**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 JUNE 30,
                2006




 ̈
            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 x No  ̈





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





As
      of
      August 10, 2006, 29,703,900 shares of the issuer’s Common Stock were issued and
      outstanding.




Transitional
      Small Business Disclosure Format (check one):   Yes  ̈ No 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 June 30, 2006
              3Condensed
                    Statements of Operations for the ThreeMonths and Six Months Ended June 30, 2005 and 2006
                    andCumulative
                      from Inception (April 21, 1997)to
                      June 30, 2006
              4Condensed
                    Statements of Cash Flows for the Six Months EndedJune 30, 2005 and 2006
                  and
                    Cumulative fromInception
                    (April 21, 1997) to June 30, 2006
              5Notes
                  to Condensed Financial Statements
              6Item
                  2. Management’s Discussion and Analysis or Plan of
                  Operation
              14Item
                  3. Controls and Procedures
              22**PART
                  II. Other Information**Item
                  1. Legal Proceedings
              25Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              25Item
                  3. Defaults Upon Senior Securities
              25Item
                  4. Submission of Matters to a Vote of Security Holders
              25Item
                  5. Other Information
              25Item
                  6. Exhibits and Reports on Form 8-K
              25Signatures
              26Certifications
              26


2




**PART
      I: FINANCIAL INFORMATION**




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









DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Condensed
      Balance Sheet


June
      30,
      2006




ASSETSCurrent
                assets:Cash
            
            $
                647,346Accounts
                receivable, net
            
            28,106Prepaid
                expenses
            
            22,796Total
                current assets
            
            698,248Fixed
                assets, net
            
            128,684Other
                assets:Deferred
                offering costs
            
            23,513Deferred
                financing costs
            
            525,733Deposits
                and other assets
            
            93,605Total
                other assets
            
            642,851Total
                assets
            
            $
                1,469,783LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCYCurrent
                liabilities:Accounts
                payable
            
            $
                678,166Accrued
                expenses
            
            271,576Convertible
                notes, net of deferred debt discount of $2,432,007
            
            2,944,755Notes
                payable, net of deferred debt discount of $401,961
            
            398,039Total
                current liabilities
            
            4,292,536Commitments
                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, 29,703,900
                shares
                issued and outstanding (See Note 2)
            
            29,704Additional
                paid-in capital
            
            11,752,927Deferred
                compensation
            
            (75,338)Deficit
                accumulated during the development stage
            
            (14,530,046)Total
                stockholders’ deficiency
            
            (2,822,753)Total
                liabilities and stockholders’ deficiency
            
            $
                1,469,783The
                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
                months
              ended
                June 30,
            
            Six
                months
              ended
                June 30,
            
            Cumulative
                from Inception (April 21, 1997) to June 30,2005
            
            2006
            
            2005
            
            2006
            
            2006Revenues
            
            $
            866
            
            $
            27,026
            
            $
            2,527
            
            $
            54,290
            
            $
            80,676Costs
                and expenses:Payroll
                and related expenses
            
            
            294,651
            
            
            585,277
            
            
            537,127
            
            
            1,201,739
            
            
            4,367,488General
                and administrative expenses (1)
            
            
            292,110
            
            
            546,916
            
            
            916,459
            
            
            1,117,213
            
            
            5,707,246Waived
                royalty fees - related parties
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            600,000Research
                and development expenses
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            499,323Depreciation
                and amortization expenses
            
            
            7,469
            
            
            13,849
            
            
            14,939
            
            
            27,467
            
            
            118,439Total
                expenses
            
            
            594,230
            
            
            1,146,042
            
            
            1,468,525
            
            
            2,346,419
            
            
            11,292,496Loss
                from operations
            
            
            (593,364
            )
            
            (1,119,016
            )
            
            (1,465,998
            )
            
            (2,292,129
            )
            
            (11,211,820
            )Other
                income (expense):Terminated
                offering costs
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (736,037
            )Net
                interest expense
            
            
            (28,693
            )
            
            (143,246
            )
            
            (28,679
            )
            
            (219,063
            )
            
            (323,016
            )Amortization
                of deferred debt discount
            
            
            (117,540
            )
            
            (388,999
            )
            
            (117,540
            )
            
            (898,134
            )
            
            (1,977,087
            )Amortization
                of deferred financing costs
            
            
            (995
            )
            
            (57,541
            )
            
            (995
            )
            
            (139,371
            )
            
            (287,586
            )Other
                income
            
            
            --
            
            
            1,500
            
            
            --
            
            
            3,000
            
            
            5,500Total
                other expense
            
            
            (147,228
            )
            
            (577,286
            )
            
            (147,214
            )
            
            (1,253,568
            )
            
            (3,318,226
            )Net
                loss
            
            $
            (740,592
            )
            $
            (1,696,302
            )
            $
            (1,613,212
            )
            $
            (3,545,697
            )
            $
            (14,530,046
            )Per
                share data:Basic
                and diluted net loss per common share
              (See
                Note 2)
            
            $
            (0.02
            )
            $
            (0.05
            )
            $
            (0.05
            )
            $
            (0.12
            )Basic
                and diluted weighted average number of common shares
                outstanding
            
            
            29,703,900
            
            
            30,975,954
            
            
            29,627,273
            
            
            30,343,441





(1)
      Stock
      based compensation totaled $70,360 and $56,406 in the three months ended June
      30, 2005 and 2006 and $498,172 and $112,812 in the six months ended June 30,
      2005 and 2006, respectively, and $2,086,410 since inception.








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)




Six
                months
              ended
                June 30,
            
            Cumulative
                from Inception (April 21, 1997) to June 30,2005
            
            2006
            
            2006**Cash
                flows from operating activities:**Net
                loss
            
            $
            (1,613,212
            )
            $
            (3,545,697
            )
            $
            (14,530,046
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Non
                cash stock based compensation
            
            
            498,172
            
            
            112,812
            
            
            2,086,410Waived
                and imputed compensation, royalty and consulting fees
            
            
            112,500
            
            
            --
            
            
            1,983,809Amortization
                of deferred debt discount
            
            
            117,540
            
            
            898,134
            
            
            1,977,087Amortization
                of deferred financing costs
            
            
            995
            
            
            139,371
            
            
            287,586Terminated
                offering costs
            
            
            --
            
            
            --
            
            
            736,037Depreciation
                and amortization
            
            
            14,939
            
            
            27,467
            
            
            118,439Loss
                on disposal of fixed assets
            
            
            --
            
            
            --
            
            
            14,954Changes
                in operating assets & liabilities:Accounts
                receivable
            
            
            45
            
            
            (21,140
            )
            
            (28,106
            )Prepaid
                expenses
            
            
            3,291
            
            
            64,209
            
            
            20,744Deposits
                and other assets
            
            
            (119,800
            )
            
            --
            
            
            (93,605
            )Accounts
                payable
            
            
            (29,448
            )
            
            106,711
            
            
            727,365Accrued
                expenses
            
            
            35,244
            
            
            230,153
            
            
            433,387Net
                cash used in operating activities
            
            
            (979,734
            )
            
            (1,987,980
            )
            
            (6,265,939
            )**Cash
                flows from investing activities:**Purchases
                of fixed assets
            
            
            (2,685
            )
            
            (4,170
            )
            
            (262,076
            )**Cash
                flows from financing activities:**Proceeds
                from issuance of notes and convertible notes
            
            
            2,050,000
            
            
            2,504,750
            
            
            5,199,750Proceeds
                from issuance of common stock
            
            
            224,900
            
            
            --
            
            
            2,432,574Proceeds
                from loans-other
            
            
            --
            
            
            525,000
            
            
            525,000Proceeds
                from stockholders’ loans
            
            
            --
            
            
            --
            
            
            510,000Repayments
                of stockholders’ loans
            
            
            (10,000
            )
            
            (25,000
            )
            
            (85,000
            )Stock
                offering costs
            
            
            (186,277
            )
            
            (23,513
            )
            
            (847,296
            )Reimbursement
                of stock offering costs
            
            
            25,000
            
            
            --
            
            
            25,000Deferred
                financing costs
            
            
            (154,500
            )
            
            (365,317
            )
            
            (584,667
            )Net
                cash provided by financing activities
            
            
            1,949,123
            
            
            2,615,920
            
            
            7,175,361Net
                increase in cash
            
            
            966,704
            
            
            623,770
            
            
            647,346Cash
                at beginning of period
            
            
            34,747
            
            
            23,576
            
            
            --Cash
                at end of period
            
            $
            1,001,451
            
            $
            647,346
            
            $
            647,346Non
                cash investing and financing activities:Conversion
                of stockholder’s loan to common stock
            
            $
            --
            
            $
            --
            
            $
            100,000Conversion
                of loans payable, accounts payable and accrued expenses to convertible
                notes
            
            $
            --
            
            $
            977,012
            
            $
            977,012Issuance
                of options for accrued compensation
            
            $
            84,000
            
            $
            --
            
            $
            84,000Issuance
                of warrants for deferred financing fees
            
            $
            73,526
            
            $
            128,211
            
            $
            237,625Capital
                contribution from waived royalty fees
            
            $
            --
            
            
            
            
            $
            $600,000Capital
                contribution from waived and imputed compensation
            
            $
            112,500
            
            $
            --
            
            $
            1,383,809The
                accompanying notes are an integral part of these condensed financial
                statements.






5


DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Notes
      to
      Condensed Financial Statements


June
      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 22,500,000 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 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 (see Note 5).




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. By the end of June 2006, the Company had eleven clients under
      contract. Eight clients were operational. As of June 30, 2006 the Company has
      not earned, nor did it expect to generate, significant revenues from these
      clients during the initial start-up periods.





NOTE
      2.  GOING
      CONCERN AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:




Going
      concern and management plans





The
      accompanying condensed financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate continuation of the Company as a going concern. As of June
      30,
      2006, the Company had
      incurred an accumulated deficit of $14,530,046.




6


During
      the year ended December 31, 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. In separate financing
      transactions in April 2005 and June/September of 2005, the Company
      received  proceeds
      from the issuance of 7% convertible promissory notes in the total aggregate
      principal amount of $2,695,000 (see Note 4). The notes from the April 2005
      financing transaction originally matured on April 21, 2006. However all existing
      April 2005 bridge note holders agreed to extend their notes to October 31,
      2006.
      In addition, in compliance with the requirements of the June/September 2005
      bridge note documents, a majority of these note holders also approved the June
      2006 Private Placement and have agreed to extend their notes to October 31,
      2006.




On
      September 30, 2005, the Company filed a Registration Statement on Form SB-2
      with
      the Securities and Exchange Commission (“SEC”). The Company withdrew that
      registration statement on February 10, 2006. On July 21, 2006, the Company
      filed
      a new Registration Statement on Form SB-2 with the SEC in connection with a
      proposed public offering of 2,500,000 shares of common stock at $5.00 per share
      with $12,500,000 in gross proceeds. Although the Company anticipates raising
      $12,500,000 in gross proceeds from this proposed public offering, there is
      no
      assurance that the offering will be successful.




During
      the six months ended June 30, 2006, the Company raised $525,000 through the
      issuance of short term notes with an interest rate of 2-1/2% per month, and
      with
      original maturities from April 30, 2006 to May 17, 2006. During May 2006, the
      holders of these notes each agreed to capitalize all accrued interest through
      June 26, 2006, the date of closing of the June 2006 Private Placement, adding
      it
      to the note principal and agreed to adopt the terms of the June 2006 Private
      Placement. On June 26, 2006 their obligations were rolled over to the June
      2006
      Private Placement.




On
      January 20, 2006, the Company entered into an agreement with a second investment
      banking firm, whereby it agreed to serve as placement agent for a private
      financing consisting of the issuance of the Company’s senior convertible
      promissory notes. On March 10, 2006, the Company entered into an agreement
      with
      an investment banking firm, Maxim Group LLC (“Maxim Group”), whereby Maxim Group
      agreed to serve as co-placement agent for that private financing. The Company
      had raised $300,000 under this offering pursuant to a confidential private
      placement term sheet dated March 15, 2006 (“the March 2006 Private Placement
      Term Sheet”). 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 (“the June 2006 Private Placement”). **** In
      addition, holders of the Company’s short term notes and shareholder notes in the
      amount of $325,000 agreed to capitalize all accrued interest through June 26,
      2006, the date of closing of the June 2006 Private Placement, adding it to
      the
      note principal, and to adopt the terms of the June 2006 Private Placement.
      A
      total of $977,012 was thus rolled over into this transaction and the Company
      has
      raised an additional $2,204,750 under this May 2006 Private Placement Term
      Sheet
      Supplement. As of June 30, 2006, the Company had raised an aggregate of
      $3,481,762 under the June 2006 Private Placement. An aggregate of 3,831,101
      shares of the Company’s common stock are issuable upon the conversion, of the
      principal on $2,681,762 of the Company’s 15% senior secured convertible
      promissory notes purchased during the June 2006 Private Placement. (See Note
      4).
      There is no assurance that the Company will be able to raise sufficient
      additional capital as needed to execute its business plan. The Company still
      has
      not recorded any significant revenue, and its working capital is not sufficient
      to fund its plan of operations for the next twelve months. The aforementioned
      factors raise substantial doubt about the Company’s ability to continue as a
      going concern.




On
      March
      10, 2006, the Company entered into a non-binding letter of intent with a
      privately-held collection agency to explore the possibility of purchasing this
      company. Prior to June 30, 2006, the two companies agreed to terminate any
      further discussions on this matter.




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 six months ended June 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 SEC on April 14, 2006.




7


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
      years 2003 and 2004 and the six months ended June 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 six months ended
      June 30, 2005 represent the restated quarterly financial information included
      in
      the Form 10-KSB which was filed with the SEC on April 14, 2006.




Reclassifications




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




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 method 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 on 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.




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









Three
                months ended June 30, 2005
            
            Six
                months ended June 30, 2005
            
            Cumulative
                from inception (April 21, 1997) to June 30, 2006Net
                loss - as reported
            
            $
            (740,592
            )
            $
            (1,613,212
            )
            $
            (14,530,046
            )Deduct:
                Stock-based employee compensation expense determined under minimum-value
                based methods for all awards
            
            
            582
            
            
            1,938
            
            
            589,220Net
                loss - pro forma
            
            $
            (741,174
            )
            $
            (1,615,150
            )
            $
            (15,119,266
            )Basic
                and diluted net loss per common share - as reported
            
            $
            (0.02
            )
            $
            (0.05
            )Basic
                and diluted net loss per common share - pro forma
            
            $
            (0.02
            )
            $
            (0.05
            )Basic
                and diluted weighted average number of common shares
                outstanding
            
            
            29,703,900
            
            
            29,627,273








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 8,533,333,
      16,427,444 and 13,093,185, respectively at June 30, 2006 and 8,533,333,
      3,637,646 and 3,352,941, respectively at June 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 to
      be
      issued under the amended and restated licensing agreement (see Note 3) and
      “make-whole” warrants and options (see Note 3).




The
      Company’s issued and outstanding common shares as of June 30, 2006 do not
      include the underlying shares exercisable with respect to the issuance of
      11,605,884 warrants exercisable at $0.001 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.




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 has also
      been
      engaged to be co-underwriter for a potential initial public offering (“IPO”). 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 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 with the SEC. (See Note 2). However, there can be no
      assurance that the Company will be able to raise additional capital in the
      public equity markets.




Also,
      in
      connection with this potential public offering, in the event 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 intends to issue to
      investors who had participated in its private placement of stock at $1.00 per
      share in 2003, 2004, and 2005, warrants to purchase common stock in a quantity
      sufficient to restore some portion of their pre-offering value, and has entered
      into a non-binding agreement with an investor to that effect. Management of
      the
      Company has indicated that it intends to issue 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
      “make-whole” warrants and stock options are anticipated to be exercisable from
      three to five years at the same price as the per share offering price at the
      time of a public offering.




Also,
      in
      connection with this potential public offering, as well as in connection with
      a
      licensing agreement, the Company’s co-chairmen will be issued 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 a potential
      public offering, assuming the exercise of such options.




NOTE
      4.  NOTES
      PAYABLE AND CONVERTIBLE NOTES:




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 1,882,352 shares of common
      stock. The notes from the April 2005 financing transaction matured on April
      21,
      2006. However all existing April 2005 note holders have agreed to extend their
      notes to October 31, 2006. The notes contain 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 the conversion and exercise price of
      the
      notes and warrants issued in the June 2006 Private Placement, and in connection
      with certain anti-dilution provisions in the notes and warrant agreements,
      the
      conversion and exercise price of the notes and warrants related to the Company’s
      7% senior convertible promissory notes and warrants issued in the June/September
      2005 private financing, were reduced. As a result of this dilutive calculation,
      an aggregate of 3,959,900 shares of the Company’s common stock are issuable upon
      the conversion, at a conversion price of $0.27 per share, discounted from an
      assumed initial public offering price of $0.50 per share ($5.00 per share on
      a
      post-reverse split basis), of 50% of the principal and accrued interest to
      August 15, 2006 on $1,895,000 of the Company’s 7% senior convertible promissory
      notes purchased in the June/September 2005 private financing. In addition,
      the
      exercise price of the outstanding five-year warrants related to this financing
      has been reduced to $0.25 per share at an assumed initial public offering price
      of $0.50 per share ($5.00 per share on a post-reverse split basis).




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 into
      2,941,176 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 into 1,517,649 shares of common
      stock. In compliance with the requirements of the June/September 2005 private
      financing documents, a majority of these note holders have approved the June
      2006 Private Placement and have agreed to extend their notes to October 31,
      2006.  As
      a
      result of the conversion and exercise price of the notes and warrants issued
      in
      the June 2006 Private Placement, and in connection with certain anti-dilution
      provisions in the warrant agreement, the exercise price of the warrants related
      to the Company’s 7% senior convertible promissory notes and warrants issued in
      the April 2005 private financing, was reduced. As a result of this dilutive
      calculation, the exercise price of the outstanding three-year warrants related
      to this financing has been reduced to $0.25 per share at an assumed initial
      public offering price of $0.50 per share ($5.00 per share on a post-reverse
      split basis). In addition, an aggregate of 2,164,706 shares of common stock
      are
      issuable upon the conversion, at a conversion price equal to 85% of an assumed
      initial public offering price of $0.50 per share ($5.00 per share on a
      post-reverse split basis), of 115% of the principal on $800,000 of the Company’s
      7% convertible promissory notes purchased in the April 2005 private
      financing.




10


In
      accordance with Emerging Issues Task Force (“EITF”) 98-5 and EITF 00-27, the
      convertible notes 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 initial public offering price. The Company recorded a beneficial conversion
      feature and a deferred debt discount in connection with the value of the April
      2005 and June/September 2005 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 the 2005 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. These amounts are 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 $227,166 and $747,301 during the three and six months ended June
      30,
      2006, respectively, $117,540 during the three and six months ended June 30,
      2005
      and $1,826,254 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 a potential future 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.




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.




On
      March
      15, 2006, the Company initiated, under the terms of the March 2006 Private
      Placement Term Sheet, a private placement involving the issuance of 12%
      convertible promissory notes due one year from the date of issuance. As of
      March
      31, 2006, the Company had raised $300,000 under this offering. On April 26 and
      April 28, 2006, the March 2006 Private Placement Term Sheet investors agreed
      to
      adopt the terms of the June 2006 Private Placement.




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 under 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 Company’s potential public offering. The
      remainder of the notes issued in connection with this offering were 15% senior
      secured convertible promissory notes repayable the earlier of October 31, 2006
      or at the time of the Company’s potential public offering. An aggregate of
      3,831,101 shares of the Company’s common stock are issuable upon the conversion,
      at a conversion price equal to 70% of an assumed initial public offering price
      of $0.50 per share ($5.00 on a post-reverse split basis), on 50% of the
      $2,681,762 principal amount of the convertible notes. These notes are only
      convertible contingent upon the Company completing its proposed IPO. In
      addition, investors were issued 11,605,884 warrants to purchase shares of the
      Company’s stock at $0.001 per share. Upon completion of a proposed IPO, the
      remainder of the un-converted principal and accrued interest on the convertible
      promissory notes purchased in the June 2006 Private Placement will be repaid
      in
      cash. Maxim Group LLC and Capital Growth Financial (“CGF”) acted as the
      placement agents in the June 2006 Private Placement. 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.
      In
      the event the registration statement is not filed or declared effective by
      that
      date, the Company will be required to pay liquidated damages to
      the
      Investors. Such damages will be paid in cash in an amount equal to 11⁄2% of the
      Investors’ subscription amount for the first 30 days (or part thereof) after
      July 31, 2006, and an additional 11⁄2% for any subsequent 30-day period (or part
      thereof) thereafter, subject to a maximum aggregate penalty of 10%.




11


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 over the remaining
      period of the related notes, or until October 31, 2006. Accordingly, the Company
      recorded a charge of $150,833 for the three and six months ended June 30, 2006.
      In accordance with EITF 00-19 and EITF 05-4, View A, “The Effect of a Liquidated
      Damages Clause on a Freestanding Financial Instrument” there are no factors that
      would prohibit equity classification relating to the aforementioned financial
      instruments. As of June 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 completing its
      proposed IPO. Upon the completion of the proposed IPO, based on a conversion
      price equal to 70% of an assumed initial public offering price of $0.50 per
      share ($5.00 on a post-reverse split basis) the Company would record an expense
      for the beneficial conversion feature in the amount of approximately $575,000.




On
      June
      26, 2006, as additional collateral pursuant to the June 2006 Private Placement,
      the Company’s co-chairmen pledged the 16,500,000 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 close of a potential public offering, and the stock pledge
      is to be released at that time.





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 336,000 shares of common stock valued at $118,035. 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 314,972
      placement agent warrants issued in connection with this financing. 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
      $57,541 and $139,371 for the three and six months ended June 30, 2006,
      respectively, $995 for the three months ended June 30, 2005 and $287,586 since
      inception.




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.  This amendment was declared effective on August 16, 2006. 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 10 to 1 reverse stock
      split, which would become effective prior to the closing of the Company’s
      proposed IPO, but no later than September 5, 2006. All references to share
      amounts in the condensed financial statements and the notes thereto reflect
      pre-reverse split share amounts.





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 June 30, 2006, DRV Capital LLC does not have
      any
      assets or liabilities.




12


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 $56,406 and $112,812 during the three and six months ended June 30, 2006,
      respectively, $70,360 and $498,172 during the three and six months ended June
      30, 2005, respectively, and $2,086,410 since inception.




NOTE
      8.  STOCK
      OPTIONS:




At
      June
      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 2,000,000 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 June 30, 2006, no options or stock grants
      have been issued under this plan.





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





WeightedWeighted
              
              AverageAverage
              
              Remaining
              
              AggregateExercise
              
              Contractual
              
              Intrinsic2006
              
              Price
              
              Term
              
              ValueOutstanding
                  at January 1,
              
              
              8,533,333
              
              $
              0.723Granted
              
              
              --Exercised
              
              
              --Forfeited
                  or Expired
              
              
              --Outstanding
                  at June 30,
              
              
              8,533,333
              
              $
              0.72
              
              
              3.94
                  Years
              
              $
              183,000Exercisable
                  at June 30,
              
              
              8,533,333
              
              $
              0.72
              
              
              3.94Years
              
              $
              183,000




As
      of
      January 1, 2006 and June 30, 2006, the Company had no unvested
      options.





In
      September 2004, the Company entered into an agreement to issue options to
      purchase 100,000 shares of its common stock at $1.00 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. As of June 30, 2006, the contingency
      has not been achieved, and the options have not been granted.




Subsequent
      to June 30, 2006, the Company issued options to purchase 500,000 shares of
      its
      common stock at $0.50 per share to the Company’s Chief Financial Officer. The
      options have an exercise period of five years and were valued at $188,669.
      Half
      of these options vested on issuance and half will vest on December 31, 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 six months ended June 30, 2006 were $14,222 and $30,261
      respectively.




13


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 Financial Accounting Standards Board (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.




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




**Overview**




The
      Company is a development stage company. Since its inception, the Company has
      devoted substantially all of its efforts to planning, research and development
      activities, and raising capital. In February 2004, the Company implemented
      the
      DebtResolve system on a test basis with a collection agency. In June and
      November 2004, the Company implemented its system with its second and third
      clients, respectively, and began generating nominal revenue based on a
      percentage of the amount of debt collected by these clients. At June 30, 2006,
      the Company had eleven clients under contract. Eight clients were operational.




Since
      completing initial product development in early 2004, the Company has marketed
      its service primarily to consumer credit card issuers, collection agencies
      and
      the buyers of defaulted debt in the United States and Europe. The Company has
      prepared for its entry into the European marketplace by reviewing its mode
      of
      business and modifying its contracts to comply with appropriate European
      privacy, debtor protection and other applicable regulations. The Company expects
      that initially, its expense associated with servicing its European clients
      will
      be minimal, consisting primarily of travel expense to meet with those clients
      and additional legal fees, as its European contracts, although already written
      to conform to European regulations may require customization. The Company has
      begun investigation of and negotiations with companies who may provide local,
      outsourced European customer service support for it on an as needed basis,
      the
      expense of which will be variable with the level of business activity. The
      Company intends to market its service to other segments served by the
      collections industry worldwide. For example, the Company believes that its
      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. The Company also intends to pursue past-due Internet-related debt,
      such as that held by sellers of sales and services online. The Company believes
      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. The Company
      believes that expanding to more recently past-due portfolios of such debt will
      result in higher settlement volumes, improving its clients’ profitability by
      increasing their collections while reducing their cost of collections.




14


The
      Company’s revenues to date have been insignificant. The Company has financed its
      activities to date through its management’s contributions of cash, the proceeds
      from sales of its common stock in private placement financings and the proceeds
      of debt offerings.




The
      Company’s preliminary contracts provide that it will earn revenue based on a
      percentage of the amount of debt collected from accounts submitted on its
      DebtResolve system. Revenue is earned and recognized when the settlement amount
      of debt is collected by its client. While the percent of debt collected method
      will continue to be one revenue recognition method going forward, other payment
      models are also being offered to clients and may possibly become the Company’s
      preferred revenue model. Most contracts currently in process base revenue on
      a
      monthly licensing fee per account with a small transaction fee on settlement.




**Liquidity
      and Capital Resources**





The
      Company’s financial statements were prepared using principles applicable to a
      going concern, which contemplates the realization of assets and liquidation
      of
      liabilities in the normal course of business. The Company had $647,346 of cash
      at June 30, 2006. The Company’s working capital is not sufficient to fund its
      plan of operations for the next twelve months. The Company has entered into
      a
      non-binding letter of intent with two investment banking firms to explore the
      possibility of raising additional capital in the public equity markets and
      filed
      with the Securities and Exchange Commission on Form SB-2 on September 30, 2005
      with that intention. On February 10, 2006 the Company withdrew that filing.
      Although the Company again filed with the Securities and Exchange Commission
      a
      registration statement on Form SB-2 on July 21, 2006 with the intention of
      raising additional capital, there can be no assurance that it will be able
      to
      raise sufficient additional capital as needed to execute its business plan.





On
      June
      26, 2006, the Company closed its June 2006 private financing. Including $977,012
      of principal and accrued interest rolled in from existing noteholders, the
      Company raised a total of $3,481,762 under this private financing. 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 closing of the Company’s potential public
      offering. The remainder of the notes issued in connection with this offering
      were 15% senior secured convertible promissory notes. An aggregate of 3,831,101
      shares of the Company’s common stock are issuable upon the conversion, at a
      conversion price equal to 70% of an assumed initial public offering price of
      $0.50 per share ($5.00 on a post-reverse split basis), on 50% of the $2,681,762
      principal amount of the convertible notes. In addition, for each dollar of
      note
      principal amount, each investor was issued 3.333 three-year warrants to purchase
      shares of the Company’s stock at $0.001 per share. An aggregate of 11,605,884
      shares of the Company’s common stock are issuable upon the exercise of these
      warrants. The remainder of the un-converted principal and accrued interest
      on
      the convertible promissory notes purchased in the June 2006 private financing
      will be repaid in cash from the proceeds of the planned public offering.





The
      associated Registration Rights Agreement requires the Company to file a
      registration statement by October 31, 2006 with respect to the shares of common
      stock into which the notes and warrants are convertible or exercisable,
      respectively. In the event the registration statement including
      the shares of the Company’s common stock reserved for issuance upon the
      conversion or exercise of the Notes and Warrants, respectively, is not declared
      effective by October 31, 2006, the Company will be required to pay liquidated
      damages to the Investors. Such damages will be paid in cash in an amount equal
      to 11⁄2% of the Investors’ subscription amount for the first 30 days (or part
      thereof) after July 31, 2006, and an additional 11⁄2% for any subsequent 30-day
      period (or part thereof) thereafter, subject to a maximum penalty of 10%. In
      connection with the Securities Purchase Agreement, the Company’s co-chairmen
      agreed to pledge 16,580,000 shares owned or controlled by them, to secure
      payment of all the obligations due under the convertible notes. Such shares
      are
      to be held in escrow until all amounts due under the convertible notes are
      paid
      in full. Maxim Group LLC and Capital Growth Financial, LLC acted as the
      placement agents in the June 2006 private financing. They were paid cash fees
      and non-accountable expense allowances aggregating to $310,818 and issued
      three-year warrants to purchase 314,972 shares of common stock at an exercise
      price of $0.333 per share.





15


There
      can
      be no assurance that the Company’s proposed public offering will occur or will
      be successful. If the Company is unable to raise sufficient additional capital,
      it will have to develop and implement a plan to eliminate staff and overhead
      until sufficient additional capital is raised to support further operations.
      These factors continue to raise substantial doubt about the Company’s ability to
      continue as a going concern.




**Results
      of Operations**




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




**Revenues**




Revenue
      totaled $27,026 and $866 for the three months ended June 30, 2006 and 2005,
      respectively. The Company earned revenue during the three months ended June
      30,
      2006 from collection agencies, a lender and a bank that implemented the
      Company’s online system. Of the revenue earned in 2006, $12,500 was earned for
      fees charged to license the Company’s software for the period and $14,526 was
      contingency fee income, based on a percentage of the amount of debt collected
      from accounts placed on the Company’s online system. Revenue in 2005 was based
      solely on a percentage of the amount of debt collected from accounts placed
      on
      the Company’s online system.




**Costs
      and Expenses**




**Payroll
      and related expenses** .
      Payroll
      and related expenses totaled $585,277 for the three months ended June 30, 2006,
      an increase of $290,626 over payroll and related expenses of $294,651 for the
      three months ended June 30, 2005, due primarily to an increase in staffing,
      which resulted in salary expense of $478,214 for the three months ended June
      30,
      2006, an increase of $251,631 over salary expense of $226,583 for the three
      months ended June 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 the Company. For the three months ended June 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 June 30, 2005, and the Company
      recorded his imputed compensation as a capital contribution. The General Counsel
      is no longer with the Company. The increase in staffing in 2006 compared to
      2005
      includes a Chief Financial Officer, sales staff, additional programmers and
      client services staff to accommodate the Company’s possible business growth. In
      addition, 2006 expenses include higher health insurance costs of $39,253,
      compared to $14,413 in the three months ended June 30, 2005, an increase of
      $24,840, associated with the increased staffing levels. Other, higher
      personnel-related expenses included social security and other payroll taxes,
      relocation costs, and 401(k) match expense.




**General
      and administrative expenses** .
      General
      and administrative expenses including stock-based compensation totaled $546,916
      for the three months ended June 30, 2006, an increase of $254,806 compared
      to
      general and administrative expenses of $292,110 for the three months ended
      June
      30, 2005. The increase in 2006 compared to 2005 is due primarily to the increase
      in legal expenses, which were $242,179 for the three months ended June 30,
      2006,
      an increase of $220,479 compared to such expenses of $21,700 during the three
      months ended June 30, 2005. The Company also saw higher expenses in most other
      general and administrative categories including consulting fees of $47,589
      for
      the three months ended June 30, 2006, which was $39,348 higher than consulting
      fees of $8,241 for the three months ended June 30, 2005; travel related expense
      of $38,454 for the three months ended June 30, 2006, which was $6,714 higher
      than travel related expenses of $31,740 for the three months ended June 30,
      2005
      due to a larger sales force; occupancy costs of $34,836 for the three months
      ended June 30, 2006, which was $23,094 higher than occupancy costs of $11,742
      for the three months ended June 30, 2005 due to the move to a new office;
      telecommunication expenses of $44,686 for the three months ended June 30, 2006,
      which was $10,240 higher than telecommunication expense of $34,446 for the
      three
      months ended June 30, 2005. These increases were partially offset by audit
      and
      accounting fees, which decreased to $40,500 for the three months ended June
      30,
      2006, down $18,120 from $58,620 of such fees for the three months ended June
      30,
      2005, stock-based compensation expense which decreased to $56,406 for the three
      months ended June 30, 2006, down $13,954 from $70,360 of such expense for the
      three months ended June 30, 2005, and office supplies and other general expenses
      which decreased to approximately $3,500 for the three months ended June 30,
      2006
      from approximately $22,600 in the prior year.




16


**Interest
      income (expense).** Interest
      expense totaled $143,246 for the three months ended June 30, 2006, compared
      to
      interest expense of $28,693 for the three months ended June 30, 2005. Interest
      expense for the three months ended June 30, 2006 includes interest accrued
      on
      the Company’s 7% convertible notes and 15% convertible notes, while the earlier
      period included interest on only a portion of these borrowings.




**Amortization
      of deferred debt discount.** Amortization
      expense of $377,999 was incurred for the three months ended June 30, 2006 for
      the amortization of the value of the beneficial conversion feature and deferred
      debt discount associated with the Company’s convertible note offerings. This
      expense was $117,540 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 $57,541 was incurred for the three months ended June 30, 2006 for
      the
      amortization of deferred financing costs associated with the Company’s
      convertible note offerings. The amortization of the deferred financing costs
      for
      the three months ended June 30, 2005 were $995.




***Six
      Months ended June 30, 2006 Compared to Six Months ended June 30,
      2005***




**Revenues**




Revenue
      totaled $54,290 and $2,527 for the six months ended June 30, 2006 and 2005,
      respectively. The Company earned revenue during the six months ended June 30,
      2006 from collection agencies, a lender and a bank that implemented the
      Company’s online system. Of the revenue earned in 2006, $14,583 was earned from
      licensing fees, $3,600 was earned from start-up fees, $363 of income was fees
      charged to clients for expenses incurred and $35,745 was based on a percentage
      of the amount of debt collected from accounts placed on the Company’s online
      system. Revenue in 2005 was based solely on a percentage of the amount of debt
      collected from accounts placed on the Company’s online system.




**Costs
      and Expenses**




**Payroll
      and related expenses** .
      Payroll
      and related expenses totaled $1,201,739 for the six months ended June 30, 2006,
      an increase of $664,612 over payroll and related expenses of $537,127 for the
      six months ended June 30, 2005, due primarily to 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 the Company. For the six months ended June
      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
      six
      months ended June 30, 2005, and the Company 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 the Company. The
      increase in staffing in 2006 compared to 2005 includes a Chief Financial
      Officer, a sales staff, additional programmers and client services staff to
      accommodate the Company’s possible business growth. Salary expense for the six
      months ended June 30, 2006 was $984,208, an increase of $616,375 over salary
      expense of $367,833 in 2005. In addition, 2006 expenses include higher social
      security and other payroll taxes ($73,701), relocation costs ($21,535), 401(k)
      match expense ($30,261) and higher health insurance costs ($73,858), associated
      with increased staffing levels. Although the Company made a staff reduction
      during the quarter ended June 30, 2006, the related cost savings did not yet
      appear in the financial statements of the Company.




**General
      and administrative expenses** .
      General
      and administrative expenses including stock-based compensation totaled
      $1,117,213 for the six months ended June 30, 2006, an increase of $200,754
      compared to general and administrative expenses of $916,459 for the six months
      ended June 30, 2005. The increase in 2006 compared to 2005 is due primarily
      to
      the increase in legal fees, which were $384,680 for the six months ended June
      30, 2006, an increase of $352,928 compared to such expenses of $31,752 during
      the six months ended June 30, 2005. Higher expenses in most other general and
      administrative categories included consulting fees of $78,867 for the six months
      ended June 30, 2006, which was $64,997 higher than consulting fees of $13,870
      for the six months ended June 30, 2005; travel related expense of $112,797
      for
      the six months ended June 30, 2006, which was $62,369 higher than travel related
      expenses of $50,428 for the six months ended June 30, 2005 due to a larger
      sales
      force; occupancy costs of $70,925 for the six months ended June 30, 2006, which
      was $42,401 higher than occupancy costs of $28,524 for the six months ended
      June
      30, 2005 due to the move to a new office; telecommunication expenses of $115,619
      for the six months ended June 30, 2006, which was $21,026 higher than
      telecommunication expense of $94,593 for the six months ended June 30, 2005
      due
      to higher client web hosting services; audit and accounting fees, which
      increased to $126,625 for the six months ended June 30, 2006, up $32,537 from
      $94,088 of such fees for the six months ended June 30, 2005; and marketing
      expenses, which increased to $44,050 for the six months ended June 30, 2006,
      up
      $16,363 from $27,687 of such expenses for the six months ended June 30, 2005.
      These expenses were partially offset by the decline in stock-based compensation
      expenses, which were $498,172 for the six months ended June 30, 2005, but were
      $112,812 for the six months ended June 30, 2006, a decrease of $385,360, as
      well
      as a decrease of approximately $6,000 in other, miscellaneous general and
      administrative expenses.




17


**Interest
      income (expense).** Interest
      expenses totaled $219,063 for the six months ended June 30, 2006, compared
      to
      interest expense of $28,679 for the six months ended June 30, 2005. Interest
      expense for the six months ended June 30, 2006 includes interest accrued on
      the
      Company’s 7% convertible notes and 12% convertible notes, as well as interest
      accrued on $875,000 in other short term notes. Interest expense for 2005
      included interest accrued on only a portion of the 7% convertible
      notes.




**Amortization
      of deferred debt discount.** Amortization
      expense of $898,134 was incurred for the six months ended June 30, 2006 for
      the
      amortization of the value of the beneficial conversion feature and deferred
      debt
      discount associated with the Company’s convertible note offerings. This expense
      was $117,540 for the six months ended June 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 $139,371 was incurred for the six months ended June 30, 2006 for
      the
      amortization of deferred financing costs associated with the Company’s
      convertible note offerings. The amortization of the deferred financing costs
      for
      the three months ended June 30, 2005 were $995.




**Critical
      Accounting Policies and Estimates**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States 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. The significant accounting
      policies that the Company believes are the most critical to aid in fully
      understanding and evaluating its reported financial results are as
      follows:




Going
      concern




The
      accompanying condensed financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate continuation of the Company as a going concern. As of June
      30,
      2006, the Company had
      incurred an accumulated deficit of $14,530,046.




During
      the year ended December 31, 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.
      In
      separate financing transactions in April 2005 and June/September 2005, the
      Company  received  proceeds
      from the issuance of 7% convertible promissory notes in the total aggregate
      principal amount of $2,695,000. The notes from the April 2005 financing
      transaction originally matured on April 21, 2006. However all existing April
      2005 note holders agreed to extend their notes to October 31, 2006. In addition,
      in compliance with the requirements of the June/September 2005 private financing
      documents, a majority of these note holders also approved the June 2006 Private
      Placement and have agreed to extend their notes to October 31, 2006.




On
      September 30, 2005, the Company  filed
      a
      Registration Statement on Form SB-2 with the Securities and Exchange Commission
      (“SEC”). The Company withdrew that registration statement on February 10, 2006.
      On July 21, 2006, the Company filed a new Registration Statement on Form SB-2
      with the SEC in connection with a proposed public offering of 2,500,000 shares
      of common stock at $5.00 per share with $12,500,000 in gross proceeds. Although
      the Company  anticipates
      raising $12,500,000 in gross proceeds from this proposed public offering, there
      is no assurance that the offering will be successful.




18


During
      the three months ended March 31, 2006, the Company  raised
      $525,000 through the issuance of short term notes with an interest rate of
      2-1/2% per month, and with original maturities from April 30, 2006 to May 17,
      2006. During May 2006, the holders of these notes agreed to capitalize all
      accrued interest through June 26, 2006, the date of closing of the June 2006
      Private Placement, adding it to the note principal and to adopt the terms of
      the
      June 2006 Private Placement, and were rolled over to the June 2006 Private
      Placement.




On
      January 20, 2006, the Company entered into an agreement with a second investment
      banking firm, whereby it agreed to serve as placement agent for a private
      financing consisting of the issuance of the Company’s senior convertible
      promissory notes. On March 10, 2006, the Company entered into an agreement
      with
      an investment banking firm, Maxim Group LLC (“Maxim Group”), whereby Maxim Group
      agreed to serve as co-placement agent for that private financing. The Company
      had raised $300,000 under this offering pursuant to a confidential private
      placement term sheet dated March 15, 2006 (“the March 2006 Private Placement
      Term Sheet”). The March 2006 Private Placement Term Sheet investors later agreed
      to adopt the terms of the 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 (“the June 2006 Private Placement”). **** In
      addition, holders of the Company’s short term notes and shareholder notes agreed
      to capitalize all accrued interest through June 26, 2006, the date of closing
      of
      the June 2006 Private Placement, adding it to the note principal, and to adopt
      the terms of the June 2006 Private Placement. A total of $977,012 was thus
      rolled over into this transaction and the Company has raised an additional
      $2,204,750 under this May 2006 Private Placement Term Sheet Supplement. As
      of
      June 30, 2006, the Company had raised an aggregate of $3,481,762 under the
      June
      2006 Private Placement. An aggregate of 3,831,101 shares of the Company’s common
      stock are issuable upon the conversion, of the principal on $2,681,762 of the
      Company’s 15% senior secured convertible promissory notes purchased during the
      June 2006 Private Placement. (see Note 4). There is no assurance that the
      Company will be able to raise sufficient additional capital as needed to execute
      its business plan. The Company still has not recorded any significant revenue,
      and its working capital is not sufficient to fund its plan of operations for
      the
      next twelve months. The aforementioned factors raise substantial doubt about
      the
      Company’s ability to continue as a going concern.




Imputed
      salary expense




Under
      the
      terms of employment agreements the Company has had
      with
      its Co-Chairman and Chief Executive Officer and with its Executive Vice
      President, General Counsel and Secretary during the three months ended June
      30,
      2005, the Company  did
      not
      pay these officers a salary, due to certain conditions as specified in the
      agreements. The Company  recorded
      compensation expense and a capital contribution 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 the Company  had
      met
      the condition for paying their salaries. During the three months ended June
      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 the
      Company ’s employ
      effective June 30, 2005.




Research
      and development




The
      Company follows the guidelines of Statement of Financial Accounting Standards
      No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or
      Otherwise Marketed,” and Statement of Financial Accounting Standards No. 2,
“Accounting for Research and Development Costs.” 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 the Company ’s online
      software product prior to establishing technological feasibility. In January
      2004, the Company  substantially
      completed the development of and began marketing its online product. In
      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 June 30, 2005 and 2006, costs incurred in connection
      with
      the operation, maintenance, modification, and customization of the
      Company’s  product
      have been charged to expense as incurred, and are neither capitalized nor
      classified as research and development expenses.




19


Fixed
      assets




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




Income
      taxes




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




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 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 the Company ’s
      s tock,
      it
      did not consider volatility in estimating the value of each option granted
      to
      employees; it followed the minimum value method. The estimated minimum value
      of
      the options granted is amortized on a proforma basis over the option vesting
      periods. The Company accounted for stock-based compensation issued to
      non-employees using the fair value method.




Beginning
      on January 1, 2006, the Company  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 months ended June 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 its stock, the
      Company  uses
      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.




20


**Statement
      Relating to Forward-Looking Statements**




This
      report contains forward-looking statements that are based on the Company’s
      beliefs as well as assumptions and information currently available to it. 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 the Company’s recent research and development activities; the risks
      and uncertainties concerning acceptance of its services and products, if and
      when fully developed, by its potential customers; its 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 the Company’s dependence on its key executives; the
      risks and uncertainties concerning technological changes and the competition
      for
      its services and products; and the risks and uncertainties concerning general
      economic conditions. 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. The Company
      cautions you not to place undue reliance on any forward-looking statements,
      all
      of which speak only as of the date of this report.


21


**Item
      3. Controls and Procedures**




**Evaluation
      of the Company’s Disclosure Controls and Procedures**




As
      of the
      conclusion of the three months ended June 30, 2006 , the
      Company has
      evaluated the effectiveness of the design and operation of its disclosure
      controls and procedures, or disclosure controls. This controls evaluation was
      done under the supervision and participation of management, including the
      Company ’s
      Chief
      Executive Officer, or CEO, who is the its principal executive officer, and the
      Company ’s
      Chief
      Financial Officer, or CFO, who is its principal financial officer.




Disclosure
      controls means controls and other procedures of the
      Company ’s
      that
      are designed with the objective of ensuring that information required to be
      disclosed in its reports filed under the Securities Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in the
      SEC’s rules and forms. Disclosure controls include, without limitation, controls
      and procedures designed to ensure that the information required to be disclosed
      by the
      Company in the
      reports that it files or submits under the Securities Exchange Act is
      accumulated and communicated to the
      Company ’s
      management, including, without limitation, its CEO and CFO, as appropriate
      to
      allow timely decisions regarding required disclosure.




Based
      on
      their evaluations as of the conclusion
      of the three months ended June
      30 ,
      2006 ,
      the
      Company’s CEO and
      CFO concluded that its disclosure controls were not effective at the “reasonable
      assurance” level. The ineffectiveness of its disclosure controls is due to the
      matters described below in “Internal Control over Financial
      Reporting.”




The
      Company ’s
      management, including its CEO and CFO, does not expect
      that its disclosure controls will prevent all error and fraud. A control system
      no matter how well conceived and operated can provide only reasonable, not
      absolute, assurance that the objectives of the control system are met. Further,
      the design of a control system must reflect the fact that there are resource
      constraints and the benefits of controls must be considered relative to their
      costs. Because of the inherent limitations of all control systems, no evaluation
      of controls can provide absolute assurance that all control issues and instances
      of fraud, if any, within the Company have been detected.




The
      Company’s CEO’s
      and CFO’s evaluation of its disclosure controls included a review of the
      controls’ objective and design, the controls’ implementation by the
      Company and the
      effect of the controls on the information generated for use in this report.
      In
      the course of the controls evaluation, management sought to identify data
      errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process movements, were being
      undertaken. This type of evaluation will be done on a quarterly basis so that
      the conclusions concerning controls effectiveness can be reported in the
      Company ’s
      quarterly reports on Form 10-QSB and annual reports on Form 10-KSB. The overall
      goals of these various review and evaluation activities are to monitor the
      Company’s disclosure controls and to make modifications as necessary. In this regard, the
      Company ’s
      intent
      is that the disclosure controls will be maintained as dynamic controls systems
      that change (including improvements and corrections) as conditions
      warrant.




**Internal
      control over financial reporting**





Effective
      internal controls are necessary to provide reliable financial reports and
      effectively prevent fraud. The Company  maintains
      a system of internal control over financial reporting, which is defined as
      a
      process designed by, or under the supervision of, the principal executive
      officer and principal financial officer, or persons performing similar
      functions, and effected by the Company ’s board
      of
      directors, management and other personnel, 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 the Company’s assets,
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|· | 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 the Company’smanagement
              and directors, and
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|· | provide
              reasonable assurance regarding prevention or timely detection of
              unauthorized acquisition, use or disposition of assets that could have
              a
              material effect on the financial
              statements.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
      Company  maintains accounting records that in reasonable detail accurately and fairly reflect
      the
      transactions and dispositions of its  assets. The
      Company has
      also established policies and procedures, including access controls, to p rovide
      reasonable assurance that transactions are recorded only as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures are made only in
      accordance with authorizations of management and directors. Access
      to
      assets is permitted only in accordance with management’s general or specific
      authorization. In addition, the recorded accountability for assets is compared
      with the existing assets at reasonable intervals and appropriate action is
      taken
      with respect to any differences. Due primarily to its small size and early
      stage
      of development, however, the Company has not
      yet
      achieved effective levels of performance with respect to accounting knowledge
      regarding complex transactions and effective cross-training to facilitate timely
      detection of minor errors in reporting.




It
      is the
      responsibility of the
      Company’s management to establish and maintain adequate internal control over financial
      reporting. However, due to its small size and limited financial resources, the
      Company ’s
      CEO
      and CFO have been the only employees principally involved in accounting and
      financial reporting. At the time of the material weakness noted below, only
      its
      CFO and a part-time bookeeper or accountant were employed by the
      Company ,
      and
      there was limited opportunity for a review and approval process. The
      Company’s audit
      committee has recognized that, as a result, there was inadequate segregation
      of
      duties within the accounting function, leaving most aspects of financial
      reporting in the hands of the
      Company ’s
      CEO
      and CFO. Despite the
      Company ’s
      efforts, its accounting staff remains inadequate. Based on procedures already
      in
      place and the fact that, except for the items noted below, no other material
      errors or irregularities were noted during repeated reviews, the
      Company’s audit
      committee has expressed its belief that there have been no irregularities in the
      Company ’s
      financial reporting or in the protection of its assets.




The
      Company’s independent registered public accounting firm has reported to the
      Company ’s
      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 relate to the March 31, 2005, December 31,
      2004
      and December 31, 2003 financial close process and inadequate reviews and
      approvals of transactions and accounting entries as well as errors, related
      primarily to the accounting for stock options granted to consultants and
      advisory board members in lieu of compensation, which resulted in financial
      reports that are being restated for these periods. Subsequently,
      during the year ended December 31, 2005, the Company  further
      determined that it had improperly calculated and disclosed the expense of
      options granted to non-employees. The Company  had
      used
      the minimum value method instead of the fair value method. During
      those time periods, only a CFO and a part-time bookkeeper or accountant provided
      the bulk of accounting controls and reports, with inadequate review and
      advisement concerning advanced accounting topics. The combination of this
      absence of a review and approval process, combined with the reporting errors,
      were sufficient to be deemed a material weakness. The adjustments related to
      these matters have been made by the
      Company 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, the Company  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. Although the
      Company ’s
      management has demonstrated certain improvements in controls over the
      preparation of its financial reports, as described above, these reported
      conditions and material weaknesses still exist, as the accounting staff remains
      thin and new review procedures are incomplete and not all have been fully
      implemented. The
      Company’s management expects that additional staff and advisors will be hired subsequent
      to its proposed public offering. The Company’s management expects that most
      issues will be resolved by the time of the financial close process related
      to
      the filing of the
      Company ’s
      annual
      report on Form 10-KSB for the year ending December 31, 2006.




22


Given
      these reportable conditions and material weakness, the
      Company’s management has devoted additional resources to investigating issues that arose
      during the audit review described above. The Company’s management believes that
      the reportable conditions noted above stem from the
      Company ’s
      operational growth. Beginning during the summer of 2005, management committed
      to
      working with the
      Company ’s
      audit
      committee to develop improved internal controls, including hiring additional
      accounting staff and advisors and documenting written accounting control
      procedures. The
      Company has also
      begun to prepare to meet the more rigid requirements of Section 404 of the
      Sarbanes-Oxley Act of 2002, performing analysis of the controls over
      expenditures and revenue recognition, and researching potential consultants.
      Going forward, the
      Company ’s
      management anticipates that the changes already begun, as well as other planned
      improvements, will correct any material issues. Recently, the
      Company has
      begun to document and apply transactional and periodic controls procedures,
      permitting a better review and approval process and improved quality of
      accounting reports. The Company’s management believes that this new
      infrastructure will assist in alleviating control weaknesses going forward.
      As a
      result, the
      Company believes
      that its financial statements for the three and six months ended June 30, 2006
      and 2005 fairly present, in all material respects, its financial condition
      and
      results of operations.




Commencing
      the year ending December 31, 2007, the
      Company will be
      required to document and test its 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 its internal
      controls over financial reporting and a report by its independent registered
      public accounting firm addressing these assessments. T he
      Company’s accounting staff is small, and although it recently begun to augment its
      internal controls procedures and expand its accounting staff, there is no
      guarantee that this effort will be adequate. During the course of its testing, the
      Company may
      identify deficiencies which it may not be able to remediate in time to meet
      the
      deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements
      of Section 404. In addition, if it fails to maintain the adequacy of its
      internal accounting controls, as such standards are modified, supplemented
      or
      amended from time to time, the
      Company may not
      be able to ensure that it can conclude on an ongoing basis that it has effective
      internal controls over financial reporting in accordance with Section 404.
      Failure to achieve and maintain an effective internal control environment could
      also cause investors to lose confidence in the
      Company ’s
      reported financial 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”).


23




**PART
      II. OTHER INFORMATION**




**Item
      1. Legal Proceedings**





None





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





During
      the three months ended June 30, 2006, the Company issued 15% senior secured
      promissory notes in the aggregate principal amount of $3,481,762.  
The majority of the investors are able to convert 50% of the outstanding
      principal amount into 3,831,101 shares of the Company’s common stock upon the
      closing of the Company’s proposed initial public offering.  In addition,
      the Company issued warrants to purchase 11,605,884 shares of common stock to
      the
      note investors.  These issuances were exempt from registration pursuant to
      Section 4(2) and Regulation D of the Securities Act.





**Item
      3. Defaults upon Senior Securities**





None





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





In
      a
      report on Form 14C filed with the SEC on July 7, 2006, the Company disclosed
      that on May 8, 2006, holders of a majority of the voting power of its
      outstanding common stock voted to approve the following:




·  A
      grant
      of discretionary authority to its board of directors to implement a reverse
      stock split of its outstanding shares of common stock on the basis of one
      post-reverse split share for up to every ten pre-reverse split shares to occur
      at some time within 120 days after the date of this information statement,
      but
      before the closing of the proposed initial public offering of its shares, with
      the exact time of the reverse stock split and the exchange ratio of the reverse
      split to be determined by its board of directors. A proposed 1-for-10 reverse
      stock split of the Company ’s outstanding
      shares of common stock would reduce its outstanding shares of common stock
      from
      29,703,900 to 2,970,390 shares.




·  The
      filing of an Amended and Restated Certificate of Incorporation, which shall
      include a provision that will increase the number of authorized shares of common
      stock from 50,000,000 to 100,000,000.





No
      other
      matters were submitted to a vote of security holders during the three months
      ended June 30, 2006.





**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 Rule 13(a)-14(a).


31.2
      Certification of Chief Financial Officer required by Rule 13(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
|--- | ---------------------------------




Current
      report on Form 8-K filed on June 30, 2006 reporting the Company’s June 2006
      private financing.




24


**SIGNATURES**




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







Dated:
      August 18, 2006


**DEBT
      RESOLVE, INC.**





By: /s/ James
      D. Burchetta


James
      D.
      Burchetta


Co-Chairman
      and Chief Executive Officer


(principal
      executive officer)




By: /s/ Katherine
      A. Dering


Katherine
      A. Dering


Chief
      Financial Officer, Treasurer, and Secretary


(principal
      financial and accounting officer)


25