##### 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 September 30, 2007
 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
    
    (I.R.S. employer identification number)incorporation or organization)One Sugar Creek Center BoulevardSugar Land, Texas
    
    77478(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
    
    
    16Item 3. Controls and Procedures
    
    
    25PART II  OTHER INFORMATION
    
    
    26Item 1. Legal Proceedings.
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 6. Exhibits
    
    
    26SIGNATURE
    
    
    27Section 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
 September 30, 2007
 (Unaudited)
 ASSETSCurrent assets:Cash and cash equivalents
    
    $
    118,047Accounts receivable, trade, net allowance for doubtful accounts of $250,000
    
    
    1,031,544Accounts receivable, factored, net of $169,237
    
    
    135,390Prepaid expenses and other current assets
    
    
    175,116Total current assets
    
    
    1,460,097Property and equipment, net
    
    
    566,849Goodwill, net
    
    
    14,133,629Other assets
    
    
    32,111Total assets
    
    $
    16,192,686
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US DATAWORKS, INC.
 BALANCE SHEET
 September 30, 2007
 (Unaudited)
 LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Note Payable, current
    
    $
    35,279Note payable
 related party
    
    
    500,000Convertible promissory note
    
    
    256,066Deferred revenue  current
    
    
    358,384Accounts payable
    
    
    1,484,016Accrued expenses
    
    
    980,081Interest
payable  related parties
    
    
    683Derivative
 warrants
    
    
    16,873Total current liabilities
    
    
    3,631,382Note Payable, long term
    
    
    70,557Total liabilities payable
    
    
    3,701,939Commitments and ContingenciesStockholders Equity:Convertible
Series B preferred stock, $0.0001 par value
700,000 shares authorized, 109,333 shares issued and outstanding $3.75 liquidation
preference, dividends of $272,917 in arrears
    
    
    55Common
stock, $0.0001 par value
90,000,000 shares authorized and 38,162,962 shares issued and 32,062,962 outstanding
    
    
    3,816Additional paid-in capital
    
    
    64,618,244Accumulated deficit
    
    
    (52,131,368
    )Total stockholders equity
    
    
    12,490,747Total liabilities and stockholders equity
    
    $
    16,192,686
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US DATAWORKS, INC.
 For the Three Months Ended
    
    
    For the Six Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUESSoftware licensing revenues
    
    $
    36,922
    
    
    $
    135,728
    
    
    $
    106,922
    
    
    $
    514,983Software transactional revenues
    
    
    389,880
    
    
    
    291,724
    
    
    
    779,389
    
    
    
    605,720Software maintenance revenues
    
    
    233,796
    
    
    
    102,783
    
    
    
    425,009
    
    
    
    206,549Professional service revenues
    
    
    705,486
    
    
    
    1,291,438
    
    
    
    1,283,836
    
    
    
    1,709,510Total revenues
    
    
    1,366,084
    
    
    
    1,821,673
    
    
    
    2,595,156
    
    
    
    3,036,762COST OF SALES
    
    
    509,123
    
    
    
    497,428
    
    
    
    895,082
    
    
    
    1,019,728Gross profit
    
    
    856,961
    
    
    
    1,324,245
    
    
    
    1,700,074
    
    
    
    2,017,034OPERATING EXPENSESGeneral and administrative
    
    
    1,642,644
    
    
    
    1,768,850
    
    
    
    3,283,777
    
    
    
    3,531,798Depreciation and amortization
    
    
    45,763
    
    
    
    34,581
    
    
    
    84,813
    
    
    
    67,641Total operating expense
    
    
    1,688,407
    
    
    
    1,803,431
    
    
    
    3,368,590
    
    
    
    3,599,439(LOSS) FROM OPERATIONS
    
    
    (831,446
    )
    
    
    (479,186
    )
    
    
    (1,668,516
    )
    
    
    (1,582,405
    )OTHER INCOME (EXPENSE)Interest expense
    
    
    (6,402
    )
    
    
    (78,606
    )
    
    
    (12,803
    )
    
    
    (170,778
    )Interest
expense  related party
    
    
    (10,938
    )
    
    
    3⁄4
    
    
    
    (21,875
    )
    
    
    3⁄4Financing Costs
    
    
    (25,976
    )
    
    
    3⁄4
    
    
    
    (25,976
    )
    
    
    3⁄4Gain/Loss on derivatives
    
    
    73,235
    
    
    
    257,383
    
    
    
    58,382
    
    
    
    (156,071
    )Litigation settlement
    
    
    3⁄4
    
    
    
    222,600
    
    
    
    3⁄4
    
    
    
    222,600Loss on
disposal of assets
    
    
    (44,231
    )
    
    
    
    
    
    
    (44,231
    )
    
    
    Other income
    
    
    3⁄4
    
    
    
    2,016
    
    
    
    3⁄4
    
    
    
    10,491Total other income/(expense)
    
    
    (14,312
    )
    
    
    403,393
    
    
    
    (46,503
    )
    
    
    (93,758
    )(LOSS) BEFORE PROVISION FOR INCOME TAXES
    
    
    (845,758
    )
    
    
    (75,793
    )
    
    
    (1,715,019
    )
    
    
    (1,676,163
    )PROVISION FOR INCOME TAXES
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4NET INCOME (LOSS)
    
    $
    (845,758
    )
    
    $
    (75,793
    )
    
    $
    (1,715,019
    )
    
    $
    (1,676,163
    )Basic and diluted loss per share
    
    $
    (0.03
    )
    
    $
    (0.00
    )
    
    $
    (0.05
    )
    
    $
    (0.06
    )Basic
weighted  average shares outstanding
    
    
    31,549,103
    
    
    
    30,560,591
    
    
    
    31,425,462
    
    
    
    30,415,806Diluted
weighted  average shares outstanding
    
    
    31,549,103
    
    
    
    30,560,591
    
    
    
    31,425,462
    
    
    
    30,415,806
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US DATAWORKS, INC.
 STATEMENTS OF CASH FLOW
 For the Six Months Ended September 30,
 (Unaudited)
 2007
    
    
    2006Cash flows from operating activities:-Net loss from operations
    
    $
    (1,715,021
    )
    
    $
    (1,676,163
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment
    
    
    84,813
    
    
    
    67,641Amortization of note discount on convertible promissory note
    
    
    3⁄4
    
    
    
    132,819(Gain)/Loss on disposition of assets
    
    
    44,231
    
    
    
    (3,394
    )Stock based compensation
    
    
    244,044
    
    
    
    390,572Gain / (Loss) on derivative
    
    
    (58,382
    )
    
    
    156,071Changes in operating assets and liabilities:Accounts receivable, trade
    
    
    1,148,485
    
    
    
    (608,831
    )Accounts receivable, factored
    
    
    (135,391
    )
    
    
    (244,280
    )Costs & estimated earnings in excess of billings on uncompleted contracts
    
    
    3⁄4
    
    
    
    238,000Prepaid expenses and other current assets
    
    
    (43,204
    )
    
    
    (31,044
    )Other assets
    
    
    (1,778
    )
    
    
    12,890Deferred revenue
    
    
    (285,511
    )
    
    
    527,629Accounts payable
    
    
    563,906
    
    
    
    230,225Accrued expenses
    
    
    (20,945
    )
    
    
    (246,004
    )Interest payable
    
    
    (17,046
    )
    
    
    (40,544
    )Net cash used in operating activities
    
    
    (191,799
    )
    
    
    (1,094,413
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (107,280
    )
    
    
    (57,246
    )Proceeds from sales of fixed assets
    
    
    10,850
    
    
    
    8,000Net cash used in investing activities
    
    
    (96,430
    )
    
    
    (49,246
    )
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US DATAWORKS, INC.
 STATEMENTS OF CASH FLOW
 For the Six Months Ended September 30,
 (Unaudited)
 2007
    
    
    2006Cash flows from financing activities:Proceeds from related party note payable
    
    
    3⁄4
    
    
    
    500,000Repayment of convertible promissory note
    
    
    3⁄4
    
    
    
    (512,133
    )Proceeds from stock sale
    
    
    305,000
    
    
    
    3⁄4Repayment of
note payable  related party
    
    
    (39,000
    )
    
    
    3⁄4Net cash provided/ (used in) by financing activities
    
    
    266,000
    
    
    
    (12,133
    )Net (decrease) in cash and cash equivalents
    
    
    (22,229
    )
    
    
    (1,155,792
    )Cash and cash equivalents, beginning of period
    
    
    140,276
    
    
    
    1,290,438Cash and cash equivalents, end of period
    
    $
    118,047
    
    
    $
    134,646Supplemental disclosures of cash flow information
Interest paid
    
    $
    25,607
    
    
    $
    78,504
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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 2007 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, 2008.Revenue RecognitionThe 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.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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The Company recognizes revenues associated with the resale of ATMs in accordance with the
provisions of the Statement of Financial Accounting Standards (SFAS) No. 48. The Companys
sale price is fixed and determinable at the date of sale and it has no obligation to directly
bring about the resale of the product. In addition, the buyers obligation to pay the Company
is not contingent upon release of the product and its sale price is not adjusted if the product
is lost or damaged. The buyer has economic substance apart from the Company and it can
reasonably estimate the amount of returns at the time of sale. Therefore revenue is recognized
at the time of sale.GoodwillEffective January 1, 2002, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142 Goodwill and Other Intangible Assets, 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, 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 did
not have an impairment of goodwill to record for the years ended March 31, 2007 or March 31,
2006.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 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 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 SFAS No. 123 (revised 2004), Share-Based
Payment, 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
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Financial Statements as of and for the three months ended September 30, 2007 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 six months ended September 30, 2007 was $173,306 and $244,044 respectively,
which consists of stock-based compensation expense related to employee and director stock
options and restricted stock issuances.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.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 and six months ended September 30, 2007 and 2006 is as follows:
 For the Three Months
    
    For the Six MonthsEnding Sept 30,
    
    Ending Sept 30,2007
    
    2006
    
    2007
    
    2006Net income as reported
    
    $
    (845,758
    )
    
    $
    (75,794
    )
    
    $
    (1,715,019
    )
    
    $
    (1,676,246
    )Add stock-based employee
compensation expense
included in net loss as
reported, net of related
tax effects
    
    $
    173,306
    
    
    $
    128,516
    
    
    $
    244,044
    
    
    $
    390,572Deduct stock-based employee
compensation expense
determined under the fair
value based method for all
awards, net of related tax
effectsNet income (loss); pro forma
    
    $
    (672,452
    )
    
    $
    52,722
    
    
    $
    (1,470,975
    )
    
    $
    (1,285,674
    )Basic and diluted earnings
(loss) per share, as
reported
    
    $
    (0.03
    )
    
    $
    (0.00
    )
    
    $
    (0.05
    )
    
    $
    (0.06
    )Basic and diluted earnings
(loss) per share, pro forma
    
    $
    (0.02
    )
    
    $
    (0.00
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )
 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 six months
ended September 30, 2007 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures.
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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 six months ended September 30, 2007, 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 Six Months EndingSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Risk-free Interest Rate
    
    
    4.30
    %
    
    
    4.93
    %
    
    
    4.56
    %
    
    
    4.95
    %Expected Life of Options Granted
    
    3 years
    
    3 years
    
    3 years
    
    3 yearsExpected Volatility
    
    
    67
    %
    
    
    84
    %
    
    
    72
    %
    
    
    86
    %Expected Dividend Yield
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Expected Forfeiture Rate
    
    
    30
    %
    
    
    30
    %
    
    
    30
    %
    
    
    30
    %
 As of September 30, 2007, there was approximately $191,214 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 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. 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.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 Six Months EndedSeptember 30,2007
    
    2006Options outstanding under the Companys stock option plans
    
    
    7,407,349
    
    
    
    6,444,349Options granted outside the Companys stock option plans
    
    
    1,160,000
    
    
    
    1,160,000Warrants issued in conjunction with private placements
    
    
    5,438,683
    
    
    
    5,839,933Warrants issued as a financing cost for notes payable and convertible notes payable
    
    
    1,757,916
    
    
    
    2,083,783Warrants issued for services rendered and litigation settlement
    
    
    180,769
    
    
    
    360,769Convertible Series B preferred stock (a)
    
    
    109,933
    
    
    
    109,933
 
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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 extends credit to its customers and performs ongoing credit evaluations of such
customers. The Company does not obtain collateral from its customers 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.Three of the Companys customers accounted for 27%, 27% and 11%, respectively, of the Companys
net revenues for the three months ended September 30, 2007. Four customers accounted for 26%,
26%, 11% and 10%, respectively, of net revenue for the six months ended September 30, 2007.
Three customers accounted for 42%, 17% and 11% of net revenues for the three months ended
September 30, 2006. Two customers accounted for 34% and 20%, respectively, of net revenue for
the six months ended September 30, 2006.At September 30, 2007, amounts due from significant customers accounted for 74% of accounts
receivable.3.
    
    Property and EquipmentProperty and equipment as of September 30, 2007 consisted of the following:
 Furniture and fixtures
    
    $
    99,535Office and telephone equipment
    
    
    182,275Computer equipment
    
    
    711,725Computer software
    
    
    1,271,098Leasehold improvements
    
    
    64,7332,329,366Less accumulated depreciation and amortization
    
    
    (1,762,517
    )Total
    
    $
    566,849
 Depreciation and amortization expense for the three and six months ended September 30, 2007 and
2006 was $45,763, $84,813, $34,581 and $67,641, respectively.4.
    
    Notes Payable  Related Parties
  Notes Payable
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5.
    
    Convertible Promissory NotesConvertible promissory notes at September 30, 2007 consisted of the following:
 Convertible promissory note, interest at 10% per
annum, unsecured, $256,066 due December 15, 2007
    
    $
    256,066Less current portion
    
    
    (256,066
    )Long-term portion
    
    $
    -0-
 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 anytime, 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 became effective September 15, 2005 and extended a principal payment of
$256,067, 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.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
expired 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.On September 14, 2007, the Company reached an agreement with the note holder to extend the terms
of the note for an additional 90 days in exchange for warrants to purchase up to 200,000 shares
of the Companys common stock dependent upon when the note is paid. On September 14, 2007, the
Company issued the holder a warrant to purchase 66,666 shares of the Companys common stock,
with another warrant to purchase 66,666 shares of the Companys common stock to be issued if the
note is not paid by October 15, 2007 and the final warrant to purchase 66,667 shares of the
Companys common stock to be issued if the note is not paid by November 15, 2007.Using the Black-Scholes pricing model the Company has determined the value of the warrants
issued on September 14, 2007 in connection with the note extension to be $13,141.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
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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 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
$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. This convertible note was paid
in full in March 2007 and as such has been removed from the Companys financial statements for
fiscal year 2008.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
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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 September 30, 2007, decreased to a fair value of $16,873, due
in part to a decrease in the market value of the companys common stock, which resulted in an
other income item of $73,235.
 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.6.
    
    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 is 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 six months period ended September 30, 2007, the financial
institution has not requested repurchase of an account receivable. For the three months ending
September 30, 2007, the Company has sold $59,105 in receivables under the agreement, which
yielded a loss on the sale of these receivables of $739. For the six months ending September 30,
2007, the Company has sold $297,105 in receivables under the agreement, which yielded a loss on
the sale of these receivables of $9,674. The Agreement was terminated by the Company on August
2, 2007.On August 10, 2007, the Company entered into a Loan and Security Agreement (the Loan
Agreement) with Silicon Valley Bank (SVB), pursuant to which SVB will advance funds to the
Company for certain of its accounts receivables up to $2 million. Under the terms of the Loan
Agreement, the Company will receive an advance of up to 80% of the subject account receivable
(the Advance) and pay a finance charge to SVB equal to prime plus 1.5% to 3.0%, based on the
Companys assets to liabilities ratio, while the Advance is outstanding. The Company is
obligated to repay the Advance upon receipt of payment for the subject account receivable. For
the three and six months ending September 30, 2007, the Company has sold $237,244 in receivables
under the agreement, which yielded a loss on the sale of these receivables of $34,465. The
Agreement will continue in effect until August 9, 2008.7.
    
    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.
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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
2008.8.
    
    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.Convertible Series B Preferred StockThe Company has 700,000 authorized shares of $0.0001 par value convertible Series B preferred
stock.In August and October 2000, the Company issued 101,867 and 26,733 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.
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
2,667 shares of Series B and warrants for the purchase of 533 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 16,000 shares and accordingly
was issued 3,200 shares of the Companys common stock.At September 30, 2007, there were accumulated, undeclared dividends in arrears of $272,916 or
$2.48 per share.Common Stock and WarrantsDuring the three and six months ended September 30, 2007, the Company completed the following:
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On August 31, 2007, the Company entered into a stock purchase agreement ( the Purchase
Agreement), with certain employees and directors of the company, pursuant to which the Company
agreed to issue to those certain
employees and directors an aggregate of 762,500 shares of the Companys common stock, $0.0001
par value (the Common Stock), for an aggregate purchase price of $305,000.
 On September 14, 2007 the Company reached agreement with a current note holder to extend the
terms of the convertible promissory note dated September 15, 2005 for an additional 90 days in
exchange for the granting of up to 200,000 warrants dependent upon when the note is paid.
66,666 warrants were issued on the agreement date with another 66,666 to be issued if the note
is not paid by October 15, 2007 and the final 66,667 warrants issued if the note is note paid
by November 15, 2007.During the three and six months ended September 30, 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 six months ended September 30, 2006, the Company issued
590,289 shares of common stock with a value of $308,000 to pay down
debt associated with the convertible promissory note issued June 16,
2005.In August 2007 the Company entered into a note payable with
an equipment vendor to purchase new telephone equipment for $105,835.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. 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 six months ended September 30, 2007 the Company granted 907,000 stock options to
certain employees that may be exercised at prices ranging between $0.48 and $0.61. During the
six months ended September 30, 2006, the Company granted 3,098,500 stock options to certain
employees that may be exercised at prices ranging from $0.46 to $0.82.The following table summarizes certain information relative to stock options:
 2000 Stock Option Plan
    
    Outside of PlanWeighted-Average
    
    
    
    
    
    Weighted-AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise PriceOutstanding, March 31, 2007
    
    
    6,565,349
    
    
    $
    0.74
    
    
    
    1,160,000
    
    
    $
    1.02Granted
    
    
    907,000
    
    
    $
    0.50
    
    
    
    3⁄4
    
    
    
    3⁄4Exercised
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Forfeited/canceled
    
    
    65,000
    
    
    $
    0.90
    
    
    
    3⁄4
    
    
    
    3⁄4Outstanding, September 30, 2007
    
    
    7,407,349
    
    
    $
    0.71
    
    
    
    1,160,000
    
    
    $
    1.02Exercisable, September 30, 2007
    
    
    5,801,352
    
    
    $
    0.69
    
    
    
    1,160,000
    
    
    $
    1.02
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The weighted-average remaining life and the weighted-average exercise price of all of the
options outstanding at September 30, 2007 were 7.69 years and $0.75 respectively. The exercise
prices for the options outstanding at September 30, 2007 ranged from $0.43 to $6.25, and
information relating to these options is as follows:
 Range of
    
    
    
    
    
    
    
    
    
    Weighted-Average
    
    
    Weighted-
    
    
    Weighted-AverageExercise
    
    Stock Options
    
    
    Stock Options
    
    
    Remaining Contractual
    
    
    Average
    
    
    Exercise Price ofPrices
    
    Outstanding
    
    
    Exercisable
    
    
    Life
    
    
    Exercise Price
    
    
    Options Exercisable$0.43  0.80
    
    
    6,035,513
    
    
    
    4,429,516
    
    
    8.11 years
    
    $
    0.55
    
    
    $
    0.47$0.81  1.35
    
    
    1,787,836
    
    
    
    1,787,836
    
    
    6.85 years
    
    $
    0.93
    
    
    $
    0.93$1.36  6.25
    
    
    744,000
    
    
    
    744,000
    
    
    6.35 years
    
    $
    1.96
    
    
    $
    1.968,567,349
    
    
    
    6,961,352
 Restricted Stock
   9.
    
    Subsequent Events
       
 Item 2. Managements Discussion and Analysis or Plan of Operation.
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Critical Accounting Policies
   Revenue Recognition
      Goodwill
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Estimates
  Concentrations of Credit Risk
    Recent Developments
 Results of Operations
  Revenues
  Three Months Ended September 30
    
    
    Six Months Ended September 30(in thousands)
    
    
    (in thousands)2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSoftware licensing revenues
    
    $
    37
    
    
    $
    136
    
    
    
    -73
    %
    
    $
    107
    
    
    $
    515
    
    
    
    -79
    %Software transactional revenues
    
    
    390
    
    
    
    292
    
    
    
    34
    %
    
    
    779
    
    
    
    606
    
    
    
    29
    %Software maintenance revenues
    
    
    234
    
    
    
    103
    
    
    
    127
    %
    
    
    425
    
    
    
    207
    
    
    
    106
    %Professional service revenues
    
    
    705
    
    
    
    1,291
    
    
    
    -45
    %
    
    
    1,284
    
    
    
    1,709
    
    
    
    -25
    %Total revenues
    
    $
    1,366
    
    
    $
    1,822
    
    
    
    -25
    %
    
    $
    2,595
    
    
    $
    3,037
    
    
    
    -14
    %
 18




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Cost of Sales
  Operating Expenses
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Other Income (Expenses)
   Net Income (Loss)
   Liquidity and Capital Resources
   
    
    We plan to increase the number of month-to-month professional services contract with
our existing customers, which is anticipated to generate revenue sufficient to reduce
the negative cash flows from our operations.
    
    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 the government. We believe
that increased demand for our solutions, including our recently introduced Clearingworks
product, will lead to increased cash flows from 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.
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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;
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
    
    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;
    
    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.
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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.
  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;
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##### Table of Contents




    
    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.
  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.
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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 1. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
 s
  For
    
    Withheld
    
    AbstainHayden D. Watson
    
    
    19,918,784
    
    
    
    1,723,071
    
    
    
    0Thomas L. West, Jr.
    
    
    19,918,284
    
    
    
    1,723,571
    
    
    
    0For
    
    Against
    
    AbstainRatification of Ham, Langston & Brezina
    
    
    20,025,128
    
    
    
    263,587
    
    
    
    1,353,140
  
 Item 6. Exhibits
  ExhibitNumber
    
    Description of Document31.1
    
    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 Document31.1
    
    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.
 28