UDW US Dataworks,

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C., 20549

 

FORM 10-QSB

 

(Mark One)

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period           to

Commission file number: 001-15835

US Dataworks, Inc.

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o    NO þ

Number of shares of Common Stock outstanding as of November 5, 2007: 32,062,962

Transitional Small Business Disclosure Format (Check one): YES o    NO þ

 

 

US DATAWORKS, INC.

TABLE OF CONTENTS

FORM 10-QSB

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

		Page
PART I — FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis or Plan of Operation			16
Item 3. Controls and Procedures			25
PART II — OTHER INFORMATION			26
Item 1. Legal Proceedings.			26
Item 4. Submission of Matters to a Vote of Security Holders			26
Item 6. Exhibits			26
SIGNATURE			27
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Accounting Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Accounting Officer

PART I — FINANCIAL INFORMATION

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

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

US DATAWORKS, INC.

		The Company recognizes revenues associated with the resale of ATMs in accordance with the provisions of the Statement of Financial Accounting Standards (“SFAS”) No. 48. The Company’s sale price is fixed and determinable at the date of sale and it has no obligation to directly bring about the resale of the product. In addition, the buyer’s obligation to pay the Company is not contingent upon release of the product and its sale price is not adjusted if the product is lost or damaged. The buyer has economic substance apart from the Company and it can reasonably estimate the amount of returns at the time of sale. Therefore revenue is recognized at the time of sale.
		Goodwill
		Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets,” which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, all goodwill amortization ceased effective January 1, 2002.
		The goodwill recorded on the Company’s books is from the acquisition of US Dataworks, Inc. in fiscal year 2001 which remains the Company’s single reporting unit. SFAS No. 142 requires goodwill for each reporting unit of an entity to be tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value is determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples for each reportable unit. On an ongoing basis, absent any impairment indicators, the Company performs impairment tests annually during the fourth quarter.
		SFAS No. 142 requires goodwill to be tested annually, typically performed during the fourth quarter, and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of the reportable unit below its carrying amount. The Company did not have an impairment of goodwill to record for the years ended March 31, 2007 or March 31, 2006.
		Convertible Debt Financing – Derivative Liabilities
		The Company reviews the terms of convertible debt and equity instruments issued to determine whether there are embedded derivative instruments, including embedded conversion options, that are required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.
		In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, the convertible debt holder’s conversion right provision, interest rate adjustment provision, liquidated damages clause, cash premium option, and the redemption option (collectively, the debt features) contained in the terms governing the convertible notes are not clearly and closely related to the characteristics of the notes. Accordingly, the features qualify as embedded derivative instruments at issuance and, because they do not qualify for any scope exception within SFAS 133, they are required by SFAS 133 to be accounted for separately from the debt instrument and recorded as derivative instrument liabilities
		Stock Options
		Effective April 1, 2006, the Company adopted the SFAS No. 123 (revised 2004), Share-Based Payment, which require the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of April 1, 2006, the first day of the Company’s fiscal year 2007. The Company’s

		Financial Statements as of and for the three months ended September 30, 2007 reflect the impact of SFAS 123R. In accordance with the modified prospective transition method, the Company’s Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. Stock-based compensation expense recognized under SFAS 123R for the three months and six months ended September 30, 2007 was $173,306 and $244,044 respectively, which consists of stock-based compensation expense related to employee and director stock options and restricted stock issuances.
		SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the company’s Statement of Operations. Prior to the adoption of SFAS 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s Statement of Operations prior to January 1, 2006 because the exercise price of the Company’s stock options granted to employees and directors was equal to or greater than the fair market value of the underlying stock at the date of grant.
		For purposes of proforma disclosure, the estimated fair value of the options is included in expense over the option’s vesting period or expected life. The Company’s proforma information for the three months and six months ended September 30, 2007 and 2006 is as follows:

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Compensation expense recognized for all employee stock options awards granted is recognized over their respective vesting periods unless the vesting period is graded. As stock-based compensation expense recognized in the Statement of Operations for the three and six months ended September 30, 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

Upon adoption of SFAS 123R, the Company continued to use the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of employee stock options granted at the date of the grant. In determining the compensation cost of the options granted during the three and six months ended September 30, 2007, as specified by SFAS 123R, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes pricing model and the weighted average assumptions used in these calculations are summarized as follows:

		As of September 30, 2007, there was approximately $191,214 of total unrecognized compensation cost related to nonvested share-based compensation arrangements, which is expected to be recognized over a period of 3 years .
		Loss per Share
		The Company calculates loss per share in accordance with SFAS No. 128, “Earnings per Share.” Basic loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding. Diluted loss per share is computed in a similar manner to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.
		The following potential common stock equivalents have been excluded from the computation of diluted net loss per share for the periods presented because the effect would have been anti-dilutive (options and warrants typically convert on a one-for-one basis, see conversion details of the preferred stock stated below for the common stock shares issuable upon conversion):

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

		Estimates
		The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
		Concentrations of Credit Risk
		The Company extends credit to its customers and performs ongoing credit evaluations of such customers. The Company does not obtain collateral from its customers to secure its accounts receivable. The Company evaluates its accounts receivable on a regular basis for collectibility and provides for an allowance for potential credit losses as deemed necessary.
		Three of the Company’s customers accounted for 27%, 27% and 11%, respectively, of the Company’s net revenues for the three months ended September 30, 2007. Four customers accounted for 26%, 26%, 11% and 10%, respectively, of net revenue for the six months ended September 30, 2007. Three customers accounted for 42%, 17% and 11% of net revenues for the three months ended September 30, 2006. Two customers accounted for 34% and 20%, respectively, of net revenue for the six months ended September 30, 2006.
		At September 30, 2007, amounts due from significant customers accounted for 74% of accounts receivable.
3.		Property and Equipment
		Property and equipment as of September 30, 2007 consisted of the following:

		Depreciation and amortization expense for the three and six months ended September 30, 2007 and 2006 was $45,763, $84,813, $34,581 and $67,641, respectively.
4.		Notes Payable – Related Parties

On September 26, 2006, the Company entered into a note payable with its Chief Executive Officer for $500,000. The note bears an 8.75% per annum interest rate, is unsecured and was due September 25, 2007. On September 25, 2007, the Company entered into a new note payable agreement that supersedes and supplants the September 2006 note. As of September 30, 2007 the outstanding balance on this note payable is $500,000. The principal, together with any unpaid accrued interest on the new note payable, shall be due and payable in full on demand on the earlier of: (i) the full and complete satisfaction of certain senior secured convertible notes (the “November Notes”) issued by the Company to certain investors on November  13, 2007 and (ii) ninety-one (91) days following the expiration of the term of the  November Notes  (such date described in (i) and (ii) hereinafter the “Demand Date”), unless such date is extended by the mutual agreement of the parties.

Notes Payable

In August 2007 the Company entered into a note payable with an equipment vendor to purchase new telephone equipment for $105,835. The note bears a 10.68% per annum interest rate, is secured by the equipment and is due in 36 equal monthly installments.

5.		Convertible Promissory Notes
		Convertible promissory notes at September 30, 2007 consisted of the following:

Convertible promissory note, interest at 10% per annum, unsecured, $256,066 due December 15, 2007		$	256,066
Less current portion			(256,066	)
Long-term portion		$	-0-

		Convertible promissory note with interest at 10% per annum
		This note is an amendment and restatement of a note in the same principal amount originally dated September 15, 2004. The original note was issued effective September 15, 2004 in connection with the November 2004 settlement of a lawsuit brought by an investor in December 2003. The amended note is convertible at anytime, at the holder’s election, into shares of the Company’s common stock at a per share conversion price of $1.10, subject to standard antidilution provisions.
		The amended note became effective September 15, 2005 and extended a principal payment of $256,067, originally due September 15, 2005, for one year. In consideration of this amendment, the Company issued the holder a common stock purchase warrant to purchase up to 650,000 shares of the Company’s common stock at an exercise price of $0.59 per share. The warrant will expire on September 15, 2008.
		The changes to this debt caused the accounting treatment to be an extinguishment of the old debt and issuance of new debt instead of being treated as modification of debt. Therefore, the excess of the fair value of the note and warrants over the carrying amount of the debt is $206,000 and has been recorded as a loss on extinguishment for the year ended March 31, 2006.
		In connection with the November 2004 settlement, the Company also issued a warrant to purchase 160,000 shares of the Company’s common stock at a purchase price of $0.75 per share, which expired on November 10, 2006.
		Using the Black-Scholes pricing model the Company has determined the value of the warrants issued in connection with the settlement to be $126,000. This amount, together with the value of the convertible promissory note, the value of the plaintiff’s legal expense reimbursement and the Company’s legal costs incurred in connection with the settlement totaled $924,200 and has been recorded as Investor litigation settlement expense for the year ended March 31, 2005.
		On September 14, 2007, the Company reached an agreement with the note holder to extend the terms of the note for an additional 90 days in exchange for warrants to purchase up to 200,000 shares of the Company’s common stock dependent upon when the note is paid. On September 14, 2007, the Company issued the holder a warrant to purchase 66,666 shares of the Company’s common stock, with another warrant to purchase 66,666 shares of the Company’s common stock to be issued if the note is not paid by October 15, 2007 and the final warrant to purchase 66,667 shares of the Company’s common stock to be issued if the note is not paid by November 15, 2007.
		Using the Black-Scholes pricing model the Company has determined the value of the warrants issued on September 14, 2007 in connection with the note extension to be $13,141.
		Convertible promissory note issued June 16, 2005 with $70,000 Original Issue Discount
		On June 16, 2005, the Company entered into a Securities Purchase Agreement with an institutional investor (the “Debenture Agreement”) for the sale of a convertible debenture with a principal amount of $770,000 and an

original issue discount of $70,000 for gross proceeds of $700,000. The debenture is convertible at anytime at the discretion of the holder at a price per share of $0.572 into 1,346,154 shares of the Company’s common stock. The convertible debenture is to be repaid in 15 monthly installments of $51,333.33 beginning April 15, 2006. The Company may also elect, upon proper notice, to pay any monthly installment in shares of the Company’s common stock based on a conversion price equal to the lesser of (i) the then applicable conversion price, or (ii) 90% of the volume weighted average price of the Company’s common stock for the 10 trading days immediately preceding the payment; provided, that, such conversion price must be at least equal to the conversion floor of $0.23, or such monthly installment must be paid in cash. This convertible debenture was amended on March 9, 2006, pursuant to which the Company must, within 25 calendar days prior to each monthly payment, deliver 89,744 shares of its common stock to the holders, which represents the monthly installment amount divided by the then conversion price with the first monthly payment becoming due on April 17, 2006. In connection with the Debenture Agreement, the Company issued two groups of warrants, Short Term Warrants and Long Term Warrants to the institutional investor. The Short Term Warrants allow the institutional investor to purchase an aggregate of 407,926 shares of the Company’s common stock with an exercise price of $0.572 per share exercisable for a period of 180 days at any time after the later of (i) the effective date of the registration statement (as described below) or (ii) December 16, 2005. The Long Term Warrants allow the institutional investor to purchase an aggregate of 471,154 shares of the Company’s common stock with an exercise price of $0.572 per share exercisable at anytime from December 16, 2005 through December 16, 2008; provided, however, the institutional investor will not be permitted to exercise a warrant to the extent that the number of shares of the Company’s common stock beneficially owned by such institutional investor taken together with the number of             shares to be issued upon exercise of the warrant equals or exceeds 4.999% of the Company’s then issued and outstanding shares of common stock. The warrants also contain trading market restrictions that preclude the Company from issuing shares of common stock upon exercise thereof if such issuance, when aggregated with other issuances of the Company’s common stock pursuant to the warrants, would exceed 19.999% of the Company’s then issued and outstanding shares of common stock, unless the Company has previously obtained the required shareholder approval. Pursuant to a Registration Rights Agreement dated June 16, 2005 between the Company and the institutional investor, The Company agreed to file a registration statement for the resale of the shares of the Company’s common stock that may be issued to the institutional investor upon the conversion of the convertible debenture and the exercise of the Short Term Warrants and the Long Term Warrants. The registration statement covering these securities was effective on September 1, 2005.

		In accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” the debt features contained in the terms governing the notes are not clearly and closely related to the characteristics of the notes. Accordingly, the debt features qualify as embedded derivative instruments at issuance and, because they did not qualify for any scope exception within SFAS 133, they were required to be accounted for separately from the debt instrument and recorded as derivative financial instruments.
		At the date of issuance, the embedded debt feature had an estimated initial fair value of $449,089, which was recorded as a discount to the convertible notes and derivative liability on our balance sheet. In subsequent periods, if the price of the security changes, the embedded derivative financial instrument related to the debt features will be adjusted to the fair value with the corresponding charge or credit to other income/(expense). The estimated fair value of the debt features was determined using the probability weighted averaged expected cash flows / Lattice Model with a closing price of $0.65, a conversion price as defined in the respective note agreement and a period of two years. Concerning the debt features, the model uses several assumptions including: historical stock price volatility, approximate risk-free interest rate (3.5%), remaining term to maturity, and the closing price of the company’s common stock to determine the estimated fair value of the derivative liability. This convertible note was paid in full in March 2007 and as such has been removed from the Company’s financial statements for fiscal year 2008.
		The warrants included with this note for purchase of the Company’s common stock had an initial value of $271,940. This amount has been classified as a derivative financial instrument and recorded as a liability on our consolidated balance sheet in accordance with SFAS 133. The estimated fair value of the warrants at the date of issuance was determined using the Black-Scholes option-pricing model with a closing price of $1.14, the respective exercise price of the warrants, a 2 year term, and a 90% volatility factor relative to the date of issuance. The model uses several assumptions including: historical stock price volatility, approximate risk-free

interest rate (3.50%), remaining term to maturity, and the closing price of the company’s common stock to determine the estimated fair value of the derivative liability. In accordance with the provisions of SFAS 133, the Company is required to adjust the carrying value of the instrument to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other income/ (expense) on its statement of operations. The warrant derivative liability at September 30, 2007, decreased to a fair value of $16,873, due in part to a decrease in the market value of the company’s common stock, which resulted in an other income item of $73,235.

		The recorded value of the warrants can fluctuate significantly based on fluctuations in the market value of the underlying securities of the issuer of the warrants, as well as in the volatility of the stock price during the term used for observation and the term remaining for the warrants.
6.		Accounts Receivable Facility
		On September 27, 2006, the Company entered into a Purchase and Sale Agreement with Catalyst Finance, L.P. (“Catalyst”) for sale of certain of its accounts receivables. The Company’s borrowing costs under this Agreement range from 1.25% to 20% of the gross amount of the receivables sold to Catalyst based on the timing of collection. The maximum funds available under the agreement is all available accounts receivables as agreed to by Catalyst and the Company. The agreement allows for Catalyst to request repurchase of an account receivable under certain conditions. For the three and six months period ended September 30, 2007, the financial institution has not requested repurchase of an account receivable. For the three months ending September 30, 2007, the Company has sold $59,105 in receivables under the agreement, which yielded a loss on the sale of these receivables of $739. For the six months ending September 30, 2007, the Company has sold $297,105 in receivables under the agreement, which yielded a loss on the sale of these receivables of $9,674. The Agreement was terminated by the Company on August 2, 2007.
		On August 10, 2007, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”), pursuant to which SVB will advance funds to the Company for certain of its accounts receivables up to $2 million. Under the terms of the Loan Agreement, the Company will receive an advance of up to 80% of the subject account receivable (the “Advance”) and pay a finance charge to SVB equal to prime plus 1.5% to 3.0%, based on the Company’s assets to liabilities ratio, while the Advance is outstanding. The Company is obligated to repay the Advance upon receipt of payment for the subject account receivable. For the three and six months ending September 30, 2007, the Company has sold $237,244 in receivables under the agreement, which yielded a loss on the sale of these receivables of $34,465. The Agreement will continue in effect until August 9, 2008.
7.		Commitments and Contingencies
		Employment Agreements
		On April 3, 2006, the Company entered into an employment agreement with each of its President, Payment Products Division and Vice Chairman, Sr. Vice President and Chief Technology Officer, and Vice President of Business Development and General Counsel, for a term of three years with automatic renewal for successive one-year terms unless either party gives timely notice of non-renewal.
		Annual base salary for the President, Payment Products Division and Vice Chairman of the Company is $190,000 and pursuant to the terms of the agreement he is entitled to receive an option to purchase 550,000 shares of the Company’s common stock. This option vests over a 3 year period with 150,000 shares vesting on April 3, 2006 and 200,000 shares vesting on each of April 3, 2007 and 2008. In addition the President, Payment Products Division and Vice Chairman is entitled to receive a bonus of $48,125 for year end 2006.
		Annual base salary for the Senior Vice President and Chief Technology Officer of the Company is $185,000 and pursuant to the terms of the agreement he is entitled to receive 200,000 shares of restricted common stock.

		The restricted shares vest over a 3 year period with 25,000 shares vesting on April 3, 2006 and 87,500 shares vesting on each of April 3, 2007 and 2008. The Senior Vice President and Chief Technology Officer is also eligible to receive a quarterly bonus of equal to 3.5% of the increase in the Company’s revenue from fiscal year quarter to fiscal year quarter and to receive a bonus of $78,750 for fiscal year 2006.
		Annual base salary for the Vice President of Business Development and General Counsel of the Company is $175,000, and pursuant to the terms of the agreement he is entitled to receive an option to purchase 700,000 shares of the Company’s common stock. This option vests over a 3 year period with 300,000 shares vesting on April 3, 2006 and 200,000 shares vesting on each of April 3, 2007 and, 2008. The Vice President of Business Development and General Counsel is also eligible to receive a quarterly bonus based upon the Company’s future acquisitions or mergers.
		On May 23, 2006, the Company entered into an employment agreement with its Chairman of the Board and Chief Executive Officer. The agreement has a 2 year term with automatic renewal for successive one year terms unless either party gives timely notice of non-renewal. His annual base salary is $220,000 and he is entitled to receive 100,000 shares of restricted common stock that vest immediately and is entitled to receive an option to purchase 600,000 shares of the Company’s common stock. This option vests as to 300,000 shares on each of May 22, 2007 and 2008.
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.
		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 101,867 and 26,733 units respectively, in a private placement for gross proceeds of $382,000 and $100,250, respectively. Each unit consisted of one share of the Company’s voting convertible Series B preferred stock (the “Series B”) and a warrant, exercisable through October 2003, to purchase one share of the Company’s common stock. The Series B has a liquidation preference of $3.75 per share and carries a 10% cumulative dividend payable each March 1 and September 1. The Company has the right to redeem the Series B at any time after issuance at a redemption price of $4.15 per share, plus any accrued but unpaid dividends. The Series B is convertible upon issuance into shares of the Company’s common stock at $3.75 per share. The warrant entitles the holder to purchase one share of the Company’s common stock at $6.25 per share, which represents 115% of the market value of the Company’s common stock at the closing date.
		In May 2001, an investor in the Series B rescinded its acquisition and returned to the Company 2,667 shares of Series B and warrants for the purchase of 533 shares of common stock in exchange for the return of its investment of $10,000.
		In August 2004, an investor in the Series B elected to convert his 16,000 shares and accordingly was issued 3,200 shares of the Company’s common stock.
		At September 30, 2007, there were accumulated, undeclared dividends in arrears of $272,916 or $2.48 per share.
		Common Stock and Warrants
		During the three and six months ended September 30, 2007, the Company completed the following:

On August 31, 2007, the Company entered into a stock purchase agreement ( the “Purchase Agreement”), with certain employees and directors of the company, pursuant to which the Company agreed to issue to those certain employees and directors an aggregate of 762,500 shares of the Company’s common stock, $0.0001 par value (the “Common Stock”), for an aggregate purchase price of $305,000.

		On September 14, 2007 the Company reached agreement with a current note holder to extend the terms of the convertible promissory note dated September 15, 2005 for an additional 90 days in exchange for the granting of up to 200,000 warrants dependent upon when the note is paid. 66,666 warrants were issued on the agreement date with another 66,666 to be issued if the note is not paid by October 15, 2007 and the final 66,667 warrants issued if the note is note paid by November 15, 2007.
		During the three and six months ended September 30, 2006, the Company completed the following:
		Non-Cash Financing
		In the quarter ended June 30, 2006, the Company issued 303,116 shares of common stock with a value of $154,000 to pay down debt associated with the convertible promissory note issued June 16, 2005.
		In the quarter ended September 30, 2006, the Company issued 287,173 shares of common stock with a value of $154,000 to pay down debt associated with the convertible promissory note issued June 16, 2005.
		In the six months ended September 30, 2006, the Company issued 590,289 shares of common stock with a value of $308,000 to pay down debt associated with the convertible promissory note issued June 16, 2005.
		In August 2007 the Company entered into a note payable with an equipment vendor to purchase new telephone equipment for $105,835.
		Stock 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. In September 2006, shareholders approved an amendment to the Company’s amended and restated 2000 Stock Option Plan to increase the maximum aggregate number of shares available for issuance thereunder from 6,000,000 to 7,500,000. The exercise price must not be less than the fair market value on the date of grant of the option. The options vest in varying increments over varying periods and expire 10 years from the date of vesting. In the case of incentive stock options granted to any 10% owners of the Company, the exercise price must not be less than 100% of the fair market value on the date of grant. Such incentive stock options vest in varying increments and expire five years from the date of vesting.
		During the six months ended September 30, 2007 the Company granted 907,000 stock options to certain employees that may be exercised at prices ranging between $0.48 and $0.61. During the six months ended September 30, 2006, the Company granted 3,098,500 stock options to certain employees that may be exercised at prices ranging from $0.46 to $0.82.
		The following table summarizes certain information relative to stock options:

The weighted-average remaining life and the weighted-average exercise price of all of the options outstanding at September 30, 2007 were 7.69 years and $0.75 respectively. The exercise prices for the options outstanding at September 30, 2007 ranged from $0.43 to $6.25, and information relating to these options is as follows:

Restricted Stock

During the three and six months ended September 30, 2006, the Company completed the following:

The Company granted 200,000 shares of restricted common stock to the Senior Vice President and Chief Technology Officer and 100,000 shares of restricted common stock to the Chairman of the Board and Chief Executive Officer associated with employment agreements reached with each. The shares are granted under the 1999 Plan, as amended and restated by the 2000 Plan.

9.

Subsequent Events

     On November 13, 2007, the Company secured certain bridge financing from certain institutional investors (collectively, the “Investors”) in the form of senior secured convertible notes (the “Notes”) for an aggregate of $4.0 million. The interest payable on the Notes is equal to the 6-month LIBOR rate plus five hundred basis points (or 9.81% at the time of subscription) and is re-calculated as of the first day of each calendar quarter. The Notes may be converted at any time into shares of the Company’s common stock (“Common Stock”) at the conversion price of $0.43 per share, which is equal to 110% of the dollar volume-weighted average price for the Common Stock on November 12, 2007, subject to anti-dilution provisions; provided, however, the Investor may not beneficially own more than 4.99% (the “Maximum Percentage”) of outstanding shares of Common Stock following such conversion. At any time, the Investor may decrease or increase this Maximum Percentage to any percentage not to exceed 9.99%. In the event of a Fundamental Transaction (as described in the Notes) where greater than 50% of the Company’s assets or equity is transferred, the Investors may redeem the note for either 125% of its principal balance or the value of the Common Stock as converted (such Common Stock as converted under the Notes, “Conversion Shares”).

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

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

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

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

     The Company is obligated to reserve for issuance upon conversion of the Notes and exercise of the Warrants shares of Common Stock equal to at least 130% of the Conversion Shares and Warrant Shares. The Conversion Shares and Warrant Shares will be included in a registration statement to be filed with the SEC within thirty (30) days following the closing of the financing.

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

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

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

Critical Accounting Policies

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

     We believe that of the significant accounting policies used in the preparation of our 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.

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 the license agreement has been signed, delivery of the software product has occurred, the related fee is fixed or determinable and collectibility is probable.

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

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

     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.

     We recognize revenues associated with the resale of ATMs in accordance with the provisions of the Statement of Financial Accounting Standards (SFAS) No. 48. Our sale price is fixed and determinable at the date of sale and we have no obligation to directly bring about the resale of the product. In addition, the buyer’s obligation to pay us is not contingent upon release of the product and our sale price is not adjusted if the product is lost or damaged. The buyer has economic substance apart from us and we can reasonably estimate the amount of returns at the time of sale. Therefore revenue is recognized at the time of sale.

Goodwill

     Effective January 1, 2002, we adopted SFAS No. 142 “Goodwill and Other Intangible Assets,” which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, all goodwill amortization ceased effective January 1, 2002.

     The goodwill recorded on our books is from the acquisition of US Dataworks, Inc. in fiscal year 2001, which remains our single reporting unit. SFAS No. 142 requires goodwill for each reporting unit of an entity to be tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value is determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term

growth rates, weighted average cost of capital and estimates of market multiples for each reportable unit. On an ongoing basis, absent any impairment indicators, we perform impairment tests annually during the fourth quarter.

     SFAS No. 142 requires goodwill to be tested annually, typically performed during the fourth quarter, and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of the reportable unit below its carrying amount. We did not have an impairment of goodwill to record for the years ended March 31, 2007 or March 31, 2006.

Estimates

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

Concentrations of Credit Risk

     We extend credit to our customers and perform ongoing credit evaluations of our customers. We do not obtain collateral from our customers to secure our accounts receivable. 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 27%, 27% and 11%, respectively, of our net revenues for the three months ended September 30, 2007. Four customers accounted for 26%, 26%, 11% and 10%, respectively, of net revenue for the six months ended September 30, 2007. Three customers accounted for 42%, 17% and 11% of net revenues for the three months ended September 30, 2006. Two customers accounted for 34% and 20%, respectively, of net revenue for the six months ended September 30, 2006.

     At September 30, 2007, amounts due from significant customers accounted for 74% of accounts receivable

Recent Developments

Results of Operations

     The results of operations reflected in this discussion include our operations for the three and six month periods ended September 30, 2007 and 2006.

      Revenues

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

     The decrease in licensing revenues for the three and six months ended September 30, 2007, compared to the same periods last year, was primarily due to the significant license revenue recorded in the first quarter of fiscal 2007 associated with the signing of the integrated license, maintenance and services agreement with a significant customer and a reduction in third party software resale as compared to the prior year period.

     The increase in transactional revenues for the three and six months ended September 30, 2007, compared to the same periods last year, was principally as a result of an increase in the number of customers subject to transactional pricing.

     The increase in maintenance revenues for the three and six months ended September 30, 2007, compared to the same periods last year, was primarily attributable to the integrated license, maintenance and services agreement we entered into with a significant customer in the first fiscal quarter of 2007. This agreement contains an annual maintenance fee component that will generate additional annual maintenance revenues of approximately $400,000 in the current fiscal year 2008. This annual maintenance agreement started in May 2007 and to date has accounted for approximately $200,000 of the maintenance revenues in the current six month period. However, we do not anticipate significant on going growth in annual maintenance fees.

     The decrease in professional service revenues for the three and six months ended September 30, 2007, compared to the same periods last year, were principally the result of reduced services required as we began to complete our services in connection with our $1.5 million professional services agreement with American Express, which we signed in September 2006, and with the completion of our agreement with Online Resources Corporation, which we signed in June 2006.

      Cost of Sales

     Costs of sales principally include the costs of our personnel who perform the services associated with our software maintenance, support, training and installation activities as well as the cost of the Accuity EPICWare™ software frequently resold in conjunction with licenses of our software. Cost of sales increased by $11,695, or 2%, from $497,428 for the three months ended September 30, 2006 to $509,123 for the three months ended September 30, 2007, which was primarily the result of a reduction of labor costs partially offset by increases in the cost of third party software resale and cost for equipment resales as compared to the prior period. Cost of sales decreased by $124,645 or 12% from $1,019,728 for the six months ended September 30, 2006 to $895,082 for the six months ended September 30, 2007. The decrease for the six month period was primarily due to the reduction in third party software resales as compared to the prior period, partially offset by a slight increase in labor costs as we transitioned from service activities to maintenance activities as we neared the completion of certain professional service contracts.

      Operating Expenses

     Total operating expenses decreased by $115,024, or 6%, from $1,803,431 for the three months ended September 30, 2006 to $1,688,407 for the three months ended September 30, 2007. This decrease is principally attributable to a decrease in legal expenses of $136,000, a decrease in outsides services and recruitment fees of $144,000, and a decrease in travel expenses of $37,000, partially offset by an increase in stock-based compensation expense of $45,000, an increase in advertising expense of $12,000, and a $188,000 increase in compensation expense.

     Total operating expenses decreased by $230,849, or 6%, from $3,599,439 for the six months ended September 30, 2006 to $3,368,590 for the six months ended September 30, 2007. This decrease is principally attributable to a decrease in legal expenses of $185,000, a decrease in outsides services and recruitment fees of $188,000, a decrease in travel expenses of $107,000, a reduction in bonus expense of $107,000 and a reduction in stock based compensation expense of $146,000 as compared to the same time period in the prior year. These reductions were partially offset by an increase in compensation expense of $447,000, an increase in advertising expense of $28,000, and a $27,000 increase in rent expense. Our headcount at September 30, 2007 was 46 compared to 37 at September 30, 2006.

      Other Income (Expenses)

     Other income (expenses), including interest expense and financing costs, decreased $389,081, or 96%, to $(14,312) in other expense for the three months ended September 30, 2007 from $(403,393) in other expenses for the three months ended September 30, 2006. The decrease in other income for the three months ended September 30, 2007 was due to a decrease in interest expense of $72,000, offset by increases in related party interest expense of $11,000, financing costs associated with our Silicon Valley Bank loan agreement of $26,000, an increase in the quarterly analysis related to the embedded derivatives associated with the promissory note of June 16, 2005 of $184,000, an increase in interest income $2,000, an increase of $222,000 in contingent liability expense and a loss of $44,000 resulting from a loss on the disposition of assets, as compared to the prior year period..

     Other income (expenses), including interest expense and financing costs, decreased $47,255, or 50%, to $(46,503) in other expenses for the six months ended September 30, 2007 from $(93,758) in other income for the six months ended September 30, 2006. The decrease in other income for the six months ended September 30, 2007 was due to a decrease in interest expense of $158,600, an decrease in the quarterly analysis related to the embedded derivatives associated with the promissory note of June 16, 2005 of $214,000, offset in part by increases in related party interest expense of $22,000, financing costs associated with our Silicon Valley Bank loan agreement of $26,000, an increase in interest income $11,000 an increase of $222,600 in contingent liability expense, and a loss of $44,000 resulting from a loss on the disposition of assets, as compared to the prior year period.

      Net Income (Loss)

     Net income (loss) decreased by $(769,965), or 1016%, to a net loss of ($845,758) for three month ended September 30, 2007 from a net income (loss) of $(75,793) for the three month ended September 30, 2006. For details related to this loss see the preceding discussions related to cost of sales, operating expenses and other income sections above.

     Net income (loss) decreased by ($38,856), or 2%, to a net loss of ($1,715,019) for the six months ended September 30, 2007 from a net income (loss) of $(1,676,163) for the six months ended September 30, 2006. For details related to this loss see the preceding discussions related to cost of sales, operating expenses and other income sections above.

Liquidity and Capital Resources

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

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

	•		We plan to increase the number of month-to-month professional services contract with our existing customers, which is anticipated to generate revenue sufficient to reduce the negative cash flows from our operations.
	•		We believe that the demand for our software and professional services will continue to expand as the United States market adopts the new payment processing opportunities available under changing regulations, such as the Check Clearing Act for the 21 st Century and NACHA’s back office conversion, which allows the conversion of paper checks in the back offices of retail merchants and the government. We believe that increased demand for our solutions, including our recently introduced Clearingworks product, will lead to increased cash flows from license fees, transaction based contract fees and increases in professional services revenues
	•		We have entered into a strategic alliance with one of the largest merchant service providers, or MSP, which will allow this MSP to sell Clearingworks as part of its ARC and back office conversion services. We expect this alliance to positively affect our profitability.

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

     Cash and cash equivalents decreased by $22,229 to $118,047 at September 30, 2007 from $140,276 at March 31, 2007. Cash used for operating activities was $146,785 in the six months ended September 30, 2007 compared to $1,094,413 in the same period in the prior year.

     Cash used for investing activities of $141,445 and $49,246 in the six months ended September 30, 2007 and September 30, 2006, respectively, was due to equipment purchases.

     Cash provided by financial activities for the six months ended September 30, 2007 was $266,000 compared to cash used in financing activities of $12,133 for the six months ended September 30, 2006. Financing activities in the current six month period included: proceeds of $305,000 from common stock sales, and the payment of $39,000 on a related party note payable.

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

Factors That May Affect Our Results

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

     We have a history of losses and our net losses and negative cash flow may continue for the foreseeable future. As of September 30, 2007, our accumulated deficit was ($52,131,368). We believe that our planned growth and profitability will depend in large part on our ability to promote our brand name, gain clients and expand our relationships with clients for whom we could provide licensing agreements and system integration. Accordingly, we intend to invest heavily in marketing, strategic partnership, development of our client base and development of our marketing technology and operating infrastructure. If we are not successful in promoting our brand name and expanding our client base, it will have a material adverse effect on our financial condition and our ability to continue to operate our business.

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

     The accompanying consolidated financial statements have been prepared assuming we will continue on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We believe we currently have adequate cash to fund anticipated cash needs through March 31, 2008. However, we may need to raise additional capital in the future. Any equity financing may be dilutive to shareholders, and debt financing, if available, will increase expenses and may involve restrictive covenants. We may be required to raise additional capital, at times and in amounts that are uncertain, especially under the current capital market conditions. These factors raise substantial doubt about our ability to continue as a going concern. Under these circumstances, if we are unable to obtain additional capital or are required to raise it on undesirable terms, it may have a material adverse effect on our financial condition, which could require us to:

•

curtail our operations significantly;

	•		sell significant assets;
	•		seek arrangements with strategic partners or other parties that may require us to relinquish significant rights to products, technologies or markets; or
	•		explore other strategic alternatives including a merger or sale of US Dataworks.

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

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

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

	•		market acceptance of and changes in demand for our products and services;
	•		gain or loss of clients or strategic relationships;
	•		announcement or introduction of new software, services and products by us or by our competitors;
	•		our ability to build brand recognition;
	•		timing of sales to customers;
	•		price competition;
	•		our ability to upgrade and develop systems and infrastructure to accommodate growth;
	•		our ability to attract and integrate new personnel in a timely and effective manner;
	•		our ability to introduce and market products and services in accordance with market demand;
	•		changes in governmental regulation;
	•		reduction in or delay of capital spending by our clients due to the effects of terrorism, war and political instability; and
	•		general economic conditions, including economic conditions specific to the financial services industry.

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

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

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

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

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

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

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

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

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 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:

	•		longer operating histories;
	•		larger installed customer bases;
	•		greater name recognition and longer relationships with clients; and
	•		significantly greater financial, technical, marketing and public relations resources than US Dataworks.

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

	•		the breadth and quality of services;
	•		creative design and systems engineering expertise;

	•		pricing;
	•		technological innovation; and
	•		understanding clients’ strategies and needs.

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

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

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

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

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

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

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

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

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

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

PART II — OTHER INFORMATION

SIGNATURE

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

     Dated: November 14, 2007

		US DATAWORKS, INC.
		By		/ s/ John T. McLaughlin
				John T. McLaughlin
				Chief Accounting Officer
				(Principal Financial and Accounting Officer
				and Duly Authorized Officer)

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