**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549







**FORM
      10-KSB/A**





**(Amendment
      No. 1)**




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.







**Table
        of Contents**


**Index
        to Financial Statements**




**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
            13Item
                8A.
            Controls
                and Procedures
            36Signatures
            38Certifications
            39





-2-
 **Table
          of Contents**


**Index
      to Financial Statements**


**EXPLANATORY
      NOTE**




Debt
      Resolve, Inc. (“Debt Resolve” or the “Company”) is filing this Amendment No. 1
      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, solely to
      amend and replace Items 6, 7 and 8A of the Form 10-KSB 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, management’s
      discussion and analysis and controls and procedures.




**RESTATEMENT
      OF 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 adjustments were necessary to recognize the cumulative impact of correcting
      its computation for stock-based compensation to consultants and advisory board
      members. Specifically, it was determined that the Company should have recorded
      an expense for stock-based compensation to consultants and advisory board
      members during those accounting periods. Accounting principles generally
      accepted in the United States require the Company to record compensation expense
      for options granted to consultants.  The Company had disclosed these
      costs
      on a pro forma basis, only. Based on the reclassification of employee and
      consultant status for stock-based compensation to these persons, Debt Resolve
      has restated the periods impacted by these adjustments. 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. Within the Balance Sheets as of December 31,
      2003
      and 2004, $5,594 and $62,939, respectively, of assets that were formerly
      classified as current were reclassified as long-term, including $0 and $43,540,
      respectively, of deferred offering expenses and $5,594 and $19,399,
      respectively, of deposits and other assets. Within the Statements of Cash Flows,
      certain items were reclassified between financing activities and operating
      activities, with the most significant being the reclassification of waived
      and
      imputed compensation and royalty fees from financing activities to an adjustment
      to reconcile net loss to net cash used in operating activities. The net effect
      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.




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






-3-
 **Table
          of Contents**


**Index
        to Financial Statements**


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
            
            $
            (2,462,903
            )
            $
            (0.09
            )
            $
            (1,970,690
            )
            $
            (0.07
            )
            $
            (4,439,335
            )Stock-based
                compensation
            
            
            (109,491
            )
            
            (0.01
            )
            
            (31,756
            )
            
            (0.00
            )
            
            (141,247
            )As
                restated
            
            $
            (2,572,394
            )
            $
            (0.10
            )
            $
            (2,002,446
            )
            $
            (0.07
            )
            $
            (4,580,582
            )





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 amounts previously reported are derived from the Forms 10-KSB for
      the
      fiscal years ended December 31, 2003 and 2004 filed on March 30, 2004 and 2005
      respectively.




Adjustments
      to the Statements of Operations




Year
                ended
              December
                31, 2003
            
            Year
                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
            
            
            (2,465,509
            )
            
            (2,576,372
            )
            
            (1,977,322
            )
            
            (2,010,078
            )
            
            (4,448,573
            )
            
            (4,592,192
            )Net
                interest income
            
            
            3,978
            
            
            3,978
            
            
            4,845
            
            
            4,845
            
            
            8,823
            
            
            8,823Income
                taxes
            
            
            1,372
            
            
            –
            
            
            1,000
            
            
            –
            
            
            2,372
            
            
            –Net
                loss
            
            $
            (2,462,903
            )
            $
            (2,572,394
            )
            $
            (1,970,690
            )
            $
            (2,002,446
            )
            $
            (4,439,335
            )
            $
            (4,580,582
            )Basic
                and diluted loss per share
            
            $
            (0.09
            )
            $
            (0.10
            )
            $
            (0.07
            )
            $
            (0.07
            )Basic
                and diluted weighted average common shares outstanding
            
            
            26,668,753
            
            
            26,852,041
            
            
            29,133,746
            
            
            29,133,746







-4-
 **Table
          of Contents**


**Index
        to Financial Statements**




Adjustments
      to the Balance Sheets




Years
                ended December 31,2003
            
            2004Amounts
            
            
            
            Amountspreviously
            
            As
            
            previously
            
            Asreported
            
            restated
            
            reported
            
            restatedCurrent
                assets
            
            $
            1,072,272
            
            $
            1,066,678
            
            $
            129,856
            
            $
            66,917Fixed
                assets
            
            
            90,517
            
            
            90,517
            
            
            62,500
            
            
            62,500Other
                assets
            
            
            –
            
            
            5,594
            
            
            –
            
            
            62,939Total
                assets
            
            $
            1,162,789
            
            $
            1,162,789
            
            $
            192,356
            
            $
            192,356Total
                liabilities
            
            $
            287,951
            
            $
            287,951
            
            $
            254,826
            
            $
            254,826Total
                stockholders’ equity (deficiency)
            
            
            874,838
            
            
            874,838
            
            
            (62,470
            )
            
            (62,470
            )Total
                liabilities andstockholders’
                equity (deficiency)
            
            $
            1,162,789
            
            $
            1,162,789
            
            $
            192,356
            
            $
            192,356


Adjustments
      to the Statements of Cash Flows


Year
                ended
              December
                31
            
            Cumulative
                from Inception
              (April
                21, 1997) to December 31,2004
            
            2004Amounts
              Previously
              Reported
            
            As
              Restated
            
            Amounts
              Previously
              Reported
            
            As
              RestatedNet
                cash used in operating activities
            
            $
            (1,454,468
            )
            $
            (1,401,928
            )
            $
            (2,177,550
            )
            $
            (2,125,010
            )Net
                cash used in investing activities
            
            
            (9,995
            )
            
            (9,995
            )
            
            (114,377
            )
            
            (114,377
            )Net
                cash provided by financing activities
            
            
            459,000
            
            
            406,460
            
            
            2,326,674
            
            
            2,274,134






-5-
 **Table
          of Contents**


**Index
      to Financial Statements**




**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
      Amended Annual Report on Form 10-KSB/A. 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.




-6-
 **Table
          of Contents**


**Index
        to Financial Statements**




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.




**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.




**General
      and administrative expenses.** General
      and administrative expenses, including stock-based compensation, totaled
      $1,019,606 for the year ended December 31, 2004, an increase of $253,245
      compared to general and administrative expenses of $766,361 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 $202,638 in
      stock-based compensation expense for options and warrants granted in payment
      for
      consulting services.




-7-
 **Table
          of Contents**


**Index
        to Financial Statements**




General
      and administrative expenses, including stock-based compensation, totaled
      $766,361 for the year ended December 31, 2003, of which $376,891 were
      non-cash items, including $136,491 in stock-based compensation expense for
      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 $396,613 for consulting fees incurred in connection with business advisory
      and marketing services, incurred as part of the Company’s start up, and $258,855
      for other general expenses, primarily consisting of legal fees, occupancy costs
      and travel-related 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. 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.




-8-
 **Table
          of Contents**


**Index
        to Financial Statements**




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 $4,580,582 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-
 **Table
          of Contents**


**Index
      to Financial Statements**




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-
 **Table
          of Contents**


**Index
        to Financial Statements**




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
      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; the Company follows the
      minimum value method. The estimated minimum value of the options granted is
      amortized to expense over the option vesting periods.




**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-
 **Table
          of Contents**


**Index
        to Financial Statements**




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.




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.





-12-
 **Table
          of Contents**


**Index
        to Financial Statements**




**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
            14Balance
                Sheets as of December 31, 2003 and
                2004
            15Statements
                of Operations for the Years Ended December 31, 2004
                and 2003 and Cumulative from Inception (April 21, 1997 to December
                31,
                2004)
            16Statements
                of Stockholders’ Equity (Deficiency) Cumulative
                from Inception (April 21, 1997 to December 31, 2004)
            17Statements
                of Cash Flows for the Year Ended December 31, 2004
                and 2003 and Cumulative from Inception (April 21, 1997 to December
                31,
                2004)
            18Notes
                to Financial Statements
            19







-13-
 **Table
          of Contents**


**Index
        to Financial Statements**




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.




As
      discussed in Note 2b, the accompanying financial statements as of December
      31,
      2004 and 2003, and for each of the years then ended, have been
      restated.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As more fully described in Note 2a, 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 2a. 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).






-14-
 **Table
          of Contents**


**Index
        to Financial Statements**




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
            
            
            3,423,954
            
            
            4,488,633Deficit
                accumulated during the development stage
            
            
            (2,578,136
            )
            
            (4,580,582
            )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.







-15-
 **Table
          of Contents**


**Index
        to Financial Statements**




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)
              
              
              766,361
              
              
              1,019,606
              
              
              1,791,709Waived
                  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
              
              
              2,576,372
              
              
              2,010,078
              
              
              4,592,192Loss
                  from operations
              
              
              (2,576,372
              )
              
              (2,007,291
              )
              
              (4,589,405
              )Net
                  interest income
              
              
              3,978
              
              
              4,845
              
              
              8,823Net
                  loss
              
              $
              (2,572,394
              )
              $
              (2,002,446
              )
              $
              (4,580,582
              )Per
                  share data:Basic
                  and diluted net loss per common share
              
              $
              (0.10
              )
              $
              (0.07
              )Basic
                  and diluted weighted average number of common shares
                  outstanding
              
              
              26,852,041
              
              
              29,133,746





(1)
            Includes
                stock based compensation of $136,491 and $202,638 for the years ended
                2003
                and 2004, respectively, and $339,129 since
                inception.





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




-16-
 **Table
            of Contents**
 **Index
          to Financial Statements**
  DEBT
        RESOLVE, INC.


(A
      Development Stage Company)


Statements
      of Stockholders’ Equity (Deficiency)


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


DeficitAccumulatedPreferred
                  Stock
              
              Common
                  Stock
              
              Additional
              
              During
                  theNumber
                  of
              
              
              
              Number
                  of
              
              
              
              Paid
                  in
              
              DevelopmentShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Total(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
              
              
              –
              
              
              –
              
              
              22,500,000
              
              
              22,500
              
              
              –
              
              
              –
              
              
              22,500Sales
                  of Common stock
              
              
              –
              
              
              –
              
              
              3,600,000
              
              
              3,600
              
              
              –
              
              
              –
              
              
              3,600Common
                  stock issued to pay consulting fees
              
              
              –
              
              
              –
              
              
              135,000
              
              
              135
              
              
              26,865
              
              
              –
              
              
              27,000Common
                  stock issued to pay compensation
              
              
              –
              
              
              –
              
              
              145,000
              
              
              145
              
              
              28,855
              
              
              –
              
              
              29,000Conversion
                  of loan into Common stock
              
              
              –
              
              
              –
              
              
              500,000
              
              
              500
              
              
              99,500
              
              
              –
              
              
              100,000Conversion
                  of loan into Common stock
              
              
              –
              
              
              –
              
              
              50,000
              
              
              50
              
              
              9,950
              
              
              –
              
              
              10,000Rescinded
                  Common stock issued to pay compensation
              
              
              –
              
              
              –
              
              
              (145,000
              )
              
              (145
              )
              
              (28,855
              )
              
              –
              
              
              (29,000
              )Rescinded
                  conversion of loan into Common stock
              
              
              –
              
              
              –
              
              
              (50,000
              )
              
              (50
              )
              
              (9,950
              )
              
              –
              
              
              (10,000
              )Capital
                  contributed from the waiver of accrued compensa-tion 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
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              109,491
              
              
              –
              
              
              109,491Sales
                  of Common stock in private placement
              
              
              –
              
              
              –
              
              
              1,785,000
              
              
              1,785
              
              
              1,783,215
              
              
              –
              
              
              1,785,000Offering
                  costs of private placement
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              (53,926
              )
              
              –
              
              
              (53,926
              )Net
                  loss
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              (2,572,394
              )
              
              (2,572,394
              )Balance
                  at December 31, 2003
              
              
              –
              
              $
              –
              
              
              29,020,000
              
              $
              29,020
              
              $
              3,423,954
              
              $
              (2,578,136
              )
              $
              874,838Common
                  stock issued to pay consulting fees
              
              
              –
              
              
              –
              
              
              9,000
              
              
              9
              
              
              8,991
              
              
              –
              
              
              9,000Sales
                  of common stock in private placement
              
              
              –
              
              
              –
              
              
              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
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              193,638
              
              
              –
              
              
              193,638Net
                  loss
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              (2,002,446
              )
              
              (2,002,446
              )Balance
                  at December 31, 2004
              
              
              –
              
              $
              –
              
              
              29,479,000
              
              $
              29,479
              
              $
              4,488,633
              
              $
              (4,580,582
              )
              $
              (62,470
              )


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




-17-
 **Table
            of Contents**
 **Index
          to Financial Statements**
  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
            
            $
            (2,572,394
            )
            $
            (2,002,446
            )
            $
            (4,580,582
            )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
            
            
            136,491
            
            
            202,638
            
            
            339,129Changes
                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
            
            
            –
            
            
            110,000Deferred
                offering expense
            
            
            (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 imputedcompensation
                and consulting fees
            
            $
            853,567
            
            $
            412,500
            
            $
            1,271,309


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






-18-
 **Table
            of Contents**
 **Index
          to Financial Statements**
  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 $4,580,582 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 raised 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 extend payables and reduce 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.




-19-
 **Table
          of Contents**


**Index
        to Financial Statements**




b.
            Prior
                period adjustments/restatement






Effective
      August 16, 2005, the Company corrected two errors, (1) relating to stock based
      compensation expense for options granted to consultants and advisory board
      members for which the Company did not record a compensation charge during fiscal
      2003 and 2004 and the three months ended March 31, 2005, and (2) relating to
      reimbursement for deferred offering costs which had been improperly credited
      against general and administrative expenses rather than additional paid in
      capital.  In addition, the Company made a number of reclassifications
      within the various statements. Amounts reflected herein for the years ended
      December 31, 2003 and 2004 represent the restated financial information rather
      than financial information included in the respective Forms 10-KSB which were
      filed with the SEC 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.




-20-
 **Table
          of Contents**


**Index
        to Financial Statements**




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 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; the Company
      follows the minimum value method. The estimated minimum value of the options
      granted is amortized to expense over the option vesting periods.




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.




-21-
 **Table
          of Contents**


**Index
        to Financial Statements**




Year
                ended
              December
                31,2003
            
            2004(restated)
            
            (restated)Net
                loss - as reported
            
            $
            (2,572,394
            )
            $
            (2,002,446
            )Deduct:
                Stock based employee compensationexpense
                determined under minimum-value basedmethods
                for all awards
            
            
            355,999
            
            
            231,378Net
                loss - pro forma
            
            $
            (2,928,393
            )
            $
            (2,233,824
            )Basic
                and diluted net loss per common share - as reported
            
            $
            (0.10
            )
            $
            (0.07
            )Basic
                and diluted net loss per common share - pro forma
            
            $
            (0.11
            )
            $
            (0.08
            )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 7,133,333 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 adjustments were necessary to recognize the cumulative impact of correcting
      its computation for stock-based compensation to consultants and advisory board
      members. Specifically, it was determined that Debt Resolve should have recorded
      an expense for stock-based compensation to consultants and advisory board
      members during those accounting periods. Accounting principles generally
      accepted in the United States of America require the Company to record
      compensation expense for options granted to consultants.  The Company
      had
      disclosed these costs on a pro forma basis, only. Based on the reclassification
      of employee and consultant status for stock-based compensation to these persons,
      Debt Resolve has restated the periods impacted by these adjustments. 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 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 Sheets
      and
      to the Statements of Cash Flows. Within the Balance Sheets as of December 31,
      2003 and 2004, $5,594 and $62,939, respectively, of assets that were formerly
      classified as current were reclassified as long-term, including $0 and $43,540,
      respectively, of deferred offering expenses and $5,594 and $19,399,
      respectively, of deposits and other assets. Within the Statements of Cash Flows,
      certain items were reclassified between financing activities and operating
      activities, including the reclassification of waived and imputed compensation
      and royalty fees from financing activities to an adjustment to reconcile net
      loss to net cash used in operating activities. The net effect 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.




-22-
 **Table
          of Contents**


**Index
        to Financial Statements**




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




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
              
              $
              (2,462,903
              )
              $
              (0.09
              )
              $
              (1,970,690
              )
              $
              (0.07
              )
              $
              (4,439,335
              )Stock-based
                  compensation (1)
              
              
              (109,491
              )
              
              (0.01
              )
              
              (31,756
              )
              
              (0.00
              )
              
              (141,247
              )As
                  restated
              
              $
              (2,572,394
              )
              $
              (0.10
              )
              $
              (2,002,446
              )
              $
              (0.07
              )
              $
              (4,580,582
              )





(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 amounts previously reported are derived from the Forms 10-KSB for
      the
      fiscal years ended December 31, 2003 and 2004 filed on March 30, 2004 and 2005
      respectively.




-23-
 **Table
          of Contents**


**Index
        to Financial Statements**




Adjustments
      to the Statements of Operations


Year
                ended
              December
                31
            
            Cumulative
                from Inception
              (April
                21, 1997) to2003
            
            2004
            
            December
                  31,2004Amounts
              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 expense
            
            
            1,255,498
            
            
            766,361
            
            
            986,850
            
            
            1,019,606
            
            
            2,248,090
            
            
            1,791,709Waived
                royalties - related parties
            
            
            –
            
            
            600,000
            
            
            –
            
            
            –
            
            
            –
            
            
            600,000Research
                and development expense
            
            
            453,301
            
            
            453,301
            
            
            46,022
            
            
            46,022
            
            
            499,323
            
            
            499,323Depreciation
                and amortization expense
            
            
            13,865
            
            
            13,865
            
            
            38,013
            
            
            38,013
            
            
            51,878
            
            
            51,878Total
                expenses
            
            
            (2,465,509
            )
            
            (2,576,372
            )
            
            (1,977,322
            )
            
            (2,010,078
            )
            
            (4,448,573
            )
            
            (4,592,192
            )Loss
                from operations
            
            
            (2,465,509
            )
            
            (2,576,372
            )
            
            (1,974,535
            )
            
            (2,007,291
            )
            
            (4,445,786
            )
            
            (4,589,405
            )Net
                interest income
            
            
            3,978
            
            
            3,978
            
            
            4,845
            
            
            4,845
            
            
            8,823
            
            
            8,823Loss
                before taxes
            
            
            (2,461,531
            )
            
            (2,572,394
            )
            
            (1,969,690
            )
            
            (2,002,446
            )
            
            (4,436,963
            )
            
            (4,580,582
            )Income
                taxes
            
            
            1,372
            
            
            –
            
            
            1,000
            
            
            –
            
            
            2,372
            
            
            –Net
                loss
            
            $
            (2,462,903
            )
            $
            (2,572,394
            )
            $
            (1,970,690
            )
            $
            (2,002,446
            )
            $
            (4,439,335
            )
            $
            (4,580,582
            )Basic
                and diluted loss per share
            
            $
            (0.09
            )
            $
            (0.10
            )
            $
            (0.07
            )
            $
            (0.07
            )Basic
                and diluted weighted average of common shares outstanding
            
            
            26,668,753
            
            
            26,852,041
            
            
            29,133,746
            
            
            29,133,746






-24-
 **Table
          of Contents**


**Index
      to Financial Statements**


Adjustments
      to the Balance Sheets


Years
                endedDecember
                31,2003
            
            2004Amounts
            
            
            
            Amountspreviously
            
            As
            
            previously
            
            Asreported
            
            restated
            
            reported
            
            restatedASSETSCurrent
                assets:
            
            $
            1,072,272
            
            $
            1,066,678
            
            $
            129,856
            
            $
            66,917Fixed
                assets, net
            
            
            90,517
            
            
            90,517
            
            
            62,500
            
            
            62,500Other
                assets
            
            
            –
            
            
            5,594
            
            
            –
            
            
            62,939Total
                assets
            
            $
            1,162,789
            
            $
            1,162,789
            
            $
            192,356
            
            $
            192,356LIABILITIES
                AND STOCKHOLDERS EQUITY (DEFICIENCY)Total
                liabilities
            
            $
            287,951
            
            $
            287,951
            
            $
            254,826
            
            $
            254,826Stockholders’
                (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
            
            
            3,314,463
            
            
            3,423,954
            
            
            4,347,386
            
            
            4,488,633Deficit
                accumulated during the development stage
            
            
            (2,468,645
            )
            
            (2,578,136
            )
            
            (4,439,335
            )
            
            (4,580,582
            )Total
                stockholders’ equity (deficiency)
            
            
            874,838
            
            
            874,838
            
            
            (62,470
            )
            
            (62,470
            )Total
                liabilities and stockholders’ equity (deficiency)
            
            $
            1,162,789
            
            $
            1,162,789
            
            $
            192,356
            
            $
            192,356


Adjustments
      to the Statements of Cash Flows




Year
                ended
              December
                31, 2004
            
            Cumulative
                from Inception
              (April
                21, 1997) to
              December
                31, 2004Amounts
              previously
              reported
            
            As
              restated
            
            Amounts
              previously
              reported
            
            As
              restatedNet
                cash used in operating activities
            
            $
            (1,454,468
            )
            $
            (1,401,928
            )
            $
            (2,177,550
            )
            $
            (2,125,010
            )Net
                cash used in investing activities
            
            
            (9,995
            )
            
            (9,995
            )
            
            114,377
            )
            
            (114,377
            )Net
                cash provided by financing activities
            
            
            459,000
            
            
            406,460
            
            
            2,326,674
            
            
            2,274,134







-25-
 **Table
          of Contents**


**Index
        to Financial Statements**


4.
            FIXED
                ASSETS:


Fixed
        assets consist of the following:
  Useful
                  life
                
                December
                      31,
                    2003
                
                December
                      31,
                    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.




-26-
 **Table
          of Contents**


**Index
        to Financial Statements**




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 $109,491 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 $0.57 and 8.44 years, respectively.




During
      2004, the Company granted non-employee options to purchase 600,000 shares of
      common stock valued at $49,600 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 minimum value of these options was estimated to be
      $161,882 as of the grant date using the Black-Scholes option pricing model.
      The
      Company recorded a capital contribution of $161,882, relieved $83,653 from
      accounts payable and accrued expenses related to this consultant and charged
      $78,229 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 7,133,333 shares outstanding, of which 6,783,333 had vested. As of
      December 31, 2004, the weighted average exercise price and the weighted average
      expected life of the options granted were $0.74 and 5.96 years, respectively.




The
      following table summarizes stock option activity:


Number
                of
              Options
            
            Weighted
                average
              exerciseprice
              pershareOutstanding
                at December 31, 2002
            
            
            –
            
            $
            –Granted
            
            
            4,393,333
            
            
            0.58Exercised
            
            
            –
            
            
            –Forfeited
            
            
            –
            
            
            –Expired
            
            
            –
            
            
            –Outstanding
                at December 31, 2003
            
            
            4,393,333
            
            $
            0.58Granted
            
            
            2,740,000
            
            
            1.00Exercised
            
            
            –
            
            
            –Forfeited
            
            
            –
            
            
            –Expired
            
            
            –
            
            
            –Outstanding
                at December 31, 2004
            
            
            7,133,333
            
            $
            0.74






-27-
 **Table
          of Contents**


**Index
        to Financial Statements**
  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
            
            
            3,698,333
            
            
            3.68
            
            $
            1.00
            
            
            3,348,333
            
            $
            1.007,133,333
            
            
            5.96
            
            $
            0.74
            
            
            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).




-28-
 **Table
          of Contents**


**Index
        to Financial Statements**




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).




-29-
 **Table
          of Contents**


**Index
        to Financial Statements**




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.




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
            
            
            19.21
            
            
            7.00Deferred
                start up costs
            
            
            5.74
            
            
            –Stock
                based compensation
            
            
            1.45
            
            
            3.29Accrued
                expenses and other
            
            
            1.54
            
            
            –Net
                operating loss carryforward
            
            
            6.06
            
            
            23.71Effective
                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
            
            $
            173,624
            
            $
            173,624Stock
                based compensation
            
            
            43,796
            
            
            121,251Accrued
                expenses and other
            
            
            46,537
            
            
            –Net
                operating loss carryforward
            
            
            185,871
            
            
            744,394Deferred
                tax asset
            
            
            449,828
            
            
            1,039,269Less:
                valuation allowance
            
            
            (449,828
            )
            
            (1,039,269
            )Net
                deferred tax asset
            
            $
            –
            
            $
            –Increase
                in valuation allowance
            
            $
            (447,531
            )
            $
            (589,441
            )





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 $1,861,000 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.




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          of Contents**


**Index
        to Financial Statements**




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.




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.




-31-
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          of Contents**


**Index
      to Financial Statements**




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.




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-of faring 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.




-32-
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          of Contents**


**Index
        to Financial Statements**




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 $1,235,887, and this amount will be amortized
      over
      the life of the notes.




Maxim
      Group LLC acted as the placement agent in the June/September 2005 private
      financing and received placement fees of $142,800 and non-accountable expenses
      of $53,550. In addition, Maxim Group received warrants to purchase 336,000
      shares of common stock, valued at $40,207, exercisable for a period of three
      years at $0.425 per share. Total cash fees associated with this offering were
      $219,350, including the above-mentioned fees paid to Maxim Group and also
      including other fees of $23,000, paid to underwriter’s attorneys and a stock
      transfer agent. The total of fees and the value of the warrants have been
      recorded as deferred financing 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.




-33-
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          of Contents**


**Index
        to Financial Statements**




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.




(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%.




-34-
 **Table
          of Contents**


**Index
      to Financial Statements**


15.
            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, 2003First
            
            Second
            
            Third
            
            FourthQuarter
            
            Quarter
            
            Quarter
            
            QuarterTotal
                revenues, as previously reported
            
            $
            –
            
            $
            –
            
            $
            –
            
            $
            –Adjustments
            
            
            –
            
            
            –
            
            
            –
            
            
            –Restated
                total revenues
            
            
            –
            
            
            –
            
            
            –
            
            
            –Net
                loss, as previously reported
            
            
            (352,839
            )
            
            (333,510
            )
            
            (827,171
            )
            
            (949,383
            )Stock-based
                compensation adjustments
            
            
            –
            
            
            (28,876
            )
            
            (33,081
            )
            
            (47,534
            )Net
                loss, as restated
            
            
            (352,839
            )
            
            (362,386
            )
            
            (860,252
            )
            
            (996,917
            )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
            )Net
                loss, as restated
            
            
            (0.02
            )
            
            (0.01
            )
            
            (0.03
            )
            
            (0.04
            )





Year
                ended December 31, 2004First
            
            Second
            
            Third
            
            FourthQuarter
            
            Quarter
            
            Quarter
            
            QuarterTotal
                revenues, as previously reported
            
            $
            –
            
            $
            –
            
            $
            2,088
            
            $
            699Adjustments
            
            
            –
            
            
            –
            
            
            –
            
            
            –Restated
                total revenues
            
            
            –
            
            
            –
            
            
            2,088
            
            
            699Net
                loss, as previously reported
            
            
            (500,719
            )
            
            (466,571
            )
            
            (451,677
            )
            
            (551,723
            )Stock-based
                compensation adjustments
            
            
            –
            
            
            –
            
            
            (26,143
            )
            
            (5,613
            )Net
                loss, as restated
            
            
            (500,719
            )
            
            (466,571
            )
            
            (477,820
            )
            
            (557,336
            )Basic
                and diluted net loss per common share:Net
                loss, as previously reported
            
            
            (0.02
            )
            
            (0.02
            )
            
            (0.02
            )
            
            (0.02
            )Stock-based
                compensation adjustments
            
            
            –
            
            
            –
            
            
            –
            
            
            –Net
                loss, as restated
            
            
            (0.02
            )
            
            (0.02
            )
            
            (0.02
            )
            
            (0.02
            )






-35-
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          of Contents**


**Index
        to Financial Statements**


**Item
      8A. Controls and Procedures**




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




As
      of the
      end of the period covered by this report, the Company has evaluated the
      effectiveness of the design and operation of its disclosure controls and
      procedures (“disclosure controls”). This evaluation (the “controls evaluation”)
      was done under the supervision and participation of the Company’s management,
      including its Chief Executive Officer (the “CEO”), who is the Company’s
      principal executive officer, and its Chief Financial Officer (the “CFO”), who is
      the Company’s principal financial officer. Rules adopted by the Securities and
      Exchange Commission require  t hat
      in
      this section of the report the Company present the conclusions of its principal
      executive officer and principal financial officer about the effectiveness of
      the
      Company’s disclosure controls based on and as of the date of the controls
      evaluation.






**CEO
      and CFO Certifications**




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




**Disclosure
      Controls**




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




**Conclusions
      on the Effectiveness of Controls**




Based
      on
      their evaluations as of the end of the period covered in this report, the
      Company’s CEO and CFO concluded that the Company’s disclosure controls were not
      effective at the “reasonable assurance” level. The ineffectiveness of the
      Company’s disclosure controls is due to the matters described below in “Internal
      Control over Financial Reporting.”




The
      Company’s management, including, without limitation, the CEO and CFO, does not expect
      that the Company’s disclosure controls will prevent all error and fraud. A
      control system no matter how well conceived and operated can provide only
      reasonable, not absolute assurance that the objectives of the control system
      are
      met. Further, the design of a control system must reflect the fact that there
      are resource constraints and the benefits of controls must be considered
      relative to their costs. Because of the inherent limitations of all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, within the Company have been
      detected.




**Scope
      of Evaluation**




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




**Internal
      Control over Financial Reporting**




The
      Company maintains a system of internal control over financial reporting, which
      is defined as a process designed by, or under the supervision of, the Company’s
      principal executive officer and principal financial officer, or persons
      performing similar functions, and effected by the Company’s board of directors,
      management and other personnel, to provide reasonable assurance regarding the
      reliability of financial reporting and the preparation of financial statements
      for external purposes in accordance with generally accepted accounting
      principles and includes those policies and procedures that: (1) pertain to
      the
      maintenance of records that in reasonable detail accurately and fairly reflect
      the transactions and dispositions of the assets of the Company, (2) provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company are
      being made only in accordance with authorizations of management and directors
      of
      the Company, and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use or disposition of the Company’s
      assets that could have a material effect on the financial
      statements.




-36-
 **Table
          of Contents**


**Index
        to Financial Statements**




The
      Company maintains accounting records that in reasonable detail accurately and fairly reflect
      the
      transactions and dispositions of the Company’s assets.
      T he
      Company has
      also established policies and procedures, including access controls, to p rovide
      reasonable assurance that transactions are recorded only as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures are made only in
      accordance with authorizations of management and directors. Access
      to
      assets is permitted only in accordance with management’s general or specific
      authorization. In addition, the recorded accountability for assets is compared
      with the existing assets at reasonable intervals and appropriate action is
      taken
      with respect to any differences.




As
      of the
      date of this report, t here
      have
      been certain positive changes in the Company’s internal control procedures that
      have improved those controls and related material weaknesses. Recently,
      the Company hired two additional, experienced accounting staff and enlisted
      the
      services of an experienced accounting consultant to assist with financial
      reporting issues. The Company has also begun to document and apply transactional
      and periodic controls procedures, including periodic closing check lists and
      sign-offs, permitting a better review and approval process and improved quality
      of accounting reports. The Company has also begun to prepare to meet the more
      rigid requirements of the Sarbanes-Oxley Act of 2002, performing research and
      analysis of the controls over expenditures and revenue recognition.




It
      is the
      responsibility of the Company’s management to establish and maintain adequate
      internal control over financial reporting. However, due to its small size and
      limited financial resources, the Company’s CEO and CFO have been the only
      employees principally involved in accounting and financial reporting. At the
      time of the material weakness noted below, both the bookkeeper and the CFO
      worked independently, from their homes and there was limited opportunity for
      a
      review and approval process. The Company’s audit committee has recognized that,
      as a result, there was inadequate segregation of duties within the accounting
      function, leaving most aspects of financial reporting in the hands of the CEO
      and CFO. Although the Company has recently hired two experienced employees
      to
      help with accounting duties, they are new to the Company and have taken on
      only
      limited duties. They provide some degree of segregation of duties over cash,
      however, and have begun to help write and implement documented control
      procedures. Combined with procedures already in place, and the information
      that,
      except for the items noted below, no other material errors or irregularities
      were noted during repeated re-reviews, the Company’s audit committee has
      confidence that there have been no irregularities in the Company’s financial
      reporting or in the protection of its assets.




The
      Company’s independent auditors reported to the Company’s audit committee certain
      matters involving internal controls that the Company’s independent auditors
      considered to be reportable conditions and a material weakness, under standards
      established by the American Institute of Certified Public Accountants. The
      reportable conditions and material weakness relate to the March 31, 2005,
      December 31, 2004 and 2003 financial close process and inadequate reviews and
      approvals of transactions and accounting entries as well as errors, related
      primarily to the accounting for stock options granted to consultants and
      advisory board members in lieu of compensation, which resulted in financial
      reports that are being restated for these periods. During those time periods,
      only a part-time CFO and bookkeeper provided the bulk of accounting controls
      and
      reports, with inadequate review and advisement concerning advanced accounting
      topics. The combination of this absence of a review and approval process,
      combined with the reporting errors, were sufficient to be deemed a material
      weakness. The adjustments related to these matters have been made by the Company
      in connection with the restatement of the audited financial statements for
      the
      year ended December 31, 2004 and 2003 and the quarterly statement for the period
      ended March 31, 2005. Although management has demonstrated certain improvements
      in controls over the preparation of its financial reports, as described above,
      these reported conditions and material weaknesses still exist, as the additional
      staff has only recently been hired, and new review procedures are incomplete
      and
      not all have been fully implemented. Management expects that most issues will
      be
      resolved by the time of the financial close process related to the filing of
      the
      Company’s Report on Form 10-KSB for the year ended December 31,
      2005.




Given
      these reportable conditions and material weakness, the Company’s management has
      devoted additional resources to resolving questions that arose during the audit
      review described above. The Company’s management believes that the reportable
      conditions noted above stem from the Company’s operational growth, and has
      committed to work closely with the Company’s audit committee to develop improved
      internal controls. Beginning over the summer of 2005, management committed
      to
      working with its audit committee to develop improved internal controls,
      including hiring additional accounting staff and documenting accounting control
      procedures in writing. The Company has also begun to prepare to meet the more
      rigid requirements of the Sarbanes-Oxley Act of 2002, performing analysis of
      the
      controls over expenditures and revenue recognition. Going forward, management
      is
      confident that the changes already begun, as well as other anticipated
      improvements, will correct any material issues. The costs associated with these
      efforts, primarily salaries and consulting fees, while material now, are not
      anticipated to be material to the Company when it achieves its anticipated
      revenue volumes in the coming years. Recently the Company hired two additional
      accounting staff, and it has begun to document and apply transactional and
      periodic controls procedures, permitting a better review and approval process
      and improved quality of accounting reports. The Company’s management believes
      that this new infrastructure will assist in alleviating control weaknesses
      going
      forward. As a result, the Company is confident that its financial statements
      for
      the years ended December 31, 2004 and 2003, fairly present, in all material
      respects, its financial condition and results of operations.




Commencing
      the year ending December 31, 2007, the Company will be required to document
      and
      test its internal control procedures in order to satisfy the requirements of
      Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management
      assessments of the effectiveness of the Company’s internal controls over
      financial reporting and a report by the Company’s independent registered public
      accounting firm addressing these assessments. The Company’s accounting staff is
      small, and although the Company recently begun to augment its internal controls
      procedures and expand its accounting staff, there is no guarantee that this
      effort will be adequate. During the course of its testing, the Company may
      identify deficiencies which it may not be able to remediate in time to meet
      the
      deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements
      of Section 404. In addition, if the Company fails to maintain the adequacy
      of
      its internal accounting controls, as such standards are modified, supplemented
      or amended from time to time, it may not be able to ensure that it can conclude
      on an ongoing basis that it has effective internal controls over financial
      reporting in accordance with Section 404. Failure to achieve and maintain an
      effective internal control environment could also cause investors to lose
      confidence in the Company’s reported financial information.




-37-
 **Table
          of Contents**


**Index
      to Financial Statements**




**SIGNATURES**




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




**DEBT
              RESOLVE, INC.**Dated: 
              December 8, 2005
            By:
            /s/ JAMES
              D.
              BURCHETTAJames
                D. Burchetta
              Co-Chairman, President and Chief Executive
                Officer
              (principal executive
                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, Co-Chairman
                of the Board
            
            December
                8, 2005James
                D. Burchetta/s/
                Charles S. Brofman
            
            Co-Chairman
                of the Board
            
            December
                8, 2005Charles
                S. Brofman/s/
                Alan M. Silberstein
            
            Director
            
            December
                8, 2005Alan
                M. Silberstein/s/
                Lawrence E. Dwyer, Jr.
            
            Director
            
            December
                8, 2005Lawrence
                E. Dwyer, Jr./s/
                William M. Mooney, Jr.
            
            Director
            
            December
                8, 2005William
                M. Mooney, Jr.





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