<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington D.C., 20549

                          ____________________________

                                   FORM 10-QSB
                          ____________________________

(Mark One)
[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934
         For the quarterly period ended December 31, 2003

[ ]      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.
        (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) 934-3855

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]

Number of shares of Common Stock outstanding as of January 31, 2004:  22,968,391

Transitional Small Business Disclosure Format (Check one): YES [ ]  NO [X]





<PAGE>

                               US DATAWORKS, INC.

                                TABLE OF CONTENTS
                                -----------------

                                   FORM 10-QSB

                    QUARTERLY PERIOD ENDED DECEMBER 31, 2003
                                                                            Page
                                                                            ----

PART I - FINANCIAL INFORMATION................................................1

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

      Item 2.     Management's Discussion and Analysis.......................22

      Item 3.     Controls and Procedures....................................30

PART II - OTHER INFORMATION..................................................31

      Item 1.     Legal Proceedings..........................................31

      Item 6.     Exhibits and Reports on Form 8-K...........................31

SIGNATURE....................................................................32





<PAGE>
<TABLE>

                              PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                                    US DATAWORKS, INC.

                                       BALANCE SHEET
                                     December 31, 2003

                                        (UNAUDITED)
<CAPTION>

                                          ASSETS

<S>                                                                         <C>
CURRENT ASSETS
     Cash and cash equivalents .........................................    $ 1,920,870
     Accounts receivable, net of allowance for doubtful accounts of $0..        340,884
     Prepaid expenses and other current assets .........................        148,302
                                                                            ------------
           Total current assets ........................................      2,410,056

PROPERTY AND EQUIPMENT, net ............................................        678,400
GOODWILL, net ..........................................................     14,133,629
OTHER ASSETS ...........................................................         27,446
                                                                            ------------

                  TOTAL ASSETS .........................................    $17,249,531
                                                                            ============

        The accompanying notes are an integral part of these financial statements.
</TABLE>

                                           F-1


<PAGE>
<TABLE>

                                         US DATAWORKS, INC.

                                            BALANCE SHEET
                                          December 31, 2003

                                             (UNAUDITED)
<CAPTION>

                                LIABILITIES AND SHAREHOLDERS' EQUITY

<S>                                                                                        <C>
CURRENT LIABILITIES
     Note payable - related party ...................................................      $     39,000
     Current portion of convertible promissory notes, net of unamortized
         discount of $552,619 .......................................................           872,381
     Deferred revenue ...............................................................            82,204
     Accounts payable ...............................................................           388,731
     Accrued expenses ...............................................................           203,238
     Interest payable ...............................................................            31,564
                                                                                           -------------
           Total liabilities ........................................................         1,617,118

COMMITMENTS
SHAREHOLDERS' EQUITY
     Convertible Series B preferred stock, $0.0001 par value 700,000 shares
         authorized, 629,666 shares issued and outstanding
         $0.75 liquidation preference, dividends of $135,289 in arrears .............                63
     Common stock, $0.0001 par value
         90,000,000 shares authorized and 22,968,391 shares issued and outstanding...             2,297
     Additional paid-in capital .....................................................        55,119,272
     Accumulated deficit ............................................................       (39,489,219)
                                                                                           -------------

           Total shareholders' equity ...............................................        15,632,413
                                                                                           -------------

                  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................      $ 17,249,531
                                                                                           =============

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

                                                F-2
</TABLE>

<PAGE>
<TABLE>

                                                        US DATAWORKS, INC.

                                                     STATEMENTS OF OPERATIONS

                                                            (UNAUDITED)

<CAPTION>

                                                                 FOR THE THREE MONTHS ENDED           FOR THE NINE MONTHS ENDED
                                                                         DECEMBER 31,                         DECEMBER 31,
                                                                  2003               2002               2003               2002
                                                              -------------      -------------      -------------      -------------
<S>                                                           <C>                <C>                <C>                <C>
REVENUES
     Software licensing revenues .......................      $     56,803       $    460,000       $    769,670       $  1,167,550
     Software maintenance revenues .....................            66,999             67,189            181,143            204,653
     Professional service revenues .....................           292,656            217,070            911,216            462,834
                                                              -------------      -------------      -------------      -------------
         Total revenues ................................           416,458            744,259          1,862,029          1,835,037

Cost of sales ..........................................           206,043            320,320            555,698            707,184
                                                              -------------      -------------      -------------      -------------

         Gross profit ..................................           210,415            423,939          1,306,331          1,127,853

OPERATING EXPENSES
     General and administrative ........................         1,122,555            480,388          2,961,828          1,939,087
     Depreciation and amortization .....................            70,069             74,058            206,700            227,698
                                                              -------------      -------------      -------------      -------------
         Total operating expense .......................         1,192,624            554,446          3,168,528          2,166,785
                                                              -------------      -------------      -------------      -------------

LOSS FROM OPERATIONS ...................................          (982,209)          (130,507)        (1,862,197)        (1,038,932)
                                                              -------------      -------------      -------------      -------------

OTHER INCOME (EXPENSE)
     Financing costs ...................................          (135,814)          (106,707)        (1,345,102)          (125,167)
     Interest expense ..................................          (128,826)          (130,198)        (1,069,774)          (608,759)
     Interest expense - related parties ................                --            (48,201)          (113,360)           (78,646)
     Loss on extinguishment of debt ....................                --                 --           (635,259)                --
     Loss on extinguishment of debt - related parties...                --                 --         (1,722,631)                --
     Other income (expense) ............................             3,635              4,175              3,635              5,419
                                                              -------------      -------------      -------------      -------------

         Total other income (expense) ..................          (261,005)          (280,931)        (4,882,491)          (807,153)
                                                              -------------      -------------      -------------      -------------

LOSS BEFORE PROVISION FOR INCOME TAXES .................        (1,243,214)          (411,438)        (6,744,688)        (1,846,085)
PROVISION FOR INCOME TAXES .............................                --                 --                 --                 --
                                                              -------------      -------------      -------------      -------------

NET LOSS ...............................................      $ (1,243,214)      $   (411,438)      $ (6,744,688)      $ (1,846,085)
                                                              =============      =============      =============      =============
BASIC AND DILUTED LOSS PER SHARE
     Total basic and diluted loss per share ............      $      (0.05)      $      (0.04)      $      (0.39)      $      (0.16)
                                                              =============      =============      =============      =============

BASIC AND DILUTED WEIGHTED-AVERAGE SHARES
OUTSTANDING ............................................        22,772,365         11,632,993         17,388,793         11,331,521
                                                              =============      =============      =============      =============

                            The accompanying notes are an integral part of these financial statements.
</TABLE>

                                                               F-3

<PAGE>
<TABLE>

                                                        US DATAWORKS, INC.

                                                STATEMENTS OF SHAREHOLDERS' EQUITY
                                            FOR THE NINE MONTHS ENDED DECEMBER 31, 2003
<CAPTION>

                                     Preferred Stock
                           ----------------------------------
                              Convertible       Convertible
                                Series A          Series B       Common Stock                              Additional
                           ----------------  ---------------- -------------------     Common Stock           Paid-In     Accumulated
                            Shares   Amount   Shares   Amount   Shares    Amount  Committed    Capital       Deficit       Total
                           --------  ------  -------- ------- ----------  -------  --------  -----------  ------------- ------------
<S>                         <C>      <C>      <C>     <C>     <C>         <C>      <C>       <C>          <C>           <C>
Balance, March 31, 2003     640,000  $   64   629,666 $    63 11,907,134  $ 1,191  $ 48,000  $41,972,618  $(32,744,531) $ 9,277,405
Warrants issued for
  Financing costs of
  promissory notes               --      --        --      --         --       --        --    1,400,293            --    1,400,293
  Services rendered              --      --        --      --         --       --        --       96,750            --       96,750

Interest from fixed
conversion features              --      --        --      --         --       --        --    1,293,217            --    1,293,217

Expiration of related
party notes (Note 5)             --      --        --      --         --       --        --      220,000            --      220,000

Common stock issued for
  Cash                           --      --        --      --  2,936,111      294        --    3,904,752            --    3,905,046
  Exercise of warrants
  and options                    --      --        --      --    434,346       44        --       22,672            --       22,716
  Committed stock                --      --        --      --     72,486        7   (48,000)      47,993            --           --
  Services rendered              --      --        --      --     23,446        2        --       73,829            --       73,831
  Notes payable
  conversion                     --      --        --      --  6,711,693      671        --    4,229,282            --    4,229,953
  Conversion of Series
  A preferred stock        (640,000)    (64)       --      --  1,994,286      199        --         (135)           --           --
Treasury stock purchased
(Note 8)                         --      --        --      -- (1,111,111)    (111)       --     (499,889)           --     (500,000)
Warrants and stock issued
for debt extinguishment
(Notes 5 and 8)                  --      --        --      --         --       --        --    2,357,890            --    2,357,890
Net loss                         --      --        --      --         --       --        --           --    (6,744,688)  (6,744,688)
                           --------  ------  -------- ------- ----------  -------  --------  -----------  ------------- ------------
Balance, December 31, 2003        0  $    0   629,666 $    63 22,968,391  $ 2,297  $      0  $55,119,272  $(39,489,219) $15,632,413
                           ========  ======  ======== ======= ==========  =======  ========  ===========  ============= ============

                             The accompanying notes are an integral part of these financial statements

                                                               F-4
</TABLE>

<PAGE>
<TABLE>

                                              US DATAWORKS, INC.

                                            STATEMENTS OF CASH FLOW
                                    For the Nine Months Ended December 31,

                                                  (UNAUDITED)
<CAPTION>

                                                                                         2003         2002
                                                                                     ------------ ------------
<S>                                                                                  <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss from continuing operations ............................................. $(6,744,688) $(1,846,085)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization of property and equipment .......................     206,700      227,698
     Loss on extinguishment of debt ................................................     635,259           --
     Loss on extinguishment of debt - related party ................................   1,722,631           --
     Loss on disposal of property and equipment ....................................          --       50,556
     Amortization of note discount and beneficial conversion features on convertible
       promissory notes ............................................................     819,551      445,071
     Issuance of stock for interest ................................................      77,261           --
     Issuance of stock for services rendered .......................................      73,830      153,774
     Issuance of stock for legal settlement ........................................          --        2,900
     Issuance of stock for lock-up agreement .......................................          --          400
     Issuance of stock for extension of notes payable due date .....................          --       97,416
     Issuance of warrants for extension of notes payable due date ..................   1,084,505           --
     Issuance of warrants for settlement of dispute ................................     262,755           --
     Issuance of warrants for services .............................................      96,750        4,737
     Issuance of warrants for stock cancellation agreement .........................      45,693           --
     Issuance of warrants for convertible promissory note conversions... ...........      12,528           --
     Contributed stock for services rendered .......................................          --       13,152
     (Increase) decrease in
       Accounts receivable .........................................................     125,897     (353,189)
       Work in progress ............................................................          --       11,312
       Prepaid expenses and other current assets ...................................      35,618      (59,769)
       Other assets ................................................................      (5,021)       5,738
     Increase (decrease) in
       Deferred revenue ............................................................    (159,247)     (77,035)
       Accounts payable ............................................................    (410,505)      66,857
       Accrued expenses ............................................................    (427,405)     127,158
       Accrued expenses - related parties ..........................................     (43,000)          --
       Interest payable ............................................................      18,051         (776)
       Interest payable - related parties ..........................................     (94,075)      78,308
                                                                                     ------------ ------------

Net cash used in continuing operations .............................................  (2,666,912)  (1,051,777)
Net cash used in discontinued operations ...........................................          --     (121,417)
                                                                                     ------------ ------------
Net cash used in operating activities ..............................................  (2,666,912)  (1,173,194)
                                                                                     ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of property and equipment ..............................................     (62,304)     (32,929)
   Repayments to related parties ...................................................          --      (54,506)
                                                                                     ------------ ------------
Net cash used in investing activities ..............................................     (62,304)     (87,435)
                                                                                     ------------ ------------

                  The accompanying notes are an integral part of these financial statements.
</TABLE>

                                                     F-5
<PAGE>
<TABLE>

                                              US DATAWORKS, INC.

                                            STATEMENTS OF CASH FLOW
                                    For the Nine Months Ended December 31,

                                                  (unaudited)
<CAPTION>

                                                                             2003              2002
                                                                        ------------      ------------
<S>                                                                     <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES
   Additions to capital lease obligations ........................            5,671                --
   Payments on capital lease obligations .........................          (12,399)          (13,701)
   Proceeds from notes payable ...................................           10,000           210,700
   Repayment of notes payable ....................................         (602,989)         (227,145)
   Proceeds from notes payable - related party ...................               --           830,000
   Repayment of notes payable - related party ....................               --           (96,000)
   Proceeds from convertible promissory notes ....................        2,190,000           702,500
   Repayment of convertible promissory notes .....................         (225,000)         (106,400)
   Repayment of note payable related to discontinued operations...         (151,442)               --
   Proceeds from stock sale ......................................        3,650,000                --
   Stock issuance costs ..........................................         (244,954)               --
   Proceeds from exercise of employee stock options ..............            2,875                --
   Proceeds from subscription receivables ........................               --            21,010
   Proceeds from exercise of warrants ............................           19,760             2,098
                                                                        ------------      ------------
Net cash provided by financing activities ........................        4,641,522         1,323,062
                                                                        ------------      ------------
Net increase (decrease) in cash and cash equivalents .............        1,912,306            62,433
Cash and cash equivalents, beginning of period ...................            8,564           134,016
                                                                        ------------      ------------
Cash and cash equivalents, end of period .........................      $ 1,920,870       $   196,449
                                                                        ============      ============
Supplemental disclosures of cash flow information
   Interest paid .................................................      $    83,151       $   100,312
                                                                        ============      ============
</TABLE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

     During the nine months ended December 31, 2003, the Company completed the
following:

o        In April 2003, the Company issued 72,487 shares of common stock that it
         had committed to issue during the year ended March 31, 2003.

o        Two notes payable to former officers of the Company amounting to
         $220,000 were forgiven pursuant to their terms that stated if the
         Company had not raised cumulative gross proceeds from debt and/or
         equity financing of $5,000,000 by the second anniversary of the notes,
         then the notes would be forgiven. As the Company did not raise these
         proceeds, the notes have been forgiven.

o        In May, July and October 2003, pursuant to the terms of the Series A
         Convertible Preferred Stock conversion, the holder converted 640,000
         shares of Series A Convertible Preferred Stock into 1,994,286 shares of
         the Company's common stock.

o        Recorded convertible note payable discounts of $373,008 related to the
         issuance of warrants attached to promissory notes to purchase 280,343
         shares of common stock. During the nine months ended December 31, 2003,
         the Company recognized $210,943 in interest expense related to the
         accretion of convertible promissory note discounts related to warrants
         attached to the promissory notes issued in the nine month period ended
         December 31, 2003 and those issued in prior periods.

o        Recorded convertible note payable discounts of $940,964 related to the
         beneficial conversion feature of the convertible promissory notes.
         During the nine months ended December 31, 2003, the Company recognized
         interest expense of $581,608 related to the issuance of convertible
         promissory notes with fixed conversion features.

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

                                      F-6

<PAGE>

o        Recorded debt discount of $262,755 related to warrants to purchase up
         to $1,000,000 of common stock at a price equal to 50% of the average
         stock price for 10 consecutive days immediately prior to the exercise,
         but not less than $0.30 per share. These warrants were issued to settle
         the Company's obligations under notes and warrants entered into in 2001
         and 2002 with an investor. During the nine months ended December 31,
         2003, the Company recognized $262,755 in interest expense related to
         the accretion of this debt discount. The related debt was fully repaid
         in October 2003.

o        As an inducement to four investors in connection with their agreement
         to convert 80.37% of the principal and accrued interest underlying
         their existing promissory notes worth $887,500, during the three months
         ended June 30, 2003, the Company recorded financing costs of $1,084,505
         related to (i) a reduction in the conversion price on the previously
         issued convertible promissory notes and (ii) a reduction in the
         exercise price on previously issued warrants to purchase 568,000 shares
         of common stock.

o        In July 2003, the Company renegotiated the terms of $1,353,000 of 12%
         per annum demand promissory notes due the Company's Chief Executive
         Officer, Mr. Ramey. The note agreements were entered into during fiscal
         2002 and 2003 to fund the Company's operations. In exchange for the 12%
         demand notes, the Company issued Mr. Ramey a new promissory note
         bearing interest at 7% per annum, maturing July 10, 2004, and
         convertible into shares of common stock at a conversion price of $0.80
         per share. Mr. Ramey was also issued a warrant to purchase 1,691,250
         shares of common stock at an exercise price of $0.80 per share. The
         excess of the fair value of the beneficial conversion feature of the
         note and the fair value of the warrants over the carrying amount of the
         debt is $1,722,631 and has been recorded as a loss on extinguishment of
         debt-related party for the nine month period ended December 31, 2003.

o        In July 2003, the Company entered into an agreement for financial
         advisory and strategic/competitive advisory services and issued a
         warrant to purchase 100,000 shares of common stock at an exercise price
         of $1.15 per share. The fair value of the warrants of $96,750 has been
         recorded as an operating expense for the nine month period ended
         December 31, 2003.

o        In September 2003, the Company successfully negotiated the conversion
         of $834,168 of remaining debt related to discontinued operations. In
         exchange for the debt, the holder was issued 417,084 shares of common
         stock and a warrant to purchase 208,542 shares of common stock at an
         exercise price of $2 per share. The excess of the fair value of the
         shares and warrants issued over the carrying amount of the debt is
         $635,259 and has been recorded as a loss on extinguishment of debt for
         the nine month period ended December 31, 2003.

o        On June 30, 2003, the Company agreed to sell to five accredited
         investors an aggregate of 1,111,112 shares of its common stock for an
         aggregate purchase price of $500,000 pursuant to a Securities Purchase
         Agreement. The investors purchased these shares from the Company on
         July 9, 2003. On August 4, 2003, the five accredited investors agreed
         to surrender their common stock in exchange for convertible promissory
         notes totaling $500,000, due August 4, 2004 with interest at 10% per
         annum, and warrants to purchase an additional 15,000 shares of common
         stock with an exercise price of $1.34 per share. The warrants may be
         exercised at any time after August 4, 2003. The promissory notes are
         convertible into common stock at $0.45 per share. The non-cash expense
         of this stock repurchase of $45,693 has been recorded as financing
         costs during the nine month period ended December 31, 2003.

     During the nine months ended December 31, 2002, the Company completed the
following:

o        In April and May 2002, issued 1,424,259 shares of common stock that it
         had committed to issue during the year ended March 31, 2002.

o        In August, September, November, and December 2002, $267,500 of
         convertible promissory notes were converted into common stock. At
         December 31, 2002, the stock certificates for 380,000 shares of common
         stock on $38,000 of the convertible promissory notes converted had not
         been issued and therefore this amount is included in common stock
         committed.

o        Accrued interest of $26,000 was transferred to the repayment amount of
         a convertible promissory note from accrued interest.

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

                                      F-7

<PAGE>

                               US DATAWORKS, INC.

                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

1.   ORGANIZATION AND BUSINESS

     US Dataworks, Inc. (the "Parent" or 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. It also has a strategic alliance
with BancTec, Inc. and through October 2002, with CheckFree Corporation to
license the Company's software for its banking customers and Thomson Financial
Publishing, a unit of Thomson Corporation, to incorporate its EPICWare database
into the Company's products. Prior to acquiring US Dataworks, Inc., a Delaware
corporation, effective March 31, 2001, the Company was a financial services
company specializing in the integration of proprietary software applications
with Applications Service Provider ("ASP") services and an internet service
provider ("ISP"). During July and December 2001, the Company started shutting
down its ISP and ASP operations, respectively, and at March 31, 2002 all ISP and
ASP activities had ceased.

     As of May 18, 1999, the Company, previously known as New World Publishing,
Inc. ("New World"), a Colorado corporation, entered into an Agreement and Plan
of Reorganization with Communications Television, Inc. ("CTV"), a California
corporation (incorporated on July 20, 1998), whereby all of the outstanding
shares of common stock of CTV were exchanged for an aggregate of 3,804,033
shares of New World. For accounting purposes, the transaction has been treated
as a recapitalization of CTV, with CTV as the accounting acquirer (reverse
acquisition), and has been accounted for in a manner similar to a pooling of
interests. The operations of New World have been included with those of CTV from
the acquisition date. New World was incorporated in Colorado on December 28,
1994. New World had minimal assets and liabilities at the date of the
acquisition and did not have significant operations prior to the acquisition. As
of November 11, 1999, CTV's name was changed to Sonicport.com, Inc.

     On October 12, 1999, a special meeting of the shareholders was held, and
the shareholders approved the following actions: (i) the change of name to
"Sonicport.com, Inc." from "New World Publishing, Inc." (ii) the adoption of the
1999 Stock Option Plan, and (iii) the change of the state of incorporation to
Nevada from Colorado. As of October 18, 1999, New World Publishing, Inc.'s named
was changed to Sonicport.com, Inc. In February 2000, Sonicport.com, Inc.
effected its change of state of incorporation from Colorado to Nevada. In
February 2001, Sonicport.com, Inc.'s name was changed to Sonicport, Inc. On
March 21, 2002, the Company dissolved Sonicport.com, Inc., a California
corporation. As of March 26, 2002, Sonicport, Inc.'s name was changed to US
Dataworks, Inc. On May 23, 2002, the Company combined with US Dataworks, Inc., a
Delaware corporation, and US Dataworks, Inc., a Delaware corporation, was
dissolved.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation
     ---------------------

     The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-B.

     Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
normal, recurring adjustments considered necessary for a fair presentation have
been included. The financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB/A for the year ended March 31, 2003. The results of
operations for the nine months ended December 31, 2003 are not necessarily
indicative of the results that may be expected for the year ended March 31,
2004.

     Going Concern
     -------------

     The Company has received a report from its independent auditors on the
financial statements as of and for the year ended March 31, 2003 that includes
an explanatory paragraph describing the uncertainty as to the Company's ability
to continue as a going concern. These consolidated financial statements
contemplate the ability to continue as such and do not include any adjustments
that might result from this uncertainty.

                                      F-8

<PAGE>

     Revenue Recognition
     -------------------

     The Company recognizes revenues in accordance with the provisions of the
American Institute of Certified Public Accountants' Statement of Position 97-2,
"Software Revenue Recognition." 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 a license agreement has been signed, delivery of the
software product has occurred, the related fee is fixed or determinable, and
collectibility is probable. 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 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.

     Cash and Cash Equivalents
     -------------------------

     For the purpose of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents.

     Property and Equipment
     ----------------------

     Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method over estimated useful lives as follows:

         Furniture and fixtures                  5 years
         Telephone equipment                     5 to 10 years
         Computer equipment                      5 years
         Computer software                       5 years
         Leasehold improvements                  Shorter of initial lease period
                                                 or useful life of asset

     Maintenance and minor replacements are charged to expense as incurred.
Gains and losses on disposals are included in the results of operations.

     Impairment of Long-Lived Assets
     -------------------------------

     The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to future net cash flows
expected to be generated by the assets. If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount exceeds the fair value of the assets.

     Goodwill
     --------

     In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which was
effective for fiscal years beginning after December 15, 2001. SFAS 142 prohibits
the amortization of goodwill and intangible assets with indefinite useful lives
but requires that these assets be reviewed for impairment at least annually or
on an interim basis if an event occurs or circumstances change that could
indicate that their value has diminished or been impaired. Other intangible
assets will continue to be amortized over their estimated useful lives. The
Company evaluates the remaining useful lives of these intangibles on an annual
basis to determine whether events or circumstances warrant a revision to the
remaining period of amortization. Pursuant to SFAS 142, goodwill is no longer
being amortized.

                                      F-9

<PAGE>

     Fair Value of Financial Instruments
     -----------------------------------

     The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the Company's
financial instruments, including cash and cash equivalents, accounts receivable,
prepaid expenses and other current assets, accounts payable, accrued expenses,
and due to related party, the carrying amounts approximate fair value due to
their short maturities. The amounts shown for notes payable, notes payable -
related parties, and note payable - affiliate also approximate fair value
because current interest rates offered to the Company for debt of similar
maturities are substantially the same or the difference is immaterial.

     Stock Options
     -------------

     SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current implicit
value accounting method specified in Accounting Principles Bulletin ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," to account for
stock-based compensation. The Company has elected to use the implicit value
based method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation.

     Income Taxes
     ------------

     The Company accounts for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts at
each period-end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The provision for income taxes, if
applicable, represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.

     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 loss
available to common shareholders by the weighted-average number of common shares
outstanding. Diluted loss per share is computed similar 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 in footnote 8
for the common stock shares issuable upon conversion):

<TABLE>
<CAPTION>
                                                                       FOR THE NINE MONTHS ENDED
                                                                              DECEMBER 31,
                                                                     -------------------------------
                                                                         2003              2002
                                                                         ----              ----
     <S>                                                               <C>               <C>
     Options outstanding under the Company's stock option
       plans                                                           2,391,500         304,000
     Options granted outside the Company's stock
       option plans                                                      713,100         124,350
     Warrants issued in conjunction with convertible Series B
       preferred stock                                                         0         125,933
     Warrants issued in conjunction with private placements            1,286,251         106,300
     Warrants issued as a financing cost for notes payable
       and convertible notes payable                                   2,341,137         681,937
     Warrants issued in conjunction with lock-up
       agreements                                                         12,000         145,952
     Warrants issued for services rendered                               447,800         378,400
     Warrants issued as part of the acquisition of
       the Subsidiary                                                     67,200          67,200
     Convertible Series A preferred stock (a)                                  0       2,185,792
     Convertible Series B preferred stock (b)                            125,933         125,933
</TABLE>

                                      F-10

<PAGE>

(a) The Series A is convertible into shares of common stock as determined by
dividing $2.50 by 60% of the average closing bid price of the Company's common
stock for the 10 trading days prior to the conversion. The number of common
stock equivalents attributable to a potential conversion of the Series A
preferred stock has been calculated based upon the closing bid price of the
Company's common stock for the 10 trading days prior to December 31, 2002. From
May through October 2003, all outstanding shares of Series A were converted
pursuant to their existing terms into 1,994,286 shares of common stock.

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

     Reclassifications
     -----------------

     Certain amounts included in the prior year financial statements have been
reclassified to conform with the current year presentation. Such
reclassification did not have any effect on reported net loss.

     Estimates
     ---------

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

     Concentrations of Credit Risk
     -----------------------------

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

     Three customers of the Company accounted for 44%, 20% and 13% of the
Company's net sales for the three months ended December 31, 2003. Three
customers of the Company accounted for 33%, 25% and 11%, respectively, of the
Company's net sales for the nine months ended December 31, 2003. Three customers
of the Company accounted for 34%, 33% and 17% of the Company's net sales for the
three months ended December 31, 2002. One customer of the Company accounted for
14% of the Company's net sales for the nine months ended December 31, 2002.
Additionally, the Company's strategic resellers accounted for 55% and 36% of the
Company's net sales for the nine months ended December 31, 2003 and 2002,
respectively.

     At December 31, 2003, amounts due from strategic resellers or significant
customers accounted for 25% and 13%, respectively, of accounts receivable.

3.   ACQUISITION

     Effective March 31, 2001, and with a closing date of April 2, 2001, the
Parent acquired 100%, or 3,571,429 shares, of the outstanding common stock of US
Dataworks, Inc. (the "Subsidiary"), a Delaware corporation (formerly known as
Allstate Dataworks, Inc.), in exchange for 2,933,333 new shares of the Parent's
common stock and warrants to purchase 200,000 shares of the Parent's common
stock. The warrants have an exercise price of $3.65, vest immediately, and
expire on April 2, 2006. In addition, certain shareholders of the Parent
transferred their ownership in 800,000 shares of the Parent's common stock to
the shareholders of the Subsidiary and committed to return 440,000 shares of the
Parent's common stock to the Parent in exchange for promissory notes in the
amount of $220,000. These shareholders had returned 305,600 shares at June 30,
2001. Of the Subsidiary's shares, 175,714 were acquired from officers of the
Subsidiary who are also officers of the Parent.

                                      F-11


<PAGE>

     The acquisition has been recorded using the purchase method, which is in
conformity with generally accepted accounting principles in accordance with APB
16, "Business Combinations." The purchase price has been allocated to the assets
acquired and liabilities assumed based on the estimated fair values at the date
of acquisition. The excess of the purchase price over the estimated fair value
of the net assets acquired is attributed to goodwill. The results of operations
of US Dataworks have been included in the Company's financial statements from
April 1, 2001.

     The aggregate purchase price was $17,437,262. The value of the 2,933,333
new shares of the Parent's common stock issued and the 800,000 shares
transferred by certain shareholders of the Parent to the shareholders of the
Subsidiary of $16,893,334 was determined based on the average closing market
price of the Parent's common stock over the period consisting of two days before
and after the terms of the acquisition agreement were agreed to and announced.
The value of the warrants to purchase 200,000 shares was determined to be
$543,928 and was derived using the Black Scholes option pricing model using the
following assumptions: expected life of 2 years, risk-free interest rate of
5.49%, expected volatility of 100% and expected dividend yield of 0%.

4.   PROPERTY AND EQUIPMENT

     Property and equipment at December 31, 2003 consisted of the following:

     Furniture and fixtures                              $    49,916
     Office and telephone equipment                           81,097
     Computer equipment                                      174,145
     Computer software                                     1,183,000
     Leasehold improvements                                   18,843
                                                         ------------
                                                           1,507,001
     Less accumulated depreciation and amortization         (828,601)
                                                         ------------
     TOTAL                                               $   678,400
                                                         ============

     Depreciation and amortization expense for the nine months ended December
31, 2003 and 2002 was $206,700 and $227,698, respectively.

5.   NOTES PAYABLE - RELATED PARTIES

     On January 22, 2001, the Company entered into a note payable with an
advisory board member and shareholder for $50,000. The note is
non-interest-bearing, is unsecured, and is due on demand. As of December 31,
2003, the outstanding balance on the note payable was $39,000.

     On April 1, 2003, two notes payable to former officers of the Company
amounting to $220,000 were terminated pursuant to their terms that stated if the
Company had not raised cumulative gross proceeds from debt and /or equity
financing of $5,000,000 by the second anniversary of the notes, then the notes
would be forgiven. As the Company did not raise these proceeds, the notes have
been terminated and have been accounted for as a contribution of shareholders
capital with no gain or loss recorded on termination.

     During fiscal 2003 and 2002, the Company issued promissory notes in an
aggregate principal amount of $1,353,000 to Mr. Ramey, our Chief Executive
Officer bearing an interest rate of 12% per annum. On July 10, 2003, the Company
consolidated these promissory notes into one promissory note for $1,353,000,
bearing an interest rate of 7% per annum, pursuant to the Subordinated,
Convertible Note and Warrant Agreement. This promissory note may be converted
into shares of the Company's common stock at a conversion price equal to the
lesser of (i) $0.16 per share or (ii) the closing bid price of our common stock
as listed on the American Stock Exchange on the trading day immediately prior to
the date of a change of control of US Dataworks or the date of Mr. Ramey's
notice of voluntary conversion of the promissory note. In connection with this
promissory note, the Company issued to Mr. Ramey a warrant to purchase 1,691,250
shares of its common stock at an exercise price of $0.80 per share. The
principal amount and accrued interest is due and payable upon demand after July
10, 2004. As of September 30, 2003, Mr. Ramey elected to fully convert the
promissory note and accrued interest of $21,277. On September 30, 2003, the
Company issued Mr. Ramey 1,717,847 shares of common stock pursuant to the
conversion. The excess of the fair value of the beneficial conversion feature of
the note and the fair value of the warrants over the carrying amount of the debt
is $1,722,631 and has been recorded as a loss on extinguishment of debt-related
party for the nine month period ended December 31, 2003.

                                      F-12

<PAGE>

6.   CONVERTIBLE PROMISSORY NOTES

     Convertible promissory notes at December 31, 2003 consisted of the
following:

<TABLE>
<CAPTION>

     Redeemable, Convertible Promissory Notes:
     -----------------------------------------

     <S>                                                                             <C>
     Convertible promissory notes, interest at 10% per annum, unsecured due June
          2004 through August 2004, net of unamortized discount of $42,122           $     57,878

     Convertible Promissory Notes:
     -----------------------------

     Convertible promissory note, interest at 5% per annum, unsecured due
          June 30, 2004, net of unamortized discount of $77,479                           422,521
     Convertible promissory notes, interest at 10% per annum, unsecured,
          due August 4, 2004                                                              250,000
     Convertible debentures, interest at 1% per annum, unsecured, due
          October 2, 2004, net of unamortized discount of $433,018                        141,982

     Convertible Promissory Notes Guaranteed by Chief Executive Officer:
     -------------------------------------------------------------------

     Convertible promissory note, interest at 8% per annum, secured by a
          personal guarantee by the Chief Executive Officer of the
          Company, due on November 30, 2004                                                     0
                                                                                     -------------
                                                                                     $    872,381
                                                                                     =============
</TABLE>

     Redeemable, Convertible Promissory Notes
     ----------------------------------------

     As of December 31, 2003, the Company has 2 convertible promissory notes
outstanding payable to 2 individuals pursuant to Subscription Agreements entered
into June 7, 2003, for gross proceeds in the aggregate of $100,000. The units
issued consisted of 2 convertible promissory notes and warrants to purchase
15,000 shares of the Company's common stock.

     The Company has the option to redeem the notes at any time prior to the
notes' maturity date at 105% of the face value of the note, plus accrued
interest, if any, at any time prior to the maturity date. The promissory notes
and accrued interest are convertible into common stock at $0.45 per share. The
notes earn interest at 10% per annum, the principal and any unpaid interest are
due one year following the issuance date of the note, and interest is payable in
cash on a quarterly basis.

     The warrants to purchase 15,000 shares of the Company's common stock are
exercisable at $0.45 per share and expire three years from the date of issuance.

     The Company allocates the proceeds received from debt or convertible debt
with detachable warrants or shares of common stock using the relative fair value
of the individual elements at the time of issuance. The amount allocated to the
warrants as a debt discount was calculated at $14,712 and will be recognized as
additional interest expense over the period from the date of issuance to the
stated maturity date. In the event the debt is settled prior to the maturity
date, an expense will be recognized based on the difference between the carrying
amount and the amount of the payment. During the nine months ended December 31,
2003, the Company recognized $7,356 in interest expense related to the accretion
of the debt discount recorded on these convertible promissory notes.

     In accordance with generally accepted accounting principles, in the event
the conversion price is less than the Company's stock price on the date of
issuance, the difference is considered to be a beneficial conversion feature and
is amortized as additional interest expense over the period from the date of
issuance to the stated redemption date of the notes. The Company has calculated
the beneficial conversion feature of these notes to be $85,288.

                                      F-13

<PAGE>

     Convertible Promissory Notes
     ----------------------------

     Convertible Note Due June 30, 2004
     ----------------------------------

     On June 30, 2003, the Company entered into a Convertible Debentures and
Warrants Agreement with an accredited investor. Pursuant to this agreement, on
July 29, 2003, the investor purchased a debenture in the principal amount of
$500,000, due June 30, 2004, bearing an interest rate of 5% per annum and a 12%
original issue discount of $60,000. The debentures may be converted into shares
of the Company's common stock at any time at a conversion price equal to the
closing bid price of the common stock as listed on the American Stock Exchange
on the trading day immediately before the date of conversion. Pursuant to the
agreement, the investor also received a warrant exercisable through June 30,
2006 to purchase 10,000 shares of common stock at an exercise price of $1.44 per
share. Using the Black-Scholes valuation model, the Company has determined the
value of the warrant to be $22,654. The amount allocated to the warrant as a
debt discount will be recognized as additional interest expense over the period
from the date of issuance to the stated maturity date.

     In accordance with generally accepted accounting principles, in the event
the conversion price is less than the Company's stock price on the date of
issuance, the difference is considered to be a beneficial conversion feature and
is amortized as additional interest expense over the period from the date of
issuance to the stated redemption date. The Company has calculated the
beneficial conversion feature of this debenture to be $81,545.

     Convertible Note Due August 4, 2004
     -----------------------------------

     On June 30, 2003, the Company agreed to sell to five accredited investors
an aggregate of 1,111,112 shares of its common stock for an aggregate purchase
price of $500,000 pursuant to a Securities Purchase Agreement. The investors
purchased these shares from the Company on July 9, 2003. In connection with this
agreement, the Company issued warrants to purchase an aggregate of 150,000
shares of our common stock with an exercise price of $1.34 per share. On August
4, 2003, the five accredited investors agreed to surrender their common stock in
exchange for convertible promissory notes totaling $500,000, due August 4, 2004,
with interest at 10% per annum, and warrants to purchase an additional 10,000
shares of common stock with an exercise price of $1.34 per share. The warrants
may be exercised at any time after August 4, 2003. The promissory notes are
convertible into common stock at $0.45 per share. On September 15, 2003, one of
the investors elected to convert his promissory note for $250,000 into common
shares and was issued 555,556 shares of common stock prior to September 30,
2003. The non-cash expense of this stock repurchase of $45,693 has been recorded
as financing costs during the nine month period ended December 31, 2003.

     Convertible Debentures Due October 2, 2004
     ------------------------------------------

     In October 2003, the Company sold 1,825,000 shares of common stock ("Common
Stock") for an aggregate purchase price of $3,650,000, and sold $575,000
aggregate principal amount of 1% Convertible Debentures (the "Debentures"). In
connection with the sale of the Common Stock and Debentures, the Company also
issued warrants to purchase 1,056,250 shares of Common Stock (the "Warrants,"
and collectively, with the Common Stock and Debentures, the "Securities") in a
private placement to 11 institutional investors. The maturity date of the
Debentures is October 2, 2004. The sale of the Securities resulted in gross
proceeds to the Company, prior to the exercise of the Warrants, of approximately
$4.2 million. The Debentures are convertible into Common Stock at a conversion
price of $2.00 per share (the "Conversion Price"), subject to standard
anti-dilution adjustments. The Warrants are fully vested and exercisable at any
time until October 2, 2006 at an exercise price of $2.00 per share (the
"Exercise Price"), subject to standard anti-dilution adjustments. In accordance
with generally accepted accounting principles, the Company allocates the
proceeds received from debt or convertible debt with detachable warrants using
the relative fair value of the individual elements at the time of issuance.
Using the Black-Scholes valuation model the Company has determined the value of
the warrants issued in connection with the Debentures to be $185,195. This
amount that has been allocated to the warrants is accounted for as a debt
discount and will be recognized as additional interest expense in the statement
of operations during the period from date of issuance to the stated maturity
date. During the three and nine month periods ended December 31, 2003, the
Company recognized $70,040 in interest expense related to the accretion of the
debt discount attributable to the warrants issued in connection with the
Debentures.

                                      F-14

<PAGE>

     In accordance with generally accepted accounting principles, in the event
the conversion price is less than the Company's stock price on the date of
issuance, the difference is considered to be a beneficial conversion feature and
is amortized as additional interest expense over the period from the date of
issuance to the stated redemption date. The Company has calculated the
beneficial conversion feature of the Debentures to be $389,805.

     Convertible Promissory Notes Guaranteed by Chief Executive Officer
     ------------------------------------------------------------------

     In June 2003, the Company executed a new note with an existing Convertible
Promissory Note holder in the amount of $480,000. This note replaces the
existing note of $150,000 and includes penalties and interest from a settlement
with the Company of $330,000. A payment of $35,000 was due upon signing and
principal and interest payments of $20,000 are due on a quarterly basis through
November of 2004. On that date all remaining principal and interest outstanding
is due. This note bears interest at 8% and is guaranteed by the Chief Executive
Officer of the Company.

     In addition to the note, the Company issued a warrant to purchase up to
$1,000,000 of the Company's common stock not to exceed 2,300,000 shares. The
exercise price of the warrant is 50% of the average stock price for 10
consecutive days immediately prior to the exercise, but not less than $0.30 per
share. The warrant is exercisable in thirds after specific number of days
following the earlier of i) the Company receiving an Effectiveness Notice
confirming the completion of a registration statement filed with the Securities
and Exchange Commission or ii) one year from the date of issue. The Company
allocates the proceeds received from debt with detachable warrants using the
relative fair value of the individual elements at the time of issuance. The
amount allocated to the warrants as a debt discount was calculated at $262,755
and will be recognized as interest expense over the period until the notes
mature. In the event the debt is settled prior to the maturity date, an expense
will be recognized based on the difference between the carrying amount and the
amount of the payment. During the nine months ended December 31, 2003, the
Company recognized $262,755 in interest expense related to the accretion of the
debt discount.

     On October 8, 2003 the full amount of the note and all accrued interest was
paid in full.

7.   COMMITMENTS AND CONTINGENCIES

     Litigation
     ----------

     On July 19, 2002, an individual and former director of US Dataworks, H. J.
Frazier, filed a lawsuit against US Dataworks in Los Angeles Superior Court
alleging breach of debenture agreement. In the complaint, the plaintiff prays
for damages in the amount of $275,000, plus prejudgment interest and cost of
suit. US Dataworks and Mr. Frazier have reached a settlement pursuant to which
US Dataworks will make monthly payments in the amount of $23,800 per month until
March 1, 2003. On March 1, 2003, US Dataworks has the option to pay the
remaining balance or to make monthly payments in the amount of $26,167 through
August 1, 2003. US Dataworks also agreed to pay Mr. Frazier's attorney's fees
and costs, up to a maximum of $5,000, and reimburse Mr. Frazier for the cost of
the suit. Upon payment in full, Mr. Frazier will dismiss the lawsuit with
prejudice. On August 1, 2003, the settlement amount was paid in full and the
lawsuit has been dismissed.

     On December 12, 2003, an individual investor filed a lawsuit against US
Dataworks in Los Angeles Superior Court alleging breach of an oral agreement
between the plaintiff and a former director of US Dataworks. In the complaint,
the plaintiff alleges that the oral agreement granted him the right to receive
additional shares from US Dataworks in the event that he should sell certain
shares of our common stock at a price less than $15 per share. The plaintiff
alleges that in March 2000, as partial consideration under the alleged oral
agreement he converted three promissory notes with an aggregate principal amount
of $725,000 into 77,856 shares of our common stock. He is seeking unspecified
damages. We intend to dispute this claim and defend this action vigorously.

8.   STOCKHOLDERS' EQUITY

     PREFERRED STOCK

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

                                      F-15

<PAGE>

     Convertible Series A Preferred Stock
     ------------------------------------

     The Company has 800,000 authorized shares of $0.0001 par value convertible
Series A preferred stock. On April 11, 2000, the Company issued 800,000 shares
of its voting convertible Series A preferred stock (the "Series A") to an
investor for gross proceeds of $2,000,000. On May 19, 2000, the Company redeemed
160,000 shares of the Series A for $400,000. The Series A has a liquidation
preference of $2.50 per share and carries a 15% cumulative dividend payable on
each April 1 and October 1. The Company has the right to redeem the Series A at
any time after issuance at a redemption price of $2.70 per share, plus any
accrued but unpaid dividends, except if the Company redeems the Series A within
60 days of issuance, the redemption price shall be $2.50. The Series A is
convertible into shares of common stock as determined by dividing $2.50 by 60%
of the average closing bid price of the Company's common stock for the 10
trading days prior to the conversion.

     In accordance with generally accepted accounting principles, the difference
between the conversion price and the Company's stock price on the date of
issuance of the Series A preferred stock is considered to be a beneficial
conversion feature and is treated in a manner similar to a dividend to the
Series A preferred shareholders. In connection with the issuance of the Series A
preferred shares, as of the date of issuance on April 11, 2000, the Company has
recorded an amount of $1,132,654 as the value of the conversion feature granted
to the Series A preferred shareholders.

     In four separate conversions in the period May through October 2003, and
pursuant to the Series A conversion terms, the holder converted all 640,000
outstanding shares of the Series A preferred and was issued 1,994,286 shares of
the Company's common stock. Prior to the first conversion in May, 2003, the
Series A preferred shares had $501,028 accumulated, undeclared dividends. In
accordance with the Series A conversion terms, all accumulated, undeclared
dividends were forfeited by the holder upon conversion.

     Convertible Series B Preferred Stock
     ------------------------------------

     The Company has 700,000 authorized shares of $0.0001 par value convertible
Series B preferred stock.

     In August and October 2000, the Company issued 509,333 and 133,666 units
respectively, in a private placement for gross proceeds of $382,000 and
$100,250, respectively. Each unit consisted of one share of its voting
convertible Series B preferred stock (the "Series B") and a warrant 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% cumulative dividend payable on
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 $0.83 per share, plus any
accrued but unpaid dividends. The Series B is convertible upon issuance into
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 stock at the closing date.

     In May 2001, an investor in the Company's convertible Series B preferred
stock rescinded its acquisition and returned 13,333 shares and warrants for the
purchase of 2,667 shares of common stock to the Company in exchange for the
return of its investment of $10,000.

     At December 31, 2003, there were accumulated, undeclared dividends in
arrears of $135,289 or $0.21 per share.

     COMMON STOCK

     Financing Agreement
     -------------------

     On June 30, 2003, the Company entered into an agreement with an
institutional investor for an equity line financing of up to $4,000,000. The
institutional investor has agreed to purchase the Company's common stock at 87%
to 92% percent of the volume weighted average price on the date in question
during each draw down pricing period, subject to certain adjustments as set
forth in the agreement. The Company may sell up to $4,000,000 of its common
stock, with a minimum commitment of $1,500,000, to the institutional investor
under the equity line on trading days on which our closing price per share is
$0.50 or more. Subject to the satisfaction of the minimum closing price and
certain other conditions, the Company has the right to determine the timing and
amount of each sale so long as the sale will not cause the institutional
investor to own more than 4.999% of the Company's outstanding common stock.
Pursuant to a registration rights agreement, the Company agreed to file a
registration statement for the resale of the shares of its common stock issued
to the institutional investor in connection with the equity line.

                                      F-16

<PAGE>

     Common Stock and Warrants
     -------------------------

     During the nine months ended December 31, 2003, the Company completed the
following:

     o    In April 2003, the Company issued 72,486 shares of common stock that
          it had committed to issue during the year ended March 31, 2003.

     o    During the nine months ended December 31, 2003, $657,547 of
          convertible promissory notes and accrued interest thereon were
          converted into 850,671 shares of common stock based upon a conversion
          price equal to 80% of the average closing price for the 20 trading
          days immediately preceding the conversion date.

     o    On June 25, 2003, we amended four convertible promissory notes
          totaling $887,500 that were issued in March 2001 such that 80.37% of
          the outstanding principal and accrued and unpaid interest converted
          into 2,088,949 shares of the Company's common stock at a conversion
          price of $0.35 per share. At the holder's option on September 30,
          2003, the remaining principal balance plus accrued interest converted
          at an exercise price of $0.35 per share into 510,157 shares.

     o    In June 2003, the Company issued to an accredited investor an 8%
          Convertible Promissory Note for $200,000, and also issued warrants to
          purchase 40,000 shares of the Company's common stock at an exercise
          price $0.35. In June 2003, the $200,000 Convertible Promissory Note
          was converted into 571,429 shares pursuant to terms of the note. On
          June 30, 2003, in accordance with the terms of the warrant, the
          investor elected to exercise the warrant through a net issuance. As a
          result, an additional 27,273 shares of common stock were issued to the
          investor.

     o    On June 30, 2003, the Company agreed to sell to five accredited
          investors an aggregate of 1,111,112 shares of its common stock for an
          aggregate purchase price of $500,000 pursuant to a Securities Purchase
          Agreement. The investors purchased these shares from the Company on
          July 9, 2003. In connection with this agreement, the Company issued
          warrants to purchase an aggregate of 150,000 shares of our common
          stock with an exercise price of $1.34 per share. The warrants may be
          exercised at any time. On August 4, 2003, the five accredited
          investors agreed to surrender their common stock in exchange for
          convertible promissory notes totaling $500,000, due August 4, 2004,
          with interest at 10% per annum, and warrants to purchase an additional
          10,000 shares of common stock with an exercise price of $1.34 per
          share. The warrants may be exercised at any time after August 4, 2003.
          The promissory notes are convertible into common stock at $0.45 per
          share. On September 15, 2003, one of the investors elected to convert
          his promissory note for $250,000 into common shares and was issued
          555,556 shares of common stock. The
          non-cash expense of this stock repurchase of $45,693 has been recorded
          as financing costs for the nine month period ended December 31, 2003.

     o    In July 2003, the Company renegotiated the terms of $1,353,000 of 12%
          per annum demand promissory notes due the Company's Chief Executive
          Officer, Mr. Ramey. The note agreements were entered into during
          fiscal 2002 and 2003 to fund the Company's operations. In exchange for
          the 12% demand notes, the Company issued Mr. Ramey a new promissory
          note bearing interest at 7% per annum, maturing July 10, 2004, and
          convertible into shares of common stock at a conversion price of $0.80
          per share. Mr. Ramey was also issued a warrant to purchase 1,691,250
          shares of common stock at an exercise price of $0.80 per share. The
          excess of the fair value of the beneficial conversion feature of the
          note and the fair value of the warrants over the carrying amount of
          the debt is $1,722,631 and has been recorded as a loss on
          extinguishment of debt-related party for the nine month period ended
          December 31, 2003.

     o    In September 2003, the Company successfully negotiated the conversion
          of $834,168 of remaining debt related to discontinued operations. In
          exchange for the debt, the holder was issued 417,084 shares of common
          stock and a warrant to purchase 208,542 shares of common stock at an
          exercise price of $2 per share. The excess of the fair value of the
          shares and warrants issued over the carrying amount of the debt is
          $635,259 and has been recorded as a loss on extinguishment of debt for
          the nine month period ended December 31, 2003.

                                      F-17
<PAGE>

     o    In October 2003, the Company sold 1,825,000 shares of common stock
          ("Common Stock") for an aggregate purchase price of $3,650,000, and
          sold $575,0000 aggregate principal amount of 1% Convertible Debentures
          (the "Debentures"). In connection with the sale of the Common Stock
          and Debentures, the Company also issued warrants to purchase 1,056,250
          shares of Common Stock (the "Warrants," and collectively, with the
          Common Stock and Debentures, the "Securities") in a private placement
          to 11 institutional investors. The maturity date of the Debentures is
          October 2, 2004. The sale of the Securities resulted in gross proceeds
          to the Company, prior to the exercise of the Warrants, of
          approximately $4.2 million. The Debentures are convertible into Common
          Stock at a conversion price of $2.00 per share (the "Conversion
          Price"), subject to standard anti-dilution adjustments. The Warrants
          are fully vested and exercisable at any time until October 2, 2006 at
          an exercise price of $2.00 per share (the "Exercise Price"), subject
          to standard anti-dilution adjustments. In accordance with generally
          accepted accounting principles, in the event the conversion price is
          less than the Company's stock price on the date of issuance, the
          difference is considered to be a beneficial conversion feature and is
          amortized as additional interest expense over the period from the date
          of issuance to the stated redemption date. The Company has calculated
          the beneficial conversion feature of the Debentures to be $389,805.

     o    During the nine months ended December 31, 2003, pursuant to the Series
          A Convertible Preferred Stock conversion terms, the holder converted
          640,000 shares of Series A Convertible Preferred Stock and the Company
          issued 1,994,286 shares of the Company's common stock.

     Common Stock and Warrants as a Financing Cost
     ---------------------------------------------

     o    In May and June 2003, the Company issued warrants to purchase 568,000
          shares of common stock to several note holders as consideration for
          the note holders extending the maturity date of $887,500 of their
          promissory notes with the Company. Under the terms of the agreement,
          the holders exercised the warrants through a net issuance exercise. By
          doing so, the aggregate number of shares issued due to the exercise of
          the warrants was 387,273 shares of common stock. These shares were
          issued on July 2, 2003.

     o    In June 2003, as partial settlement of an existing note and warrant
          agreement, the Company issued a warrant to purchase up to $1,000,000
          of the Company's common stock not to exceed 2,300,000 shares. The
          exercise price of the warrant is 50% of the average stock price for 10
          consecutive days immediately prior to the exercise, but not less than
          $0.06 per share. The warrant is exercisable in thirds after specific
          amounts of days following the earlier of i) the Company receiving an
          effectiveness notice confirming the completion of a registration
          statement filed with the Securities and Exchange Commission or ii) one
          year from the date of issue.

     o    In July 2003, the Company entered into an agreement for financial
          advisory and strategic/competitive advisory services and issued a
          warrant to purchase 100,000 shares of common stock at an exercise
          price of $1.15 per share. The warrant is exercisable through June 30,
          2006.

     Common Stock Issued for Services
     --------------------------------

     o    During the three months ended December 31, 2003, the Company issued
          23,446 shares pursuant to two professional service agreements. The
          value of the services received has been determined based upon the
          current market price of the Company's common stock issued in exchange
          for the services. The aggregate value of these shares, $73,831.18, has
          been included as operating expenses in the quarter ended December 31,
          2003.

     STOCK OPTIONS

     In August 1999, the Company implemented its 1999 Stock Option Plan (the
"1999 Plan"). In August 2000, the Company's Board of Directors approved the 2000
Stock Option Plan (the "2000 Plan"), which amends and restates the 1999 Plan.
Under the 2000 Plan, the maximum aggregate number of shares which may be granted
is 15,000,000. The exercise price may 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% owner of the Company, the exercise
price must not be less than 100% of the fair market value on the date of grant.
Such incentive stock options vest in varying increments and expire five years
from the date of vesting.

     During the three months and nine months ended December 31, 2003 and 2002,
the Company granted 0 and 2,694,000, and 0 and 72,000 stock options,
respectively, to certain employees and directors that may be exercised at prices
ranging between $2.95 and $0.54, and $1.00 and $1.00, respectively.

                                      F-18
<PAGE>

     The following table summarizes certain information relative to stock
options:
<TABLE>
                                       2000 Stock Option Plan                       Outside of Plan
                                -------------------------------------     -------------------------------------
                                                   Weighted-Average                            Weighted-Average
                                    Shares          Exercise Price            Shares           Exercise Price
                                ---------------    ------------------     ---------------      ----------------
<S>                               <C>              <C>                        <C>              <C>
Outstanding, March 31, 2003            282,000     $      3.85                   143,350       $     20.18
Granted                           2,114,000(a)     $      1.62                580,000(b)       $      0.55
Exercised                                2,500     $      1.15                        --       $        --
Forfeited/canceled                       2,000     $      6.25                    10,250       $     11.69
Outstanding, December 31,
    2003                             2,391,500     $      1.88                   713,100       $      3.72

</TABLE>

(a) Consists of 420,000 shares granted to each of Messrs. Stepanik and
Villarreal, 400,000 shares granted to each of Messrs. Ramey and Figone, 200,000
shares granted to Mr. Reiland and 274,000 shares granted to other employees and
non-employee directors. SEE DETAILS OF ISSUANCE BELOW.

(b) Consists of 290,000 shares granted to each of Messrs. Stepanik and
Villarreal. SEE DETAILS OF ISSUANCE BELOW.

     The weighted-average remaining life and the weighted-average exercise price
of all of the options outstanding at December 31, 2003 were 9.00 years and
$2.30, respectively. The exercise prices for the options outstanding at December
31, 2003 ranged from $ 0.55 to $50.00, and information relating to these options
is as follows:

<TABLE>
<CAPTION>
                                                          Weighted-Average                         Weighted-Average
                           Stock            Stock            Remaining           Weighted         Exercise Price of
Range of Exercise         Options          Options          Contractual           Average              Options
      Prices            Outstanding      Exercisable           Life           Exercise Price         Exercisable
-------------------    --------------   --------------    ----------------    ----------------    -------------------
<S>                        <C>              <C>             <C>                  <C>                 <C>
$ 0.55 - 5.00              2,858,500          902,500       9.40 years           $   1.40            $   1.08
$ 5.01 - 20.00               151,500          151,500       6.38 years           $   7.14            $   7.14
$20.01- 50.00                 94,600           94,600       1.31 years           $  21.98            $  21.98
          Total            3,104,600        1,148,600
</TABLE>

     DETAILS OF ISSUANCE

     On April 2, 2003, we entered into employment agreements with Terry Stepanik
and Mario Villarreal, pursuant to which Mr. Stepanik is employed as our
President and Chief Operating Officer and Mr. Villarreal as our Chief Technology
Officer. Pursuant to the terms of the agreements, Mr. Stepanik and Mr.
Villarreal each received an option to purchase 355,000 shares of our common
stock under the 2000 Plan, at an exercise price of $0.55 per share which was the
closing market price of our common stock on the date of grant. Mr. Stepanik's
option vests as to 177,500 shares on December 31, 2003 and the remaining shares
vest on April 2, 2004. Mr. Villarreal's option vested as to 177,500 shares on
April 25, 2003 and the remaining shares vest on April 2, 2004. Both Mr. Stepanik
and Mr. Villarreal were each also granted an option to purchase 290,000 shares
of our common stock outside the 2000 Plan at an exercise price of $0.55 per
share. Each of these options vests as to 145,000 shares on March 31, 2005 and
the remaining shares vest on March 31, 2006. Both Mr. Stepanik and Mr.
Villarreal will also each be entitled to receive an option to purchase 290,000
shares of our common stock outside the 2000 Plan on April 25, 2004 at an
exercise price equal to the fair market value of our common stock on the date of
grant. This option will vest as to 145,000 shares on March 31, 2005 and the
remaining shares will vest on March 31, 2006.

     On September 15, 2003, following stockholder approval of certain proposals
at the 2003 Annual meeting held September 10, 2003, both Mr. Stepanik and Mr.
Villarreal each received an option to purchase 65,000 shares of our common stock
under the 2000 Plan at an exercise price of $2.95 which was the closing market
price of our common stock on the date of grant.

                                      F-19

<PAGE>

     In the event of a change of control, all of Mr. Stepanik's and Mr.
Villarreal's options will become fully vested and exercisable. If the event
either. Stepanik or Mr. Villarreal have not received the additional options to
purchase 290,000 shares and 65,000 shares described above before a change of
control, each will be entitled to a cash bonus at that time equal to the
appreciation of the value of 355,000 shares of our common stock subsequent to
April 2, 2003. If either Mr. Stepanik or Mr. Villarreal is terminated, other
than for cause, or resigns within 10 days following a material decrease in title
within six months following a change of control, then he will be entitled to
receive a lump sum payment equal to two times his annual base salary and all his
options will become fully vested, subject to compliance with certain ongoing
obligations and the delivery of a release to us. If either Mr. Stepanik or Mr.
Villarreal resigns within 10 days following a material decrease in title by the
our Board of Directors, other than for cause, then 50% of his unvested options
will become fully vested.

     On May 13, 2003, we entered into an employment agreement with Charles E.
Ramey, pursuant to which he is employed as our Chief Executive Officer and
Chairman of the Board of Directors. Pursuant to the terms of the agreement, Mr.
Ramey received an option to purchase 394,000 shares of our common stock under
the 2000 Plan at an exercise price of $1.00 per share which was the closing
market price of our common stock on the date of grant. The option vested as to
280,000 shares on May 20, 2003 and the remaining 104, 000 shares vest on January
1, 2004.

     On September 15, 2003, following stockholder approval of certain proposals
at the 2003 Annual meeting held September 10, 2003, Mr. Ramey received an option
to purchase 6,000 shares of our common stock under the 2000 Plan at an exercise
price of $2.95 which was the closing market price of our common stock on the
date of grant. This option will become fully vested on January 1, 2004.

     In the event of a change of control, all of Mr. Ramey's options will become
fully vested and exercisable. If Mr. Ramey is terminated, other than for cause,
or resigns within 10 days following a material decrease in title within six
months following a change of control, Mr. Ramey is entitled to receive a lump
sum payment equal to two times his annual base salary and all his options shall
become fully vested, subject to compliance with certain ongoing obligations and
the delivery of a release to us. If Mr. Ramey resigns within 10 days following a
material decrease in title by the our Board of Directors, other than for cause,
50% of Mr. Ramey's unvested options will become fully vested.

     Effective September 1, 2003, we entered into an employment agreement with
John Figone, pursuant to which Mr. Figone is employed as our Vice President of
Business Development and General Counsel. Pursuant to the terms of the
agreement, Mr. Figone was granted on September 26, 2003 an option to purchase
400,000 shares of our common stock under the 2000 Plan, at an exercise price of
$2.70 per share which was the closing market price of our common stock on the
date of grant. Mr. Figone's option vests as to 100,000 shares on September 26,
2004, 150,000 shares on September 26, 2005 and the remaining 150,000 shares vest
on September 26, 2006.

     In the event of a change of control, all of Mr. Figone's options will
become fully vested and exercisable. If Mr. Figone is terminated, other than for
cause, or resigns within 10 days following a material decrease in title within
six months following a change of control, all his options shall become fully
vested, subject to compliance with certain ongoing obligations and the delivery
of a release to us. If Mr. Figone resigns within 10 days following a material
decrease in title by the our Board of Directors, other than for cause, 50% of
Mr. Figone's unvested options will become fully vested.

     On September 26, 2003, John Reiland, our Chief Financial Officer, was
granted an option to purchase 200,000 shares of our common stock under the 2000
Plan, at an exercise price of $2.70 per share which was the closing market price
of our common stock on the date of grant. Mr. Reiland's option vests as to
37,500 shares on September 26, 2004, 81,250 shares on September 26, 2005 and the
remaining 81,250 shares vest on September 26, 2006.

     In the event of a change of control, all of Mr. Reiland's options will
become fully vested and exercisable. If Mr. Reiland is terminated, other than
for cause, or resigns within 10 days following a material decrease in title
within six months following a change of control, all his options shall become
fully vested, subject to compliance with certain ongoing obligations and the
delivery of a release to us. If Mr. Reiland resigns within 10 days following a
material decrease in title by the our Board of Directors, other than for cause,
50% of Mr. Reiland's unvested options will become fully vested.

     During the nine months ended December 31, 2003, the Company issued options
to certain other employees and non-employee directors to purchase a total of
274,000 shares of our common stock under the 2000 Plan, at exercise prices
ranging from $1.15 to $2.90 per share which in all cases was the closing market
price of our common stock on the date of grant. All of the options are
exercisable over a ten year life, generally vest over a period of three years,
and terminate generally ninety days after the date the optionee ceases to be an
employee or a director.

                                      F-20

<PAGE>

PRO-FORMA DISCLOSURES

     The Company has elected to follow Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock Based Compensation", requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options is
greater than or equals the market price of the underlying stock on the date of
grant, no compensation cost has been recognized during the three months and nine
months ended December 31, 2003 and December 31, 2002.

     Pro-forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     For purposes of pro-forma disclosure, the estimated fair value of the
options is included in expense over the option's vesting period or expected
life. The Company's pro-forma information for the three and nine months ended
December 31, 2003 and 2002 is as follows:

<TABLE>
<CAPTION>
                                              Nine Months Ended                     Three Months Ended
                                                December 31,                           December 31,
                                      ----------------------------------   -------------------------------------
                                          2003               2002               2003                  2002
                                      --------------    ----------------   ---------------       ---------------
<S>                                    <C>                 <C>               <C>                   <C>
Net loss as reported                   $(6,744,688)        $(1,846,085)      $(1,243,214)          $  (411,438)
Net loss, pro forma                    $(8,010,457)        $(1,904,600)      $(1,711,739)          $  (411,438)
Basic & diluted loss per share, as
reported                                    $(0.39)             $(0.16)           $(0.05)              $ (0.04)
Basic & diluted loss per share,
pro forma                                   $(0.46)             $(0.17)           $(0.08)              $ (0.04)
</TABLE>

     The fair value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for the three and nine months ended December 31, 2003 and 2002:
dividend yields of 0% for all periods; expected volatility of 150% for all
periods; risk-free interest rates of 2.00%, 2.00%, 3.75%, and 3.75%,
respectively; and expected lives of 3.0 years, 3.0 years, 2.55 years and 2.55
years, respectively. The per-share weighted average fair value of stock options
granted during the three and nine months ended December 31, 2003 and 2002 was
$0.00, $ 1.13, $0.00 and $0.78, respectively.

                                      F-21

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS

     The following discussion and analysis of our financial condition and
results of operations should be read with the unaudited consolidated financial
statements and related notes included elsewhere in this Report.

     When used in this Report, the words "expects," "anticipates," "believes,"
"plans," "will" and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods and include, but
are not limited to, statements as to statements regarding benefits related to
our strategic alliances, our critical accounting policies, expectations
regarding our revenue, adequacy of cash, statements regarding our growth and
profitability, investments in marketing, promotion, and operating
infrastructure, our need for future financing, and our ability to respond to
rapid technological change. Forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. These risks and uncertainties include, but are not limited
to, those discussed below, as well as risks related to our ability to develop
and timely introduce products that address market demand, the impact of
alternative technological advances and competitive products, market
fluctuations, our ability to obtain future financing, loss of a strategic
partnership and the risks set forth below under "Factors that May Affect Our
Results." These forward-looking statements speak only as of the date hereof. US
Dataworks expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in the our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.

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

     MICRworks, Returnworks, Remitworks and Remoteworks are trademarks of US
Dataworks. Other trademarks referenced herein are the property of their
respective owners.

OVERVIEW

     US Dataworks is a developer of payment processing software, serving several
of the top banking institutions, credit card issuers, and the United States
Government. We generate revenue from the licensing, system integration and
maintenance of our core products: MICRworks, Returnworks, Remitworks and
Remoteworks for the financial services industry. The software developed by us is
designed to enable organizations to transition from traditional paper-based
payment and billing processes to electronic solutions. US Dataworks' products
include check processing, point-of-purchase transactions and turnkey Automated
Clearing House, or ACH, payments. Our products are designed to provide
organizations with an in-house solution that will complement and enhance such
organizations' existing technologies, systems and operational workflow. US
Dataworks' strategy is to identify, design and develop products that fill
specific niches in the financial transaction processing industry.

CRITICAL ACCOUNTING POLICIES

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

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

                                       22


<PAGE>

     REVENUE RECOGNITION

     We recognize revenues in accordance with the provisions of the American
Institute of Certified Public Accountants' Statement of Position 97-2, "Software
Revenue Recognition." We license our software products under non-exclusive,
non-transferable license agreements. These arrangements do not require
significant production, modification, or customization, therefore, revenue is
recognized when a license agreement has been signed, delivery of the software
products has occurred, the related fee is fixed or determinable, and
collectibility is probable. If professional services are provided in conjunction
with the installation of the software license, revenue is recognized when these
services have been provided.

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

     CONCENTRATIONS OF CREDIT RISK

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

     Three of our customers accounted for 33%, 25% and 11% of our net sales for
the nine months ended December 31, 2003. One of our customers accounted for 14%
of our net sales for the nine months ended December 31, 2002. Additionally, our
strategic resellers accounted for 55% and 36% of our net sales for the nine
months ended December 31, 2003 and 2002, respectively.

     At December 31, 2003, amounts due from our strategic resellers or
significant customers accounted for 25% and 13%, respectively, of accounts
receivable.

RESULTS OF OPERATIONS

     The results of operations reflected in this discussion include the
operations of US Dataworks for the nine months ended December 31, 2003 and 2002.

     REVENUE

     Revenue decreased by $327,801 or 44% to $416,458 for the three months ended
December 31, 2003 from $744,259 for the three months ended December 31, 2002.
The decrease in revenue was primarily attributable to a decrease of $403,000 or
88% in license fees offset by an increase in service revenue of $76,000 or 34%.
The decrease in license fees is principally due to our not completing a customer
license transaction during the three months ended December 31, 2003 for proceeds
greater than $100,000. Historically, we have been successful in completing such
transactions during a quarter with one or more customers. In the three months
ended December 31, 2002 we completed license transactions with an agency of the
federal government and with a major retailer, each for approximately $200,000.
Further, in the three months ended September 30, 2003 we completed a license
transaction with a major credit card processor in excess of $400,000. We believe
the relatively low level of license revenue in the current quarter is an
isolated occurrence and not indicative of our expectations for future quarters.
Service revenue increased $125,000 compared to the same period in the prior year
as a result of one of our significant customer's request for our services
related to dedicated project management and testing resources related to their
use of our software product suite. We believe this request will continue for the
foreseeable future. This $125,000 increase was offset by an approximate $49,000
decrease in service performed for other customers due to the low level of
license activity in the current quarter as compared to the same period in the
prior year.

                                       23

<PAGE>

     Revenue increased by $26,992 or 2% to $1,862,029 for the nine months ended
December 31, 2003 from $1,835,037 for the nine months ended December 31, 2002.
The increase in revenue was primarily attributable to an increase of $448,382 or
97% in service revenues offset by an approximate $398,000 decrease in license
revenues as stated in the preceding paragraph. Approximately $175,000 of the
service revenue increase in the nine month period is due to ongoing and
continuing requests for our services from the customer mentioned in the
preceding paragraph. The remainder of the service revenue increase is due to
requests for professional services from a larger number of existing customers.

     COST OF SALES

     Cost of sales decreased by $114,277 or 36% to $206,043 for the three months
ended December 31, 2003 from $320,320 for the three months ended December 31,
2002. Cost of sales decreased by $151,487 or 21% to $555,697 for the nine months
ended December 31, 2003 from $707,184 for the nine months ended December 31,
2002. The decreases in both the three and nine month periods were primarily
attributable to our professional staff devoting a greater amount of time on
professional services revenue activity and research and development activities
and a corresponding smaller amount of time on maintenance and support activities
for existing customers. With the recent passage of the federal Check 21
legislation, we expect our staff will continue to devote greater amounts of time
on new product development activities.

     OPERATING EXPENSES

     Total operating expenses increased by $638,178 or 115% to $1,192,624 for
the three months ended December 31, 2003 from $554,446 for the three months
ended December 31, 2002. Total operating expenses increased by $1,001,743 or 46%
to $3,168,528 for the nine months ended December 31, 2003 from $2,166,785 for
the nine months ended December 31, 2002. The increases were primarily
attributable to increases in personnel costs and legal and accounting fees due
to the higher level of financing and capital restructuring transactions as
compared to the same periods in the prior year. We do not expect the unusually
high level of capital restructuring transactions and the associated high level
of legal, accounting and consulting expenses to continue in future periods
beyond March 31, 2004.

     OTHER EXPENSES

     Other expenses, including interest expense and financing costs, decreased
$19,926 or 7% to $261,005 for the three months ended December 31, 2003 from
$280,931 for the three months ended December 31, 2002. The decrease was
primarily due to a decrease in both related party interest and other interest
expense as a result of the September 30, 2003 conversion of approximately $2
million of related party promissory notes and note payable related to
discontinued operations.

     Other expenses, including interest expense and financing costs, increased
$4,075,338 or 505% to $4,882,491 for the nine months ended December 31, 2003
from $807,153 for the nine months ended December 31, 2002. The increase was
primarily due to non-cash financing charges related to nonrecurring transactions
occurring in the nine months ended December 31, 2003, related to the following
transactions:

     o    $735,142 non-cash interest expense related to amortization of
          beneficial conversion features and warrants granted with promissory
          notes totaling $1,690,000 to nine investors in June, July, August and
          October 2003.

     o    $635,259 non-cash loss on extinguishment of debt due to conversion in
          September 2003 of $834,168 of debt related to discontinued operations
          in exchange for 417,084 shares of common stock and a warrant to
          purchase 208,542 shares of common stock at $2 per share.

     o    $1,722,631 non-cash loss on extinguishment of debt related parties due
          to exchange of debt instruments in July 2003 of $1,353,000 of demand
          promissory notes due to our Chief Executive Officer, Charles Ramey
          entered into during fiscal 2002 and 2003 to fund our operations. The
          former 12% per annum demand notes were exchanged for 7% per annum
          convertible notes, due in July 2004, convertible into shares of common
          stock at an exercise price of $0.80 per share. Mr. Ramey was also
          issued a warrant to purchase 1,691,250 shares of common stock at an
          exercise price of $0.80 per share.

                                       24

<PAGE>

     o    $262,755 non-cash interest expense related to the full amortization of
          previously issued debt discount on warrants issued with a promissory
          note in June 2003 as partial settlement of a previously existing note
          and warrant agreement.

     o    $96,750 non-cash financing costs related to the issuance in July 2003
          of a warrant to purchase 100,000 shares of common stock at an exercise
          price of $1.15 per share pursuant to a financial advisory and
          strategic/competitive advisory services agreement.

     o    $1,084,505 of non-cash financing charges in June 2003 pursuant to (i)
          the reduction in the conversion price of four existing convertible
          promissory notes and (ii) the reduction in the exercise price of
          previously issued warrants to purchase 568,000 shares of common stock.
          The reductions in the conversion price and warrant exercise price were
          granted to four investors in connection with their agreement to
          convert 80.37% of the principal and accrued interest underlying their
          existing $887,500 promissory notes.

     NET LOSS

     Net loss increased by $831,776 or 202% to a net loss of $1,243,214 for the
three months ended December 31, 2003 from $411,438 for the three months ended
December 31, 2002.

     Net loss increased by $4,898,603 or 265% to a net loss of $6,744,688 for
the nine months ended December 31, 2003 from $1,846,085 for the nine months
ended December 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

     CASH AND CASH EQUIVALENTS

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

     Cash and cash equivalents increased by $1,912,306 to $1,920,870 at December
31, 2003 from $8,564 at March 31, 2003. Cash used for operating activities was
$2,666,912 in the nine months ended December 31, 2003 compared to $1,173,194 to
the same period in the prior year. Net loss from continuing operations reduced
cash by $6,744,688 and $1,846,085 in the nine months ended December 31, 2003 and
2002, respectively.

     CASH USED FOR INVESTING ACTIVITIES

     Cash used for investing activities of $62,304 and $87,435 in the nine
months ended December 31, 2003 and December 31, 2002, respectively, was due to
equipment purchases, and in the nine months ended December 31, 2002 we repaid
our affiliates $54,506.

     FINANCING ACTIVITIES

     Financing activities provided net cash of $4,641,522 in the nine months
ended December 31, 2003 and included the issuance of $2,190,000 in convertible
promissory notes. In addition, we received a gross aggregate of $4,225,000
pursuant to the sale of 1,825,000 shares of our common stock for a purchase
price of $3,650,000 and a $575,000 debenture, due October 2, 2004, with interest
at 1%, which may be converted into 287,500 shares of our common stock. The
common stock and the debenture were sold with warrants to purchase 1,056,250
shares of our common stock at an exercise price of $2 per share. The gross
proceeds were reduced by approximately $245,000 of issuance costs related to
this financing.

     Financing activities provided net cash of $1,323,062 for the nine months
ended December 31, 2002 and included the issuance of $210,700 in promissory
notes, $702,500 in convertible promissory notes and $830,000 in demand
promissory notes due to a related party.

                                       25

<PAGE>

     We recognize the need for the infusion of additional cash to sustain our
operations and are actively pursuing financing options. However, there can be no
assurance that we will be able to raise additional funds on favorable terms or
at all.

     In addition, we may wish to pursue possible acquisitions of, or investments
in businesses, technologies or products complementary to ours in order to expand
our geographic presence, broaden our product offerings and achieve operating
efficiencies. We may not have sufficient liquidity, or we may be unable to
obtain additional financing on favorable terms or at all, in order to finance
such an acquisition or investment. We are not currently in negotiations for any
specific acquisition or investment.

     We believe we currently have adequate cash to fund anticipated cash needs
for at least the next six months. An adverse business or legal development may
also require us to raise additional financing sooner than anticipated. We
recognize that we may be required to raise such additional capital, at times and
in amounts, which are uncertain, especially under the current capital market
conditions. If we are unable to acquire additional capital or are required to
raise it on terms that are less satisfactory than we desire, it may have a
material adverse effect on our financial condition. If necessary, we may be
required to consider curtailing our operations significantly or to seek
arrangements with strategic partners or other parties that may require us to
relinquish significant rights to products, technologies or markets. In the event
we raise additional equity financings, these financings may result in dilution
to existing stockholders.

     As of December 31, 2003, our accumulated deficit was $39,489,219. Our
auditors have included an explanatory paragraph in their Independent Auditor's
Report included in our audited financial statements for the years ended March
31, 2003 and 2002 filed with our annual report on Form 10-KSB/A for fiscal year
ended March 31, 2003, to the effect that our loss from operations for the year
ended March 31, 2003, and the accumulated deficit at March 31, 2003 raise
substantial doubt about our ability to continue as a going concern.

FACTORS THAT MAY AFFECT OUR RESULTS

WE HAVE A GENERAL HISTORY OF LOSSES AND MAY NOT OPERATE PROFITABLY IN THE
FUTURE.

     We have incurred significant losses for the last two fiscal years. Our net
losses and negative cash flow may continue for the foreseeable future. As of
December 31, 2003, our accumulated deficit was $39,489,219. Our auditors have
included an explanatory paragraph in their Independent Auditor's Report included
in our audited financial statements for the years ended March 31, 2003 and 2002
filed with our annual report on Form 10-KSB/A for fiscal year ended March 31,
2003, to the effect that our loss from operations for the year ended March 31,
2003, and the accumulated deficit at March 31, 2003 raise substantial doubt
about our ability to continue as a going concern. We believe that our planned
growth and profitability will depend in large part on our ability to continue to
promote our brand name and gain clients and expand our relationship with clients
for whom we would provide licensing agreements and system integration.
Accordingly, we intend to invest heavily in marketing, strategic partnerships,
development of our client base, and development of our marketing technology and
operating infrastructure. If we are not successful in promoting our brand name
and expanding our client base, it will have a material adverse effect on our
financial condition and our ability to continue to operate our business.

IF WE ARE UNSUCCESSFUL IN RAISING ADDITIONAL CAPITAL IN THE FUTURE, WE MAY BE
UNABLE TO CONTINUE TO OPERATE.

     We believe we currently have adequate cash to fund anticipated cash needs
for at least the next six months. Our independent auditors have advised us
regarding uncertainty as to our ability to continue as a going concern. We will
need to raise additional capital in the future and are actively pursuing various
financing options. Any equity financing may be dilutive to shareholders, and
debt financing, if available, will increase expenses and may involve restrictive
covenants. We may be required to raise additional capital, at times and in
amounts, which are uncertain, especially under the current capital market
conditions. Under these circumstances, if we are unable to obtain additional
capital or are required to raise it on undesirable terms, it may have a material
adverse effect on our financial condition, which could require us to:

                                       26

<PAGE>

         o        curtail our operations significantly;

         o        sell significant assets;

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

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

OUR OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS CAUSED BY MANY FACTORS WHICH
COULD CAUSE US TO FAIL TO ACHIEVE OUR REVENUE OR PROFITABILITY EXPECTATIONS,
WHICH IN TURN COULD CAUSE OUR STOCK PRICE TO DECLINE.

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

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

         o        gain or loss of clients or strategic relationships;

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

         o        our ability to build brand recognition;

         o        timing of sales to customers;

         o        price competition;

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

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

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

         o        changes in governmental regulation;

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

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

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

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

                                       27

<PAGE>

WE MAY NOT BE ABLE TO MAINTAIN OUR RELATIONSHIPS WITH STRATEGIC PARTNERS, WHICH
MAY CAUSE OUR CASH FLOW TO DECLINE.

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

BECAUSE A SMALL NUMBER OF CUSTOMERS HAS HISTORICALLY ACCOUNTED FOR AND MAY IN
FUTURE PERIODS ACCOUNT FOR SUBSTANTIAL PORTIONS OF OUR REVENUE, OUR REVENUE
COULD DECLINE BECAUSE OF DELAYS OF CUSTOMER ORDERS OR THE FAILURE TO RETAIN
CUSTOMERS.

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

IF GENERAL ECONOMIC CONDITIONS DO NOT IMPROVE, WE MAY EXPERIENCE DECREASED
REVENUE OR LOWER GROWTH RATES.

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

WE MAY NOT BE ABLE TO ATTRACT, RETAIN OR INTEGRATE KEY PERSONNEL, WHICH MAY
PREVENT US FROM SUCCESSFULLY OPERATING OUR BUSINESS.

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

WE OPERATE IN A MARKET THAT IS INTENSELY AND INCREASINGLY COMPETITIVE, AND IF WE
ARE UNABLE TO COMPETE SUCCESSFULLY, OUR REVENUE COULD DECLINE AND WE MAY BE OR
BE UNABLE TO GAIN MARKET SHARE.

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

         Some of our competitors have:

         o        longer operating histories;

         o        larger installed customer bases;

         o        greater name recognition and longer relationships with
                  clients; and

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

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

         o        breadth and quality of services;

         o        creative design and systems engineering expertise;

         o        pricing;

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<PAGE>

         o        technological innovation; and

         o        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 offered by US Dataworks. If we fail to gain market share or lose
existing market share, our financial condition, operating results and business
could be adversely affected and the value of the investment in us could be
reduced significantly. We may not have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully.

WE MAY BE RESPONSIBLE FOR MAINTAINING THE CONFIDENTIALITY OF OUR CLIENT'S
SENSITIVE INFORMATION, AND ANY UNAUTHORIZED USE OR DISCLOSURE COULD RESULT IN
SUBSTANTIAL DAMAGES AND HARM OUR REPUTATION.

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

OUR PRINCIPAL SHAREHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS HAVE SIGNIFICANT
VOTING POWER AND MAY TAKE ACTIONS THAT MAY BE DIFFERENT THAT ACTIONS SOUGHT BY
OUR OTHER SHAREHOLDERS.

         Our principal shareholders, executive officers, directors and their
affiliates, in the aggregate, own more than 31% of our outstanding common stock.
These shareholders, if they act together, will be able to control our management
and affairs and all matters requiring shareholder approval, including the
election and removal of directors and approval of significant corporate
transactions. This influence over our affairs might be adverse to the interest
of our other shareholders. In addition, this concentration of ownership may
delay or prevent a change in control and might have an adverse effect on the
market price of our common stock.

FUTURE SALES OF OUR COMMON STOCK MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO DECLINE.

         As of December 31, 2003, there were approximately 22,968,391 shares of
common stock outstanding, of which at least 9,814,528 are restricted securities
under the Securities Act, a minority of which are held by affiliates of US
Dataworks. These restricted securities will be eligible for sale from time to
time upon expiration of applicable holding periods under Rule 144 under the
Securities Act. If these holders sell in the public market, these sales could
cause the market price of our common stock to decline. This also could make it
more difficult for us to raise funds through future offerings of our common
stock.

IF WE DO NOT ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, OUR BUSINESS MAY
SUFFER, WE MAY LOSE REVENUE OR WE MAY BE REQUIRED TO SPEND SIGNIFICANT TIME AND
RESOURCES TO DEFEND OUR INTELLECTUAL PROPERTY RIGHTS.

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

                                       29

<PAGE>

ITEM 3.  CONTROLS AND PROCEDURES

         (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain
"disclosure controls and procedures," as such term is defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934 (the "Exchange Act"), that are
designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognized that disclosure controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls and
procedures are met. Our disclosure controls and procedures provide reasonable
assurances that the objectives of the disclosure controls and procedures are
met. Additionally, in designing disclosure controls and procedures, our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. The
design of any disclosure controls and procedures also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.

         Based on their evaluation as of a date within 90 days prior to the
filing date of this Quarterly Report, our Chief Executive Officer and Chief
Financial Officer have concluded that, subject to the limitations noted above,
our disclosure controls and procedures were effective to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to them by others within those entities, particularly during the period in
which this Quarterly Report was being prepared.

         (b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in
our internal controls or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.

                                       30

<PAGE>

                          PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     On December 12, 2003, an individual investor filed a lawsuit against US
Dataworks in Los Angeles Superior Court alleging breach of an oral agreement
between the plaintiff and a former director of US Dataworks. In the complaint,
the plaintiff alleges that the oral agreement granted him the right to receive
additional shares from US Dataworks in the event that he should sell certain
shares of our common stock at a price less than $15 per share. The plaintiff
alleges that in March 2000, as partial consideration under the alleged oral
agreement he converted three promissory notes with an aggregate principal amount
of $725,000 into 77,856 shares of our common stock. He is seeking unspecified
damages. We intend to dispute this claim and defend this action vigorously.

ITEM 2.  CHANGES IN SECURITIES

     During the three months ended December 31, 2003, we issued an aggregate of
23,446 shares of our common stock pursuant to two professional services
agreements. The value of the services received has been determined based upon
the current market price of our common stock issued in exchange for the
services. The aggregate value of these shares was $73,831.

     The issuances disclosed in this Item 2 were made to accredited investors
and were deemed to be exempt from registration under the Securities Act in
reliance upon Section 4(2) of the Securities Act or Regulation D promulgated
thereunder.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits.

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

        EXHIBIT
         NUMBER                        DESCRIPTION OF DOCUMENT
         ------                        -----------------------
          31.1      Certification by Chief Executive Officer pursuant to
                    13a-14(a).
          31.2      Certification by Chief Financial Officer pursuant to
                    13a-14(a).
          32.1      Statement of Chief Executive Officer and Chief Financial
                    Officer under 18 U.S.C. ss. 1350.

     (b) Reports on Form 8-K.

     The Company has filed a current report on Form 8-K on October 9, 2003
reporting under Item 5 the sale of debentures, common stock and warrants to
certain accredited investors.

                                       31





<PAGE>

                                    SIGNATURE

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

     Dated:  February 17, 2004

                                US DATAWORKS, INC.

                                By  /S/ John S. Reiland
                                   --------------------------------------------
                                                 John S. Reiland
                                             Chief Financial Officer
                                   (Principal Financial and Accounting Officer
                                          and Duly Authorized Officer)

                                       32





<PAGE>

                                  EXHIBIT INDEX

  EXHIBIT
   NUMBER                             DESCRIPTION OF DOCUMENT
   ------                             -----------------------
    31.1            Certification by Chief Executive Officer pursuant to
                    13a-14(a).
    31.2            Certification by Chief Financial Officer pursuant to
                    13a-14(a).
    32.1            Statement of Chief Executive Officer and Chief Financial
                    Officer under 18 U.S.C. ss. 1350.

                                       33