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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington D.C., 20549****FORM 10-QSB**(Mark One)   þ **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934****For the quarterly period ended June 30, 2005**   o **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934****For the transition period                 to****Commission file number: 001-15835****US Dataworks, Inc.**(Exact name of small business issuer as specified in its charter)   **Nevada** **84-1290152**(State or other jurisdiction of (I.R.S. employer identification number)incorporation or organization)     **5301 Hollister Road, Suite 250**  **Houston, Texas** **77040**(Address of principal executive offices) (Zip Code)Issuer’s telephone number: (713) 934-3855Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirements for the past90 days. YES þ NO oNumber of shares of Common Stock outstanding as of August 1, 2005: 30,037,020Transitional Small Business Disclosure Format (Check one): YES o NO þ  
 

**US DATAWORKS, INC.**TABLE OF CONTENTSFORM 10-QSBQUARTERLY PERIOD ENDED JUNE 30, 2005       PagePART I — FINANCIAL INFORMATION  1      Item 1. Financial Statements  1      Item 2. Management’s Discussion and Analysis or Plan of Operation  16      Item 3. Controls and Procedures  23      PART II — OTHER INFORMATION  24      Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.  24      Item 6. Exhibits  24      SIGNATURE  25  Section 302 Certification of CEO Section 302 Certification of CFO Section 906 Certification of CEO Section 906 Certification of CFO
 

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**PART I — FINANCIAL INFORMATION****Item 1. Financial Statements****US DATAWORKS, INC.****BALANCE SHEET****June 30, 2005****(Unaudited)****ASSETS**     Current assets:    Cash and cash equivalents $1,769,273 Accounts receivable, net of allowance for doubtful accounts of $0  752,959 Prepaid expenses and other current assets  169,333           Total current assets  2,691,565      Property and equipment, net  629,736 Goodwill, net  14,133,629 Other assets  43,792           Total assets $17,498,722      The accompanying notes are an integral part of these financial statements.
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**US DATAWORKS, INC.****BALANCE SHEET****June 30, 2005****(Unaudited)****LIABILITIESAND STOCKHOLDERS’ EQUITY**     Current liabilities:    Note payable — related party $39,000 Current portion of convertible promissory notes, net of unamortized discount of $314,484  95,582 Deferred revenue — current  195,702 Accounts payable  309,338 Accrued expenses  344,483 Interest payable  60,877      Total current liabilities  1,044,982 Convertible promissory notes, net of unamortized discount of $327,596  800,537 Deferred revenue  25,021 Deferred compensation  2,022      Total liabilities Interest payable  1,872,562           Commitments and Contingencies         Stockholders’ Equity:    Convertible Series B preferred stock, $0.0001 par value700,000 shares authorized, 549,667 shares issued and outstanding $0.75 liquidationpreference, dividends of $179,805 in arrears  55 Common stock, $0.0001 par value90,000,000 shares authorized and 30,037,020 shares issued and outstanding  3,004 Additional paid-in capital  62,885,019 Deferred compensation  (937)Accumulated deficit  (47,260,981)          Total shareholders’ equity  15,626,160           Total liabilities and stockholders’ equity $17,498,722      The accompanying notes are an integral part of these financial statements.
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**US DATAWORKS, INC.****STATEMENTS OF OPERATIONS****For the Three Months Ended June 30,****(Unaudited)**           **2005** **2004**Revenues:        Software licensing revenues $299,120  $347,716 Software transactional revenues  181,243   129,652 Software maintenance revenues  92,326   31,739 Professional services revenues  507,650   394,025                   Total revenues  1,080,339   903,132          Cost of Sales  377,501   316,136                   Gross Profit  702,838   586,996          Operating expenses:        General and administrative  1,554,275   1,469,905 Depreciation and amortization  88,525   74,126          Total operating expense  1,642,800   1,544,031                   Loss from operations  (939,962)  (957,035)                  Other income (expense)        Financing costs  —   (322,451)Interest expense  (35,637)  (116,521)Other income  6,799   6,460                   Total other expense  (28,838)  (432,512)                  Loss before provision for income taxes  (968,800)  (1,389,547)Provision for income taxes  —   —                   Net loss $(968,800) $(1,389,547)                  Basic and diluted loss per share $(0.03) $(0.05)                  Basic and diluted weighted-average shares outstanding  28,972,005   25,509,912          The accompanying notes are an integral part of these financial statements.
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**US DATAWORKS, INC.****STATEMENT OF STOCKHOLDERS’ EQUITY****for the Three Months ended June 30, 2005****(Unaudited)**                                   Preferred Stock         Additional        Convertible Series B Common Stock Paid-In Deferred Accumulated    Shares Amount Shares Amount Capital Compensation Deficit TotalBalance, March 31, 2005  549,667  $55   28,778,366  $2,878  $61,676,629  $(12,198) $(46,292,181) $15,375,183 Warrants and beneficial conversionfeature issued in connection withconvertible debenture  3⁄4   3⁄4   3⁄4   3⁄4   585,184   3⁄4   3⁄4   585,184 Warrants and options issued to thirdparties for services rendered  3⁄4   3⁄4   3⁄4   3⁄4   37,882   3⁄4   3⁄4   37,882 Amortization of deferred compensation  3⁄4   3⁄4   3⁄4   3⁄4   3⁄4   11,261   3⁄4   11,261 Common stock issued for                                Cash  3⁄4   3⁄4   1,258,654   126   599,874   3⁄4   3⁄4   600,000 Less costs of offering  3⁄4   3⁄4   3⁄4   3⁄4   (14,550)  3⁄4   3⁄4   (14,550)Net loss  3⁄4   3⁄4   3⁄4   3⁄4   3⁄4   3⁄4   (968,800)  (968,800)                                 Balance, June 30, 2005  549,667  $55   30,037,020  $3,004  $62,885,019  $(937) $(47,260,981) $15,626,160                                  Theaccompanying notes are an integral part of these financial statements.
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**US DATAWORKS, INC.****STATEMENTS OF CASH FLOW****For the Three Months Ended June 30,****(Unaudited)**           **2005** **2004**Cash flows from operating activities:-        Net loss from continuing operations $(968,800) $(1,389,547)Adjustments to reconcile net loss to net cash used in operating activities:        Depreciation and amortization of property and equipment  88,525   74,126 Amortization of OID discount on convertible promissory note  1,400   3⁄4 Amortization of note discount and beneficial conversion feature onconvertible promissory notes  11,704   200,074 Amortization of deferred compensation expense  (8,217)  21,052 Issuance of stock for interest  3⁄4   10,000 Issuance of stock for extinguishment of equity credit line facility  3⁄4   225,000 Issuance of warrants for services  26,456   3⁄4 Issuance of options to third party for services  11,426   34,279 Changes in operating assets and liabilities:        Accounts receivable  86,331   (152,049)Prepaid expenses and other current assets  (73,605)  (112,108)Other assets  3⁄4   10,000 Deferred revenue  (283,313)  (31,740)Accounts payable  70,091   2,793 Accrued expenses  18,216   (130,315)Interest payable  19,205   (33,638)                  Net cash used in operating activities  (1,000,581)  (1,272,073)                  Cash flows from investing activities:        Purchase of property and equipment  (40,982)  (32,274)         Net cash used in investing activities  (40,982)  (32,274)         The accompanying notes are an integral part of these financial statements.
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**US DATAWORKS, INC.****STATEMENTS OF CASH FLOW****For the Three Months Ended June 30,****(Unaudited)**           **2005** **2004**Cash flows from financing activities:        Proceeds from convertible promissory note  700,000   3⁄4 Repayment of convertible promissory note  3⁄4   (500,000)Proceeds from stock sale  600,000   4,650,000 Stock issuance costs  (14,550)  (558,500)Proceeds from exercise of stock options  3⁄4   67,575 Proceeds from exercise of warrants  3⁄4   30,000                   Net cash provided by financing activities  1,285,450   3,689,075                   Net increase in cash and cash equivalents  243,887   2,384,728 Cash and cash equivalents, beginning of period  1,525,386   1,203,389          Cash and cash equivalents, end of period $1,769,273  $3,588,117                   Supplemental disclosures of cash flow information        Interest paid  3⁄4  $28,898          The accompanying notes are an integral part of these financial statements.
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**US DATAWORKS, INC.****NOTES TO UNAUDITED FINANCIAL STATEMENTS****1.** **Organization and Business**   **General**   US Dataworks, Inc. (the “Company”), a Nevada corporation, develops, markets, and supportspayment processing software for the financial services industry. Its customer base includes manyof the largest financial institutions as well as credit card companies, government institutions,and high-volume merchants in the United States. The Company was formerly known as Sonicport,Inc. **2.** **Summary of Significant Accounting Policies**   **Revenue Recognition**   The Company recognizes revenues in accordance with the provisions of the American Institute ofCertified Public Accountants’ Statement of Position 97-2, “Software Revenue Recognition.” TheCompany licenses its software products under nonexclusive, nontransferable license agreements.These arrangements do not require significant production, modification, or customization,therefore, revenue is recognized when a license agreement has been signed, delivery of thesoftware product has occurred, the related fee is fixed or determinable, and collectibility isprobable.   In certain instances, the Company licenses its software on a transactional fee basis in lieu ofan up-front licensing fee. In these arrangements, the customer is charged a fee based upon thenumber of items processed by the software and the Company recognizes revenue as thesetransactions occur. The transaction fee also includes the provision of standard maintenance andsupport services as well as product upgrades should such upgrades become available.   If professional services were provided in conjunction with the installation of the softwarelicensed, revenue is recognized when these services have been provided.   For license agreements that include a separately identifiable fee for contracted maintenanceservices, such maintenance revenues are recognized on a straight-line basis over the life of themaintenance agreement noted in the agreement, but following any installation period of thesoftware.   **Goodwill**   Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards(SFAS) No. 142 “Goodwill and Other Intangible Assets,” which establishes new accounting andreporting requirements for goodwill and other intangible assets. Under SFAS No. 142, allgoodwill amortization ceased effective January 1, 2002.   The goodwill recorded on the Company’s books is from the acquisition of US Dataworks, Inc. infiscal year 2001 which remains the Company’s single reporting unit. SFAS 142 requires goodwillfor each reporting unit of an entity be tested for impairment by comparing the fair value ofeach reporting unit with its carrying value. Fair value is determined using a combination of thediscounted cash flow, market multiple and market capitalization valuation approaches.Significant estimates used in the methodologies include estimates of future cash flows, futureshort-term and long-term growth rates, weighted average cost of capital and estimates of marketmultiples for each reportable unit. On an ongoing basis, absent any impairment indicators, theCompany performs impairment tests annually during the fourth quarter.   SFAS 142 requires goodwill to be tested annually and between annual tests if events occur orcircumstances change that would more likely than not reduce the fair value of the reportableunit below its carrying amount.
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  The Company did not have an impairment of goodwill to record for the years ended March 31, 2005or March 31, 2004.   **Stock Options**   SFAS No. 123, “Accounting for Stock-Based Compensation,” establishes and encourages the use ofthe fair value based method of accounting for stock-based compensation arrangements under whichcompensation cost is determined using the fair value of stock-based compensation determined asof the date of grant and is recognized over the periods in which the related services arerendered. The statement also permits companies to elect to continue using the current intrinsicvalue accounting method specified in Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (APB 25), to account for stock-based compensation. The Company haselected to use the implicit value based method and has disclosed the pro forma effect of usingthe fair value based method to account for its stock-based compensation.   The Company has elected to follow APB 25 and related Interpretations in accounting for itsemployee stock options because, as discussed below, the alternative fair value accountingprovided for under SFAS No. 123 requires the use of option valuation models that were notdeveloped for use in valuing employee stock options. Under APB 25, because the exercise priceof the Company’s employee stock options is greater than or equals the market price of theunderlying stock on the date of grant, no compensation cost has been recognized during the threemonths ended June 30, 2005 and June 30, 2004 or for the years ended March 31, 2005 and March 31,2004.   Pro forma information regarding net income and earnings per share is required by SFAS No. 123and has been determined as if the Company had accounted for its employee stock options under thefair value method of that Statement. The fair value for these options was estimated at the dateof grant using a Black-Scholes option pricing model.   The Black-Scholes option pricing model was developed for use in estimating the fair value oftraded options which have no vesting restrictions and are fully transferable. In addition,option pricing models require the input of highly subjective assumptions including the expectedstock price volatility. Because the Company’s employee stock options have characteristicssignificantly different from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable single measure of the fair value of itsemployee stock options.   For purposes of pro forma disclosure, the estimated fair value of the options is included inexpense over the option’s vesting period or expected life. The Company’s pro forma informationfor the three months ended June 30, 2005 and 2004 is as follows:           **For the Three Months Ended**  **June 30,**  **2005** **2004**Net loss as reported $(968,800) $(1,389,547)Add stock-based employee compensationexpense included in net loss as reported,net of related tax effects  0   0          Deduct stock-based employee compensationexpense determined under the fair valuebased method for all awards, net of relatedtax effects $(307,452) $(287,627)Net loss; pro forma $(1,276,252) $(1,677,174)Basic and diluted loss per share, as reported $(0.03) $(0.05)Basic and diluted loss per share, pro forma $(0.04) $(0.07)
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  The fair value of these options was estimated at the date of grant using the Black-Scholesoption pricing model with the following weighted-average assumptions for the three months endedJune 30, 2005 and 2004: dividend yields of 0%; expectedvolatility of 65% and 75%, respectively;risk-free interest rates of 3.69% and 2.75%, respectively; and expected lives of 3 years. Therewere no stock options granted during the three months ended June 30, 2005. The per-shareweighted average fair value of stock options granted during the three months ended June 30, 2004was $0.73.   **Loss per Share**   The Company calculates loss per share in accordance with SFAS No. 128, “Earnings per Share.”Basic loss per share is computed by dividing the net loss by the weighted-average number ofcommon shares outstanding. Diluted loss per share is computed in a similar manner to basic lossper share except that the denominator is increased to include the number of additional commonshares that would have been outstanding if the potential common stock equivalents had beenissued and if the additional common shares were dilutive.   The following potential common stock equivalents have been excluded from the computation ofdiluted net loss per share for the periods presented because the effect would have beenanti-dilutive (options and warrants typically convert on a one-for-one basis, see conversiondetails of the preferred stock stated below for the common stock shares issuable uponconversion):           **For the Three Months Ended**  **June 30,**  **2005** **2004**Options outstanding under the Company’s stock option plans  3,926,783   2,667,250 Options granted outside the Company’s stock option plans  1,160,000   1,260,100 Warrants issued in conjunction with private placements  4,947,859   4,896,502 Warrants issued as a financing cost for notes payableand convertible notes payable  2,194,837   2,241,137 Warrants issued for services rendered and litigation settlement  360,769   337,800 Warrants issued as part of the US Dataworks, Inc. acquisition  67,200   67,200 Convertible Series B preferred stock (a)  109,933   167,911  (a) The Series B preferred stock is convertible into shares of common stock at a conversionprice of $3.75 per share.  **Estimates**   The preparation of financial statements requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from those estimates.   **Concentrations of Credit Risk**   The Company sells its products throughout the United States and extends credit to its customers.It also performs ongoing credit evaluations of such customers. The Company does not obtaincollateral to secure its
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  accounts receivable. The Company evaluates its accounts receivable on a regular basis forcollectibility and provides for an allowance for potential credit losses as deemed necessary.   Four of our customers accounted for 34%, 19%, 16% and 12% of our net revenues for the threemonths ended June 30, 2005. Two of these customers, which represented 19% and 12% of ourquarterly revenues, were the result of our relationship with a one of our strategic resellers.Four of our customers accounted for 35%, 23%, 19% and 12% of our net revenues for the threemonths ended June 30, 2004.   At June 30, 2005, amounts due from a strategic reseller and two significant customers accountedfor 36%, 25% **3.** **Property and Equipment**   Property and equipment as of June 30, 2005 consisted of the following:     Furniture and fixtures $84,745 Automobile  15,072 Office and telephone equipment  90,237 Computer equipment  435,011 Computer software  1,255,585 Leasehold improvements  62,998         1,943,648 Less accumulated depreciation and amortization  (1,313,912)     Total $629,736        Depreciation and amortization expense for the three months ended June 30, 2005 and 2004 was$88,525 and $74,126, respectively. **4.** **Notes Payable — Related Parties**   On January 22, 2001, the Company entered into a note payable with an advisory board member andshareholder for $50,000. The note is non-interest-bearing, is unsecured, and is due on demand.As of June 30, 2005, the outstanding balance on the note payable was $39,000. **5.** **Convertible Promissory Notes**   Convertible promissory notes at June 30, 2005 consisted of the following:     Convertible promissory note, interest at 10% perannum, unsecured, due in three equal annual installmentsbeginning September 15, 2005 $768,199      Convertible promissory note issued June 16, 2005 with $70,000 OriginalIssue Discount, due in 15 equal monthly installments beginning April 15, 2006,net of unamortized discount of $642,080  127,920          896,119      Less current portion  (95,582)          Long-term portion $800,537      
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  Convertible promissory note with interest at 10% per annum  This unsecured convertible promissory note in the principal amount of $768,199 is due, withinterest at 10% per annum, in three equal annual installments beginning September 15, 2005 andwas issued to settle litigation (described below) brought by an investor in the Company pursuantto a Settlement Agreement and Mutual Release executed November 12, 2004 wherein the partiesagreed to dismiss the lawsuit.   On December 12, 2003, an individual investor filed a lawsuit against US Dataworks in Los AngelesSuperior Court alleging breach of an oral agreement between the plaintiff and a former directorof US Dataworks. In the complaint, the plaintiff alleged that the oral agreement granted himthe right to receive additional shares from US Dataworks in the event that he should sellcertain shares of our common stock at a price less than $15 per share. The plaintiff allegedthat in March 2000, as partial consideration under the alleged oral agreement, he convertedthree promissory notes with an aggregate principal amount of $725,000 into 77,856 shares of ourcommon stock.   On November 12, 2004, the Company and the plaintiff entered into a Settlement Agreement andMutual Release wherein the parties agreed to dismiss the lawsuit and the Company agreed to paythe plaintiff (1) a $768,199 convertible promissory note payable with interest at 10% per annumin three equal annual installments beginning September 15, 2005, (2) a warrant to purchase160,000 shares of the Company’s common stock at a purchase price of $0.75 per share, whichwarrant expires on November 10, 2006 and (3) reimbursement of the plaintiff’s legal fees andexpenses. The note is convertible at anytime, at the holder’s election, into shares of theCompany’s common stock at a per share conversion price of $1.10, subject to standardantidilution provisions.   Using the Black-Scholes pricing model the Company has determined the value of the warrantsissued in connection with the settlement to be $126,000. This amount, together with the value ofthe convertible promissory note, the value of the plaintiff’s legal expense reimbursement andthe Company’s legal costs incurred in connection with the settlement totals $924,200 and hasbeen 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 Discount   On June 16, 2005, the Company entered into a Securities Purchase Agreement dated June 16, 2005with an institutional investor (the “Debenture Agreement”) for the sale of a convertibledebenture with a principal amount of $770,000 and an original issue discount of $70,000 forgross proceeds of $700,000. The debenture is convertible at anytime at the discretion of theholder at a price per share of $0.572 into 1,346,154 shares of the Company’s common stock. Theconvertible debenture is to be repaid in 15 monthly installments of $51,333.33 beginning April15, 2006. The Company may also elect, upon proper notice, to pay any monthly installment inshares of Common Stock based on a conversion price equal to the lesser of (i) the thenapplicable Conversion Price or (ii) 90% of the volume weighted average price of the common stockfor the 10 trading days immediately preceding the payment; provided, that, such conversion pricemust be at least equal to the conversion floor of $0.23, or such monthly installment must bepaid in cash. In connection with the Debenture Agreement, the Company issued two groups ofwarrants, Short Term warrants and Long Term warrants to the institutional investor. The ShortTerm warrants allow the institutional investor to purchase an aggregate of 407,926 shares of theCompany’s common stock with an exercise price of $0.572 per share that may be exercised for aperiod of 180 days at any time after the later of (i) the Effective Date of the registrationstatement described below or (ii) December 16, 2005. The Long Term warrants allow theinstitutional investor to purchase an aggregate of 471,154 shares of the Company’s common stockwith an exercise price of $0.572 per share that may be exercised at anytime from December 16,2005 through December 16, 2008; provided, however, the institutional investor will not bepermitted to exercise a warrant to the extent that the number of shares of Common Stockbeneficially owned by such institutional investor taken together with the number of shares to beissued upon exercise of the warrant equals or exceeds 4.999% of the Company’s then issued andoutstanding shares of Common Stock. The warrants also contain trading market restrictions thatpreclude the Company from issuing shares of Common Stock upon exercise thereof if such issuance,when aggregated with other issuances of Common Stock pursuant to the warrants, would exceed19.999% of the Company’s then issued and outstanding shares of Common Stock, unless the Companyhas previously obtained the required shareholder approval. The Company, pursuant to theRegistration Rights Agreement dated June 16, 2005 between the Company and the institutionalinvestor, agreed to file a registration statement for the resale of the
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  shares of Common Stock that may be issued to the institutional investor upon the conversion ofthe convertible debenture and the exercise of the Short Term warrants and the Long Termwarrants.   The Company allocates the proceeds received from debt or convertible debt with detachablewarrants or shares of common stock using the relative fair value of the individual elements atthe time of issuance. Using the Black-Scholes valuation model, the Company has determined theaggregate value of the warrants issued in connection with this convertible note to be $221,722.The amount allocated to the warrants as debt discount will be recognized as additional interestexpense over the period from the date of issuance of the note to the earlier of the conversiondate or the stated maturity date. During the three months ended June 30, 2005, the Companyrecognized $4,435 in interest expense related to the accretion of the debt discount associatedwith the warrants issued in connection with this convertible promissory note.   In accordance with generally accepted accounting principles, in the event the conversion priceis less than the Company’s stock price on the date of issuance, the difference is considered tobe a beneficial conversion feature and is amortized as financing expense over the period fromthe date of issuance to the earlier of the conversion date or the stated redemption date. TheCompany has calculated the aggregate beneficial conversion feature of this convertible note tobe $363,462. During the three months ended June 30, 2005, the Company recognized $7,269 ininterest expense related to the amortization of the beneficial conversion feature recorded onthis convertible promissory note. 6. **Commitments and Contingencies**   **Employment Agreements**   On April 2, April 2, May 13 and September 26, 2003, the Company entered into employmentagreements with its President and Chief Operating Officer, Senior Vice President and ChiefTechnology Officer, Chief Executive Officer and Chairman of the Board, and Vice President ofBusiness Development and General Counsel, respectively. Each employment agreement is for a termof three years. Annual base salaries for these four members of senior management are $175,000,$165, 000, $200,000 and $150,000, respectively.   On August 2, 2004, the Company entered into an employment agreement with its Vice PresidentSales – Remittance Processing Division. The employment agreement is for a term of three yearswith an annual base salary of $150,000 and, during the first twelve months of the agreement, anadvance of future commissions of $75,000, payable in semi-monthly installments. The advance isnon-recoverable; however, any commissions earned during the first twenty-four months of theagreement will be reduced by the amount of the advance.   **Deferred compensation**   On April 12, 2004, the Company granted a deferred compensation award to its Chief FinancialOfficer. The award provides for a payment equal to the product of 200,000 multiplied by anamount equal to (a) the Company’s average 20 day trailing stock price on the third anniversarydate of his employment (March 17, 2006) less (b) $0.55 (the Company’s stock price on the date ofhis employment). In no event may the payment amount exceed $430,000. The payment amount, if any,is cancelable in the event of Mr. Reiland’s voluntary termination or termination by the Companyfor Cause (as defined).   Upon the granting of the deferred compensation award, an unamortized compensation expense equalto the value on the date of grant is accrued as a liability and charged to stockholders’ equity.This amount is then amortized over the service period of the award. As the amount of the awardis not yet determined because it can be adjusted as stated in the terms above, the award isrevalued at the end of each reporting period using the stock price at that time. This variableaccounting will be in place until March 17, 2006, the date upon which the amount of the paymentson these awards will be fixed. Total compensation expense recognized with respect to thisdeferred compensation award during the three months ended June 30, 2005 was a reduction inpreviously booked expenses of $(8,217).
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**7.** **Stockholders’ Equity**   **Preferred Stock**   The Company has 10,000,000 authorized shares of $0.0001 par value preferred stock. The preferredstock may be issued in series, from time to time, with such designations, rights, preferences,and limitations as the Board of Directors may determine by resolution.   **Convertible Series B Preferred Stock**   The Company has 700,000 authorized shares of $0.0001 par value convertible Series B preferredstock.   In August and October 2000, the Company issued 509,333 and 133,666 units respectively, in aprivate placement for gross proceeds of $382,000 and $100,250, respectively. Each unit consistedof one share of the Company’s voting convertible Series B preferred stock (the “Series B”) and awarrant, exercisable through October 2003, to purchase one share of the Company’s common stock.The Series B has a liquidation preference of $0.75 per share and carries a 10% cumulativedividend payable each March 1 and September 1. The Company has the right to redeem the Series Bat any time after issuance at a redemption price of $0.83 per share, plus any accrued but unpaiddividends. The Series B is convertible upon issuance into common stock at $3.75 per share. Thewarrant entitles the holder to purchase one share of the Company’s common stock at $6.25 pershare, which represents 115% of the market value of the Company’s stock at the closing date.   In May 2001, an investor in the Series B rescinded its acquisition and returned to the Company13,333 shares and warrants for the purchase of 2,667 shares of common stock in exchange for thereturn of its investment of $10,000.   In August 2004, an investor in the Series B elected to convert his 79,999 shares and accordinglywas issued 15,998 shares of the Company’s common stock.   At June 30, 2005, there were accumulated, undeclared dividends in arrears of $179,805 or $0.33per share.   **Common Stock**   **Financing Agreement**   During the three months ended June 30, 2004, the Company completed the following:   On June 30, 2003, the Company entered into an agreement with an institutional investor for anequity line financing of up to $4,000,000. The Company may sell up to $4,000,000 of its commonstock, with a minimum commitment of $1,500,000, to the institutional investor under the equityline on trading days on which our closing price per share is $0.50 or more.   In May 2004, the Company and the institutional investor agreed to terminate the equity linefinancing in consideration of the Company issuing to the investor $225,000 of unregisteredshares of common stock. Based upon the closing market price of the Company’s common stock on thedate of the termination agreement, the Company issued 136,861 shares of common stock to theinvestor in May 2004.   **Common Stock and Warrants**   During the three months ended June 30, 2005, the Company completed the following:   Sale of Common Stock and Warrants   Effective June 16, 2005, the Company entered into definitive agreements with nine accreditedinvestors for the sale of 1,258,654 shares of Common Stock for gross proceeds of $600,000. Theagreements also provide that the Company will issue warrants, exercisable over a three yearperiod, to purchase up to 314,664 shares of
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  Common Stock at an exercise price of $0.715 per share and an additional 314,664 shares of CommonStock at an exercise price of $0.812 per share. In July 2005, upon receipt of approval of theAmerican Stock Exchange for issuance of the shares of Common Stock, the agreements werecompleted and the investors were issued the shares of Common Stock and warrants.   During the three months ended June 30, 2004, the Company completed the following:   Sale of Common Stock and Warrants   In April 2004, the Company completed a private placement of $4.65 million, less direct issuanceexpenses of $641,500, with certain major institutional investment funds. Under terms of theagreement, the Company issued 2.89 million shares of common stock. In addition, the Companyissued warrants to purchase up to 3.61 million shares of common stock at an exercise price of$1.61 per share.   Conversions of Convertible Promissory Notes   In June 2004, two accredited investors elected to convert their notes totaling $100,000 inaggregate principal amount of convertible notes and $10,000 of aggregate accrued interest andwere issued 244,446 shares of common stock in accordance with the terms of the notes.   **Stock Options**   In August 1999, the Company implemented its 1999 Stock Option Plan (the “1999 Plan”). In August2000, the Company’s Board of Directors approved the 2000 Stock Option Plan (the “2000 Plan”),which amends and restates the 1999 Plan. Under the 2000 Plan, the maximum aggregate number ofshares which may be granted is 6,000,000. The exercise price must not be less than the fairmarket value on the date of grant of the option. The options vest in varying increments overvarying periods and expire 10 years from the date of vesting. In the case of incentive stockoptions 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 varyingincrements and expire five years from the date of vesting.   During the three months ended June 30, 2005 the Company did not grant any stock options. Duringthe three months ended June 30, 2004, the Company granted 790,000 stock options to certainemployees that may be exercised at prices ranging between $0.55 and $1.36.   The following table summarizes certain information relative to stock options:                   2000 Stock Option Plan Outside of Plan      Weighted-            Average Exercise     Weighted-Average  Shares Price Shares Exercise PriceOutstanding, March 31, 2005  3,926,783  $1.60   1,163,000  $1.07 Granted  0       0     Exercised  0       0     Forfeited/canceled  0      (3,000) $21.72 Outstanding, June 30, 2005  3,926,783  $1.60   1,160,000  $1.02 Exercisable, June 30, 2005  1,905,285  $1.69   580,000  $1.02 
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  The weighted-average remaining life and the weighted-average exercise price of all of theoptions outstanding at June 30, 2005 were 8.3 years and $1.47, respectively. The exercise pricesfor the options outstanding at June 30, 2005 ranged from $0.55 to $22.58, and informationrelating 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$0.55 — 2.00  3,916,949   1,913,779  8.46 years $0.94  $0.87 $2.01 — 3.00  1,023,834   425,506  8.24 years $2.78  $2.84 $3.01 — 22.58  146,000   146,000  5.68 years $6.37  $6.37    5,086,783   2,485,285             
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**Item 2. Management’s Discussion and Analysis or Plan of Operation.**The following discussionand analysis of our financial condition and results of operations should be read with theconsolidated financial statements and related notes included elsewhere in this Quarterly Report onForm 10-QSB.     When used in this Quarterly Report on Form 10QSB, the words “expects,” “anticipates,”“believes,” “plans,” “will” and similar expressions are intended to identify forward-lookingstatements. These are statements that relate to future periods and include, but are not limited to,statements regarding our critical accounting policies, adequacy of cash, expectations regarding netlosses and cash flow, statements regarding our growth and profitability, investments in marketingand promotion, our need for future financing, our dependence on personnel and our ability torespond to rapid technological change. Forward-looking statements are subject to certain risks anduncertainties that could cause actual results to differ materially from those projected. Theserisks and uncertainties include, but are not limited to, those discussed below, as well as risksrelated to our ability to develop and timely introduce products that address market demand, theimpact of alternative technological advances and competitive products, market fluctuations, ourability to obtain future financing, and the risks set forth below under “Factors That May AffectOur Results.” These forward-looking statements speak only as of the date hereof. We expresslydisclaim any obligation or undertaking to release publicly any updates or revisions to anyforward-looking statements contained herein to reflect any change in our expectations with regardthereto or any change in events, conditions or circumstances on which any such statement is based.**Critical Accounting Policies**     The following discussion and analysis of our financial condition and results of operations isbased upon our financial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Onan on-going basis, we evaluate these estimates, including those related to revenue recognition andconcentration of credit risk. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.     We believe that of the significant accounting policies used in the preparation of ourfinancial statements (see Note 2 to the Financial Statements), the following are criticalaccounting policies, which may involve a higher degree of judgment, complexity and estimates.*Revenue Recognition*     We recognize revenues in accordance with the provisions of the American Institute of CertifiedPublic Accountants’ Statement of Position 97-2, “Software Revenue Recognition.” We license oursoftware products under non-exclusive, non-transferable license agreements. These arrangements donot require significant production, modification or customization, therefore revenue is recognizedwhen the license agreement has been signed, delivery of the software product has occurred, therelated fee is fixed or determinable and collectibility is probable.     In certain instances, we license our software on a transactional fee basis in lieu of anup-front licensing fee. In these arrangements, the customer is charged a fee based upon the numberof items processed by the software and we recognize revenue as these transactions occur. Thetransaction fee also includes the provision of standard maintenance and support services as well asproduct upgrades should such upgrades become available.     If professional services are provided in conjunction with the installation of the softwarelicensed, revenue is recognized when those services have been provided.     For license agreements that include a separately identifiable fee for contracted maintenanceservices, such revenues are recognized on a straight-line basis over the life of the maintenanceagreement noted in the license agreement, but following any installation period of the software.
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*Concentrations of Credit Risk*     We extend credit to our customers and perform ongoing credit evaluations of our customers. Wedo not obtain collateral from our customers to secure our accounts receivable. We evaluate ouraccounts receivable on a regular basis for collectibility and provide for an allowance forpotential credit losses as deemed necessary.     Four of our customers, the Federal Reserve Bank, Southern California Gas Company, Regulus andCitibank, accounted for 34%, 19%, 16% and 12%, respectively, of our net revenues for the threemonths ended June 30, 2005. Two of these customers, which represented 19% and 12% of our quarterlyrevenues, were the result of our relationship with one of our strategic resellers. Four of ourcustomers accounted for 35%, 23%, 19% and 12% of our net revenues for the three months ended June30, 2004.     At June 30, 2005, amounts due from a strategic reseller and two significant customersaccounted for 36%, 25% and 25%, respectively, of accounts receivable.**Results of Operations**     The results of operations reflected in this discussion include our operations for the threemonth periods ended June 30, 2005 and 2004.     *Revenues*     Revenues totaled $1,080,339 for the three months ended June 30, 2005 compared to revenues of$903,132 for the three months ended June 30, 2004, an increase of $177,207 or 20%. The increase inrevenues was primarily attributable to an increase in service revenues of $113,625 or 29%, anincrease in transactional revenues of $51,591 or 40%, and an increase in maintenance revenues of$60,587 or 191%, offset by a decrease in license revenues of $48,596 or 14%. Services revenuesincreased due to installation services performed for two recently signed customers and additionalinstallation and conversion services performed for two existing customers. Transactional revenuesincreased in the first quarter of the current fiscal year compared to the same period in the prioryear principally as a result of previously installed customers subject to transactional feesincreasing their utilization of our software solutions. Maintenance revenues increased in the firstquarter compared to the same period in the prior year principally due to a larger number ofinstalled customers subject to annual maintenance fees. The decrease in license revenues in thefirst quarter is due to upfront license revenues received in the prior fiscal year from two largecredit card processing companies with only one similar large upfront license transaction in thefirst quarter of the current year.     *Cost of Sales*     Costs of sales principally include the cost of Thomson Financial EPICWareTM software resold inconjunction with our software as well as costs of our personnel who perform the services associatedwith our software maintenance, support, training and installation activities. Cost of salesincreased by $61,365 or 19% to $377,501 for the three months ended June 30, 2005 from $316,136 forthe three months ended June 30, 2004, principally due to a $114,212 increase in the cost ofEPICWareTM software resold in the quarter offset by a decrease of $52,697 in personnel costs relatedto services, maintenance, support, training and installation services.     *Operating Expenses*     Total operating expenses increased by $98,769 or 6% to $1,642,800 for the three months endedJune 30, 2005 from $1,544,031 for the three months ended June 30, 2004. The increase in operatingexpenses was principally attributable to a $298,511 increase in personnel costs primarily due to anincrease in our headcount to 42 at June 30, 2005 compared to 22 at June 30, 2004. Additionally,occupancy costs increased by $60,201 for the quarter due to additional leased office space requiredby our larger staff. Also our legal expenses increased by $27,202 in the first quarter of thecurrent fiscal year compared to the same period in the prior year principally as a result of thetwo capital financing transactions we entered into in June 2005. These operating costs increaseswere offset by decreases
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in other areas, principally a decrease of $256,721 in marketing and advertising expenses. Inthe prior fiscal year first quarter we incurred an unusually high level of marketing andadvertising expenses as a result of the development and planned release of our new product,ClearingworksTM.     *Other Expenses*     Other expenses, including interest expense and financing costs, decreased $403,674 or 93% to$28,838 for the three months ended June 30, 2005 from $432,512 for the three months ended June 30,2004. The decrease was primarily due to the non-recurring, non-cash financing charges incurred inour capital restructuring transactions in the prior year.     *Net Loss*     Net loss decreased by $420,747 or 30% to a net loss of $968,800 for the three months endedJune 30, 2005 from $1,389,547 for the three months ended June 30, 2004.**Liquidity and Capital Resources**     We have incurred significant losses and negative cash flows from operations for the last threefiscal years. We have obtained our required cash resources through the sale of debt and equitysecurities. We may not operate profitably in the future and may be required to continue the sale ofdebt and equity securities to finance our operations.     Management has specific plans to address the Company’s financial situation as follows: **•** In addition to the two June 2005 capital transactions discussed below, Managementplans to raise additional capital through private placements of our common stock and/orthe sale of debt that is convertible into common stock.  **•** Management believes that a month-to-month professional services contract with anexisting major financial services customer that was executed in June 2005, together witha contemplated software licensing and maintenance services contract with this samecustomer may significantly reduce the negative cash flows from operations through March31, 2006.  **•** Additionally, Management believes that the demand for our software and professionalservices will continue to expand as the United States market embraces the new paymentprocessing opportunities available under changing regulations such as the Check ClearingAct for the 21st Century. Management believes that increased demand for oursolutions, including our recently introduced ClearingworksTM product, will lead toincreased cash flows from up-front license fees, transaction based contract fees andincreases in professional services revenues.     There can be no assurance that our planned activities will be successful or that we willultimately attain profitability. Our long term viability depends on our ability to obtain adequatesources of debt or equity funding to fund the continuation of our business operations and toultimately achieve adequate profitability and cash flows to sustain our operations.     The opinion of our independent auditor as of and for each of the two years ended March 31,2005 expressed substantial doubt as to our ability to continue as a going concern. We will need toincrease revenues from software licenses, transaction based software license contracts andprofessional services agreements to become profitable.     Cash and cash equivalents increased by $243,887 to $1,769,273 at June 30, 2005 from $1,525,386at March 31, 2005. Cash used for operating activities was $1,000,581 in the three months endedJune 30, 2005 compared to $1,272,073 in the same period in the prior year.     Cashused for investing activities of $40,982 and $32,274 in the three months ended June 30,2005 and June 30, 2004, respectively, was due to equipment purchases.
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     Financing activities provided cash of $1,285,450 in the three months ended June 30, 2005compared to $3,689,075 in the three months ended June 30, 2004. Financing activities in the currentthree month period included: (a) the receipt of $600,000, less direct issuance expenses of $14,550,from the sale to nine accredited investors of 1.3 million shares of our common stock and warrantsto purchase up to 629,328 shares of our common stock, and (b) the receipt of $700,000 from the saleto an institutional investor of a convertible debenture with a principal amount of $770,000 and anoriginal issue discount of $70,000 with warrants to purchase 879,080 shares of our common stock.     As discussed above, also in June 2005, we entered into a month-to-month contract with anexisting customer, one of the country’s largest credit card and financial services companies, toprovide professional services which we believe may result in revenues of up to approximately $1.2million during the fiscal year ending March 31, 2006. Further, we believe this existing customermay also enter into our contemplated license and maintenance services contract for ourClearingworksTM product suite that may yield additional revenues of up to approximately $2.5million. We cannot assure you that this existing customer will actually enter into our contemplatedcontract. As a result of our recent capital raising transactions, our increased level oftransactional revenues achieved in fiscal 2005 and the first quarter of fiscal 2006, and theincreased revenues to be received from recently received and contemplated contracts, we believe wecurrently have adequate capital resources to fund our anticipated cash needs through March 31, 2006and beyond. However, an adverse business or legal development could require us to raise additionalfinancing sooner than anticipated. We recognize that we may be required to raise such additionalcapital, at times and in amounts, which are uncertain, especially under the current capital marketconditions. If we are unable to acquire additional capital or are required to raise it on termsthat are less satisfactory than we desire, it may have a material adverse effect on our financialcondition. In the event we raise additional equity, these financings may result in dilution toexisting shareholders.**Factors That May Affect Our Results****We have a general history of losses and may not operate profitably in the future.**     We have incurred losses for the last three fiscal years. Our net losses and negative cash flowmay continue for the foreseeable future. As of June 30, 2005, our accumulated deficit was$(47,260,981). We believe that our planned growth and profitability will depend in large part onour ability to promote our brand name and gain clients and expand our relationships with clientsfor whom we would provide licensing agreements and system integration. Accordingly, we intend toinvest heavily in marketing, strategic partnership, development of our client base and developmentof our marketing technology and operating infrastructure. If we are not successful in promoting ourbrand name and expanding our client base, it will have a material adverse effect on our financialcondition and our ability to continue to operate our business.**Our ability to continue as a going concern may be contingent upon our ability to secure capitalfrom prospective investors or lenders.**     The accompanying consolidated financial statements have been prepared assuming the Companywill continue on a going concern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business. We believe we currently have adequatecash to fund anticipated cash needs through March 31, 2006 and beyond. In June 2005, we raised anadditional $700,000 of convertible debt and negotiated definitive agreements for $600,000 of equitycapital in private placements with accredited individual and institutional investors. However, wemay need to raise additional capital in the future. Any equity financing may be dilutive toshareholders, and debt financing, if available, will increase expenses and may involve restrictivecovenants. We may be required to raise additional capital, at times and in amounts that areuncertain, especially under the current capital market conditions. These factors raise substantialdoubt about the Company’s ability to continue as a going concern. Under these circumstances, if weare unable to obtain additional capital or are required to raise it on undesirable terms, it mayhave a material adverse effect on our financial condition, which could require us to: **•** curtail our operations significantly;  **•** sell significant assets;
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 **•** seek arrangements with strategic partners or other parties that may require usto relinquish significant rights to products, technologies or markets; or  **•** explore other strategic alternatives including a merger or sale of USDataworks.     Our financial statements do not include any adjustments relating to the recoverability andclassification of recorded assets or liabilities that might be necessary should the Company beunable to continue as a going concern.**Our operating results are subject to fluctuations caused by many factors that could cause us tofail to achieve our revenue or profitability expectations, which in turn could cause our stockprice to decline.**     Our operating results can vary significantly depending upon a number factors, many of whichare outside our control. Factors that may affect our quarterly operating results include: **•** market acceptance of and changes in demand for our products and services;  **•** gain or loss of clients or strategic relationships;  **•** announcement or introduction of new software, services and products by us or by our competitors;  **•** 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 ofterrorism, war and political instability; and  **•** general economic conditions, including economic conditions specific to thefinancial services industry.     In addition, each quarter we derive a significant portion of our revenue from agreementssigned at the end of the quarter. Our operating results could suffer if the timing of theseagreements is delayed. Depending on the type of agreements we enter into, we may not be able torecognize revenue under these agreements in the quarter in which they are signed. Some of all ofthese factors could negatively affect demand for our products and services, and our futureoperating results.     Most of our operating expenses are relatively fixed in the short-term. We may be unable toadjust spending rapidly to compensate for any unexpected sales shortfall, which could harm ourquarterly operating results. Because of the emerging nature of the markets in which we compete, wedo not have the ability to predict future operating results with any certainty. Because of theabove factors, you should not rely on period-to-period comparisons of results of operation as anindication of future performances.
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**We may not be able to maintain our relationships with strategic partners, which may cause our cashflow to decline.**     We may not be able to maintain our relationships with strategic partners, such as BancTec andComputer Sciences Corporation. These strategic relationships are a core component of our sales anddistribution strategy. The loss of a strategic partner could harm our financial results.**Because a small number of customers have historically accounted for and may in future periodsaccount for substantial portions of our revenue, our revenue could decline because of delays ofcustomer orders or the failure to retain customers.**     We have a small number of customers that account for a significant portion of our revenue. Ourrevenue could decline because of a delay in signing agreements with a single customer or thefailure to retain an existing customer. We may not obtain additional customers. The failure toobtain additional customers and the failure to retain existing customers will harm our operatingresults.**If general economic and business conditions do not improve, we may experience decreased revenue orlower growth rates.**     The revenue growth and profitability of our business depends on the overall demand forcomputer software and services in the product segments in which we compete. Because our sales areprimarily to major banking and government customers, our business also depends on general economicand business conditions. A softening of demand caused by a weakening of the economy may result indecreased revenue or lower growth rates. As a result, we may not be able to effectively promotefuture license revenue growth in our application business.**We may not be able to attract, retain or integrate key personnel, which may prevent us fromsuccessfully operating our business.**     We may not be able to retain our key personnel or attract other qualified personnel in thefuture. Our success will depend upon the continued service of key management personnel. The loss ofservices of any of the key members of our management team or our failure to attract and retainother key personnel could disrupt operations and have a negative effect on employee productivityand morale and harm our financial results.**We operate in a market that is intensely and increasingly competitive, and if we are unable tocompete successfully, our revenue could decline and we may be unable to gain market share.**     The market for financial services software is relatively new and highly competitive. Ourfuture success will depend on our ability to adapt to rapidly changing technologies, evolvingindustry standards, product offerings and evolving demands of the marketplace.     Some of our competitors have: **•** longer operating histories;  **•** larger installed customer bases;  **•** greater name recognition and longer relationships with clients; and  **•** significantly greater financial, technical, marketing and public relations resources than US Dataworks.     Our competitors may also be better positioned to address technological and market developmentsor may react more favorably to technological changes. We compete on the basis of a number offactors, including: **•** the breadth and quality of services;  **•** creative design and systems engineering expertise;  **•** pricing;
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 **•** technological innovation; and  **•** understanding clients’ strategies and needs.     Competitors may develop or offer strategic services that provide significant technological,creative, performance, price or other advantages over the services we offer. If we fail to gainmarket share or lose existing market share, our financial condition, operating results and businesscould be adversely affected and the value of the investment in us could be reduced significantly.We may not have the financial resources, technical expertise or marketing, distribution or supportcapabilities to compete successfully.**We may be responsible for maintaining the confidentiality of our client’s sensitive information,and any unauthorized use or disclosure could result in substantial damages and harm our reputation.**     The services we provide for our clients may grant us access to confidential or proprietaryclient information. Any unauthorized disclosure or use could result in a claim against us forsubstantial damages and could harm our reputation. Our contractual provisions attempting to limitthese damages may not be enforceable in all instances or may otherwise fail to adequately protectus from liability for damages.**If we do not adequately protect our intellectual property, our business may suffer, we may loserevenue or we may be required to spend significant time and resources to defend our intellectualproperty rights.**     We rely on a combination of patent, trademark, trade secrets, confidentiality procedures andcontractual procedures to protect our intellectual property rights. If we are unable to adequatelyprotect our intellectual property, our business may suffer from the piracy of our technology andthe associated loss in revenue. Any patents that we may hold may not sufficiently protect ourintellectual property and may be challenged by third parties. Our efforts to protect ourintellectual property rights, may not prevent the misappropriation of our intellectual property.These infringement claims or any future claims could cause us to spend significant time and moneyto defend our intellectual property rights, redesign our products or develop or license asubstitute technology. We may be unsuccessful in acquiring or developing substitute technology andany required license may be unavailable on commercially reasonable terms, if at all. In the eventof litigation to determine the validity of any third party claims or claims by us against suchthird party, such litigation, whether or not determined in our favor, could result in significantexpense and divert the efforts of our technical and management personnel, regardless of the outcomeof such litigation. Furthermore, other parties may also independently develop similar or competingproducts that do not infringe upon our intellectual property rights.
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**Item 3. Controls and Procedures****Evaluation of Disclosure Controls and Procedures**     We carried out an evaluation, under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer, of the effectivenessof our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end ofthe period covered by this quarterly report. Based on the evaluation, such officers have concludedthat these disclosure controls and procedures are effective in ensuring that the information we arerequired to disclose in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in Securities and ExchangeCommission rules and forms and is accumulated and communicated to management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timely discussions regardingrequired disclosure.     There has been no change in our internal control over financial reporting (as defined in Rules13a-13(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by thisquarterly report that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.
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**PART II — OTHER INFORMATION****Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**     Effective as of June 16, 2005, pursuant to Section 4(2) of the Securities Act of 1933, asamended, and Rule 506 promulgated thereunder, we sold to nine accredited investors (each a“Purchaser” and collectively, the “Purchasers”) an aggregate of 1,258,654 shares of our CommonStock for an aggregate purchase price of $600,000 ($0.4767 per share) pursuant to that certainSecurities Purchase Agreement dated effective as of June 16, 2005 (the “Equity Agreement”). Inconnection with the Equity Agreement, we issued warrants to the Purchasers to purchase an aggregateof 629,328 shares of our common stock, of which 50%, or 314,664 shares, were issued with anexercise price of $0.715 per share and the remaining 314,664 shares were issued with an exerciseprice of $0.812 per share. The warrants may be exercised at any time after June 16, 2005 and priorto June 16, 2008. We, pursuant to the Registration Rights Agreement dated June 16, 2005 between usand the Purchasers, agreed to file a registration statement for the resale of the shares of CommonStock purchased by the Purchasers, including shares issued upon exercise of the warrants.**Item 6. Exhibits**     The exhibits listed below are required by Item 601 of Regulation S-B.   **Exhibit**  **Number** **Description of Document**   4.1 Securities Purchase Agreement dated as of June 16, 2005 among USDataworks, Inc. and the Purchasers identified on the signaturepages thereto (incorporated by reference to Exhibit 4.1 to theRegistrant’s Current Report on Form 8-K filed with the SEC onJune 22, 2005).   4.2 $770,000 Convertible Debenture dated June 17, 2005 among USDataworks, Inc and the Holder (incorporated by reference toExhibit 4.2 to the Registrant’s Current Report on Form 8-K filedwith the SEC on June 22, 2005).   4.3 Short Term Common Stock Purchase Warrant dated June 16, 2005among US Dataworks, Inc. and the Holder (incorporated byreference to Exhibit 4.3 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 22, 2005).   4.4 Long Term Common Stock Purchase Warrant dated June 16, 2005among US Dataworks, Inc. and the Holder (incorporated byreference to Exhibit 4.4 to the Registrant’s Current Report onForm 8-K filed with the SEC on June 22, 2005).   4.5 Registration Rights Agreement entered into as of June 16, 2005,among US Dataworks, Inc. and the Purchasers identified on thesignature pages thereto (incorporated by reference to Exhibit4.5 to the Registrant’s Current Report on Form 8-K filed withthe SEC on June 22, 2005).   4.6 Securities Purchase Agreement dated as of June 16, 2005 amongthe Registrant and the Purchasers named therein (incorporated byreference to Exhibit 4.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on July 21, 2005).   4.7 Form of Common Stock Purchase Warrant dated June 16, 2005 amongthe Registrant and the Holders named therein with an exerciseprice of $0.715 per share (incorporated by reference to Exhibit4.2 to the Registrant’s Current Report on Form 8-K filed withthe SEC on July 21, 2005).   4.8 Form of Common Stock Purchase Warrant dated June 16, 2005 amongthe Registrant and the Holders named therein with an exerciseprice of $0.812 per share (incorporated by reference to Exhibit4.3 to the Registrant’s Current Report on Form 8-K filed withthe SEC on July 21, 2005).   4.9 Registration Rights Agreement entered into as of June 16, 2005,among the Registrant and the Purchasers named therein(incorporated by reference to Exhibit 4.4 to the Registrant’sCurrent Report on Form 8-K filed with the SEC on July 21, 2005).
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   **Exhibit**  **Number** **Description of Document**   31.1 Section 302 Certification of Chief Executive Officer.   31.2 Section 302 Certification of Chief Financial Officer.   32.1 Section 906 Certification of Chief Executive Officer.   32.2 Section 906 Certification of Chief Financial Officer.**SIGNATURE**     In accordance with the requirements of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.     Dated: August 15, 2005       US DATAWORKS, INC.       By /s/  John S. Reiland          John S. Reiland    Chief Financial Officer    (Principal Financial and Accounting Officer    and Duly Authorized Officer)
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EXHIBIT INDEX   **Exhibit**  **Number** **Description of Document**   4.1 Securities Purchase Agreement dated as of June 16, 2005 amongUS Dataworks, Inc. and the Purchasers identified on thesignature pages thereto (incorporated by reference to Exhibit4.1 to the Registrant’s Current Report on Form 8-K filed withthe SEC on June 22, 2005).   4.2 $770,000 Convertible Debenture dated June 17, 2005 among USDataworks, Inc and the Holder (incorporated by reference toExhibit 4.2 to the Registrant’s Current Report on Form 8-Kfiled with the SEC on June 22, 2005).   4.3 Short Term Common Stock Purchase Warrant dated June 16, 2005among US Dataworks, Inc. and the Holder (incorporated byreference to Exhibit 4.3 to the Registrant’s Current Reporton Form 8-K filed with the SEC on June 22, 2005).   4.4 Long Term Common Stock Purchase Warrant dated June 16, 2005among US Dataworks, Inc. and the Holder (incorporated byreference to Exhibit 4.4 to the Registrant’s Current Reporton Form 8-K filed with the SEC on June 22, 2005).   4.5 Registration Rights Agreement entered into as of June 16,2005, among US Dataworks, Inc. and the Purchasers identifiedon the signature pages thereto (incorporated by reference toExhibit 4.5 to the Registrant’s Current Report on Form 8-Kfiled with the SEC on June 22, 2005).   4.6 Securities Purchase Agreement dated as of June 16, 2005 amongthe Registrant and the Purchasers named therein (incorporatedby reference to Exhibit 4.1 to the Registrant’s CurrentReport on Form 8-K filed with the SEC on July 21, 2005).   4.7 Form of Common Stock Purchase Warrant dated June 16, 2005among the Registrant and the Holders named therein with anexercise price of $0.715 per share (incorporated by referenceto Exhibit 4.2 to the Registrant’s Current Report on Form 8-Kfiled with the SEC on July 21, 2005).   4.8 Form of Common Stock Purchase Warrant dated June 16, 2005among the Registrant and the Holders named therein with anexercise price of $0.812 per share (incorporated by referenceto Exhibit 4.3 to the Registrant’s Current Report on Form 8-Kfiled with the SEC on July 21, 2005).   4.9 Registration Rights Agreement entered into as of June 16,2005, among the Registrant and the Purchasers named therein(incorporated by reference to Exhibit 4.4 to the Registrant’sCurrent Report on Form 8-K filed with the SEC on July 21,2005).   31.1 Section 302 Certification of Chief Executive Officer.   31.2 Section 302 Certification of Chief Financial Officer.   32.1 Section 906 Certification of Chief Executive Officer.   32.2 Section 906 Certification of Chief Financial Officer.
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