements
      of
      the June/September 2005 private financing documents, a majority of these note
      holders approved the June 2006 Private Placement (see below) and have agreed
      to
      extend their notes to October 31, 2006, and subsequent to September 30, 2006
      further agreed to extend their notes to December 31, 2006.





As
      a
      result of the conversion and exercise price of the notes and warrants issued
      in
      the June 2006 Private Placement (see below), and in connection with certain
      anti-dilution provisions in the note agreement, the exercise price of the
      underlying shares related to the June/September 2005 Private Placement, was
      reduced to $2.67 per share at an assumed IPO price of $5.00 per share.
      Accordingly, an aggregate of 387,014 shares of common stock are issuable upon
      the conversion of 50% of the principal and accrued interest to November 6,
      2006
      (the closing date of the IPO - see Note 11) in the June/September 2005 Private
      Placement. Subsequent to the completion of the IPO, 50% of the principal and
      accrued interest will be converted to 387,014 shares of common stock and
      $1,033,000 was repaid in cash. (See Note 11c).





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





In
      accordance with EITF 98-5 and EITF 00-27, the convertible notes from the April
      2005 Private Placement and June/September 2005 Private Placement are considered
      to have an embedded beneficial conversion feature because the conversion price
      is less than the fair market value at the issuance date and the contingent
      conversion price is expected to be less than the IPO price. The Company recorded
      a beneficial conversion feature and a deferred debt discount in connection
      with
      the value of the April 2005 Private Placement and June/September 2005 Private
      Placement notes and related investor warrants in the amount of $2,097,478,
      using
      the fair value method. Due to certain modifications in the conversion terms
      of
      these notes, the Company has recorded an incremental beneficial conversion
      feature in connection with the value of the April 2005 and June/September 2005
      notes in the amount of $537,475. Such amount is being amortized over the life
      of
      the respective notes. The Company recorded amortization of the beneficial
      conversion feature and debt discount in the amount of $604,881 and $1,352,182
      during the three and nine months ended September 30, 2006, respectively,
      $432,732 and $550,273, during the three and nine months ended September 30,
      2005, respectively, and $2,431,135 since inception. Per the terms of the note
      agreements, the Company shall use its best efforts to register the underlying
      common stock and warrants in conjunction with the IPO. In accordance with EITF
      00-19, “Accounting for Derivative Financial Instruments Indexed to and
      Potentially Settled in, a Company’s Own Stock,” (“EITF 00-19”) there are no
      factors that would prohibit equity classification relating to the embedded
      conversion option or the warrants.




11


June
      2006 Private Placement





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





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





On
      May
      31, 2006, the Company issued the May 2006 Private Placement Term Sheet
      Supplement with respect to the June 2006 Private Placement. The Company raised
      a
      total of $3,481,762 (the “June 2006 Private Placement”), including $977,012 of
      principal and accrued interest rolled in from existing noteholders. Of this
      total, $800,000 was invested by a lead investor, to which the Company issued
      a
      non-convertible 15% senior secured promissory note, repayable the earlier of
      October 31, 2006 or at the time of the conclusion of the Company’s IPO. The
      remainder of the notes issued in connection with this offering was 15% senior
      secured convertible promissory notes repayable the earlier of October 31, 2006
      or at the time of the Company’s conclusion
      of its IPO .
      Subsequent to September 30, 2006, the 15% non-convertible and 15% convertible
      notes were extended to December 31, 2006. Upon the completion of an IPO, an
      aggregate of 383,119 shares of the Company’s common stock would be issued upon
      the conversion, at a conversion price equal to 70% of an assumed IPO price
      of
      $5.00 per share, on 50% of the $2,681,762 principal amount of the convertible
      notes. These notes are only convertible contingent upon the closing of
      an IPO.




The
      June
      2006 Private Placement promissory notes contain a provision that in the event
      their repayment occurs after August 30, 2006, they are repayable at 107.5%
      of
      the principal amount plus accrued interest to the date of repayment.
      Accordingly, since the notes were still outstanding as of August 30, 2006,
      the
      Company recorded a charge to interest expense of approximately $260,000 during
      the three months ended September 30, 2006. S ubsequent
      to the completion of the IPO, 50% of the principal was converted to 383,119
      shares of common stock and $2,533,610 was repaid in cash, representing 57.5%
      of
      the principal amount of the notes. (See Note 11c).




In
      addition, investors were issued 1,160,598 warrants to purchase shares of the
      Company’s stock at $0.01 per share. Subsequent to September 30, 2006, in
      connection with the completion of the Company’s IPO, one investor and one of the
      Company’s underwriters relinquished 36,923 warrants exercisable at $0.01 per
      share. (See Note 11c).




The
      Company evaluated the provisions of the aforementioned notes under EITF 00-19
      and EITF 05-4, View A, “The Effect of a Liquidated Damages Clause on a
      Freestanding Financial Instrument” and accordingly classified the aforementioned
      warrants and registration rights agreement as equity. The gross proceeds of
      $3,481,762 associated with the June 2006 Private Placement were recorded net
      of
      a discount of $2,176,101, related to the fair value of the warrants. The debt
      discount of $2,176,101 will be accreted until the note matures. Accordingly,
      the
      Company recorded a charge of $1,514,929 and $1,665,762 for the three and nine
      months ended September 30, 2006, respectively. As of September 30, 2006, the
      Company did not record a beneficial conversion feature in connection with the
      June 2006 Private Placement since these notes are only convertible contingent
      upon the Company conclusion of the IPO. Upon the conclusion of the IPO on
      November 6, 2006, based on a conversion price equal to 70% of an IPO price
      of
      $5.00 per share, the Company recorded an expense for the beneficial conversion
      feature in the amount of $909,883. (See Note 11c).





The
      Registration Rights Agreement entered into in connection with the June 2006
      Private Placement requires the Company to file a registration statement by
      October 31, 2006. Subsequent to September 30, 2006, the agreement was extended
      to December 31, 2006. The underlying registration statement was declared
      effective by the SEC on November 1, 2006 (See Note 11c).





12


On
      June
      26, 2006, as additional collateral pursuant to the June 2006 Private Placement,
      the Company’s co-chairmen pledged the 1,650,000 shares of the Company’s common
      stock that they personally own or control to secure the June 2006 Private
      Placement indebtedness. The stock pledge is a secondary, non-recourse liability
      which may be called upon only following the exhaustion of all legal remedies
      against the Company for collection of the indebtedness. The June 2006 Private
      Placement indebtedness is to be repaid or converted into shares of the Company’s
      common stock upon the conclusion of the IPO, and the stock pledge is to be
      released at that time. The June 2006 Private Placement indebtedness is also
      collateralized with a first lien on all of the Company’s assets as well as those
      of any Company’s subsidiaries now existing or that may be formed. (See Note
      11).




Deferred
      Financing Costs





The
      Company incurred costs in conjunction with the April 2005 private financing,
      the
      June/September 2005 private financing and the June 2006 Private Placement.
      Total
      cash fees associated with the April 2005 and June/September 2005 private
      financings were $219,350. In addition, the placement agent was issued warrants
      to purchase 33,600 shares of common stock valued at $118,035. Maxim Group LLC
      and Capital Growth Financial (“CGF”) acted as the placement agents in the June
      2006 Private Placement. Total cash fees associated with the June 2006 Private
      Placement were $365,317. In addition, the Company recorded deferred financing
      costs of $110,617 for the value of 31,508 placement agent warrants issued in
      connection with this financing, although Maxim Group LLC subsequently
      relinquished its portion of such warrants, or 8,644 warrants. The total of
      fees
      and the value of the warrants have been recorded as deferred financing costs
      and
      are being amortized over the life of the notes. Amortization of deferred
      financing costs for the 2005 and 2006 private financings totaled $393,232 and
      $532,603 for the three and nine months ended September 30, 2006, respectively,
      $64,354 for the three months and nine months ended September 30, 2005 and
      $680,817 since inception.





Notes
      Payable





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





NOTE
      5.  AUTHORIZED
      SHARES AND REVERSE STOCK SPLIT:




On
      May 8,
      2006, the Company’s Board of Directors and holders of a majority of the
      Company’s outstanding shares
      of
      common stock approved an amendment to the Company’s certificate of incorporation
      to increase the number
      of
      the Company’s authorized shares of common stock from 50,000,000 to 100,000,000
      shares. Also on May 8,
      2006,
      the Company’s Board of Directors and holders of a majority of the Company’s
      outstanding shares of common
      stock approved a one-for-ten reverse stock split. On August 16, 2006, following
      approvals by the Board of Directors
      and holders of a majority of Company’s outstanding shares of common stock, the
      Company’s Certificate of
      Incorporation was amended to increase the number of the Company’s authorized
      shares of common stock from 50,000,000
      to 100,000,000 shares. On August 25, 2006, following approvals by the Board
      of
      Directors and holders of
      a
      majority of Company’s outstanding shares of common stock, the Company’s
      Certificate of Incorporation was amended
      to effect a reverse one-for-ten stock split, which reduced the number of
      outstanding shares from 29,703,900 to 2,970,390. All share and per share
      information herein have been retroactively restated to give effect to this
      reverse stock split.





13


NOTE
      6.  FORMATION
      OF SUBSIDIARY AND SIGNING OF PRELIMINARY, NON-BINDING FUNDING TERM
      SHEET:




On
      June
      5, 2006, the Company formed a wholly owned subsidiary, DRV Capital LLC. This
      subsidiary may potentially purchase portfolios of defaulted consumer debt and
      attempt to collect on that debt, but has not yet been capitalized. In May 2006,
      the Company signed a preliminary, non-binding term sheet with a possible
      financial partner. Preliminary terms call for the partner to provide the Company
      with up to $20 million in such financings, secured by the debt portfolios which
      are purchased with those funds. The Company has not yet finalized these
      financing arrangements. As of September 30, 2006, DRV Capital LLC does not
      have
      any assets or liabilities.




NOTE
      7.  STOCKHOLDERS’
      DEFICIENCY:




The
      Company recorded compensation expense representing the amortized amount of
      the
      fair value of options granted to advisory board members in 2003, 2004 and 2005,
      of $44,465 and $157,277 during the three and nine months ended September 30,
      2006, respectively, $70,360 and $568,532 during the three and nine months ended
      September 30, 2005, respectively, and $2,130,875 since inception.




NOTE
      8.  STOCK
      OPTIONS:




As
      of
      September 30, 2006, the Company had one stock-based employee compensation
      plan.  The 2005 Incentive Compensation Plan (the “2005 Plan”).  The
      2005 Plan was approved by the stockholders on June 14, 2005 and provides for
      the
      issuance of options and restricted stock grants to officers, directors, key
      employees and consultants


of
      the
      Company to purchase up to 900,000 shares of common stock.  The
      2005
      Plan is administered by the Compensation Committee of the Board of
      Directors.  The 2005 Plan provides that the Compensation Committee of the
      Board of Directors may establish stock-based compensation awards for officers
      and other key employees, consultants and directors as recommended by management
      over the coming time period. As of September 30, 2006, 280,000 options have
      been
      issued under this plan.





A
      summary
      of option activity within the 2005 Plan as of September 30, 2006 and changes
      during the nine months ended September 30, 2006 is presented below:





2006
              
              
              WeightedAverageExercisePrice
              
              
              WeightedAverageRemainingContractualTerm
              
              
              AggregateIntrinsicValueOutstanding
                  at January 1,
              
              
              —
              
              
              —
              
              
              —
              
              
              —Granted
              
              
              280,000
              
              $
              5.00
              
              
              4.9Years
              
              
              —Exercised
              
              
              —Forfeited
                  or Expired
              
              
              —Outstanding
                  at September 30,
              
              
              280,000
              
              $
              5.00
              
              
              4.9Years
              
              $
              0Exercisable
                  at September 30,
              
              
              115,000
              
              $
              5.00
              
              
              4.9Years
              
              $
              0





As
      of
      September 30, 2006, the Company had 165,000 unvested options within the 2005
      Plan.





A
      summary
      of option activity outside the 2005 Plan as of September 30, 2006 and changes
      during the nine months ended September 30, 2006 is presented below:




2006
              
              
              WeightedAverageExercisePrice
              
              
              WeightedAverageRemainingContractualTerm
              
              
              AggregateIntrinsicValueOutstanding
                  at January 1,
              
              
              853,333
              
              $
              7.23
              
              
              —
              
              
              —Granted
              
              
              490,000
              
              $
              5.00
              
              
              4.9
                  Years
              
              
              —Exercised
              
              
              —
              
              
              —
              
              
              —
              
              
              —Forfeited
                  or Expired
              
              
              (43,333
              )Outstanding
                  at September 30,
              
              
              1,300,000
              
              $
              5.05
              
              
              4.3
                  Years
              
              $
              183,000Exercisable
                  at September 30,
              
              
              1,275,000
              
              $
              5.05
              
              
              4.3
                  Years
              
              $
              183,000


14


As
      of
      January 1, 2006 and September 30, 2006, the Company had 25,000 unvested options,
      outside the 2005 Plan.





In
      September 2004, the Company entered into an agreement to issue options to
      purchase 10,000 shares of its common stock at $10.00 per share to a member
      of
      the Company’s advisory board. The options will have an exercise period of three
      years, and will vest at such time as the Company achieves $2,000,000 in revenues
      as a result of the consultant’s efforts. On August 31, 2006, these options were
      repriced to $5.00 per share. As of September 30, 2006, the contingency has
      not
      been achieved, and the options have not been granted.




In
      September 2005, the Company entered into an agreement to issue options to
      purchase 330,000 shares of its common stock at $5.00 per share to two employees.
      These options have an exercise period of five years, vested at the conclusion
      of
      the Company’s IPO. (See Note 11).




On
      July
      5, 2006, the Company issued options to purchase 50,000 shares of its common
      stock at $5.00 per share to the Company’s Chief Financial Officer. The options
      have an exercise period of five years, were valued at $188,000, and will be
      expensed over the vesting period. Half of these options vested upon issuance
      and
      half will vest on December 31, 2006. During the nine months ended September
      30,
      2006, the Company recorded a compensation charge in the amount of $141,000
      for
      these options.




On
      August
      7, 2006, the Company issued options to purchase 50,000 shares of its common
      stock at $5.00 per share to the Company’s Controller. The options have an
      exercise period of five years, were valued at $188,000, and will be expensed
      over the vesting period. Half of these options will vest on February 7, 2007
      and
      half will vest on the anniversary date. During the nine months ended September
      30, 2006, the Company recorded a compensation charge in the amount of $31,333
      for these options.




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




On
      August
      31, 2006 the Company issued options to purchase 360,000 shares of its common
      stock at $5.00 per share to employees of the Company. The options have an
      exercise period of five years, and were valued at $1,353,600. 245,000 of these
      options vested upon issuance, and 115,000 will vest on August 31, 2007, and
      will
      be expensed over the vesting period. Of these option grants, 230,000 options
      grants are within the Company’s Incentive Stock Option Plan, and 130,000 are
      outside of the plan. The Company recorded an expense of $957,233 during the
      nine
      months ended September 30, 2006 related to this issuance.




On
      August
      31, 2006 the Company issued options to purchase 310,000 shares of its common
      stock at $5.00 per share to two consultants of the Company. The options have
      an
      exercise period of five years, were valued at $1,165,600, and vested upon
      issuance. These options grants are outside of the Company’s stock plan. The
      Company recorded an expense of $1,132,178 during the nine months ended September
      30, 2006 related to this issuance.




During
      the nine months ended September 30, 2006, the Company recorded an expense of
      $157,277 representing the amortized amount of the fair value of options issued
      to non-employees prior to January 1, 2006.




NOTE
      9.  EMPLOYEE
      BENEFIT PLAN:




Beginning
      January 1, 2006, the Company sponsors an employee savings plan designed to
      qualify under Section 401K of the Internal Revenue Code. This plan is for all
      employees who were employed by the Company at December 31, 2005 or who have
      completed 1,000 hours of service. Company contributions are made in the form
      of
      the employee’s investment choices and vest immediately. The Company will match
      the first 3 percent of the employee contribution on a dollar for dollar basis.
      After 3%, the Company matches an additional 1⁄2% for every 1% that the employee
      contributes up to a maximum match of 4% of the employees’ salary or the maximum
      contribution allowed under Internal Revenue Code. Contributions for the three
      and nine months ended September 30, 2006 were $12,379 and $42,640
      respectively.




15


NOTE
      10.  RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS:






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






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




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




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




In
      September 2006, the staff of the SEC issued Staff Accounting Bulletin No. 108
      ("SAB 108") which provides interpretive guidance on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement. SAB 108 becomes effective in fiscal
      2007. Adoption of SAB 108 is not expected to have a material impact on the
      Company's consolidated financial position, results of operations or cash
      flows.







NOTE
      11.
      SUBSEQUENT EVENTS:




a.
      Options and warrants




16


On
      October 9, 2006, the Company issued options to purchase 20,000 shares of its
      common stock exercisable
      at $5.00 per share to a
      new
      advisory board member .
      The
      options have an exercise period of five years, were valued at $75,200, and
      will
      be expensed over the two year term of the advisory service period .




On
      November 1, 2006, the Company issued options to two employees to purchase 6,000
      shares of its common stock exercisable
      at $5.00 per share. The options have an exercise period of five years, were
      valued at approximately $22,500, and will be expensed over the vesting
      period .




On
      November 6, 2006, in connection with its IPO, the contingency regarding
      previously issued options to two employees to purchase 330,000 shares of its
      common stock exercisable
      at $5.00 per share was achieved, and the options were granted. The options
      have
      an exercise period of five years, were valued at $1,240,800, and were expensed
      at issuance.




On
      November 6, 2006, in connection with its IPO and in connection with a licensing
      agreement, the Company is in the process of issuing options to the two
      vice-chairmen to purchase 1,517,434 shares of its common stock exercisable
      at $5.00 per share. The options have an exercise period of ten years, were
      valued at $6,828,453, and were expensed at issuance.




b.
      Short-term notes payable




Subsequent
      to September 30, 2006, the Company received advances from several board members,
      officers, and their family members totaling $360,000. The borrowings carried
      an
      interest rate of 18%, had maturities of two months to one year, and were
      prepayable at any time at the option of the borrower and by agreement in the
      event of a public offering at from 110% to 115% of the amount borrowed. At
      the
      conclusion of the IPO, these notes and the Company’s other $300,000 short term
      note were repaid. The Company recorded approximately $74,000 in financing costs
      related to these borrowings.





c.
      Initial public offering





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





After
      deducting underwriting discounts and expenses and offering-related expenses,
      the
      IPO resulted in net proceeds to the Company of approximately $10,680,000. After
      the repayment of approximately $3,650,000 in interest and a portion of the
      remaining principal of the Company’s outstanding notes and convertible notes,
      the Company’s cash position will be approximately $7,100,000. The Company also
      issued to the underwriters an over-allotment option to purchase 375,000 shares
      of common stock at $4.60 per share. In connection with the IPO, an agreed-upon
      portion of the Company’s convertible notes will be automatically converted into
      986,605 shares of the Company’s common stock.





In
      connection with its IPO, the Company recorded an expense of $909,883 for the
      beneficial conversion feature of the June 2006 Private Placement, (see Note
      4),
      $846,660 for the accelerated amortization of the beneficial conversion feature
      and related deferred financing costs of its convertible notes of the April
      2005
      Private Placement and the June/September 2005 Private Placement, $130,773 in
      incremental interest payable on those financings, $1,240,800 for the recording
      of stock options issued at the close of the IPO, and $6,828,453 in expense
      related to the issuance of stock options in the process of being issued
      following the close of the IPO in connection with a licensing agreement with
      the
      Company’s co-chairmen.





17


The
      following table presents summary balance sheet information as of
      September 30, 2006 to give effect on a pro forma basis to the sale of
      2,500,000 shares of common stock on November 6, 2006 at $5.00 per share, but
      without giving effect to the 375,000 shares of common stock which may be issued
      on a subsequent date in connection with the underwriters’ over-allotment option,
      after deducting underwriting discounts and expenses and estimated
      offering-related expenses, the automatic conversion of the contractual portion
      of the Company’s outstanding convertible notes into 986,605 shares of common
      stock, the accelerated amortization of beneficial conversion feature and
      deferred offering costs related to the Company’s 2005 and 2006 debt offerings,
      and the payment of the interest and a portion of the remaining principal of
      the
      Company’s outstanding notes and convertible notes in the amount of $3,650,000
      upon completion of the Company’s IPO:







**As
                of**
              **September
                30, 2006**
            
            **As
                of**
              **September
                30, 2006****Actual**
            
            **Pro
                Forma**Total
                Current Assets
            
            $
            75,663
            
            $
            7,102,222Total
                Noncurrent Assets
            
            
            614,354
            
            
            210,268Total
                Assets
            
            $
            690,017
            
            $
            7,312,490Total
                Current Liabilities
            
            $
            7,413,515
            
            $
            1,430,824Stockholders’
                (deficiency):Common
                Stock
            
            $
            2,970
            
            $
            6,457Additional
                paid-in-capital
            
            
            14,306,457
            
            
            36,873,077Accumulated
                deficit
            
            
            (21,032,925
            )
            
            (30,997,868
            )Total
                stockholders’ (deficiency) equity
            
            
            (6,723,498
            )
            
            5,881,666Total
                liabilities and stockholders’ (deficiency) equity
            
            $
            690,017
            
            $
            7,312,490







**Item
      2. Management’s Discussion and Analysis or Plan of
      Operation**





**Overview**





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





Since
      completing initial product development in early 2004, we have marketed our
      service primarily to consumer credit card issuers, collection agencies and
      the
      buyers of defaulted debt in the United States and Europe. We intend to market
      our service to other segments served by the collections industry worldwide.
      For
      example, we believe that our system will be especially valuable for the
      collection of low balance debt, such as that held by utility companies and
      online service providers, where the cost of traditionally labor intensive
      collection efforts may exceed the value collected. We also intend to pursue
      past-due Internet-related debt, such as that held by sellers of sales and
      services online. We believe that consumers who incurred their debt over the
      Internet will be likely to respond favorably to an Internet-based collection
      solution. In addition, creditors of Internet-related debt usually have access
      to
      debtors’ e-mail addresses, facilitating the contact of debtors directly by
      e-mail. We believe that expanding to more recently past-due portfolios of such
      debt will result in higher settlement volumes, improving our clients’
profitability by increasing their collections while reducing their cost of
      collections. We do not anticipate any material incremental costs associated
      with
      developing our capabilities and marketing to these creditors, as our existing
      DebtResolve system can already handle this type of debt and we make contact
      with
      these creditors in our normal course of business.





We
      have
      prepared for our entry into the European debt collection market 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 expenses associated with servicing United Kingdom and other
      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 further
      customization. We have begun identifying and preliminarily negotiating with
      companies that have the capability to 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 determine to expand into Canada
      and other foreign countries. In other areas of the world, including Japan,
      Korea
      and Israel, we are exploring partnerships for sales distribution to expand
      our
      market presence without adding substantial overhead or other costs, but have
      not
      yet entered into any agreement or commitment with any such company.





18


Our
      revenues to date have been nominal. We have financed our activities to date
      through the proceeds from sales
      of
      our common stock in private placement financings, the issuance of our
      convertible promissory
      notes in three private financings and the sale of 2,500,000 shares of our common
      stock in our initial public offering (“ IPO”), as well as our management’s
      contributions of cash and the forgiveness of royalty and consulting fees. In
      connection with our marketing and client support goals, we expect our operating
      expenses to be approximately $1,000,000 per quarter, and to increase as we
      employ additional technicians, sales staff, accountants and client support
      representatives. We expect that salaries and other compensation expenses will
      continue to be our largest category of expense, while travel, legal and other
      sales and marketing expenses will increase as we expand our sales, marketing
      and
      support capabilities. Our web hosting expense will also grow in tandem with
      expanded usage, but will be a minor expense compared to expected revenues
      associated with that growth. Effective utilization of our system will require
      a
      change in thinking on the part of the collection industry, but we believe the
      effort will result in new collection benchmarks. We intend to provide detailed
      advice and hands-on assistance to clients to help them make the transition
      to
      our system.





Our
      current contracts provide that we will earn revenue in one of two ways: based
      on
      a percentage of the amount of debt collected from accounts submitted on our
      DebtResolve system or based on recurring license fees coupled with other
      transaction fees. Under the “percent of debt collected” method, revenue is
      recognized when the settlement amount of debt is collected by our client. The
      material risk that we face by relying on the “percent of debt collected” model
      is that if the clients do not successfully settle and collect debt through
      our
      system, we may not generate any revenue from the clients or recoup the real
      and
      opportunity costs of implementing our system for those clients. Under the
“licensing method” method, revenue is recognized monthly when such revenue is
      due and payable by our client. The material risk that we face by relying on
      the
“licensing” model is that we may have received more revenue if we had used the
“percentage of debt collected” method. While the “percent of debt collected”
model is used for revenue recognition on existing contracts and will continue
      to
      be used going forward most contracts currently in process include provisions
      for
      set-up fees, and base revenue on a monthly licensing fee per account with a
      small transaction fee on debt settlement.





In
      all
      cases, it is our policy to charge a set-up fee for the implementation and
      customization of our system for each client. However, for the early adopters
      of
      our system, we waived set-up fees and certain other transactional fees because
      their use of our system and feedback were important in the early stages of
      the
      system. We no longer waive set-up fees and other transactional fees for new
      clients as a matter of course.





Our
      original contracts were all written for clients who are using our first module,
      DR Settle. For the collection of early-stage debt through our DR Prevent module,
      we anticipate using a fee model based on the number of accounts which the client
      sends to the DebtResolve system, plus transaction fees for either log-ins or
      successful payments. 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. Some of our current contracts provide for
      license fees.





We
      also
      plan to enter into the business of purchasing and collecting debt. Through
      a
      subsidiary we have formed for this purpose, DRV Capital LLC, we plan to buy
      portfolios of charged-off debts at a significant discount to their face value
      and, through subcontracted, licensed debt collectors, attempt to collect on
      that
      debt by utilizing both our DebtResolve system and also traditional collection
      methods. We believe that there will be two benefits from this operation. First,
      we expect to earn revenues from this venture, by buying and settling these
      consumer debts, and especially opportunistic, Internet-related debt, such as
      debts associated with ISPs and e-commerce merchants. Second, we believe that
      we
      will develop a new paradigm for the collection of such debts, as well as develop
      “best practice” usage methods, which we can then share with our core
      clients.





19


Our
      plans
      call for us to finance these charged-off debt portfolios using funds borrowed
      from investment partners, enabling us to diversify our investment and
      potentially mitigate risks in this sector by taking small percentage positions
      in many larger pools. Investment partners in charged-off debt portfolios would
      typically include large financial institutions, hedge funds and private
      investment companies. We anticipate that we will enter into arrangements with
      financial partners who will provide the bulk of the funding for our debt
      purchases. In May 2006, we signed a preliminary, non-binding term sheet with
      a
      possible financial partner; however, as of the date of this report, we have
      not
      finalized any financing arrangements to allow us to engage in the debt
      purchasing business, and we cannot assure you that such financing will be
      available on suitable terms, if at all. Revenue streams associated with this
      business will include servicing fees earned and paid, collections of principal
      in excess of the price paid, interest earned on purchased debt and paid to
      investment partners and, from time to time, gains on the resale of remaining
      balances. We may also expect to earn increased revenues from the use of our
      DebtResolve system by the agencies subcontracted to collect the debts. We expect
      that revenues earned from our proposed debt purchase and collection business
      will develop slowly, over several months or longer, beginning from the time
      we
      first capitalize our subsidiary, which is expected to be sometime in late 2006.
      We have already hired experienced staff and incurred certain legal expenses
      to
      prepare for entering this business. Until we achieve certain scale in these
      operations, we expect early revenues will at first only cover those
      costs.





**Results
      of Operations**




***Three
      Months ended September 30, 2006 Compared to Three Months ended September 30,
      2005***




**Revenues**




Revenues
      totaled $30,617 and $7,306 for the three months ended September 30, 2006 and
      2005, respectively. We earned revenue during the three months ended September
      30, 2006 from collection agencies, a lender and a bank that implemented our
      online system. Of the revenue earned in 2006, $12,500 was earned for fees
      charged to license our software for the period, and $18,117 was contingency
      fee
      income, based on a percentage of the amount of debt collected from accounts
      placed on our online system. Revenue in 2005 was based solely on a percentage
      of
      the amount of debt collected from accounts placed on our online
      system.




**Costs
      and Expenses**




**Payroll
      and related expenses** .
      Payroll
      and related expenses totaled $1,921,778 for the three months ended September
      30,
      2006, an increase of $1,516,120 over payroll and related expenses of $405,658
      for the three months ended September 30, 2005. This increase was due primarily
      to the recording of a stock-based compensation charge for employees in the
      quarter ended September 30, 2006 in the amount of $1,334,366 related to stock
      options issued during this period. We recorded no stock based compensation
      for
      the quarter ended September 30, 2005. In addition, there was an increase in
      staffing, which resulted in salary expense of $517,607 for the three months
      ended September 30, 2006, an increase of $150,655 over salary expense of
      $366,952 for the three months ended September 30, 2005. This increase was
      partially offset by a reduction in imputed salary expense, due to a change
      in
      the employment agreement with key executives of ours. For the three months
      ended
      September 30, 2005, the imputed salary expenses were $37,500 for the minimum
      base salary amounts under the employment agreement with the General Counsel.
      No
      salary payments were made to this executive during the three months ended
      September 30, 2005, and we recorded his imputed compensation as a capital
      contribution. The General Counsel is no longer with us. The increase in staffing
      for the three months ended September 30, 2006 as compared to the three months
      ended September 30, 2005 includes a Corporate Controller as well as additional
      client services staff to accommodate our future business growth. Related payroll
      expenses for the three months ended September 30, 2006 amounted to $69,805,
      as
      compared with $42,906 for the three months ended September 30, 2005, an increase
      of $26,899.




**General
      and administrative expenses** .
      General
      and administrative expenses amounted to $1,644,887 for the three months ended
      September 30, 2006, as compared to $415,491 for the three months ended September
      30, 2005, an increase of $1,229,396. This increase was primarily due to the
      recording of stock based compensation for options granted to consultants in
      the
      quarter ended September 30, 2006 of $1,267,768, as compared with stock based
      compensation in the amount of $70,360 for the quarter ended September 30, 2005.
      Also, for the quarter ended September 30, 2006 consulting fees amount to
      $58,795, which includes a recruitment fee in the amount of **** $32,500,
      as compared with $44,362 in consulting fees for the quarter ended September
      30,
      2005, resulting in an increase of $14,433. Audit fees increased by $20,228
      to
      $71,110 during the three months ended September 30, 2006 from $50,882 in the
      three months ended September 30, 2005. Other general operating costs during
      the
      quarter ended September 30, 2006 amounted to $247,214, as compared with $245,626
      for the quarter ended September 30, 2005.




20


**Interest
      income (expense).** Net
      interest expense totaled $443,269 for the three months ended September 30,
      2006,
      compared to interest expense of $35,643 for the three months ended September
      30,
      2005. Interest expense for the three months ended September 30, 2006 includes
      interest accrued on our 7% convertible notes and 15% convertible and
      non-convertible notes, in addition to 7 1⁄2% of the principal of the 2006
      convertible notes, while the earlier period included interest on only a portion
      of these borrowings.




**Amortization
      of deferred debt discount.** Amortization
      expense of $2,119,810 was incurred for the three months ended September 30,
      2006
      for the amortization of the value of the beneficial conversion feature and
      deferred debt discount associated with our convertible note offerings. This
      expense amounted to $ 432,732 in the prior year. The increase is due to
      additional convertible note offerings and partial period amortization during
      the
      earlier period.




**Amortization
      of deferred financing costs.**  Amortization
      expense of $393,232 was incurred for the three months ended September 30, 2006
      for the amortization of deferred financing costs associated with our convertible
      note offerings. Amortization of deferred financing costs for the three months
      ended September 30, 2005 amounted to $64,354.




***Nine
      Months ended September 30, 2006 Compared to Nine Months ended September 30,
      2005***




**Revenues**




Revenues
      for the nine months ended September 30, 2006 and 2005, totaled $84,908 and
      $9,833 respectively. We earned revenues during the nine months ended September
      30, 2006 from collection agencies, a lender and a bank that implemented our
      online system. Of total revenues earned in 2006, $27,083 was earned from
      licensing fees, and $53,861 was based on a percentage of the amount of debt
      collected from accounts placed on our online system (contingency fees). Revenues
      in 2005 was based solely on a percentage of the amount of debt collected from
      accounts placed on our online system. We also earned $3,600 in start-up fees
      during the nine months ended September 30, 2006.




**Costs
      and Expenses**




**Payroll
      and related expenses** .
      Payroll
      and related expenses totaled $3,123,518 for the nine months ended September
      30,
      2006, an increase of $2,180,733 over payroll and related expenses of $942,785
      for the nine months ended September 30, 2005. This increase was due primarily
      to
      the recording of a stock-based compensation charge for employees in the quarter
      ended September 30, 2006 in the amount of $1,334,366 related to stock options
      issued during this period. We recorded no stock based compensation for employees
      for the quarter ended September 30, 2005. In addition, there was an increase
      in
      staffing, net of a reduction in imputed salary expense, due to a change in
      the
      employment agreement with a key executive of ours. For the nine months ended
      September 30, 2005, the imputed salary expenses were $112,500 for the minimum
      base salary amounts under the employment agreements with the Chief Executive
      Officer and the General Counsel. No salary payments were made to these
      executives during the nine months ended September 30, 2005, and we recorded
      their imputed compensation as a capital contribution. In 2006, the Chief
      Executive Officer’s salary was paid and/or accrued. The General Counsel is no
      longer with us. The increase in staffing in 2006 compared to 2005 includes
      a
      Chief Financial Officer, a Corporate Controller, a sales staff, and additional
      programmers and client services staff, to accommodate our future business
      growth. Salary expense for the nine months ended September 30, 2006 amounted
      to
      $1,501,815, an increase of $767,030 over salary expense of $734,785 in 2005.
      Related payroll expenses for the nine months ended September 30, 2006 amounted
      to $287,337, as compared with $212,199 for the corresponding period of the
      prior
      year, an increase of $75,138.




**General
      and administrative expenses** .
      General
      and administrative expenses amounted to $2,762,100 for the nine months ended
      September 30, 2006, an increase of $1,430,149, as compared to $1,331,951 for
      the
      nine months ended September 30, 2005. This increase was primarily due to the
      recording of stock based compensation in the nine months ended September 30,
      2006 in the amount of $1,380,580, as compared with $568,532 for the nine months
      ended September 30, 2005, resulting in an increase of $812,048. This charge
      is
      related to stock options issued during this period. Legal fees for the nine
      months ended September 30, 2006 amounted to $414,405, as compared with $70,707
      for 2006, an increase of $343,698. Also, for the nine months ended September
      30,
      2006, consulting fees amounted to $126,568, which includes a recruitment fee
      in
      the amount of **** $32,500,
      as compared with consulting fees of $58,233 for the nine months ending September
      30, 2005, an increase of $68,335. Audit fees increased by $52,765 to $197,735
      during the nine months ended September 30, 2006 from $144,970 in the nine months
      ended September 30, 2005. Occupancy costs for the nine months ended September
      30, 2006 increased during the nine months in 2006 by $48,425 to $106,356, as
      compared with $57,931 for the nine months ended September 30, 2005 due to moving
      to larger facilities to accommodate growth potential. Travel and marketing
      expenses increased by $110,858 to $237,689 during the nine months ended
      September 30, 2006 from $126,831 as we accelerated marketing
      efforts.




21


**Interest
      income (expense).** Interest
      expenses totaled $662,333 for the nine months ended September 30, 2006, compared
      to $64,321 for the nine months ended September 30, 2005. Interest expense for
      the nine months ended September 30, 2006 includes interest accrued on our 7%
      convertible notes and 15% convertible notes, as well as interest accrued on
      $875,000 in other short term notes. During the nine months ended September
      30,
      2006, we also recorded a penalty of 7 1⁄2% of the principal of the 2006
      convertible notes, Interest expense for the nine months ended September 30,
      2005
      included interest accrued on only a portion of the 7% convertible
      notes.




**Amortization
      of deferred debt discount.** Amortization
      expense of $3,017,944 was incurred for the nine months ended September 30,
      2006
      for the amortization of the value of the beneficial conversion feature and
      deferred debt discount associated with our convertible note offerings. This
      expense was $551,267 for the nine months ended September 30, 2005. The increase
      is due to additional convertible note offerings and partial period amortization
      during the earlier period.




**Amortization
      of deferred financing costs.**  Amortization
      expense of $532,603 was incurred for the nine months ended September 30, 2006
      for the amortization of deferred financing costs associated with our convertible
      note offerings. Amortization of deferred financing costs for the three months
      ended September 30, 2005 was $64,321.




**Liquidity
      and Capital Resources**





As
      of
      September 30, 2006, we had a working capital deficit in the amount of
      $7,337,852, and cash and cash equivalents totaling $15,944. We incurred a net
      loss of $6,502,879 and $10,048,576 for the three and nine months ended September
      30, 2006, respectively, and $21,032,925 since inception. Cash flow used in
      operating and investing activities was $2,671,311 and $4,170, respectively,
      for
      the nine months ended September 30, 2006. Cash flow provided by financing
      activities was $2,667,849.





On
      September 11, 2006, we raised $300,000 in a short term borrowing at an annual
      interest rate of 15%. The note was repayable in full on September 11, 2007,
      or
      repayable with a ten percent penalty at any date prior to maturity. Subsequent
      to September 30, 2006, at the conclusion of the our IPO, 110% of this note
      was
      repaid.





Subsequent
      to September 30, 2006, we received advances from several board members,
      officers, and their family members totaling $360,000. The borrowings carry
      an
      interest rate of 18%, had maturities of from two months to one year, and were
      prepayable at any time at the option of the borrower and by agreement in the
      event of a public offering at 110% of the amount borrowed. The money from these
      borrowings was used to fund our operating expenses until we completed our IPO.
      At the conclusion of the IPO, 110% of these notes were repaid.





On
      November 6, 2006, we completed an IPO. We sold 2,500,000 shares of common stock
      on at $5.00 per share pursuant to the IPO. After deducting underwriting
      discounts and expenses and offering-related expenses, the initial public
      offering resulted in net proceeds to us of approximately $10,650,000. We may
      also issue 375,000 shares of common stock on a subsequent date, in connection
      with the underwriters’ over allotment option, which may result in net proceeds
      after offering expenses of approximately $1,725,000. Based upon projected
      revenues and operating expenses, we believe we have sufficient working capital
      to finance our operation for the coming year. At the same time we commenced
      our
      IPO, we registered for resale by selling stockholders 2,483,819 shares of common
      stock issuable upon conversion of convertible notes or exercise of warrants.
      We
      will not receive any of the proceeds from the sale of shares of our common
      stock
      by the selling stockholders. We are using the proceeds of the IPO for the
      repayment of approximately $3,700,000 in interest and a portion of the remaining
      principal of our outstanding notes and convertible notes, and there has been
      no
      material change in our planned use of proceeds from the IPO than what is
      described in our final prospectus relating to the IPO filed with the Securities
      and Exchange Commission pursuant to Rule 424(b).





22




**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.





Imputed
      salary expense




Under
      the
      terms of employment agreements we have had with our Co-Chairman and Chief
      Executive Officer and with our Executive Vice President, General Counsel and
      Secretary during the three months ended September 30, 2005, we did not pay
      these
      officers a salary, due to certain conditions as specified in the agreements.
      We
      recorded compensation expense and a capital contribution in an amount equal
      to
      the salary that would have been paid during those periods, representing an
      imputed compensation expense for the minimum base salary amounts under the
      agreement with them, as if we had met the condition for paying their salaries.
      During the three months ended September 30, 2006, the terms of these employment
      agreements had changed. Beginning April 1, 2005, the Co-Chairman and Chief
      Executive Officer began to draw a salary. The Executive Vice President, General
      Counsel and Secretary left our employ effective June 30, 2005.




Research
      and development




We
      follow
      the guidelines of Statement of Financial Accounting Standards No. 86, Accounting
      for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,
      and Statement of Financial Accounting Standards No. 2, Accounting for Research
      and Development Costs. Research and development expenses in the period since
      inception consisted primarily of payroll and related expenses and consulting
      fees incurred in connection with employees and consultants involved in the
      development of our online software product prior to establishing technological
      feasibility. In January 2004, we substantially completed the development of
      and
      began marketing our online product. In our management’s opinion, the software
      became available for general release concurrent with the establishment of
      technological feasibility. As a result, no software development costs were
      capitalized. Commencing February 2004, including the three months ended
      September 30, 2005 and 2006, costs incurred in connection with the operation,
      maintenance, modification, and customization of our product have been charged
      to
      expense as incurred, and are neither capitalized nor classified as research
      and
      development expenses .




Fixed
      assets




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




Income
      taxes




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




23


Stock-based
      compensation




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




Beginning
      on January 1, 2006, we account for stock options issued under stock-based
      compensation plans under the recognition and measurement principles of Statement
      of Financial Accounting Standards No. 123 - Revised. We have adopted the
      modified prospective transition method and therefore, have not restated prior
      periods’ results. Under this transition method, there was no impact to the
      condensed financial statements for the three months ended September 30, 2006
      on
      net loss or basic and diluted net loss per share, as all options previously
      granted to employees vested prior to adoption and there were no new issuances
      during the period. The fair value of each option granted to employees and
      non-employees will be estimated as of the grant date using the Black-Scholes
      option pricing model. The estimated fair value of the options granted will
      be
      recognized as an expense over the requisite service period of the award, which
      is generally the option vesting period. The fair value of each option granted
      will be estimated as of the grant date using the Black-Scholes option pricing
      model with the following assumptions: dividend yield of 0%, expected volatility
      of 96.7%, risk-free interest rates for individual options in accordance with
      the
      accounting pronouncement and will expense that fair value over the vesting
      period of the options. Since there is no public market for our stock, we use
      a
      volatility measure based on an average volatility of the stock of five
      comparable companies during their first five years as a publicly traded company
      in estimating the value of each option.




**Statement
      Relating to Forward-Looking Statements**




This
      report contains forward-looking statements that are based on our beliefs as
      well
      as assumptions and information currently available to us. When used in this
      report, the words “believe,” “expect,” “anticipate,” “estimate,” “potential” and
      similar expressions are intended to identify forward-looking statements. These
      statements are subject to risks, uncertainties and assumptions, including,
      without limitation, the risks and uncertainties concerning our recent research
      and development activities; the risks and uncertainties concerning acceptance
      of
      our services and products, if and when fully developed, by our potential
      customers; our present financial condition and the risks and uncertainties
      concerning the availability of additional capital as and when required; the
      risks and uncertainties concerning the Limited License Agreement with Messrs.
      Brofman and Burchetta; the risks and uncertainties concerning our dependence
      on
      our key executives; the risks and uncertainties concerning technological changes
      and the competition for our services and products; the risks and uncertainties
      concerning general economic conditions; and the risks and uncertainties
      described in our Registration Statement on Form SB-1, filed on July 21, 2006,
      as
      amended, section labeled “Risk Factors.” Should one or more of these risks or
      uncertainties materialize, or should underlying assumptions prove incorrect,
      actual results may vary materially from those anticipated, estimated, or
      projected. We caution you not to place undue reliance on any forward-looking
      statements, all of which speak only as of the date of this report.




**Item
      3. Controls and Procedures**





**Evaluation
      of our disclosure controls and procedures**




As
      of the
      conclusion of the three months ended September 30, 2006 , our
      Chief
      Executive Officer and Chief Financial Officer, based on evaluation of our
      disclosure controls and procedures, have concluded that our disclosure controls
      and procedures were effective in ensuring that information required to be
      disclosed by us in the reports that we file or submit under the Exchange Act
      is
      recorded, processed, summarized and reported within the time periods specified
      in the Commission’s rules and forms.





24


**Internal
      control over financial reporting**




Our
      internal control system was designed to provide reasonable assurance to our
      management and board of directors regarding the preparation and fair
      presentation of published consolidated financial statements in accordance with
      accounting principles generally accepted in the United States of America.




Because
      of its inherent limitations, a system of internal control over financial
      reporting can provide only reasonable assurance and may not prevent or detect
      misstatements. Further, because of changing conditions, effectiveness of
      internal control over financial reporting may vary over time. Our internal
      control procedures contain self-monitoring mechanisms, and actions are taken
      to
      correct deficiencies as they are identified.




We
      maintain a system of internal control over financial reporting, which is defined
      as a process to provide reasonable assurance regarding the reliability of
      financial reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting principles and
      includes those policies and procedures that:




·
            pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflect the transactions and dispositions of our assets,
                and




·
            provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that receipts and expenditures are being
                made
                only in accordance with authorizations of our management and
                directors.




Our
      independent registered public accounting firm in previous accounting periods
      reported to our audit committee certain matters involving internal controls
      that
      this firm considered to be reportable conditions and a material weakness, under
      standards established by the American Institute of Certified Public Accountants.
      The reportable conditions and material weakness related to the March 31, 2005,
      December 31, 2004 and December 31, 2003 financial close process of transactions
      and accounting entries related to the accounting for stock options granted
      to
      consultants and advisory board members in lieu of compensation. The adjustments
      related to these matters have been made by us in connection with the restatement
      of the audited financial statements for the years ended December 31, 2004 and
      2003 and the quarterly financial statements for the three months ended March
      31,
      2005. O n
      April
      14, 2006, we filed a report on Form 10-KSB for the year ended December 31,
      2005.
      This report included the corrected expense of options granted to non-employees
      for the year ended December 31, 2004 and amended data for the first three
      quarterly periods of the year ended December 31, 2005.




Beginning
      with the fourth quarter of 2005, management implemented improved controls over
      financial reporting. During
      most of the time period when the above-noted errors occurred regarding the
      recording of expense for consultant options, the Company’s CFO worked part time,
      and both the CFO and the part-time bookkeeper worked from their homes. During
      June, 2005, we employed a full time CFO, and in September, 2005, hired a senior
      financial analyst, a competent accounting professional who provided segregation
      of duties and support for analytical functions. During this time period, we
      developed a set of accounting procedures and began to implement them, including
      formal bank reconciliations, written purchase orders, analysis of revenues
      and
      receivables, etc. Subsequent to the restatements of 2004 and the first three
      quarters of 2005, we have demonstrated the ability to produce annual and
      quarterly financial reports on a timely basis as well as other financial
      information that was required as part of the IPO process. During August, 2006,
      Debt Resolve hired an experienced Controller who has extensive background in
      finance, systems, establishing internal controls, managing accounting
      departments and operations, as well as experience in SEC reporting. As a result
      of hiring a Controller, there is segregation of duties, and a system of checks
      and balances.





Our
      management has concluded that with the recent improvements in controls over
      the
      preparation of our financial reports, errors that occurred with respect to
      accounting for options granted to non-employees are not likely to reoccur,
      and
      that our disclosure controls and internal control over financial reporting
      are
      effective at the reasonable assurance level.





25


Commencing
      the year ending December 31, 2007, we will be required to document and test
      our
      internal control procedures in order to satisfy the requirements of Section
      404
      of the Sarbanes-Oxley Act of 2002, which requires annual management assessments
      of the effectiveness of our internal controls over financial reporting and
      a
      report by our independent registered public accounting firm addressing these
      assessments in 2008. We have commenced discussions with various consulting
      firms
      specializing in Sarbanes-Oxley implementation, particularly in small companies.
      Management has been educated on Sarbanes-Oxley Section 404 requirements, and
      plans to meet those requirements for fiscal year 2007.




**Changes
      in internal control over financial reporting**




As
      of the
      period ending September 30, 2006, we have materially improved our internal
      control over financial reporting by hiring a Controller, and designing and
      implementing systems and procedures to ensure reliability of
      information.




**CEO
      and CFO Certifications**




Appearing
      as Exhibits 31.1 and 31.2 to this report are “Certifications” of the CEO and
      CFO. The certifications are required pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”).






26


**PART
      II. OTHER INFORMATION**




**Item
      1. Legal Proceedings**





None





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





*Recent
      Sales of Unregistered Securities*





None





*Initial
      Public Offering and Use of Proceeds from Sales of Registered
      Securities*





On
      November 6, 2006, we completed our initial public offering (“IPO”) of 2,500,000
      shares of our common stock at an initial offering price of $5.00 per share.
      We
      sold 2,500,000 shares of common stock at an aggregate offering price of $12.5
      million. The IPO commenced on November 1, 2006 pursuant to a Registration
      Statement on Form SB-2 (Registration No. 333-135911) that the Securities
      and Exchange Commission declared effective on November 1, 2006. EKN Financial
      Services, Inc. acted as the managing underwriter and National Securities
      Corporation, Joseph Stevens & Company, Inc. and Maxim Group LLC acted as
      co-underwriters. At the same time we commenced our IPO, we registered for resale
      by selling stockholders 2,483,819 shares of common stock issuable upon
      conversion of convertible notes or exercise of warrants. The offering will
      terminate after all the securities registered are sold.





After
      deducting underwriting discounts and commissions of $1,000,000 and
      offering-related expenses of $850,000, the IPO resulted in net proceeds to
      us of
      approximately $10,650,000. No offering expenses were paid directly or indirectly
      to any of our directors, officers or their associates, persons owning ten
      percent or more of any class of our equity securities or any other of our
      affiliates. We have deposited the net proceeds of the IPO in a highly rated
      financial institution in the United States. We will not receive any of the
      proceeds from the sale of shares of our common stock by the selling
      stockholders. We are using the proceeds of the IPO for the repayment of
      approximately $3,700,000 in interest and a portion of the remaining principal
      of
      our outstanding notes and convertible notes, and there has been no material
      change in our planned use of proceeds from the IPO than what is described in
      our
      final prospectus relating to the IPO filed with the Securities and Exchange
      Commission pursuant to Rule 424(b).





**Item
      3. Defaults upon Senior Securities**





None





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





None





**Item
      5. Other Information**





None





**Item
      6. Exhibits and Reports on Form 8-K**





(a)
      Exhibits





31.1
            Certification
                of Chief Executive Officer required by Rule13(a)-14(a).


31.2
            Certification
                of Chief Financial Officer required by Rule13(a)-14(a).


32.1
            Certifications
                required by Rule 13(a)-14(b) and 18 U.S.C.Section 1350.





(b)
            Reports
                on Form 8-K







27


Current
      Report on Form 8-K filed on July 28, 2006 reporting the issuance of a press
      release relating the filing for an initial public offering.





Current
      Report on Form 8-K filed on August 18, 2006 reporting the appointment of Jeff
      Bernstein to the board of directors.





Current
      Report on Form 8-K/A filed on August 21, 2006 attaching a press release to
      the
      Current Report on Form 8-K filed on August 18, 2006.





Current
      Report on Form 8-K filed on August 31, 2006 reporting the increase in authorized
      shares and the reverse stock split.





**SIGNATURES**




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


**DEBT
              RESOLVE, INC.**Dated:
              November 14, 2006
            By:
            /s/ James
              D.
              BurchettaJames
                D. Burchetta
              Co-Chairman
                and Chief Executive Officer
              (principal
                executive officer)


**DEBT
                RESOLVE, INC.**Dated:
                November 14, 2006
              By:
              /s/ Katherine
                A. DeringKatherine
                  A. Dering
                Chief
                  Financial Officer, Treasurer, and Secretary
                (principal
                  financial and accounting officer)
 
 28