UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


Washington
      D.C., 20549







FORM
      10-QSB









(Mark
      One)


x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OFTHE
                SECURITIES EXCHANGE ACT OF 1934  For
              the quarterly period ended June 30, 2008




o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OFTHE
                SECURITIES EXCHANGE ACT OF 1934  For
              the transition
              period                         to




Commission
      file number: 001-15835




**US
      Dataworks, Inc.**


(Exact
      name of small business issuer as specified in its charter)




**Nevada**
            
            **84-1290152**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                employer identification number)**One
                Sugar Creek Center Boulevard,**
              **Fifth
                Floor**
              **Sugar
                Land, Texas**
            
            **77478**(Address
                of principal executive offices)
            
            (Zip
                Code)





Issuer’s
      telephone number: (281) 504-8000




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




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). YES oNO x




Number
      of
      shares of Common Stock outstanding as of August 1, 2008: 32,368,217




Transitional
      Small Business Disclosure Format (Check one): YES oNO x










**US
      DATAWORKS, INC.**





TABLE
      OF CONTENTS





FORM
      10-QSB





QUARTERLY
      PERIOD ENDED JUNE 30, 2008




PagePART
                  I - FINANCIAL INFORMATION
              3Item
                  1.
              Financial
                  Statements
              3Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation.
              18Item
                  3.
              Controls
                  and Procedures
              27PART
                  II - OTHER INFORMATION
              27Item
                  1.
              Legal
                  Proceedings
              27Item
                  5.
              Other
                  Information
              27Item
                  6.
              Exhibits
              27









**PART
      I -** **FINANCIAL
      INFORMATION**




**Item
      1.**  **Financial
      Statements**




**US
                DATAWORKS, INC.**
              
              **BALANCE
                SHEET**
              
              **June
                30****,
                2008**
              
              **(Unaudited)**




**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            1,067,318Accounts
                receivable, trade
            
            
            1,088,678Prepaid
                expenses and other current assets
            
            
            212,904Total
                current assets
            
            
            2,368,900Property
                and equipment, net
            
            
            430,635Goodwill,
                net
            
            
            4,020,698Other
                assets
            
            
            327,387Total
                assets
            
            $
            7,147,620




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


3





**US
                DATAWORKS, INC.**
              
              **BALANCE
                SHEET**
              
              **June
                30, 2008**
              
              **(Unaudited)**




**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Current
                portion of long term debt
            
            $
            35,279Derivative –
                compound embedded
            
            
            359,527Derivative
                - warrants
            
            
            220,674Deferred
                revenue
            
            
            470,848Accounts
                payable
            
            
            383,630Accrued
                interest – related party
            
            
            29,095Accrued
                expenses
            
            
            235,812Note
                payable – related party
            
            
            500,000Convertible
                promissory notes, net of unamortized discount of $
                1,830,101
            
            
            2,169,899Total
                current liabilities
            
            
            4,404,764Long
                term debt
            
            
            44,098Total
                liabilities
            
            
            4,448,862Commitments
                and ContingenciesStockholders’
                Equity:Convertible
                Series B preferred stock, $0.0001 par value700,000
                shares authorized, 549,667 shares issued and outstanding $0.75 liquidation
                preference, dividends of $303,879 in arrears
            
            
            55Common
                stock, $0.0001 par value90,000,000
                shares authorized and 32,262,962 shares issued and
                outstanding
            
            
            3,226Additional
                paid-in capital
            
            
            64,864,830Unissued
                common stock
            
            
            31,367Accumulated
                deficit
            
            
            (62,200,720
            )Total
                stockholders’ equity
            
            
            2,698,758Total
                liabilities and stockholders’ equity
            
            $
            7,147,620




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




4




**US
                DATAWORKS, INC.**
              
              **UNAUDITED
                CONDENSED STATEMENTS OF OPERATIONS**
              
              **For
                the Three Months Ended June 30,****2008**
            
            **2007**Revenues:Software
                licensing revenues
            
            $
            30,000
            
            $
            70,000Software
                transactional revenues
            
            
            537,749
            
            
            389,508Software
                maintenance revenues
            
            
            228,874
            
            
            191,213Professional
                services revenues
            
            
            1,272,426
            
            
            578,350Total
                revenues
            
            
            2,069,049
            
            
            1,229,071Cost
                of sales
            
            
            537,494
            
            
            385,959Gross
                profit
            
            
            1,531,555
            
            
            843,112Operating
                expenses:General
                and administrative
            
            
            1,376,356
            
            
            1,641,134Depreciation
                and amortization
            
            
            48,051
            
            
            39,050Total
                operating expense
            
            
            1,424,407
            
            
            1,680,184Income/(loss)
                from operations
            
            
            107,148
            
            
            (837,072
            )Other
                income (expense)Interest
                expense
            
            
            (303,716
            )
            
            (6,401
            )Interest
                expense – related party
            
            
            (10,907
            )
            
            (10,938
            )Other
                income
            
            
            56,914
            
            
            —Gain/(loss)
                on change in value of derivative liabilities
            
            
            41,080
            
            
            (14,853
            )Total
                other income/(expense), net
            
            
            (216,629
            )
            
            (32,192
            )Net
                loss
            
            $
            (109,481
            )
            $
            (869,264
            )Basic
                and diluted loss per share
            
            $
            (0.00
            )
            $
            (0.03
            )Basic
                and diluted weighted-average shares outstanding
            
            
            32,137,687
            
            
            31,300,462




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




5




**US
      DATAWORKS, INC.**





**UNAUDITED
      CONDENSED STATEMENTS OF CASH FLOW**





**For
      the Three Months Ended June 30,**




**2008**
            
            **2007**Cash
                flows from operating activities:-Net
                loss
            
            
            (109,481
            )
            
            (869,265
            )Adjustments
                to reconcile net loss to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            48,051
            
            
            39,050Amortization
                of note discount on convertible promissory notes
            
            
            165,535
            
            
            3⁄4Amortization
                of deferred financing costs
            
            
            29,737
            
            
            3⁄4Stock
                based compensation
            
            
            117,239
            
            
            70,738(Gain)/loss
                on change in value of derivative liabilities
            
            
            (41,080
            )
            
            14,853Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (232,417
            )
            
            900,921Prepaid
                expenses and other current assets
            
            
            (66,988
            )
            
            (90,980
            )Deferred
                revenue
            
            
            270,015
            
            
            (111,214
            )Accounts
                payable
            
            
            111,953
            
            
            133,515Accrued
                expenses
            
            
            (119,819
            )
            
            (35,683
            )Net
                cash provided by operating activities
            
            
            172,745
            
            
            51,935Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            3⁄4
            
            
            (18,171
            )Net
                cash used in investing activities
            
            
            3⁄4
            
            
            (18,171
            )




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


6


**US
      DATAWORKS, INC.**





**UNAUDITED
      CONDENSED STATEMENTS OF CASH FLOW**





**For
      the Three Months Ended June 30,**







**2008**
            
            **2007**Cash
                flows from financing activities:Payments
                on note payable
            
            
            (8,820
            )
            
            3⁄4Net
                cash used by financing activities
            
            
            (8,820
            )
            
            3⁄4Net
                increase in cash and cash equivalents
            
            
            163,925
            
            
            33,764Cash
                and cash equivalents, beginning of period
            
            
            903,393
            
            
            140,276Cash
                and cash equivalents, end of period
            
            
            1,067,318
            
            
            174,040Supplemental
                disclosures of cash flow informationInterest
                paid
            
            
            96,725
            
            
            12,618




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


7


**US
      DATAWORKS, INC.**




**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**





**1.**
            **Organization
                and Business**




**General**




US
      Dataworks, Inc. (the “Company”), a Nevada corporation, develops, markets, and
      supports payment processing software for the financial services industry. Its
      customer base includes many of the largest financial institutions as well as
      credit card companies, government institutions, and high-volume merchants in
      the
      United States. The Company was formerly known as Sonicport, Inc.




**2.**
                **Summary
                    of Significant Accounting
                    Policies**




INTERIM
      FINANCIAL STATEMENTS




The
      accompanying interim unaudited condensed financial statements included herein
      have been prepared by the Company pursuant to the rules and regulations of
      the
      Securities and Exchange Commission. The financial statements reflect all
      adjustments that are, in the opinion of management, necessary to fairly present
      such information. All such adjustments are of a normal recurring nature.
      Although the Company believes that the disclosures are adequate to make the
      information presented not misleading, certain information and footnote
      disclosures, including a description of significant accounting policies normally
      included in financial statements prepared in accordance with accounting
      principles generally accepted in the United States of America (“US GAAP”), have
      been condensed or omitted pursuant to such rules and regulations.




These
      financial statements should be read in conjunction with the audited financial
      statements and the notes thereto included in the Company’s 2008 Annual Report.
      The results of operations for interim periods are not necessarily indicative
      of
      the results for any subsequent quarter or the entire year ending March 31,
      2009.




**Revenue
      Recognition**





The
      Company recognizes revenues associated with our software services in accordance
      with the provisions of the American Institute of Certified Public Accountants’
Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”). The
      Company licenses its software products under nonexclusive, nontransferable
      license agreements. These arrangements do not require significant production,
      modification, or customization. Therefore, revenue is recognized when such
      a
      license agreement has been signed, delivery of the software product has
      occurred, the related fee is fixed or determinable, and collectibility is
      probable.





In
      certain instances, the Company licenses its software on a transactional fee
      basis in lieu of an up-front licensing fee. In these arrangements, the customer
      is charged a fee based upon the number of items processed by the software and
      the Company recognizes revenue as these transactions occur. The transaction
      fee
      also includes the provision of standard maintenance and support services as
      well
      as product upgrades should such upgrades become available.





If
      professional services were provided in conjunction with the installation of
      the
      software licensed, revenue is recognized when these services have been
      provided.





In
      certain instances, the Company will recognize revenue on a percent of completion
      basis for the portion of professional services related to customized customer
      projects that have been completed but are not yet deliverable to customer.





For
      license agreements that include a separately identifiable fee for contracted
      maintenance services, such maintenance revenues are recognized on a
      straight-line basis over the life of the maintenance agreement noted in the
      agreement, but following any installation period of the software.





8





**Goodwill**





The
      goodwill recorded on the Company’s books is from the acquisition of US
      Dataworks, Inc. in fiscal year 2001, which remains the Company’s single
      reporting unit. Statement of Financial Accounting Standards
      (“SFAS”) No. 142 “Goodwill and Other Intangible Assets,” requires
      goodwill for each reporting unit of an entity be tested for impairment by
      comparing the fair value of each reporting unit with its carrying value. Fair
      value is determined using a combination of the discounted cash flow, market
      multiple and market capitalization valuation approaches. Significant estimates
      used in the methodologies include estimates of future cash flows, future
      short-term and long-term growth rates, weighted average cost of capital and
      estimates of market multiples for each reportable unit. On an ongoing basis,
      absent any impairment indicators, the Company performs impairment tests annually
      during the fourth quarter.





SFAS
      No.
      142 requires goodwill to be tested annually, typically performed during the
      fourth quarter, and between annual tests if events occur or circumstances change
      that would more likely than not reduce the fair value of the reportable unit
      below its carrying amount. The Company recorded an impairment of goodwill of
      $10,112,931 for the year ended March 31, 2008 and did not have an impairment
      of
      goodwill to record for the year ended March 31, 2007.




**Convertible
      Debt Financing – Derivative Liabilities**





The
      Company reviews the terms of convertible debt and equity instruments issued
      to
      determine whether there are embedded derivative instruments, including embedded
      conversion options, that are required to be bifurcated and accounted for
      separately as a derivative financial instrument. In circumstances where the
      convertible instrument contains more than one embedded derivative instrument,
      including the conversion option, that is required to be bifurcated, the
      bifurcated derivative instruments are accounted for as a single, compound
      derivative instrument. Also, in connection with the sale of convertible debt
      and
      equity instruments, the Company may issue freestanding options or warrants
      that
      may, depending on their terms, be accounted for as derivative instrument
      liabilities, rather than as equity.





In
      accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities,” as amended, the convertible debt holder’s conversion right
      provision, interest rate adjustment provision, liquidated damages clause, cash
      premium option, and the redemption option (collectively, the debt features)
      contained in the terms governing the convertible notes are not clearly and
      closely related to the characteristics of the notes. Accordingly, the features
      qualify as embedded derivative instruments at issuance and, because they do
      not
      qualify for any scope exception within SFAS No. 133, they are required by SFAS
      No. 133 to be accounted for separately from the debt instrument and recorded
      as
      derivative instrument liabilities.





**Stock
      Options**




The
      Company’s financial statements as of and for the three months ended June 30,
      2008 and 2007, reflect the impact of SFAS No. 123R. Stock-based compensation
      expense recognized under SFAS No. 123R for the three months ended June 30,
      2008
      was $117,239, which consists of stock-based compensation expense related to
      employee and director stock options and restricted stock issuances.




SFAS
      No.
      123R requires companies to estimate the fair value of share-based payment awards
      on the date of grant using an option-pricing model. The value of the portion
      of
      the award that is ultimately expected to vest is recognized as expense over
      the
      requisite service periods in the Company’s statement of operations.




For
      purposes of proforma disclosure, the estimated fair value of the options is
      included in expense over the option’s vesting period or expected life. The
      Company’s proforma information for the three months ended June 30, 2008 and 2007
      is as follows:




9




**For the Three Months Ended**
              **June 30,****2008**
            
            **2007**Net
                loss as reported
            
            $
            (109,481
            )
            $
            (869,284
            )Add
                stock-based employee compensation expense included in net loss as
                reported, net of related tax effects
            
            $
            117,239
            
            $
            70,738Deduct
                stock-based employee compensation expense determined under the fair
                value
                based method for all awards, net of related tax effectsNet
                income/(loss); pro forma
            
            $
            7,758
            
            $
            (798,526
            )Basic
                and diluted income/(loss) per share, as reported
            
            $
            (0.00
            )
            $
            (0.03
            )Basic
                and diluted income/(loss) per share, pro forma
            
            $
            (0.00
            )
            $
            (0.03
            )




Stock-based
      compensation expense recognized during the period is based on the value of
      the
      portion of share-based payment awards that is ultimately expected to vest during
      the period. Compensation expense recognized for all employee stock options
      awards granted is recognized over their respective vesting periods unless the
      vesting period is graded. As stock-based compensation expense recognized in
      the
      statement of operations for the three months ended June 30, 2008 is based on
      awards ultimately expected to vest, it has been reduced for estimated
      forfeitures.





The
      Company uses the Black-Scholes option valuation model, which requires management
      to make certain assumptions for estimating the fair value of employee stock
      options granted at the date of the grant. There were no options granted during
      the period ended June 30, 2008. In determining the compensation cost of the
      options granted during the three months ended June 30, 2007, as specified by
      SFAS No. 123R, the fair value of each option grant has been estimated on the
      date of grant using the Black-Scholes pricing model and the weighted average
      assumptions used in these calculations are summarized as follows:





**For the Three**
              **Months Ended**
              **June 30,****2007**Risk-free
                Interest Rate
            
            
            4.67
            %Expected
                Life of Options Granted
            
            
            3 yearsExpected
                Volatility
            
            
            74
            %Expected
                Dividend Yield
            
            
            0Expected
                forfeiture rate
            
            
            30
            %




As
      of
      June 30, 2008, there was approximately $34,206 of total unrecognized
      compensation cost related to nonvested share-based compensation arrangements,
      which is expected to be recognized over a period of 3 years.





**Loss
      per Share**




The
      Company calculates loss per share in accordance with SFAS No. 128, “Earnings per
      Share.” Basic loss per share is computed by dividing the net loss by the
      weighted-average number of common shares outstanding. Diluted loss per share
      is
      computed in a similar manner to basic loss per share except that the denominator
      is increased to include the number of additional common shares that would have
      been outstanding if the potential common stock equivalents had been issued
      and
      if the additional common shares were dilutive.




10




The
      following potential common stock equivalents have been excluded from the
      computation of diluted net loss per share for the periods presented because
      the
      effect would have been anti-dilutive (options and warrants typically convert
      on
      a one-for-one basis, see conversion details of the preferred stock stated below
      for the common stock shares issuable upon conversion):




**For the Three Months Ended**
              ********
              ****
              **June 30,**
              ********
              ****
              **2008**
              ****
              **2007**Options
                  outstanding under the Company’s stock option plans
              
              
              6,657,153
              
              
              6,627,349Options
                  granted outside the Company’s stock option plans
              
              
              1,160,000
              
              
              1,160,000Warrants
                  issued in conjunction with private placements
              
              
              8,839,364
              
              
              5,438,683Warrants
                  issued as a financing cost for notes payableand
                  convertible notes payable
              
              
              1,891,250
              
              
              1,691,250Warrants
                  issued for services rendered and litigation settlement
              
              
              300,000
              
              
              180,769Convertible
                  Series B preferred stock (a)
              
              
              109,933
              
              
              109,933




(a)
      The
      Series B preferred stock is convertible into shares of common stock at a
      conversion price of $3.75 per share.





**Estimates**




The
      preparation of financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenue and expenses during the reporting
      period. Actual results could differ from those estimates.




**Concentrations
      of Credit Risk**




The
      Company sells its products throughout the United States and extends credit
      to
      its customers. It also performs ongoing credit evaluations of such customers.
      The Company does not obtain collateral to secure its accounts receivable. The
      Company evaluates its accounts receivable on a regular basis for collectibility
      and provides for an allowance for potential credit losses as deemed
      necessary.




Two
      of
      our customers accounted for 51% and 20% of our net revenues for the three months
      ended June 30, 2008. Four of our customers accounted for 25%, 24%, 13% and
      12%
      of our net revenues for the three months ended June 30, 2007.




At
      June
      30, 2008, amounts due from significant customers accounted for 68% of accounts
      receivable.




**3.**
            **Property
                and Equipment**




Property
      and equipment as of June 30, 2008 consisted of the following:





Furniture
                and fixtures
            
            $
            99,535Office
                and telephone equipment
            
            
            182,275Computer
                equipment
            
            
            720,005Computer
                software
            
            
            1,271,098Leasehold
                improvements
            
            
            64,7322,337,645Less
                accumulated depreciation and amortization
            
            
            (1,907,010
            )Total
            
            $
            430,635




11




Depreciation
      and amortization expense for the three months ended June 30, 2008 and 2007
      was
      $48,051and $39,050, respectively.





**4.**
            **Convertible
                Promissory Notes**




Convertible
      promissory notes at June 30, 2008 consisted of the following:





Senior
                Secured Convertible Notes, interest at 6-month Libor plus 500 Basis
                points, determined quarterly, (currently @ 6/30/08, 7.2616%), $4,000,000
                principal due November 13, 2010, net of unamortized discount of
                $1,830,101
            
            $
            2,169,899




Convertible
      promissory note with interest at 10% per annum





This
      note
      is an amendment and restatement of a note in the same principal amount
      originally dated September 15, 2004. The amended note was effective September
      15, 2005 and extended the principal payment originally due September 15, 2005
      for one year. In consideration of this amendment, the Company issued the holder
      a common stock purchase warrant to purchase up to 650,000 shares of the
      Company’s common stock at an exercise price of $0.59 per share. The warrant will
      expire on September 15, 2008.





Convertible
      promissory note issued June 16, 2005 with $70,000 Original Issue
      Discount





On
      June
      16, 2005, the Company entered into a Securities Purchase Agreement with an
      institutional investor (the “Debenture Agreement”) for the sale of a convertible
      debenture with a principal amount of $770,000 and an original issue discount
      of
      $70,000 for gross proceeds of $700,000. This convertible note was paid in full
      in March 2007 and as such was removed from the Company’s financial statements in
      fiscal year 2008.





In
      connection with the Debenture Agreement, the Company issued Long Term warrants
      to the institutional investor. The Long Term Warrants allow the institutional
      investor to purchase an aggregate of 471,154 shares of the Company’s common
      stock with an exercise price of $0.572 per share exercisable at anytime through
      June 16, 2008. In June 2008, the warrants associated with this note expired
      without being exercised and the Company no longer has any liability associated
      with this note at June 30, 2008.





Senior
      Secured Convertible promissory notes due November 13, 2010





On
      November 13, 2007, the Company secured certain financing from certain
      institutional investors (collectively, the “Investors”) in the form of senior
      secured convertible notes (the “Notes”) for an aggregate of $4,000,000. The
      interest payable on the Notes is equal to the 6-month LIBOR rate plus five
      hundred basis points (or 9.7375% at the time of subscription) and is
      recalculated as of the first day of each calendar quarter. The Notes may be
      converted at any time into shares of the Company’s common stock (“Common Stock”)
      at the conversion price of $0.43 per share, which is equal to 110% of the dollar
      volume-weighted average price for the Common Stock on November 12, 2007, subject
      to anti-dilution provisions; provided, however, the Investor may not
      beneficially own more than 4.99% (the “Maximum Percentage”) of outstanding
      shares of Common Stock following such conversion. At any time, the Investor
      may
      decrease or increase this Maximum Percentage to any percentage not to exceed
      9.99%. In the event of a Fundamental Transaction (as described in the Notes)
      where greater than 50% of the Company’s assets or equity is transferred, the
      Investors may redeem the note for either 125% of its principal balance or the
      value of the Common Stock as converted (such Common Stock as converted under
      the
      Notes, “Conversion Shares”).





In
      addition, on each of the 9 month and 18 month anniversary of the closing, the
      Investors may request that the Company redeem a portion of the Notes. The Notes
      have a maturity date of November 13, 2010. The Notes are secured by the Security
      Agreement, dated November 13, 2007, by and between the Company and the Investors
      (the “Security Agreement”), pursuant to which the Company granted the Investors
      a security interest in all its personal property, whether now owned or hereafter
      acquired, including but not limited to, all accounts, copyrights, trademarks,
      licenses, equipment and all proceeds as from such collateral.





12




The
      Investors also entered into a Put Agreement (the “Put Agreement”) with the
      Company’s Chief Executive Officer, and a member of the Company’s Board of
      Directors (collectively, the “Put Grantors”). Pursuant to the Put Agreement,
      following August 13, 2008, under certain circumstances the Investors may require
      one or more of the Put Grantors to purchase all or a portion of the Note,
      including any accrued interest or late charges.





In
      consideration for entering into the Put Agreement, the Company is paying the
      Put
      Grantors a fee (the “Put Grantor Fee”) equal to: (i) an initial installment of
      two percent (2%) of the outstanding Note principal for initial six months of
      the
      Note’s term; (ii) then, an additional fee equal to two percent (2%) of the
      outstanding Note principal for the following twelve months; and, (iii) a final
      installment equal to two percent (2%) of the outstanding Note principal for
      the
      remaining 18 months of the Note’s term. The Put Grantor Fee will be shared
      equally by the Put Grantors and will accrue immediately upon the start of each
      of the time periods described by subsection (i), (ii) and (iii), above. The
      Put
      Grantor Fee is not payable until after the complete satisfaction of the
      Note.





In
      connection with the issuance of the Notes, the Company has also issued to the
      Investors warrants (the “Warrants”) to purchase an aggregate of 4,651,162 shares
      of Common Stock (such Common Stock exercisable from the Warrants, “Warrant
      Shares”) at the exercise price of $0.43 per share, which is equal to 110% of the
      dollar volume-weighted average price for the Common Stock on November 12, 2007,
      subject to anti-dilution provisions; provided, however, the Investor may not
      beneficially own more than the Maximum Percentage following such exercise.
      The
      Warrant may be exercised at any time until 11:59 p.m., New York time on November
      13, 2012.





The
      Company is obligated to reserve for issuance upon conversion of the Notes and
      exercise of the Warrants shares of Common Stock equal to at least 130% of the
      Conversion Shares and Warrant Shares. The Company filed a registration statement
      in December 2007 to register the Conversion Shares and Warrant Shares. As of
      June 30, 2008, this registration statement has not been declared
      effective.





In
      accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging
      Activities,” the debt features contained in the terms governing the notes are
      not clearly and closely related to the characteristics of the notes.
      Accordingly, the debt features qualify as embedded derivative instruments at
      issuance and, because they did not qualify for any scope exception within SFAS
      133, they were required to be accounted for separately from the debt instrument
      and recorded as derivative financial instruments.





At
      the
      date of issuance, the embedded debt feature had an estimated initial fair value
      of $960,714, which was recorded as a discount to the convertible notes and
      derivative liability on our balance sheet. In subsequent periods, if the price
      of the security changes, the embedded derivative financial instrument related
      to
      the debt features will be adjusted to the fair value with the corresponding
      charge or credit to other income/(expense). The estimated fair value of the
      debt
      features was determined using the probability weighted averaged discounted
      cash
      flows / Lattice Model with a closing price of $0.43, a conversion price as
      defined in the respective note agreement and a period of three years. Concerning
      the debt features, the model uses several assumptions including: projected
      stock
      price volatility, annual stock price growth rate, interest rate projections,
      no
      registration default, alternative financing availability, default status, holder
      redeeming under default, ownership limitation, warrant exercise reset, fixed
      conversion reset and trading volume to determine the estimated fair value of
      the
      derivative liability. The derivative liability at June 30, 2008, increased
      to a
      fair value of $359,527, due in part to a decrease in the market value of the
      company’s common stock, which resulted in an other income item of
      $5,778.





The
      warrants included with this note for purchase of the Company’s common stock had
      an initial value of $1,279,549. This amount has been classified as a derivative
      financial instrument and recorded as discount to the convertible notes and
      derivative liability on our balance sheet in accordance with SFAS No. 133.
      The
      estimated fair value of the warrants at the date of issuance was determined
      using the Black-Scholes option-pricing model with a closing price of $0.43,
      the
      respective exercise price of the warrants, a 5 year term, and an 80% volatility
      factor relative to the date of issuance. The model uses several assumptions
      including: historical stock price volatility, approximate risk-free interest
      rate (3.84%), remaining term to maturity, and the closing price of the company’s
      common stock to determine the estimated fair value of the derivative liability.
      In accordance with the provisions of SFAS No. 133, the Company is required
      to
      adjust the carrying value of the instrument to its fair value at each balance
      sheet date and recognize any change since the prior balance sheet date as a
      component of other income/ (expense) on its statement of operations. The warrant
      derivative liability at June 30, 2008, decreased to a fair value of $220,674,
      due in part to a decrease in the market value of the company’s common stock,
      which resulted in an other income item of $46,856.





13




The
      recorded value of the warrants can fluctuate significantly based on fluctuations
      in the market value of the underlying securities of the issuer of the warrants,
      as well as in the volatility of the stock price during the term used for
      observation and the term remaining for the warrants.





In June
      2008, the Company received letters from each of the Investors purporting to
      be Event of Default Redemption Notices (the “Notices”) pursuant to the Notes.
      According to the Notices, the purported Event of Default was the failure of
      the
      registration statement filed by the Company in December 2007 to register
      the Conversion Shares and the Warrant Shares to be declared effective by May
      12,
      2008.




The Company
      subsequently informed the Investors that, for reasons described to the
      Investors, the Notices were defective and requested that each immediately
      withdraw their respective Notice.





5.
            **Accounts
                Receivable Facility**




On
      September 27, 2006, the Company entered into a Purchase and Sale Agreement
      with
      Catalyst Finance, L.P. (“Catalyst”) for sale of certain of its accounts
      receivables. The Company’s borrowing costs under this Agreement range from 1.25%
      to 20% of the gross amount of the receivables sold to Catalyst based on the
      timing of collection. The maximum funds available under the agreement are all
      available accounts receivables as agreed to by Catalyst and the Company. The
      agreement allows for Catalyst to request repurchase of an account receivable
      under certain conditions. The
      Agreement was terminated by the Company on August 2, 2007. For the
      three months ending June 30, 2007, the Company sold $238,000 in receivables
      under the agreement, which yielded a loss on the sale of these receivables
      of
      $8,935.





6.
            **Commitments
                and Contingencies**




**Employment
      Agreements**




On
      May 1
      and May 15, 2008, the Company accepted the resignation of Messrs. John Figone
      and Terry Stepanik, respectively, and as part of the Company’s restructuring, on
      June 12, 2008, it entered into a new Employment Agreement (the ‘Agreement”) with
      Mr. Mario Villarreal in connection with his promotion to President and Chief
      Operating Officer. Under the Agreement Mr. Villarreal will receive an annual
      base salary of $185,000 for a term of one year. If Mr. Villarreal is terminated,
      other than for cause, death or disability, or resigns within 60 days following
      a
      material reduction in duties or a material reduction in compensation within
      six
      months following a change of control, Mr. Villarreal is entitled to receive
      a
      lump sum payment equal to one-half (0.5) times his annual base salary and any
      unpaid base salary and bonus, subject to compliance with certain ongoing
      obligations and the delivery of a release to us.




14




**7.**
            **Stockholders’
                Equity**




**Preferred
      Stock**




The
      Company has 10,000,000 authorized shares of $0.0001 par value preferred stock.
      The preferred stock may be issued in series, from time to time, with such
      designations, rights, preferences, and limitations as the Board of Directors
      may
      determine by resolution.




**Convertible
      Series B Preferred Stock**




The
      Company has 700,000 authorized shares of $0.0001 par value convertible Series
      B
      preferred stock. The Series B has a liquidation preference of $3.75 per share
      and carries a 10% cumulative dividend payable each March 1 and September 1.
      The
      Series B is convertible upon issuance into common stock at $3.75 per share.
      The
      Company has the right to redeem the Series B at any time after issuance at
      a
      redemption price of $4.15 per share, plus any accrued but unpaid
      dividends.




At
      June
      30, 2008, there were accumulated, undeclared dividends in arrears of $303,879
      or
      $2.76 per share.




**Stock
      Options**




In
      August
      1999, the Company implemented its 1999 Stock Option Plan (the “1999 Plan”). In
      August 2000, the Company’s Board of Directors approved the 2000 Stock Option
      Plan (the “2000 Plan”), which amends and restates the 1999 Plan. Under the 2000
      Plan, the maximum aggregate number of shares which may be granted is 6,000,000.
      The exercise price must not be less than the fair market value on the date
      of
      grant of the option. The options vest in varying increments over varying periods
      and expire 10 years from the date of vesting. In the case of incentive stock
      options granted to any 10% owners of the Company, the exercise price must not
      be
      less than 100% of the fair market value on the date of grant. Such incentive
      stock options vest in varying increments and expire five years from the date
      of
      vesting.





During
      the three months ended June 30, 2008 the Company did not grant any stock
      options.




The
      following table summarizes certain information relative to stock
      options:




2000
                  Stock Option Plan
              
              Outside
                  of PlanShares
              
              Weighted-
                Average Exercise
                Price
              
              Shares
              
              Weighted-Average
                Exercise
                  PriceOutstanding,
                  March 31, 2008
              
              
              7,521,349
              
              $
              0.70
              
              
              1,160,000
              
              $
              1.02Granted
              
              
              3⁄4
              
              
              3⁄4
              
              
              3⁄4
              
              
              3⁄4Exercised
              
              
              3⁄4
              
              
              3⁄4
              
              
              3⁄4
              
              
              3⁄4Forfeited/canceled
              
              
              864,196
              
              $
              0.47
              
              
              3⁄4
              
              
              3⁄4Outstanding,
                  June 30, 2008
              
              
              6,657,153
              
              $
              0.73
              
              
              1,160,000
              
              $
              1.02Exercisable,
                  June 30, 2008
              
              
              5,769,325
              
              $
              0.71
              
              
              1,160,000
              
              $
              1.02




15




The
      weighted-average remaining life and the weighted-average exercise price of
      all
      of the options outstanding at June 30, 2008 were 6.9 years and $0.77,
      respectively. The exercise prices for the options outstanding at June 30, 2008
      ranged from $0.15 to $6.25, and information relating to these options is as
      follows:




Range
                of
              Exercise
              Prices
            
            Stock Options
              Outstanding
            
            Stock
              Options
              Exercisable
            
            Weighted-Average
              Remaining
              Contractual Life
            
            Weighted-
              Average
              Exercise Price
            
            Weighted-
              Average Exercise
              Price of Options
              Exercisable$0.15 – 0.80
            
            
            5,306,317
            
            
            4,418,489
            
            
            7.34
                years
            
            $
            0.55
            
            $
            0.49$0.81 – 1.35
            
            
            1,771,836
            
            
            1,771,836
            
            
            6.10
                years
            
            $
            0.93
            
            $
            0.93$1.36 – 6.25
            
            
            739,000
            
            
            739,000
            
            
            5.60
                years
            
            $
            1.96
            
            $
            1.967,817,153
            
            
            6,929,325




**8.**
            **Fair
                Value Measurements**




The
      Company adopted Statement of Financial Accounting Standards No. 157 “Fair
      Value Measurements” (“SFAS 157”) on April 1, 2008.  SFAS 157, among
      other things, defines fair value, establishes a consistent framework for
      measuring fair value and expands disclosure for each major asset and liability
      category measured at fair value on either a recurring or nonrecurring
      basis.  SFAS 157 clarifies that fair value is an exit price,
      representing the amount that would be received to sell an asset or paid to
      transfer a liability in an orderly transaction between market
      participants.  As such, fair value is a market-based measurement that
      should be determined based on assumptions that market participants would use
      in
      pricing an asset or liability.  As a basis for considering such
      assumptions, SFAS 157 establishes a three-tier fair value hierarchy, which
      prioritizes the inputs used in measuring fair value as follows:





Level
                1.
            
            Observable
                inputs such as quoted prices in active markets for identical assets
                or
                liabilities;Level
                2.
            
            Inputs,
                other than quoted prices included within Level 1, that are observable
                either directly or indirectly; andLevel
                3.
            
            Unobservable
                inputs in which there is little or no market data, which require
                the
                reporting entity to develop its own
                assumptions.





As
      of
      June 30, 2008, the Company’s assets and liabilities that are measured at fair
      value on a recurring basis include the following:





**Fair
                Value Measurements Using****Total**
            
            **Quoted Prices in**
              **Active Markets**
              **(Level 1)**
            
            **Significant**
              **Other**
              **Observable**
              **Inputs**
              **(Level 2)**
            
            **Significant**
              **Unobservable Inputs**
              **(Level 3)**Derivative
                liability
            
            $
            359,527
            
            
            —
            
            $
            359,527
            
            
            —Warrant
                liability
            
            $
            220,674
            
            
            —
            
            $
            220,674
            
            
            —




16




**9.**
            **Liquidity**




The
      Company has incurred significant losses and negative cash flows from operations
      for the last two fiscal years. We have obtained our required cash resources
      through the sale of debt and equity securities. We may not operate profitably
      in
      the future and may be required to continue the sale of debt and equity
      securities to finance our operations.





We
      have
      specific plans to address our financial situation as follows:





·
            We
                believe that the demand for our software and professional services
                will
                continue to expand as the United States market adopts the new payment
                processing opportunities available under changing regulations such
                as the
                Check Clearing Act for the 21stCentury, and NACHA’s back office conversion, which allows the conversion
                of paper checks in the back offices of retail merchants and government.
                Increased demand for our solutions, including our recently introduced
                Clearingworks product, has led to increased cash flows from up-front
                license fees, transaction-based contract fees and increases in
                professional services revenues.





·
            We
                have entered into a strategic alliance with one of the largest merchant
                service providers (MSP), that will allow this MSP to sell Clearingworks
                as
                part of its ARC and back office conversion services.





·
            We
                have undertaken a staff restructuring in an effort to reduce our
                salary
                and benefit expense in the coming year.





·
            We
                have renewed our professional service contract with a major credit
                card
                company and with an arm of the federal government for an additional
                year.





·
            We
                have entered into an agreement with a major business process outsourcer
                (BPO), which will enable us to significantly increase our transactional
                revenues in the coming fiscal year as more billers outsource their
                work to
                BPO’s




There
      can
      be no assurance that our planned activities will be successful or that we will
      ultimately attain profitability. Our long term viability depends on our ability
      to obtain adequate sources of debt or equity funding to fund the continuation
      of
      our business operations and to ultimately achieve adequate profitability and
      cash flows to sustain our operations. We will need to increase revenues from
      software licenses, transaction-based software license contracts and professional
      services agreements to become profitable.





**10.**
            **Subsequent
                Events******




On
      July
      23, 2008, the Company received notice from the staff of the American Stock
      Exchange (“AMEX”) indicating that it was not in compliance
      with certain continued listing standards of the AMEX Company Guide in
      that its stockholders’ equity is less than $4,000,000 and it had
      losses from continuing operations and net losses in three of its four most
      recent fiscal years (Section 1003(a)(ii)) and because its stockholders’
equity is less than $6,000,000 and it had losses from continuing operations
      and net losses in its five most recent fiscal years (Section 1003(a)(iii)).
      In
      addition, AMEX advised the Company that, in accordance with Section
      1003(f)(v) of the AMEX Company Guide, it must effect a reverse stock split
      to address its low stock price. Failure to effect a reverse split within a
      reasonable amount of time could result in suspension or delisting of its
      common stock. The Company intends to submit to AMEX a plan advising
      AMEX of action it has taken, or will take, to bring it in compliance
      with Sections 1003(a)(ii) and 1003(a)(iii) of the AMEX Company Guide within
      a
      maximum of 18 months from July 23, 2008. If it does not submit a plan by
      August 22, 2008, or submits a plan that is not accepted, it may be subject
      to delisting procedures. Additionally, if a plan is accepted but it
      is not in compliance with any continued listing standards by January 22,
      2010, it could be subject to delisting procedures. In the event
      that its common stock is delisted from AMEX its market value and liquidity
      could be materially adversely affected.




On
      July 15, 2008, the Company gave notice to the
      Investors of their respective rights of optional redemption of the Notes on
      August 13, 2008. In respect thereto, the Company received optional
      redemption notices from each of the Investors. On August 13, 2008, the Company
      repaid principal of $4,000,000 and $38,807.50 of interest accrued on
      the principal from and including July 1, 2008 through August 12, 2008. There
      is
      a dispute with the Investors regarding whether a redemption
      premium, penalty interest and other amounts are owed to the
      Investors. The Company cannot assure you regarding the outcome of this
      dispute or that additional amounts will not be payable under the
      Notes.


In
        connection with the redemption of the Notes, the Company entered into
        a Note Purchase Agreement and issued an aggregate of $3,703,500 Senior Secured
        Notes due August 13, 2009 (“Refinance Notes”). The Refinance Notes were
        purchased by the Company’s Chief Executive Officer and a member of its Board of
        Directors (“Holders”). The Refinance Notes bear interest at a rate of 12% per
        annum with interest payments due in arrears monthly.
  Pursuant
        to the Refinance Notes, if the Company fails to pay any amount of principal,
        interest, or other amounts when and as due, then the Refinance Notes will
        bear
        an interest rate of 18% until such time as the Company cures this default.
        In
        addition, if the Company is subject to certain events of bankruptcy or
        insolvency, the Refinance Notes provide that the Holders may redeem all or
        a
        portion of the Refinance Notes.
  The
        Refinance Notes are secured by a Security Agreement, dated August 13, 2008,
        by
        and between the Company and the Holders, pursuant to which the Company granted
        the Holders a security interest in all its personal property, whether now
        owned
        or hereafter acquired, including but not limited to, all accounts, copyrights,
        trademarks, licenses, equipment and all proceeds as from such
        collateral.





17


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




The
      following discussion and analysis of our financial condition and results of
      operations should be read with the unaudited condensed financial statements
      and
      related notes included elsewhere in this Quarterly Report on Form
      10-QSB.





When
      used
      in this Quarterly Report on Form 10-QSB, the words “expects,” “anticipates,”
“believes,” “plans,” “will” and similar expressions are intended to identify
      forward-looking statements. These are statements that relate to future periods
      and include, but are not limited to, statements regarding our critical
      accounting policies, our operating expenses, our strategic opportunities,
      adequacy of capital resources, our ability to increase our professional services
      contracts and the related benefits, demand for software and professional
      services, demand for our solutions, expectations regarding net losses,
      expectations regarding cash flow and sources of revenue, benefits of our
      relationship with an MSP, statements regarding our growth and profitability,
      investments in marketing and promotion, fluctuations in our operating results,
      our need for future financing, our ability to defend against the assertions
      and
      demands made by the Investors (as defined below), our intent to submit a plan
      to
      AMEX, the timing of such submission and the potential outcomes regarding
      continued listing on AMEX, our dependence on our strategic partners, our
      dependence on personnel, our disclosure controls and procedures, our ability
      to
      respond to rapid technological change, statements regarding future acquisitions
      or investments, our ability to expand the range of our technologies and products
      and our legal proceedings. Forward-looking statements are subject to certain
      risks and uncertainties that could cause actual results to differ materially
      from those projected. These risks and uncertainties include, but are not limited
      to, those discussed below, as well as risks related to our ability to develop
      and timely introduce products that address market demand, the impact of
      alternative technological advances and competitive products, market
      fluctuations, our ability to obtain future financing, our ability to timely
      submit our plan to AMEX, whether our plan will be approved, our ability to
      continue to comply with other continued listing standards of AMEX and our
      ability to effect a reverse stock split, and the risks set forth below under
      “Factors That May Affect Our Results.” These forward-looking statements speak
      only as of the date hereof. We expressly disclaim any obligation or undertaking
      to release publicly any updates or revisions to any forward-looking statements
      contained herein to reflect any change in our expectations with regard thereto
      or any change in events, conditions or circumstances on which any such statement
      is based.





All
      references to “US Dataworks,” “we,” “us,” or “our” means US Dataworks, Inc.




MICRworkstm,
      Clearingworks®, Returnworkstm, Remitworkstm, and Clearinghouse Least Cost
      Routing/Best Fit Clearing sm ,
      are
      trademarks of US Dataworks. Other trademarks referenced herein are the property
      of their respective owners.





**Critical
      Accounting Policies**





The
      following discussion and analysis of our unaudited condensed financial condition
      and results of operations is based upon our financial statements, which have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States. The preparation of these financial statements requires us to
      make
      estimates and judgments that affect the reported amounts of assets, liabilities,
      revenues and expenses, and related disclosure of contingent assets and
      liabilities. On an on-going basis, we evaluate these estimates, including those
      related to revenue recognition and concentration of credit risk. We base our
      estimates on historical experience and on various other assumptions that we
      believe to be reasonable under the circumstances, the results of which form
      the
      basis for making judgments about the carrying values of assets and liabilities
      that are not readily apparent from other sources. Actual results may differ
      from
      these estimates under different assumptions or conditions.





We
      believe that of the significant accounting policies used in the preparation
      of
      our unaudited condensed financial statements (see Note 2 to the Financial
      Statements), the following are critical accounting policies, which may involve
      a
      higher degree of judgment, complexity and estimates.





18




*Revenue
      Recognition*





We
      recognize revenues associated with our software products in accordance with
      the
      provisions of the American Institute of Certified Public Accountants’ Statement
      of Position 97-2, “Software Revenue Recognition.” We license our software
      products under non-exclusive, non-transferable license agreements. These
      arrangements do not require significant production, modification or
      customization, therefore revenue is recognized when the license agreement has
      been signed, delivery of the software product has occurred, the related fee
      is
      fixed or determinable and collectibility is probable.





In
      certain instances, we license our software on a transactional fee basis in
      lieu
      of an up-front licensing fee. In these arrangements, the customer is charged
      a
      fee based upon the number of items processed by the software and we recognize
      revenue as these transactions occur. The transaction fee also includes the
      provision of standard maintenance and support services, as well as product
      upgrades should such upgrades become available.





If
      professional services are provided in conjunction with the installation of
      the
      software licensed, revenue is recognized when those services have been
      provided.





In
      certain instances, the Company will recognize revenue on a percent of completion
      basis for the portion of professional services related to customized customer
      projects that have been completed but are not yet deliverable to customer.





For
      license agreements that include a separately identifiable fee for contracted
      maintenance services, such revenues are recognized on a straight-line basis
      over
      the life of the maintenance agreement noted in the license agreement, but
      following any installation period of the software.





*Goodwill*





The
      goodwill recorded on our books is from the acquisition of US Dataworks, Inc.
      in
      fiscal year 2001, which remains our single reporting unit. Statement of
      Financial Accounting Standards (SFAS) No. 142 “Goodwill and Other
      Intangible Assets,” requires goodwill for each reporting unit of an entity to be
      tested for impairment by comparing the fair value of each reporting unit with
      its carrying value. Fair value is determined using a combination of the
      discounted cash flow, market multiple and market capitalization valuation
      approaches. Significant estimates used in the methodologies include estimates
      of
      future cash flows, future short-term and long-term growth rates, weighted
      average cost of capital and estimates of market multiples for each reportable
      unit. On an ongoing basis, absent any impairment indicators, we perform
      impairment tests annually during the fourth quarter.





SFAS
      No.
      142 requires goodwill to be tested annually, typically performed during the
      fourth quarter, and between annual tests if events occur or circumstances change
      that would more likely than not reduce the fair value of the reportable unit
      below its carrying amount. We recorded an impairment of goodwill of $10,112,931
      for the year ended March 31, 2008 and did not have an impairment of goodwill
      to
      record for the year ended March 31, 2007.





*Estimates*





The
      preparation of financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenue and expenses during the reporting
      period. Actual results could differ from those estimates.




*Concentrations
      of Credit Risk*





We
      extend
      credit to our customers and perform ongoing credit evaluations of our customers.
      We do not obtain collateral from our customers to secure our accounts
      receivables. We evaluate our accounts receivable on a regular basis for
      collectibility and provide for an allowance for potential credit losses as
      deemed necessary.





19




Two
      of
      our customers accounted for 51% and 20% of our net revenues for the three months
      ended June 30, 2008. Four of our customers accounted for 25%, 24%, 13% and
      12%,
      respectively, of our net revenues ended June 30, 2007.





At
      June
      30, 2008, amounts due from significant customers accounted for 68% of accounts
      receivable.





**Results
      of Operations**




The
      results of operations reflected in this discussion include our operations for
      the three month periods ended June 30, 2008 and 2007.




We
      generate revenues from (a) licensing software with fees due at the initial
      term
      of the license, (b) licensing and supporting software with fees due on a
      transactional basis, (c) providing maintenance, enhancement and support for
      previously licensed products, and (d) providing professional
      services..




*Revenues*




**For the Three Months****Ended****June 30,****2008**
            
            **2007**
            
            **Change**Software
                licensing revenues
            
            $
            30,000
            
            $
            70,000
            
            
            −57.1
            %Software
                transactional revenues
            
            
            537,749
            
            
            389,508
            
            
            38.1
            %Software
                maintenance revenues
            
            
            228,874
            
            
            191,213
            
            
            19.7
            %Professional
                service revenues
            
            
            1,272,426
            
            
            578,350
            
            
            120.0
            %Total
                revenues
            
            $
            2,069,049
            
            $
            1,229,071
            
            
            68.3
            %




Revenues
      increased by 68.3% for the three months ended June 30, 2008 compared to the
      three months ended June 30, 2007. Transactional, maintenance and professional
      services revenues increased by 38.1%, 19.7% and 120.0%, respectively, offset
      by
      a decrease in license revenues by 57.1%.




The
      increase in transactional revenues was primarily due to an increase in
      utilization of our software solutions by current customers, along with new
      customers utilizing our software solutions. Maintenance revenues increased
      in
      large part due to the annual maintenance fees generated under our license
      agreement with American Express Company. The increase in professional service
      revenues was due primarily to our professional services contract with American
      Express.




*Cost
      of Sales*




Costs
      of
      sales principally include the cost of Thomson Financial EPICWareTM software and
      other third party software resold in conjunction with our software, as well
      as
      personnel costs associated with our software maintenance, support, training
      and
      installation services. Cost of sales increased by $151,535, or 39.3%, to
      $537,494 for the three months ended June 30, 2008 from $385,959 for the three
      months ended June 30, 2007, principally due to an increase of personnel costs
      associated with the increase in professional service revenues as compared to
      the
      same period in the prior fiscal year.




*Operating
      Expenses*




Total
      operating expenses decreased by $255,777, or 15.2%, to $1,424,407 for the three
      months ended June 30, 2008 from $1,680,184 for the three months ended June
      30,
      2007. The decrease in operating expenses was attributable to a $182,964 decrease
      in personnel expenses associated with our recent restructuring in staffing,
      $146,876 decrease in the use of outside consultants and services, and a $65,958
      decrease in other various expenses, including director fees, licenses, telephone
      expense and advertising expense in the first quarter of 2008, as compared to
      the
      same period in the prior fiscal year. These decreases were partially offset
      by
      an increase of $88,338 in legal expenses, a $46,501 increase in stock based
      compensation, and a $9,335 increase in travel related expenses. In our effort
      to
      promote our brand name, increase our client base and expand our relationship
      with existing clients, we expect our operating expenses to increase. We also
      expect our legal expenses to increase as result of our dispute with certain
      of
      our Investors (as defined below) and in connection with our efforts to maintain
      compliance with the listing requirements of the American Stock
      Exchange.




20




*Other
      Expenses*




Other
      expenses, including interest expense and financing costs, increased $184,437,
      or
      572.9%, to $216,629 for the three months ended June 30, 2008 from $32,192 for
      the three months ended June 30, 2007. The increase was primarily due to the
      quarterly analysis related to the embedded derivatives associated with the
      convertible promissory note of November 13, 2007. Interest expense increased
      $273,716, which was partially offset by a gain of $41,080 on the derivatives
      associated with the November 13, 2007 convertible note and $56,914 in other
      income




*Net
      Loss*




Net
      loss
      decreased by $759,783, or 87.4%, to a net loss of $109,481 for the three months
      ended June 30, 2008 from $869,264 for the three months ended June 30, 2007.
      For
      details related to the decrease in our net loss see the preceding discussions
      related to revenues, to cost of sales, operating expenses and other income
      sections above.




**Liquidity
      and Capital Resources**




We
      have
      incurred significant losses and negative cash flows from operations for the
      last
      two fiscal years. We have obtained our required cash resources through the
      sale
      of debt and equity securities. We may not operate profitably in the future
      and
      may be required to continue the sale of debt and equity securities to finance
      our operations.





We
      have
      specific plans to address our financial situation as follows:





·
            We
                believe that the demand for our software and professional services
                will
                continue to expand as the United States market adopts the new payment
                processing opportunities available under changing regulations such
                as the
                Check Clearing Act for the 21stCentury, and NACHA’s back office conversion, which allows the conversion
                of paper checks in the back offices of retail merchants and government.
                Increased demand for our solutions, including our recently introduced
                Clearingworks product, has led to increased cash flows from up-front
                license fees, transaction-based contract fees and increases in
                professional services revenues. We expect demand for its product
                and
                services to continue to increase in the coming
                year.





·
            We
                have entered into a strategic alliance with one of the largest merchant
                service providers (MSP), which will allow this MSP to sell Clearingworks
                as part of its ARC and back office conversion services. Though no
                exact
                dollar amounts have been forecast at the time, we expect that this
                alliance will positively affect our
                profitability.





·
            We
                have undertaken a staff restructuring that we expect will significantly
                reduce our salary and benefit expense in the coming year while still
                maintaining our customer service
                levels.





·
            We
                have renewed our professional service contract with a major credit
                card
                company and with an arm of the federal government for an additional
                year
                that, in aggregate, could provide up to $3,000,000 in revenue in
                the
                coming fiscal year.





·
            We
                have entered into an agreement with a major business process outsourcer
                (BPO), which will enable us to significantly increase our transactional
                revenues in the coming fiscal year as more billers outsource their
                work to
                BPO’s.





21





There
      can
      be no assurance that our planned activities will be successful or that we will
      ultimately attain profitability. Our long term viability depends on our ability
      to obtain adequate sources of debt or equity funding to fund the continuation
      of
      our business operations and to ultimately achieve adequate profitability and
      cash flows to sustain our operations. We will need to increase revenues from
      software licenses, transaction based software license contracts and professional
      services agreements to become profitable.





Cash
      and
      cash equivalents increased by $163,925 to $1,067,318 at June 30, 2008 from
      $903,393 at March 31, 2008. Cash provided by operating activities was $172,745
      in the three months ended June 30, 2008 compared to $51,935 in the same period
      in the prior fiscal year.




No
      cash
      was used for investing activities in the three months ended June 30, 2008 as
      compared to cash used of $18,172 in the three months ended June 30, 2007.




Financing
      activities used cash of $8,820 in the three month period ended June 30, 2008
      and
      financing activities provided no cash in the three months ended June 30,
      2007.




As
      a
      result of our increased level of transactional revenues achieved in fiscal
      2008,
      and the expected increase in revenues from recently received and contemplated
      contracts, we believe we currently have adequate capital resources to fund
      our
      anticipated cash needs through March 31, 2009. However, an adverse business
      or
      legal development could require us to raise additional financing sooner than
      anticipated. We recognize that we may be required to raise such additional
      capital, at times and in amounts, which are uncertain, especially under the
      current capital market conditions. If we are unable to acquire additional
      capital or are required to raise it on terms that are less satisfactory than
      we
      desire, it may have a material adverse effect on our financial condition. In
      the
      event we raise additional equity, these financings may result in dilution to
      existing shareholders.





**Recent
      Developments**




In June
      2008, we received letters from each of the holders of the Notes 
(collectively referred to as the Investors) purporting to be Event of Default
      Redemption Notices (Notices) pursuant to the Senior Secured Convertible Note
      due
      November 13, 2010 (Notes). According to the Notices, the purported Event of
      Default was the failure of the registration statement filed
      by us in December 2007 to register the Conversion Shares and the Warrant Shares
      to be declared effective by May 12, 2008.




We
      subsequently informed the Investors that, for the reasons described to the
      Investors, the Notices were defective and requested that each immediately
      withdraw their respective Notices.




On
      July
      15, 2008, we gave notice to the Investors of their respective rights of optional
      redemption of the Notes on August 13, 2008. In respect thereto, we received
      optional redemption notices from each of the Investors.




On
      August 13, 2008, we repaid principal of $4,000,000
      and $38,807.50 of interest accrued on the principal from and including July
      1,
      2008 through August 12, 2008. There is a dispute with the Investors regarding
      whether a redemption premium, penalty interest and other amounts are owed to
      the
      investors.





22




The
      issues of whether or not an Event of Default has occurred and whether or not
      the
      Investors are entitled to the additional amounts in respect to the Notes are
      in
      dispute, and the dispute with the Investors is subject to change. Further,
      we
      cannot provide assurances that additional amounts will not be payable under
      the
      Notes. We believe we have meritorious defenses against the assertions and
      demands made by the Investors. Regardless of the outcome, this dispute may
      be
      time-consuming and expensive and could divert management’s attention from our
      business.





**Factors
      That May Affect Our Results**





**We
      have a general history of losses and may not operate profitably in
      the**  **future.**





We
      have
      incurred losses for the last three fiscal years. Our net losses and negative
      cash flow may continue for the foreseeable future. As of June 30, 2008, our
      accumulated deficit was $62,200,720. We believe that our planned growth and
      profitability will depend in large part on our ability to promote our brand
      name
      and gain clients and expand our relationships with clients for whom we would
      provide licensing agreements and system integration. Accordingly, we intend
      to
      invest heavily in marketing, strategic partnerships, development of our client
      base and development of our marketing technology and operating infrastructure.
      If we are not successful in promoting our brand name and expanding our client
      base, it will have a material adverse effect on our financial condition and
      our
      ability to continue to operate our business.





**Our
      ability to continue as a going concern may be contingent upon our ability to
      secure capital from prospective investors or lenders.**





The
      accompanying consolidated financial statements have been prepared assuming
      we
      will continue on a going concern basis, which contemplates the realization
      of
      assets and the satisfaction of liabilities in the normal course of business.
      We
      believe we currently have adequate cash to fund anticipated cash needs through
      March 31, 2009. However, we may need to raise additional capital in the future.
      Any equity financing may be dilutive to shareholders, and debt financing, if
      available, will increase expenses and may involve restrictive covenants. We
      may
      be required to raise additional capital, at times and in amounts that are
      uncertain, especially under the current capital market conditions. These factors
      raise substantial doubt about our ability to continue as a going concern. Under
      these circumstances, if we are unable to obtain additional capital or are
      required to raise it on undesirable terms, it may have a material adverse effect
      on our financial condition, which could require us to:





·
            curtail
                our operations significantly;





·
            sell
                significant assets;





·
            seek
                arrangements with strategic partners or other parties that may require
                us
                to relinquish significant rights to products, technologies or markets;
                or





·
            explore
                other strategic alternatives including a merger or sale of US
                Dataworks.





Our
      financial statements do not include any adjustments relating to the
      recoverability and classification of recorded assets or liabilities that might
      be necessary should we be unable to continue as a going concern.





**Our
      operating results are subject to fluctuations caused by many factors
      that**  **could
      cause us to fail to achieve our revenue or profitability
      expectations,**  **which
      in turn could cause our stock price to decline.**





Our
      operating results can vary significantly depending upon a number of factors,
      many of which are outside our control. Factors that may affect our quarterly
      operating results include:





·
            market
                acceptance of and changes in demand for our products and
                services;





·
            gain
                or loss of clients or strategic relationships;





·
            announcement
                or introduction of new software, services and products by us or by
                our
                competitors;




23




·
            our
                ability to build brand recognition;





·
            timing
                of sales to customers;





·
            price
                competition;





·
            our
                ability to upgrade and develop systems and infrastructure to accommodate
                growth;





·
            our
                ability to attract and integrate new personnel in a timely and effective
                manner;





·
            our
                ability to introduce and market products and services in accordance
                with
                market demand;





·
            changes
                in governmental regulation;





·
            reduction
                in or delay of capital spending by our clients due to the effects
                of
                terrorism, war and political instability;
                and





·
            general
                economic conditions, including economic conditions specific to the
                financial services industry.





In
      addition, each quarter we derive a significant portion of our revenue from
      agreements signed at the end of the quarter. Our operating results could suffer
      if the timing of these agreements is delayed. Depending on the type of
      agreements we enter into, we may not be able to recognize revenue under these
      agreements in the quarter in which they are signed. Some of all of these factors
      could negatively affect demand for our products and services, and our future
      operating results.





Most
      of
      our operating expenses are relatively fixed in the short-term. We may be unable
      to adjust spending rapidly to compensate for any unexpected sales shortfall,
      which could harm our quarterly operating results. Because of the
      emerging nature of the markets in which we compete, we do not have the ability
      to predict future operating results with any certainty. Because of the above
      factors, you should not rely on period-to-period comparisons of results of
      operation as an indication of future performances.





**We
      may not be able to maintain our relationships with strategic partners, which
      may
      cause our cash flow to decline.**




We
      may
      not be able to maintain our relationships with strategic partners, such as
      Computer Sciences Corporation. These strategic relationships are a core
      component of our sales and distribution strategy. The loss of a strategic
      partner could harm our financial results.





**Because
      a small number of customers have historically accounted for and, may
      in**  **future
      periods account for, substantial portions of our revenue, our
      revenue**  **could
      decline because of delays of customer orders or the failure to
      retain**  **customers.**





We
      have a
      small number of customers that account for a significant portion of our revenue.
      Our revenue could decline because of a delay in signing agreements with a single
      customer or the failure to retain an existing customer. We may not obtain
      additional customers. The failure to obtain additional customers or the failure
      to retain existing customers will harm our operating results.





**If
      general economic and business conditions do not improve, we may
      experience**  **decreased
      revenue or lower growth rates.**





The
      revenue growth and profitability of our business depends on the overall demand
      for computer software and services in the product segments in which we compete.
      Because our sales are primarily to major banking and government customers,
      our
      business also depends on general economic and business conditions. A softening
      of demand caused by a weakening of the economy may result in decreased revenue
      or lower growth rates. As a result, we may not be able to effectively promote
      future license revenue growth in our application business.





24




**We
      may not be able to attract, retain or integrate key personnel, which
      may**  **prevent
      us from successfully operating our business.**





We
      may
      not be able to retain our key personnel or attract other qualified personnel
      in
      the future. Our success will depend upon the continued service of key management
      personnel. The loss of services of any of the key members of our management
      team
      or our failure to attract and retain other key personnel could disrupt
      operations and have a negative effect on employee productivity and morale and
      harm our financial results.





**We
      operate in markets that are intensely and increasingly competitive, and
      if**  **we
      are unable to compete successfully, our revenue could decline and we may
      be**  **unable
      to gain market share.**





The
      market for financial services software is highly competitive. Our future success
      will depend on our ability to adapt to rapidly changing technologies, evolving
      industry standards, product offerings and evolving demands of the
      marketplace.





Some
      of
      our competitors have:





·
            longer
                operating histories;





·
            larger
                installed customer bases;





·
            greater
                name recognition and longer relationships with clients; and





·
            significantly
                greater financial, technical, marketing and public relations resources
                than US Dataworks.





Our
      competitors may also be better positioned to address technological and market
      developments or may react more favorably to technological changes. We compete
      on
      the basis of a number of factors, including:





·
            the
                breadth and quality of services;





·
            creative
                design and systems engineering expertise;





·
            pricing;





·
            technological
                innovation; and





·
            understanding
                clients’ strategies and needs.





Competitors
      may develop or offer strategic services that provide significant technological,
      creative, performance, price or other advantages over the services we offer.
      If
      we fail to gain market share or lose existing market share, our financial
      condition, operating results and business could be adversely affected and the
      value of the investment in us could be reduced significantly. We may not have
      the financial resources, technical expertise or marketing, distribution or
      support capabilities to compete successfully.





**We
      may be responsible for maintaining the confidentiality of our
      client’s**  **sensitive
      information, and any unauthorized use or disclosure could result
      in**  **substantial
      damages and harm our reputation.**





The
      services we provide for our clients may grant us access to confidential or
      proprietary client information. Any unauthorized disclosure or use could result
      in a claim against us for substantial damages and could harm our reputation.
      Our
      contractual provisions attempting to limit these damages may not be enforceable
      in all instances or may otherwise fail to adequately protect us from liability
      for damages.





25




**If
      we do not adequately protect our intellectual property, our business
      may**  **suffer,
      we may lose revenue or we may be required to spend significant time
      and**  **resources
      to defend our intellectual property rights.**





We
      rely
      on a combination of patent, trademark, trade secrets, confidentiality procedures
      and contractual procedures to protect our intellectual property rights. If
      we
      are unable to adequately protect our intellectual property, our business may
      suffer from the piracy of our technology and the associated loss in revenue.
      Any
      patents that we may hold may not sufficiently protect our intellectual property
      and may be challenged by third parties. Our efforts to protect our intellectual
      property rights, may not prevent the misappropriation of our intellectual
      property. These infringement claims or any future claims could cause us to
      spend
      significant time and money to defend our intellectual property rights, redesign
      our products or develop or license a substitute technology. We may be
      unsuccessful in acquiring or developing substitute technology and any required
      license may be unavailable on commercially reasonable terms, if at all. In
      the
      event of litigation to determine the validity of any third party claims or
      claims by us against such third party, such litigation, whether or not
      determined in our favor, could result in significant expense and divert the
      efforts of our technical and management personnel, regardless of the outcome
      of
      such litigation. Furthermore, other parties may also independently develop
      similar or competing products that do not infringe upon our intellectual
      property rights.





**We
      may be unable to consummate future potential acquisitions or investments or
      successfully integrate acquired businesses or investments or foreign operations
      with our business, which may disrupt our business, divert management’s attention
      and slow our ability to expand the range of our technologies and
      products.** ****





We
      intend
      to continue to expand the range of our technologies and products, and we may
      acquire or make investments in additional complementary businesses, technologies
      or products, if appropriate opportunities arise. We may be unable to identify
      suitable acquisition or investment candidates at reasonable prices or on
      reasonable terms, or consummate future acquisitions or investments, each of
      which could slow our growth strategy. We have no prior history or experience
      in
      investing in or acquiring and integrating complementary businesses and therefore
      may have difficulties completing such transactions or realizing the benefits
      of
      such transactions, or they may have a negative effect on our business. Such
      investments or acquisitions could require us to devote a substantial amount
      of
      time and resources and could place a significant strain on our management and
      personnel. To finance any acquisitions, we may choose to issue shares of our
      common stock, which would dilute your interest in us. Any future acquisitions
      by
      us also could result in significant write-offs or the incurrence of debt and
      contingent liabilities, any of which could harm our operating results.




**Our
      Senior Secured Convertible Notes contains operating and financial covenants
      that
      may restrict our business and financing activities.**





We
      issued
      $4,000,000 in senior secured convertible notes on November 13, 2007. The notes
      are secured by a pledge of all of our assets, including our intellectual
      property, and contains a variety of operational covenants, including limitations
      on our ability to incur liens or additional debt, make dispositions, pay
      dividends, redeem our stock, make certain investments and engage in certain
      merger, consolidation or asset sale transactions, among other restrictions.
      Any
      future debt financing we enter into may involve similar or more onerous
      covenants that restrict our operations. Our borrowings under the notes or any
      future debt financing we do will need to be repaid, which creates additional
      financial risk for our company, particularly if our business, or prevailing
      financial market conditions, are not conducive to paying-off or refinancing
      our
      outstanding debt obligations. Furthermore, any breach of the covenants in the
      notes could cause a default under the notes. If there were an event of default
      under the notes that is not waived, the noteholders could cause all amounts
      outstanding with respect to the notes to be due and payable immediately. Neither
      our assets and cash flow nor those of our put grantors may be sufficient to
      fully repay borrowings under the notes if accelerated upon an event of default.
      If, as or when required, we are unable to repay, refinance or restructure the
      notes, and if our put grantors are unable to repay the notes, the noteholders
      could institute foreclosure proceedings against the assets securing borrowings
      under the notes. On August 13, 2008, we repaid principal of $4,000,000 and
      accrued interest of $38,807.50. There is a dispute with the noteholders
      regarding whether a redemption premium, penalty interest or other amounts are
      owed to the noteholders. We cannot assure you regarding the outcome of the
      dispute or that additional amounts will not be payable under these notes, as
      noted above.





**We
      have received notice from AMEX notifying us of our failure to
      satisfy several continued listing rules or standards, which could result us
      being subject to delisting procedures**





Our
      common stock is listed on AMEX under the symbol “UDW.” All companies listed on
      AMEX are required to comply with certain continued listing standards, including
      maintaining stockholders’ equity at required levels, share price requirements
      and other rules and regulations of AMEX. On July 23, 2008, we received notice
      from the staff of AMEX indicating that we were not in compliance with certain
      continued listing standards of the AMEX Company Guide in that our stockholders’
equity is less than $4,000,000 and we had losses from continuing operations
      and
      net losses in three of our four most recent fiscal years (Section 1003(a)(ii))
      and because our stockholders’ equity is less than $6,000,000 and we had losses
      from continuing operations and net losses in our five most recent fiscal years
      (Section 1003(a)(iii)). In addition, AMEX advised us that, in accordance with
      Section 1003(f)(v) of the AMEX Company Guide, we must effect a reverse stock
      split to address its low stock price. Failure to effect a reverse split within
      a
      reasonable amount of time could result in suspension or delisting of our common
      stock. We intend to submit to AMEX a plan advising AMEX of action we have taken,
      or will take, to bring us in compliance with Sections 1003(a)(ii) and
      1003(a)(iii) of the AMEX Company Guide within a maximum of 18 months from July
      23, 2008. If we do not submit a plan by August 22, 2008, or submit a plan that
      is not accepted, we may be subject to delisting procedures. Additionally, if
      a
      plan is accepted but we are not in compliance with any continued listing
      standards by January 22, 2010, we could be subject to delisting procedures.
      In
      the event that our common stock is delisted from AMEX, its market value and
      liquidity could be materially adversely affected.





26




**Item
      3A(T).**  **Controls
      and Procedures**




(a) ***Evaluation
      of disclosure controls and procedures*** .
      We
      maintain “disclosure controls and procedures,” as such term is defined in
      Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange
      Act, that are designed to ensure that information required to be disclosed
      by us
      in reports that we file or submit under the Exchange Act is recorded, processed,
      summarized, and reported within the time periods specified in Securities and
      Exchange Commission rules and forms, and that such information is accumulated
      and communicated to our management, including our Chief Executive Officer and
      Chief Financial Officer, or persons performing similar functions, as
      appropriate, to allow timely decisions regarding required disclosure. In
      designing and evaluating our disclosure controls and procedures, management
      recognized that disclosure controls and procedures, no matter how well conceived
      and operated, can provide only reasonable, not absolute, assurance that the
      objectives of the disclosure controls and procedures are met. Our disclosure
      controls and procedures have been designed to meet reasonable assurance
      standards. Additionally, in designing disclosure controls and procedures, our
      management necessarily was required to apply its judgment in evaluating the
      cost-benefit relationship of possible disclosure controls and procedures. The
      design of any disclosure controls and procedures also is based in part upon
      certain assumptions about the likelihood of future events, and there can be
      no
      assurance that any design will succeed in achieving its stated goals under
      all
      potential future conditions.





Based
      on their evaluation as of the end of the period covered by this Quarterly Report
      on Form 10-QSB, our Chief Executive Officer and Chief Financial Officer, or
      persons performing similar functions, have concluded that, as of that date,
      our
      disclosure controls and procedures were effective at the reasonable assurance
      level.





(b) ***Changes
      in internal control over financial reporting*** .
      There
      was no change in our internal control over financial reporting (as defined
      in
      Rule 13a-15(f) under the Exchange Act) identified in connection with
      management’s evaluation during our last fiscal quarter that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.





**PART
      II -** **OTHER
      INFORMATION**




**Item 1.**  **Legal Proceedings** ****




From
      time to time, we are involved in various legal and other proceedings that are
      incidental to the conduct of our business. We believe that none of these
      proceedings, if adversely determined, would have a material effect on our
      financial condition, results of operations or cash flows.




Item 5.  **Other Information**


On
        August 13, 2008, we redeemed $4,000,000 aggregate principal and an aggregate
        of
        $38,807.50 in interest on the Senior Secured Convertible Notes due 2010 (Notes).
        In connection with the redemption, we entered into a Note Purchase Agreement
        and
        issued an aggregate of $3,703,500 Senior Secured Notes due August 13, 2009
        (Refinance Notes). The Refinance Notes were purchased by our Chief Executive
        Officer and a member of our Board of Directors (Holders). The Refinance Notes
        bear interest at a rate of 12% per annum with interest payments due in arrears
        monthly.
  Pursuant
        to the Refinance Notes, if we fail to pay any amount of principal, interest,
        or
        other amounts when and as due, then the Refinance Notes will bear an interest
        rate of 18% until such time as we cure this default. In addition, if we are
        subject to certain events of bankruptcy or insolvency, the Refinance Notes
        provide that the Holders may redeem all or a portion of the Refinance Notes.
  The
        Refinance Notes are secured by a Security Agreement, dated August 13, 2008,
        by
        and between us and the Holders, pursuant to which we granted the Holders
        a
        security interest in all our personal property, whether now owned or hereafter
        acquired, including but not limited to, all accounts, copyrights, trademarks,
        licenses, equipment and all proceeds as from such collateral.


**Item
      6.**  **Exhibits** ****




The
      exhibits listed below are required by Item 601 of Regulation S-B.




**Exhibit**
              **Number**
            
            **Description
                of Document**10.1
            
            Employment
                Agreement dated June 12, 2008 by and between the Registrant and Mario
                Villarreal (incorporated by reference to Exhibit 10.1 to the Registrant’s
                Current Report on Form 8-K filed with the SEC on June 18,
                2008).31.1
            
            Section
                302 Certification of Chief Executive Officer.




27





**Exhibit**
              **Number**
            
            **Description
                of Document**31.2
            
            Section
                302 Certification of Chief Financial Officer or person performing
                similar
                functions.32.1
            
            Section
                906 Certification of Chief Executive Officer.32.2
            
            Section
                906 Certification of Chief Financial Officer or person performing
                similar
                functions.




28


**SIGNATURE**




In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




Dated:
      August 14, 2008


US
                  DATAWORKS, INC.By /s/
                  John T.
                  McLaughlinJohn
                  T. McLaughlinChief
                  Accounting Officer(Principal
                  Financial and Accounting Officerand
                  Duly Authorized Officer)




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EXHIBIT
      INDEX




**Exhibit**
              **Number**
            
            **Description
                of Document**10.1
            
            Employment
                Agreement dated June 12, 2008 by and between the Registrant and Mario
                Villarreal (incorporated by reference to Exhibit 10.1 to the Registrant’s
                Current Report on Form 8-K filed with the SEC on June 18,
                2008).31.1
            
            Section
                302 Certification of Chief Executive Officer.31.2
            
            Section
                302 Certification of Chief Financial Officer or person performing
                similar
                functions.32.1
            
            Section
                906 Certification of Chief Executive Officer.32.2
            
            Section
                906 Certification of Chief Financial Officer or person performing
                similar
                functions.





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