##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C., 20549
 
 FORM 10-QSB
 
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period                 to
 Commission file number: 001-15835
 US Dataworks, Inc.
  Nevada
    
    84-1290152(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. employer identification number)
 5301 Hollister Road, Suite 250Houston, Texas
    
    77040(Address of principal executive offices)
    
    (Zip Code)
  þ o
 o þ
  o þ




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##### 



US DATAWORKS, INC.
 TABLE OF CONTENTS
   PagePART I  FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    17Item 3. Controls and Procedures
    
    
    26PART II  OTHER INFORMATION
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 6. Exhibits
    
    
    27Schedule No.1 to Master License AgreementMaster License AgreementSection 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Accounting OfficerSection 906 Certification of Chief Executive OfficerSection 906 Certification of Chief Accounting Officer




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 US DATAWORKS, INC.
 BALANCE SHEET
 December 31, 2006
(Unaudited)
 ASSETSCurrent assets:Cash and cash equivalents
    
    $
    82,507Accounts receivable, net of allowance for doubtful accounts of $0
    
    
    2,591,521Prepaid expenses and other current assets
    
    
    167,455Total current assets
    
    
    2,841,483Property and equipment, net
    
    
    519,351Goodwill, net
    
    
    14,133,629Other assets
    
    
    30,334Total assets
    
    $
    17,524,797
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##### Table of Contents



US DATAWORKS, INC.
 BALANCE SHEET
 December 31, 2006
 (Unaudited)
 LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of convertible promissory notes, net of unamortized discount of $92,115
    
    $
    420,618Note payable  related party
    
    
    539,000Deferred revenue  current
    
    
    771,523Accounts payable
    
    
    803,117Accrued expenses
    
    
    180,125Interest payable
    
    
    7,530Interest payable  related party
    
    
    1,708Derivative  Compounded embedded within note
    
    
    39,034Derivative  warrants
    
    
    70,826Total current liabilities
    
    
    2,833,481Total liabilities
    
    
    2,833,481Commitments and ContingenciesStockholders Equity:Convertible Series B preferred stock, $0.0001 par value
700,000 shares authorized, 109,933 shares issued and outstanding $3.75 liquidation
preference, dividends of $241,842 in arrears
    
    
    55Common stock, $0.0001 par value
90,000,000 shares authorized and 37,139,303 shares issued and outstanding
    
    
    3,714Common Stock Subscription
    
    
    (1,500,000
    )Additional paid-in capital
    
    
    65,295,838Accumulated deficit
    
    
    (49,108,291
    )Total shareholders equity
    
    
    14,691,316Total liabilities and stockholders equity
    
    $
    17,524,797
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##### Table of Contents



STATEMENTS OF OPERATIONS
 For the Three Months Ended
    
    
    For the Nine Months EndedDecember 31,
    
    
    December 31,As Restated
    
    
    
    
    
    
    As Restated2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUESSoftware licensing revenues
    
    $
    94,175
    
    
    $
    89,109
    
    
    $
    609,158
    
    
    $
    1,840,029Software transactional revenues
    
    
    532,868
    
    
    
    236,848
    
    
    
    1,138,588
    
    
    
    649,452Software maintenance revenues
    
    
    109,128
    
    
    
    104,477
    
    
    
    315,677
    
    
    
    331,369Professional service revenues
    
    
    983,716
    
    
    
    656,119
    
    
    
    2,693,226
    
    
    
    2,078,335Total revenues
    
    
    1,719,887
    
    
    
    1,086,553
    
    
    
    4,756,649
    
    
    
    4,899,185COST OF SALES
    
    
    540,127
    
    
    
    321,100
    
    
    
    1,559,854
    
    
    
    1,103,956Gross profit
    
    
    1,179,760
    
    
    
    765,453
    
    
    
    3,196,795
    
    
    
    3,795,229OPERATING EXPENSESGeneral and administrative
    
    
    1,364,879
    
    
    
    1,261,557
    
    
    
    4,896,677
    
    
    
    4,167,079Depreciation and amortization
    
    
    37,605
    
    
    
    91,163
    
    
    
    105,246
    
    
    
    269,645Total operating expense
    
    
    1,402,484
    
    
    
    1,352,720
    
    
    
    5,001,923
    
    
    
    4,436,724LOSS FROM OPERATIONS
    
    
    (222,724
    )
    
    
    (587,267
    )
    
    
    (1,805,128
    )
    
    
    (641,495
    )OTHER INCOME (EXPENSE)Financing costs
    
    
    
    
    
    
    (160,000
    )
    
    
    
    
    
    
    (160,000
    )Interest expense
    
    
    (49,641
    )
    
    
    (96,512
    )
    
    
    (220,418
    )
    
    
    (241,163
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (206,000
    )Interest expense  related party
    
    
    (10,938
    )
    
    
    
    
    
    
    (10,938
    )
    
    
    Gain/Loss on derivatives
    
    
    (37,889
    )
    
    
    34,633
    
    
    
    (193,960
    )
    
    
    453,729Contingent liabilities loss
    
    
    
    
    
    
    
    
    
    
    222,600
    
    
    
    Other income
    
    
    
    
    
    
    8,249
    
    
    
    10,491
    
    
    
    24,467Total other income (expense)
    
    
    (98,468
    )
    
    
    (213,630
    )
    
    
    (192,225
    )
    
    
    (128,967
    )LOSS BEFORE PROVISION FOR INCOME TAXES
    
    
    (321,192
    )
    
    
    (800,897
    )
    
    
    (1,997,353
    )
    
    
    (770,462
    )PROVISION FOR INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET LOSS
    
    $
    (321,192
    )
    
    $
    (800,897
    )
    
    $
    (1,997,353
    )
    
    $
    (770,462
    )NET LOSS ATTRIBUTABLE TO COMMON STOCK
    
    $
    (321,192
    )
    
    $
    (800,897
    )
    
    $
    (1,997,353
    )
    
    $
    (770,462
    )Basic and diluted loss per share
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.07
    )
    
    $
    (0.03
    )Basic and diluted weighted-average shares outstanding
    
    
    31,003,828
    
    
    
    30,037,020
    
    
    
    30,612,526
    
    
    
    29,684,597
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US DATAWORKS, INC.
 STATEMENTS OF CASH FLOW
 For the Nine Months Ended December 31,
 (Unaudited)
 As Restated2006
    
    
    2005Cash flows from operating activities:-Net (loss)/income from operations
    
    $
    (1,997,953
    )
    
    $
    (770,461
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment
    
    
    105,247
    
    
    
    269,645Amortization of note discount on convertible promissory note
    
    
    176,058
    
    
    
    180,221Amortization of deferred compensation expense
    
    
    3⁄4
    
    
    
    (9,302
    )Loss on extinguishment of debt
    
    
    3⁄4
    
    
    
    206,000Gain on disposition of automobile
    
    
    (3,394
    )
    
    
    3⁄4Stock based compensation
    
    
    517,639
    
    
    
    3⁄4Gain / (Loss) on derivatives
    
    
    193,960
    
    
    
    (453,729
    )Issuance of warrants for services
    
    
    3⁄4
    
    
    
    26,456Issuance of options to third party for services
    
    
    3⁄4
    
    
    
    27,423Issuance of warrants to lender in exchange for waiver in excess of cash
received
    
    
    3⁄4
    
    
    
    160,000Loss on disposition of fixed assets
    
    
    3⁄4
    
    
    
    2,650Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (1,099,833
    )
    
    
    180,306Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    238,000
    
    
    
    (937,323
    )Prepaid expenses and other current assets
    
    
    (941
    )
    
    
    (125,594
    )Other assets
    
    
    12,890
    
    
    
    569Deferred revenue
    
    
    554,769
    
    
    
    (185,773
    )Accounts payable
    
    
    571,705
    
    
    
    (96,996
    )Accrued expenses
    
    
    (282,413
    )
    
    
    (64,585
    )Interest payable
    
    
    (32,434
    )
    
    
    (19,206
    )Net cash used in operating activities
    
    
    (1,046,700
    )
    
    
    (1,609,699
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (157,098
    )
    
    
    (114,817
    )Proceeds from sales of fixed assets
    
    
    8,000
    
    
    
    2,682Net cash used in investing activities
    
    
    (149,098
    )
    
    
    (112,135
    )
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US DATAWORKS, INC.
 STATEMENTS OF CASH FLOW
 For the Nine Months Ended December 31,
 (Unaudited)
 As Restated2006
    
    
    2005Cash flows from financing activities:Proceeds from related party note payable
    
    
    500,000
    
    
    
    3⁄4Proceeds from convertible promissory note
    
    
    3⁄4
    
    
    
    700,000Repayment of convertible promissory note
    
    
    (512,133
    )
    
    
    3⁄4Proceeds from stock sale
    
    
    3⁄4
    
    
    
    600,000Stock issuance costs
    
    
    3⁄4
    
    
    
    (14,550
    )Proceeds from issuance of warrants to lender in exchange for waiver
    
    
    3⁄4
    
    
    
    25,000Net cash (used in) /provided by financing activities
    
    
    (12,133
    )
    
    
    1,310,450Net decrease in cash and cash equivalents
    
    
    (1,207,931
    )
    
    
    (411,384
    )Cash and cash equivalents, beginning of period
    
    
    1,290,438
    
    
    
    1,525,386Cash and cash equivalents, end of period
    
    $
    82,507
    
    
    $
    1,114,002Supplemental disclosures of cash flow information
Interest paid
    
    $
    87,733
    
    
    $
    76,820
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US DATAWORKS, INC.
 NOTES TO UNAUDITED FINANCIAL STATEMENTS
 1.
    
    Organization and BusinessGeneralUS 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 PoliciesINTERIM FINANCIAL STATEMENTSThe 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 financial statements and the
notes thereto included in the Companys 2006 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, 2007.Revenue RecognitionThe Company recognizes revenues 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.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.
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GoodwillEffective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No.
142 Goodwill and Other Intangible Assets (SFAS No. 142), which establishes new accounting
and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, all
goodwill amortization ceased effective January 1, 2002.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. SFAS No. 142 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, the Company performs impairment tests annually during the fourth quarter.SFAS No. 142 requires goodwill to be tested annually 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 did not have an impairment of goodwill to record for
the years ended March 31, 2006 or March 31, 2005. In addition, during the quarters ended
December 31, 2006 and 2005, the company noted no events or circumstances that would
indicate the need to evaluate the impairment of its goodwill.Convertible Debt Financing  Derivative LiabilitiesThe 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 Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (SFAS 133), 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
133, they are required by SFAS 133 to be accounted for separately from the debt instrument and
recorded as derivative instrument liabilitiesStock OptionsEffective April 1, 2006, the Company adopted the Statement of Financial Accounting Standards No.
123 (revised 2004), Share-Based Payment (SFAS 123R), which require the measurement and
recognition of compensation expense for all share-based payment awards made to employees and
directors, including employee stock options, based on estimated fair values. The Company adopted
SFAS 123R using the modified prospective transition method, which requires the application of
the accounting standard as of April 1, 2006, the first day of the Companys fiscal year 2007.
The Companys Financial Statements as of and for the three months ended December 31, 2006
reflect the impact of SFAS 123R. In accordance with the modified prospective transition method,
the Companys Financial Statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123R. Stock-based compensation expense
recognized under SFAS 123R for the three months and nine months ended December 31, 2006 was
$127,067 and $517,639 respectively, which consists of stock-based compensation expense related
to employee and director stock options and restricted stock issuances.
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SFAS 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. Prior to the adoption of SFAS 123R, the Company accounted for
stock-based awards to employees and directors using the intrinsic value method in accordance
with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123). Under the intrinsic value method, no stock-based
compensation expense had been recognized in the Companys Statement of Operations prior to
January 1, 2006 because the exercise price of the Companys stock options granted to employees
and directors was equal to or greater than the fair market value of the underlying stock at the
date of grant. The Companys pro forma information for the three and nine month periods ended
December 31, 2006 is as follows:
 For the Three Months Ending
    
    For the Nine MonthsEnding Dec 31, 2005
    
    Dec 31, 2005As Restated
    
    As RestatedNet loss as reported
    
    $
    (800,897
    )
    
    $
    (770,462
    )Stock-based employee
compensation expense
determined under the fair
value based method for all
awards, net of related tax
effects
    
    $
    (116,567
    )
    
    $
    (229,024
    )Net income (loss); pro forma
    
    $
    (917,464
    )
    
    $
    (999,486
    )Basic and diluted earnings
(loss) per share, as
reported
    
    $
    (0.03
    )
    
    $
    (0.03
    )Basic and diluted earnings
(loss) per share, pro forma
    
    $
    (0.03
    )
    
    $
    (0.03
    )
 The fair value of these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions for the three and nine
months ended December 31, 2005: dividend yields of 0%; expected volatility of 89%; risk-free
interest rates of 4.34% and 4.07% respectively; and expected lives of 3 years. For the three
and nine months ended December 31, 2005 there were -0- and 1,161,900 respectively of options
granted.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 and nine months
ended December 31, 2006 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures.Upon adoption of SFAS 123R the Company continued to use 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. In determining the compensation cost of
the options granted during the three and nine months ended December 31 2006, as specified by
SFAS 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 Ending
    
    For the Nine Months EndingDecember 31, 2006
    
    December 31, 2006Risk-free Interest Rate
    
    
    4.69
    %
    
    
    4.89
    %Expected Life of Options
Granted
    
    
    3 years
    
    
    
    3 yearsExpected Volatility
    
    
    71
    %
    
    
    82
    %Expected Dividend Yield
    
    
    0
    
    
    
    0Expected forfeiture Rate
    
    
    30
    %
    
    
    30
    %
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As of December 31, 2006, there was approximately $332,267 of total unrecognized compensation
cost related to nonvested share-based compensation arrangements, which is expected to be
recognized over a period of 3 years.Earnings (Loss) per ShareThe 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. For periods in which there was a loss attributable to common stock
outstanding, (i) convertible securities, (ii) warrants and (iii) stock options to purchase shares of the Companys common stock were excluded from the calculations of diluted loss per
share, as inclusion of these securities would have reduced the net loss per share.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 Nine Months EndedDecember 31,2006
    
    2005Options outstanding under the Companys stock option plans
    
    
    6,460,349
    
    
    
    3,730,183Options granted outside the Companys stock option plans
    
    
    1,160,000
    
    
    
    1,160,000Warrants issued in conjunction with private placements
    
    
    19,738,683
    
    
    
    6,247,859Warrants issued as a financing cost for notes payable
and convertible notes payable
    
    
    1,783,650
    
    
    
    2,122,283Warrants issued for services rendered and litigation settlement
    
    
    200,769
    
    
    
    360,769Warrants issued as part of the US Dataworks, Inc. acquisition
    
    
    
    
    
    
    67,200Convertible 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.EstimatesThe 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 RiskThe 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.Four of the Companys customers accounted for 20%, 17%, 17% and 12%, respectively, of the
Companys net revenues for the three months ended December 31, 2006. Three customers accounted
for 29%, 19% and 12%, respectively, of net revenues for the nine months ended December 31, 2006.
Three customers accounted for 43%, 25% and 12% of net revenues for the three months ended
December 31, 2005. Two customers accounted for 51% and 20%, respectively, of net revenues for
the nine months ended December 31, 2005.At December 31, 2006, amounts due from significant customers accounted for 67% of accounts
receivable.
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3.
    
    Restatement of Quarterly InformationThe Company concluded that it was necessary to restate its financial results for the interim
period ended September 30, 2005, to reflect additional non-operating gains and losses related
to certain features included is the Companys debt that require derivative treatment.The Company had previously classified the value of its conversion features and warrants to
purchase common stock as debt discounts. After further review, the Company has determined that
these instruments should have been recorded as derivative liabilities and therefore, the fair
value of each instrument must be recorded as a derivative liability on the Companys balance
sheet. Changes in the fair values of these instruments will result in adjustments to the amount
of the recorded derivative liabilities and the corresponding gain or loss will be recorded in
the Companys statement of operations. At the date of the conversion of each respective
instrument or portion thereof (or exercise of the options or warrants or portion thereof, as the
case may be), the corresponding derivative liability will be reclassified as equity.
 STATEMENTS OF OPERATIONS
 For Quarter ending December 31, 2005
___
 As PreviouslyReported
    
    
    Adjustments
    
    
    As RestatedRevenue
    
    $
    1,086,553
    
    
    $
    
    
    
    $
    1,086,553Loss from operations
    
    
    (587,267
    )
    
    
    
    
    
    
    (587,267
    )Other income (expense):Financing costs
    
    
    (268,846
    )
    
    
    108,846
    
    
    
    (160,000
    )Interest expense
    
    
    (27,605
    )
    
    
    (68,907
    )
    
    
    (96,512
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    Gain/Loss on derivatives
    
    
    
    
    
    
    34,633
    
    
    
    34,633Other income (expense)
    
    
    8,249
    
    
    
    
    
    
    
    8,249Net income / loss
    
    $
    (875,469
    )
    
    $
    74,572
    
    
    $
    (800,897
    )Net income / loss per common share; basic and undiluted
    
    $
    (0.03
    )
    
    $
    
    
    
    $
    (0.03
    )BALANCE SHEETAs PreviouslyReported
    
    Adjustments
    
    As RestatedTotal Assets
    
    $
    17,625,603
    
    
    $
    
    
    
    $
    17,625,603Total liabilities
    
    
    1,676,090
    
    
    
    302,266
    
    
    
    1,978,356Stockholders Equity
    
    $
    15,949,514
    
    
    $
    (302,266
    )
    
    $
    15,647,247
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4.
    
    Property and EquipmentProperty and equipment as of December 31, 2006 consisted of the following:
 Furniture and fixtures
    
    $
    77,559Office and telephone equipment
    
    
    92,795Computer equipment
    
    
    693,552Computer software
    
    
    1,271,098Leasehold improvements
    
    
    62,9972,198,001Less accumulated depreciation and amortization
    
    
    (1,678,650
    )Total
    
    $
    519,351
 Depreciation and amortization expense for the three and nine months ended December 31, 2006 and
2005 was $37,605, $105,246, $91,163 and $269,645, respectively.5.
    
    Notes Payable  Related PartiesOn September 26, 2006, the Company entered into a note payable with its Chief Executive Officer
for $500,000. The note bears an 8.75% per annum interest rate, is unsecured and is due
September 25, 2007. As of December 31, 2006 the outstanding balance on the note payable is
$500,000.6.
    
    Convertible Promissory NotesConvertible promissory notes at December 31, 2006 consisted of the following:
 Convertible promissory note, interest at 10% per
annum, unsecured, $256,066 due September 15, 2007
    
    $
    256,066Convertible promissory note issued June 16, 2005 with $70,000 Original
Issue Discount, due in 15 equal monthly installments beginning April 15, 2006,
net of unamortized discount of $92,115
    
    
    164,552420,618Less current portion
    
    
    (420,618
    )Long-term portion
    
    $
    
 Convertible promissory note with interest at 10% per annumThis note is an amendment and restatement of a note in the same principal amount originally
dated September 15, 2004. The original note was issued effective September 15, 2004 in
connection with the November 2004 settlement of a lawsuit brought by an investor in December
2003. The amended note is convertible at any time, at the holders election, into shares of the
Companys common stock at a per share conversion price of $1.10, subject to standard
antidilution provisions.The amended note is effective September 15, 2005 and extended the principal payment of $256,067
originally due September 15, 2005 for one year. The final principal payment of $256,066 is due
on September 15, 2007. 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.
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The changes to this debt caused the accounting treatment to be an extinguishment of the old debt
and issuance of new debt instead of being treated as modification of debt. Therefore, the
excess of the fair value of the note and warrants over the carrying amount of the debt is
$206,000 and has been recorded as a loss on extinguishment for the year ended March 31, 2006.In connection with the November 2004 settlement, the Company also issued a warrant to purchase
160,000 shares of the Companys common stock at a purchase price of $0.75 per share, which
warrant will expire on November 10, 2006.Using the Black-Scholes pricing model the Company has determined the value of the warrants
issued in connection with the settlement to be $126,000. This amount, together with the value of
the convertible promissory note, the value of the plaintiffs legal expense reimbursement and
the Companys legal costs incurred in connection with the settlement totaled $924,200 and has
been recorded as Investor litigation settlement expense for the year ended March 31, 2005.Convertible promissory note issued June 16, 2005 with $70,000 Original Issue DiscountOn 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.
The debenture is convertible at anytime at the discretion of the holder at a price per share of
$0.572 into 1,346,154 shares of the Companys common stock. The convertible debenture is to be
repaid in 15 monthly installments of $51,333.33 beginning April 15, 2006. The Company may also
elect, upon proper notice, to pay any monthly installment in shares of the Companys common
stock based on a conversion price equal to the lesser of (i) the then applicable conversion
price, or (ii) 90% of the volume weighted average price of the Companys common stock for the 10
trading days immediately preceding the payment; provided, that, such conversion price must be at
least equal to the conversion floor of $0.23, or such monthly installment must be paid in cash.
This convertible debenture was amended on March 9, 2006, pursuant to which the Company must,
within 25 calendar days prior to each monthly payment, deliver 89,744 shares of its common stock
to the holders, which represents the monthly installment amount divided by the then conversion
price with the first monthly payment becoming due on April 17, 2006. In connection with the
Debenture Agreement, the Company issued two groups of warrants, Short Term Warrants and Long
Term Warrants to the institutional investor. The Short Term Warrants allow the institutional
investor to purchase an aggregate of 407,926 shares of the Companys common stock with an
exercise price of $0.572 per share exercisable for a period of 180 days at any time after the
later of (i) the effective date of the registration statement (as described below) or (ii)
December 16, 2005. 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 from December 16, 2005 through December 16, 2008; provided,
however, the institutional investor will not be permitted to exercise a warrant to the extent
that the number of shares of the Companys common stock beneficially owned by such institutional
investor taken together with the number of shares to be issued upon exercise of the warrant
equals or exceeds 4.999% of the Companys then issued and outstanding shares of common stock.
The warrants also contain trading market restrictions that preclude
the Company from issuing shares of common stock upon exercise thereof if such issuance, when aggregated with other
issuances of the Companys common stock pursuant to the warrants, would exceed 19.999% of the
Companys then issued and outstanding shares of common stock, unless the Company has previously
obtained the required shareholder approval. Pursuant to a Registration Rights Agreement dated
June 16, 2005 between the Company and the institutional investor, the Company agreed to file a
registration statement for the resale of the shares of the Companys common stock that may be
issued to the institutional investor upon the conversion of the convertible debenture and the
exercise of the Short Term Warrants and the Long Term Warrants. The registration statement
covering these securities was effective on September 1, 2005.In accordance with Statement of Financial Accounting Standards No. 133 Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), 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.
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At the date of issuance, the embedded debt feature had an estimated initial fair value of
$449,089, 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 expected cash flows /
Lattice Model with a closing price of $0.65, a conversion price as defined in the respective
note agreement and a period of two years. Concerning the debt features, the model uses several
assumptions including: historical stock price volatility, approximate risk-free interest rate
(3.5%), remaining term to maturity, and the closing price of the companys common stock to
determine the estimated fair value of the derivative liability. For the quarter ended December
31, 2006, due in part to a decrease in the market value of the Companys common stock , the
Company recorded an other income item on the statement of operations for the change in fair
value of the embedded debt feature of approximately $29,419. At December 31, 2006, the
estimated fair value of the embedded debt feature was approximately $39,034.The recorded value of the embedded debt feature related to this debt can fluctuate significantly
based on fluctuations in the fair value of the Companys common stock.The warrants included with this note for purchase of the Companys common stock had an initial
value of $271,940. This amount has been classified as a derivative financial instrument and
recorded as a liability on our consolidated balance sheet in accordance with SFAS 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 $1.14, the respective exercise price
of the warrants, a 2 year term, and a 90% volatility factor relative to the date of issuance.
The model uses several assumptions including: historical stock price volatility, approximate
risk-free interest rate (3.50%), 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 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 December 31, 2006, decreased to a fair value of
$70,826, due in part to a decrease in the market value of the companys common stock, which
resulted in an other income item of $6,638.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.Due to changes in value upon the conversion of this debt when shares were issued for required
principal payments, additional losses were incurred amounting to $73,946. This loss is the
result of differences in the settlement method and the assumptions that were used in the
original derivative valuation.7.
    
    Accounts Receivable FacilityOn 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. For the three and nine months period ended December 31, 2006, Catalyst has
not requested repurchase of an account receivable. To date, the Company has sold $305,350 in
receivables under the agreement, which yielded a loss on the sale of these receivables of
$6,597. The Agreement will continue in effect until terminated by either party.
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##### Table of Contents



8.
    
    Commitments and ContingenciesEmployment AgreementsOn April 3, 2006, the Company entered into an employment agreement with each of its President,
Payment Products Division and Vice Chairman, Sr. Vice President and Chief Technology Officer,
and Vice President of Business Development and General Counsel, for a term of three years with
automatic renewal for successive one-year terms unless either party gives timely notice of
non-renewal.Annual base salary for the President, Payment Products Division and Vice Chairman of the Company
is $190,000 and pursuant to the terms of the agreement he is entitled to receive an option to
purchase 550,000 shares of the Companys common stock. This option vests over a 3 year period
with 150,000 shares vesting on April 3, 2006 and 200,000 shares vesting on each of April 3, 2007
and 2008. In addition the President, Payment Products Division and Vice Chairman is entitled to
receive a bonus of $48,125 for year end 2006.Annual base salary for the Senior Vice President and Chief Technology Officer of the Company is
$185,000 and pursuant to the terms of the agreement he is entitled to receive 200,000 shares of
restricted common stock. The restricted shares vest over a 3 year period with 25,000 shares
vesting on April 3, 2006 and 87,500 shares vesting on each of April 3, 2007 and 2008. The Senior
Vice President and Chief Technology Officer is also eligible to receive a quarterly bonus of
equal to 3.5% of the increase in the Companys revenue from fiscal year quarter to fiscal year
quarter and to receive a bonus of $78,750 for fiscal year 2006.Annual base salary for the Vice President of Business Development and General Counsel of the
Company is $175,000, and pursuant to the terms of the agreement he is entitled to receive an
option to purchase 700,000 shares of the Companys common stock. This option vests over a 3
year period with 300,000 shares vesting on April 3, 2006 and 200,000 shares vesting on each of
April 3, 2007 and, 2008. The Vice President of Business Development and General Counsel is also
eligible to receive a quarterly bonus based upon the Companys future acquisitions or mergers.On May 23, 2006, the Company entered into an employment agreement with its Chairman of the Board
and Chief Executive Officer. The agreement has a 2 year term with automatic renewal for
successive one year terms unless either party gives timely notice of non-renewal. His annual
base salary is $220,000 and he is entitled to receive 100,000 shares of restricted common stock
that vest immediately and is entitled to receive an option to purchase 600,000 shares of the
Companys common stock. This option vests as to 300,000 shares on each of May 22, 2007 and
2008.LitigationIn June 2005, two of our former employees initiated arbitration against the company alleging
wrongful termination and sought severance pay. Arbitration was held on March 28, 2006 and on
June 19, 2006, the arbitration ruled that each employee was entitled to $90,000 in severance
pay, as well as costs and interest. These amounts were included in accrued liabilities at March
31, 2006. On August 25, 2006 all severance pay, as well as costs and interest due each employee
was paid. These amounts were removed from accrued liabilities at September 30, 2006.9.
    
    Stockholders EquityPreferred StockThe 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.
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##### Table of Contents



Convertible Series B Preferred Stock
 The Company has 700,000 authorized shares of $0.0001 par value convertible Series B preferred
stock.In August and October 2000, the Company issued 509,333 and 133,666 units respectively, in a
private placement for gross proceeds of $382,000 and $100,250, respectively. Each unit consisted
of one share of the Companys voting convertible Series B preferred stock (the Series B) and a
warrant, exercisable through October 2003, to purchase one share of the Companys common stock.
These warrants were not exercised and were cancelled in October of 2003. 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 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. The
Series B is convertible upon issuance into shares of the Companys common stock at $3.75 per
share. The warrant entitles the holder to purchase one share of the Companys common stock at
$6.25 per share, which represents 115% of the market value of the Companys common stock at the
closing date.In May 2001, an investor in the Series B rescinded its acquisition and returned to the Company
13,333 shares of Series B and warrants for the purchase of 2,667 shares of common stock in
exchange for the return of its investment of $10,000.In August 2004, an investor in the Series B elected to convert his 79,999 shares and accordingly
was issued 15,998 shares of the Companys common stock.At December 31, 2006, there were accumulated, undeclared dividends in arrears of $241,842 or
$0.44 per share.Common Stock and WarrantsDuring the three and nine months ended December 31, 2006, the Company completed the
following:Non-Cash FinancingIn the quarter ended June 30, 2006, the Company issued 303,116 shares of common stock with a
value of $154,000 to pay down debt associated with the convertible promissory note issued June
16, 2005.In the quarter ended September 30, 2006, the Company issued 287,173 shares of common stock with
a value of $154,000 to pay down debt associated with the convertible promissory note issued June
16, 2005.In the quarter ended December 31, 2006, the Company issued 314,253 shares of common stock with a
value of $154,000 to pay down debt associated with the convertible promissory note issued June
16, 2005.Sale of Common Stock and WarrantsOn December 29, 2006, the Company entered into a stock purchase agreement (the Purchase
Agreement), with Hyundai Syscomm Corp., a California corporation (Hyundai), pursuant to which
the Company agreed to issue to Hyundai an aggregate of 6,100,000 shares of the Companys common
stock, $0.0001 par value (the Common Stock), for an aggregate purchase price of $1,500,000
(Purchase Shares). In connection with the Purchase Agreement, and subject to shareholder
approval, the Company also agreed to issue to Hyundai a warrant (the Warrant) to purchase up
to an aggregate of 14,300,000 shares of Common Stock (the Warrant Shares); provided, however,
in no event shall the aggregate of Hyundais Warrant Shares and Purchased Shares exceed 39.9% of
the Companys total outstanding shares. Under no condition will Warrant Shares become issuable
hereunder unless and until the Company secures the necessary vote from its shareholders in favor
of the issuance of this Warrant. The Warrant will vest as to one million shares of Common Stock
for each $1 million in gross profits allocated to Hyundai under the Resale Agreement. At
Hyundais option, it may elect to apply its allocation of gross profits to the payment of the
exercise price of the exercise of any of the Warrant Shares. The exercise price will be $0.01
per share and it will have term of 10 years. The Purchase Shares and
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##### Table of Contents



Warrant are being held in escrow pending the Closing. The Closing, initially set for December
29, 2006, is expected to occur in March 2007.
 During the three and nine months ended December 31, 2005, the Company completed the following:Amendment of Convertible Promissory Note and Issuance of WarrantOn October 13, 2005, the Company amended and restated its 10% convertible debenture effective
September 15, 2005 in the principal amount of $768,199.24, issued by the Company for the benefit
of an accredited individual investor. This convertible debenture, originally dated September 15,
2004, was amended to extend the payment of the principal due and payable on September 15, 2005
until September 15, 2006. The final principal payment of $256,066 is due on September 15, 2007.
In consideration of this amendment, the Company issued to the individual investor a common
stock purchase warrant to purchase up to 650,000 shares of its common stock at an exercise price
of $0.59 per share. The warrant will expire on September 15, 2008.Sale of WarrantsOn November 22, 2005, the Company entered into an agreement with the institutional investor
owning the $770,000 convertible debenture issued June 16, 2005 whereby the investor agreed to
(i) pay the Company $25,000 and (ii) waive all rights the institutional investor may have
related to the Companys September 15, 2005 amended note agreement with an individual investor
(see Note 5) in exchange for 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, which warrant will expire on
November 22, 2008. Using the Black-Scholes pricing model the Company has determined the value of
the warrants issued in connection with this November 22, 2005 agreement to be $185,000. This
amount, less the $25,000 proceeds received, has been recorded as Financing costs expense for the
three and nine months ended December 31, 2005.Sale of Common Stock and WarrantsEffective June 16, 2005, the Company entered into definitive agreements with nine accredited
investors for the sale of 1,258,654 shares of the Companys common stock for gross proceeds of
$600,000. The agreements also provide that the Company will issue warrants, exercisable over a
three year period, to purchase up to 314,664 shares of the Companys common stock at an exercise
price of $0.715 per share and an additional 314,664 shares of the Companys common stock at an
exercise price of $0.812 per share. In July 2005, upon receipt of approval of the American
Stock Exchange for issuance of the shares of the Companys common stock, the agreements were
completed and the investors were issued the shares of the Companys common stock and warrants.Stock OptionsIn 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. In September 2006, shareholders approved an amendment
to the Companys amended and restated 2000 stock option plan to increase the maximum aggregate
number of shares available for issuance thereunder from 6,000,000 to 7,500,000. Under the 2000
Plan, 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 nine months ended December 31, 2006 the Company granted 3,114,500 stock options to
certain employees that may be exercised at prices ranging between $0.46 and $0.82 per share.
During the nine months ended December 31, 2005, the Company granted 1,161,900 stock options to
certain employees that may be exercised at prices ranging between $0.44 and $0.65 per share.
 16




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##### Table of Contents



2000 Stock Option Plan
    
    Outside of PlanWeighted-Average
    
    
    
    
    
    Weighted-AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise PriceOutstanding, March 31, 2006
    
    
    3,499,115
    
    
    $
    0.92
    
    
    
    1,160,000
    
    
    $
    1.02Granted
    
    
    3,114,500
    
    
    $
    0.58
    
    
    
    0
    
    
    
    0Exercised
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Forfeited/canceled
    
    
    153,266
    
    
    $
    1.40
    
    
    
    0
    
    
    
    0Outstanding, December 31, 2006
    
    
    6,460,349
    
    
    $
    0.74
    
    
    
    1,160,000
    
    
    $
    1.02Exercisable, December 31, 2006
    
    
    3,795,849
    
    
    $
    0.84
    
    
    
    1,160,000
    
    
    $
    1.02
 The weighted-average remaining life and the weighted-average exercise price of all of the
options outstanding at December 31, 2006 were 8.1 years and $0.78, respectively. The exercise
prices for the options outstanding at December 31, 2006 ranged from $0.44 to $6.25, and
information relating to these options is as follows:
 Weighted-Range of
    
    
    
    
    
    Stock
    
    Weighted-Average
    
    Weighted-
    
    Average ExerciseExercise
    
    Stock Options
    
    Options
    
    Remaining
    
    Average
    
    Price of OptionsPrices
    
    Outstanding
    
    Exercisable
    
    Contractual Life
    
    Exercise Price
    
    Exercisable$0.44 - 0.80
    
    
    5,038,513
    
    
    
    2,749,013
    
    
    8.52 years
    
    $
    0.56
    
    
    $
    0.55$0.81 - 1.35
    
    
    1,837,836
    
    
    
    1,462,836
    
    
    7.56 years
    
    $
    0.93
    
    
    $
    0.96$1.36 - 6.25
    
    
    744,000
    
    
    
    744,000
    
    
    7.10 years
    
    $
    1.96
    
    
    $
    1.967,620,349
    
    
    
    4,955,849
 Restricted StockThe Company granted 200,000 shares of restricted common stock to the Senior Vice President and
Chief Technology Officer and 100,000 shares of restricted common stock to the Chairman of the
Board and Chief Executive Officer associated with employment agreements reached with each. The shares are granted under the 1999 stock option plan (the 1999 plan) as amended and restated by
the 2000 stock option plan (the 2000 plan). The Company uses the Black-Scholes valuation model
to determine the relative fair value of these shares at the time of issuance. The Company has
determined that the aggregate fair value of the restricted shares granted to be $97,090.
 
 Item 2. Managements Discussion and Analysis or Plan of Operation.
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Critical Accounting Policies
   Revenue Recognition
     18




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##### Table of Contents



Goodwill
    Estimates
  Concentrations of Credit Risk
    Results of Operations
  Revenues
  19




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##### Table of Contents



Three Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    
    
    
    
    EndedDecember 31,
    
    
    
    
    
    
    December 31,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(In 000s)
    
    
    
    
    
    
    (In 000s)Software licensing revenues
    
    $
    94
    
    
    $
    89
    
    
    
    6
    %
    
    $
    609
    
    
    $
    1,840
    
    
    
    -67
    %Software transactional revenues
    
    
    533
    
    
    
    237
    
    
    
    125
    %
    
    
    1,139
    
    
    
    650
    
    
    
    75
    %Software maintenance revenues
    
    
    109
    
    
    
    105
    
    
    
    4
    %
    
    
    316
    
    
    
    331
    
    
    
    -5
    %Professional service revenues
    
    
    984
    
    
    
    656
    
    
    
    50
    %
    
    
    2,693
    
    
    
    2,078
    
    
    
    30
    %Total revenues
    
    $
    1,720
    
    
    $
    1,087
    
    
    
    58
    %
    
    $
    4,757
    
    
    $
    4,899
    
    
    
    -3
    %
 rd
    Cost of Sales
  20




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##### Table of Contents



Operating Expenses
    Other Expenses
   Net Loss
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##### Table of Contents



Liquidity and Capital Resources
   
    
    We received a purchase order for professional services from American Express Company
in September 2006 that we expect will generate revenue sufficient to significantly
reduce the negative cash flows from our operations for fiscal 2007.
    
    Additionally, 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 21st Century and NACHAs back office conversion, which allows the
conversion of paper checks in the back offices of retail merchants and government. We
believe that increased demand for our solutions, including our recently introduced
Clearingworks product, will lead 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, or MSP, which will allow this MSP to sell Clearingworks as part of its ARC
and back office conversion services. We expect this alliance to positively affect our
profitability.
    
    Our alliance with Hyundai Syscomm Corp. will allow the us to resale, automated teller
machines enhanced with our software. We expect this alliance to positively affect our
profitability.
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##### Table of Contents



Factors That May Affect Our Results
 We have a general history of losses and may not operate profitably in the future.
  Our ability to continue as a going concern may be contingent upon our ability to secure capital
from prospective investors or lenders.
  
    
    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 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.
  
    
    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;
    
    our ability to build brand recognition;
    
    timing of sales to customers;
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
    
    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.
   We may not be able to maintain our relationships with strategic partners, which may cause our cash
flow to decline.
  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.
  If general economic and business conditions do not improve, we may experience decreased revenue or
lower growth rates.
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We may not be able to attract, retain or integrate key personnel, which may prevent us from
successfully operating our business.
  We operate in a market that is 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.
   
    
    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.
  
    
    the breadth and quality of services;
    
    creative design and systems engineering expertise;
    
    pricing;
    
    technological innovation; and
    
    understanding clients strategies and needs.
  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.
  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.
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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.
  
 Item 3. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Changes in internal control over financial reporting
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PART II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 6. Exhibits
 ExhibitNumber
    
    Description of Document4.1
    
    Rights Agreement, dated July 24, 2003, by and between the
Registrant and Corporate Stock Transfer (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on Form
8-K, filed with the Securities and Exchange Commission on
January 5, 2007).4.2
    
    Amendment No. 1 to Rights Agreement, dated December 29, 2006, by
and between the Registrant and American Stock Transfer & Trust.
(incorporated by reference to Exhibit 4.2 to the Companys
Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 5, 2007).4.3
    
    Stock Purchase Warrant issued on December 29, 2006 by and
between the Registrant to the benefit of Hyundai Syscomm Corp.
(incorporated by reference to Exhibit 4.3 to the Companys
Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 5, 2007).4.4
    
    Registration Rights Agreement, dated December 29, 2006, by and
between the Registrant and Hyundai Syscomm Corp. (incorporated
by reference to Exhibit 4.4 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on
January 5, 2007).10.1
    
    Amendment Agreement, dated as of December 28, 2006, by and
between the Registrant and Crescent International Ltd.
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 29, 2006).10.2
    
    Stock Purchase Agreement, dated December 29, 2006, by and
between the Registrant and Hyundai Syscomm Corp. (incorporated
by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on
January 5, 2007).10.3
    
    Software Integration and Resale Agreement, dated December 29,
2006, by and between the Registrant and Hyundai Syscomm Corp.
(incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 5, 2007).
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ExhibitNumber
    
    Description of Document10.4
    
    Schedule Number 1 to Master License Agreement, dated July 22,
2005, by and between the Registrant and American Express Travel
Related Services Company.10.5
    
    Master License Agreement, effective as of October 15, 1999, by
and between the Registrant and American Express Travel Related
Services Company.31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Accounting Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.32.2
    
    Section 906 Certification of Chief Accounting Officer.
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SIGNATURE
   US DATAWORKS, INC.By
    /s/ John T. McLaughlinJohn T. McLaughlinChief Accounting Officer(Principal Financial and Accounting Officerand Duly Authorized Officer)
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ExhibitNumber
    
    Description of Document4.1
    
    Rights Agreement, dated July 24, 2003, by and between the
Registrant and Corporate Stock Transfer. (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on
January 5, 2007).4.2
    
    Amendment No. 1 to Rights Agreement, dated December 29, 2006,
by and between the Registrant and American Stock Transfer &
Trust. (incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 5, 2007).4.3
    
    Stock Purchase Warrant issued on December 29, 2006 by and
between the Registrant to the benefit of Hyundai Syscomm
Corp. (incorporated by reference to Exhibit 4.3 to the
Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 5, 2007).4.4
    
    Registration Rights Agreement, dated December 29, 2006, by
and between the Registrant and Hyundai Syscomm Corp.
(incorporated by reference to Exhibit 4.4 to the Companys
Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 5, 2007).10.1
    
    Amendment Agreement, dated as of December 28, 2006, by and
between the Registrant and Crescent International Ltd.
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 29, 2006).10.2
    
    Stock Purchase Agreement, dated December 29, 2006, by and
between the Registrant and Hyundai Syscomm Corp.
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 5, 2007).10.3
    
    Software Integration and Resale Agreement, dated December 29,
2006, by and between the Registrant and Hyundai Syscomm Corp.
(incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 5, 2007).10.4
    
    Schedule Number 1 to Master License Agreement, dated July 22,
2005, by and between the Registrant and American Express
Travel Related Services Company.10.5
    
    Master License Agreement, effective as of October 15, 1999,
by and between the Registrant and American Express Travel
Related Services Company.31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Accounting Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.32.2
    
    Section 906 Certification of Chief Accounting Officer.
 30