**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-KSB/A**




**(Amendment
      No. 2)**




x ANNUAL
      REPORT
      UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL
      YEAR ENDED DECEMBER 31, 2004




Commission
      File No.:  0-29525





**DEBT
      RESOLVE, INC.**


(Name
      of
      small business issuer in its charter)




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




**(914)
      949-5500**


(Issuer’s
      telephone number)




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, 2004 were
      $2,787.




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




As
      of
      March 22, 2005, 29,653,000 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**







Explanatory
                Note
            3Restatement
                of Financial Statements
            3**PART
                II.**Item
                6.
            Management’s
                Discussion and Analysis or Plan of Operation
            6Item
                7.
            Financial
                Statements
            14Signatures
            38Certifications
            39





2


**EXPLANATORY
      NOTE**




Debt
      Resolve, Inc. (the “Company”) is filing this Amendment No. 2 to its Annual
      Report on Form 10-KSB for the year ended December 31, 2004 (the “2004 Form
      10-KSB”), which was originally filed on March 30, 2005 and previously amended by
      Form 10-KSB/A Amendment No. 1 (“Amendment No. 1”) filed on December 8, 2005,
      solely to amend and replace Items 6 and 7 of Amendment No. 1 for the year ended
      December 31, 2004 . In
      addition to the restatements noted below, the Company has updated certain
      disclosures in the financial statement footnotes and management’s discussion and
      analysis.




**RESTATEMENT
      OF FINANCIAL STATEMENTS**






Subsequent
      to the completion and filing of Amendment No. 1, the Company 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
      Amendment No.1, the Company 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, the Company decided that guidance in EITF
      96-18 should also apply. Specifically, that stock options 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 the Company’s
      stock was not, and is not as of the date hereof, publicly traded, the Company
      developed an index of the volatility reported by comparable companies in
      accordance with SFAS No. 123. Accordingly, the Company is restating its prior
      financial statements using the fair value method of calculating non-employee
      stock-based compensation.




As
      of
      December 31, 2004, the restatement adjustments related to the computation of
      the
      fair value for stock-based compensation to non-employees increased net loss
      compared to the previously restated financial statements by $1,000,225 since
      inception, including $333,673 during the year ended December 31, 2003, and
      $666,552 during the year ended December 31, 2004, and increased the basic and
      diluted net loss per share by $0.01, from $(0.10) to $(0.11) in the year ended
      December 31, 2003, and $0.02 from $(0.07) to $(0.09) in the year ended December
      31, 2004.




Amounts
      reflected herein for the fiscal years ended December 31, 2003 and 2004 represent
      the restated financial information.




The
      following summarizes the effect of these adjustments on the previously reported
      net loss and net loss per share:




Year
                ended December 31, 2003
            
            Year
                ended December 31, 2004
            
            Cumulative
                from Inception (April 21, 1997) to December 31, 2004Net
                loss
            
            
            
            Net
                lossNet
                loss
            
            per
                share
            
            Net
                loss
            
            per
                share
            
            Net
                lossAs
                reported in Amendment No. 1
            
            $
            (2,572,394
            )
            $
            (0.10
            )
            $
            (2,002,446
            )
            $
            (0.07
            )
            $
            (4,580,582
            )Stock-based
                compensation
            
            
            (333,673
            )
            
            (0.01
            )
            
            (666,552
            )
            
            (0.02
            )
            
            (1,000,225
            )As
                restated
            
            $
            (2,906,067
            )
            $
            (0.11
            )
            $
            (2,668,998
            )
            $
            (0.09
            )
            $
            (5,580,807
            )





The
      adjustments to the Statements of Operations, Balance Sheet and Statement of
      Cash
      Flows, as a result of the above adjustments, is summarized on a condensed basis
      below. The balance sheet and statements of cash flow show only the sections
      that
      were effected by these adjustments. The amounts previously reported are those
      reported in Amendment No. 1.




3


Adjustments
      to the Statements of Operations




Year
                ended December 31, 2003Year
                ended December 31, 2004
            
            Cumulative
                from Inception (April
                21, 1997)to
                December 31, 2004Amounts
              previously
              reported
            
            As
              Restated
            
            Amounts
              previously
              reported
            
            As
              restated
            
            Amounts
              Previously
              Reported
            
            As
              restatedTotal
                revenues
            
            $
            --
            
            $
            --
            
            $
            2,787
            
            $
            2,787
            
            $
            2,787
            
            $
            2,787Total
                expenses
            
            
            (2,576,372
            )
            
            (2,910,045
            )
            
            (2,010,078
            )
            
            (2,676,630
            )
            
            (4,592,192
            )
            
            (5,592,417
            )Net
                interest income
            
            
            3,978
            
            
            3,978
            
            
            4,845
            
            
            4,845
            
            
            8,823
            
            
            8,823Net
                loss
            
            $
            (2,572,394
            )
            $
            (2,906,067
            )
            $
            (2,002,446
            )
            $
            (2,668,998
            )
            $
            (4,580,582
            )
            $
            (5,580,807
            )Basic
                and diluted loss per share
            
            $
            (0.10
            )
            $
            (0.11
            )
            $
            (0.07
            )
            $
            (0.09
            )Basic
                and diluted weighted average common shares outstanding
            
            
            26,852,041
            
            
            26,852,041
            
            
            29,133,746
            
            
            29,133,746








Adjustments
      to the Balance Sheets




Years
                ended December 31,2003
            
            2004Amounts
            
            
            
            Amountspreviously
            
            As
            
            previously
            
            Asreported
            
            restated
            
            reported
            
            restatedSTOCKHOLDERS’
                EQUITY (DEFICIENCY)Stockholders’
                equity (deficiency):Common
                stock, 50,000,000 shares authorized,
              $.001
                par value, 29,703,900 shares issued and outstanding
            
            $
            29,020
            
            $
            29,020
            
            $
            29,479
            
            $
            29,479Additional
                paid-in capital
            
            
            3,423,954
            
            
            3,892,172
            
            
            4,488,633
            
            
            5,814,868Deferred
                compensation
            
            
            --
            
            
            (134,545
            )
            
            --
            
            
            (326,010
            )Deficit
                accumulated during the
              development
                stage
            
            
            (2,578,136
            )
            
            (2,911,809
            )
            
            (4,580,582
            )
            
            (5,580,807
            )Total
                stockholders’ equity (deficiency)
            
            $
            874,838
            
            $
            874,838
            
            $
            (62,470
            )
            $
            (62,470
            )







4


Adjustments
      to the Statements of Cash Flows








Years
                ended December 31,
            
            Cumulative
                from inception
              (April
                21, 1997 to December 31,)2003
            
            2003
            
            2004
            
            2004
            
            2004
            
            2004Amounts
              previously
              reported
            
            As
              restated
            
            Amounts
                previously reported
            
            As
              restated
            
            Amounts
              previously
              reported
            
            As
              restatedCash
                flows from operating activities:Net
                loss
            
            $
            (2,572,394
            )
            $
            (2,906,067
            )
            $
            (2,002,446
            )
            $
            (2,668,998
            )
            $
            (4,580,582
            )
            $
            (5,580,807
            )Adjustments
                to reconcile net loss to net cash used by operating
                activities:Depreciation
            
            
            13,865
            
            
            13,865
            
            
            38,013
            
            
            38,013
            
            
            51,878
            
            
            51,878Capital
                contributions from waived and imputed compensation and waived royalty
                and
                consulting fees
            
            
            1,453,567
            
            
            1,453,567
            
            
            412,500
            
            
            412,500
            
            
            1,871,309
            
            
            1,871,309Non
                cash stock-based compensation
            
            
            136,491
            
            
            470,164
            
            
            202,638
            
            
            869,190
            
            
            339,129
            
            
            1,339,354Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            --
            
            
            --
            
            
            (1,219
            )
            
            (1,219
            )
            
            (1,219
            )
            
            (1,219
            )Prepaid
                expenses and other current assets
            
            
            (26,468
            )
            
            (26,468
            )
            
            (4,483
            )
            
            (4,483
            )
            
            (30,951
            )
            
            (30,951
            )Deposits
                and other assets
            
            
            (5,594
            )
            
            (5,594
            )
            
            (13,805
            )
            
            (13,805
            )
            
            (19,399
            )
            
            (19,399
            )Accounts
                payable
            
            
            95,643
            
            
            95,643
            
            
            (15,622
            )
            
            (15,622
            )
            
            80,020
            
            
            80,020Accrued
                expenses
            
            
            182,309
            
            
            182,309
            
            
            (17,504
            )
            
            (17,504
            )
            
            164,805
            
            
            164,805Net
                cash used in operating activities
            
            $
            (722,581
            )
            $
            (722,581
            )
            $
            (1,401,928
            )
            $
            (1,401,928
            )
            $
            (2,125,010
            )
            $
            (2,125,010
            )


5


**PART
      II.**







**Item
      6.**




**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**




The
      following discussion of the Company’s financial condition and results of
      operations has been revised to reflect the restatement, as discussed in the
      Explanatory Note and the section titled Restatement of Financial Statements,
      and
      certain events occurring subsequent to the filing of the original Form 10-KSB.
      In addition, the Company updated its disclosure regarding critical accounting
      policies. The following discussion should be read in conjunction with the
      restated financial statements and notes thereto appearing elsewhere in this
      Amendment No. 2. This discussion includes forward-looking statements that
      involve risks and uncertainties. As a result of many factors, the Company’s
      actual results may differ materially from those anticipated in these
      forward-looking statements.




**Overview**




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




Since
      completing initial product development in early 2004, the Company has marketed
      its service primarily to consumer credit card issuers, collection agencies
      and
      the buyers of defaulted debt in the United States and Europe. The Company
      intends to market its service to other segments served by the collections
      industry worldwide. For example, the Company believes that its system will
      be
      especially valuable for the collection of low balance debt, such as that held
      by
      utility companies and online service providers, where the cost of traditionally
      labor intensive collection efforts may exceed the value collected. The Company
      also intends to pursue past-due Internet-related debt, such as that held by
      sellers of sales and services online. The Company believes that consumers who
      incurred their debt over the Internet will be likely to respond favorably to
      an
      Internet-based collection solution. In addition, creditors of Internet-related
      debt usually have access to debtors’ e-mail addresses, facilitating the contact
      of debtors directly by e-mail. The Company believes that expanding to more
      recently past-due portfolios of such debt will result in higher settlement
      volumes, improving its clients’ profitability by increasing their collections
      while reducing their cost of collections.




The
      Company’s revenues to date have been insignificant. The Company has financed its
      activities to date through its management’s contributions of cash, the
      forgiveness of royalty and consulting fees, the proceeds from sales of its
      common stock in private placement financings and the proceeds of its 7%
      convertible promissory notes in two private financings. In connection with
      its
      marketing and client support goals, the Company expects its operating expenses
      to be approximately $950,000 per quarter at first, and to grow as it employs
      additional technicians, sales people and client support representatives. The
      Company expects that salaries and other compensation expenses will continue
      to
      be its largest category of expense, while travel, legal, and other sales and
      marketing expenses will grow as it expands its sales, marketing and support
      capabilities. Effective utilization of the Company’s system will require a
      change in thinking on the part of the collection industry, but the Company
      believes the effort will result in new collection benchmarks. The Company
      intends to provide detailed advice and hands-on assistance to clients to help
      them make the transition to its system.




The
      Company’s current contracts provide that it will earn revenue based on a
      percentage of the amount of debt collected from accounts submitted on its
      DebtResolve system or based on recurring license fees coupled with success
      or
      other transaction fees. Although other revenue models have been proposed, all
      revenue earned to date has been determined using the “percent of debt collected”
method, and such revenue is recognized when the settlement amount of debt is
      collected by the Company’s client. While the “percent of debt collected” model
      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.







The
      Company’s financial statements were prepared using principles applicable to a
      going concern, which contemplates the realization of assets and liquidation
      of
      liabilities in the normal course of business. In April 2005 and in
      June/September 2005, the Company issued $2,695,000 of its 7% convertible
      promissory notes as part of two separate private financing arrangements, and
      the
      Company borrowed $100,000 on November 30, 2005 from a director and an existing
      shareholder of the Company for a term of three months at an annual interest
      rate
      of 10%. The Company has also filed a Registration Statement on Form SB-2 with
      the Securities and Exchange Commission. The Company anticipates that it will
      issue 2,400,000 shares of common stock in a proposed public offering . However,
      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
      December 2005. The Company is currently negotiating with current shareholders
      and other qualified investors to arrange a private debt financing. (With regards
      to any such debt financing, the securities offered thereby will not have been
      registered under the Securities Act and may not be sold in the United States
      absent registration or an applicable exemption from registration requirements.)
      There can be no assurance that such a plan will be successful. If the Company
      is
      unable to raise sufficient additional capital before the end of December 2005,
      it will have to develop and implement a plan to extend payables and reduce
      overhead until sufficient additional capital is raised to support further
      operations.




6


**Plan** **of
      Operation**




***Year
      ended December 31, 2004 Compared to Year Ended December 31, 2003***




**Revenues**




The
      Company earned nominal revenues of $2,787 in 2004 and no revenues in 2003,
      as
      its DebtResolve system was still in development. Revenue was earned based on
      a
      percentage of the amount collected from accounts submitted on its system by
      two
      collection agencies.




The
      Company’s current contracts provide that it will earn revenue based on a
      percentage of the amount of debt collected from accounts submitted on its
      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 the Company’s
      client. For the early adopters of its system, the Company 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
      could possibly become the Company’s 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.




**Costs
      and Expenses**




**Payroll
      and related expenses.** Payroll
      and related expenses totaled $906,437 for the year ended December 31, 2004,
      an increase of $163,592 over payroll and related expenses of $742,845 for the
      year ended December 31, 2003. The increase was due primarily to the
      classification of a large percentage of employee salaries to research and
      development expense in 2003, as well as to an increase in the number of
      employees in 2004, net of a decrease in waived compensation to executives,
      due
      to modifications to their employment agreements. Included in these expenses
      in
      2004 are $412,500 of imputed compensation incurred in connection with employment
      agreements with members of our executive management team. The Company’s
      executive officers waived their contractual salaries during its development
      period and the Company accrued their salaries as imputed compensation. As of
      December 31, 2004, the Company had eight full-time employees.




The
      payroll and related expenses of $742,845 for the year ended December 31,
      2003 primarily consisted of compensation incurred in connection with employment
      agreements with members of the Company’s executive management team. Three
      executives waived the entire amount of their compensation during 2003 and were
      not paid, resulting in a capital contribution of $586,167.




7


**General
      and administrative expenses.** General
      and administrative expenses, including stock-based compensation, totaled
      $1,686,158 for the year ended December 31, 2004, an increase of $586,124
      compared to general and administrative expenses of $1,100,034 for the year
      ended
      December 31, 2003. General and administrative expenses in 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 $81,771
      for other general expenses. Also recorded in this category was $869,190 in
      stock-based compensation expense for common stock, options and warrants granted
      in payment for consulting services.




General
      and administrative expenses, including stock-based compensation, totaled
      $1,100,034 for the year ended December 31, 2003, including $470,164 in
      stock-based compensation expense for common stock and options granted in payment
      for consulting services. In addition, two directors waived the entire amount
      of
      their consulting fees during 2003 and were not paid, resulting in a capital
      contribution of $267,400. Also recorded in this category were $295,451 for
      consulting fees incurred in connection with business advisory and marketing
      services, incurred as part of the Company’s start up, and $296,502 for other
      general expenses, primarily consisting of legal fees, occupancy costs and
      travel-related expenses. These expenses were reduced by a $229,483 allocation
      to
      Research and Development expenses.




**Waived
      royalty fees - related parties.** Waived
      royalty fees - related parties, were $600,000 for the year ended December 31,
      2003. Royalty fees were not accrued in the year ended December 31, 2004 due
      to a
      change in the license agreement. The licensors of the Company’s technology
      waived the entire amount of the royalty fee for 2003 and were not paid,
      resulting in a capital contribution of $600,000.




**Research
      and development expenses.** Research
      and development expenses totaled $46,022 for the year ended December 31,
      2004, a decrease of $407,279 from research and development expenses of $453,301
      for the year ended December 31, 2003. These expenses in both years consisted
      of
      payroll and related expenses and consulting fees incurred in connection with
      employees and consultants involved in the development of our DebtResolve system.
      In January 2004, the Company substantially completed development and began
      marketing its services. Commencing February 2004, costs incurred in connection
      with the operation, maintenance, modification and customization of the Company’s
      DebtResolve system were charged to expense as incurred, but were not classified
      as research and development expenses.




**Liquidity
      and Capital Resources**




To
      fund
      its development activities and operations, the Company issued shares of its
      capital stock in private placement financings. The approximately $2,200,000
      in
      proceeds from 2003 and 2004 private placement financings, together with limited
      revenues generated from licensing its system, has provided the Company with
      working capital.




The
      Company used $1,401,928 of cash in funding operating activities during the
      year
      ended December 31, 2004, as compared to $722,581 in the year ended December
      31,
      2003.




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. The Company has not entered into any definitive
      agreements to raise capital in the public equity markets as a result of this
      letter of intent, but is exploring the possibility of doing so. On September
      30,
      2005, the Company filed a Registration Statement on Form SB-2 with the
      Securities and Exchange Commission. The Company anticipates that it will issue
      2,400,000 shares of common stock in a proposed public offering. Previously,
      the
      Company completed two private financing transactions in April 2005 and in
      June/September 2005, in which it raised total gross proceeds of $2,695,000
      from
      accredited investors, and the Company borrowed $100,000 on November 30, 2005
      from a director and an existing shareholder of the Company for a term of three
      months at an annual interest rate of 10%. An aggregate of 426,018 shares of
      its
      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% 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 317,059 shares of its
      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.
      However, there can be no assurance that the Company will be able to raise
      additional capital in the public equity markets.




8


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 December
      2005. The Company is currently negotiating with current shareholders and other
      qualified investors to arrange a private debt financing. (With regards to any
      such debt financing, the securities offered thereby will not have been
      registered under the Securities Act and may not be sold in the United States
      absent registration or an applicable exemption from registration requirements.)
      If it is unable to raise sufficient additional capital before the end of
      December 2005, the Company will have to develop and implement a plan to extend
      payables and reduce overhead until sufficient additional capital is raised
      to
      support further operations.




The
      Company’s cash needs will grow as it meets its compensation obligations for
      sales, accounting and customer support staff hired in September and October
      2005, combined with the expense of additional staff hired going forward. Of
      the
      anticipated $900,000 to $950,000 in operating expenses that the Company expects
      to incur per quarter for the year following the proposed public offering, 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 and other expenses of being
      a publicly traded company. While its web hosting arrangements include
      significant excess capacity at this time, as its client base grows, the Company
      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, the Company will also have to add to staff to provide
      its
      planned superior levels of customer support. In addition, the Company will
      incur
      additional sales and marketing expense to grow its customer base as well as
      travel and other expenses to service its customer base.




The
      Company also anticipates additional increased costs associated with the start
      up
      of its proposed debt-buying subsidiary. Before it begins to recognize revenue,
      the Company will incur some legal, filing fees and other start up costs
      associated with establishing this potential line of business.




**Off-Balance
      Sheet Arrangements**




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




**Critical
      Accounting Policies** **and Estimates**




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




*Going
      concern*




The
      accompanying 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,
      2004, the Company had incurred an accumulated deficit of $5,580,807 and its
      working capital was not sufficient to fund its plan of operations beyond the
      next fiscal year. Subsequent to that date, however, the Company has been
      successful in raising additional capital through private equity investments
      of
      $224,900 and aggregate debt financing of $2,695,000. In addition, the Company
      has 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 and filed with the Securities and Exchange Commission on Form SB-2
      on
      September 30, 2005 with that intention. However, there can be no assurance
      that
      the Company will be able to raise sufficient additional capital as needed to
      execute its business plan. The Company’s working capital is not sufficient to
      fund its plan of operations beyond the end of December 2005. The Company is
      currently negotiating with current shareholders and other qualified investors
      to
      arrange a private debt financing. (With regards to any such debt financing,
      the
      securities offered thereby will not have been registered under the Securities
      Act and may not be sold in the United States absent registration or an
      applicable exemption from registration requirements.) 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 December 2005. If the Company
      is
      unable to raise sufficient additional capital before the end of December 2005,
      it will have to develop and implement a plan to extend payables and reduce
      overhead until sufficient additional capital is raised to support further
      operations. There can be no assurance that such a plan will be successful.
      These
      factors continue to raise substantial doubt about the Company’s ability to
      continue as a going concern.




9


*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 years ended December 31, 2003 and 2004, the Company
      has
      not paid 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.




*Waived
      royalty fees*




Under
      the
      terms of a license agreement that the Company has with its Co-Chairmen, royalty
      fees were due to Messrs. Burchetta and Brofman. However, these payments were
      not
      made since they were waived by the Co-Chairmen. The Company recorded royalty
      expense and a capital contribution in an amount equal to the waived
      payments.




*Research
      and development*




The
      Company follows the guidelines of Statement of Financial Accounting Standards
      No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or
      Otherwise Marketed, and Statement of Financial Accounting Standards No. 2,
      Accounting for Research and Development Costs. Research and development expenses
      in the 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
      the
      Company’s online software product prior to establishing technological
      feasibility. In January 2004, the Company substantially completed the
      development of and began marketing its online product. In management’s opinion,
      the software became available for general release concurrent with the
      establishment of technological feasibility. As a result, no software development
      costs were capitalized. Commencing February 2004, costs incurred in connection
      with the operation, maintenance, modification, and customization of the
      Company’s product have been charged to expense as incurred, and are neither
      capitalized nor classified as research and development expenses.




*Fixed
      assets*




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




*Income
      taxes*




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




10


*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 option granted; the
      Company follows the minimum value method. The estimated minimum value of the
      options granted is amortized to expense over the option vesting periods. The
      Company accounts for stock-based compensation issued to non-employees using
      the
      fair value method.




**Statement
      Relating to Forward-Looking Statements**




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




**Recently
      Issued Accounting Pronouncements**




In
      December 2004, the Financial Accounting Standards Board (“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.




11


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. 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 fair value recognition provisions of
      SFAS
      123 to stock-based employee compensation.




The
      Company will evaluate the requirements of SFAS 123 - Revised and plans to adopt
      its provisions as soon as practicable. The Company believes that the effect
      of
      implementing SFAS 123 - Revised will result in the recording of additional
      stock
      compensation expense.




In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      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
      October 2004, the FASB ratified the consensus reached in EITF Issue No. 04-8,
      “The Effect of Contingently Convertible Instruments on Diluted Earnings per
      Share.” The EITF reached a consensus that contingently convertible instruments,
      such as contingently convertible debt, contingently convertible preferred stock,
      and other such securities should be included in diluted earnings per share
      (if
      dilutive) regardless of whether the market price trigger has been met. The
      consensus became effective for reporting periods ending after December 15,
      2004.
      The adoption of this pronouncement did not have a material effect on the
      Company’s financial statements.




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.




12


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 FASB
      Statement of Financial Accounting Standards 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.




13


**Item
              7.**
            ****Financial
                Statements for the years ended December 31, 2004 and 2003 and Cumulative
                from Inception (April 21, 1997 to December 31,
                2004)****




Report
                of Independent Registered Public Accounting Firm
            15Balance
                Sheets as of December 31, 2003 and 2004
            16Statements
                of Operations for the Years Ended December 31, 2004 and 2003 and
                Cumulative from Inception (April 21, 1997 to December 31,
                2004)
            17Statements
                of Stockholders’ Equity (Deficiency) Cumulative from Inception (April 21,
                1997 to December 31, 2004)
            18Statements
                of Cash Flows for the Years Ended December 31, 2004 and 2003 and
                Cumulative from Inception (April 21, 1997 to December 31,
                2004)
            19Notes
                to Financial Statements
            20









14


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, 2004 and 2003, and the related
      statements of operations, stockholders’ equity (deficiency), and cash flows for
      the years then ended. 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, 2004 and 2003,
      and
      the results of its operations and its cash flows for the years ended December
      31, 2004 and 2003, in conformity with accounting principles generally accepted
      in the United States of America.




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,
      NY




July
      26,
      2005 (except for Note 14f, as to which the date is August 1, 2005, Note 2b,
      as
      to which the date is August 16, 2005, Note 3, as to which the date is August
      19,
      2005, Note 14b, as to which the date is September 6, 2005, Note 14e, as to
      which
      the date is September 28, 2005, Note 2a and Note 14a, as to which the date
      is
      September 30, 2005 and Note 14g, as to which the date is November 30,
      2005).




15


DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Balance
      Sheets




December
                31,2003
            
            2004(restated)
            
            (restated)ASSETSCurrent
                assets:Cash
            
            $
            1,040,210
            
            $
            34,747Accounts
                receivable
            
            
            -
            
            
            1,219Prepaid
                expenses and other current assets
            
            
            26,468
            
            
            30,951Total
                current assets
            
            
            1,066,678
            
            
            66,917Fixed
                assets, net
            
            
            90,517
            
            
            62,500Other
                assets:Deferred
                offering costs
            
            
            -
            
            
            43,540Deposits
                and other assets
            
            
            5,594
            
            
            19,399Total
                other assets
            
            
            5,594
            
            
            62,939Total
                assets
            
            $
            1,162,789
            
            $
            192,356LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIENCY)Current
                liabilities:Accounts
                payable
            
            $
            95,643
            
            $
            80,021Accrued
                compensation expenses
            
            
            95,667
            
            
            95,667Accrued
                expenses
            
            
            86,641
            
            
            69,138Loan
                payable to stockholder
            
            
            10,000
            
            
            10,000Total
                liabilities
            
            
            287,951
            
            
            254,826Commitments
                and contingenciesStockholders’
                equity (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, 29,020,000 and 29,479,000 shares issued and outstanding,
                respectively
            
            
            29,020
            
            
            29,479Additional
                paid-in capital
            
            
            3,892,172
            
            
            5,814,868Deferred
                compensation
            
            
            (134,545
            )
            
            (326,010
            )Deficit
                accumulated during the development stage
            
            
            (2,911,809
            )
            
            (5,580,807
            )Total
                stockholders’ equity (deficiency)
            
            
            874,838
            
            
            (62,470
            )Total
                liabilities and stockholders’ equity (deficiency)
            
            $
            1,162,789
            
            $
            192,356The
                accompanying notes are an integral part of these financial
                statements.


16


DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Statements
      of Operations








Years
                ended December 31
            
            Cumulative
                from inception (April 21, 1997) to December
                31,2003
            
            
            2004
            
            
            2004(restated)
            
            
            (restated)
            
            
            (restated)Revenues
            
            $
            --
            
            $
            2,787
            
            $
            2,787Costs
                and expenses:Payroll
                and related expenses
            
            
            742,845
            
            
            906,437
            
            
            1,649,282General
                and administrative expenses (1)
            
            
            1,100,034
            
            
            1,686,158
            
            
            2,791,934Waived
                royalty fees - related parties
            
            
            600,000
            
            
            --
            
            
            600,000Research
                and development expenses
            
            
            453,301
            
            
            46,022
            
            
            499,323Depreciation
                expenses
            
            
            13,865
            
            
            38,013
            
            
            51,878Total
                expenses
            
            
            2,910,045
            
            
            2,676,630
            
            
            5,592,417Loss
                from operations
            
            
            (2,910,045
            )
            
            (2,673,843
            )
            
            (5,589,630
            )Net
                interest income
            
            
            3,978
            
            
            4,845
            
            
            8,823Net
                loss
            
            $
            (2,906,067
            )
            $
            (2,668,998
            )
            $
            (5,580,807
            )Per
                share data:Basic
                and diluted net loss per common share
            
            $
            (0.11
            )
            $
            (0.09
            )Basic
                and diluted weighted average number of common shares
                outstanding
            
            
            26,852,041
            
            
            29,133,746




(1)
            Includes
                stock based compensation of $ 470,164 and $869,190 for the years
                ended
                2003 and 2004, respectively, and $1,339,354 since
                inception.








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




17





DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Statements
      of Stockholders’ Equity (Deficiency)


From
      Inception (April 21, 1997) to December 31, 2004








Preferred
                Stock
            
            
            Common
                StockNumber
                of
              Shares
            
            
            Amount
            
            
            Number
                of
              Shares
            
            
            Amount
            
            
            Deferred
                compensation
            
            
            Additional
              Paid
                in
              Capital
            
            
            Deficit
              Accumulated
              During
                the
              Development
              Stage
            
            
            Total(restated)
            
            
            (restated)
            
            
            (restated)
            
            
            (restated)INCEPTION,
                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
            
            
            
            
            
            
            
            
            443,164Sales
                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
            )




18


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







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







19


DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Statements
      of Cash Flows




Years
                ended December 31,
            
            Cumulative
                from inception (April 21, 1997 to December 31, 2004)2003
            
            2004(restated)
            
            (restated)
            
            (restated)Cash
                flows from operating activities:Net
                loss
            
            $
            (2,906,067
            )
            $
            (2,668,998
            )
            $
            (5,580,807
            )Adjustments
                to reconcile net loss to net cash used by operating
              activities:Depreciation
            
            
            13,865
            
            
            38,013
            
            
            51,878Capital
                contributions from waived and imputed compensation
              and
                waived royalty and consulting fees
            
            
            1,453,567
            
            
            412,500
            
            
            1,871,309Non
                cash stock-based compensation
            
            
            470,164
            
            
            869,190
            
            
            1,339,354Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            --
            
            
            (1,219
            )
            
            (1,219
            )Prepaid
                expenses and other current assets
            
            
            (26,468
            )
            
            (4,483
            )
            
            (30,951
            )Deposits
                and other assets
            
            
            (5,594
            )
            
            (13,805
            )
            
            (19,399
            )Accounts
                payable
            
            
            95,643
            
            
            (15,622
            )
            
            80,020Accrued
                expenses
            
            
            182,309
            
            
            (17,504
            )
            
            164,805Net
                cash used in operating activities
            
            
            (722,581
            )
            
            (1,401,928
            )
            
            (2,125,010
            )Cash
                flows from investing activities:Purchases
                of fixed assets
            
            
            (104,383
            )
            
            (9,995
            )
            
            (114,377
            )Cash
                flows from financing activities:Issuance
                of common stock
            
            
            1,811,100
            
            
            450,000
            
            
            2,207,674Stockholders’
                loans
            
            
            110,000
            
            
            --
            
            
            110,000Stock
                offering costs
            
            
            (53,926
            )
            
            (43,540
            )
            
            (43,540
            )Net
                cash provided by financing activities
            
            
            1,867,174
            
            
            406,460
            
            
            2,274,134Net
                increase (decrease) in cash
            
            
            1,040,210
            
            
            (1,005,463
            )
            
            34,747Cash
                at beginning of period
            
            
            --
            
            
            1,040,210
            
            
            --Cash
                at end of period
            
            $
            1,040,210
            
            $
            34,747
            
            $
            34,747Non
                cash investing and financing activities:Conversion
                of stockholder’s loan to common stock
            
            $
            100,000
            
            $
            --
            
            $
            100,000Capital
                contribution from waived royalty fees
            
            $
            600,000
            
            $
            --
            
            $
            600,000Capital
                contribution from waived and imputed
              compensation
                and consulting fees
            
            $
            853,567
            
            $
            412,500
            
            $
            1,271,309





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




20


DEBT
      RESOLVE, INC.


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2004




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 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. In
      December 2004, a major commercial bank signed an agreement to use the
      DebtResolve system. The Company did not earn, nor did it expect to generate,
      significant revenues from these clients during the initial start-up
      periods.




2.  GOING
      CONCERN AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES :




a.  Going
      concern




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,
      2004, the Company had
      incurred an accumulated deficit of $5,580,807 and its working
      capital was not sufficient to fund its plan of operations beyond the next fiscal
      year. Subsequent to that date, however, the Company has been successful in
      raising additional capital through private equity investments of $224,900 and
      aggregate debt financing of $2,695,000 (see Note 14b). In addition, the Company
      has 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 and filed on Form SB-2 with the Securities and Exchange Commission
      on
      September 30, 2005 with that intention (see Note 14a). However, there can be
      no
      assurance that the Company will be able to raise sufficient additional capital
      as needed to execute its business plan. 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
      December 2005. The Company is currently negotiating with current shareholders
      and other qualified investors to arrange a private debt financing. There can
      be
      no assurance that such a plan will be successful. If the Company is unable
      to
      raise sufficient additional capital before the end of December 2005, it will
      have to develop and implement a plan to eliminate staff and overhead until
      sufficient additional capital is raised to support further operations. These
      factors continue to raise substantial doubt about the Company’s ability to
      continue as a going concern.




21


b.  Prior
      period adjustments/restatement






Effective
      with this filing, the Company is correcting an error relating to stock based
      compensation expense for options granted to consultants and advisory board
      members for which the Company recorded a compensation charge during fiscal
      2003
      and 2004 using the minimum value method, instead of the fair value method,
      which
      is required. Amounts reflected herein for the years ended December 31, 2003
      and
      2004 represent the restated financial information rather than financial
      information included in Form 10-KSB/A Amendment No. 1 for the year ended
      December 31, 2004 (“Amendment No. 1”) which was filed with the SEC on December
      8, 2005 or the original filings on March 30, 2004 and March 30, 2005. (See
      Note
      3).




c.  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.




d.  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.




e.  Revenue
      recognition




The
      Company earned revenue during 2004 from a collection agency 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, 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 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 set up fees or
      monthly licensing fees with transaction fees upon debt settlement.




f.  Imputed
      salary expense




Under
      the
      terms of employment agreements (see Note 8) the Company has had with its
      Co-Chairman and Chief Executive Officer and with its Executive Vice President,
      General Counsel and Secretary during the years ended December 31, 2003 and
      2004,
      the Company has not paid 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 5.




22


g.  Waived
      royalty fees




Under
      the
      terms of a license agreement that the Company has with its Co-Chairmen, royalty
      fees were due to Messrs. Burchetta and Brofman. However, these payments were
      not
      made since they were waived by the Co-Chairmen. The Company recorded royalty
      expense and a capital contribution in an amount equal to the waived
      payments.




h.  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.




i.  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.




j.  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.




k.  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 option; the Company follows the minimum value method.
      The
      estimated minimum value of the options granted to employees is amortized on
      a
      pro forma basis over the option vesting periods.




The
      Company accounts for stock-based compensation issued to non-employees using
      the
      fair value method. (See Note 6)




23


During
      2003, the Company granted employee options to purchase a total of 3,200,000
      shares of common stock. During 2004, the Company granted employee options to
      purchase 1,140,000 shares of its common stock. The following table illustrates
      the pro forma effects on net loss and net loss per common share for the years
      ended December 31, 2004 and 2003 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 31,2003
            
            2004(restated)
            
            (restated)Net
                loss - as reported
            
            $
            (2,906,067
            )
            $
            (2,668,998
            )Deduct:
                Stock based employee compensation
              expense
                determined under minimum-value based
              methods
                for all awards
            
            
            355,999
            
            
            231,378Net
                loss - pro forma
            
            $
            (3,262,066
            )
            $
            (2,900,376
            )Basic
                and diluted net loss per common share - as reported
            
            $
            (0.11
            )
            $
            (0.09
            )Basic
                and diluted net loss per common share - pro forma
            
            $
            (0.12
            )
            $
            (0.10
            )Basic
                and diluted weighted average number of common shares
                outstanding
            
            
            26,852,041
            
            
            29,133,746





l.  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 employee and consultant options of 4,393,333 at December 31, 2003
      and 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 13d)
      and
      options relating to the anti dilution provision (see Note 14a).




3.  RESTATEMENT
      OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS :




On
      August
      19, 2005, the Company filed a report on Form 8-K with the Securities and
      Exchange Commission disclosing that the Company would restate previously issued
      financial statements for the years ended December 31, 2004 and 2003 and the
      three months ended March 31, 2005. In conjunction with the re-audit of Debt
      Resolve’s financial statements for the years ended December 31, 2003 and
      December 31, 2004 and a review of the quarter ended March 31, 2005 by the
      Company’s independent registered public accounting firm, the Company determined
      that it should have recorded an expense for stock-based compensation to
      consultants and advisory board members during those accounting periods. The
      restatement adjustments related to computation for stock-based compensation
      to
      consultants and advisory board members increased net loss by $213,383 since
      inception through March 31, 2005, including $109,491 during the year ended
      December 31, 2003, $31,756 during the year ended December 31, 2004 and $72,136
      during the quarter ended March 31, 2005. The Company also rectified a
      computation error in the calculation of weighted average shares outstanding
      for
      the year ended December 31, 2003. The adjustments to the recording of expense
      for the issuance of options to consultants and the correction of the computation
      of average shares outstanding in 2003 did not change net loss per share for
      the
      year ended December 31, 2004, but increased net loss per share by $0.01 to
      ($0.10) for the year ended December 31, 2003. In addition, the Company made
      certain reclassifications to the Balance Sheet and to the Statements of Cash
      Flows. The net effect of these reclassifications was a reduction in the cash
      provided by financing activities, with a corresponding reduction in the cash
      used in operating activities, of $-0- and $52,540 for the years ending December
      31, 2003 and 2004, and $52,540 from inception to December 31, 2004.






24


Subsequent
      to the completion of the above restatement, while in the process of preparing
      for its planned initial public offering, the Company became aware of certain
      accounting guidance regarding how a non-public entity should calculate of the
      value of options granted to non-employees. The Company 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 both employee and consultant
      options. Upon further review, it was decided that guidance in EITF 96-18 should
      apply. That is, non-employee options should be valued using the fair value
      method, which includes 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. Accordingly, the Company is restating its prior financial
      statements using the fair value method in calculating the value of non-employee
      stock-based compensation calculated using an average volatility of comparable
      public companies. As of December 31, 2004, the restatement adjustments related
      to the computation of the fair value for stock-based compensation to
      non-employees increased net loss compared to the previously restated financial
      statements by $1,000,225 since inception, including $333,673 during the year
      ended December 31, 2003, and $666,552 during the year ended December 31, 2004,
      and increased the basic and diluted net loss per share by $0.01, from $(0.10)
      to
      $(0.11) in the year ended December 31, 2003, and by $0.02, from $(0.07) to
      $(0.09) in the year ended December 31, 2004.





Amounts
      reflected herein for the fiscal years ended December 31, 2003 and 2004 represent
      the restated financial information rather than financial information included
      in
      the original Forms 10-KSB for the years ended December 31, 2003 and 2004 which
      were filed with the SEC on March 30, 2004 and March 30, 2005 or the information
      included in Amendment No. 1, the restated Form 10-KSB for the year ended
      December 31, 2004, which was filed with the SEC on December 8,
      2005.




The
      following summarizes the effect of these adjustments on the previously reported
      net loss and net loss per share:




Year
                ended December 31, 2003
            
            Year
                ended December 31, 2004
            
            Cumulative
                from Inception (April 21, 1997) to December 31, 2004Net
                loss
            
            
            
            Net
                lossNet
                loss
            
            per
                share
            
            Net
                loss
            
            per
                share
            
            Net
                lossAs
                reported in Amendment No. 1
            
            $
            (2,572,394
            )
            $
            (0.10
            )
            $
            (2,002,446
            )
            $
            (0.07
            )
            $
            (4,580,582
            )Stock-based
                compensation (1)
            
            
            (333,673
            )
            
            (0.01
            )
            
            (666,552
            )
            
            (0.02
            )
            
            (1,000,225
            )As
                restated
            
            $
            (2,906,067
            )
            $
            (0.11
            )
            $
            (2,668,998
            )
            $
            (0.09
            )
            $
            (5,580,807
            )





(1)
      Included in General and Administrative Expenses.








The
      impact on the Statements of Operations, Balance Sheet and Statement of Cash
      Flows, as a result of the above adjustments, is illustrated on a condensed
      basis
      below. The balance sheet and statements of cash flow show only the sections
      that
      were effected by these adjustments. The amounts previously reported are derived
      from Amendment No. 1 filed on December 8, 2005.




25







Adjustments
      to the Statements of Operations









Year
                ended December 31
            
            Cumulative
                from Inception
              (April
                21, 1997) to
              December
                31,2003
            
            2004
            
            2004Amounts
              previously
              Reported
            
            As
              restated
            
            Amounts
              previously
              reported
            
            As
                restated
            
            Amounts
              previously
              reported
            
            As
              restatedRevenues
            
            $
            --
            
            $
            --
            
            $
            2,787
            
            $
            2,787
            
            $
            2,787
            
            $
            2,787Costs
                and expensesPayroll
                and related expenses
            
            
            742,845
            
            
            742,845
            
            
            906,437
            
            
            906,437
            
            
            1,649,282
            
            
            1,649,282General
                and administrative expenses
            
            
            766,361
            
            
            1,100,034
            
            
            1,019,606
            
            
            1,686,158
            
            
            1,791,709
            
            
            2,791,934Waived
                royalties - related parties
            
            
            600,000
            
            
            600,000
            
            
            --
            
            
            --
            
            
            600,000
            
            
            600,000Research
                and development expense
            
            
            453,301
            
            
            453,301
            
            
            46,022
            
            
            46,022
            
            
            499,323
            
            
            499,323Depreciation
                expense
            
            
            13,865
            
            
            13,865
            
            
            38,013
            
            
            38,013
            
            
            51,878
            
            
            51,878Total
                expenses
            
            
            (2,576,372
            )
            
            (2,910,045
            )
            
            (2,010,078
            )
            
            (2,676,630
            )
            
            (4,592,192
            )
            
            (5,592,417
            )Loss
                from operations
            
            
            (2,576,372
            )
            
            (2,910,045
            )
            
            (2,007,291
            )
            
            (2,673,843
            )
            
            (4,589,405
            )
            
            (5,589,630
            )Net
                interest income
            
            
            3,978
            
            
            3,978
            
            
            4,845
            
            
            4,845
            
            
            8,823
            
            
            8,823Net
                loss
            
            $
            (2,572,394
            )
            $
            (2,906,067
            )
            $
            (2,002,446
            )
            $
            (2,668,998
            )
            $
            (4,580,582
            )
            $
            (5,580,807
            )Basic
                and diluted loss per share
            
            $
            (0.10
            )
            $
            (0.11
            )
            $
            (0.07
            )
            $
            (0.09
            )Basic
                and diluted weighted averageof
                common shares outstanding
            
            
            26,852,041
            
            
            26,852,041
            
            
            29,133,746
            
            
            29,133,746






26


Adjustments
      to the Balance Sheets




Years
                ended December 31,2003
            
            2004Amounts
            
            
            
            Amountspreviously
            
            As
            
            previously
            
            Asreported
            
            restated
            
            reported
            
            restatedSTOCKHOLDERS
                EQUITY (DEFICIENCY)Stockholders’
                equity (deficiency):Common
                stock, 50,000,000 shares
              authorized,
                $.001 par value, 29,703,900
              shares
                issued and outstanding
            
            
            29,020
            
            
            29,020
            
            
            29,479
            
            
            29,479Additional
                paid-in capital
            
            
            3,423,954
            
            
            3,892,172
            
            
            4,488,633
            
            
            5,814,868Deferred
                compensation
            
            
            --
            
            
            (134,545
            )
            
            --
            
            
            (326,010
            )Deficit
                accumulated during the development stage
            
            
            (2,578,136
            )
            
            (2,911,809
            )
            
            (4,580,582
            )
            
            (5,580,807
            )Total
                stockholders’ equity (deficiency)
            
            
            874,838
            
            
            874,838
            
            
            (62,470
            )
            
            (62,470
            )







Adjustments
      to the Statements of Cash Flows






Years
                ended December 31,
            
            Cumulative
                from inception
              (April
                21, 1997 to December 31,)2003
            
            2003
            
            2003
            
            2004
            
            2004
            
            2004Cash
                flows from operating activities:
            
            Amounts
              previously
              reported
            
            As
              (restated)
            
            Amounts
              previously
              reported
            
            As
              (restated)
            
            Amounts
              previously
              reported
            
            As
              (restated)Net
                loss
            
            $
            (2,572,394
            )
            $
            (2,906,067
            )
            $
            (2,002,446
            )
            $
            (2,668,998
            )
            $
            (4,580,582
            )
            $
            (5,580,807
            )Adjustments
                to reconcile net loss to net cash used by operating
                activities:Depreciation
            
            
            13,865
            
            
            13,865
            
            
            38,013
            
            
            38,013
            
            
            51,878
            
            
            51,878Capital
                contributions from waived and imputed compensation and waived royalty
                and
                consulting fees
            
            
            1,453,567
            
            
            1,453,567
            
            
            412,500
            
            
            412,500
            
            
            1,871,309
            
            
            1,871,309Non
                cash stock-based compensation
            
            
            136,491
            
            
            470,164
            
            
            202,638
            
            
            869,190
            
            
            339,129
            
            
            1,339,354Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            --
            
            
            --
            
            
            (1,219
            )
            
            (1,219
            )
            
            (1,219
            )
            
            (1,219
            )Prepaid
                expenses and other current assets
            
            
            (26,468
            )
            
            (26,468
            )
            
            (4,483
            )
            
            (4,483
            )
            
            (30,951
            )
            
            (30,951
            )Deposits
                and other assets
            
            
            (5,594
            )
            
            (5,594
            )
            
            (13,805
            )
            
            (13,805
            )
            
            (19,399
            )
            
            (19,399
            )Accounts
                payable
            
            
            95,643
            
            
            95,643
            
            
            (15,622
            )
            
            (15,622
            )
            
            80,020
            
            
            80,020Accrued
                expenses
            
            
            182,309
            
            
            182,309
            
            
            (17,504
            )
            
            (17,504
            )
            
            164,805
            
            
            164,805Net
                cash used in operating activities
            
            
            (722,581
            )
            
            (722,581
            )
            
            (1,401,928
            )
            
            (1,401,928
            )
            
            (2,125,010
            )
            
            (2,125,010
            )










27





4.FIXED
                ASSETS:
              Fixed
                assets consist of the following:




December
                31,
            
            December
                31,Useful
                life
            
            2003
            
            2004Computer
                equipment
            
            
            3
                years
            
            $
            60,975
            
            $
            70,971Computer
                software
            
            
            3
                years
            
            
            1,919
            
            
            1,919Office
                equipment
            
            
            3
                years
            
            
            2,192
            
            
            2,192Furniture
                and fixtures
            
            
            5
                years
            
            
            24,250
            
            
            24,250Leasehold
                improvements
            
            
            Lease
                term
            
            
            15,046
            
            
            15,046104,382
            
            
            114,378Less:
                accumulated depreciation
            
            (13,865
            )
            
            (51,878
            )$
            90,517
            
            $
            62,500





Depreciation
      expense totaled $38,013 and $13,865 for the years ended December 31, 2004 and
      2003, respectively.




5.  STOCKHOLDERS’
      EQUITY :




On
      February 24, 2003, 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. On February 14, 2003, but effective
      January 13, 2003, five other individuals, consisting of consultants to the
      Company and members of the Company’s management team, purchased an aggregate of
      3,600,000 newly-issued shares of the Company’s common stock for an aggregate
      cash payment of $3,600.




In
      April
      2003 and May 2003, the Company issued 135,000 shares and 500,000 shares,
      respectively, of its common stock at $0.20 per share (representing fair value
      at
      that time as agreed upon between management and the consultant) to a consultant
      to the Company as full consideration for $27,000 in accrued consulting fees
      and
      as repayment for a $100,000 loan.




In
      April
      2003 and May 2003, the Company agreed to issue 145,000 shares and 50,000 shares,
      respectively, of its common stock at $0.20 per share (representing fair value
      at
      that time as determined by the board of directors) to its former Chief Financial
      Officer, Mr. Cacciamatta, as full consideration for $29,000 in accrued
      compensation and as repayment for a $10,000 loan. In August 2003, Mr.
      Cacciamatta, in accordance with the terms of his agreement, rescinded his
      acceptance of the Company’s common stock as full consideration for his accrued
      compensation and repayment for his loan. Because the shares of the Company’s
      common stock were never formally issued to him in connection with this
      transaction, the Company reversed the original transaction as of the effective
      rescission date, and restored the original accrued compensation expense and
      loan
      payable to stockholder amounts. The matter was subsequently resolved (see Note
      14c).




Five
      executive officers and members of the board of directors of the Company waived
      the entire amount of their compensation and consulting fees accrued under the
      terms of their employment and consulting agreements for 2003, aggregating
      $853,567, resulting in a capital contribution of $853,567.




Effective
      September 30 and December 31, 2003, Messrs. Brofman and Burchetta waived the
      entire amount of their royalty fee (see Note 7) accrued under the terms of
      their
      Limited License Agreement for the three months ended September 30 and December
      31, 2003, aggregating $600,000, resulting in a capital contribution of
      $600,000.




During
      2003, the Company issued an aggregate of 1,785,000 shares of its common stock
      in
      a series of private placement closings at a price of $1.00 per share. During
      2003, the Company charged $53,926 of offering costs relating to the private
      placement of its common stock to additional paid-in capital, resulting in net
      proceeds of $1,731,074.




28


In
      March
      2004, the Company issued 9,000 shares of its common stock to two consultants
      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.




Under
      the
      terms of their amended employment agreements, no salary payments were made
      to
      Messrs. Burchetta, Harris and Silberstein during 2004 (see Note 8). 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.




6.  STOCK
      OPTIONS :




During
      2003, the Company granted non-employee options to consultants to purchase a
      total of 1,193,333 shares of common stock valued at $577,709, using the fair
      value method, and granted employee options to purchase a total of 3,200,000
      shares of common stock. As of December 31, 2003, there were options to purchase
      4,393,333 shares outstanding, of which 3,118,333 had vested. As of December
      31,
      2003, the weighted average exercise price and the weighted average expected
      life
      of these options and warrants were $0.58 and 8.44 years,
      respectively.




During
      2004, the Company granted non-employee options to purchase 500,000 shares of
      common stock valued at $307,410 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. 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 $0.73 and 5.96 years, respectively.




The
      following table summarizes stock option activity:




Number
                of
              Options
            
            Weighted
                average
              exercise
              price
                per shareOutstanding
                at December 31, 2002
            
            
            --
            
            $
            --Granted
            
            
            4,393,333
            
            
            0.58Exercised
            
            
            --
            
            
            --Forfeited
            
            
            --
            
            
            --Expired
            
            
            --
            
            
            --Outstanding
                at December 31, 2003
            
            
            4,393,333
            
            $
            0.58Granted
            
            
            2,640,000
            
            
            1.00Exercised
            
            
            --
            
            
            --Forfeited
            
            
            --
            
            
            --Expired
            
            
            --
            
            
            --Outstanding
                at December 31, 2004
            
            
            7,033,333
            
            $
            0.73





29


The
      following table summarizes information about stock options outstanding at
      December 31, 2004:





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
            
            
            8.27
            
            $
            0.20
            
            
            435,000
            
            $
            0.20$
            0.50
            
            
            3,000,000
            
            
            8.44
            
            $
            0.50
            
            
            3,000,000
            
            $
            0.50$
            1.00
            
            
            3,598,333
            
            
            3.68
            
            $
            1.00
            
            
            3,348,333
            
            $
            1.007,033,333
            
            
            5.96
            
            $
            0.73
            
            
            6,783,333
            
            $
            0.73










7.  RELATED
      PARTY LICENSE AGREEMENT




On
      February 20, 2003, the Company entered into a Limited License Agreement (the
      “License”) with Messrs. Brofman and Burchetta (together, the “Licensors”) for
      the licensed usage (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 (the “Patent”) for “Computerized Dispute and
      Resolution System and Method.” 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. In February 2004, the License was amended
      (the “Amendment”) to modify the royalty fee obligations and the termination
      rights. Pursuant to the Amendment, the Company will pay a royalty fee to the
      Licensors as follows: (1) in 2004, the Company will pay no royalties; (2) in
      2005, the Company will pay a royalty fee of 10% of the Company’s annual gross
      revenues attributable to the use of the patented computerized dispute resolution
      system and method (the “Fee”); (3) in 2006, the Company will pay the Fee with a
      minimum guaranteed royalty payment of $300,000; and (4) in 2007 and thereafter,
      the Company will pay the Fee with a minimum guaranteed royalty payment of
      $600,000 annually, subject to certain conditions relating to the Licensors’
continued affiliation with the Company, or potentially as much as $3,000,000
      in
      the aggregate, depending on the circumstances of their separation from the
      Company. In addition, pursuant to the Amendment, if the Company’s annual gross
      revenues do not exceed one hundred and ten percent (110%) of the Company’s
      annual gross revenues for the immediately preceding calendar year (the “Minimum
      Annual Gross Revenue Clause”), the Licensors may not terminate the License prior
      to January 1, 2006, provided that the Company has not breached its obligations
      to pay the Fee.




In
      2003,
      prior to the Amendment, the License provided for a royalty fee, payable to
      the
      Licensors, of ten percent (10%) of the Company’s annual gross revenues
      attributable to the Licensed Usage commencing July 1, 2003 and continuing until
      the expiration of the Patent. The minimum annual royalty for any fiscal year
      was
      $600,000. Under certain circumstances, if Mr. Burchetta was no longer employed
      as a director and officer of the Company, or if Mr. Brofman was no longer
      retained as a consultant to the Company, the minimum annual royalty fee for
      any
      fiscal year would be $3,000,000. The Licensors had the right to terminate the
      License if, among other reasons, the Company had not developed and produced
      a
      fully functional and commercially usable system contemplated by the License
      on
      or before September 30, 2003 (which was extended to March 31, 2004), or the
      Company’s annual gross revenues during any calendar year did not exceed $500,000
      through December 31, 2004, or if the Company failed to meet the Minimum Annual
      Gross Revenue Clause.




Royalty
      fee expense, which is included in general and administrative expenses, totaled
      $-0- and $600,000 for the years ended December 31, 2004 and 2003, respectively.
      The Licensors waived the entire amount of the royalty fee for the year ended
      December 31, 2003, resulting in a capital contribution of $600,000. The License
      agreement was subsequently amended during June 2005 (see Note 14d).




30







8.  EMPLOYMENT
      AGREEMENTS




The
      Company has entered into employment agreements with four executives. Future
      aggregate minimum compensation under these agreements as of December 31, 2004
      is
      as follows:




2005
            
            $
            473,0142006
            
            
            300,0002007
            
            
            300,0002008
            
            
            16,438Total
            
            $
            1,089,452





The
      employment agreements with Messrs. Burchetta and Harris are effective through
      January 13, 2008. The employment agreement with Mr. Silberstein, originally
      effective through December 31, 2004 was terminated in October 2004 coincident
      with his resignation. These agreements provide each executive with an initial
      annual compensation of $240,000 and contain provisions for annual increases
      based on “cost-of-living” changes. The employment agreements with Messrs.
      Burchetta and Harris contain provisions under which their annual compensation
      may increase to $600,000 if the Company achieves certain operating milestones
      and also provide for additional compensation based on the value of a transaction
      that results in a change of control, as that term is defined in their
      agreements. Compensation expense under the agreements with Messrs. Burchetta,
      Harris and Silberstein totaled $586,167 for the year ended December 31, 2003.
      Messrs. Burchetta, Harris and Silberstein are three of the executives mentioned
      in Note 5 who waived the entire amount of their compensation during
      2003.




Each
      of
      Messrs. Burchetta, Harris and Silberstein amended their employment agreements
      on
      February 25, 2004, with each agreeing to modify their respective level of
      compensation, subject to the Company meeting certain financial and performance
      milestones. The employment agreements, as amended, provide that the base salary
      for each of Messrs. Burchetta, Harris and Silberstein will be as follows: (1)
      if
      at the date of any salary payment, the aggregate amount of the Company’s net
      cash on hand provided from operating activities and net cash and/or investments
      on hand provided from financing activities is sufficient to cover the Company’s
      projected cash flow requirements (as established by the Company’s Board of
      Directors in good faith from time to time) for the following succeeding 12
      months (the “Projected Cash Requirement”), the annual base salary will be
      $150,000; and (2) if at the date of any salary payment, the Company’s net cash
      on hand provided from operating activities is sufficient to cover the Company’s
      Projected Cash Requirement, the annual base salary will be $240,000, and
      increased to $450,000 upon the later to occur of (a) January 1, 2004 and (b)
      the
      date upon which the Company completes the sale or license of its system with
      respect to 400,000 consumer credit accounts. Since the annual base salaries
      of
      Messrs. Burchetta and Harris are subject to the Company meeting these specified
      financial and performance milestones, any salary payments to Messrs. Burchetta
      and Harris will be allocated equally among each of them at the time payment
      is
      made.




Under
      the
      terms of the amended employment agreements, no salary payments were made to
      Messrs. Burchetta, Harris and Silberstein during 2004. The Company recorded
      compensation expense and a capital contribution totaling $412,500 in 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. These employment
      agreements were subsequently amended during June 2005 (see Note 14e).




9.  OFFICE
      LEASE :




The
      Company leases office facilities under a non-cancelable operating lease through
      July 2005. Rent expense and utilities for the years ended December 31, 2004
      and
      2003 was $72,721 and $39,603, respectively. Future aggregate minimum lease
      payments as of December 31, 2004 are $39,158 for 2005. On August 1, 2005, the
      Company moved its headquarters to a larger space in the same building and
      entered into a new lease agreement (see Note 14f).




10.  INCOME
      TAXES :




For
      U.S.
      Federal income tax purposes, expenses of the Company have been capitalized
      as
      start-up costs and are subject to amortization once business
      begins.




31


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 31,2003
            
            2004Statutory
                federal income tax rate (benefit)
            
            
            (34.00
            )%
            
            (34.00
            )%Nondeductible
                expenses:Permanent
                differences
            
            
            17.09
            
            
            5.32Deferred
                start up costs
            
            
            5.57
            
            
            (1.21
            )Stock
                based compensation
            
            
            5.18
            
            
            10.96Accrued
                expenses and other
            
            
            1.28
            
            
            --Net
                operating loss carryforward
            
            
            4.88
            
            
            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
                31,2003
            
            2004Deferred
                tax asset:Deferred
                start up costs
            
            $
            190,401
            
            $
            152,655Stock
                based compensation
            
            
            177,266
            
            
            521,342Accrued
                expenses and other
            
            
            46,537
            
            
            --Net
                operating loss carryforward
            
            
            169,094
            
            
            763,413Deferred
                tax asset
            
            
            583,298
            
            
            1,437,410Less:
                valuation allowance
            
            
            (583,298
            )
            
            (1,437,410
            )Net
                deferred tax asset
            
            $
            --
            
            $
            --Increase
                in valuation allowance
            
            $
            (581,000
            )
            $
            (854,112
            )





Due
      to
      the uncertainty surrounding the realization of the benefits of deferred start-up
      costs and net operating loss carryforward, the Company provided a valuation
      allowance for the entire amount of the deferred tax asset at December 31, 2003
      and 2004. At December 31, 2004, the Company had net operating loss carryforwards
      of approximately $1,908,533 which expire at various dates through
      2024.




11.  TRANSACTIONS
      WITH RELATED PARTIES :




Effective
      January 13, 2003, the Company entered into a consulting agreement with Mr.
      Brofman as non-executive Co-Chairman of the Board. The consulting fee expense
      under this agreement, which is included in general and administrative expenses,
      totaled $222,000 for year ended December 31, 2003. Mr. Brofman is one of the
      individuals mentioned in Note 5 above, who waived the entire amount of his
      consulting fee during 2003. The Company and Mr. Brofman mutually agreed to
      terminate the consulting agreement on February 25, 2004. Although the consulting
      agreement has been terminated, Mr. Brofman continues to serve as the Co-Chairman
      of the Board.




12.  WEB
      HOSTING COMMITMENT :




On
      October 31, 2003, the Company entered into a 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 $14,180 and $124,595 for the years ended December
      31,
      2003 and 2004, respectively. The agreement is in effect until April 2006, and
      based on current volumes as of the filing date of this amended report, the
      Company expects to incur expenses of $15,000 to $18,000 per month going
      forward.




32


13.  RECENTLY
      ISSUED AND PROPOSED ACCOUNTING PRONOUNCEMENTS :




In
      December 2004, the Financial Accounting Standards Board (“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.




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. 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 fair value recognition provisions of
      SFAS
      123 to stock-based employee compensation.




The
      Company will evaluate the requirements of SFAS 123 - Revised and plans to adopt
      its provisions as soon as practicable. The Company believes that the effect
      of
      implementing SFAS 123 - Revised will result in the recording of additional
      stock
      compensation expense.




In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      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
      October 2004, the FASB ratified the consensus reached in EITF Issue No. 04-8,
      “The Effect of Contingently Convertible Instruments on Diluted Earnings per
      Share.” The EITF reached a consensus that contingently convertible instruments,
      such as contingently convertible debt, contingently convertible preferred stock,
      and other such securities should be included in diluted earnings per share
      (if
      dilutive) regardless of whether the market price trigger has been met. The
      consensus became effective for reporting periods ending after December 15,
      2004.
      The adoption of this pronouncement did not have a material effect on the
      Company’s financial statements.




33


14.  SUBSEQUENT
      EVENTS :




a.  LETTER
      OF
      INTENT:




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. The Company has not entered into any definitive
      agreements to raise capital in the public equity markets as a result of this
      letter of intent, but is exploring the possibility of doing so. On September
      30,
      2005, the Company filed a Registration Statement on Form SB-2 with the
      Securities and Exchange Commission. The Company anticipates that it will issue
      2,400,000 shares of common stock in a proposed public offering. However, there
      can be no assurance that the Company will be able to raise additional capital
      in
      the public equity markets as a result of this letter of intent or any other
      agreements the Company may enter into. In connection with this non-binding
      letter of intent, and 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 to that effect. The Company also intends to issue stock options to
      purchase common stock to certain employees and consultants of the Company for
      the same purpose. 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.




b.  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.




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, initially 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.




On
      September 6, 2005, the Company received proceeds from a further 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 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, and (ii) 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.




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 will be less than the initial
      public offering price. 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, and this amount will be amortized
      over
      the life of the notes.




34


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, 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 a deferred financing cost and will be amortized over the life of
      the
      notes.




c.  ACCRUED
      COMPENSATION EXPENSE AND LOANS PAYABLE TO STOCKHOLDERS:




As
      of
      June 30, 2005, the Company had reached an agreement to resolve an outstanding
      debt owed to a former employee. Danilo Cacciamatta, the Company’s former CFO,
      accepted payments of options to purchase 700,000 shares of common stock, valued
      at $84,000, as well as cash payments of $38,400, as part of a package resolution
      of unpaid compensation of $95,667, a $10,000 loan, as reflected on the Balance
      Sheets as of December 31, 2003 and 2004, plus interest owed on these balances.




d.  RELATED
      PARTY TRANSACTIONS:




(i)  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 aim 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 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.




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.




35


(ii)  Sublease




On
      August
      1, 2005, the Company entered into a sublease agreement with a company owned
      by
      the CEO and Co-Chairmen. The President of this company is the son of the CEO
      and
      Co-Chairman of Debt Resolve. 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 Debt Resolve may cancel the sublease
      at anytime on 30 days notice.




e.  EMPLOYMENT
      AGREEMENTS:




On
      June
      6, 2005, at a meeting of the Board of Directors, the Company entered into a
      revised employment agreement with the Co-Chairman and Chief Executive Officer.
      The action modified an employment agreement which 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.
      The modification allowed him to begin receiving cash payments of his salary
      effective as of April 1, 2005. Prior to this date, the CEO’s salary was waived.
      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.




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 remains in effect until December 1, 2005. This employment
      agreement provides 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, effective as
      of
      the date the Company’s proposed public stock offering is declared effective and
      assuming a proposed 1-for-10 reverse stock split, the Company granted these
      officers options to purchase 230,000 and 100,000 shares, respectively, of
      Company common stock. These stock options are exercisable at $5.00 per share
      and
      will have a term of five years from their date of grant and will vest
      immediately with the proposed 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. In the event the
      Company’s proposed public stock offering does not take place by March 31, 2006,
      the options terminate and become null and void.




f.  LEASED
      FACILITIES:




On
      August
      1, 2005, the Company moved its headquarters to a larger space in the same
      building. The Company leases this office facility under a non-cancelable
      operating lease through July 2010. Future aggregate minimum lease payments
      over
      the 60 months of the lease period total $616,456, of which $80,000 has been
      prepaid as a deposit.




g.  SHORT
      TERM FINANCING:




On
      November 30, 2005 the Company borrowed $100,000 from a director and an existing
      stockholder of the Company for a term of three months at an annual interest
      rate
      of 10%.


36


14.  SUMMARY
      QUARTERLY FINANCIAL DATA (UNAUDITED AND RESTATED)




The
      following is the summarized quarterly financial data for the years ended
      December 31, 2003 and 2004, as previously reported and as restated for the
      adjustments discussed in Note 3:






Year
                ended December 31, 2003FirstQuarter
            
            SecondQuarter
            
            ThirdQuarter
            
            FourthQuarterTotal
                revenues, as previously reported
            
            $
            -
            
            $
            --
            
            $
            --
            
            $
            --Net
                loss, as previously reported
            
            
            (352,839
            )
            
            (362,386
            )
            
            (860,252
            )
            
            (996,917
            )Stock-based
                compensation adjustments
            
            
            --
            
            
            (49,175
            )
            
            (202,256
            )
            
            (82,242
            )Net
                loss, as restated
            
            
            (352,839
            )
            
            (411,561
            )
            
            (1,062,508
            )
            
            (1,079,159
            )Basic
                and diluted net loss per common share:Net
                loss, as previously reported
            
            
            (0.02
            )
            
            (0.01
            )
            
            (0.03
            )
            
            (0.03
            )Stock-based
                compensation adjustments
            
            
            --
            
            
            (0.01
            )
            
            --
            
            
            (0.01
            )Net
                loss, as restated
            
            
            (0.02
            )
            
            (0.02
            )
            
            (0.03
            )
            
            (0.04
            )





Year
                ended December 31, 2004First
            
            Second
            
            Third
            
            FourthQuarter
            
            Quarter
            
            Quarter
            
            QuarterTotal
                revenues, as previously reported
            
            $
            --
            
            $
            --
            
            $
            2,088
            
            $
            699Net
                loss, as previously reported
            
            
            (500,719
            )
            
            (466,571
            )
            
            (477,820
            )
            
            (557,336
            )Stock-based
                compensation adjustments
            
            
            (16,498
            )
            
            (16,498
            )
            
            (7,567
            )
            
            (625,989
            )Net
                loss, as restated
            
            
            (517,217
            )
            
            (483,069
            )
            
            (485,387
            )
            
            (1,183,325
            )Basic
                and diluted net loss per common share:Net
                loss, as previously reported
            
            
            (0.02
            )
            
            (0.01
            )
            
            (0.02
            )
            
            (0.02
            )Stock-based
                compensation adjustments
            
            
            --
            
            
            (0.01
            )
            
            --
            
            
            (0.01
            )Net
                loss, as restated
            
            
            (0.02
            )
            
            (0.02
            )
            
            (0.02
            )
            
            (0.03
            )





37





**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:
       March 30, 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,
            
            March
                30, 2006James
                D. Burchetta
            
            Co-Chairman
                of the Board/s/
                Charles S. Brofman
            
            Co-Chairman
                of the Board
            
            March
                30, 2006Charles
                S. Brofman/s/
                Alan M. Silberstein
            
            Director
            
            March
                30, 2006Alan
                M. Silberstein/s/
                Lawrence E. Dwyer, Jr.
            
            Director
            
            March
                30, 2006Lawrence
                E. Dwyer, Jr./s/
                William M. Mooney, Jr.
            
            Director
            
            March
                30, 2006William
                M. Mooney, Jr.





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