**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-KSB**




[X]
      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005




Commission
      File No.:  0-29525





**DEBT
      RESOLVE, INC.**


(Name
      of
      small business issuer in its charter)




**Delaware**
            
            **33-0889197**(State
                or other jurisdiction of
            
            (I.R.S.
                Employer Identification
                No.)incorporation
                or organization)**707
                Westchester Avenue, Suite
                L7****White
                Plains, New
                York**
            
            **10604**(Address
                of principal executive
                offices)
            
            (Zip
                Code)




**(914)
      949-5500**


(Issuer’s
      telephone number)




Securities
      registered under Section 12(b) of the Exchange Act: None




Securities
      registered under Section 12(g) of the Exchange Act: Common
      Stock, par value $.001 per share ****




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 o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of Issuer’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. x




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




The
      issuer’s revenues for its fiscal year ended December 31, 2005 were
      $23,599.




The
      aggregate market value of the voting and non-voting stock held by non-affiliates
      of the issuer was approximately $ 0.




As
      of
      March 31, 2006, 29,703,000 shares of the issuer’s Common Stock were issued and
      outstanding.




Transitional
      Small Business Disclosure Format (check one):  Yes o No x




**Documents
      Incorporated by Reference:** None.




1




**DEBT
      RESOLVE, INC.**


**(A
      Development Stage Company)**




**TABLE
      OF CONTENTS**





**PART
              I.**Item
                1.
            Description
                of business
            3Item
                2.
            Description
                of property
            23Item
                3.
            Legal
                proceedings
            23Item
                4.
            Submission
                of matters to a vote of security holders
            23**PART
                II.**Item
                5.
            Market
                for registrant’s common equity andrelated
                stockholder matters
            24Item
                6.
            Management’s
                discussion and analysis or plan of operation
            24Item
                7.
            Financial
                statements
            33Item
                8A.
            Controls
                and procedures
            55**PART
                III.**Item
                9.
            Directors,
                executive officers, promoters and controlpersons;
                compliance with Section 16(a) of the Exchange Act
            58Item
                10.
            Executive
                compensation
            61Item
                11.
            Security
                ownership of certain beneficial owners and management
            62Item
                12.
            Certain
                relationships and related transactions
            62Item
                13.
            Exhibits
                and reports on Form 8-K
            63Item
                14.
            Principal
                accountant fees and services
            64Signatures
            65Certifications





2





**PART
      I.**




**ITEM
      1. Description of business**




*This
      report contains forward-looking statements regarding our business, financial
      condition, results of operations and prospects. Words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar
      expressions or variations of such words are intended to identify forward-looking
      statements, but are not the exclusive means of identifying forward-looking
      statements in this report. Additionally, statements concerning future matters
      such as the development or regulatory approval of new products, enhancements
      of
      existing products or technologies, revenue and expense levels and other
      statements regarding matters that are not historical are forward-looking
      statements.*




*Although
      forward-looking statements in this report reflect the good faith judgment of
      our
      management, such statements can only be based on facts and factors currently
      known by us. Consequently, forward-looking statements are inherently subject
      to
      risks and uncertainties and actual results and outcomes may differ materially
      from the results and outcomes discussed in or anticipated by the forward-looking
      statements. Factors that could cause or contribute to such differences in
      results and outcomes include without limitation those discussed under the
      heading “Risk Factors” below, as well as those discussed elsewhere in this
      report. Readers are urged not to place undue reliance on these forward-looking
      statements, which speak only as of the date of this report. We undertake no
      obligation to revise or update any forward-looking statements in order to
      reflect any event or circumstance that may arise after the date of this report.
      Readers are urged to carefully review and consider the various disclosures
      made
      in this report, which attempt to advise interested parties of the risks and
      factors that may affect our business, financial condition, results of operations
      and prospects.*




**Overview**




Debt
      Resolve, Inc., (“we,” “our,” “us” and similar phrases refer to Debt Resolve,
      Inc.), is a Delaware corporation formed on April 21, 1997. We are a development
      stage company providing a software solution to consumer lenders based on our
      licensed, proprietary DebtResolve ® system.
      Our Internet-based system facilitates the settlement and collection of defaulted
      consumer debt via the Internet. Our existing and target creditor clients include
      banks and other credit originators, credit card issuers and third-party
      collection agencies, as well as assignees and buyers of charged-off consumer
      debt. By using our client-branded, user-friendly web interface, we believe
      that
      the Debt Resolve system provides our clients with a less intrusive, less
      expensive, more secure and more efficient way of pursuing delinquent debts
      than
      traditional labor-intensive methods.




We
      also
      intend to form a subsidiary that will focus on purchasing or investing in
      defaulted consumer debt portfolios that we can manage and collect through our
      DebtResolve system. This subsidiary will be headed by an individual with
      extensive experience in the debt buying and debt collection
      industries.




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




We
      have
      only recently completed development and commenced licensing our software
      solution, and have generated nominal revenues to date. We currently have written
      contracts in place with, and have begun processing select portfolios for, HSBC
      Technology and Services (USA), Inc., a unit of HSBC Bank plc, one of the largest
      financial institutions in the world, Premier Bankcard, Inc., a unit of First
      Premier Bank, a major credit card issuer, and CLK Management, LLC, a provider
      of
      personal loans through subsidiaries such as One Click Cash. In addition to
      lenders, we provide services to collection agencies such as Plaza Associates,
      Receivables Management Solutions Inc., ARS National Services, Inc. and Creditors
      Interchange Receivable Management, LLC. We also have written contracts in place
      with, but have not yet begun processing debt for, collection agencies DAR
      Services, Inc. (doing business as Foremost Search & Recovery), KCA Financial
      Services, Inc., Mercantile Adjustment Bureau, LLC and Certified Recovery
      Systems, LLP, as well as Lloyds TSB Bank plc, the United Kingdom’s fifth largest
      bank by market value, and Bank of America, N.A. These are the only contracts
      we
      currently have in place and we are dependent on these few contracts for the
      revenues we have generated to date. Since we have generated nominal DebtResolve
      system revenues to date from these contracts we believe that none of our
      existing clients is more or less critical to us than any other at this stage
      and, therefore, the loss of one or more of these contracts would not have a
      material adverse impact on our business.




3


**Corporate
      information**




We
      were
      incorporated as a Delaware corporation in April 1997 under our former name,
      Lombardia Acquisition Corp. In 2000, we filed a registration statement on Form
      10-SB with the SEC and became a reporting, non-trading public company. Through
      February 24, 2003, we were inactive and had no significant assets, liabilities
      or operations. On February 24, 2003, James D. Burchetta and Charles S. Brofman,
      directors of our company, and Michael S. Harris, a former director of our
      company, purchased 22,500,000 newly-issued shares of our common stock,
      representing 84.6% of the then outstanding shares. We received an aggregate
      cash
      payment of $22,500 in consideration for the sale of such shares to Messrs.
      Burchetta, Brofman and Harris. Our board of directors was then reconstituted
      and
      we began our current business and product development. On May 7, 2003, following
      approvals by our board of directors and holders of a majority of our outstanding
      shares of common stock, our certificate of incorporation was amended to change
      our corporate name to Debt Resolve, Inc. and increase the number of our
      authorized shares of common stock from 20,000,000 to 50,000,000 shares. In
      June
      2005, our board of directors and holders of a majority of our outstanding shares
      of common stock approved a reverse stock split, which would become effective
      prior to the closing of a potential initial public offering (“IPO”). We
      contemplate commencing an IPO of our common stock in mid-2006, but we cannot
      assure you that we will be able to effect such an offering. A proposed 1-for-10
      reverse stock split of our outstanding shares of common stock would reduce
      our
      outstanding shares of common stock from 29,703,900 to 2,970,390
      shares.




**Development
      stage activities**




From
      February 24, 2003 to date, we have devoted substantially all of our efforts
      to
      planning and budgeting, research and product development, and raising capital.
      In January 2004, we substantially completed the development of our online system
      for the settlement of credit card and other consumer debt and began marketing
      to
      banks, collection agencies, debt buyers and other creditors. In February 2004,
      we implemented our DebtResolve system, on a test basis, with a collection
      agency. From that time forward, we have implemented our system with additional
      clients, but have not earned, nor did we expect to generate, significant
      revenues from these clients during the initial start-up periods.




**Industry
      background and trends**




The
      DebtResolve system was developed to provide increased efficiency and performance
      for the collection of consumer debt, which is a large and fast-growing market.
      Growth in the collections industry is driven by increasing levels of consumer
      debt, significant charge-offs of the underlying receivables by credit
      originators, and reliance on third-party providers to execute the recovery
      of
      defaulted receivables. In addition, recent legislation makes it more difficult
      for U.S. consumers to declare bankruptcy.




Typically,
      lenders categorize defaulted consumer debt by the age, or stage, of the debt.
      The goals and treatments at each stage of debt vary.




·
            *Early-stage
                Delinquency.*This
                stage is characterized by late payment or payments, when a borrower
                has
                failed to make the required payment for 30, 60 or 90 days. The lenders
                at
                this stage usually focus on collecting one or more payments to bring
                the
                account current, or “cure” the account. Their prime concern is bringing
                the account up-to-date while retaining the customer. The original
                lender
                may work these accounts in-house or place them with an outside collection
                agency.




4


·
            *Late-stage
                Collections.*Typically,
                after 90 days the debt is considered in serious default, and lenders
                step
                up the severity of efforts to collect. This function is often performed
                by
                outside collection agencies on either a contingency or fee
                basis.




·
            *Charged-off
                Accounts.*After
                a certain period of non-payment, the delinquent accounts must be
                charged
                off according to applicable accounting rules and conventions. By
                regulation, U.S. banks are required to charge off balances that are
                deemed
                uncollectible, usually after 120 to 180 days without payment. These
                accounts may be outsourced for collection to one or more outside
                collection agencies, usually on a contingency fee
                basis.




·
            *Purchased
                Debts.*The final stage a lender may go through with a portfolio of delinquent
                debt is to sell the uncollected debts to a debt purchaser. In this
                segment
                of the collection and recovery industry, credit originators sell
                off their
                defaulted consumer debt at a discount to third parties who buy these
                portfolios of debt and attempt to collect a targeted “cents on the dollar”
                amount over a period of time.




We
      believe that our DebtResolve solution can be a highly effective collections
      tool
      at all of the stages noted above, and with each class of potential DebtResolve
      system users we have identified: credit originators, outside collection agencies
      and debt buyers. The means by which collections have traditionally been pursued,
      by phone and mail, are, we believe, perceived by debtors as intrusive and
      intimidating. In addition, the general trend in the collections industry is
      moving towards outsourcing of collections efforts to third parties.




**The
      DebtResolve solution**




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




We
      believe the DebtResolve system offers significant benefits to our creditor
      clients, enabling them to:




·
            reduce
                the cost of collecting defaulted consumer debt by minimizing the
                need for
                collectors on the phone,




·
            easily
                implement and test different collection strategies, potentially increasing
                current rates of return on defaulted consumer
                debt,




·
            achieve
                real-time settlements with consumer
                debtors,




·
            add
                a new and cost-effective communication channel for better communication
                with debtors,




·
            appeal
                to new segments of debtors who do not respond to traditional collection
                techniques,




·
            improve
                compliance with applicable federal and state debt collection laws
                and
                regulations through the use of a controlled script,
                and




·
            preserve
                and enhance client brand name by providing a positive tool for
                communicating with consumers.





5


Through
      formal focus groups and one-on-one user studies conducted by us with consumer
      debtors who would be potential candidates to use the DebtResolve system, we
      designed the system to be user-friendly and easily navigated. We believe the
      main advantages to consumer debtors in using the DebtResolve system
      are:




·
            greater
                feeling of dignity and control over the debt collection
                process,




·
            confidentiality,
                security, ease of use and 24-hour access,
                and




·
            a
                less threatening experience than dealing directly with debt
                collectors.





Despite
      these advantages, neither we nor any other company has established a firm
      foothold in the potential new market for online debt collection. Effective
      utilization of our system will require a change in thinking on the part of
      the
      debt collection industry, and the market for online collection of defaulted
      consumer debt may never develop to the extent that we envision or that is
      required for us to become a viable, long-term business.




We
      also
      do not have sufficient data to quantify if, and to what extent, our DebtResolve
      system offers long-term benefits to clients. For example, although we have
      data
      to suggest that our clients and consumer debtors may find online debt collection
      to be preferable to traditional methods, we cannot say for certain whether
      our
      DebtResolve system actually reduces the collection cost of defaulted consumer
      debt over the long run or will potentially increase the current rates of return
      on defaulted consumer debt. We expect, over time, that we will accumulate a
      sufficient amount of such data so we can reach meaningful conclusions on these
      and related matters, but we are too early in our business to be able to do
      so at
      this time.




**Business
      growth strategy**




Our
      goal
      is to make the DebtResolve system a key collection tool at all stages of
      delinquency across all categories of consumer debt. The key elements of our
      business growth strategy are:




·
            **Accelerate
                our marketing efforts.**Initially,
                we are marketing our DebtResolve system to credit issuers, their
                collection agencies and the buyers of their defaulted debt in the
                United
                States, Canada and the United Kingdom. Going forward, we intend to
                target
                additional markets in the United States and also abroad. We believe
                that
                our system will be especially valuable for the collection of low
                balance
                debt, such as that held by utilities, telecommunication companies
                and
                online service providers, where the cost of traditionally labor intensive
                collection efforts may exceed the value collected. Other markets
                in the
                United States may include student loan debt and automobile loans.




·
            **Expand
                our service offerings.**In
                the second half of 2006, we plan to build a scoring model based on
                aggregate customer data collected. This scoring model will identify
                customers based on their propensity to use the Internet versus other
                channels offered and, we believe, will help our creditor clients
                determine
                to what degree settlement should be offered as an option.




·
            **Seek
                strategic acquisitions.**We
                may seek to make strategic acquisitions of businesses, assets and
                technologies that complement our business, including possible acquisitions
                of, or investments in, defaulted consumer debt portfolios that we
                can
                manage and collect through our DebtResolve system. In March 2006,
                we
                entered into a non-binding letter of intent with a privately-held
                collection agency to explore the possibility purchasing this company.
                We
                have not entered into any definitive agreements to purchase this
                collection agency as a result of this letter of intent, but are exploring
                the possibility of doing so.




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




6


*Possible
      acquisitions of defaulted consumer debt portfolios*




We
      also
      intend to form a subsidiary that will focus on purchasing or investing in
      defaulted consumer debt portfolios that we can manage and collect through our
      DebtResolve system. This subsidiary will be headed by an individual with
      extensive experience in the debt buying and debt collection
      industries.




Through
      this subsidiary, we will seek to make acquisitions of, or investments in,
      defaulted consumer debt portfolios that we can manage and collect through our
      DebtResolve system. These would likely consist of consumer debt portfolios
      that
      the credit originator has deemed uncollectible and has charged-off, generally
      after making attempts to collect on them. We have no commitments or agreements
      at this time with regard to any acquisitions of, or investments in, defaulted
      consumer debt portfolios.




This
      is
      an area in which we have little current experience. We may not be successful
      in
      completing any acquisitions of defaulted consumer debt portfolios, and our
      inexperience may impair our ability to manage and collect on acquired consumer
      debt portfolios. These defaulted consumer debt portfolios are difficult to
      collect and we may not collect even a sufficient amount to cover the cost of
      acquiring them. We have no experience with pricing defaulted consumer debt
      portfolios. We may pay too much for these portfolios and, consequently, we
      may
      not generate a profit from these consumer debt portfolio acquisitions. In
      addition, we may be faced with new regulatory requirements that apply to buyers
      of defaulted debt. See also “- Regulation of our Clients’ and Our
      Business.”




The
      expansion into this line of business could result in the need to enter into
      potentially complex financing arrangements, resulting in the need to manage
      those relationships and the potential interest rate risk and credit risk
      associated with them. We would attempt to mitigate the credit risk of the
      portfolios by selling large percentages of each purchased portfolio to outside
      investors, thus allowing us to purchase small percentages of many portfolios
      instead of larger percentages of a smaller number of portfolios. The resale
      of
      these portions and the accounting for this activity would require that we become
      familiar with the applicable accounting regulations, with which we are not
      currently familiar. Our accounting would also become more complex, requiring
      combining the results of our proposed debt-buying subsidiary into our
      consolidated financial statements.




We
      anticipate additional increased costs associated with the start-up of our
      proposed debt-buying subsidiary. Before we begin to recognize revenue, we expect
      to incur legal, filing fees and other start-up costs associated with
      establishing this potential line of business.




**The
      DebtResolve system**




The
      DebtResolve system is centered on our online bidding module, DR SettleTM, which
      allows debtors to make offers, or “bids,” setting forth what they can pay
      against their total overdue balances. We have developed a suite of modules
      to
      complement the core DR Settle module. These modules include DR PayTM for online
      payments, DR ControlTM for system administration, DR MailTM as our secure e-mail
      methodology and DR PreventTM for early stage collections treatments. These
      modules and their features together allow our clients to:




request
      payment in full,




request
      a
      single payment to bring an account current,




offer
      debtors a bidding process leading to settlement for a portion of the total
      balance due,




accept
      free-form offers through email, and accept or reject those e-mail offers by
      e-mail,




queue
      unresolved accounts for immediate follow-up by a collector,




7


accept
      consumer disputes online and respond electronically,




notify
      consumers of upcoming promised payments through e-mail and accept the payments
      due online,




immediately
      collect payments online, and




set
      up
      treatments including a promise to pay, change of terms, payment hiatus and
      interest waiver requests.




The
      DebtResolve system works through a series of steps, initiated when our client
      sends a file of accounts to us and, using the online portal from their desktop,
      sets the rules for collection on each account. We build and host a website
      in
      the name of our client where the consumer debtor can log on to resolve his
      or
      her account. The steps are simple and are described below.




·
            **Connect.**The
                client invites the delinquent consumer debtor to the website by mail,
                e-mail or by phone. Each invitation has a personal invitation code
                to
                identify the account. The consumer debtor logs in, verifies his or
                her
                identity and updates personal contact
                information.




·
            **Resolve.**Based
                on the rules our client has set, the consumer debtor is presented
                with a
                series of screens. In early-stage collections, for example, this
                may be a
                request for a minimum payment to bring the account current or an
                offer by
                the creditor client to make some accommodation like a reduction in
                fees.
                In settlement, the consumer debtor is presented with three chances
                to make
                an offer of what he or she can pay to settle the entire debt. This
                is a
                percentage of the total due, and the minimum acceptable percentage
                is set
                in advance by our creditor client (but is not revealed to the consumer
                debtor). The consumer debtor gains a sense of control in making offers
                rather than responding to a collector’s demand in a telephone
                conversation. Our creditor clients can view results of the bidding
                process
                and review individual accounts in real
                time.




·
            **Collect.**If
                a successful resolution is reached, the consumer debtor can pay online
                and
                conclude the transaction, again in real
                time.





Even
      if
      the consumer debtor is not able to reach a satisfactory resolution online or
      fails to proceed past the sign-in process, our clients gain valuable
      information. They know that the consumer debtor has gotten the initial
      invitation to the website and has some interest or willingness to resolve the
      delinquency. Our creditor clients may also get updated contact information
      on
      the consumer debtor, and they can view all of the consumer debtor’s bidding
      attempts. In addition, consumer debtors can register disputes or send their
      own
      offers by e-mail if their bids fail.




**Sales
      and marketing**




Our
      current sales efforts are focused on United States consumer credit issuers,
      collection agencies and the buyers of defaulted consumer debt. Our primary
      targets are the major companies in each of these segments: the top ten credit
      card issuers as well as the most significant outside collection agencies and
      purchasers of charged-off debt. Because of industry concentration of outside
      collection agencies and consumer debt buyers, we believe we can reach a large
      number of individual consumers by securing relationships with just the top
      few
      companies in each of these segments.




Our
      initial sales and marketing efforts have been limited to securing significant
      early adopters, and senior management have all been involved in high-level
      sales
      to our core target market, which includes the top ten banks, collection agencies
      and consumer debt buyers. We added a full-time senior vice president and
      director of sales in July 2005, who has built a sales staff from the collections
      industry.




The
      economics of an Internet model means that our fixed costs will be relatively
      stable in relation to growth of our business. It is our intention to base
      pricing on the value gained by clients rather than on our direct costs. In
      general, we believe that if our services are priced at a substantial discount
      to
      the relative cost of traditional collections, the economic advantages will
      be
      sufficiently compelling to persuade clients to offer the DebtResolve system
      to a
      majority of their target debtors as a preferred or alternate channel.




8


**Consumer
      creditor clients and pricing**




Our
      target creditor clients include banks and other lenders, credit card issuers,
      third party collection agencies and purchasers of charged-off consumer debt.
      The
      DebtResolve system, which is offered through an ASP model, enables a client
      to
      introduce this collections option with no modifications to its existing
      collections computer systems. By using the Internet, we believe the DebtResolve
      system provides our clients a less intrusive, less expensive and more efficient
      means of pursuing delinquent debts as compared with traditional labor-intensive
      methods.




Under
      our
      standard licensing agreement with clients, we create a series of web pages
      using
      our DebtResolve system that are branded with the client’s trademarks and logos.
      We host the resulting customized client website on servers that we maintain.
      The
      client periodically forwards to us debtor account information, and sets
      settlement parameters using a desktop portal. The client neither receives nor
      needs any software for utilization of the customized DebtResolve system. The
      only license the client receives is to use, and for its debtors to use, the
      DebtResolve system during the term of the contract. Upon sending debtor account
      information to us, the client is responsible for contacting the debtors and
      inviting them to the client-branded website. As a condition to using our
      DebtResolve system, the client agrees to be bound by any settlement within
      the
      parameters the client provided to us and also to hold us harmless from any
      claims or losses that arise as a result of settlement, or attempted settlement,
      of a debtor account through the DebtResolve system. Following the initial term,
      which is negotiated between us and the client, the contract typically renews
      automatically.




The
      DebtResolve system went live with a pilot program in February 2004. We currently
      have written contracts in place with, and have begun processing select
      portfolios for, HSBC Technology and Services (USA), Inc., a unit of HSBC Bank
      plc, one of the largest financial institutions in the world, Premier Bankcard,
      Inc., a unit of First Premier Bank, a major credit card issuer, and CLK
      Management, LLC, a provider of personal loans through subsidiaries such as
      One
      Click Cash. In addition to lenders, we provide services to collection agencies
      such as Plaza Associates, Receivables Management Solutions Inc., ARS National
      Services, Inc. and Creditors Interchange Receivable Management, LLC. We also
      have written contracts in place with, but have not yet begun processing debt
      for, collection agencies DAR Services, Inc. (doing business as Foremost Search
      & Recovery), KCA Financial Services, Inc., Mercantile Adjustment Bureau, LLC
      and Certified Recovery Systems, LLP, as well as Lloyds TSB Bank plc, the United
      Kingdom’s fifth largest bank by market value, and Bank of America, N.A. Our
      nominal 2004 revenues were attributable to Receivables Management Solutions,
      our
      first client. These contracts provide us with a success fee (ranging from 4%
      to
      15% of the collected amounts, with the average being approximating 10%) or
      recurring license fees coupled with success or other transaction fees. In
      establishing our fees, we consider the expected account volumes and balances,
      the age and other characteristics of the consumer debt and our relationship
      with
      the creditor client involved.




Currently,
      we are processing accounts and generating revenues under our contracts with
      Household Finance/HSBC Group, First Premier Bank, CLK Management, Plaza
      Associates, Receivables Management Solutions, ARS National and Creditors
      Interchange Receivable Management. We are in the process of implementing
      operations under the DAR Services, Lloyds TSB Bank, Bank of America, KCA
      Financial Services, Mercantile Adjustment Bureau and Certified Recovery Systems
      contracts and expect to begin to process accounts and generate revenues under
      those contracts in the second quarter of 2006. To date we have not generated
      significant revenues from these contracts.




We
      priced
      our services under existing client contracts on a contingency success fee basis,
      averaging 10% of the dollars settled through our DebtResolve system, or
      recurring license fees coupled with success or other transaction fees. All
      current contracts call for our services to be provided on an ASP model, and
      are
      hosted at our web hosting facility. Our current pricing model has expanded
      to be
      a blend of the following:




**Set-up
      charge.** A
      one-time set-up charge ranging from $5,000 to $25,000, depending on the degree
      of customization required and the anticipated annual volume.




**Recurring
      license fee.** Based
      on
      the type of client portfolio and number of accounts in the DebtResolve
      system.




**Success/Transaction
      fee.** A
      contingent success fee or flat fee based on successful resolutions and
      settlements. Other transaction-based fees may also be utilized.




9


**Technology
      license and proprietary technology**




At
      the
      core of our DebtResolve system is a patent-protected bidding methodology
      co-invented by James D. Burchetta and Charles S. Brofman, the co-chairmen of
      our
      company. We originally entered into a license agreement in February
      2003 **** with
      Messrs. Burchetta and Brofman for the licensed usage of the intellectual
      property rights relating to U.S. Patent No. 6,330,551 issued by the U.S. Patent
      and Trademark Office on December 11, 2001 for “Computerized Dispute and
      Resolution System and Method” worldwide. This patent, which expires August 5,
      2018, covers automated and online, double blind-bid systems that generate
      high-speed settlements by matching offers and demands in rounds. In June 2005,
      we amended and restated the license agreement in its entirety. The licensed
      usage is limited to the creation of software and other code enabling an
      automated system used solely for the settlement and collection of delinquent,
      defaulted and other types of credit card receivables and other consumer debt
      and
      specifically excludes the settlement and collection of insurance claims, tax
      and
      other municipal fees of all types. The licensed usage also includes the
      creation, distribution and sale of software products or solutions for the same
      aim as above and with the same exclusions. In lieu of cash royalty fees, Messrs.
      Burchetta and Brofman have agreed to accept stock options to purchase shares
      of
      our common stock, to be granted as follows:




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




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




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




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




The
      stock
      options granted to Messrs. Burchetta and Brofman pursuant to the license
      agreement have an exercise price equal to the offering price per share in a
      potential public offering of the Company’s common stock and are exercisable for
      ten years from the date of grant.




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




Cybersettle,
      Inc. also licenses and utilizes the patent-protected bidding methodology
      co-invented by Messrs. Burchetta and Brofman, exclusive to the settlement of
      personal injury, property and worker’s compensation claims between claimants and
      insurance companies, self-insured corporations and municipalities. Cybersettle
      is controlled by XL Capital Ltd., one of the world’s largest insurance
      providers, and Mr. Brofman, our co-chairman, is the President and Chief
      Executive Officer of Cybersettle. Cybersettle is not affiliated with
      us.




10


In
      addition, we have developed our own software based on the licensed intellectual
      property rights. We regard our software as proprietary and rely primarily on
      a
      combination of copyright, trademark and trade secret laws of general
      applicability, employee confidentiality and invention assignment agreements
      and
      other intellectual property protection methods to safeguard our technology
      and
      software. We have not applied for patents on any of our own technology. We
      have
      obtained through the U.S. Patent and Trademark Office a registered trademark
      for
      our DebtResolve corporate and system name as well as our slogan “Debt Resolve -
      Settlement with Dignity.” “DR Settle,” “DR Pay,” “DR Control,” “DR Mail,” “DR
      Prevent,” “Debt Resolve - Resolved. With Dignity.” and “Connect. Resolve.
      Collect.” are our trademarks/service marks, and we intend to attempt to register
      them with the U.S. Patent and Trademark Office as well.




**Research
      and development**




We
      have
      devoted a significant portion of our resources to designing and developing
      new
      offerings, maintaining and enhancing existing offerings, expanding and improving
      our core technology and strengthening our technological expertise. In 2003
      and
      2004, we spent $453,301 and $46,022, respectively, on research and development
      of our offerings and services. In January 2004, we substantially completed
      the
      development of, and began marketing, our online service. Commencing February
      2004, costs incurred in connection with the operation, maintenance, modification
      and customization of our software were charged to expense as incurred, and
      are
      not classified as research and development expenses. We have developed
      internally, acquired or licensed the software and services we offer.




**Technology
      and service providers**




We
      outsource our web hosting to AT&T Corp. at the rate of $15,000 to $18,000
      per month, based on current volumes. The AT&T hosting facility is located in
      Secaucus, New Jersey. We use servers operated by AT&T to operate our
      proprietary software developed in our facility. Our agreement with AT&T
      expired on April 1, 2006. AT&T continues to provide the Company with service
      under the terms of this agreement while alternative possible contractual
      arrangements are discussed. Under the terms of our agreement with AT&T,
      AT&T has agreed to provide network connectivity availability 99.9% of the
      time from the connection off their backbone to our hosted infrastructure. Web
      hosting services are generally available from multiple sources and we believe
      that we can readily renew our contract or replace AT&T if it can no longer
      supply web hosting services to us on acceptable terms. The Company is currently
      reviewing alternative carriers and expects to enter into a new web hosting
      agreement with AT&T or another carrier in the near future. Based on current
      negotiations and volumes, we expect to incur expenses of from $12,000 to $18,000
      per month.




**Government
      regulation**




We
      believe that our business activities are subject to no particular regulation
      by
      governmental agencies other than that routinely imposed on corporate and
      Internet-based businesses. Although we believe it is unlikely, state or foreign
      regulators may take the position that our system effectively constitutes the
      collection of debts that is subject to licensing and other laws regulating
      the
      activities of collection agencies. If so, we might need to obtain licenses
      from
      such states, or such foreign countries where we may engage in business. Until
      licensed, if necessary, we would not be able to lawfully deal with consumers
      in
      such states or foreign countries. Moreover, we would likely have to incur
      expenses in obtaining licenses, including applications fees and post statutorily
      required bonds for each license.




A
      number
      of our existing and potential clients, such as credit card issuers, are in
      highly regulated industries. We will be indirectly impacted by consumer credit
      and debt collection practices laws, both in the United States and abroad. The
      relationship of a customer and a creditor is extensively regulated by federal,
      state and foreign consumer credit and protection laws and regulations.
      Significant laws include the Fair Debt Collection Practice Act, Fair Credit
      Reporting Act, the Federal Truth-In-Lending Act, the Fair Credit Billing Act
      and
      the Gramm-Leach-Bliley Act, as well as applicable comparable statutes in the
      states in which consumers reside. Failure of these parties to comply with
      applicable federal, state and foreign laws and regulations could have a negative
      impact on us. For example, applicable laws and regulations may limit our ability
      to collect amounts owing with respect to receivables, regardless of any act
      or
      omission on our part. No assurance can be given that any indemnities received
      from the financial institutions which originated the credit account will be
      adequate to protect us from losses on the receivables or liabilities to
      consumers. Any new laws or rulings that may be adopted, and existing consumer
      credit and protection laws, may adversely affect our ability to collect the
      receivables; and any failure on our part to comply with such requirements could
      adversely affect our ability to enforce the receivables and result in liability.
      While we are not a collection agency and do not operate as such, we cannot
      predict the impact of future regulations on either us or our existing or
      potential clients.




11


Any
      penetration of our network security or other misappropriation of consumers’
personal information could subject us to liability. Other potential misuses
      of
      personal information, such as for unauthorized marketing purposes, could also
      result in claims against us. These claims could result in litigation. In
      addition, the Federal Trade Commission and several states have investigated
      the
      use by certain Internet companies of personal information. Legislation has
      been
      introduced in the U.S. Senate that would mandate data-security management steps
      for many businesses and a nationwide standard for notifying consumers of
      security breaches. The legislation would require companies that store
      information on more than 10,000 people to create a data privacy and protection
      program, including assessing, maintaining and controlling risks to data privacy
      and security. Businesses would have to provide employee training, perform
      vulnerability tests and ensure that third-party service providers have adequate
      security programs. We could incur unanticipated expenses, especially in
      connection with our settlement database, if and when new regulations regarding
      the use of personal information are enacted.




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




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




As
      of the
      date of this report, we have only one contract in place relating to a foreign
      jurisdiction, our contract with Lloyds TSB Bank plc of the United Kingdom.
      Under
      this contract, we are subject to European data protection law that derives
      from
      the Data Protection Directive (Directive 95/46/EC) of the European Commission,
      which has been implemented in the United Kingdom under the Data Protection
      Act
      1998. Under the Data Protection Act, we are categorized as a “data processor.”
As a data processor, we are required to agree to take steps, including technical
      and organizational security measures, to ensure that personal data which may
      identify a living individual that may be passed to our DebtResolve system by
      our
      creditor client in the course of our business is protected. In addition, the
      Consumer Credit Act 1974 of the United Kingdom and various regulations made
      under it, governs the consumer finance market in the United Kingdom and provides
      that our creditor client must hold a license to carry on a consumer credit
      business. Under the Consumer Credit Act, all activities conducted through our
      DebtResolve system must be by, and in the name of, the creditor client. Except
      for our examination of European and United Kingdom law as it applies to our
      Lloyds TSB contract, we cannot predict how foreign laws will impact our ability
      to expand our business internationally, and the cost of such expansion. We
      will
      evaluate applicable foreign laws as our efforts to expand our business into
      other foreign jurisdictions warrant.




12


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




We
      may
      also pursue the acquisition of defaulted consumer debt portfolios to process
      through our DebtResolve system as part of our growth strategy. If we decide
      to
      pursue the acquisition of defaulted consumer debt portfolios to process through
      our DebtResolve system, federal, state, local and foreign laws may limit our
      ability to recover and enforce any acquired defaulted consumer debt portfolios
      regardless of any act or omission on our part. Some laws and regulations
      applicable to credit originators may preclude us from collecting on defaulted
      consumer debt portfolios we may purchase if the credit originator previously
      failed to comply with applicable law in generating or servicing those consumer
      debt receivables. These
      laws and regulations would include applicable state revolving credit, credit
      card or usury laws, state consumer plain English and disclosure
      laws, the Uniform Consumer Credit Code, the federal Truth
      in Lending Act (including the Fair Credit Billing Act amendments) and
      the Federal Reserve Board’s implementing Regulation Z, the federal Fair
      Credit Reporting Act, and state unfair and deceptive acts and practices laws. Collection
      laws and regulations may also directly apply to our business, ** such
      as
      the federal Fair Debt Collection Practice Act and state law
      counterparts *.* Additional
      consumer protection and privacy protection laws may be enacted that would impose
      additional requirements on the enforcement of and collection on defaulted
      consumer debt, and any new laws, rules or regulations that may be adopted,
      as
      well as existing consumer protection and privacy protection laws, may adversely
      affect our ability to collect on any acquired defaulted consumer debt
      portfolios. Finally, federal and state governmental bodies are considering,
      and
      may consider in the future, other legislative proposals that would regulate
      the
      collection of any acquired defaulted consumer debt portfolios, and although
      we
      cannot predict if or how any future legislation would impact this proposed
      expansion of our business, our failure to comply with any current or future
      laws
      or regulations applicable to us could limit our ability to collect on any
      acquired defaulted consumer debt portfolios. If we were to acquire defaulted
      consumer debt portfolios that consist of consumer debt that originated in
      foreign jurisdictions, foreign laws may also limit our ability to recover and
      enforce these portfolios. However, we do not anticipate acquiring defaulted
      consumer debt portfolios that consist of consumer debt that originated in
      foreign jurisdictions at this time, and we have not evaluated the impact of
      any
      applicable foreign laws at this time.




**Competition**




We
      believe that we are the first company to introduce an Internet-based online
      system designed to facilitate the collection of consumer debt. However, we
      are
      aware of two other companies that have announced offerings that may touch on
      some aspects of our market. Incurrent Solutions, Inc., a division of Online
      Resources Corp., is a supplier of customer relationship management systems
      and
      front-end web applications for banks. It announced a collection offering in
      fall
      2004. We believe the Online Resources product is tightly integrated into the
      creditors’ computer system and rules for treatment of accounts must be entered
      by Incurrent, not the client. Also, in fall 2004, Apollo Enterprises Solutions,
      LLC, a provider of enterprise-class web-hosted solutions for a variety of
      industries involved in receivables management and debt collection, announced
      an
      online collection offering. Its offering ties directly into the credit rating
      bureaus and incorporates real-time credit scoring. Based on our research, we
      are
      aware of only one client using the Apollo system to settle and collect consumer
      debt. Because the entire area of Internet-based online systems designed to
      facilitate the collection of consumer debt is a new offering in the collections
      industry, we are not aware of any market data that is presently available with
      respect to market share or other similar industry metrics.




13


Presently,
      other technology-based offerings introduced by other participants in our general
      market have related to credit and collections scoring, which differs from our
      system and strategic direction. Several companies offer collections management
      and payment software systems designed to support direct-mail and telephone
      collection efforts. These companies may add Internet-based payment and automated
      settlement mechanisms to their systems. Creditor institutions themselves may
      also consider developing systems similar to those offered by us internally,
      although such systems may be limited by the breadth of the patent upon which
      our
      DebtResolve system is based. Even if creditor institutions ultimately do not
      decide to develop systems similar to those offered by us internally, many large
      creditor insitutions have the financial and technical resources to do so which
      may cause them to delay or decline to use the DebtResolve system for an extended
      period while they evaluate the merits of internal development. In addition,
      a
      number of creditor institutions have already developed Internet-based payment
      sites and could decide that such sites are sufficient for their collection
      purposes. To date, however, creditor financial institutions’ new development
      efforts appear to have been focused on their non-delinquent customers, where
      they have the largest revenue opportunity, and we are not aware of any creditor
      financial institutions working to develop a system that is directly competetive
      with our DebtResolve system. However, this may change as the effectiveness
      of
      the DebtResolve system is established.




We
      intend
      to continuously enhance and extend our offerings and develop significant
      expertise in customer behavior with respect to online debt payment to remain
      ahead of these potential competitors. In addition, we believe we have the
      following key competitive advantages:




to
      our
      knowledge, we are the first to market an integrated set of Internet-based
      consumer debt collection tools,




as
      the
      first to market, we have developed early expertise which we expect will allow
      us
      to keep our technology on the leading edge and develop related offerings and
      services to meet our clients’ needs,




the
      patent license to the Internet bidding process protects the DebtResolve system’s
      key methodology and limits what future competitors may develop,




the
      effectiveness of the Internet bidding model to settle claims has already been
      shown in the insurance industry by Cybersettle, Inc. (with respect to insurance
      claims), and




the
      industry reputation of our management team and the extensive consumer debt
      research we have conducted provide us with credibility with potential
      clients.




**Employees**




As
      of the
      date of this report, we had 17 full-time employees, all of whom are based at
      our
      corporate headquarters in White Plains, New York. None of our employees is
      subject to a collective bargaining agreement and we believe that our relations
      with our employees are good.




**Risk
      Factors**




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




As
      of
      December 31, 2005, our total stockholders’ deficiency was $2,222,682 and we had
      a working capital deficit of $2,648,817. Primarily as a result of our losses,
      limited cash balances and debt obligations, our independent registered public
      accounting firm has included in its report for the year ended December 31,
      2005
      an explanatory paragraph expressing substantial doubt about our ability to
      continue as a “going concern.” Our ability to continue as a going concern is
      contingent upon, among other factors, obtaining additional financing. If we
      are
      not able to obtain additional financing, we may be forced to cease our
      operations.




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




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




14


*We
      have experienced significant and continuing losses from operations. From
      inception through December 31, 2005, we have incurred accumulated net losses
      of
      $10,984,349. If such losses continue, we may not be able to continue our
      operations.*




We
      incurred a net loss of $5,403,542 for the year ended December 31, 2005 and
      $2,668,998 for the year ended December 31, 2004. From February 2003 to date,
      our
      operations have been funded almost entirely through the proceeds of
      approximately $2,400,000 that we have received from the issuance of our common
      stock in private placements, $2,695,000 that we have received from the issuance
      of our 7% convertible promissory notes in two private financings in 2005 and
      approximately $925,000 in short-term financing received in the last quarter
      of
      2005 through the first quarter of 2006, of which $400,000 was received from
      current stockholders. In addition, the Company has raised $300,000 in March
      of
      2006 in its ongoing private debt offering consisting of 12% convertible notes.
      From inception through December 31, 2005, we incurred accumulated net losses
      of
      $10,984,349. If we continue to experience losses, we may not be able to continue
      our operations.




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




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




*If
      we
      are unable to implement our marketing program, we will not be able to grow
      our
      client base and generate revenues.*




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




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




Our
      ability to compete in our sector depends in part upon the strength of our
      proprietary rights in our technologies. We consider our intellectual property
      to
      be critical to our viability. We do not hold patents on our consumer
      debt-related product, but rather license technology for our DebtResolve system
      from James D. Burchetta and Charles S. Brofman, the co-chairmen of our company,
      whose patented technology is now, and is anticipated to continue to be,
      incorporated into our service offerings as a key component. Unauthorized use
      by
      others of our proprietary technology could result in an increase in competing
      products and a reduction in our sales. We rely on patent, trademark, trade
      secret and copyright laws to protect our licensed and proprietary technology
      and
      other intellectual property. We cannot be certain, however, that the steps
      that
      we have taken to protect our proprietary rights to date will provide meaningful
      protection from unauthorized use by others. If we must pursue litigation in
      the
      future to enforce our intellectual property rights, to protect our trade secrets
      or to determine the validity and scope of the proprietary rights of others,
      we
      may not prevail and we are likely to incur substantial expenditures and divert
      valuable resources in the process. In addition, many foreign countries’ laws may
      not protect us from improper use of our proprietary technologies. Consequently,
      we may not have adequate remedies if our proprietary rights are breached or
      our
      trade secrets are disclosed.




15


*If
      we
      are unable to build brand awareness for our company and our services, demand
      for
      our services will be limited.*




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




*The
      intellectual property rights that we license from our co-founders are limited
      in
      industry scope, and it is possible these limits could constrain the expansion
      of
      our business.*




We
      do not
      hold patents on our consumer debt-related product, but rather license technology
      for our DebtResolve system from James D. Burchetta and Charles S. Brofman,
      the
      co-chairmen of our company, whose patented technology is now, and is anticipated
      to continue to be, incorporated into our service offerings as a key component.
      This license agreement limits usage of the technology to the creation of
      software and other code enabling an automated system used solely for the
      settlement and collection of credit card receivables and other consumer debt
      and
      specifically excludes the settlement and collection of insurance claims, tax
      and
      other municipal fees of all types. These limitations on usage of the licensed
      technology could constrain the expansion of our business by limiting the
      different types of debt for which our DebtResolve system can potentially be
      used, and limiting the potential clients that we could service.




*In
      the future, we may be subject to intellectual property rights claims, which
      are
      costly to defend, could require us to pay damages and could limit our ability
      to
      use certain technologies in the future and thereby result in loss of clients
      and
      revenue.*




Litigation
      regarding intellectual property rights is common in the Internet and technology
      industries. We expect that Internet technologies and software products and
      services may be increasingly subject to third-party infringement claims as
      the
      number of competitors in our industry segment grows and the functionality of
      products and services in different industry segments overlaps. Under our license
      agreement, we have the right and obligation to control and defend against
      third-party infringement claims against us with respect to the patent rights
      that we license. Any claims relating to our services or intellectual property
      could result in costly litigation and be time consuming to defend, divert
      management’s attention and resources, cause delays in releasing new or upgrading
      existing products and services or require us to enter into royalty or licensing
      agreements. Royalty or licensing agreements, if required, may not be available
      on acceptable terms, if at all. There
      can
      be no assurance that our services or intellectual property rights do not
      infringe the intellectual property rights of third parties. A successful claim
      of infringement against us and our failure or inability to license the infringed
      or similar technology or content could prevent us from continuing our
      business.




16


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




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




Upon
      completion of our potential IPO, we anticipate that Messrs. Burchetta and
      Brofman will beneficially own approximately 30.5% of our outstanding shares
      of
      common stock. They have controlled our company since its inception. Under the
      terms of our license agreement, Messrs. Burchetta and Brofman will be entitled
      to receive stock options to purchase shares of our common stock if and to the
      extent the licensed technology produces specific levels of revenue for us.
      They
      will not be entitled receive any stock options for other debt collection
      activities such as off-line settlements. Messrs. Burchetta and Brofman will
      be
      substantially responsible for selecting the business direction we take, the
      products and services we may develop and the mix of businesses we may pursue.
      The license agreement may present Messrs. Burchetta and Brofman with conflicts
      of interest.





*We
      have not made any previous acquisitions, and we may fail to successfully
      integrate acquisitions and reduce our operating expenses.*




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




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




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




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




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




*We
      may pay too much for, or collect too little on, defaulted consumer debt
      portfolios that we may purchase.*




We
      may
      pursue the acquisition of defaulted consumer debt portfolios to process through
      our DebtResolve system, an area in which we have little experience. These are
      consumer debt portfolios that the credit originator has deemed uncollectible
      and
      has charged-off, generally after making numerous attempts to collect on them.
      We
      may not be able to consummate any acquisitions of defaulted consumer debt
      portfolios on favorable terms, if at all, and our inexperience may impair our
      ability to manage and collect on such consumer debt portfolios. These defaulted
      consumer debt portfolios are difficult to collect and we may not collect even
      a
      sufficient amount to cover the cost of acquiring them. Also, as we have no
      experience with pricing defaulted consumer debt portfolios, we may pay too
      much
      for these portfolios and, consequently, we may not generate a profit from these
      consumer debt portfolio acquisitions.




17


Moreover,
      if we decide to pursue the acquisition of defaulted consumer debt portfolios
      to
      process through our DebtResolve system, we will: (i) have to expand our
      operations, (ii) face new operational risks that we cannot predict at this
      time,
      (iii) become subject to increased government regulation and (iv) be subject
      to
      material changes in our financial statements and financial reporting.
      Specifically:




·
            our
                expansion into this line of business could result in the need to
                enter
                into potentially complex financing arrangements, resulting in the
                need to
                manage those relationships and the potential interest rate risk and
                credit
                risk associated with them,




·
            accounting
                for this activity would require that we become familiar with the
                applicable accounting regulations, with which we are not currently
                familiar,




·
            our
                accounting would also become more complex, requiring combining the
                results
                of our proposed debt-buying subsidiary into our consolidated financial
                statements, and




·
            we
                would incur additional costs associated with the start-up of our
                proposed
                debt-buying subsidiary, including legal, filing fees and other start-up
                costs associated with establishing this potential line of business.




In
      addition:




·
            federal,
                state, local and foreign laws may limit our ability to recover and
                enforce
                any acquired defaulted consumer debt portfolios regardless of any
                act or
                omission on our part,




·
            some
                laws and regulations applicable to credit originators may preclude
                us from
                collecting on defaulted consumer debt portfolios we may purchase
                if the
                credit originator previously failed to comply with applicable law
                in
                generating or servicing those consumer debt
                receivables,




·
            collection
                laws and regulations may also directly apply to our
                business,




·
            additional
                consumer protection and privacy protection laws may be enacted that
                would
                impose additional requirements on the enforcement of and collection
                on
                defaulted consumer debt, and any new laws, rules or regulations that
                may
                be adopted, as well as existing consumer protection and privacy protection
                laws, may adversely affect our ability to collect on any acquired
                defaulted consumer debt portfolios,
                and




·
            federal
                and state governmental bodies are considering, and may consider in
                the
                future, other legislative proposals that would regulate the collection
                of
                any acquired defaulted consumer debt portfolios, and although we
                cannot
                predict if or how any future legislation would impact this proposed
                expansion of our business, our failure to comply with any current
                or
                future laws or regulations applicable to us could limit our ability
                to
                collect on any acquired defaulted consumer debt portfolios.




If
      any of
      these or similar risks materialize, we may have to scale back or eliminate
      our
      proposed debt portfolio acquisitions and business.




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




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




18


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




Our
      ability to provide high-quality client support largely depends on the efficient
      and uninterrupted operation of our computer and communications systems to
      accommodate our creditor clients and the consumers who use our system. In the
      terms and conditions of our standard form of licensing agreement with our
      clients, we agree to make commercially reasonable efforts to maintain
      uninterrupted operation of our DebtResolve system 99.99% of the time, except
      for
      scheduled system maintenance. In the normal course of our business, we must
      record and process significant amounts of data quickly and accurately to access,
      maintain and expand our DebtResolve system. Any failure of our information
      systems, software or backup systems would interrupt our operations and could
      cause us to lose clients. We are exposed to the risk of network and Internet
      failure, both through our own systems and those of our service providers. While
      our utilization of redundant transmission systems can improve our network’s
      reliability, we cannot be certain that our network will avoid downtime.
      Substantially all of our computer and communications hardware systems are hosted
      in leased facilities with AT&T in New Jersey, and under the terms of our
      hosting service level agreement with AT&T, AT&T will provide network
      connectivity availability 99.9% of the time from the connection off their
      backbone to our hosted infrastructure. Our disaster recovery plan may not be
      adequate and our business interruption insurance may not adequately compensate
      us for losses that could occur as a result of a network-related business
      interruption. The occurrence of a natural disaster or unanticipated problems
      at
      our facilities or those of our service providers could cause interruptions
      or
      delays in use of our DebtResolve system and loss of data. Additionally, we
      rely
      on third parties to facilitate network transmissions and telecommunications.
      We
      cannot assure you that these transmissions and telecommunications will remain
      either reliable or secure. Any transmission or telecommunications problems,
      including computer viruses and other cyberattacks, particularly if those
      problems persist or recur frequently, could result in lost business from
      creditor clients and consumers. Network failures of any sort could seriously
      affect our client relations, potentially causing clients to cancel or not renew
      contracts with us.




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




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




*James
      D. Burchetta and Richard G. Rosa possess specialized knowledge about our
      business and we would be adversely impacted if either one were to become
      unavailable to us.*




We
      believe that our ability to execute our business strategy will depend to a
      significant extent upon the efforts and abilities of James D. Burchetta, our
      Chief Executive Officer, and Richard G. Rosa, our Senior Vice President and
      Chief Technology Officer. Mr. Burchetta, who is a licensor of key
      intellectual property to us, has knowledge regarding online debt collection
      technology and business contacts that would be difficult to replace.
      Mr. Rosa has technical expertise regarding our system that our other
      officers do not possess. If Messrs. Burchetta or Rosa were to become unavailable
      to us, our operations would be adversely affected. We are in the process of
      obtaining “key-man” life insurance for our benefit in the amount of $1,000,000
      on the lives of each of Messrs. Burchetta and Rosa, but not for any other
      officer. This insurance may be inadequate to compensate us for the loss of
      either Mr. Burchetta or Mr. Rosa. Moreover, we have no insurance to compensate
      us for the loss of any other of our named executive officers or key
      employees.




19


*Our
      clients’ ability to recover and enforce defaulted**consumer
      debt may be limited under federal, state, local and foreign laws, which would
      negatively impact our revenues.*




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




*Government
      regulation and legal uncertainties regarding consumer credit and debt collection
      practices may require us to incur significant expenses in complying with any
      new
      regulations.*




A
      number
      of our existing and potential creditor clients, such as banks and credit card
      issuers, operate in highly regulated industries. We are indirectly impacted
      by
      consumer credit and debt collection practices laws, both in the United States
      and abroad. The relationship of a consumer and a creditor is extensively
      regulated by federal, state, local and foreign consumer credit and protection
      laws and regulations. Governing laws include the Fair Debt Collection Practices
      Act, Fair Credit Reporting Act, the Federal Truth-In-Lending Act, the Fair
      Credit Billing Act and the Gramm-Leach-Bliley Act, as well as applicable
      comparable statutes in the states in which consumers reside. Failure of these
      parties to comply with applicable federal, state, local and foreign laws and
      regulations could have a negative impact on us. For example, applicable laws
      and
      regulations may limit our ability to collect amounts owing with respect to
      defaulted consumer debt accounts, regardless of any act or omission on our
      part.
      We cannot assure you that any indemnities received from the financial
      institutions which originated the consumer debt account will be adequate to
      protect us from liability to consumers. Any new laws or rulings that may be
      adopted, and existing consumer credit and protection laws, may adversely affect
      our ability to collect and settle defaulted consumer debt accounts. In addition,
      any failure on our part to comply with such requirements could adversely affect
      our ability to settle defaulted consumer debt accounts and result in liability.
      In addition, state or foreign regulators may take the position that our system
      effectively constitutes the collection of debts that is subject to licensing
      and
      other laws regulating the activities of collection agencies. If so, we may
      need
      to obtain licenses from such states, or such foreign countries where we may
      engage in business. Until licensed, we will not be able to lawfully deal with
      consumers in such states or foreign countries. Moreover, we will likely have
      to
      incur expenses in obtaining licenses, including applications fees and post
      statutorily required bonds for each license.




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




Any
      penetration of our network security or other misappropriation of consumers’
personal information could subject us to liability. Other potential misuses
      of
      personal information, such as for unauthorized marketing purposes, could also
      result in claims against us. These claims could result in litigation. In
      addition, the Federal Trade Commission and several states have investigated
      the
      use by certain Internet companies of personal information. Legislation has
      been
      introduced in the U.S. Senate that would mandate data-security management steps
      for many businesses and a nationwide standard for notifying consumers of
      security breaches. The legislation would require companies that store
      information on more than 10,000 people to create a data privacy and protection
      program, including assessing, maintaining and controlling risks to data privacy
      and security. Businesses would have to provide employee training, perform
      vulnerability tests and ensure that third-party service providers have adequate
      security programs. We could incur unanticipated expenses, especially in
      connection with our settlement database, if and when new regulations regarding
      the use of personal information are enacted.




20


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




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




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




*We
      were recently required to restate our financial results due to insufficient
      internal controls.  No assurances can be given that we will be able to
      remedy these deficiencies or that similar restatements will not be required
      in
      the future.*




On
      August
      16, 2005, our independent auditors reported to our audit committee certain
      matters involving internal controls that our independent auditors considered
      to
      be reportable conditions and a material weakness under standards established
      by
      the American Institute of Certified Public Accountants. The reportable
      conditions and material weakness related to the June 30, 2005, March 31, 2005,
      December 31, 2004 and December 31, 2003 financial closing process and inadequate
      reviews and approvals of transactions and accounting entries, as well as errors
      which resulted in financial reports that were restated for these periods. 
These reportable conditions and material weakness also existed as of December
      31, 2005. While we believe we have put processes in place to begin to remedy
      these deficiencies, no assurance can be given that we will not be faced with
      these or other financial reporting deficiencies in the future.  Any such
      deficiencies may require us to restate our financial results again, which could
      adversely effect the credibility of our reported results.




The
      impact of the restatement to the March 31, 2005 financial statements was
      included in our report for the nine months ended September 30, 2005. The
      restated financial reports for the years ended December 31, 2004 and 2003 were
      included in the first amendment to our annual report for the year ended December
      31, 2004 filed December 8, 2005. Subsequent to the completion and filing of
      the
      first amendment, we became aware of certain accounting guidance regarding how
      a
      non-public entity should calculate of the value of options granted to
      non-employees. Up through the filing of the first amendment, we had followed
      the
      guidance in SFAS No. 123, and had followed the minimum value method, which
      does
      not take into account volatility, to calculate the value of stock options issued
      to both employees and consultants. Upon further review, we decided that guidance
      in EITF 96-18 should also apply. Specifically, that stock options granted to
      non-employees should be valued using the fair value method, which includes
      stock
      price volatility as a component of the valuation of stock options. Since our
      stock was not, and is not as of the date hereof, publicly traded, we developed
      an index of the volatility reported by comparable companies in accordance with
      SFAS No. 123. Accordingly, we restated our prior financial statements using
      the
      fair value method of calculating non-employee stock-based compensation. The
      restated financial reports for the years ended December 31, 2004 and 2003 were
      included in the second amendment to our annual report for the year ended
      December 31, 2004 that was filed on March 30, 2006.




21


Given
      these reportable conditions and material weakness, our Chief Executive Officer
      and our Chief Financial Officer concluded that our disclosure controls and
      procedures were not effective at the “reasonable assurance” level due to
      reporting errors which occurred with respect to our financial reports for the
      years ended December 31, 2004 and 2003 and the three months ended March 31,
      2005, which required the restatement of these reports. Our management has since
      devoted additional resources to resolving questions that arose during the
      preparation of our prior year financial statements. As a result, our executive
      and financial officers have, as required, certified that our **** financial
      statements for the year ended December 31, 2005 and 2004, as well as our
      restated financial statements for the years ended December 31, 2004 and 2003,
      fairly present, in all material respects, our **** financial
      condition and results of operations. Our management believes that the reportable
      conditions noted above stem from our operational growth. Our management has
      worked closely with our audit committee to develop improved internal controls,
      including hiring additional accounting staff, seeking experienced accounting
      advice and documenting accounting control procedures. Notwithstanding these
      efforts, as of December 31, 2005, our disclosure controls were not effective.
      Our management believes that this new infrastructure will assist in alleviating
      these weaknesses going forward, but we cannot assure you that weaknesses will
      never occur.




*Failure
      to achieve and maintain effective internal controls in accordance with Section
      404 of the* *Sarbanes-Oxley**Act
      of 2002 could prevent us from producing reliable financial reports or
      identifying fraud. In addition, current and potential stockholders could lose
      confidence in our financial reporting, which could have an adverse effect on
      our
      stock price.*




Effective
      internal controls are necessary for us to provide reliable financial reports
      and
      effectively prevent fraud, and a lack of effective controls could preclude
      us
      from accomplishing these critical functions. Commencing the year ending December
      31, 2007, we will be required to document and test our internal control
      procedures in order to satisfy the requirements of Section 404 of the
      Sarbanes-Oxley Act of 2002, which requires annual management assessments of
      the
      effectiveness of our internal controls over financial reporting and a report
      by
      our independent registered public accounting firm addressing these assessments.
      Assigned to accounting issues at present are only our Chief Financial Officer
      and one staff accountant, which may be deemed to be inadequate. Although we
      intend to augment our internal controls procedures and expand our accounting
      staff, there is no guarantee that this effort will be adequate.




During
      the course of our testing, we may identify deficiencies which we 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 we fail to
      maintain the adequacy of our internal accounting controls, as such standards
      are
      modified, supplemented or amended from time to time, we may not be able to
      ensure that we can conclude on an ongoing basis that we have effective internal
      controls over financial reporting in accordance with Section 404. Failure to
      achieve and maintain an effective internal control environment could cause
      us to
      face regulatory action and also cause investors to lose confidence in our
      reported financial information, either of which could have an adverse effect
      on
      our stock price.




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




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




22


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




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




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




**ITEM
      2. Description of property**




We
      lease
      approximately 4,900 square feet of office space at 707 Westchester Avenue,
      Suite
      L7, White Plains, New York 10604. We lease this space for $10,274 per month
      on a
      straight-line basis under a non-cancelable lease through July 2010.




**ITEM
      3. Legal proceedings**




None.




**ITEM
      4. Submission of matters to a vote of security holders**




In
      a
      report on Form 14c filed with the SEC on December 9, 2005, the Company disclosed
      that on June 14, 2005, holders of a majority of the voting power of our
      outstanding common stock voted to approve the following:




·
            A
                grant of discretionary authority to our board of directors to implement
                a
                reverse stock split of our 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 December 9, 2005,
                but
                before the closing of the potential IPO of our shares, with the exact
                time
                of the reverse stock split and the exchange ratio of the reverse
                split to
                be determined by our board of directors. A proposed 1-for-10 reverse
                stock
                split of our outstanding shares of common stock would reduce our
                outstanding shares of common stock from 29,703,900 to 2,970,390 shares.
                A
                total of 19,859,900 votes were cast for the proposal; 0 votes were
                cast
                against the proposal; 0 votes abstained; and there were no broker
                non-votes. The authority to do so has expired and no formal action
                with
                respect to the split was taken.




·
            The
                Debt Resolve, Inc. 2005 Incentive Compensation Plan, approved by
                our
                directors on June 14, 2005, with a total of 900,000 shares authorized
                for
                issuance under the Incentive Compensation Plan. A total of 19,859,900
                votes were cast for the proposal; 0 votes were cast against the proposal;
                0 votes abstained; and there were no broker non-votes.




No
      other
      matters were submitted to a vote of security holders during the year ended
      December 31, 2005.




23


**PART
      II.**




**ITEM
      5. Market for common equity and related shareholder
      matters**




There
      is
      not currently a public trading market for our common stock.




During
      2005, we issued an aggregate of 224,900 shares of our common stock in a series
      of private placement closings at a price of $1.00 per share to six “accredited
      investors” as that term is defined in Rule 501(a) under the Securities Act of
      1933. These issuances were exempt from registration pursuant to Section 4(2)
      of
      the Securities Act and Regulation D (Rule 506) promulgated there under. No
      underwriting discounts or commissions were paid in association with the private
      placement sales.




We
      completed two private financing transactions in April 2005 and in June and
      September 2005, in which we raised total gross proceeds of $2,695,000 from
      accredited investors. The principal amount and accrued interest under the April
      and the June/September notes are convertible into shares of common stock at
      any
      time at the option of the holder, and automatically, in the case of a public
      offering of the Company’s common stock, in which case an aggregate of 428,461
      shares of our common stock are issuable upon the conversion, at a conversion
      ratio equal to 85% of an assumed IPO price of $5.00 per share, of the principal
      and accrued interest on $800,000 of 7% convertible promissory notes purchased
      in
      a private financing in April 2005 and 50% of the principal and accrued interest
      on $1,895,000 of 7% convertible notes purchased in a private financing in
      June/September 2005, and an aggregate of 317,058 shares of our common stock
      are
      issuable upon the exercise of outstanding three- and five-year warrants,
      exercisable at $4.25 per share at an assumed initial public offering price
      of
      $5.00 per share, issued in connection with the two private financings. The
      remainder of the principal and accrued interest on the convertible promissory
      notes purchased in our June/September 2005 private financing are to be repaid
      in
      cash from the proceeds of our potential IPO. The notes from the April 2005
      financing transaction will mature on April 21, 2006. The Company intends to
      request that existing bridge note holders extend their notes. Maxim Group LLC
      acted as the placement agent in the June/September 2005 private financing and
      received placement fees of $142,800 and non-accountable expenses of $53,550.
      In
      addition, Maxim Group LLC received a warrant to purchase up to 336,000 shares
      of
      our common stock.




As
      of the
      date of this report, there were 81 record holders of our common
      stock.




We
      have
      not paid any cash dividends since our inception and do not contemplate paying
      dividends in the foreseeable future.




**ITEM
      6. Management’s discussion and analysis or plan of
      operation**




*The
      following discussion of our financial condition and results of operations should
      be read in conjunction with our financial statements and related notes included
      in this report. This discussion includes forward-looking statements that involve
      risks and uncertainties. As a result of many factors, our actual results may
      differ materially from those anticipated in these forward-looking statements.*




**Overview**




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




24


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




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




Our
      revenues to date have been insignificant. We have financed our activities to
      date through our management’s contributions of cash, the forgiveness of royalty
      and consulting fees, the proceeds from sales of our common stock in private
      placement financings, the proceeds of our 7% convertible promissory notes in
      two
      private financings and short-term borrowings. In connection with our marketing
      and client support goals, we expect our operating expenses to grow as we employ
      additional technicians, sales people and client support representatives. We
      expect that salaries and other compensation expenses will continue to be our
      largest category of expense, while travel, legal, and other sales and marketing
      expenses will grow as we expand our sales, marketing and support capabilities.
      Effective utilization of our system will require a change in thinking on the
      part of the collection industry, but we believe the effort will result in new
      collection benchmarks. We intend to provide detailed advice and hands-on
      assistance to clients to help them make the transition to our system.




Our
      preliminary contracts provide that we will earn revenue based on a percentage
      of
      the amount of debt collected from accounts submitted on our 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 our client. For the early adopters
      of
      its system, we waived set-up fees and other transactional fees that it
      anticipates charging on a going-forward basis. While the percent of debt
      collected will continue to be a revenue recognition method going forward, other
      payment models are also being offered to clients and may possibly become our
      preferred revenue model. Most contracts currently in process include provisions
      for set up fees and base revenue on a monthly licensing fee per account, with
      a
      small transaction fee on debt settlement. In addition, with respect to our
      DR
      Prevent TM module, we expect that a licensing fee per account on our system,
      and/or the hybrid revenue model which will include both fees per account and
      transaction fees at settlement, may become the preferred revenue methods. As
      we
      expand our knowledge of the industry, we have become aware that different
      revenue models may be more appropriate for the individual circumstances of
      our
      potential clients, and our expanded choice of revenue models reflect that
      knowledge.




We
      have
      also made plans to enter into the business of purchasing and collecting debt.
      Through a planned-for subsidiary, we plan to buy portfolios of charged-off
      debts
      at a significant discount to their face value and, through subcontracted,
      licensed debt collectors, attempt to collect on that debt by utilizing both
      our
      DebtResolve system and also traditional collection methods. We hope that, in
      addition to the actual revenues earned from this venture, by buying and settling
      these debts, and especially opportunistic, Internet-related debt, such as debts
      associated with Internet service providers and sellers and lenders over the
      Internet, we will develop a new paradigm for the collection of such debts,
      as
      well as develop “best practice” usage methods, which we can then share with our
      core clients.




25


Our
      plans
      call for us to co-own these charged-off debt portfolios along with investment
      partners, enabling us to diversify our investment in this sector by taking
      small
      percentage positions in many larger pools. Revenue streams associated with
      this
      business will include servicing fees earned and paid, collections of principal
      in excess of the price paid, interest earned on purchased debt and paid to
      investment partners, and, from time to time, gains on the resale of remaining
      balances. We, as the parent company, may also earn increased revenues from
      the
      use of our DebtResolve system by agencies that may be subcontracted to collect
      these debts. We expect that revenues earned from the debt purchase and
      collection business will develop slowly, over several months, beginning from
      the
      time we first capitalize the subsidiary. We have already hired experienced
      staff
      and incurred certain legal expenses to prepare to meet compliance requirements
      for entering this business. Until we achieve certain scale in these operations,
      early revenues will at first only cover those costs.




In
      addition, in March 2006, we entered into a non-binding letter of intent with
      a
      privately-held collection agency to explore the possibility purchasing this
      company. We have not entered into any definitive agreements to purchase this
      collection agency as a result of this letter of intent, but are exploring the
      possibility of doing so.




Our
      financial statements were prepared using principles applicable to a going
      concern, which contemplate the realization of assets and liquidation of
      liabilities in the normal course of business. We had $23,576 in cash and cash
      equivalents at December 31, 2005. Our working capital deficit at December 31,
      2005 was $2,648,817. In April 2005 and in June/September 2005, we issued
      $2,695,000 of our 7% senior convertible promissory notes as part of two separate
      private financing arrangements. From November 2005 through March 2006, we also
      borrowed an additional $1,225,000 in short-term funds. We believe that our
      working capital as of the date of this report is not sufficient to fund our
      plan
      of operations beyond April 30, 2006. We are currently seeking to complete a
      private financing consisting of the issuance of senior convertible promissory
      notes. While revenues and cash from revenues may increase during 2006, we do
      not
      expect this growth to be sufficient to alleviate our funding issues described
      in
      this report. Thus, our ability to continue as a “going concern” is contingent
      upon the successful completion of our current private financing efforts and
      our
      potential IPO. These factors raise substantial doubt as to our ability to
      continue as a going concern. Our most recent independent registered public
      accounting firm’s report also contains an explanatory paragraph expressing
      substantial doubt about our ability to continue as a going concern. The
      financial statements do not include adjustments to the value or classification
      of our assets and liabilities that we may need to make if we are unable to
      continue operating as a going concern.




**Plan****of
      operation**




***Year
      ended December 31, 2005 Compared to Year Ended December 31, 2004***




**Revenues**




We
      earned
      nominal revenues of $23,599 for the year ended December 31, 2005, an increase
      of
      $20,812 over revenues of $2,787 for the year ended December 31, 2004. All of
      the
      revenue earned in 2005 was earned based on a percentage of the amount collected
      from accounts submitted on our DebtResolves system by our clients. An additional
      $3,600 was received in set up fees, which will be recognized when we have
      delivered completed programming to the client.




Up
      to
      December 2005, all of our contracts provided that we would earn revenue based
      on
      a percentage of the amount of debt collected from accounts submitted on our
      DebtResolve system. Although other revenue models have been proposed, all
      revenue earned to date has been determined using this method, and such revenue
      is recognized when the settlement amount of debt is collected by our client.
      For
      the early adopters of our system, we waived set-up fees and other transactional
      fees that we anticipate charging on a going-forward basis. While the percent
      of
      debt collected method will continue to be a revenue recognition method going
      forward, other payment models are also being offered to clients and could
      possibly become our preferred revenue model. Most contracts currently in process
      include set up fees and base revenue on a monthly licensing fee per account
      with
      a small transaction fee on settlement.




26


**Costs
      and expenses**




**Payroll
      and related expenses.** Payroll
      and related expenses totaled $1,516,467 for the year ended December 31,
      2005, an increase of $610,030 over payroll and related expenses of $906,437
      for
      the year ended December 31, 2004. The increase was due primarily to an increase
      in the number of employees in 2005, net of a decrease in waived compensation
      to
      executives due to modifications to their employment agreements. A substantial
      portion of the payroll and related expenses of $906,437 for the year ended
      December 31, 2004 consisted of compensation incurred in connection with
      employment agreements with members of our executive management team. Three
      executives waived the entire amount of their compensation during 2004 and were
      not paid, resulting in a capital contribution of $412,500. In the year ended
      December 31, 2005, two of our executives waived $112,500 in compensation, which
      was recorded as imputed compensation and a contribution to capital.




As
      of
      December 31, 2005, we had seventeen full-time employees.




**General
      and administrative expenses.** General
      and administrative expenses, including stock-based compensation, totaled
      $1,798,099 for the year ended December 31, 2005, an increase of $111,941
      compared to general and administrative expenses of $1,686,158 for the year
      ended
      December 31, 2004. General and administrative expenses in the year ended
      December 31, 2005 consisted of $469,014 for service fees, including legal,
      consulting and accounting fees, $209,510 for telecommunication costs, including
      web hosting services, $66,816 for marketing expenses, $154,935 for
      travel-related expenses, $92,678 for rent and occupancy expenses, $88,230 for
      insurance and $82,672 for other general expenses including computer software
      and
      office supplies. Also recorded in this category was $634,244 in stock-based
      compensation expense for options and warrants granted in payment for consulting
      services.




General
      and administrative expenses, including stock-based compensation of $1,686,158
      for the year ended December 31, 2004 consisted of $285,677 for service
      fees, including legal, consulting and accounting fees, $158,346 for
      telecommunication costs, including web hosting services, $123,013 for marketing
      expenses, $95,440 for travel-related expenses, $72,721 for rent and occupancy
      expenses, and approximately $82,000 for other general expenses including
      computer software and office supplies. Also recorded in this category was
      $869,190 in stock-based compensation expense for options and warrants granted
      in
      payment for consulting services.




**Terminated
      offering costs.** We
      incurred $736,037 in costs associated with our efforts to raise capital in
      the
      public equity markets. We withdrew our Registration Statement on Form SB-2
      on
      February 10, 2006 and charged the accumulated costs to terminated offering
      costs
      during the year ended December 31, 2005.




**Amortization
      of deferred debt discount.** For
      the
      year ended December 31, 2005, we incurred expense of $1,078,952 in the
      amortization of deferred debt discount and beneficial conversion feature of
      convertible notes, and $148,215 in the amortization of deferred financing costs.




**Interest
      expense.** We
      incurred $112,777 in net interest expense for the year ended December 31, 2005,
      consisting of interest income of $4,538 and interest expense on convertible
      notes of $100,038, and $17,277 in other, miscellaneous interest expense items.




**Research
      and development expenses.** Commencing February 2004, costs incurred in connection with the operation,
      maintenance, modification and customization of our DebtResolve system were
      charged to expense as incurred, but were not classified as research and
      development expenses. In January 2004, we substantially completed development
      and began marketing our services. Hence, there were no expenses recorded to
      research and development in the year ended December 31, 2005. Research and
      development expenses totaled $46,022 for the year ended December 31, 2004.
      These expenses consisted of payroll and related expenses and consulting fees
      incurred in connection with employees and consultants involved in the
      development of our DebtResolve system.




**Liquidity
      and capital resources**




To
      fund
      our development activities and operations, we issued shares of our capital
      stock
      in private placement financings. The approximately $2,200,000 in proceeds from
      2003 and 2004 private placement financings, together with $3,095,000 in private
      debt financings in 2005 and $825,000 in debt financings in 2006, as well as
      limited revenues generated from licensing its system, has provided us with
      working capital.




27


We
      used
      $2,152,949 of cash in funding operating activities during the year ended
      December 31, 2005, as compared to $1,401,928 during the year ended December
      31,
      2004.




On
      March
      4, 2005, we entered into a non-binding letter of intent with an investment
      banking firm, Maxim Group LLC, to explore the possibility of raising additional
      capital in the public equity markets, and extended that letter of intent through
      July 31, 2006. We have not entered into any definitive agreements to raise
      capital in the public equity markets as a result of this letter of intent,
      but
      are exploring the possibility of doing so. On September 30, 2005, we filed
      a
      Registration Statement on Form SB-2 with the Securities and Exchange Commission.
      We withdrew that registration statement on February 10, 2006. We are currently
      seeking to complete a private financing consisting of the issuance of senior
      convertible promissory notes. We previously completed two private financing
      transactions in April 2005 and in June/September 2005, in which we raised total
      gross proceeds of $2,695,000 from accredited investors. The principal amount
      and
      accrued interest under the April and the June/September notes are convertible
      into shares of common stock at any time at the option of the holder, at $4.25
      per share, and automatically, in the case of a public offering of the Company’s
      common stock, in which case an aggregate of 426,018 shares of our common stock
      are issuable upon the conversion, at a conversion ratio equal to 85% of the
      assumed initial public offering price of $5.00 per share, of the principal
      and
      accrued interest on $800,000 of 7% senior convertible promissory notes issued
      in
      our private financing in April 2005 and 50% of the principal and accrued
      interest on $1,895,000 of 7% senior convertible promissory notes issued in
      our
      private financing in June/September 2005, and an aggregate of 317,059 shares
      of
      our common stock are issuable upon the exercise of outstanding three and
      five-year warrants, exercisable at $4.25 per share at an assumed initial public
      offering price of $5.00 per share, issued in connection with the two private
      financings. The notes from the April 2005 financing transaction will mature
      on
      April 21, 2006. The Company intends to request that existing bridge note holders
      extend their notes.




Although
      we intend to refile a revised registration statement in the near future, we
      cannot assure you that we will be able to raise additional capital in the public
      equity markets. We still have not recorded any significant revenue, and our
      working capital is not sufficient to fund our plan of operations beyond April
      30, 2006. During November and December of 2005, we borrowed $400,000 from
      stockholders. Subsequent to December 31, 2005, we borrowed $525,000 in short
      term notes from stockholders and other investors. On January 20, 2006, we
      entered into an agreement with an investment banking firm, Capital Growth
      Financial, LLC (“CGF”), whereby CGF agreed to serve as our placement agent for a
      private financing consisting of the issuance of senior convertible promissory
      notes. As of March 27, 2006, we have raised $300,000 under this offering. These
      notes are convertible at any time at the option of the holder into shares of
      common stock at a price of $0.33 per share. **** If
      we
      raise the maximum $3,500,000 contemplated by this private financing (not
      including the $1,000,000 over allotment option), an aggregate of approximately
      1,050,000 shares of our common stock will be issuable upon the consummation
      of a
      potential public offering, at a conversion ratio equal to 66.67% of an assumed
      initial public offering price of $5.00 per share. The Company is currently
      in
      discussions with the note holders to renegotiate the terms of the notes. Maxim
      Group, LLC is acting as the co-placement agent in this private financing. CGF
      has also indicated its intention to act as a co-underwriter of our potential
      IPO. If this private financing is unsuccessful, and if we are unable to raise
      sufficient additional capital, we will have to develop and implement a plan
      to
      extend payables and eliminate staff and overhead until sufficient additional
      capital is raised to support further operations.




Our
      cash
      needs will grow as we meet our compensation obligations for sales, accounting
      and customer support staff, combined with the expense of additional staff hired
      going forward. Of the anticipated operating expenses that we expect to incur,
      more than half will be salary and compensation expense related to current
      employees. Also significant will be the expense of legal, audit and consulting
      services to meet the requirements of Sarbanes Oxley legislation. While our
      web
      hosting arrangements include significant excess capacity at this time, as our
      client base grows, we may need to add additional web space to accommodate this
      growth, and incur corresponding expense. This additional web hosting expense
      will not be significant; however, we will also have to add to staff to provide
      our planned levels of customer support. In addition, we will incur additional
      sales and marketing expense to grow our customer base as well as travel and
      other expenses to service our customer base.




28


We
      also
      anticipate additional increased costs associated with the start up of our
      proposed debt-buying subsidiary. Before we begin to recognize revenue from
      this
      operation, we will incur legal, filing fees and start-up and other costs
      associated with establishing this potential line of business.




**Off-** **b** **alance** **s** **heet** **a** **rrangements**




We
      have
      not entered into any transactions with unconsolidated entities in which we
      have
      financial guarantees, subordinated retained interests, derivative instruments
      or
      other contingent arrangements that expose us to material continuing risks,
      contingent liabilities or any other obligations under a variable interest in
      an
      unconsolidated entity that provides us with financing, liquidity, market risk
      or
      credit risk support.




**Critical** **a** **ccounting** **p** **olicies** **and estimates**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires our management to make
      estimates and assumptions that affect the amounts reported in the financial
      statements and the accompanying notes. These estimates and assumptions are
      based
      on our management’s judgment and available information and, consequently, actual
      results could be different from these estimates. The significant accounting
      policies that we believe are the most critical to aid in fully understanding
      and
      evaluating our reported financial results are as follows:




*Going
      concern*




The
      accompanying financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States, which contemplate
      our continuation as a going concern. As of December 31, 2005, we had incurred
      an
      accumulated deficit of $10,984,349 and our working capital was not sufficient
      to
      fund our plan of operations beyond the end of that fiscal year. During the
      year
      ended December 31, 2005, we 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 September 30, 2005, we filed a Registration
      Statement on Form SB-2 with the Securities and Exchange Commission. We withdrew
      that registration statement on February 10, 2006, and we are currently seeking
      to complete a private financing consisting of the issuance of senior convertible
      promissory notes. From November 2005 through March 2006 we have raised
      $1,225,000 through this and other private debt offerings. However, we cannot
      assure you that we will be able to raise sufficient additional capital as needed
      to execute our business plan. We still have not recorded any significant
      revenue, and our working capital is not sufficient to fund our plan of
      operations beyond the end of April 2006. On January 20, 2006, we entered into
      an
      agreement with an investment banking firm, Capital Growth Financial, LLC
      (“CGF”), whereby CGF agreed to serve as our placement agent for a private
      financing consisting of the issuance of senior convertible promissory notes.
      As
      of March 27, 2006, we have raised $300,000 under this offering. If our current
      private financing is unsuccessful, and if we are unable to raise sufficient
      additional capital, we will have to develop and implement a plan to extend
      payables and eliminate staff and overhead until sufficient additional capital
      is
      raised to support further operations. We cannot assure you that such a plan
      will
      be successful. These factors continue to raise substantial doubt about our
      ability to continue as a going concern.




*Imputed
      salary expense*




Under
      the
      terms of employment agreements we have had with our Co-Chairman and Chief
      Executive Officer and with our Executive Vice President, General Counsel and
      Secretary during the years ended December 31, 2004, we did not pay these
      officers a salary, due to certain conditions as specified in the agreements.
      We
      recorded compensation expense and a capital contribution in an amount equal
      to
      the salary that would have been paid during those periods, representing an
      imputed compensation expense for the minimum base salary amounts under the
      agreement with them, as if we had met the condition for paying their salaries.
      During the year ended December 31, 2005, the terms of these employment
      agreements changed, and beginning April 1, 2005, the Co-Chairman and Chief
      Executive Officer began to draw a salary. The Executive Vice President, General
      Counsel and Secretary left our employ effective June 30, 2005.




29


*Research
      and development*




We
      follow
      the guidelines of Statement of Financial Accounting Standards No. 86, Accounting
      for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,
      and Statement of Financial Accounting Standards No. 2, Accounting for Research
      and Development Costs. Research and development expenses in the three months
      ended March 31, 2004 and in the period since inception consisted primarily
      of
      payroll and related expenses and consulting fees incurred in connection with
      employees and consultants involved in the development of our online software
      product prior to establishing technological feasibility. In January 2004, we
      substantially completed the development of and began marketing our online
      product. In our management’s opinion, the software became available for general
      release concurrent with the establishment of technological feasibility. As
      a
      result, no software development costs were capitalized. Commencing February
      2004, costs incurred in connection with the operation, maintenance,
      modification, and customization of our product have been charged to expense
      as
      incurred, and are neither capitalized nor classified as research and development
      expenses.




*Fixed
      assets*




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




*Income
      taxes*




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




*Stock-based
      compensation*




Stock
      options issued to employees under stock-based compensation plans are 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 is reflected in
      the
      net loss, 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, requires the disclosure of the effect
      on
      net loss and loss per share had we applied the minimum value recognition
      provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
      to stock-based employee compensation. The minimum value of each option granted
      to employees is 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
      2.17% to 4.12%, and an expected life of each option, ranging from three to
      ten
      years. Since there is no public market for our stock, we do not consider
      volatility in estimating the value of each option granted to employees; we
      follow the minimum value method. The estimated minimum value of the options
      is
      amortized on a proforma basis over the option vesting periods.




We
      account for stock options issued to non-employees using the fair value method.
      The expense related to granting options to non-employees in lieu of consulting
      fees or other, cash considerations is accounted for as stock-based compensation
      expense. The fair value of each option granted is 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 ranging from 2.17% to 4.12%, and an expected life of each
      option, ranging from three to ten years. Since there is no public market for
      our
      stock, we use a volatility measure based on an average volatility of the stock
      of five comparable companies during their first five years as a publicly traded
      company in estimating the value of each option. The estimated fair value of
      the
      options granted to non-employees is amortized to expense over the option vesting
      periods.




30


**Recently** **i** **ssued** **a** **ccounting** **p** **ronouncements**




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123 (revised 2004), “Share-Based Payment” (“SFAS 123 - Revised”). SFAS 123 -
      Revised is a revision of SFAS 123, “Accounting for Stock-Based Compensation,”
and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”
and its related implementation guidance. SFAS 123 - Revised establishes
      accounting standards for recording any transaction in which an entity exchanges
      its equity instrument for goods or services. It also addresses transactions
      in
      which an entity incurs liabilities in exchange for goods or services that are
      based on the fair value of the entity’s equity instruments or that may be
      settled by the issuance of those equity instruments. It does not change the
      accounting guidance for share-based payment transactions with parties other
      than
      employees provided in SFAS 123 as originally issued and EITF Issue No. 96-18,
      “Accounting for Equity Instruments that are Issued to Other than Employees for
      Acquiring, or in Conjunction with Selling, Goods or Services.” SFAS 123 -
      Revised requires a public entity to measure the cost of employee services
      received in exchange for an award of equity instruments based on the grant-date
      fair value of the award. That cost will be recognized over the period during
      which an employee is required to provide service in exchange for the award
      (usually the vesting period). The grant-date fair value of employee share
      options and similar instruments will be estimated using option-pricing models
      adjusted for the unique characteristics of those instruments (unless observable
      market prices for the same or similar instruments are available). SFAS 123
      -
      Revised eliminates the alternative to use APB 25’s intrinsic value method of
      accounting that was provided in SFAS 123 as originally issued. Under APB 25,
      issuing stock options to employees generally resulted in recognition of no
      compensation cost. SFAS 123 - Revised requires entities to recognize the cost
      of
      employee services received in exchange for awards of equity instruments based
      on
      the grant-date fair value of those awards. SFAS 123 - Revised is effective
      for
      public entities that file as small business issuers as of the beginning of
      the
      first interim or annual reporting period that begins after December 15,
      2005.




Until
      December 31, 2005, we have accounted for stock options issued under stock-based
      compensation plans under the recognition and measurement principles of APB
      25.
      No stock-based employee compensation cost is reflected in the net loss, 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. SFAS No. 148, “Accounting for Stock-Based Compensation-
      Transition and Disclosure - an Amendment of FASB Statement No. 123,” requires
      the disclosure of the effect on net loss and loss per share had we applied
      the
      fair value recognition provisions of SFAS 123 to stock-based employee
      compensation.




We
      will
      adopt the provisions of SFAS 123 - Revised beginning January 1, 2006. We believe
      that the effect of implementing SFAS 123 - Revised will result in the recording
      of additional stock compensation expense. We will utilize the fair value method
      to calculate the value of any future instruments issued after the implementation
      date.




In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
      An Amendment of APB No. 29.” SFAS 153 amends APB No. 29 to eliminate the
      exception of non-monetary exchanges of similar productive assets and replaces
      it
      with a general exception for exchanges of non-monetary assets that do not have
      commercial substance. A non-monetary exchange has commercial substance if the
      future cash flows of the entity are expect to change significantly as a result
      of the exchange. SFAS 153 and APB No. 29 do not apply to the acquisition of
      non-monetary assets or services on issuance of the capital stock of an entity.
      Currently, we have not had any exchanges of non-monetary assets within the
      meaning of SFAS 153 and adoption of SFAS 153 has had no effect on our financial
      position or results of operations.




In
      May
      2005, SFAS No. 154, “Accounting Changes and Error Corrections, a
      replacement of APB Opinion No. 20, Accounting Changes and FASB Statement
      No. 3” was issued which, among other things, changes the accounting and
      reporting requirements for a change in accounting principle and provides
      guidance on error corrections. SFAS No. 154 requires retrospective
      application to prior period financial statements of a voluntary change in
      accounting principle unless impracticable to determine the period-specific
      effects or cumulative effect of the change, and restatement with respect to
      the
      reporting of error corrections. SFAS No. 154 applies to all voluntary
      changes in accounting principles, and to changes required by an accounting
      pronouncement in the unusual instance that the pronouncement does not include
      specific transition provisions. SFAS No. 154 also requires that a change in
      method of depreciation or amortization for long-lived, non-financial assets
      be
      accounted for as a change in accounting estimate that is effected by a change
      in
      accounting principle. SFAS No. 154 is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15,
      2005. At this time, adoption of SFAS No. 154 is not expected to
      significantly impact our financial statements or future results of
      operations.




31


In
      September 2005, the FASB ratified the following consensus reached in EITF Issue
      05-8, “Income Tax Consequences of Issuing Convertible Debt with a Beneficial
      Conversion Feature”:  a)  The issuance of convertible debt with a
      beneficial conversion feature results in a basis difference in applying SFAS
      No.
      109 ,
      “Accounting for Income Taxes.” Recognition of such a feature effectively creates
      a debt instrument and a separate equity instrument for book purposes, whereas
      the convertible debt is treated entirely as a debt instrument for income tax
      purposes.  b)  The resulting basis difference should be deemed a
      temporary difference because it will result in a taxable amount when the
      recorded amount of the liability is recovered or settled.  c) 
Recognition of deferred taxes for the temporary difference should be reported
      as
      an adjustment to additional paid-in capital. This consensus is effective in
      the
      first interim or annual reporting period commencing after December 15, 2005,
      with early application permitted. The effect of applying the consensus should
      be
      accounted for retroactively to all debt instruments containing a beneficial
      conversion feature that are subject to EITF
      Issue 00-27 ,
      “Application of Issue No. 98-5 to Certain Convertible Debt Instruments” (and
      thus is applicable to debt instruments converted or extinguished in prior
      periods but which are still presented in the financial statements). The adoption of this pronouncement is not expected to have a material impact
      on our financial statements.




In
      September 2005, the EITF reached a consensus on, Issue No.  05-7,
      "Accounting for Modifications to Conversion Options Embedded in Debt Securities
      and Related Issues,” beginning in the first interim or annual reporting period
      beginning after December 15, 2005.  Early application of this guidance is
      permitted in periods for which financial statements have not yet been issued.
      The disclosures required by Statement 154 should be made excluding those
      disclosures that require the effects of retroactive application. EITF No. 05-7
      is not expected to have material effect on the Company’s financial
      position.




In
      June
      2005, the FASB ratified EITF Issue No. 05-2, “The Meaning of `Conventional
      Convertible Debt Instrument’ in EITF No. 00-19, `Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock” (“EITF No. 05-2”), which addresses when a convertible debt
      instrument should be considered `conventional’ for the purpose of applying the
      guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under
      EITF No. 00-19 for conventional convertible debt instruments and indicated
      that
      convertible preferred stock having a mandatory redemption date may qualify
      for
      the exemption provided under EITF No. 00-19 for conventional convertible debt
      if
      the instrument’s economic characteristics are more similar to debt than equity.
      EITF No. 05-2 is effective for new instruments entered into and instruments
      modified in periods beginning after June 29, 2005. The Company has applied
      the requirements of EITF No. 05-2 since the required implementation date.
      The adoption of this pronouncement did not have an impact on the Company’s
      financial position, results of operations or cash flows.




In
      June
      2005, the EITF released EITF Issue No. 05-4 “The Effect of a Liquidated
      Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue
      No.
      00-19, `Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settled in, a Company’s Own Stock” (“EITF No. 05-4”) addresses
      financial instruments, such as stock purchase warrants, which are accounted
      for
      under EITF 00-19 that may be issued at the same time and in contemplation of
      a
      registration rights agreement that includes a liquidated damages clause. The
      consensus for EITF No. 05-4 has not been finalized.




In
      June
      2005, the EITF reached consensus on Issue No. 05-6 "Determining the
      Amortization Period for Leasehold Improvements Purchased after Lease Inception
      or Acquired in a Business Combination. (“EITF 05-6”). EITF 05-6 provides
      guidance on determining the amortization period for leasehold improvements
      acquired in a business combination or acquired subsequent to lease inception.
      The guidance in EITF 05-6 will be applied prospectively and is effective for
      periods beginning after June 29, 2005. The adoption of EITF 05-6 did not
      have an impact on the Company’s financial position, results of operations, or
      cash flows.




32


**ITEM
      7. Financial statements**




**Financial
                Statements for the years ended December 31, 2005 and 2004 and Cumulative
                from Inception (April 21, 1997) to December 31,
                2005**Report
                of Independent Registered Public Accounting Firm
            34Balance
                Sheets as of December 31, 2005 and 2004
            35Statements
                of Operations for the Years Ended December 31, 2005 and 2004 and
                Cumulative from Inception (April 21, 1997 to December 31,
                2005)
            36Statements
                of Stockholders’ Equity (Deficiency) Cumulative from Inception (April 21,
                1997 to December 31, 2005)
            37Statements
                of Cash Flows for the Year Ended December 31, 2005 and 2004 and Cumulative
                from Inception (April 21, 1997 to December 31, 2005)
            39Notes
                to Financial Statements
            40







33




REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To
      the
      Audit Committee of the Board of Directors


of
      Debt
      Resolve, Inc.








We
      have
      audited the accompanying balance sheets of Debt Resolve, Inc (a development
      stage company) (the “Company”) as of December 31, 2005 and 2004, and the related
      statements of operations, stockholders’ equity (deficiency), and cash flows for
      the years then ended and for the period from January 1, 2003 to December 31,
      2005 (for which the statements of operations and cash flows are not presented
      separately herein). These financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits. The financial statements of the
      Company for the period from April 21, 1997 (inception) to December 31, 2002
      were
      audited by other auditors whose report, dated March 17, 2003, expressed an
      unqualified opinion on those statements and included an explanatory paragraph
      regarding the Company’s ability to continue as a going concern. The statements
      for the period from April 21, 1997 (inception) to December 31, 2002 reflect
      a
      deficit accumulated during the development stage of $5,742. The other auditors’
report has been furnished to us, and our opinion, insofar as it related to
      the
      amounts included for such prior periods, is based solely on the report of such
      other auditors.





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





In
      our
      opinion, based on our audit and the report of the other auditors, the financial
      statements referred to above present fairly, in all material respects, the
      financial position of Debt Resolve, Inc. as of December 31, 2005 and 2004,
      and
      the results of its operations and its cash flows for the years ended December
      31, 2005 and 2004 and for the period from April 21, 1997 (inception) to December
      31, 2005 in conformity with United States generally accepted accounting
      principles.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As more fully described in Note 2, the Company
      has no significant revenues and has incurred significant losses since inception,
      which raise substantial doubt about the Company’s ability to continue as a going
      concern. Management’s plans in regard to these matters are also described in
      Note 2. The financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.





/s/
      Marcum & Kliegman llp








New
      York,
      New York


February
      21, 2006, except for Note 18c, as to which the date is March 10, 2006 and Note
      18b, as to which the date is March 27, 2006.





34




DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Balance
      Sheets




December
                31,2005
            
            2004ASSETSCurrent
                assets:Cash
            $
            23,576
            
            $
            34,747Accounts
                receivable
            
            6,966
            
            
            1,219Prepaid
                expenses and other current assets
            
            87,005
            
            
            30,951Total
                current assets
            
            117,547
            
            
            66,917Fixed
                assets, net
            
            151,981
            
            
            62,500Other
                assets:Deferred
                offering costs
            
            --
            
            
            43,540Deferred
                financing costs
            
            180,549
            
            
            --Deposits
                and other assets
            
            93,605
            
            
            19,399Total
                other assets
            
            274,154
            
            
            62,939Total
                assets
            $
            543,682
            
            $
            192,356LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCYCurrent
                liabilities:Accounts
                payable
            $
            620,655
            
            $
            80,021Accrued
                compensation expenses
            
            --
            
            
            95,667Accrued
                expenses
            
            119,234
            
            
            69,138Loans
                payable to stockholders
            
            350,000
            
            
            10,000Convertible
                notes, net of deferred discount of $1,078,953
            
            1,676,475
            
            
            --Total
                liabilities
            
            2,766,364
            
            
            254,826Commitments
                and contingenciesStockholders’
                deficiency:Preferred
                stock, 10,000,000 shares authorized, $.001 par
                value, none issued and outstanding
            
            --
            
            
            --Common
                stock, 50,000,000 shares authorized, $0.001 par value, 29,703,900
                and
                29,479,000 shares issued and outstanding, respectively
            
            29,704
            
            
            29,479Additional
                paid-in capital
            
            8,920,113
            
            
            5,814,868Deferred
                compensation
            
            (188,150
            )
            
            (326,010
            )Deficit
                accumulated during the development stage
            
            (10,984,349
            )
            
            (5,580,807
            )Total
                stockholders’ deficiency
            
            (2,222,682
            )
            
            (62,470
            )Total
                liabilities and stockholders’ deficiency
            $
            543,682
            
            $
            192,356




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






35


DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Statements
      of Operations




Years
                ended December 31,
            
            Cumulative
                from
              inception
                (April 21,
              1997)
                to December 31,2005
            
            2004
            
            2005Revenues
            
            $
            23,599
            
            $
            2,787
            
            $
            26,386Costs
                and expenses:Payroll
                and related expenses
            
            
            1,516,467
            
            
            906,437
            
            
            3,165,749General
                and administrative expenses (1)
            
            
            1,798,099
            
            
            1,686,158
            
            
            4,590,033Waived
                royalty fees - related parties
            
            
            --
            
            
            --
            
            
            600,000Research
                and development expenses
            
            
            --
            
            
            46,022
            
            
            499,323Depreciation
                expenses
            
            
            39,094
            
            
            38,013
            
            
            90,972Total
                expenses
            
            
            3,353,660
            
            
            2,676,630
            
            
            8,946,077Loss
                from operations
            
            
            (3,330,061
            )
            
            (2,673,843
            )
            
            (8,919,691
            )Other
                income and expense:Terminated
                offering costs
            
            
            (736,037
            )
            
            --
            
            
            (736,037
            )Net
                interest(expense) income
            
            
            (112,777
            )
            
            4,845
            
            
            (103,954
            )Amortization
                of the beneficial conversion feature and deferred debt discount
            
            
            (1,227,167
            )
            
            --
            
            
            (1,227,167
            )Other
                income
            
            
            2,500
            
            
            --
            
            
            2,500Total
                other (expense) income
            
            
            (2,073,481
            )
            
            4,845
            
            
            (2,064,558
            )Net
                loss
            
            $
            (5,403,542
            )
            $
            (2,668,998
            )
            $
            (
                10,984,349
            )Per
                share data:Basic
                and diluted net loss per common share
            
            $
            (0.18
            )
            $
            (0.09
            )Basic
                and diluted weighted average number of common shares
                outstanding
            
            
            29,665,901
            
            
            29,133,746




(1)
            Includes
                stock based compensation of $634,244 and $869,190 for the years ended
                2005
                and 2004, respectively, and $1,973,598 since
                inception.







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




36


DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Statements
      of Stockholders’ Equity (Deficiency)


From
      Inception (April 21, 1997) to December 31, 2005




Preferred
                Stock
            
            Common
                StockNumber
                of
              Shares
            
            Amount
            
            Number
                of
              Shares
            
            Amount
            
            Deferred
                compensation
            
            Additional
              Paid
                in
              Capital
            
            Deficit
                Accumulated During the Development Stage
            
            TotalINCEPTION,
                APRIL 21, 1997
            
            
            --
            
            $
            --
            
            
            --
            
            $
            --
            
            
            
            
            $
            --
            
            $
            --
            
            $
            --Issuance
                of common stock
            
            
            --
            
            
            --
            
            
            500,000
            
            
            500
            
            
            
            
            
            --
            
            
            --
            
            
            500Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            (330
            )
            
            (330
            )Balance
                at December 31, 1997
            
            
            --
            
            
            --
            
            
            500,000
            
            
            500
            
            
            
            
            
            --
            
            
            (330
            )
            
            170Capital
                contribution
            
            
            
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            20
            
            
            --
            
            
            20Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            (190
            )
            
            (190
            )Balance
                at December 31, 1998
            
            
            --
            
            
            --
            
            
            500,000
            
            
            500
            
            
            
            
            
            20
            
            
            (520
            )
            
            --Capital
                contribution
            
            
            
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            209
            
            
            --
            
            
            209Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            (209
            )
            
            (209
            )Balance
                at December 31, 1999
            
            
            --
            
            
            --
            
            
            500,000
            
            
            500
            
            
            
            
            
            229
            
            
            (729
            )
            
            --Capital
                contribution
            
            
            
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            1,387
            
            
            --
            
            
            1,387Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            (1,387
            )
            
            (1,387
            )Balance
                at December 31, 2000
            
            
            --
            
            
            --
            
            
            500,000
            
            
            500
            
            
            
            
            
            1,616
            
            
            (2,116
            )
            
            --Capital
                contribution
            
            
            
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            1,225
            
            
            --
            
            
            1,225Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            (1,225
            )
            
            (1,225
            )Balance
                at December 31, 2001
            
            
            --
            
            
            --
            
            
            500,000
            
            
            500
            
            
            
            
            
            2,841
            
            
            (3,341
            )
            
            --Capital
                contribution
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            2,401
            
            
            --
            
            
            2,401Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            (2,401
            )
            
            (2,401
            )Balance
                at December 31, 2002
            
            
            --
            
            
            --
            
            
            500,000
            
            
            500
            
            
            
            
            
            5,242
            
            
            (5,742
            )
            
            --Sales
                of Common stock to principal stockholders, January, 2003 ($0.001
                per
                share)
            
            
            --
            
            
            --
            
            
            22,500,000
            
            
            22,500
            
            
            
            
            
            --
            
            
            --
            
            
            22,500Sales
                of Common stock January, 2003 ($0.001 per share)
            
            
            --
            
            
            --
            
            
            3,600,000
            
            
            3,600
            
            
            
            
            
            --
            
            
            --
            
            
            3,600Common
                stock issued to pay consulting fees, April 2003 ($0.20 per
                share)
            
            
            --
            
            
            --
            
            
            135,000
            
            
            135
            
            
            
            
            
            26,865
            
            
            --
            
            
            27,000Common
                stock issued to pay compensation, May 2003 ($0.20 per
                share)
            
            
            --
            
            
            --
            
            
            145,000
            
            
            145
            
            
            
            
            
            28,855
            
            
            --
            
            
            29,000Conversion
                of loan into Common stock, April 2003 ($0.20 per share)
            
            
            --
            
            
            --
            
            
            500,000
            
            
            500
            
            
            
            
            
            99,500
            
            
            --
            
            
            100,000Conversion
                of loan into Common stock, July 2003 ($0.20 per share)
            
            
            --
            
            
            --
            
            
            50,000
            
            
            50
            
            
            
            
            
            9,950
            
            
            --
            
            
            10,000Rescinded
                Common stock issued to pay compensation, July 2003 ($0.20 per
                share)
            
            
            --
            
            
            --
            
            
            (145,000
            )
            
            (145
            )
            
            
            
            
            (28,855
            )
            
            --
            
            
            (29,000
            )Rescinded
                conversion of loan into Common stock, July 2003 ($0.20 per
                share)
            
            
            --
            
            
            --
            
            
            (50,000
            )
            
            (50
            )
            
            
            
            
            (9,950
            )
            
            --
            
            
            (10,000
            )Capital
                contributed from the waiver of accrued compensation and consulting
                fees
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            853,567
            
            
            --
            
            
            853,567Capital
                contributed from the waiver of royalty fee
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            600,000
            
            
            --
            
            
            600,000Capital
                contributed from the grant of stock options to pay for consulting
                services
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (577,709
            )
            
            577,709
            
            
            --
            
            
            --Amortization
                of deferred compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            443,164
            
            
            
            
            
            
            
            
            443,164






37




Preferred
                  Stock
              
              Common
                  StockNumber
                  of
                Shares
              
              Amount
              
              Number
                  of
                Shares
              
              Amount
              
              Deferred
                  compensation
              
              Additional
                Paid
                  in
                Capital
              
              Deficit
                  Accumulated During the Development Stage
              
              Total


Sales
                of Common stock in private placement, June 2003 - December 2003 ($1.00
                per
                share)
            
            
            --
            
            
            --
            
            
            1,785,000
            
            
            1,785
            
            
            --
            
            
            1,783,215
            
            
            --
            
            
            1,785,000Offering
                costs of private placement
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (53,926
            )
            
            --
            
            
            (53,926
            )Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (2,906,067
            )
            
            (2,906,067
            )Balance
                at December 31, 2003
            
            
            --
            
            $
            --
            
            
            29,020,000
            
            $
            29,020
            
            
            (134,545
            )
            $
            3,892,172
            
            $
            (2,911,809
            )
            $
            874,838Common
                stock issued to pay consulting fees, March 2004 ($1.00 per
                share)
            
            
            --
            
            
            --
            
            
            9,000
            
            
            9
            
            
            --
            
            
            8,991
            
            
            --
            
            
            9,000Sales
                of common stock in private placement, June - December 2004 ($1.00
                per
                share)
            
            
            --
            
            
            --
            
            
            450,000
            
            
            450
            
            
            --
            
            
            449,550
            
            
            --
            
            
            450,000Capital
                contributed from imputed compensation
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            412,500
            
            
            --
            
            
            412,500Capital
                contributed from the grant of stock options to pay for consulting
                services
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (1,051,655
            )
            
            1,051,655
            
            
            --
            
            
            --Amortization
                of deferred compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            860,190
            
            
            
            
            
            
            
            
            860,190Net
                loss
            
            
            
            
            
            
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            (2,668,998
            )
            
            (2,668,998
            )Balance
                at December 31, 2004
            
            
            
            
            
            
            
            
            29,479,000
            
            $
            29,479
            
            
            (326,010
            )
            $
            5,814,868
            
            $
            (5,580,807
            )
            $
            (62,470
            )Capital
                contributed from stock issued to pay compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            --
            
            
            84,000
            
            
            
            
            
            84,000Sales
                of common stock in private placement, January-March 2005 ($1.00 per
                share)
            
            
            --
            
            
            --
            
            
            224,900
            
            
            225
            
            
            --
            
            
            224,675
            
            
            --
            
            
            224,900Reimbursement
                of offering costs of private placement
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            25,000
            
            
            
            
            
            25,000Offering
                costs of private placement
            
            
            --
            
            
            --
            
            
            
            
            
            
            
            
            --
            
            
            (44,206
            )
            
            --
            
            
            (44,206
            )Capital
                contributed from imputed compensation
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            112,500
            
            
            --
            
            
            112,500Capital
                contributed from deferred debt discount
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            --
            
            
            2,097,478
            
            
            
            
            
            2,097,478Capital
                contributed from grant of warrants for bridge financings
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            --
            
            
            109,414
            
            
            
            
            
            109,414Capital
                contributed from the grant of stock options to pay for consulting
                services
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            (496,384
            )
            
            496,384
            
            
            --
            
            
            --Amortization
                of deferred compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            634,244
            
            
            
            
            
            
            
            
            634,244Net
                loss
            
            
            --
            
            
            --
            
            
            
            
            
            --
            
            
            --
            
            
            --
            
            
            (5,403,542
            )
            
            (5,403,542
            )Balance
                at December 31, 2005
            
            
            --
            
            $
            --
            
            
            29,703,900
            
            $
            29,704
            
            $
            (188,150
            )
            $
            8,920,113
            
            $
            (10,984,349
            )
            $
            (2,222,682
            )






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




38





DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Statements
      of Cash Flows




Years
                ended December 31,
            
            Cumulative
                from inception (April 21,
              1997
                to December 31, 2005)2005
            
            2004Cash
                flows from operating activities:Net
                loss
            
            $
            (5,403,542
            )
            $
            (2,668,998
            )
            $
            (10,984,349
            )Adjustments
                to reconcile net loss to net cash used by operating
                activities:Non
                cash stock-based compensation
            
            
            634,244
            
            
            869,190
            
            
            1,973,598Waived
                and imputed compensation, royalty and consulting fees
            
            
            112,500
            
            
            412,500
            
            
            1,983,809Amortization
                of debt discount
            
            
            1,078,953
            
            
            --
            
            
            1,078,953Amortization
                of debt financing costs
            
            
            148,215
            
            
            --
            
            
            148,215Terminated
                offering costs
            
            
            736,037
            
            
            --
            
            
            736,037Depreciation
            
            
            39,094
            
            
            38,012
            
            
            90,972Loss
                on disposal of fixed assets
            
            
            14,954
            
            
            --
            
            
            14,954Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (5,747
            )
            
            (1,219
            )
            
            (6,966
            )Other
                current assets
            
            
            (12,514
            )
            
            (4,483
            )
            
            (43,465
            )Deposits
                and other assets
            
            
            (74,206
            )
            
            (13,805
            )
            
            (93,605
            )Accounts
                payable
            
            
            540,634
            
            
            (15,622
            )
            
            620,654Accrued
                expenses
            
            
            38,429
            
            
            (17,504
            )
            
            203,234Net
                cash used in operating activities
            
            
            (2,152,949
            )
            
            (1,401,928
            )
            
            (4,277,959
            )Cash
                flows from investing activities:Purchases
                of fixed assets
            
            
            (143,529
            )
            
            (9,995
            )
            
            (
                257,906
            )Cash
                flows from financing activities:Proceeds
                from issuance of convertible notes
            
            
            2,695,000
            
            
            
            
            
            2,695,000Issuance
                of common stock
            
            
            224,900
            
            
            450,000
            
            
            2,432,574Proceeds
                from stockholders’ loans
            
            
            400,000
            
            
            --
            
            
            510,000Repayment
                of stockholders’ loans
            
            
            (60,000
            )
            
            --
            
            
            (60,000
            )Stock
                offering costs
            
            
            (780,243
            )
            
            (43,540
            )
            
            (823,783
            )Reimbursement
                of stock offering costs
            
            
            25,000
            
            
            --
            
            
            25,000Deferred
                financing costs
            
            
            (219,350
            )
            
            --
            
            
            (219,350
            )Net
                cash provided by financing activities
            
            
            2,285,307
            
            
            406,460
            
            
            4,559,441Net
                increase (decrease) in cash
            
            
            (11,171
            )
            
            (1,005,463
            )
            
            23,576Cash
                at beginning of period
            
            
            34,747
            
            
            1,040,210
            
            
            --Cash
                at end of period
            
            $
            23,576
            
            $
            34,747
            
            $
            23,576Non
                cash investing and financing activities:Conversion
                of stockholder’s loan to common stock
            
            $
            --
            
            $
            --
            
            $
            100,000Issuance
                of common stock for accrued compensation
            
            $
            84,000
            
            $
            --
            
            $
            84,000Issuance
                of warrants for deferred financing fees
            
            $
            109,414
            
            $
            --
            
            $
            109,414Capital
                contribution from waived royalty fees
            
            $
            --
            
            $
            --
            
            $
            600,000Capital
                contribution from waived and imputed compensation and consulting
                fees
            
            $
            112,500
            
            $
            412,500
            
            $
            1,383,809






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




39


DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2005




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.




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 2005, the Company had nine clients under contract,
      five of which were operational, however the Company has not earned, nor did
      it
      expect to generate, significant revenues from these clients during the initial
      start-up periods.




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




Going
      concern and management plans




The
      accompanying 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 December
      31,
      2005, the Company had
      incurred an accumulated deficit of $10,984,349. The
      Company has
      still not recorded any significant revenue, and its working
      capital is not sufficient to fund its plan of operations beyond the end of
      April
      2006.




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 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 5). The notes from the April 2005
      financing transaction will mature on April 21, 2006. The Company intends to
      request that existing bridge note holders extend their notes.




40


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. During November and December of
      2005, the Company borrowed $400,000 from stockholders. Subsequent to December
      31, 2005, the Company raised $525,000 through the issuance of short term notes
      with an interest rate of 2-1/2% per month, and with maturities from April 30,
      2006 to May 17, 2006. On January 20, 2006, the Company entered into an agreement
      with an investment banking firm, Capital Growth Financial, LLC (“CGF”), whereby
      CGF agreed to serve as placement agent for a private financing consisting of
      the
      issuance of the Company’s senior convertible promissory notes. As of March 27,
      2006, the Company had raised $300,000 under this offering (See Note 18b). These
      notes are convertible at any time at the option of the holder into shares of
      common stock at a price of $0.33 per share. **** If
      the
      Company raises the maximum $3,500,000 contemplated by this private financing
      (not including the $1,000,000 over allotment option), an aggregate of
      approximately 1,050,000 shares of common stock will be issuable, upon the
      consummation of a potential public offering, at a conversion ratio equal to
      66.67% of an assumed initial public offering price of $5.00 per share. Maxim
      Group, LLC is acting as the co-placement agent in this private financing.
      However, 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 beyond the end of April 2006. 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 purchasing this
      company (See Note 18c). The Company has not entered into any definitive
      agreements to purchase this collection agency as a result of this letter of
      intent, but is exploring the possibility of doing so.




Prior
      period adjustments/restatement




Effective
      August 16, 2005, the Company corrected two errors, (1) relating to stock based
      compensation expense for options granted to consultants and advisory board
      members for which the Company did not record a compensation charge during fiscal
      2003 and 2004 and the three months ended March 31, 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 year ended December 31,
      2004
      represent the restated financial information included in the Form 10-KSB/A
      No. 2
      which was filed with the SEC on March 30, 2006.




Cash
      and
      cash equivalents




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




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 2005 and 2004 from several collection agencies
      and
      lenders that implemented the Company’s online system. The Company’s preliminary
      contracts provide for revenue based on a percentage of the amount of debt
      collected from accounts submitted on the DebtResolve system. Although other
      revenue models have been proposed, most revenue earned to date has been
      determined using this method, and such revenue is recognized when the settlement
      amount of debt is collected by the client. For the early adopters of the
      Company’s product, the Company waived set-up fees and other transactional fees
      that the Company anticipates charging in the future. While the percent of debt
      collected will continue to be a revenue recognition method going forward, other
      payment models are also being offered to clients and may possibly become the
      Company’s preferred revenue model. Dependent 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.




41


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 year ended December 31, 2004 and a portion of the
      year
      ended December 31, 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.
      (See Note 10).




Research
      and development expenses




Research
      and development expenses consist 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. 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. Since the Company intended and has begun to market its
      online product, these costs have been charged to expense as incurred and
      classified as research and development expenses. In January 2004, the Company
      substantially completed the development of and began marketing its online
      product. Commencing February 2004, costs incurred in connection with the
      operation, maintenance, modification, and customization of the Company’s product
      have been charged to expense as incurred, but are not classified as research
      and
      development expenses.




Fixed
      assets




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




Income
      taxes




In
      accordance with Statement of Financial Accounting Standards No. 109, Accounting
      for Income Taxes, 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.




Stock-based
      compensation




Stock
      options issued under stock-based compensation plans are 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 is reflected in the net loss, 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, requires 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 is 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 stock, the Company does not consider volatility in estimating the
      value of each employee stock option; the Company follows the minimum value
      method. The estimated minimum value of the options granted is amortized on
      a
      pro-forma basis over the option vesting periods.




42


The
      Company accounts for stock-based compensation issued to non-employees using
      the
      fair value method. (See Note 7.)




During
      2004, the Company granted employee options to purchase 1,140,000 shares of
      its
      common stock. During 2005 the Company did not grant any employee options to
      purchase shares of its common stock. As of December 31, 2005, the weighted
      average exercise price and the weighted average expected life of the stock
      options granted to employees were $0.63 and 6.00 years,
      respectively.




The
      following table illustrates the pro forma effects on net loss and net loss
      per
      common share for the years ended December 31, 2005 and 2004 as if the Company
      had applied the minimum value recognition provisions of FASB Statement No.
      123
      to stock-based compensation issued to employees.




Year
                ended December 31,
            
            Cumulative
                from
              inception
                (April 21,
              1997)
                to December 31,2005
            
            2004
            
            2005Net
                loss - as reported
            
            $
            (5,403,542
            )
            $
            (2,668,998
            )
            $
            (10,984,349
            )Deduct:
                Stock based employee compensation expense determined under minimum-value
                based methods for all awards
            
            
            1,842
            
            
            231,378
            
            
            589,220Net
                loss - pro forma
            
            $
            (5,405,384
            )
            $
            (2,900,376
            )
            $
            (11,573,569
            )Basic
              and diluted net loss per common share - as reported
            
            $
            (0.18
            )
            $
            (0.09
            )Basic
                and diluted net loss per common share - pro forma
            
            $
            (0.18
            )
            $
            (0.10
            )Basic
                and diluted weighted average number of common shares
                outstanding
            
            
            29,665,901
            
            
            29,133,746




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, 4,506,588
      and 6,341,177, respectively, at December 31, 2005 and options of 7,033,333
      at
      December 31, 2004, respectively, are excluded from the computation of diluted
      net loss per share as their inclusion would be antidilutive. The potentially
      dilutive securities noted above exclude options to be issued under the amended
      and restated licensing agreement (see Note 9a) and options relating to the
      anti
      dilution provision (see Note 4).




43


NOTE
      3.  FIXED
      ASSETS:




Fixed
      assets consist of the following:




December
                31,
            
            December
                31,Useful
                life
            
            2005
            
            2004Computer
                equipment
            
            
            3
                years
            
            $
            87,562
            
            $
            70,971Computer
                software
            
            
            3
                years
            
            
            1,919
            
            
            1,919Telecommunications
                equipment
            
            
            5
                years
            
            
            2,685
            
            
            --Office
                equipment
            
            
            3
                years
            
            
            2,193
            
            
            2,192Furniture
                and fixtures
            
            
            5
                years
            
            
            103,172
            
            
            24,250Leasehold
                improvements
            
            
            Lease
                term
            
            
            21,080
            
            
            15,046218,611
            
            
            114,378Less:
                accumulated depreciation
            
            (66,630
            )
            
            (51,878
            )$
            151,981
            
            $
            62,500





Concurrent
      with the Company’s move to new premises on July 29, 2005, certain assets were
      taken out of service and the original cost and related accumulated depreciation
      were removed from the balance sheet. Removing the original cost of $39,296
      and
      the related accumulated depreciation of $24,342 resulted in a net loss on
      disposal of fixed assets of $14,954 for the year ended December 31, 2005.




Depreciation
      expense totaled $39,094 and $38,013 for the years ended December 31, 2005 and
      2004, respectively, and $90,972 since inception.




NOTE
      4.  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
      indicated its intention to be co-underwriter for a potential public offering.
      The Company has not entered into any definitive agreements to raise capital
      in
      the public equity markets as a result of these agreements, but is exploring
      the
      possibility of doing so. On September 30, 2005, the Company filed a Registration
      Statement on Form SB-2 and on December 9, 2005 filed Amendment No. 1 to
      Registration Statement on Form SB-2/A with the Securities and Exchange
      Commission. On February 10, 2006, the Company withdrew the Registration
      Statement on Form SB-2. Management of the Company has indicated that it intends
      to refile a revised registration statement at a future date that has not yet
      been determined. 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 and 2004, 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 restore some portion of their pre-offering value. 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. Because the registration statement was withdrawn,
      $736,037 in previously recorded deferred offering costs were expensed during
      the
      year ended December 31, 2005.




NOTE
      5.  CONVERTIBLE
      NOTES:




On
      April
      21, 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. As part of the private financing, the Company issued to the
      investors warrants to purchase 941,176 warrants to purchase common stock,
      exercisable for a period of three years at $0.425 per share.




44


On
      June
      28, 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, convertible into 2,941,176
      shares of common stock. As part of the private financing, the Company issued
      to
      the investors warrants to purchase 1,470,590 shares of common stock, exercisable
      for a period of five years at $0.425 per share. The terms of the notes and
      warrants issued in the June 2005 private financing were substantially identical
      to those issued in the April 2005 private financing, except with respect to
      the
      conversion provision for the notes and the exercise period of the warrants.
      The
      conversion provision on the April financing is 100% upon a potential IPO; while
      50% of the notes issued in connection with the June and September financing
      is
      convertible into stock of the Company upon a potential IPO and 50% will be
      paid
      in cash. Under the April, June and September financings, the principal amount
      and accrued interest are convertible into shares of common stock at any time
      at
      the option of the holder. The warrants issued in connection with the April
      financing have an exercise period of three years; while the warrants issued
      in
      connection with the June and September financings have an exercise period of
      five years.




On
      September 6, 2005, the Company received proceeds from an additional 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. As part of this private
      financing, the Company issued to the investors warrants to purchase 758,827
      shares of common stock exercisable for a period of five years at $0.425 per
      share. The terms of the notes and warrants issued in the September 2005 private
      financing were identical to those issued in the June 2005 private
      financing.




The
      principal amount and accrued interest under the April and the June/September
      notes are convertible into shares of common stock at any time at the option
      of
      the holder, and automatically, in the case of a public offering of the Company’s
      common stock, in which case (i) for the April 2005 notes, all of the outstanding
      principal amount and accrued interest under the notes will be converted into
      shares of common stock, and (ii) for the June and September 2005 notes, 50%
      of
      the outstanding principal amount and accrued interest under the notes will
      be
      converted into shares of common stock, and the remaining 50% of the outstanding
      principal amount and accrued interest under the notes will be repaid to the
      holders from the proceeds of such public offering. The notes from the April
      2005
      financing transaction will mature on April 21, 2006. The Company intends to
      request that existing bridge note holders extend their notes.




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 principal amount and accrued interest
      under the April and the June/September notes are convertible into shares of
      common stock at any time at the option of the holder, and automatically, in
      the
      case of a public offering of the Company’s common stock, in which case (i) for
      the April 2005 notes, all of the outstanding principal amount and accrued
      interest under the notes will be converted into shares of common stock, and
      (ii)
      for the June and September 2005 notes, 50% of the outstanding principal amount
      and accrued interest under the notes will be converted into shares of common
      stock, and the remaining 50% of the outstanding principal amount and accrued
      interest under the notes will be repaid to the holders from the proceeds of
      such
      public offering. The Company has recorded a beneficial conversion feature and
      a
      deferred debt discount in connection with the value of the notes and related
      investor warrants of $2,097,478, using the fair value method. This amount is
      being amortized over the life of the notes. Amortization of the beneficial
      conversion feature and deferred debt discount totaled $1,078,953 for the year
      ended December 31, 2005. 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,” there are no
      factors that would prohibit equity classification relating to the embedded
      conversion option or the warrants.




Maxim
      Group LLC acted as the placement agent in the June/September 2005 private
      financing and received placement fees of $142,800 and non-accountable expenses
      of $53,550. In addition, Maxim Group received warrants to purchase 336,000
      shares of common stock, valued at $109,414 using the fair value method,
      exercisable for a period of three years at $0.425 per share. Total cash fees
      associated with this offering were $219,350, including the above-mentioned
      fees
      paid to Maxim Group and also including other fees of $23,000, paid to
      underwriter’s attorneys and a stock transfer agent. The total of fees and the
      value of the warrants have been recorded as deferred financing costs and will
      be
      amortized over the life of the notes. Amortization of deferred financing costs
      totaled $148,215 for the year ended December 31, 2005.




45





NOTE
      6.  STOCKHOLDERS’
      EQUITY:




In
      March
      2004, the Company issued 9,000 shares of its common stock to two consultants
      valued at $9,000 for services provided to the Company in connection with the
      preparation of a private placement memorandum.




During
      2004, the Company issued an aggregate of 450,000 shares of its common stock
      in a
      series of private placement closings at a price of $1.00 per share.




During
      the year ended December 31, 2004, under the terms of their amended employment
      agreements, no salary payments were made to Messrs. Burchetta, Harris and
      Silberstein (see Note 10). The Company recorded compensation expense and a
      capital contribution totaling $412,500 during 2004, representing an imputed
      compensation expense for the minimum base salary amounts under the agreements
      with Messrs. Burchetta, Harris and Silberstein, as if the Company had met the
      condition for paying their salaries.




During
      the year ended December 31, 2005, the Company issued 224,900 shares of common
      stock through a private placement for a total of $224,900 and incurred expenses
      of the private placement of $44,206. During the year ended December 31, 2005,
      the Company issued warrants to purchase 1,000,000 shares of common stock to
      a
      consultant who also invested in this private placement, exercisable at $0.425
      per share, valued at $744,245. These warrants are exercisable for three years
      from the date of grant and vested upon issuance.




During
      the year ended December 31, 2005, two stockholders reimbursed the Company for
      $25,000 of deferred offering costs. Such amount has been credited to additional
      paid-in capital.




During
      the year ended December 31, 2005, the Company recorded imputed compensation
      expense of $112,500 related to salaries for its Co-Chairman and Chief Executive
      Officer and its Executive Vice President, General Counsel and Secretary as
      if
      the Company had met the terms for the payment of their salaries as stipulated
      in
      their employment agreements, and recorded the waived salary as a contribution
      to
      paid-in capital. (See Note 10).




During
      the year ended December 31, 2005, the Company granted, effective as of the
      date
      the Company completes a potential public stock offering that is declared
      effective and assuming a proposed 1-for-10 reverse stock split, its Senior
      Vice
      President and Chief Technology Officer and its Chief Financial Officer,
      Treasurer and Secretary options to purchase 230,000 and 100,000 shares,
      respectively, of Company common stock. These stock options will be exercisable
      at $5.00 per share (subject to adjustment to the actual potential public
      offering price), will have a term of five years from their date of grant and
      will vest immediately upon a potential public stock offering. The initial number
      of shares and the exercise price per share thereof subject to each option assume
      that the Company completes a proposed 1-for-10 reverse stock split of its
      outstanding shares of common stock prior to the date of grant, and in the event
      the stock split actually effected by the Company is in a different ratio than
      1-for-10, the number of shares and the exercise price per share thereof subject
      to each option will automatically be adjusted accordingly. The fair value of
      these stock options will be determined at the date the potential public stock
      offering is declared effective. In the event that the potential public stock
      offering does not take place by May 31, 2006, the options terminate and become
      null and void.




NOTE
      7.  STOCK
      OPTIONS:




During
      2004, the Company granted non-employee options to purchase 500,000 shares of
      common stock valued at $307,410 using the fair value method, to two members
      of
      its Board of Advisors, exercisable at $1.00 per share. During 2004, the Company
      also granted non-employee options to purchase 1,000,000 shares of its common
      stock to a consultant in order to settle a dispute regarding unpaid consulting
      fees and expenses and in exchange for the consultant’s agreement to continue to
      seek additional investors for the Company. These options are fully vested as
      of
      the grant date, November 9, 2004, are exercisable at $1.00 per share and expire
      on November 9, 2009. The fair value of these options was estimated to be
      $744,245 as of the grant date using the Black-Scholes option pricing model.
      The
      Company recorded a capital contribution of $744,245, relieved $83,653 from
      accounts payable and accrued expenses related to this consultant and charged
      $660,592 to general and administrative expenses. The Company also granted
      employee options to purchase 1,140,000 shares of its common stock during the
      year ended December 31, 2004. The value of these options, calculated using
      the
      minimum value method, was $105,220. As of December 31, 2004, there were options
      to purchase 7,033,333 shares outstanding, of which 6,783,333 had vested. As
      of
      December 31, 2004, the weighted average exercise price and the weighted average
      expected life of the options granted were $0.74 and 5.96 years.




46


As
        of
        December 31, 2004, the weighted average exercise price and the weighted average
        expected life of the options granted were $0.74 and 5.96
        years.




On
      March
      17, 2005, the Company issued options to purchase 600,000 shares of common stock,
      exercisable at $1.00 per share, to a board member as consideration for
      consulting services, valued at $372,889 using the fair value method. These
      options are exercisable for three years from the date of grant and vested upon
      issuance.




On
      April
      6, 2005, the Company granted non-employee options to purchase 200,000 shares
      of
      common stock, exercisable at $1.00 per share, to a consultant as consideration
      for services as an advisory board member valued at $123,495 using the fair
      value
      method. These options are exercisable for three years from the date of grant,
      vested upon issuance and are being expensed over the service periods related
      to
      the award.




On
      June
      30, 2005, the Company resolved an outstanding debt owed to a former employee.
      Danilo Cacciamatta, the Company’s former Chief Financial Officer, accepted
      payments of options to purchase 700,000 shares of common stock, exercisable
      at
      $0.425 per share, valued at $84,000, as well as cash payments of $38,400, as
      part of a package resolution of unpaid compensation of $95,677, a $10,000 loan,
      and approximately $16,000 of interest owed on these balances. These options
      are
      exercisable for three years from the date of grant and vested upon issuance.




During
      the year ended December 31, 2005, the Company recorded an expense of $261,355
      representing the amortized amount of the fair value of options issued to
      advisory board members in 2003 and 2004.




The
      following table summarizes the Company’s stock option activity:




Number
                of
              Options
            
            Weighted
                average
              Exercise
                price per
              shareOutstanding
                at December 31, 2003
            
            
            4,393,333
            
            $
            0.58Granted
            
            
            2,640,000
            
            
            1.00Outstanding
                at December 31, 2004
            
            
            7,033,333
            
            $
            0.74Granted
            
            
            1,500,000
            
            $
            0.73Outstanding
                at December 31, 2005
            
            
            8,533,333
            
            $
            0.74





The
      following table summarizes information about stock options outstanding at
      December 31, 2005:




Stock
                options outstanding
            
            Stock
                options exercisableExercise
              Price
            
            Number
                of
              shares
            
            Weighted
                average
              remaining
                life
            
            Weighted
                average
              exercise
                price
            
            Number
                of
              Shares
            
            Weighted
                average
              exercise
                price$0.20
            
            
            435,000
            
            
            7.27
            
            $
            0.20
            
            
            435,000
            
            $
            0.20$0.43
            
            
            700,000
            
            
            2.50
            
            $
            0.43
            
            
            700,000
            
            $
            0.43$0.50
            
            
            3,000,000
            
            
            7.44
            
            $
            0.50
            
            
            3,000,000
            
            $
            0.50$1.00
            
            
            4,398,333
            
            
            2.42
            
            $
            1.00
            
            
            4,398,333
            
            $
            1.008,533,333
            
            
            4.41
            
            $
            0.74
            
            
            8,533,333
            
            $
            0.74





NOTE
      8.  WARRANTS:





During
      the year ended December 31, 2005, the Company granted warrants to purchase
      1,000,000 shares of common stock, exercisable at $0.425 per share, to an
      investor as consideration for services raising capital for the Company. These
      warrants are exercisable for three years from the date of grant and vested
      upon
      issuance. (See Note 6).




During
      the year ended December 31, 2005, the Company granted warrants to purchase
      an
      aggregate of 3,506,588 shares of common stock, exercisable at $0.425 per share,
      to investors and a placement agent in the April, June and September bridge
      financings. These warrants are exercisable for from three to five years from
      the
      date of a potential public stock offering and vested upon issuance. (See Note
      5).




47


The
      following table summarizes the Company’s warrant activity:




Number
                of
              Warrants
            
            Weighted
                average
              Exercise
                price per
              shareOutstanding
                at December 31, 2004 and 2003
            
            
            --
            
            $
            --Granted
            
            
            4,506,588
            
            
            0.425Outstanding
                at December 31, 2005
            
            
            4,506,588
            
            $
            0.425







The
      following table summarizes information about warrants outstanding at December
      31, 2005:




Warrants
                outstandingExercise
              Price
            
            Number
                of
              shares
            
            Weighted
                average
              remaining
                life
            
            Weighted
                average
              exercise
                price
            
            Exercisable$0.425
            
            
            4,506,588
            
            
            3.29
            
            $
            0.425
            
            
            4,506,5884,506,588
            
            
            3.29
            
            $
            0.425
            
            
            4,506,588





NOTE
      9.  RELATED
      PARTY TRANSACTIONS:




a)
      License Agreement




The
      Company originally entered into a license agreement in February 2003 with
      Messrs. Burchetta and Brofman for the licensed usage of the intellectual
      property rights relating to U.S. Patent No. 6,330,551 issued by the U.S. Patent
      and Trademark Office on December 11, 2001 for “Computerized Dispute and
      Resolution System and Method” worldwide. In June 2005, subsequent to an interim
      amendment in February 2004, the Company amended and restated the license
      agreement in its entirety. The licensed usage is limited to the creation of
      software and other code enabling an automated system used solely for the
      settlement and collection of credit card receivables and other consumer debt
      and
      specifically excludes the settlement and collection of insurance claims, tax
      and
      other municipal fees of all types. The license usage also includes the creation,
      distribution and sale of software products or solutions for the same purpose
      as
      above and with the same exclusions. In lieu of cash royalty fees, Messrs.
      Burchetta and Brofman have agreed to accept stock options for the Company’s
      common stock as follows:




On
      June
      29, 2005, the Company granted to each of Messrs. Burchetta and Brofman a stock
      option for up to such number of shares of common stock such that the stock
      option, when added to the number of shares of common stock owned by each of
      Messrs. Burchetta and Brofman, and in combination with any shares owned by
      any
      of their respective immediate family members and affiliates, will equal 14.6%
      of
      the total number of outstanding shares of common stock on a fully-diluted basis
      as of the closing of a potential public offering of the Company’s common stock,
      assuming the exercise of such stock option. The value of these options will
      be
      recorded as a prepaid royalty and classified as contra-equity once the number
      of
      options has been determined, and will be amortized over the life of the
      underlying patent.




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




48


The
      stock
      options granted to Messrs. Burchetta and Brofman pursuant to the license
      agreement will have an exercise price equal to the offering price per share
      in
      such potential public offering of the Company’s common stock and are exercisable
      for ten years from the date of grant.




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




b)
      Sublease




On
      August
      1, 2005, the Company entered into a sublease agreement with a company owned
      by
      its Co-Chairman and Chief Executive Officer. The President of this company
      is
      the son of the Co-Chairman and Chief Executive Officer of the Company. The
      agreement calls for payments of $500 per month and requires the sublessee to
      supply its own equipment and utilities such as phone service. The agreement
      provides that the Company may cancel the sublease at anytime on 30 days
      notice.




c)
      Short
      Term Financings




In
      order
      to provide for certain cash requirements, the Company borrowed $400,000 in
      the
      fourth quarter of 2005 from three directors and an existing stockholder of
      our
      company, at an annual interest rate of 10%. Subsequent to December 31, 2005
      the
      Company borrowed an additional $525,000, at an monthly interest rate of 2-1/2%,
      from private investors for terms ranging from three to six months.




NOTE
      10.  EMPLOYMENT
      AGREEMENTS:




The
      Co-Chairman and Chief Executive Officer has an employment agreement with the
      Company, and under the terms of this employment agreement, no salary payments
      were made to him during the three months ended March 31, 2005. (See Note 6).
      As
      of April 1, 2005, pursuant to a decision made by the Board of Directors of
      the
      Company, the Company began to pay the Co-Chairman and Chief Executive Officer
      a
      salary of $250,000 per year. On June 6, 2005, the Company entered into a revised
      employment agreement with him. The employment agreement with the Co-Chairman
      and
      Chief Executive Officer is effective through July 2008. The agreement provides
      him with an initial annual compensation of $250,000 and contains provisions
      for
      annual increases based on “cost-of-living” changes. Prior to this date, the CEO
      waived entitlement to his salary. The employment agreement with him contains
      provisions under which his annual compensation may increase to $600,000 if
      the
      Company achieves specified operating milestones and also provides for additional
      compensation based on the value of a transaction that results in a change of
      control, as that term is defined in the agreement.




The
      Company recorded compensation expense and a capital contribution totaling
      $412,500 in the year ended December 31, 2004, representing an imputed
      compensation expense for the minimum base salary amounts under agreements with
      the Co-Chairman and Chief Executive Officer, the Executive Vice President,
      General Counsel and Secretary and the President and Chief Operating Officer
      as
      if the Company had met the condition for paying their salaries. Under the terms
      of their employment agreements, no cash payments for salary were made to these
      executives during the year ended December 31, 2004. These employment agreements
      were also subsequently amended during June 2005.




The
      Company’s employment agreement with the President and Chief Operating Officer,
      originally effective through December 31, 2004, was terminated in October 2004
      coincident with his resignation. These agreements provided each executive with
      an initial annual compensation of $240,000 and contain provisions for annual
      increases based on “cost-of-living” changes. Compensation expense under the
      agreements with these three executives totaled $412,500 for the year ended
      December 31, 2004. The three mentioned executives waived the entire amount
      of
      their compensation during 2004.




49


In
      addition to the agreements above, the Company has an employment agreement with
      the Senior Vice President and Chief Technology Officer that became effective
      December 1, 2003 and remained in effect until December 1, 2005. This officer
      continues to serve under the terms of that contract while a new contract is
      being negotiated. This employment agreement provided for annual compensation
      of
      $200,000 and other considerations. On August 1, 2005, the Company also entered
      into an employment agreement with the Chief Financial Officer, Treasurer and
      Secretary. This employment agreement provides for annual compensation of
      $150,000 and other considerations, and remains in effect until July 31, 2006.
      On
      September 28, 2005, the Company granted, effective as of the date the Company
      completes a potential stock offering that is declared effective and assuming
      a
      proposed 1-for-10 reverse stock split, these officers options to purchase
      230,000 and 100,000 shares, respectively, of Company common stock. (See Note
      6).




NOTE
      11.  OFFICE
      LEASE:




Prior
      to
      July 31, 2005, the Company had leased its office facilities under a
      non-cancelable operating lease through July 2005. Beginning August 1, 2005,
      the
      Company entered into a five year lease which includes annual escalations in
      rent. Since that date, in accordance with SFAS No. 13, “Accounting for Leases,”
the Company accounts for rent expense using the straight line method of
      accounting, accruing the difference between actual rent due and the straight
      line amount. At December 31, 2005, accrued rent payable totaled $4,296. Rent
      expense and utilities for the years ended December 31, 2005 and 2004 was $92,678
      and $72,721, respectively. Future aggregate minimum lease payments as of
      December 31, 2005 over the remaining 55 months of the lease period total
      $569,377, of which approximately $80,000 has been prepaid as a deposit.






Future
      minimum rental payments under the above non-cancelable operating leases are
      as
      follows:




For
                the Year Ending
              December
                31,
            
            Amount2006
            
            
            
            
            $
            115,0252007
            
            
            
            
            
            120,9582008
            
            
            
            
            
            127,3012009
            
            
            
            
            
            130,1642010
            
            
            
            
            
            75,929$
            569,377





NOTE
      12.  WEB
      HOSTING COMMITMENT:




On
      October 31, 2003, the Company entered into a two year web hosting agreement
      with
      AT&T Corporation. The agreement became effective in April 2004, when the
      Company began to service their first customer, and provided for the purchase
      of
      certain equipment and start-up charges at the time of the agreement and a
      combination of monthly variable expenses, dependent on volumes, going forward.
      Expenses for web hosting services totaled $181,245 and $124,595 for the years
      ended December 31, 2005 and 2004, respectively, and $320,020 since inception.
      The agreement expired on April 1, 2006. AT&T continues to provide the
      Company with service under the terms of this agreement while alternative
      possible contractual arrangements are discussed. The Company is currently
      reviewing alternative carriers and expects to enter into a new web hosting
      agreement with AT&T or another carrier in the near future. Based on current
      negotiations and volumes, the Company expects to incur expenses of from $12,000
      to $18,000 per month.




50





NOTE
      13.  INCOME
      TAXES:




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




Year
                ended December 31,2005
            
            2004Statutory
                federal income tax rate (benefit)
            
            
            (34.00
            )%
            
            (34.00
            )%Nondeductible
                expenses:Permanent
                differences
            
            
            8.49
            
            
            5.32Deferred
                start up costs
            
            
            (0.62
            )
            
            (1.21
            )Stock
                based compensation
            
            
            3.99
            
            
            10.96Increase
                in valuation allowance
            
            
            22.14
            
            
            18.93Effective
                tax rate
            
            
            0.00
            %
            
            0.00
            %





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets for financial reporting purposes and the amount
      used
      for income tax purposes. The Company’s deferred tax assets are as
      follows:




December
                31,2005
            
            2004Deferred
                tax asset:Deferred
                start up costs
            
            $
            113,239
            
            $
            152,655Stock
                based compensation
            
            
            775,039
            
            
            521,342Net
                operating loss carryforward
            
            
            2,170,670
            
            
            763,413Deferred
                tax asset
            
            
            3,058,948
            
            
            1,437,410Less:
                valuation allowance
            
            
            (3,058,948
            )
            
            (1,437,410
            )Net
                deferred tax asset
            
            $
            --
            
            $
            --Increase
                in valuation allowance
            
            $
            (1,621,538
            )
            $
            (854,113
            )





Due
      to
      the uncertainty surrounding the realization of the benefits of deferred start-up
      costs and net operating loss carryforwards, the Company provided a valuation
      allowance for the entire amount of the deferred tax asset at December 31, 2005
      and 2004. At December 31, 2005, the Company had net operating loss carryforwards
      of approximately $3,058,948 which expire at various dates through
      2025.




NOTE
      14.  RECENTLY
      ISSUED AND PROPOSED ACCOUNTING PRONOUNCEMENTS:




In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      No.
      123 (revised 2004), “Share-Based Payment” (“SFAS 123 - Revised”). SFAS 123 -
      Revised is a revision of SFAS 123, “Accounting for Stock-Based Compensation”
(“SFAS 123”), and supersedes APB Opinion No. 25, “Accounting for Stock Issued to
      Employees” (“APB 25”), and its related implementation guidance. SFAS 123 -
      Revised establishes accounting standards for recording any transaction in which
      an entity exchanges its equity instrument for goods or services. It also
      addresses transactions in which an entity incurs liabilities in exchange for
      goods or services that are based on the fair value of the entity’s equity
      instruments or that may be settled by the issuance of those equity instruments.
      It does not change the accounting guidance for share-based payment transactions
      with parties other than employees provided in SFAS 123 as originally issued
      and
      EITF Issue No. 96-18, “Accounting for Equity Instruments that Are Issued to
      Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services.” SFAS 123 - Revised requires a public entity to measure the cost of
      employee services received in exchange for an award of equity instruments based
      on the grant-date fair value of the award. That cost will be recognized over
      the
      period during which an employee is required to provide service in exchange
      for
      the award (usually the vesting period). The grant-date fair value of employee
      share options and similar instruments will be estimated using option-pricing
      models adjusted for the unique characteristics of those instruments (unless
      observable market prices for the same or similar instruments are available).
      SFAS 123 - Revised eliminates the alternative to use APB 25’s intrinsic value
      method of accounting that was provided in SFAS 123 as originally issued. Under
      APB 25, issuing stock options to employees generally resulted in recognition
      of
      no compensation cost. SFAS 123 - Revised requires entities to recognize the
      cost
      of employee services received in exchange for awards of equity instruments
      based
      on the grant-date fair value of those awards. SFAS 123 - Revised is effective
      for public entities that file as small business issuers as of the beginning
      of
      the first interim or annual reporting period that begins after December 15,
      2005.




51


Currently,
      the Company accounts for stock options issued under stock-based compensation
      plans under the recognition and measurement principles of APB 25. No stock-based
      employee compensation cost is reflected in the net loss, 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. SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and
      Disclosure - an Amendment of FASB Statement No. 123,” requires the disclosure of
      the effect on net loss and loss per share had the Company applied the fair
      value
      recognition provisions of SFAS 123 to stock-based employee
      compensation.




The
      Company will adopt the provisions of SFAS 123 - Revised during the first quarter
      of 2006. Based on the employee options outstanding as of December 31, 2005,
      the
      transitional provisions of SFAS 123 - Revised will not have an effect on the
      Company’s financial position or results of operation as all the outstanding
      employee options vested prior to December 31, 2005. Additionally, the Company
      will utilize prospective transition method for any future issuance of equity
      instruments issued after the implementation date.




In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
      An Amendment of APB No. 29” (“SFAS 153”). SFAS 153 amends APB No. 29 to
      eliminate the exception of non-monetary exchanges of similar productive assets
      and replaces it with a general exception for exchanges of non-monetary assets
      that do not have commercial substance. A non-monetary exchange has commercial
      substance if the future cash flows of the entity are expect to change
      significantly as a result of the exchange. SFAS 153 and APB No. 29 do not apply
      to the acquisition of non-monetary assets or services on issuance of the capital
      stock of an entity. Currently, the Company has not had any exchanges of
      non-monetary assets within the meaning of SFAS 153 and adoption of SFAS 153
      has
      had no effect on the Company’s financial position or results of
      operations.




In
      May
      2005, SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of
      APB Opinion No. 20, Accounting Changes and FASB Statement No. 3” was issued
      which, among other things, changes the accounting and reporting requirements
      for
      a change in accounting principle and provides guidance on error corrections.
      SFAS No. 154 requires retrospective application to prior period financial
      statements of a voluntary change in accounting principle unless impracticable
      to
      determine the period-specific effects or cumulative effect of the change, and
      restatement with respect to the reporting of error corrections. SFAS No. 154
      applies to all voluntary changes in accounting principles, and to changes
      required by an accounting pronouncement in the unusual instance that the
      pronouncement does not include specific transition provisions. SFAS No. 154
      also
      requires that a change in method of depreciation or amortization for long-lived,
      non-financial assets be accounted for as a change in accounting estimate that
      is
      effected by a change in accounting principle. SFAS No. 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. At this time, adoption of SFAS No. 154 is not expected
      to significantly impact the Company’s financial statements or future results of
      operations.




On
      September 28, 2005, the FASB ratified the following consensus reached in EITF
      Issue 05-8, “Income Tax Consequences of Issuing Convertible Debt with a
      Beneficial Conversion Feature”:  a)  The issuance of convertible debt
      with a beneficial conversion feature results in a basis difference in applying
      SFAS No. 109, “Accounting for Income Taxes.” Recognition of such a feature
      effectively creates a debt instrument and a separate equity instrument for
      book
      purposes, whereas the convertible debt is treated entirely as a debt instrument
      for income tax purposes.  b)  The resulting basis difference should be
      deemed a temporary difference because it will result in a taxable amount when
      the recorded amount of the liability is recovered or settled.  c) 
Recognition of deferred taxes for the temporary difference should be reported
      as
      an adjustment to additional paid-in capital. This consensus is effective in
      the
      first interim or annual reporting period commencing after December 15, 2005,
      with early application permitted. The effect of applying the consensus should
      be
      accounted for retroactively to all debt instruments containing a beneficial
      conversion feature that are subject to EITF Issue 00-27 , “Application of Issue
      No. 98-5 to Certain Convertible Debt Instruments” (and thus is applicable to
      debt instruments converted or extinguished in prior periods but which are still
      presented in the financial statements).  The adoption of this pronouncement
      is not expected to have a material impact on the Company’s financial
      statements.




In
      September 2005, the EITF reached a consensus on, Issue No.  05-7,
      "Accounting for Modifications to Conversion Options Embedded in Debt Securities
      and Related Issues,” beginning in the first interim or annual reporting period
      beginning after December 15, 2005.  Early application of this guidance is
      permitted in periods for which financial statements have not yet been issued.
      The disclosures required by Statement 154 should be made excluding those
      disclosures that require the effects of retroactive application. EITF No. 05-7
      is not expected to have material effect on the Company’s financial
      position.




52


In
      June
      2005, the FASB ratified EITF Issue No. 05-2, “The Meaning of `Conventional
      Convertible Debt Instrument’ in EITF No. 00-19, `Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock” (“EITF No. 05-2”), which addresses when a convertible debt
      instrument should be considered `conventional’ for the purpose of applying the
      guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under
      EITF No. 00-19 for conventional convertible debt instruments and indicated
      that
      convertible preferred stock having a mandatory redemption date may qualify
      for
      the exemption provided under EITF No. 00-19 for conventional convertible debt
      if
      the instrument’s economic characteristics are more similar to debt than equity.
      EITF No. 05-2 is effective for new instruments entered into and instruments
      modified in periods beginning after June 29, 2005. The Company has applied
      the requirements of EITF No. 05-2 since the required implementation date.
      The adoption of this pronouncement did not have an impact on the Company’s
      financial position, results of operations or cash flows.




In
      June
      2005, the EITF released EITF Issue No. 05-4 “The Effect of a Liquidated
      Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue
      No.
      00-19, `Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settled in, a Company’s Own Stock” (“EITF No. 05-4”) addresses
      financial instruments, such as stock purchase warrants, which are accounted
      for
      under EITF 00-19 that may be issued at the same time and in contemplation of
      a
      registration rights agreement that includes a liquidated damages clause. The
      consensus for EITF No. 05-4 has not been finalized.




In
      June
      2005, the EITF reached consensus on Issue No. 05-6 "Determining the
      Amortization Period for Leasehold Improvements Purchased after Lease Inception
      or Acquired in a Business Combination. (“EITF 05-6”). EITF 05-6 provides
      guidance on determining the amortization period for leasehold improvements
      acquired in a business combination or acquired subsequent to lease inception.
      The guidance in EITF 05-6 will be applied prospectively and is effective for
      periods beginning after June 29, 2005. The adoption of EITF 05-6 did not
      have an impact on the Company’s financial position, results of operations, or
      cash flows.




NOTE
      15.  SUMMARY
      QUARTERLY FINANCIAL DATA (UNAUDITED ):




Prior
      to
      the issuance of this report on Form 10-KSB, the Company reviewed its methodology
      for calculating the expense associated with options issued to non-employees
      and
      determined that it should have used the fair value method to calculate this
      expense, using an average of stock price volatility as a component of the
      valuation of stock options. Since the Company’s stock was not publicly traded,
      it developed an index of the volatility reported by comparable companies in
      accordance with SFAS No. 123. Until this point, the Company had used the minimum
      value method. Adoption of this methodology increased the previously reported
      expense of non-employee options and the value of the beneficial conversion
      feature (BCF) and deferred debt discount (DDD) of the convertible notes issued
      in connection with its debt offerings in April and June/September of 2005.




The
      following is the summarized unaudited quarterly financial data for the year
      ended December 31, 2005 reflecting the impact on expense of the revised
      methodology for calculating the value of non-employee options and warrants
      and
      the BCF and DDD of investor convertible shares and warrants, and the resulting
      restatement of the first three quarters of 2005:




53







Year
                ended December 31, 2005First
            
            Second
            
            Third
            
            FourthQuarter
            
            Quarter
            
            Quarter
            
            Quarterrestated
            
            restated
            
            restatedTotal
                revenues, as previously reported
            
            $
            1,661
            
            $
            866
            
            $
            7,306
            
            $
            13,766


Net
                loss, as previously reported
            
            
            (516,943
            )
            
            (638,636
            )
            
            (1,097,807
            )
            
            (2,433,904
            )Stock-based
                compensation adjustments
            
            
            (355,676
            )
            
            (48,774
            )
            
            (70,360
            )
            
            --Deferred
                financing costs adjustments related to valuation of
                warrants
            
            
            --
            
            
            (53,192
            )
            
            (188,261
            )
            
            --Net
                loss, as restated
            
            
            (872,619
            )
            
            (740,592
            )
            
            (1,356,427
            )
            
            (2,433,904
            )Basic
                and diluted net loss per common shareNet
                loss, as previously reported
            
            
            (0.02
            )
            
            (0.02
            )
            
            (0.04
            )
            
            --Stock-based
                compensation adjustments
            
            
            (0.01
            )
            
            --
            
            
            --
            
            
            --Deferred
                financing costs adjustments related to valuation of
                warrants
            
            
            --
            
            
            --
            
            
            (0.01
            )
            
            --Net
                loss, as restated
            
            
            (0.03
            )
            
            (0.02
            )
            
            (0.05
            )
            
            (0.08
            )Average
                basic and diluted shares outstanding
            
            
            29,549,794
            
            
            29,703,900
            
            
            29,703,900
            
            
            29,703,900





The
      following summary of quarterly information for 2004 reflects the information
      reported in the Form 10-KSB/A No. 2, filed on March 30, 2006:





Year
                ended December 31, 2004First
            
            Second
            
            Third
            
            FourthQuarter
            
            Quarter
            
            Quarter
            
            QuarterTotal
                revenues
            
            $
            --
            
            $
            --
            
            $
            2,088
            
            $
            699Total
                operating expenses
            
            
            519,753
            
            
            484,078
            
            
            488,413
            
            
            1,184,386Net
                operating income (loss)
            
            
            (519,753
            )
            
            (484,078
            )
            
            (486,325
            )
            
            (1,183,687
            )Other
                income/(expense)
            
            
            2,536
            
            
            1,009
            
            
            938
            
            
            362Net
                loss
            
            
            (517,217
            )
            
            (483,069
            )
            
            (485,387
            )
            
            (1,183,325
            )Basic
                and diluted net loss per common share
            
            
            (0.02
            )
            
            (0.02
            )
            
            (0.02
            )
            
            (0.03
            )Average
                basic and diluted shares outstanding
            
            
            29,020,890
            
            
            29,052,077
            
            
            29,107,261
            
            
            29,133,746





NOTE
      18.  SUBSEQUENT
      EVENTS:




a.  SEC
      FILINGS




On
      February 10, 2006, the Company withdrew its Registration Statement on Form
      SB-2,
      which had previously been filed with the Securities and Exchange Commission.
      Management of the Company has indicated that it intends to refile a revised
      registration statement at a future date that has not yet been determined.




b.  PRIVATE
      FINANCINGS




Subsequent
      to December 31, 2005, the Company has raised $525,000 through the issuance
      of
      short term notes carrying an interest rate of 2-1/2% per month and maturing
      from
      April 30, 2006 through May 17, 2006. On January 20, 2006, the Company entered
      into an agreement with an investment banking firm, Capital Growth Financial,
      LLC
      (“CGF”), whereby CGF agreed to serve as placement agent for a private financing
      consisting of the issuance of the Company’s senior convertible promissory notes.
      As of March 27, 2006, the Company had raised $300,000 under this offering.
      These
      notes are convertible at any time at the option of the holder into shares of
      common stock at a price of $0.33 per share. **** If the
      Company raises the maximum $3,500,000 contemplated by this private financing
      (not including the $1,000,000 over allotment option), an aggregate of
      approximately 1,050,000 shares of common stock will be issuable, upon the
      consummation of a potential public offering, at a conversion ratio equal to
      66.67% of an assumed initial public offering price of $5.00 per share. Maxim
      Group, LLC is acting as the co-placement agent in this private financing.




54


c. LETTER
        OF
        INTENT




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. The Company has not entered into any definitive agreements to purchase
      this collection agency as a result of this letter of intent, but is exploring
      the possibility of doing so.




**ITEM
      8A. Controls and procedures**




**Evaluation
      of our disclosure controls and procedures**




As
      of the
      end of the period covered by this report, we have evaluated the effectiveness
      of
      the design and operation of our disclosure controls and procedures (“disclosure
      controls”). This evaluation (the “controls evaluation”) was done under the
      supervision and participation of our management, including our Chief Executive
      Officer (the “CEO”), who is our principal executive officer, and our Chief
      Financial Officer (the “CFO”), who is our principal financial officer. Rules
      adopted by the Securities and Exchange Commission require  t hat
      in
      this section of the report we present the conclusions of our principal executive
      officer and principal financial officer about the effectiveness of our
      disclosure controls based on and as of the date of the controls
      evaluation.




*Disclosure
      controls and procedures*




As
      of the
      conclusion of the year ended December 31, 2005, we have evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures, or disclosure controls. This controls evaluation was done under
      the
      supervision and participation of our management, including our CEO, who is
      the
      our principal executive officer, and our CFO, who is our principal financial
      officer.




Disclosure
      controls means controls and other procedures of ours that are designed with
      the
      objective of ensuring that information required to be disclosed in our 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 us in the
      reports that we file or submit under the Securities Exchange Act is accumulated
      and communicated to our management, including, without limitation, our CEO
      and
      CFO, as appropriate to allow timely decisions regarding required
      disclosure.




Based
      on
      their evaluations as of the conclusion
      of the year ended December 31, 2005 , our
      CEO
      and CFO concluded that our disclosure controls were not effective at the “reasonable
      assurance” level. The ineffectiveness of our disclosure controls is due to the
      matters described below in “Internal Control over Financial
      Reporting.”




Our
      management, including our CEO and CFO, does not expect
      that our 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 our company have been detected.




Our
      CEO’s
      and CFO’s evaluation of our disclosure controls included a review of the
      controls’ objective and design, the controls’ implementation by us and the
      effect of the controls on the information generated for use in this prospectus
      and periodic SEC reports. In the course of the controls evaluation, our
      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 our
      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 our
      disclosure controls and to make modifications as necessary. In this regard,
      our
      intent is that the disclosure controls will be maintained as dynamic controls
      systems that change (including improvements and corrections) as conditions
      warrant.




55


*Internal
      control over financial reporting*





Effective
      internal controls are necessary for us to provide reliable financial reports
      and
      effectively prevent fraud. We maintain a system of internal control over
      financial reporting, which is defined as a process designed by, or under the
      supervision of, our principal executive officer and principal financial officer,
      or persons performing similar functions, and effected by our 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 our 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 our receipts and expenditures are
                being
                made only in accordance with authorizations of our management and
                directors, and




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




We
      maintain accounting records that in reasonable detail accurately and fairly reflect
      the
      transactions and dispositions of our  assets.
      We have 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.




Our
      independent registered public accounting firm has reported to our audit
      committee certain matters involving internal controls that this firm considered
      to be reportable conditions and a material weakness, under standards established
      by the American Institute of Certified Public Accountants. The reportable
      conditions and material weakness relate to 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. The combination of an absence of an adequate 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 us in connection with the restatement of the audited financial
      statements for the years ended December 31, 2004 and 2003. Although our
      management has demonstrated certain improvements in controls over the
      preparation of our financial reports, as described above, these reported
      conditions and material weaknesses still exist, as the additional accounting
      staff members have only recently been hired, and new review procedures are
      incomplete and not all have been fully implemented.




Subsequently,
      during the year ended December 31, 2005, we determined that we had improperly
      calculated and disclosed the expense of options granted to non-employees. We
      had
      used the minimum value method instead of the fair value method. Accordingly,
      we
      filed, on March 30, 2006, an amended report on Form 10-KSB/A No. 2 for the
      year
      ended December 31, 2004 to report the corrected expense of these options for
      the
      years ended December 31, 2004 and 2003. In addition, this report includes
      amended data for the first three quarterly periods of the year ended December
      31, 2005. We are a small company with limited accounting staff and find it
      difficult to stay current with all required accounting regulations. In addition,
      due to limited staffing, we are not always able to detect minor errors or
      omissions in reporting.




We
      believe we have begun to make changes
      in our internal control procedures that have improved those controls and related
      material weakness. Specifically,
      we hired additional, experienced accounting staff members and enlisted the
      services of an experienced accounting consultant to assist with financial
      reporting issues, and we have also begun to document and apply transactional
      and
      periodic controls procedures, including periodic closing checklists and
      sign-offs, permitting a better review and approval process and improved quality
      of accounting reports. We have also begun to perform research and analysis
      of
      the controls over expenditures and revenue recognition.




56


It
      is the
      responsibility of our management to establish and maintain adequate internal
      control over financial reporting. However, due to our small size and limited
      financial resources, our CEO and CFO have been the only employees principally
      involved in accounting and financial reporting. Our 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 our CEO and CFO. Although we have recently hired two experienced staff
      members to help with accounting duties, they have taken on only limited duties.
      The new accounting staff members provide a degree of segregation of duties
      over
      cash, and have begun to help write and implement documented control procedures,
      but have not taken on financial reporting responsibilities. 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, our audit
      committee has expressed its belief that there have been no irregularities in
      our
      financial reporting or in the protection of our assets.




Our
      management believes that the reportable conditions noted above stem from our
      operational growth. Beginning during the summer of 2005, our management
      committed to working with our audit committee to develop improved internal
      controls, including hiring additional accounting staff and documenting written
      accounting control procedures. We have 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. Going
      forward, our management anticipates that the changes already begun, as well
      as
      other planned improvements, will correct any material issues. Recently, we
      have
      begun to document and apply transactional and periodic controls procedures,
      permitting a better review and approval process and improved quality of
      accounting reports. Our management believes that this new infrastructure will
      assist in alleviating control weaknesses going forward. As a result, we believe
      that our financial statements for the year ended December 31, 2005 and 2004,
      fairly present, in all material respects, our financial condition and results
      of
      operations.




Commencing
      the year ending December 31, 2007, we will be required to document and test
      our
      internal control procedures in order to satisfy the requirements of Section
      404
      of the Sarbanes-Oxley Act of 2002, which requires annual management assessments
      of the effectiveness of our internal controls over financial reporting and
      a
      report by our independent registered public accounting firm addressing these
      assessments. Our accounting staff is small, and although we recently begun
      to
      augment our internal controls procedures and expand our accounting staff, there
      is no guarantee that this effort will be adequate. During the course of our
      testing, we may identify deficiencies which we 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 we fail to maintain the
      adequacy of our internal accounting controls, as such standards are modified,
      supplemented or amended from time to time, we may not be able to ensure that
      we
      can conclude on an ongoing basis that we have 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 our reported financial information.




57





**PART
      III.**




**ITEM
      9. Directors, executive officers, promoters and control persons; compliance
      with
      Section 16(a) of the Exchange Act**




Our
      directors and executive officers, along with certain information regarding
      them,
      are as follows:




**Name**
            **Age**
            **Position**
            **Shares
                of stock**
              **beneficially
                owned**
            **Percent
                of common**
              **stock
                beneficially owned**James
                D. Burchetta
            57
            Co-Chairman
                of the Board, Chief Executive Officer, President
            6,500,000
            (1)
            21.88%Charles
                S. Brofman
            49
            Co-Chairman
                of the Board
            10,000,000
            (2)
            33.67%Alan
                M. Silberstein
            59
            Director
            3,025,000
            (3)
            9.25%Lawrence
                E. Dwyer, Jr.
            62
            Director
            1,003,333
            (4)
            3.36%William
                H. Mooney
            65
            Director
            609,900
            (5)
            2.02%Richard
                Rosa
            39
            Senior
                Vice President, Chief Technology Officer
            1,000,000
            (6)
            3.31%Katherine
                A. Dering
            58
            Chief
                Financial Officer, Secretary, Treasurer
            0
            
            *All
                directors and executive officers as a group
            
            
            22,138,233
            
            65.45%







*  Denotes
      less than 1%.




(1)
            Includes
                3,000,000 shares held by the James D. Burchetta, Sr. Family Trust
                and
                150,000 shares held by the James D. Burchetta Education and Health
                Trust,
                for both of which Mr. Burchetta’s son, James D. Burchetta, is the trustee,
                as well as 350,000 shares held by Park Avenue Associates, Inc., a
                corporation controlled by Mr.
                Burchetta.




(2)
            Includes
                8,000,000 shares held by Arisean Capital Ltd., a corporation that
                includes
                Mr. Brofman’s minor children.




(3)
            Includes
                options to purchase 3,000,000 shares of common stock, exercisable
                at $0.50
                per share.




(4)
            Includes
                options to purchase 183,333 shares of common stock, exercisable at
                $1.00
                per share.




(5)
            Includes
                options to purchase 435,000 shares of common stock, exercisable at
                $0.20
                per share.




(6)
            Includes
                options to purchase 500,000 shares of common stock, exercisable at
                $1.00
                per share




In
      addition to the directors and officers noted above, Earle Zimmerman, a private
      investor, holds beneficial ownership of 3,535,000 shares of common stock
      (11.15%), including 500,000 shares held by Zimmerman Inc., a corporation
      controlled by Mr. Zimmerman, and options to purchase 2,000,000 shares of common
      stock, of which 1,000,000 are exercisable at $1.00 per share and 1,000,000
      are
      exercisable at $0.425 per share.




Directors
      hold office until a successor is elected and qualified or until their earlier
      resignation in the manner provided in our Bylaws.




58


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




**Charles
      S. Brofman** has been
      our non-executive Co-Chairman of the Board since January 13, 2003. Mr. Brofman
      was the co-founder of Cybersettle and has served as a director and its President
      and Co-Chief Executive Officer since 1997, becoming its Chief Executive Officer
      in August 2000. Prior to founding Cybersettle, Mr. Brofman was a Senior Partner
      in the New York law firm of Burchetta, Brofman, Collins & Hanley, LLP and,
      prior to that, was an Assistant District Attorney in New York. Mr. Brofman
      received a B.S. degree from Brooklyn College, City University of New York and
      a
      J.D. degree from Fordham University Law School and is a member of the New York
      State Bar.




**Alan
      M. Silberstein** has been
      a member of our board of directors since June 2003. Mr. Silberstein served
      as
      our President and Chief Operating Officer from June 2003 until October 2004.
      Mr.
      Silberstein is currently President of Silco Associates, a management advisory
      firm in the financial services industry. Alan has worked in the financial
      services sector for more than 30 years, including as President and Chief
      Executive Officer of Western Union, a subsidiary of First Data Corporation.
      He
      served as Chairman and CEO of Claim Services at Travelers Property Casualty
      Insurance. He headed consumer banking at Midlantic Bank (now PNC) and Chemical
      Bank (now JPMorgan Chase) with executive experience in consumer credit,
      technology, finance and operations. Mr. Silberstein serves as a director of
      Global Payments Inc., and of Capital Access Network, Inc. He also serves on
      numerous university-related advisory boards. He is a member of the Council
      on
      Foreign Relations and also of Business Executives for National Security. He
      holds a B.S. degree in engineering from Columbia University and an M.B.A. from
      Harvard Business School.




**Lawrence
      E. Dwyer, Jr.** has been
      a member of our board of directors since February 2003. Mr. Dwyer is the former
      President of The Westchester County Association Inc., having served from 1994
      to
      2003, and is active in local, state and national politics. The Westchester
      County Association is a member of the Business Council of New York State and
      its
      membership includes many Fortune 500 companies. Mr. Dwyer also presently serves
      on two regional task forces for New York Governor George Pataki. Mr. Dwyer
      has
      been the Chairman of the Westchester, Nassau & Suffolk Municipal Officials
      Association, New York State Ethics Advisory Board and presently serves on the
      board of directors of the Lubin School of Business at Pace University, The
      Westchester Land Trust, Westchester Business Accelerator, Transportation
      Management Organization, The Lyndhurst Council, The Westchester Housing Fund
      and
      Westchester Community College Foundation. Mr. Dwyer received an M.A. degree
      in
      education and an M.A. degree in administration from Teachers College, Columbia
      University.




**William
      M. Mooney, Jr.** has been
      a member of our board of directors since April 2003. Mr. Mooney is currently
      President of The Westchester County Association and also serves as a Senior
      Vice
      President at Independence Community Bank. Mr. Mooney has been involved in the
      banking sector in an executive capacity for more than 30 years. Prior to joining
      Independence Community Bank, he served for four years as an Executive Vice
      President and member of the management committee of Union State Bank,
      responsible for retail banking, branch banking and all marketing activity.
      Mr.
      Mooney also spent 23 years at Chemical Bank and, following its merger with
      Chase
      Manhattan Bank, he was a Senior Vice President with responsibilities including
      oversight of all retail business. Mr. Mooney was the President of the
      Westchester Partnership for Economic Development. He also held the position
      of
      Chairman for the Westchester County Association, past Chairman of the United
      Way
      Westchester and Chairman of St. Thomas Aquinas College. He has served on the
      board of trustees for New York Medical College, St. Agnes Hospital, the Board
      of
      Dominican Sisters and the Hispanic Chamber of Commerce. Mr. Mooney received
      a
      B.A. degree in business administration from Manhattan College. He also attended
      the Harvard Management Program and the Darden Graduate School at the University
      of Virginia.




59


**Richard
      G. Rosa** has been
      our Senior Vice President and Chief Technology Officer since February 2003.
      He
      most recently served as the Senior Director of Technology for Scholastic Inc.’s
      Software and Internet Group from November 2000 to May 2002. Mr. Rosa was
      responsible for all website-related application development, networking and
      hosting infrastructure and operations. Mr. Rosa was previously Chief
      Technology Officer of BabyGear.com (a Bertelsmann venture capital investment),
      responsible for the technical integration of iBaby.com, as well as improving
      all
      facets of transaction processing and warehouse data management and fulfillment,
      from July to November 2000. Mr. Rosa was also Director of Online Operations
      at 1800Flowers.com, where he oversaw all phases of applications development,
      web
      hosting infrastructure and technical operations, from early 1999 to June 2000.
      Mr. Rosa has been involved with technology and Internet service businesses
      since February 1995, when he founded Netamorphasis Corp., a provider of
      application development and Internet-based infrastructure consulting services.
      Mr. Rosa received a B.A. degree from the City University of New York,
      Queens College.




**Katherine
      A. Dering** has been
      our Chief Financial Officer since April 2005 and our Treasurer and Secretary
      since July 2005. Ms. Dering was, from 1994 to March 2003, Senior Vice President
      and Chief Financial Officer of Provident Bank, where she provided financial
      and
      strategic leadership as part of the bank’s senior management team. Between April
      2003 and April 2005, Ms. Dering was an independent financial consultant. Prior
      to 1994, Ms. Dering was Senior Vice President and Chief Financial Officer at
      Great Country Bank, Vice President and Divisional Controller at First American
      Bank of New York, and First Vice President, Accounting Operations of Dollar
      Dry
      Dock Bank. Ms. Dering received a B.A. degree from Le Moyne College, M.A. degrees
      from the State University of New York at Buffalo and Manhattanville College,
      and
      an M.B.A. from the University of Minnesota with a concentration in accounting
      and economics.




60


**ITEM
      10. Executive Compensation**





Summary
      compensation table


Name
                and principal position
            
            Year
            
            Salary
            
            Bonus
            
            Other
                annualcompensation
            
            RestrictedStock
                Awards
            
            Securities
                Underlying Options/SARspayouts
            
            Long
                termincentive
                plan
            
            All
                OtherCompensationJames
                D. Burchetta
              Chief
                Executive Officer, President Co-Chairman of the Board (1)
            
            
            2003
            
            $
            222,000
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --2004
            
            $
            150,000
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --2005
            
            $
            224,787
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --Charles
                S. Brofman
              Co-Chairman
                of the Board
            
            
            2003
            
            $
            --
            
            $
            --
            
            $
            222,000
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --2004
            
            $
            --
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --2005
            
            $
            --
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --Katherine
                A. Dering
              Chief
                Financial Officer, Secretary, Treasurer
            
            
            2003
            
            $
            --
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --2004
            
            $
            --
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --2005
            
            $
            91,450
            
            $
            --
            
            $
            15,750
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --Richard
                A. Rosa
              Senior
                Vice President, Chief Technology Officer
            
            
            2003
            
            $
            31,250
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --2004
            
            $
            150,000
            
            $
            --
            
            $
            --
            
            
            --
            
            
            500,000
            
            $
            --
            
            $
            --2005
            
            $
            193,271
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --Alan
                M. Silberstein
              director
                and former chief operating officer (2)
            
            
            2003
            
            $
            134,667
            
            $
            --
            
            $
            --
            
            
            --
            
            
            3,000,000
            
            $
            --
            
            $
            --2004
            
            $
            112,500
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --2005
            
            $
            --
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --Lawrence
                E. Dwyer, Jr.
              director
                (3)
            
            
            2003
            
            $
            --
            
            $
            --
            
            $
            45,400
            
            
            --
            
            
            183.333
            
            $
            --
            
            $
            --2004
            
            $
            --
            
            $
            --
            
            $
            1,677
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --2005
            
            $
            --
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --William
                M. Mooney, Jr.
              director
            
            
            2003
            
            $
            --
            
            $
            --
            
            $
            --
            
            
            --
            
            
            435,000
            
            $
            --
            
            $
            --2004
            
            $
            --
            
            $
            --
            
            $
            --
            
            
            --
            
            
            --
            
            $
            --
            
            $
            --2005
            
            $
            --
            
            $
            --
            
            $
            --
            
            
            --
            
            
            600,000
            
            $
            --
            
            $
            --







(1)
            Mr.
                Burchetta has an employment agreement with us, but waived his compensation
                during the year ended December 31, 2003 and was not paid. In addition,
                under the terms of his amended employment agreement, no salary payments
                were made to Mr. Burchetta during the year ended December 31, 2004.
                We
                recorded compensation expense and a capital contribution during the
                year
                ended December 31, 2004, and in the first quarter of 2005, representing
                an
                imputed compensation expense for the minimum base salary amounts
                under the
                agreement with Mr. Burchetta, as if we had met the condition for
                paying
                his salary. Beginning April 1, 2005, Mr. Burchetta began to draw
                a salary.
                The agreement with Mr. Burchetta is described in Item 7 above in
                Note 10
                to the financial statements.




(2)
            Mr.
                Silberstein had an employment agreement with us, which terminated
                with his
                resignation in October 2004. Mr. Silberstein waived his compensation
                during the year ended December 31, 2003 and was not paid. Under the
                terms
                of his amended employment agreement, no salary payments were made
                to Mr.
                Silberstein during the year ended December 31, 2004. We recorded
                compensation expense and a capital contribution during the year ended
                December 31, 2004, representing an imputed compensation expense for
                the
                minimum base salary amount under the agreement with Mr. Silberstein,
                as if
                we had met the condition for paying his salary. The agreement with
                Mr.
                Silberstein is described in Item 7 above in Note 10 to the financial
                statements.




61




(3)
            Mr.
                Dwyer had a consulting agreement with us, but waived his fees during
                the
                year ended December 31, 2003 and was not paid. The consulting agreement
                with Mr. Dwyer provided for a consulting fee of $4,000 per month.
                This
                agreement expired in January 2004 and was not renewed.




*Option/SAR
      grants in the last fiscal year*




During
      the year ended December 31, 2005 options to purchase 600,000 shares of stock
      were granted to Mr. Mooney.




The
      following table sets forth certain information regarding stock options exercised
      during 2004 by the named directors and executive officers and the number and
      value of options held by those directors and executive officers at December
      31,
      2005. The values of unexercised in-the-money stock options shown below are
      presented pursuant to SEC rules. There is no assurance that the values of
      unexercised in-the-money options shown below will be realized.




Aggregated
      option/SAR exercises in last fiscal year and fiscal year end option/SAR
      values




**Number
                of securities**
              **underlying
                unexercised**
              **options/SAR’s
                at**
              **fiscal
                year end**
            
            **Value
                of unexercised**
              **in-the-money
                options/SAR’s**
              **at
                fiscal year end****Name**
            
            **Shares**
              **acquired**
              **on
                exercise**
            
            **Value**
              **realized**
            
            **Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**William
                M. Mooney, Jr.
            
            
            --
            
            $
            --
            
            
            435,000
            
            
            --
            
            $
            348,000
            
            
            --Alan
                M. Silberstein
            
            
            --
            
            $
            --
            
            
            3,000,000
            
            
            --
            
            $
            1,500,000
            
            
            --Lawrence
                E. Dwyer, Jr
            
            
            --
            
            $
            --
            
            
            183,333
            
            
            --
            
            
            --
            
            
            --Richard
                S. Rosa
            
            
            --
            
            $
            --
            
            
            500,000
            
            
            --
            
            
            --
            
            
            --





*Long-term
      incentive plans*





We
      currently have no long-term incentive plans.





**ITEM
      11. Security ownership of certain beneficial owners and
      management**





Item
      9
      above lists the beneficial ownership of the our common stock by all directors
      and executive officers and also notes the beneficial ownership of 9.6% of our
      common stock by Earle Zimmerman, a private investor. There are no other owners
      of more than 5% beneficial ownership of the our common stock.





**ITEM
      12. Certain relationships and related transactions**





Transactions
      with related parties are also described in Item 7 above in Note 9 to the
      financial statements. There are no other transactions with related
      parties.




62


**ITEM
      13. Exhibits and reports on Form 8-K**





(a)
      Exhibits




Exhibit
                No.
            
            Description2.1
            
            Stock
                Purchase Agreement, dated February 20, 2003 and effective as of January
                13, 2003, by and between Lombardia Acquisition Corp. (now Debt Resolve,
                Inc.) and each of Charles S. Brofman, James D. Burchetta and Michael
                S.
                Harris.(2)3.1
            
            Certificate
                of Incorporation.(1)3.2
            
            Certificate
                of Amendment of the Certificate of Incorporation.(7)3.3
            
            By-laws.(1)4.1
            
            Specimen
                Common Stock Certificate.(1)4.2
            
            Form
                of 7% Senior Convertible Promissory Note of Debt Resolve, Inc. for
                June
                28, 2005 private placement.(5)4.3
            
            Form
                of Warrant to Purchase Common Stock of Debt Resolve, Inc. for June
                28,
                2005 private placement.(5)10.1
            
            Form
                of Indemnity Agreement.(1)10.2
            
            Form
                of Employment Agreement with Executives of DebtResolve,
                Inc.(3)10.3
            
            Limited
                License Agreement, dated February 20, 2003, between DebtResolve,
                Inc. and
                James D. Burchetta and Charles S. Brofman.(3)10.4
            
            Amendment
                to Limited License Agreement, dated February 25, 2004, between Lombardia
                Acquisition Corp. (now Debt Resolve, Inc.) and James D. Burchetta
                and
                Charles S. Brofman.(4)10.5
            
            Amendments
                to Employment Agreements, dated February 25, 2004, between Lombardia
                Acquisition Corp. (now Debt Resolve, Inc.) and James D. Burchetta,
                Michael
                S. Harris and Alan M. Silberstein.(4)10.6
            
            Securities
                Purchase Agreement, dated as of June 28, 2005, among Debt Resolve,
                Inc.
                and each of the private placement subscribers.(5)10.7
            
            Registration
                Rights Agreement, dated as of June 28, 2005, among Debt Resolve,
                Inc. and
                each of the private placement subscribers.(5)10.8
            
            Form
                of investor lock-up agreement for June 28, 2005 private
                placement.(5)10.9
            
            Amended
                and Restated Limited License Agreement, dated as of June 27, 2005,
                by and
                among Debt Resolve, Inc., James D. Burchetta and Charles S.
                Brofman.(5)10.10
            
            Form
                of Licensing Agreement with Debt Resolve clients.(6)10.11
            
            2005
                Incentive Compensation Plan of Debt Resolve, Inc.(6)31.1
            
            Certification
                required by Rule 13(a)-14(a).32.1
            
            Certification
                required by Rule 13(a)-14(b) and 18 U.S.C. Section
                1350.99.1
            
            Certifications
                pursuant to Sec. 906


_________________




(1)
            Incorporated
                herein by reference to Registration Statement on Form 10-SB (File
                No. 000-29525) of Lombardia Acquisition Corp., filed February 15,
                2000.




(2)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed March 11,
                2003.




(3)
            Incorporated
                herein by reference to Quarterly Report on Form 10-QSB for the quarter
                ended June 30, 2003, filed August 14,
                2003.




(4)
            Incorporated
                herein by reference to Annual Report on Form 10-KSB for the year
                ended
                December 31, 2003, filed March 30,
                2004.




(5)
            Incorporated
                herein by reference to Current Report on Form 8-K, filed July 5,
                2005.




(6)
            Incorporated
                herein by reference to Registration Statement on Form SB-2 (File
                No. 333-128749), filed September 30,
                2005.




(7)
            Incorporated
                herein by reference to Amendment No. 1 to Registration Statement
                on Form
                SB-2 (File No. 333-128749), filed December 9,
                2005.




63





(b)
      Reports on Form 8-K filed in the quarter ended December 31, 2005




None




**ITEM
      14. Principal accountant fees and services**




Becher,
      Della Torre, Gitto & Company served as our independent auditors for the year
      ended December 31, 2004. As described in Item 8 above, effective June 20, 2005,
      we engaged Marcum & Kliegman LLP as our new independent auditors for the
      year ended December 31, 2005. The firm also performed a reaudit of the years
      ended 2003 and 2004.




Audit
      fees




Audit
      fees are those fees billed for professional services rendered for the audit
      of
      the annual financial statements and review of the financial statements included
      in Form 10-QSB. The aggregate amount of the audit fees billed by Marcum &
Kliegman LLP was $220,000 in 2005, which includes $77,500 in fees related to
      the
      audit of financial statements included in the Company’s Registration Statement
      on Form SB-2. The aggregate amount of the audit fees billed by Becher, Della
      Torre, Gitto & Company was $36,805 in 2005 and $35,922 in 2004.




Audit
      related fees




Audit
      related fees are fees billed for professional services other than the audit
      of
      our financial statements. No audit related fees were billed by our independent
      auditors in 2004 or 2005.




Tax
      fees




Tax
      fees
      are those fees billed for professional services rendered for tax compliance,
      including preparation of corporate federal and state income tax returns, tax
      advice and tax planning. No tax fees were billed by Marcum & Kliegman LLP in
      2005. The aggregate amount of the tax fees billed by Becher, Della Torre, Gitto
      & Company was $15,730 in 2005 and $5,735 in 2004.




All
      other fees




No
      other
      fees were billed by our independent auditors in 2005 and 2004.




Audit
      committee




The
      members of our audit committee are Messrs. Dwyer and Mooney. Our board of
      directors and audit committee approved the decision to change our independent
      auditors for the year ending December 31, 2005 and approved the services
      rendered and fees charged by our new independent auditors. The audit committee
      has reviewed and discussed our audited financial statements for the year ended
      December 31, 2005 with our management. In addition, the audit committee has
      discussed with Marcum & Kliegman LLP, our independent auditors, the matters
      required to be discussed by Statement of Auditing Standards No. 61
      (Communications with Audit Committee). The audit committee also has received
      the
      written disclosures and the letter from as required by the Independence
      Standards Board Standard No. 1 (Independence Discussions with Audit Committees)
      and the audit committee has discussed the independence of Marcum & Kliegman
      LLP with that firm.




Based
      on
      the audit committee’s review of the matters noted above and its discussions with
      our independent auditors and our management, the audit committee recommended
      to
      the board of directors that the audited financial statements be included in
      our
      annual report on Form 10-KSB for the year ended December 31, 2005.




64


**SIGNATURES**




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




Dated:
       April 14, 2006




**DEBT
                RESOLVE, INC.**By:
            /s/ JAMES
              D. BURCHETTAJames
              D. BurchettaCo-Chairman,
                President and Chief Executive Officer(principal
                executive officer)




By:
            /s/ KATHERINE
              A. DERINGKatherine
                A. DeringChief
                Financial Officer, Treasurer and Secretary(principal
                financial and accounting officer)




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







Signature
            
            Title
            
            Date/s/
                James D. Burchetta
            
            Chief
                Executive Officer, President,
            
            April
                14, 2006James
                D. Burchetta
            
            Co-Chairman
                of the Board/s/
                Charles S. Brofman
            
            Co-Chairman
                of the Board
            
            April
                14, 2006Charles
                S. Brofman/s/
                Alan M. Silberstein
            
            Director
            
            April
                14, 2006Alan
                M. Silberstein/s/
                Lawrence E. Dwyer, Jr.
            
            Director
            
            April
                14, 2006Lawrence
                E. Dwyer, Jr./s/
                William M. Mooney, Jr.
            
            Director
            
            April
                14, 2006William
                M. Mooney, Jr.








65