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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C., 20549

FORM 10-KSB/A

Amendment No. 1

(Mark One)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2005


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

For the transition period to

Commission file number: 001-15385

US Dataworks, Inc.

(Name of small business issuer in its charter)


Nevada (State or other jurisdiction of incorporation or organization) 5301 Hollister Road, Suite 250		84-1290152 (I.R.S. employer identification number)
Houston, Texas (Address of principal executive offices)		77040 (Zip Code)

Issuer’s telephone number: (713) 934-3855

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.0001 per share

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. þ

Issuer’s revenue for fiscal year ended March 31, 2005: $2,686,749

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the price of such common equity as of June 13, 2005 as reported on the American Stock Exchange is
$ 14,784,324. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose.

Number of shares of Common Stock outstanding as of June 13, 2005: 28,778,366.

Transitional Small Business Disclosure Format: YES o NO þ

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-KSB (“Amendment No. 1”) amends the Registrant’s Annual Report on Form 10-KSB, as filed by the Registrant on June 29, 2005 (the “Original Filing”), and is being filed (i) to reflect the elimination of the going concern qualification in the Report of Independent Registered Public Accounting Firm, dated June 3, 2005; (ii) to amend the going concern qualification referenced in Management’s Discussion and Analysis or Plan of Operation; (iii) to amend any risk factor related to such qualification; and (iv) to amend Notes 3 and 11 to the Company’s financial statements to reflect the recent material development discussed below. In addition, in connection with the filing of this Amendment No. 1, and pursuant to the rules of the Securities and Exchange Commission, we are including currently dated certifications.

Except as described above, no other changes have been made to the Original Filing. This Amendment No. 1 continues to speak as of the date of the Original Filing, and except as set forth below, we have not updated the disclosures contained in this Amendment No. 1 to reflect any events that occurred at a date subsequent to the filing of the Original Filing. The filing of this Amendment No. 1 is not a representation that any statements contained in items of the Original Filing other than that information being amended are true or complete as of any date subsequent to the date of the Original Filing.

Recent Material Developments

The following material development occurred since the filing of our original Annual Report on Form 10-KSB on June 29, 2005:

On August 30, 2005, we announced that we had completed the execution of integrated license, maintenance and services agreements with American Express Travel Related Services Company, Inc. (“Amexco”). Clearingworks™, our integrated electronic transaction processing platform, will process all payments received by Amexco, including mailed remittances, Internet payments, telephone payments and transactions captured at worldwide remote offices.

The license and maintenance agreement has a ten year term. The services agreement is a time-and-materials based contract that is estimated to be completed over an 18 month period. The combined agreements are expected to provide revenues to US Dataworks of approximately $7.0 million.

PART I

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 the features, benefits, performance and utility of our current and future products and services, customer concentration, our efforts to develop and maintain strategic relationships, our ability to compete, growth of competition, competitive factors, our employee relations, statements regarding our critical accounting policies, adequacy of cash, expectations regarding net losses and cash flow, statements regarding our growth and profitability, investments in marketing and promotion, our need for future financing, our dependence on personnel 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 development of new products and services and their use by our potential customers, our ability to work with our strategic partners, our ability to retain and obtain customers, our ability to protect our proprietary rights, our ability to successfully gain market share, our dependence on a small number of customers, our ability to obtain future financing, and the risks set forth below under Item 6, “Management’s Discussion and Analysis and Results of Operations — 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 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,” “our” or “the Company” means US Dataworks, Inc.

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

Item 1. Description of Business

General

US Dataworks is a developer of payment processing software, serving several of the top 25 banking institutions, top 10 credit card issuers, major retailers and the United States Government. We generate revenue from the licensing, system integration and maintenance of our core product, Clearingworks™, and its component subsystems, ClearingworksACH, ClearingworksCHECK21, ClearingworksPAYMENTS and ClearingworksSECURE. Our software is designed to enable organizations to transition from traditional paper-based payment and billing processes to electronic payment solutions. Our products include check processing, point-of-purchase transactions and turnkey Automated Clearing House, or ACH, payments. ACH payments are highly reliable and efficient electronic fund transfers among participating depository financial institutions including the Federal Reserve, the central bank of the United States. 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. Our strategy is to identify, design and develop products that fill specific niches in the payment processing industry.

Background

US Dataworks was incorporated in the state of Colorado as JLQ, Inc. in December 1994, and we changed our name to New World Publishing in October 1997. In May 1999, we acquired Communications Television, Inc., a California corporation, and changed our business to an Internet marketing and technology infrastructure company specializing in supporting cost effective business-to-business and business-to-consumer revenue based marketing initiatives. We changed our name to Sonicport.com, Inc. in October 1999 and in February 2000, changed our state of incorporation from Colorado to Nevada. In February 2001, we changed our name to Sonicport, Inc.

We acquired US Dataworks, Inc., a Delaware corporation, in April 2001. Following the acquisition, we focused our business on developing electronic check processing software. In March 2002, we changed our name to US Dataworks, Inc.

Products

Clearingworks™ is US Dataworks’ transaction processing platform that provides a fully automated, end-to-end solution for electronic payment processing. Clearingworks™ technology includes state-of-the-art decision-making functionality that determines “best-fit clearing” and “least-cost routing” of payments. Clearingworks™ incorporates US Dataworks’ industry-leading functionality in an easily configurable processing stream to give customers the scalability and flexibility needed to handle all of their payment transactions.

ClearingworksACH:

Whatever the capture device — point-of-sale, web, telephone or remittance processing system - simply provide Clearingworks™ with the data and it will decision it. Clearingworks™ is an integrated ACH payment management tool that handles all major National Automated Clearing House (NACHA) Standard Entry Class codes. Clearingworks™ contains our industry-leading MICR parsing technology, which provides unsurpassed levels of accuracy and consistency for check conversion. It supports both centralized and distributed payment models and is integrated with most third party payment processing platforms such as PEP+, Wausau Financial Systems, J&B Software, BancTec and others.

ClearingworksCHECK21:

As part of the Clearingworks™ transaction processing platform, ClearingworksCHECK21 functionality leverages leading edge technologies to deliver an end-to-end solution for converting paper checks to substitute checks for banks and other payment processors. Clearingworks™ smart routing capability allows images to be routed to only those institutions that are equipped to receive image exchange transmissions. It provides an infrastructure through which these electronic transmissions will be received, downloaded, printed and delivered to the paying bank.

ClearingworksPAYMENTS:

ClearingworksPAYMENTS payments functionality brings new innovation to problem solving in a traditional remittance environment. Conventional remittance processing requires an additional encoding pass to create a paper-based cash letter deposit. Clearingworks™, however, creates electronic cash letter deposits using ACH and Check 21 networks for a complete electronic solution. Express batching allows items to be processed independently from their physical capture batch, while a robust web architecture allows payments to be keyed in and processed from anywhere at any time.

ClearingworksSECURE:

Clearingworks™ addresses all aspects of the enterprise to ensure total protection, including issues such as compliance, information assurance, privacy, business continuity, fraud, and disaster recovery.

Customers

US Dataworks’ customers include five of the top 25 banking institutions in the United States, four of the top 10 credit card issuers in the United States, major retailers and two United States Government agencies.

Strategic Business Relationships

We believe that, in addition to growth from organic sales, aligning ourselves with key strategic partners to sell and distribute our software products will accelerate our revenue growth and capture of market share. Further, we expect that these strategic business relationships, among other factors, will help us achieve positive cash flow in the near future. As of June 13, 2005, we have aligned ourselves with eight strategic partners as a core component of our sales and distribution strategy. In fiscal 2005, our strategic resellers accounted for 32% of our net revenue.

We also have a key strategic alliance with Thomson Financial Publishing, a unit of Thomson Corporation, to incorporate its EPICWare database into our products. We plan to pursue additional strategic alliances to help increase market share.

Competition

Our competitors include E-Funds, Equifax, Wausau Financial Systems, J&B Software and Telecheck. The services offered by these competitors include electronic billing and payment, electronic funds transfer, payment solutions, reconciliation, checks by phone and recurring billing, as well as value-added services such as strategy consulting, marketing and technology infrastructure. The majority of these offerings are on an out-sourced basis, while our products offer an in-house solution.

We believe that the principal competitive factors determining success in the financial services software market include:

	•		reputation for reliability and service;

	•		breadth and quality of services;

	•		technological innovation and understanding client strategies and needs;

	•		creative design and systems engineering expertise;

	•		easy-to-use software;

	•		effective customer support;

	•		processing speed and accuracy; and

	•		pricing.

We believe we compete favorably with respect to these factors. However, the market for payment processing software is highly competitive, rapidly evolving and subject to significant technological change. As the market grows, we expect competition to increase. Increased competition may result in price reductions and reduced margins.

We may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully. If we fail to compete successfully, we may fail to gain market share or lose existing market share and our financial condition, operating results and business could be adversely affected.

Patents and Trademarks

US Dataworks has obtained trademarks on the names of our premier products and services, including Clearingworks™ and a currently unlicensed, newly developed product, ZeroPass ™. We also have applied for patents on ChecKey and ImageKey, which are products currently in development. These applications are pending. Our efforts to protect our intellectual property rights may not prevent the misappropriation of our intellectual property.

Government Regulation

As a processor of ACH payments, we must comply with federal laws governing the processing of electronic transactions. We are in compliance with all federal laws and work closely with NACHA to ensure our systems remain both compliant with the laws and regulations, as well as NACHA guidelines.

Employees

As of June 13, 2005, we have 42 employees, all of which are full-time employees. We are not a party to any collective bargaining agreement with our employees. We believe our employee relations to be good.

Research and Development

For fiscal 2005 and 2004 we spent approximately $481,416 and $63,543, respectively, on research and development activities.

Item 2. Description of Property

Our principal executive offices, currently consisting of 15,354 square feet of office space, are located at 5301 Hollister Road, Suite 250, Houston, Texas 77040, which is leased through July 2007.

Item 3. Legal Proceedings

From time to time, we are involved in various legal and other proceedings that are incidental to the conduct of our business. We believe that none of these proceedings, if adversely determined, would have a material effect on our financial condition, results of operations or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Our common stock is traded on the American Stock Exchange under the symbol “UDW.” The following table indicates the high and low sale prices as reported by the American Stock Exchange for the periods presented. The following per share prices have been adjusted to reflect the one-for-five reverse stock split effective on September 29, 2003.


	High		Low
Fiscal 2005
First Quarter	$	2.10	$	0.95
Second Quarter		1.60		0.80
Third Quarter		1.46		0.90
Fourth Quarter		1.07		0.60
Fiscal 2004
First Quarter	$	1.65	$	0.50
Second Quarter		3.00		1.00
Third Quarter		3.79		2.00
Fourth Quarter		3.68		1.73

Dividend Policy

We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to fund the development and growth of our business.

Recent Sales of Unregistered Securities

At various times during fiscal year 2005, we issued through private placements, convertible promissory notes, warrants to purchase shares of our common stock and shares of common stock. The following table summarizes these transactions (the following shares and per share prices reflect the one-for-five reverse stock split effective on September 29, 2003):


					Terms of
Date	Price ($)	Title of Security	Amount Sold		Conversion/Exercise
April 16, 2004	$1.61 per share	Common Stock	$	4,650,000	(1)
		Warrant		3,610,250	$1.61 per share (1)

December 14, 2004	$0.90 per share	Common Stock	$	1,092,607	(2)

(1)			In April 2004, we completed a private placement of $4.65 million in securities with certain major institutional investment funds. Under terms of the agreement, we issued 2,888,200 shares of Common Stock. In addition, we issued warrants, exercisable over a ten year period, to purchase up to 3,610,250 shares of Common Stock at an exercise price of $1.61 per share.

(2)			On December 14, 2004, we entered into an Amended Warrants Agreement wherein certain investors accelerated the exercise of previously issued common stock warrants at a reduced exercise price of $0.90 per share. A total of 1,214,007 warrants were exercised for cash proceeds of $1,092,607.

The issuances disclosed in this Item 5 were made to accredited investors and were deemed to be exempt from registration under the Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated thereunder.

Item 6. 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 Report.

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.

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.

Four of our customers, the Federal Reserve Bank, Regulus Group, General Electric Corporation and Citibank, accounted for 34%, 19%, 12% and 12%, respectively, of our net revenue for the year ended March 31, 2005. Three of our customers, the Federal Reserve Bank, CapitalOne and Citibank, accounted for 44%, 16% and 16%, respectively, of our net revenue for the year ended March 31, 2004. Two of our strategic resellers, BancTec and Computer Sciences Corporation, accounted for an aggregate of 32% of our net revenue for the year ended March 31, 2005. BancTec accounted for 42% of our net revenue for the year ended March 31, 2004.

At March 31, 2005, amounts due from three customers, one an entity of the U.S. Federal government, accounted for 23%, 18% and 10%, respectively, of accounts receivable. Additionally, at March 31, 2005, amounts due from a strategic reseller accounted for 42% of accounts receivable.

Results of Operations

The results of operations reflected in this discussion include the operations of US Dataworks for the past two years.

Revenue

Revenues decreased by $755,521 or 22% from $3,442,270 in fiscal 2004 to $2,686,749 in fiscal 2005. The decrease in revenue was primarily attributable to a decrease of $1,367,251 or 69% in licensing revenue partially offset by an increase of $482,905 or 359% in transactional revenues. Additionally, in the prior fiscal year, the Company recorded $900,000 in software licensing revenues due to a software licensing and technology sharing agreement entered into with an entity of the U.S. Federal government and had no such similar large licensing revenue event in fiscal 2005.

Cost of Revenue

Cost of revenue principally includes the cost of personnel who perform the services associated with our software maintenance and installation revenue activities, and the cost of third party software that is used by our software to convert electronic data into acceptable formats utilized by the nation’s banking system. Total cost of revenue increased by $119,587 or 15% from $784,146 in fiscal 2004 to $903,733 in fiscal 2005. Cost of sales as a percentage of combined maintenance and services revenues for the current year was 62% as compared to 59% in the prior year. The increase in the dollar amount of cost of sales is principally as a result of an increased number of customers utilizing our annual maintenance services.

Operating Expenses

Total operating expenses increased by $2,094,958 or 45% from $4,642,824 in fiscal 2004 to $6,737,782 in fiscal 2005. The increase in operating expenses was principally attributable to a $2,085,829 increase in personnel related costs primarily due to an increase in our headcount to 41 at March 31, 2005 compared to 21 at March 31, 2004. Additionally, marketing and advertising expenses increased $652,001 in the current year. These increases were offset by a $775,534 decrease in legal and accounting fees. In the prior year period we entered into an unusually high level of capital restructuring transactions and incurred the associated high level of legal, accounting and consulting expenses. We do not expect these unusually high level of capital restructuring transactions and the associated high level of legal, accounting and consulting expenses incurred in the prior year to continue in future periods.

Other Expenses

Total other expenses, including interest expense and financing costs, decreased $3,599,159 or 71% from $5,103,672 in fiscal 2004 to $1,504,513 in fiscal 2005. The decrease was primarily due to the non-recurring, non-cash financing charges incurred in our capital restructuring transactions in the prior year offset by approximately $924,000 of costs incurred in the current year in the settlement of a lawsuit brought by a former investor (See Note 7 to the Financial Statements).

Net Loss

Net loss decreased by $629,093 or 9% from a net loss of $7,088,372 in fiscal 2004 to a net loss of $6,459,279 in fiscal 2005.

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.

Management has specific plans to address the Company’s financial situation as follows:

	•		In addition to the two June 2005 capital transactions discussed below, Management plans to raise additional capital through private placements of our common stock and/or the sale of debt that is convertible into common stock.

	•		Management believes that a month-to-month professional services contract with an existing major financial services customer that was executed in June 2005, together with a software licensing and maintenance services contract with this same customer executed in August 2005 will generate significant revenue and significantly reduce the negative cash flows from operations for fiscal 2006.

	•		Additionally, Management believes that the demand for our software and professional services will continue to expand as the United States market embraces the new payment processing opportunities available under changing regulations such as the Check Clearing Act for the 21^st Century. Management believes that increased demand for our solutions, including our recently introduced Clearingworks™ product, will lead to increased cash flows from up-front license fees, transaction based contract fees and increases in professional services revenues.

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 increased by $321,997 from $1,203,389 at March 31, 2004 to $1,525,386 at March 31, 2005. Cash used for operating activities was $3,513,759 in fiscal 2004 compared to $4,053,807 in fiscal 2005.

Cash used for investing activities for fiscal 2004 and 2005 consisted of the purchase of property and equipment and repayments to our affiliates totaling $234,001 and $305,854, respectively

Financing activities provided cash of $4,681,658 in fiscal 2005 and included $4,650,000 proceeds from stock sales, $1,173,158 from the exercise of warrants and options, offset by a $500,000 debt repayment.

Financing activities provided cash of $4,942,585 in fiscal 2004 and included $4,150,000 proceeds from stock sales, $2,190,000 from the issuance of promissory notes, and $38,597 from the exercise of warrants and options, offset by $684,330 in debt repayments and a $500,000 repurchase of treasury stock.

In June 2005, we sold a convertible debenture in the principal amount of $770,000, with an original issue discount of $70,000 and warrants to purchase 879,080 shares of common stock. We also negotiated definitive agreements, effective as of June 16, 2005, with nine accredited investors for the sale of 1,258,654 shares of Common Stock for gross proceeds of $600,000. The agreements also provide that we will issue warrants, exercisable over a three year period beginning in December 2005, to purchase an aggregate of 629,328 shares of Common Stock. We are currently awaiting approval of the American Stock Exchange for the issuance of the shares of Common Stock and anticipate receipt of such approval in early July 2005. Upon receipt of approval, we will execute the agreements and issue the shares of Common Stock and warrants.

As a result of our recent capital raising transactions, our increased level of transactional revenues achieved in fiscal 2005, and the increased revenues to be received from recently executed contracts, we believe we currently have adequate capital resources to fund our anticipated cash needs through March 31, 2006 and beyond. 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.

Our contractual obligations, which are described elsewhere in our financial statements, have been summarized in the table below:


	Balance as of				Payments Due in
Contractual Obligations	March 31, 2005		2006		2007		2008		2009
Operating Lease	$	658,726	$	272,983	$	289,055	$	96,688	$	0.00

Recently Issued Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payments (SFAS 123R). The statement requires that the Company record stock option expense in its financial statements based on a fair value methodology beginning no later than the first fiscal quarter beginning after December 15, 2005, the Company’s fourth quarter of the next fiscal year ending March 31, 2006. The Company is evaluating the impact of the new standard and the method and timing of adoption. Although we have not completed our analysis, we anticipate that the expense would not exceed the amounts disclosed in Note 2 to the Financial Statements had the Company been expensing under the new rule.

Factors That May Affect Our Results

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

We have incurred losses for the last three fiscal years. Our net losses and negative cash flow may continue for the foreseeable future. As of March 31, 2005, our accumulated deficit was $(46,292,182). We believe that our planned growth and profitability will depend in large part on our ability to promote our brand name and gain clients and expand our relationships with clients for whom we would 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.

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 through March 31, 2006 and beyond. 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, 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:

	•		curtail our operations significantly;

	•		sell significant assets;

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

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

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

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. 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 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.

Item 7. Financial Statements

US DATAWORKS, INC.

TABLE OF CONTENTS


	Page
Report of Independent Registered Public Accounting Firm		13
Financial Statements:
Balance Sheet as of March 31, 2005		14
Statements of Operations for the years ended March 31, 2005 and 2004		15
Statements of Stockholders’ Equity for the years ended March 31, 2005 and 2004		16
Statements of Cash Flows for the years ended March 31, 2005 and 2004		18
Notes to Financial Statements		20

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

US Dataworks, Inc.

We have audited the accompanying balance sheet of US Dataworks, Inc. as of March 31, 2005, and the related statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended March 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of US Dataworks, Inc. as of March 31, 2005, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2005 in conformity with U.S. generally accepted accounting principles.

/s/ Ham, Langston & Brezina, LLP

Houston, Texas
June 3, 2005
(except for Notes 3 and 11, as to which
the date is August 30, 2005)

US DATAWORKS, INC.

BALANCE SHEET

March 31, 2005


ASSETS

Current assets:
Cash and cash equivalents	$	1,525,386
Accounts receivable, net allowance for doubtful accounts of $33,238		839,290
Prepaid expenses and other current assets		95,728


Total current assets		2,460,404

Property and equipment, net		677,280

Goodwill, net		14,133,629

Other assets		43,793


Total assets	$	17,315,106


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Notes payable — related parties	$	39,000
Current portion of convertible promissory notes		256,066
Deferred revenue — current		470,684
Accounts payable		239,247
Accrued expenses		326,270
Interest payable		41,672


Total current liabilities		1,372,939

Convertible promissory note		512,133
Deferred revenue		33,352
Deferred compensation		21,500


Total liabilities		1,939,924


Commitments and Contingencies

Stockholders’ Equity:

Convertible Series B preferred stock, $0.0001 par value; 700,000 shares authorized; 549,667 shares issued and outstanding; $0.75 liquidation preference, dividends of $169,522 in arrears		55
Common stock, $0.0001 par value; 90,000,000 shares authorized; 28,778,366 shares issued and outstanding		2,878
Additional paid-in capital		61,676,629
Deferred Compensation		(12,198	)
Accumulated deficit		(46,292,182	)


Total stockholders’ equity		15,375,182


Total liabilities and stockholders’ equity	$	17,315,106

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

US DATAWORKS, INC.

STATEMENTS OF OPERATIONS

for the years ended March 31, 2005 and 2004


	2005			2004
Revenues:
Software licensing revenues	$	611,356		$	1,978,607
Software transactional revenues		617,342			134,437
Software maintenance revenues		349,606			214,698
Professional services revenues		1,108,445			1,114,528


Total revenues		2,686,749			3,442,270


Cost of Sales		903,733			784,146


Gross Profit		1,783,016			2,658,124


Operating expenses:
General and administrative		6,414,334			4,362,786
Depreciation and amortization		323,448			280,038
Loss on disposal of property and equipment		—			—


Total operating expenses		6,737,782			4,642,824


Loss from operations		(4,954,766	)		(1,984,700	)


Other income (expense):
Financing costs		(419,902	)		(1,444,322	)
Interest expense		(206,628	)		(1,195,723	)
Interest expense — related parties		—			(113,360	)
Loss on extinguishment of debt		—			(635,259	)
Loss on extinguishment of debt — related parties		—			(1,722,631	)
Investor litigation settlement expense		(924,200	)		—
Other income (expense)		46,217			7,623


Total other income (expense)		(1,504,513	)		(5,103,672	)


Loss before provision for income taxes		(6,459,279	)		(7,088,372	)

Provision for income taxes		—			—


Net loss	$	(6,459,279	)	$	(7,088,372	)


Basic and diluted loss per share	$	(0.24	)	$	(0.38	)


Basic and diluted weighted-average shares outstanding		27,231,401			18,776,184

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

US DATAWORKS, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

for the years ended March 31, 2005 and 2004


	Preferred Stock
	Convertible Series A						Convertible Series B				Common Stock
	Shares			Amount			Shares		Amount		Shares			Amount
Balance, March 31, 2003		640,000		$	64			629,666	$	63		11,907,134		$	1,190
Warrants issued for:
Financing costs of promissory notes		—			—			—		—		—			—
Services rendered		—			—			—		—		—			—
Expiration of related party notes		—			—			—		—		—			—
Interest from fixed conversion features		—			—			—		—		—			—
Common stock issued for:
Cash		—			—			—		—		2,936,112			294
Exercise of Warrants/ Options		—			—			—		—		435,723			44
Committed stock		—			—			—		—		72,485			7
Services rendered		—			—			—		—		23,446			2
Notes payable conversion		—			—			—		—		6,739,062			675
Conversion of Series A preferred stock		(640,000	)		(64	)		—		—		1,994,286			199
Treasury Stock Purchased		—			—			—		—		(1,111,112	)		(111	)
Warrants and Stocks issued for debt extinguishment		—			—			—		—		—			—
Net loss		—			—			—		—		—			—

Balance at March 31, 2004		—		$	—			629,666	$	63		22,997,136		$	2,300

[Additional columns below]

[Continued from above table, first column(s) repeated]


	Common			Additional
	Stock			Paid— In			Accumulated
	Committed			Capital			Deficit			Total
Balance, March 31, 2003	$	48,000		$	41,972,619		$	(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
Expiration of related party notes		—			220,000			—			220,000
Interest from fixed conversion features		—			1,293,217			—			1,293,217
Common stock issued for:
Cash		—			3,904,752			—			3,905,046
Exercise of Warrants/ Options		—			38,553			—			38,597
Committed stock		(48,000	)		47,993			—			—
Services rendered		—			73,829			—			73,831
Notes payable conversion		—			4,229,360			—			4,230,035
Conversion of Series A preferred stock		—			(135	)		—			—
Treasury Stock Purchased		—			(499,889	)		—			(500,000	)
Warrants and Stocks issued for debt extinguishment		—			2,357,890			—			2,357,890
Net loss		—			—			(7,088,372	)		(7,088,372	)

Balance at March 31, 2004	$	—		$	55,135,232		$	(39,832,903	)	$	15,304,692

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

US DATAWORKS, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

for the years ended March 31, 2005 and 2004


	Preferred Stock
	Convertible Series A				Convertible Series B						Common Stock
	Shares		Amount		Shares			Amount			Shares		Amount
Balance, March 31, 2004		—	$	—		629,666		$	63			22,997,136	$	2,300
Options granted to third parties		—		—		—			—			—		—
Warrants granted in settlement of litigation		—		—		—			—			—		—
Grant of deferred compensation (Note 7)		—		—		—			—			—		—
Amortization of deferred compensation		—		—		—			—			—		—
Common stock issued for:
Cash, less cost of offering ($641,500)		—		—		—			—			2,888,201		289
Exercise of Warrants / Options		—		—		—			—			1,649,794		164
Notes payable & accrued interest conversion		—		—		—			—			1,090,376		109
Conversion of Series B preferred stock		—		—		(79,999	)		(8	)		15,998		2
Settlement to terminate equity line financing (Note 8)		—		—		—			—			136,861		14
Current Period Profit (Loss)		—		—		—			—			—		—

Balance at March 31, 2005		—	$	—		549,667		$	55			28,778,366	$	2,878

[Additional columns below]

[Continued from above table, first column(s) repeated]


	Additional
	Paid— In		Deferred			Accumulated
	Capital		Compensation			Deficit			Total
Balance, March 31, 2004	$	55,135,232		—		$	(39,832,903	)	$	15,304,692
Options granted to third parties		68,559		—			—			68,559
Warrants granted in settlement of litigation		126,000		—			—			126,000
Grant of deferred Compensation (Note 7)		—		(21,500	)		—			(21,500	)
Amortization of deferred compensation		—		9,302			—			9,302
Common stock issued for:
Cash, less cost of offering ($641,500)		4,008,211		—			—			4,008,500
Exercise of Warrants / Options		1,172,994		—			—			1,173,158
Notes payable & accrued interest conversion		940,641		—			—			940,750
Conversion of Series B preferred stock		6		—			—			—
Settlement to terminate equity line financing (Note 8)		224,986		—			—			225,000
Current Period Profit (Loss)		—		—		$	(6,459,279	)	$	(6,459,279	)

Balance, March 31, 2005	$	61,676,629	$	(12,198	)	$	(46,292,182	)	$	15,375,182

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

US DATAWORKS, INC.

STATEMENTS OF CASH FLOWS

for the years ended March 31, 2005 and 2004


	2005			2004
Cash flows from operating activities:
Net loss from continuing operations	$	(6,459,279	)	$	(7,088,372	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment		323,448			280,038
Loss on extinguishment of debt		—			635,259
Loss on extinguishment of debt — related party		—			1,722,631
Amortization of note discount and beneficial conversion features on convertible promissory notes		343,824			1,018,346
Amortization of deferred compensation expense		9,302			—
Issuance of stock for interest		15,750			30,158
Issuance of stock for services rendered		—			73,831
Issuance of stock for settlement of equity line of credit		225,000			—
Issuance of warrants for extension of notes payable due date		—			1,084,505
Issuance of warrants for settlement of dispute		—			227,755
Issuance of options to 3^rd parties for services		68,559			—
Issuance of warrants for services		—			96,750
Issuance of warrants for stock cancellation agreement		—			45,693
Issuance of warrants for litigation settlement		126,000			—
Issuance of warrants for convertible promissory note conversions		—			7,340
Issuance of convertible promissory note for litigation settlement		768,199			—
Changes in operating assets and liabilities:
Accounts receivable		389,811			(759,320	)
Prepaid expenses and other current assets		21,044			64,149
Other assets		(16,348	)		(5,021	)
Deferred revenue		343,584			(80,998	)
Accounts payable		(108,401	)		(356,704	)
Accrued expenses		(108,721	)		(461,653	)
Interest payable		4,421			23,738
Interest payable — related parties		—			(94,075	)
Other		—			22,191


Net cash used in operating activities		(4,053,807	)		(3,513,759	)


Cash flows from investing activities:
Purchase of property and equipment		(305,854	)		(152,116	)
Repayments to related parties		—			(81,885	)


Net cash used in investing activities		(305,854	)		(234,001	)

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

US DATAWORKS INC.

NOTES TO FINANCIAL STATEMENTS

1.		Organization and Business

		General

		US Dataworks, Inc. (the “Company”), a Nevada corporation, develops, markets, and supports payment processing software for the financial services industry. Its customer base includes many of the largest financial institutions as well as credit card companies, government institutions, and high-volume merchants in the United States. The Company was formerly known as Sonicport, Inc.

2.		Summary of Significant Accounting Policies

		Reverse Stock Split

		On September 10, 2003, our Board of Directors approved a one–for-five reverse spilt of our shares of common stock. As a result of the stock split, our shareholders received one share of our common stock for each five shares of common stock held of record on September 29, 2003. The reverse stock split was completed on September 29, 2003. All share and per share amounts in these Financial Statements and related notes have been retroactively adjusted to reflect this reverse stock split for all periods presented.

		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.

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

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

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

		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.

US DATAWORKS INC.

NOTES TO FINANCIAL STATEMENTS

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:


Automobiles		3 years
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

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 142 requires goodwill for each reporting unit of an entity 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 142 requires goodwill to be tested annually and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of the reportable unit below its carrying amount. The Company did not have an impairment of goodwill to record for the years ended March 31, 2005 or March 31, 2004.

US DATAWORKS INC.

NOTES TO FINANCIAL STATEMENTS

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, and accrued expenses, the carrying amounts approximate fair value due to their short maturities. The amounts shown for convertible promissory note payable and notes payable — related parties 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 intrinsic 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.

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 years ended March 31, 2005 and March 31, 2004.

Proforma 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.

US DATAWORKS INC.

NOTES TO FINANCIAL STATEMENTS

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 years ended March 31, 2005 and 2004 is as follows:


	2005			2004
Net loss as reported	$	(6,459,279	)	$	(7,088,372	)

Add stock— based employee compensation expense included in net earnings (loss) as reported, net of related tax effects		0			0

Deduct stock— based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(1,835,277	)		(1,720,635	)

Net loss, pro forma	$	(8,294,556	)	$	(8,809,007	)

Basic and diluted loss per share, as reported	$	(0.24	)	$	(0.38	)

Basic and diluted loss per share, pro forma	$	(0.30	)	$	(0.47	)

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 years ended March 31, 2005 and 2004: dividend yields of 0% and 0%, respectively; expected volatility of 74% and 150%, respectively; risk-free interest rates of 2.84% and 3.75%, respectively; and expected lives of 3.0 and 3.0 years, respectively. The per-share weighted average fair values of stock options granted during the years ended March 31, 2005 and 2004 were $0.58 and $1.10, respectively.

Advertising Expense

Advertising costs are charged to expense as incurred. For the years ended March 31, 2005 and 2004, the Company recorded advertising expense of $147,232 and $104,097, respectively.

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 net loss 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.

US DATAWORKS INC.

NOTES TO FINANCIAL STATEMENTS

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):


	Year Ended March 31,
	2005		2004
Options outstanding under the Company’s stock option plans		3,926,783		2,493,750
Options granted outside the Company’s stock option plans		1,163,000		713,100
Warrants issued in conjunction with private placements		3,439,451		1,286,251
Warrants issued as a financing cost for notes payable and convertible notes payable		2,221,437		2,241,137
Warrants issued in conjunction with lock— up agreements		0		12,000
Warrants issued for services rendered and litigation settlement		280,000		447,800
Warrants issued as part of the April 2001 acquisition		67,200		67,200
Convertible Series B preferred stock (a)		109,933		125,933


(a)		The Series B preferred stock 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.

Four customers of the company accounted for 34%, 19%, 12% and 12% of the company’s net revenues for the year ended March 31, 2005. Three customers of the Company accounted for 44%, 16% and 16% of the Company’s net revenues for the year ended March 31, 2004. Additionally, the company’s strategic resellers accounted for 19% and 42% of the company’s net sales for the year ended March 31, 2005 and 2004, respectively.

US DATAWORKS INC.

NOTES TO FINANCIAL STATEMENTS

Recently Issued Accounting Pronouncements

SFAS 123R

3. Liquidity

Since its inception, the Company has incurred losses and negative cash flows from operations. The Company’s net losses and negative cash flow may continue for the foreseeable future. As of March 31, 2005, the Company’s accumulated deficit was $(46,292,182). The Company has obtained its required cash resources through the sale of debt and equity securities. The Company may not operate profitably in the future and may be required to continue the sale of debt and equity securities to finance its operations.

For the year ended March 31, 2005, the Company incurred a net loss of $(6,459,279) and a loss from operations of $(4,954,766). As of March 31, 2005, the Company had current assets in excess of current liabilities of $1,087,465 including a cash balance of $1,525,386. During the year ended March 31, 2005, the Company was able to raise approximately $5.1 million, net of expenses, from financing activities, primarily the sale of common stock.

Subsequent to March 31, 2005 the Company raised additional debt financing of approximately $700,000, prior to offering expenses of $82,000, and had negotiated agreements for an additional $600,000 of equity capital to fund the Company’s operations. Also subsequent to March 31, 2005, the Company executed license, maintenance and service agreements with a major credit card and financial services company. Management believes the Company has adequate resources to fund operations through March 31, 2006 and beyond. (See Note 11).

US DATAWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

4. Property and Equipment

Property and equipment at March 31, 2005 consisted of the following:


Automobiles	$	15,072
Furniture and fixtures		84,745
Telephone equipment		90,237
Computer equipment		394,031
Computer Software		1,255,585
Leasehold improvements		62,997


		1,902,667
Less accumulated depreciation and amortization		(1,225,387	)

Total	$	677,280

Depreciation and amortization expense for the years ended March 31, 2005 and 2004 was $323,448 and $280,038, 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 March 31, 2005, the outstanding balance on the note payable was $39,000

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. The terms of this promissory note were such that it could be converted into shares of the Company’s common stock at a conversion price equal to the lesser of (i) $0.80 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 was 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 in the statement of operations for the year ended March 31, 2004.

US DATAWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

6. Convertible Promissory Notes

Convertible Promissory Notes Outstanding at March 31, 2005

At March 31, 2005 the Company had one unsecured convertible promissory note outstanding in the principal amount of $768,199 due, with interest due at 10% per annum, in three equal annual installments (beginning September 15, 2005). Accordingly, at March 31, 2005, $256,066 of this convertible promissory note is classified as current and the remaining amount of $512,133 is classified as a long term obligation. This note was issued to settle litigation brought by an investor in the Company pursuant to a Settlement Agreement and Mutual Release executed November 12, 2004 wherein the parties agreed to dismiss the lawsuit (see Note 7).

Convertible Promissory Notes Repaid During the Fiscal Year Ended March 31, 2005

Additionally, in accordance with the terms of a convertible promissory note dated June 30, 2003, the Company repaid on the note’s maturity date of June 30, 2004, the principal amount of $500,000 and accrued interest thereon. This convertible promissory note was issued with an original issue discount of $60,000 and interest of 5% per annum payable semi-annually. 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. 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. Using the Black-Scholes valuation model, the Company determined the value of the warrant to be $22,654. The amount allocated to the warrant as a debt discount has been recognized as additional interest expense over the period from the date of issuance to the stated maturity date. During the year ended March 31, 2005, the Company recognized $7,667 in interest expense related to the accretion of the debt discount recorded on this convertible promissory note.

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. During the year ended March 31, 2005, the Company recognized $27,596 in financing expense related to the amortization of the beneficial conversion feature recorded on this convertible promissory note.

Convertible Promissory Notes Converted During the Fiscal Year Ended March 31, 2005

Further, also in accordance with the terms of the various underlying agreements and promissory notes, at various times during the fiscal year ended March 31, 2005, the Company converted into 1,090,376 shares of its common stock the principal amounts and accrued interest thereon of four promissory notes dated June 7, 2003, June 7, 2003, August 4, 2004 and October 2, 2004 in the principal amounts of $50,000, $50,000, $250,000 and $575,000, respectively. Pursuant to the agreements, the investors also received warrants, exercisable over a period of three years from issuance, to purchase an aggregate of 163,750 shares of common stock at exercise prices ranging from $0.45 to $2.00 per share. 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. Using the Black-Scholes valuation model, the Company has determined the aggregate value of the warrants to be $199,907. The amount allocated to the warrants as debt discount has been recognized as additional interest expense over the period from the date of issuance of the note to the earlier of the conversion date or the stated maturity date. During the year ended March 31, 2005, the Company recognized $95,695 in interest expense related to the accretion of the debt discount recorded on this convertible promissory note.

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 financing expense over the period from the date of issuance to the earlier of the conversion date or the stated redemption date. The Company has calculated the aggregate beneficial conversion feature of these convertible notes to be $475,093. During the year ended March 31, 2005, the Company recognized $212,866 in financing expense related to the amortization of the beneficial conversion feature recorded on these convertible promissory notes.

US DATAWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

Commitments and Contingencies

Leases

The Company leases an office in Houston, Texas under an operating lease agreement that expires in July 2007. Rent expense was $282,735 and $146,845 for the years ended March 31, 2005 and 2004, respectively.

Future minimum lease payments under operating leases at March 31, 2005 were as follows:


Year Ended	Operating
March 31,	Lease
2006	$	272,983
2007		289,055
2008		96,688

	$	658,726

Employment Agreements

On April 2, April 2, May 13 and September 26, 2003, the Company entered into employment agreements with its President and Chief Operating Officer, Senior Vice President and Chief Technology Officer, Chief Executive Officer and Chairman of the Board, and Vice President Business Development and General Counsel, respectively. Each employment agreement is for a term of three years. Annual base salaries for these four members of senior management are $175,000, $150,000, $200,000 and $150,000, respectively.

On August 2, 2004, the Company entered into an employment agreement with its Vice President Sales — Remittance Processing Division. The employment agreement is for a term of three years with an annual base salary of $150,000 and, during the first twelve months of the agreement, an advance of future commissions of $75,000, payable in semi-monthly installments. The advance is non-recoverable; however, any commissions earned during the first twenty-four months of the agreement will be reduced by the amount of the advance.

Deferred Compensation

On April 12, 2004, the Company granted a deferred compensation award to its Chief Financial Officer. The award provides for a payment equal to the product of 200,000 multiplied by an amount equal to (a) the Company’s average 20 day trailing stock price on the third anniversary date of his employment (March 17, 2006) less (b) $0.55 (the Company’s stock price on the date of his employment). In no event may the payment amount exceed $430,000. The payment amount, if any, is cancelable in the event of the Chief Financial Officer’s voluntary termination or termination by the Company for Cause (as defined).

Upon the granting of the deferred compensation award, an unamortized compensation expense equal to the value on the date of grant is accrued as a liability and charged to stockholders’ equity. This amount is then amortized over the service period of the award. As the amount of the award is not yet determined because it can be adjusted as stated in the terms above, the award is revalued at the end of each reporting period using the stock price at that time. This variable accounting will be in place until March 17, 2006, the date upon which the amount of the payments on these awards will be fixed. Total compensation expense recognized with respect to this deferred compensation award during the year ended March 31, 2005 was $9,302.

US DATAWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

		Litigation

		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 alleged 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.

		On November 12, 2004, the Company and the plaintiff entered into a Settlement Agreement and Mutual Release wherein the parties agreed to dismiss the lawsuit and the Company agreed to pay the plaintiff (1) a $768,199 convertible promissory note payable with interest at 10% per annum in three equal annual installments beginning September 15, 2005, (2) a warrant to purchase 160,000 shares of the Company’s common stock at a purchase price of $0.75 per share, which warrant expires on November 10, 2006 and (3) reimbursement of the plaintiff’s legal fees and expenses. The 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.

		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 totals $924,200 and has been recorded as Investor litigation settlement expense for the year ended March 31, 2005.

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 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.

		In August 2004, an investor in the Series B elected to convert his 79,999 shares and accordingly was issued 15,998 shares of the Company’s common stock.

		At March 31, 2005, there were accumulated, undeclared dividends in arrears of $169,522 or $0.31 per share.

US DATAWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

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 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.

In May 2004, the Company and the institutional investor agreed to terminate the equity line financing in consideration of the Company issuing to the investor $225,000 of unregistered shares of common stock. Based upon the closing market price of the Company’s common stock on the date of the termination agreement, the Company issued 136,861 shares of common stock to the investor in May 2004.

Common Stock and Warrants

During the year ended March 31, 2005, the Company completed the following:

Sale of Common Stock and Warrants

In April 2004, the Company completed a private placement of securities for $4.65 million, less direct issuance expenses of $641,500, with certain major institutional investment funds. Under terms of the agreement, the Company issued 2.89 million shares of common stock. In addition, the Company issued warrants to purchase up to 3.61 million shares of common stock at an exercise price of $1.61 per share.

Exercise of Warrants and Options

On December 14, 2004, the Company entered into an Amended Warrants Agreement wherein certain investors accelerated the exercise of previously issued common stock warrants at a reduced exercise price of $0.90 per share. A total of 1,214,007 warrants were exercised for cash proceeds of $1,092,607. Direct issuance expenses were $20,124.

In accordance with the terms of existing agreements, other previously issued warrants and stock options totaling 435,787 shares were exercised during the year ended March 31, 2005 for proceeds of $100,675.

Conversions of Convertible Promissory Notes

In June 2004, two accredited investors elected to convert their notes totaling $100,000 in aggregate principal amount and $10,000 of aggregate accrued interest and were issued 244,446 shares of common stock in accordance with the terms of the notes.

In August 2004, four accredited investors elected to convert their notes totaling $250,000 and were issued 555,556 shares of common stock in accordance with the terms of the notes.

In September 2004, the Company exercised its option to convert $575,000 in aggregate principal amount of convertible notes and $5,750 of accrued interest at 1% per annum due October 2, 2004 into common stock at a conversion price of $2.00 per share. Accordingly, as of September 30, 2004, the Company issued the noteholder 290,375 shares of common stock.

During the year ended March 31, 2004, the Company completed the following:

Sale of Common Stock and Warrants

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

US DATAWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

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 prior to September 30, 2003. The non-cash expense of this stock repurchase of $45,693 has been recorded as financing costs for the year ended March 31, 2004.

In October 2003, the Company sold 1,825,000 shares of 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. Using the Black-Scholes method, the Company has assigned $2,007,286 of these proceeds to the value of the Warrants issued in connection with the Securities, of which $185,195 has been assigned to the fair value of the Warrants issued in connection with the Debentures. 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.

Issuance of Committed Shares

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.

Conversions of Convertible Promissory Notes

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.

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.

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 year ended March 31, 2004.

US DATAWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

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 year ended March 31, 2004.

During the year ended March 31, 2004, $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.

Conversions of Series A Preferred Stock

During the year ended March 31, 2004, 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 1,994,285 shares of the Company’s common stock.

Common Stock and Warrants as a Financing Cost

During the year ended March 31, 2004, the Company completed the following:

	•		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.

	•		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. In April 2004, the Company received an effectiveness notice of a registration statement from the Securities and Exchange Commission and the maximum number of shares that the investor may purchase pursuant to this warrant agreement was determined to be 477,783 shares.

Common Stock and Warrants Issued for Services

During the year ended March 31, 2004, the Company completed the following:

	•		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 statement of operations for the year ended March 31, 2004.

	•		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. Using the Black-Scholes valuation model, the Company has determined the value of the warrant to be $96,750. This amount has been included as operating expenses in the statement of operations for the year ended March 31, 2004.

US DATAWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

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 6,000,000. 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 period and expire 10 years form 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 years ended March 31, 2005 and 2004, the Company granted 2,084,836 and 2,772,500 stock options, respectively, to certain employees that may be exercised at prices ranging between $1.36 and $0.78, and between $2.95 and $0.55, respectively. Additionally, in September 2003, the Company granted 50,000 non-qualified stock options to a non-employee financial consulting firm. These 50,000 options were granted for financial advisory and consulting services, vest through September 2006 and have an exercise price equal to the fair market value on the date of grant of the option. Using the Black-Scholes valuation model, the Company has determined the value of these 50,000 options to be approximately $110,000 and this amount will be recognized in the statement of operations as consulting services expense over the vesting period of the options.

The following table summarizes certain information relative to stock options:


	2000 Stock Option Plan					Outside of Plan
				Weighted-					Weighted-
				Average					Average
				Exercise					Exercise
	Shares			Price		Shares			Price
Outstanding, March 31, 2003		282,000		$	3.85		143,350		$	16.78

Granted		2,242,500		$	1.70		580,000		$	0.55

Exercised		(28,750	)	$	1.15		(19,000	)	$	2.50

Forfeited/canceled		(2,000	)	$	6.25		(10,250	)	$	11.69

Outstanding, March 31, 2004		2,493,750		$	1.95		694,100		$	3.68

Granted		1,504,836		$	1.02		580,000		$	1.49

Forfeited/canceled		—		$	—		(111,100	)	$	19.99

Exercised		(71,803	)	$	.31		—		$	—

Outstanding, March 31, 2005		3,926,783		$	1.60		1,163,000		$	1.07

Exercisable, March 31, 2005		1,805,119		$	1.71		583,000		$	1.13

US DATAWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

The weighted-average remaining life and the weighted-average exercise price of all of the options outstanding at March 31, 2005 were 8.58 years and $1.48, respectively. The exercise prices for the options outstanding at March 31, 2005 ranged from $0.55 to $22.58, and information relating to these options is as follows:


								Weighted-
					Weighted-			Average
					Average	Weighted		Exercise
Range of	Stock		Stock		Remaining	-Average		Price of
Exercise	Options		Options		Contractual	Exercise		Options
Prices	Outstanding		Exercisable		Life	Price		Exercisable
$0.55 — 2.00		3,916,949		1,813,613	8.71 years	$	0.94	$	0.85
$2.01 — 3.00		1,023,834		425,506	8.49 years	$	2.78	$	2.84
$3.01 — 22.58		149,000		149,000	5.81 years	$	6.68	$	6.68
		5,089,783		2,388,119

9. Income Taxes

The tax effects of temporary differences that give rise to deferred taxes at March 31, 2005 were as follows:


Deferred tax assets:
United States federal net operating loss carryforwards	$	8,928,854
Effect of state net operating loss carryforwards		787,840
Deferred Revenue		24,670
Allowance for doubtful collections		12,298
Accrued liabilities		45,305


Total deferred tax assets		9,798,967

Valuation allowance		(9,695,555	)


Deferred tax assets		103,412

Deferred tax liability — Basis of property and equipment		(103,412	)


Net deferred tax assets	$	—

The valuation allowance increased by $2,092,720 during the year ended March 31, 2005 and increased by $2,097,093 during the year ended March 31, 2004. At March 31, 2005, the Company had approximately $26,261,000 of federal net operating loss carryforwards attributable to losses incurred since the Company’s inception that may be offset against future taxable income through 2025. Because United States tax laws and the tax laws of most states limit the time during which NOL carryforwards may be applied against future taxable income, the Company may be unable to take full advantage of its NOL for federal income tax purposes should the Company generate taxable income. Based on such limitations, the Company has significant NOL carryforwards for which realization of tax benefits is uncertain. Further, the benefit from utilization of NOL carryforwards could be subject to limitations if material ownership changes occur in the Company. For the years ended March 31, 2005 and 2004, the Company recognized revisions to deferred tax

US DATAWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

assets with offsetting revisions to the valuation allowance that resulted in an insignificant net change in the aggregate of total deferred tax assets less the valuation allowance.

Income tax expense differs from the amounts computed by applying the United States federal income tax rate of 34% to loss before income taxes as follows:


	2005			2004
Income tax benefit at federal statutory rate		34.0	%		34.0	%
Non-deductible interest expense from beneficial conversion feature and issuance of common stock and stock warrants		(2.0	)		(5.3	)
Non-deductible compensation and other expense arising from issuance of common stock and stock warrants		(2.5	)		(0.9	)
Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense		(32.4	)		(29.6	)
State income taxes		3.0			3.0
Other		(0.1	)		(1.2	)

Total		—	%		—	%

10.		Related Party Transactions

		On July 12, 2000, the Company issued a promissory note for $1,127,500 to purchase certain capitalized software valued at $1,040,000 and telephone equipment valued at $87,500. The note was issued to an affiliated company whose significant shareholders are also significant shareholders of the Company. On April 2, 2001, the Company refinanced the note payable with the affiliate. The new note was issued for $1,315,000, which included the previous note for $1,127,500, accrued interest for $136,000, and $51,500 of the amount due to a related party as of March 31, 2001. In December 2001, the software and equipment were written off. In March 2003, the telephone equipment was written off as it was no longer being used. At March 31, 2003, the outstanding balance on the note payable was $961,627, which was included in net liabilities of discontinued operations. 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 was $635,259 and has been recorded as a loss on extinguishment of debt in the statement of operations for the year ended March 31, 2004.

11.		Subsequent Events

		Sale of Convertible Debt, Common Stock and Warrants

		We have negotiated definitive agreements, effective as of June 16, 2005, with nine accredited investors for the sale of 1,258,654 shares of Common Stock for gross proceeds of $600,000. The agreements also provide that we will issue warrants, exercisable over a three year period beginning in December 2005, to purchase up to 314,664 shares of Common Stock at an exercise price of $0.715 per share and an additional 314,664 shares of Common Stock at an exercise price of $0.812 per share. We are currently awaiting approval of the American Stock Exchange for issuance of the shares of Common Stock and anticipate receipt of such approval in early July 2005. Upon receipt of approval, we will execute the agreements and issue the shares of Common Stock and warrants.

		Additionally in June 2005, the Company sold to an institutional investor 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. In connection with the sale of the debenture, the Company issued the investor two groups of warrants, Short Term and Long Term warrants. The Short Term warrants allow the purchase of up to 407,926 shares of the Company’s common stock with an exercise price of $0.572 per share that may be exercised for a period of 180 days at any time after the later of (i) the effective date of the registration statement covering the

		conversion and warrant shares or (ii) December 16, 2005. The Long Term warrants allow the purchase of up to 471,154 shares of the Company’s common stock with an exercise price of $0.572 per share that may be exercised at anytime from December 16, 2005 through December 16, 2008.

		License, Maintenance and Service Agreements

		On August 30, 2005, the Company completed the execution of integrated license, maintenance and service agreements with one of the Country’s largest credit card and financial services companies. The license and maintenance agreement has a ten year term and the services agreement is estimated to be completed over an 18 month period. The combined agreements are expected to provide a significant amount of revenues to the Company.

Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 8A. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are effective alerting them on a timely basis to material information relating to US Dataworks that is required to be included in our periodic filings under the Exchange Act.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-13(f) and 15d-15(f) under the Exchange Act) that occurred during our fourth fiscal quarter of the fiscal year ended March 31, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 8B. Other Information

None.

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.

Organization of the Board of Directors.

Our directors are divided into three classes designated Class I, Class II and Class III. Each class consists, as nearly as possible, of one-third of the total number of directors constituting the entire Board of Directors. Under our Bylaws, Class I directors will serve until the annual meeting of stockholders in 2006. At the 2004 annual meeting of stockholders, Class II directors were elected for a term expiring at the 2007 annual meeting of stockholders. The Class III directors serve for a term expiring at the 2005 annual meeting of stockholders. At each annual meeting of stockholders, successors to the class of directors whose term expires at that annual meeting shall be elected for a term expiring at the third succeeding annual meeting. Each director holds office until the annual meeting for the year in which his term expires and until his successor has been elected and qualified.

As of June 13, 2005, our directors were as follows:


Name	Class	Age		Position(s)
Charles E. Ramey	Class III		64	Chief Executive Officer and Director
Terry Stepanik	Class III		54	President, Chief Operating Officer and Director
Joe Abrell	Class I		70	Director
J. Patrick Millinor	Class III		59	Director
John L. Nicholson, MD	Class I		70	Director
Hayden D. Watson	Class II		56	Lead Director
Thomas L. West Jr.	Class II		68	Director

Charles E. Ramey has served as a director since July 2001 and became our Chief Executive Officer in December 2001. Prior to joining US Dataworks, Mr. Ramey was a private investor from December 1998 through July 2001 and was President and co- founder of PaymentNet Inc., now Signio Inc., an outsourced e-commerce payment processing company, from April 1996 to December 1998.

Terry Stepanik has served as a director since September 2002 and our President and Chief Operating Officer since April 2001. Mr. Stepanik also served as our Interim Chief Financial Officer from September 2002 to March 2003. In November 1997, Mr. Stepanik co- founded of US Dataworks, Inc., a Delaware corporation, which we acquired in April 2001, and served as its President from November 1997 to April 2001. From April 1994 to November 1997, Mr. Stepanik was the Senior Project Manager for TeleCheck Services, Inc., a provider of paper and electronic check services.

Joe Abrell has served as a director since October 1999. From July 1997 until his retirement in December 1999, he served as a consultant at PrimeCo Personal Communications, a wireless technology company. From July 1986 to December 1999, he operated his own public relations and marketing firm, Joe Abrell, Inc.

J. Patrick Millinor, Jr. has served as a director since December 6, 2004. He has been Chairman and Chief Executive Officer of Ampam, Inc. since October 2004. From 2000 until he joined Ampam, he held several positions in conjunction with his association with a venture capital group. His positions included Chairman of Encompass, Inc., Chairman of ADViSYS, Inc., and Chief Financial Officer of Agennix, Incorporated. Between 1986 and 2000, Mr. Millinor held several executive positions, including Chief Executive Officer of GroupMAC, Inc., Chief Executive Officer of UltrAir, Inc., and Chief Operating Officer of Commonwealth Financial Group, Inc. He was a partner with KPMG LLP for eight years prior to 1986. Mr. Millinor currently sits on the boards of Ampam, Inc. and Agennix, Incorporated.

John L Nicholson, MD has served as a director since September 2002. He has been in private practice since 1969. Dr. Nicholson brings an entrepreneurial perspective and seasoned business experience to the Board of Directors. He has been an investor in several companies, including US Dataworks, Inc. Dr. Nicholson has served on many local, state, and national medical organizations and has been an Associate Clinical Professor at Stanford University since 1969

Hayden D. Watson has served as a director since September 2002. In May 1999, he founded The Mariner Group, Inc., a banking investment and management consulting company, where he serves as President. From December 1996 to May 1999, Mr. Watson served as Managing Director of Bank Operations for Fleet Financial Group, now FleetBoston Financial Corporation, a financial holding company.

Thomas L. West Jr. has served as a director since September 2002. He has served as Chairman and Chief Executive Officer of WestMark Ventures, a venture capital company, since January 2000 and as President and Chief Executive Officer of Pocket Technologies, Inc., a developer of applications for handheld computing devices, since July 2000. Prior to joining WestMark Ventures and Pocket Technologies, Inc., Mr. West held various positions at the American General Financial Group, an insurance company, including Vice Chairman and Group Executive-Retirement Services from April 1994 to January 2000.

Audit Committee

We have a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act by the Board of Directors for the purpose of overseeing our accounting and financial reporting processes and our audits and financial statements. The Audit Committee, which held ten meetings in fiscal 2005, currently consists of Mr. Abrell, Mr. Millinor, Dr. Nicholson and Mr. Watson, each of whom are qualified to serve on the Audit Committee under rules of the American Stock Exchange. Mr. Watson currently serves as the Chairman of the Audit Committee. Our Board of Directors has determined that Mr. Millinor is qualified to serve as the Company’s audit committee financial expert, as such term is defined in Item 401 of Regulation S-B. Mr. Millinor is an independent director, as such term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

The Audit Committee’s primary functions are to oversee the integrity of our financial statements, our compliance with legal and regulatory reporting requirements, appoint a firm of certified public accountants whose duty it is to audit our financial records for the fiscal year for which it is appointed, evaluate the qualifications and independence of the independent auditors, oversee the performance of our internal audit function and independent auditors, and determine the compensation and oversee the work of the independent auditors. It is not the duty of the Audit Committee to plan or conduct audits or to determine that our financial statements are complete

and accurate and are prepared in accordance with generally accepted accounting principles. Management is responsible for preparing our financial statements, and the independent auditors are responsible for auditing those financial statements.

Executive Officers

As of June 13, 2005, the following persons were our executive officers:


Name	Age		Position
Charles E. Ramey		64	Chief Executive Officer and Director
Terry Stepanik		54	President, Chief Operating Officer and Director
John Reiland		55	Chief Financial Officer
John J. Figone		45	Vice President of Business Operations and General Counsel
Mario Villarreal		35	Senior Vice President and Chief Technology Officer

Information concerning Messrs. Ramey and Stepanik is provided under the section entitled “Organization of the Board of Directors.”

John Reiland has served as our Chief Financial Officer since March 2003. Prior to joining US Dataworks, Mr. Reiland was an independent financial consultant providing senior financial and operational management services from September 2002 to March 2003. From March 2002 to September 2002, he was Interim Chief Executive Officer of New England Pantry, a master franchiser and operator of 53 convenience stores located in the greater Boston area. From November 2000 through February 2002, Mr. Reiland was President and Chief Executive Officer of ServiceIQ, Inc., a developer of service industry field work force software applications utilizing wireless handheld devices. Prior to joining ServiceIQ, Inc., he was Chief Financial Officer and Director of NEON Systems, Inc., a computer software developer of mainframe integration adapters from June 1996 to October 2000. Mr. Reiland is a Certified Public Accountant.

John J. Figone has served as of Vice President of Business Operations and General Counsel since September 2003. Prior to joining us, Mr. Figone served as legal counsel at Pillsbury Winthrop LLP for three years, as well as Ferrari, Olsen, Ottoboni & Bebb LLP. Mr. Figone worked for the City and County of San Francisco where he was in charge of Special Projects from 1994 to 1998. In 1994, Mr. Figone became Senior Negotiator for the City and County of San Francisco.

Mario Villarreal has served as our Vice President and Chief Technology Officer since April 2001. In April 2004, he was named Senior Vice President. In November 1997, Mr. Villarreal co-founded US Dataworks, Inc., a Delaware corporation, and served as its Vice President from November 1997 to April 2001. From June 1991 to May 1997, Mr. Villarreal served as Manager of Systems Architecture Group at TeleCheck Services, Inc.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission. Officers, directors and greater than 10% shareholders are required to furnish us with copies of all such forms that they file.

Based solely on our review of copies of such forms it has received and written representations from certain reporting persons that they were not required to file Forms 5 for specified fiscal years, we believe that all of our officers, directors and greater than 10% beneficial owners complied with all Section 16(a) filing requirements applicable to them with respect to transactions during fiscal 2005.

Code of Ethics

In April 2003, our Board of Directors adopted a Code of Business Conduct and Ethics governing its Chief Executive Officer, Chief Financial Officer, its other executive officers, the Board of Directors and employees. Our Code of Business Conduct and Ethics is available on our corporate website at http://www.usdataworks.com on the “Investor Relations” page under “Code of Business Conduct and Ethics”. We intend to disclose on our website any waivers or amendments to our Code of Business Conduct and Ethics within five business days of such action.

Item 10. Executive Compensation

Executive Compensation and Related Information

The following table sets forth compensation for services rendered in all capacities to US Dataworks for the three fiscal years ended March 31, 2005 for our Chief Executive Officer and the four other most highly compensated executive officers as of March 31, 2005 whose total annual salary and bonus for fiscal 2005 exceeded $100,000 (collectively, the “Named Officers”).

Summary Compensation Table

Long— Term


								Long— Term
								Compensation
								Awards
								Securities
	Annual Compensation							Underlying		All Other
Name and Principal
Position	Year		Salary($)			Bonus($)		Options(#)(1)		Compensation ($)
Charles E. Ramey		2005		200,000			1,000		—		—
Chief Executive Officer		2004		200,000	(2)		—		400,000		—
		2003		180,000	(2)		—		—		—

Terry Stepanik		2005		175,000			1,000		290,000		—
President and Chief		2004		175,000	(3)		—		710,000		—
Operating Officer		2003		186,128	(3)		—		—		—

John Reiland		2005		150,000			750		200,000		—
Chief Financial		2004		150,000			—		150,000		—
Officer(4)		2003		6,250			—		—		—

John J. Figone		2005		150,000			230,750		—		—
Vice President and		2004		150,000			—		400,000		—
General Counsel(5)		2003					—		—		—

Mario Villarreal		2005		165,000			1,000		290,000		—
Senior Vice President and Chief Technology		2004		150,000			—		710,000		—
Officer (6)		2003		120,000			5,000		—		—


(1)		All share amounts have been adjusted to reflect the one— for— five reverse stock split effective on September 29, 2003.

(2)		Mr. Ramey’s 2003 compensation includes $136,774 that was accrued in 2003 but paid in 2004.

(3)		Mr. Stepanik’s 2003 compensation includes $66,128 sales commissions that were accrued but unpaid in 2003. Mr. Stepanik was paid $60,000 of these accrued unpaid sales commissions in 2004.

(4)		Mr. Reiland was appointed Chief Financial Officer in March 2003.

(5)		Mr. Figone was appointed Vice President Business Operations and General Counsel in September 2003.

(6)		On April 1, 2004, Mr. Villarreal’s annual base compensation was increased to $165,000.

Stock Options

The following table provides summary information concerning stock options held as of March 31, 2005 by each of the executive officers.

Aggregate Fiscal Year— End Option Values


					Number of Securities
					Underlying Unexercised				Value of Unexercised
	Shares				Options Held at				In-the-Money Options at
	Acquired		Value		March 31, 2005 (#)				March 31, 2005 ($) (1)
Name	On Exercise (#)		Realized ($)		Exercisable		Unexercisable		Exercisable		Unexercisable
Charles E. Ramey		—		—		400,000		—		—		—
Terry Stepanik		36,500		48,351		659,750		322,500		43,725		29,000
John S. Reiland		—		—		37,500		312,500		—		—
John J. Figone		—		—		100,000		300,000		—		—
Mario Villarreal		3,637		2,255		718,863		322,500		49,636		29,000


(1)		Calculated on the basis of the fair market value of the underlying securities at March 31, 2005 ($0.65 per share) as reported on the American Stock Exchange minus the exercise price.

Compensation of Directors

Each non-employee director receives a fee for attendance at each meeting of the Board of Directors according to the following schedule: $5,000 for attendance at a board meeting in person; $1,000 for attendance at a board meeting by telephone. Additionally, directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors or the committees thereof, and for other expenses reasonably incurred in their capacity as directors of the Company. Upon election to the Board of Directors at an annual meeting of stockholders, each such elected or re-elected non-employee director receives an option to purchase 100,000 shares of the Company’s Common Stock (the “Election Stock Option”). If elected to serve a term of less than three years the non-employee director receives a pro rata portion of the 100,000 shares. Each non-employee director will also receive an option to purchase 60,000 shares of the Company’s Common Stock annually. The Lead Director and the Audit Committee Chairperson will also receive an option to purchase 50,000 shares of the Company’s Common Stock annually while each Chairperson of a committee, other than the Audit Committee, will receive an option to purchase 30,000 shares of the Company’s Common Stock annually. In addition, for each committee, other than the Audit Committee, on which a non-employee director serves, except as Chairperson, the non-employee director will receive an option to purchase 10,000 shares of the Company’s Common Stock annually. Finally, members of the Audit Committee, except the Chairperson, will receive an option to purchase 15,000 shares of the Company’s Common Stock annually. These non-employee director options, except the Election Stock Option, vest in full on the one year anniversary of the date of grant.

Upon the appointment of Mr. Millinor to the Board and to the Audit Committee on December 6, 2004, he received options to purchase 48,334 shares of the Company’s Common Stock at an exercise price of $1.16 per share which was the fair market value on the date of grant.

Employment Contracts, Termination of Employment and Change in Control Agreements

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 at an annual base salary of $200,000 for a term of three years. The Agreement will automatically renew for successive one year terms unless either party gives timely notice of non-renewal. 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. The option vests as to 280,000 shares on May 20, 2003 and the remaining shares vest on January 1, 2004. Mr. Ramey was also entitled to receive an option to purchase 6,000 shares of our common stock under the 2000 Plan at an exercise price equal to $2.95 per share. This option became fully vested on January 1, 2004. Mr. Ramey is also eligible to receive a bonus at the discretion of the Board of Directors.

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 Company’s Board of Directors, other than for cause, 50% of Mr. Ramey’s unvested options will become fully vested.

On April 2, 2003, we entered into an employment agreement with Terry Stepanik, pursuant to which he is employed as our President and Chief Operating Officer at an annual base salary of $175,000 for a term of three years. The agreement will automatically renew for successive one year terms unless either party gives timely notice of non renewal. Pursuant to the terms of the agreement, Mr. Stepanik received an option to purchase 355,000 shares of our common stock under the Amended and Restated 2000 Stock Option Plan, or 2000 Plan, at an exercise price of $0.55 per share. The option vests as to 177,500 shares on December 31, 2003 and the remaining shares vest on April 2, 2004. Mr. Stepanik was 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 and an option to purchase 65,000 shares of our common stock under the 2000 Plan at an exercise price of $2.95 per share. These options vest as to 145,000 shares and 32,500 shares, respectively, on March 31, 2005 and the remaining shares under both options vest on March 31, 2006. Pursuant to his employment agreement, Mr. Stepanik also received an option to purchase 290,000 shares of our common stock outside the 2000 Plan on April 26, 2004 at an exercise price of $1.49 per share which amount was 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. Mr. Stepanik is also eligible to receive an annual bonus equal to 5% of our earnings before interest, taxes, depreciation and amortization, not to exceed 1.5 times his annual base salary, plus such additional amount as determined by the Board of Directors in its sole discretion.

In the event of a change of control, all of Mr. Stepanik’s options will become fully vested and exercisable. If Mr. Stepanik 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, he is 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 Mr. Stepanik resigns within 10 days following a material decrease in title by our Board of Directors, other than for cause, 50% of Mr. Stepanik’s unvested options will become fully vested.

On April 2, 2003, we also entered into an employment agreement with Mario Villarreal, pursuant to which he is employed as our Senior Vice President-Chief Technology Officer at an annual base salary of $150,000 for a term of three years. The agreement will automatically renew for successive one year terms unless either party gives timely notice of non renewal. Pursuant to the terms of the agreement, Mr. Villarreal 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. The option vests as to 177,500 shares on April 25, 2003 and the remaining shares vest on April 2, 2004. Mr. Villarreal was 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 and an option to purchase 65,000 shares of our common stock under the 2000 Plan at an exercise price of $2.95 per share. These options vest as to 145,000 shares and 32,500 shares, respectively, on March 31, 2005 and the remaining shares under both options vest on March 31, 2006. Pursuant to his employment agreement, Mr. Villarreal also received an option to purchase 290,000 shares of our common stock outside the 2000 Plan on April 26, 2004 at an exercise price of $1.49 per share which amount was 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 vest on March 31, 2006. Mr. Villarreal is also eligible to receive an annual bonus equal to 3% of our earnings before interest, taxes, depreciation and amortization, not to exceed 1.5 times his annual base salary, plus such additional amount as determined by the Board of Directors in its sole discretion.

In the event of a change of control, all of Mr. Villarreal’s options will become fully vested and exercisable. If 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, he 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. Villarreal resigns within 10 days following a material decrease in title by our Board of Directors, other than for cause, 50% of Mr. Villarreal’s unvested options will become fully vested.

On September 26, 2003, we entered into an employment agreement with John J. Figone, pursuant to which he is employed as our Vice President Business Development and General Counsel at an annual base salary of $150,000 for a term of three years. The agreement will automatically renew for successive one year terms unless either party gives 90 days prior written notice of non renewal. Pursuant to the terms of the agreement, Mr. Figone received 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 amount was the fair market value of our common stock on the date of grant. The option vests as to 100,000 shares on September 26, 2004, 150,000 shares on September 26, 2005, and 150,000 shares on September 26, 2006. Subject to approval of the Compensation Committee, Mr. Figone will also be granted an option to purchase an additional 400,000 shares of our common stock under the 2000 Plan on September 26, 2006, at an exercise price of equal to the fair market value of our common stock on the date of grant. These options vest as to 200,000 shares on September 26, 2007 and the remaining shares will vest on September 26, 2008. Mr. Figone is also eligible to receive an annual bonus equal to 33% of his annual base salary based upon the

achievement of our corporate goals as established and determined by the Board annually and for other achievements by us or Mr. Figone during the year as approved by the Compensation Committee.

If Mr. Figone has not received the additional options to purchase 400,000 shares described above before a change of control, he will be entitled to a cash bonus at that time equal to the appreciation of the value of 400,000 shares of our common stock subsequent to September 26, 2003. 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, he is 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 Mr. Figone resigns within 10 days following a material decrease in title by our Board of Directors, other than for cause, 50% of Mr. Figone’s unvested options will become fully vested.

On March 17, 2003, we entered into an employment agreement with John S. Reiland, pursuant to which he is employed as our Chief Financial Officer at an annual base salary of $150,000. Either party may terminate the agreement with at least thirty days prior written notice. In the event Mr. Reiland is terminated, other than for cause, he is entitled to receive a lump sum payment equal to two months base salary and all his options and cash bonuses, if any, will become fully vested and payable.

On April 12, 2004, we granted a deferred compensation award to Mr. Reiland. The award provides for a payment equal to the product of 200,000 multiplied by an amount equal to (a) the Company’s average 20 day trailing stock price on the third anniversary date of his employment (March 17, 2006) less (b) $0.55 (the Company’s stock price on the date of his employment). In no event may the payment amount exceed $430,000. The payment amount, if any, is cancelable in the event of Mr. Reiland’s voluntary termination or termination by the Company for Cause (as defined).

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information as of June 13, 2005, as to shares of our common stock beneficially owned by: (i) each person who is known by us to own beneficially more than 5% of any class of our capital stock, (ii) each of our Named Officers, (iii) each of our directors and (iv) all of our current directors and executive officers as a group. Unless otherwise stated below, the address of each beneficial owner listed on the table is c/o US Dataworks, Inc., 5301 Hollister Road, Suite 250, Houston, Texas 77040. All share amounts have been adjusted to reflect the one-for-five reverse stock split effective on September 29, 2003.


	Amount and Nature of Beneficial Ownership
					Right To
			Shares of		Acquire
	Shares of		Series B		Beneficial				Percentage of Class
	Common		Preferred		Ownership of				Beneficially Owned					Percentage of Voting
	Stock		Stock		Common Stock		Total							Securities
Name and Address of	Beneficially		Beneficially		within 60 days		Common		Common		Series B			Beneficially
Beneficial Owner	Owned		Owned		of June 13, 2005		Stock		Stock (2)		Preferred Stock			Owned(1)(2)
5% Stockholders
Mark Deveau		37,322		56,000		11,200		48,522		*		10.2	%		*
Harvey M. Gammon (3)		45,769		280,000		56,000		101,769		*		50.9			*
Thomas & Lois Gibbons		503		67,000		13,400		13,903		*		12.2			*

Named Officers and Directors
Charles E. Ramey		2,050,210		*		2,091,250		4,141,460		13.4		*			13.4
Terry Stepanik		267,586		*		673,350		940,936		3.2		*			3.2
John S. Reiland		5,000		*		104,166		109,166		*		*			*
John J. Figone		750		*		100,000		100,750		*		*			*
Mario Villarreal		101,670		*		723,263		824,933		2.8		*			2.8
Joe Abrell		1,000		*		87,000		88,000		*		*			*
J. Patrick Millinor, Jr.		—		—		—		—		*		*			*
John L. Nicholson (4)		313,146		133,334		110,076		423,222		1.5		24.3			1.5
Hayden D. Watson		—		*		72,000		72,000		*		*			*
Thomas L. West, Jr.		18,000		*		64,000		82,000		*		*			*
All current directors and executive officers as a group (10 persons)		2,757,362		133,334		4,025,105		6,782,467		20.7		24.3			20.6


*		Amount represents less than 1% of our common stock.


(1)		To our knowledge, the persons named in the table have sole voting and investment power with respect to all shares of voting securities shown as beneficially owned by them, subject to community property law, where applicable, and the information contained in the footnotes to this table.

(2)		Applicable percentage ownership of common stock is based on 28,778,366 shares of common stock issued and outstanding as of June 13, 2005. Series B Preferred Stock is based on 549,667 shares of Series B Preferred Stock outstanding on June 13, 2005. Applicable percentage ownership of voting securities is based on 28,888,299 shares of common stock issued and outstanding as of June 13, 2005, including shares of Series B Preferred Stock convertible into common stock. Beneficial ownership is determined in accordance with the rules and regulations of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or convertible or exchangeable into such shares of common stock, held by that person, that are currently exercisable or exercisable within 60 days of June 13, 2005 are deemed outstanding. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of another person.

(3)		Includes 25,873 shares held by the Sterling Trust Company Trustee FBO Harvey M. Gammon.

(4)		Includes 165,454 shares held by J.L. Nicholson MD Inc. 401— K FBO John L. Nicholson, 50,000 shares held by JLN Trust DTD April 26, 2001 and 55,031 shares held by John L. Nicholson MD Inc. FBO John L. Nicholson.

Equity Compensation Plan Information

The following table sets forth certain information as to our equity compensation plans for fiscal 2005. All share amounts have been adjusted to reflect the one-for- five reverse stock split effective on September 29, 2003.

Number of securities

Weighted average

remaining available for

Number of securities to be

exercise price of

future issuance under

issued upon exercise of

outstanding options,

equity compensation plans

outstanding options,

warrants and

(excluding securities

warrants and rights

rights

reflected in column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by the stockholders

3,926,783

1.60

2,173,217

Equity compensation plans not approved by the stockholders

1,163,000

1.07

—

Total

5,089,783

1.48

2,173,217

The Amended and Restated 2000 Stock Option Plan is our only equity compensation plan that has been approved by the stockholders. We have also granted non-statutory stock options to purchase shares of our common stock pursuant to stock option agreements. These grants were made outside of our 2000 Stock Option Plan. The exercise prices of these options were equal to the fair market value of our common stock on the date of grant. These options vest over periods up to three years from the date of grant and have a duration of five years (3,000) and ten years (1,160,000). The exercise price may be paid in cash or by a net issuance.

Item 12. Certain Relationships and Related Transactions

In connection with Mr. Figone’s relocation to the Company’s headquarters in Houston, Texas in August 2003, the Company guaranteed a personal loan with Amegy Bank of Texas on his behalf. On May 20, 2004, Mr. Figone repaid the principal and accrued interest in full. Accordingly, the Company is no longer a guarantor of the loan.

All share amounts and per share prices discussed below have been adjusted to reflect the one— for— five reverse stock split effective on September 29, 2003.

We, through our predecessor-in-interests, acquired US Dataworks, Inc., a Delaware corporation, on March 31, 2001, with an effective date of April 2, 2001 through a Share Exchange Agreement. Terry Stepanik and Mario Villarreal, co-founders of the Delaware company, received 199,467 shares of our common stock and 64,533 shares of our common stock, respectively, and a warrant to

purchase 13,600 shares and 4,400 shares of our common stock, respectively, at an exercise price of $3.65 per share. One of the liabilities of this Delaware company that was assumed by us was a promissory note in the principal amount of $1,315,000 in favor of Allstate Communications, Inc.

On February 14, 2002, we entered into a settlement agreement with Allstate Communications, Inc. As part of this settlement, we transferred all rights in our application service provider technology software to Allstate Communications, Inc. and the warrants to purchase an aggregate of 664,000 shares of our common stock held by Messrs. Leventhal and Montelione were cancelled. In addition, Allstate Communications, Inc. and Messrs. Leventhal and Montelione forgave notes payable in the amount of $260,206 and we forgave notes payable in the amount of $300,519. We also agreed to pay the remainder of the amounts owed to Allstate Communications, Inc. and Messrs. Levental and Montelione, an aggregate of $1,150,000, out of proceeds from future equity financings. Of the $1,150,000 owed, $1,024,400 is pursuant to the promissory note assumed in connection with the acquisition of the Delaware company. On December 31, 2002, this promissory note was cancelled and we issued a new promissory note in the amount of $1,041,482 pursuant to Amendment Number 1 to Settlement Agreement. The promissory note was fully repaid at September 30, 2003 as a result of the conversion of the outstanding principal and accrued interest into 417,084 shares of common stock.

During fiscal 2003 and 2002, we 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, we 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. The note proceeds were used to fund our business operations. This promissory note may be converted into shares of our common stock at a conversion price equal to the lesser of (i) $0.80 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, we issued to Mr. Ramey a warrant to purchase 1,691,250 shares of our 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. On September 30, 2003, Mr. Ramey elected to fully convert the promissory note and accrued interest of $21,277. On September 30, 2003, we issued Mr. Ramey 1,717,847 shares of our common stock pursuant to the conversion.

Item 13. Exhibits

The exhibits listed below are required by Item 601 of Regulation S-B. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-KSB/A has been identified.


Exhibit
Number		Description of Document
3(i).1		Articles of Incorporation of Sonicport.com, Inc. (incorporated by reference to Exhibit 3(i).1 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

3(i).2		Certificate of Designation of Series A Convertible Preferred Stock of Sonicport.com, Inc. (incorporated by reference to Exhibit 3.1(g) to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2000).

3(i).3		Certificate of Designation of Series B Convertible Preferred Stock of Sonicport.com, Inc. (incorporated by reference to Exhibit 3(1).3 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

3(i).4		Certificate of Amendment to Articles of Incorporation of Sonicport.com, Inc. (incorporated by reference to Exhibit 3.1(h) to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2001).

3(i).5		Certificate of Amendment to Articles of Incorporation of Sonicport, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s registration statement on Form S— 3 filed May 14, 2002).

3(ii)		Amended and Restated Bylaws. (incorporated by reference to Exhibit 3(ii) to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended December 31, 2002).

4.1		Specimen common stock certificate. (incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).


Exhibit
Number		Description of Document
4.2		Registration Rights Agreement dated as of June 30, 2003 between the Registrant and Icon Investors Ltd. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8— K, filed with the SEC on July 10, 2003).

4.3		Finder’s Fee and Piggyback Registration Rights Agreement dated June 30, 2003 between the Registrant and Bridgewater Capital (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003.)

4.4		Registration Agreement dated September 30, 2003 between the Registrant and ACI Communications Holdings, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended September 30, 2003).

4.5		1% Convertible Debenture (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8— K filed October 9, 2003).

4.6		Form of Common Stock Purchase Agreement (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8— K, filed with the SEC on October 9, 2003).

4.7		Registration Rights Agreement, dated as of October 2, 2003, by and among the Registrant and the signatories thereto (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8— K, filed with the SEC on October 9, 2003).

4.8		Registration Rights Agreement, dated as of April 16, 2004, by and among the Registrant and the signatories thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2004).

4.9		Registration Agreement dated as of November 12, 2004, between the Registrant and Peter Simons (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-3 (File No. 333-121951) filed by the Registrant on January 11, 2005).

4.10		Common Stock Purchase Warrant to purchase up to 160,000 shares of the Registrant Common Stock issued to Peter Simons (incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-3 (File No. 333-121951) filed by the Registrant on January 11, 2005).

4.11		10% Convertible Debenture issued by the Registrant for the benefit of Peter Simons dated effective September 15, 2004 (incorporated by reference to Exhibit 99.2 to Registration Statement on Form S-3 (File No. 333-121951) filed by the Registrant on January 11, 2005).

10.1†		Amended and Restated 2000 Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S— 8 (File No. 333— 102840)).

10.2†		Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2003).

10.3		Lease Agreement dated as of November 18, 1997, by and between Allstate Dataworks, LLC and 5301 Hollister, L.P. (incorporated by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).


Exhibit
Number		Description of Document
10.4		Second Addendum to Lease Contract dated as of October 28, 2000, by and between US Dataworks, Inc., a Delaware corporation, and 5301 Hollister, L.P. (incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.5		Fourth Amendment to Lease Agreement dated as of May 14, 2002 by and between the Registrant and MLCV Hollister LP. (incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.6		Form of Warrant Agreement between the Registrant and each of Messrs. Cooper, Shapiro, Stepanik and Villarreal (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.7		Form of Warrant Agreement. (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.8		Form of Convertible Promissory Note (incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.9		Warrant Agreement for Common Stock of Sonicport, Inc. dated as of January 21, 2002, by and between the Registrant and Red Rock Bridge Fund, L.L.C. (incorporated by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.10		Convertible Secured Promissory Note dated as of January 21, 2002, by and between the Registrant and Red Rock Bridge Fund, L.L.C. (incorporated by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.11		Form of Promissory Note between the Registrant and each of David Baeza and Stanton Dodson. (incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.12†		Form of Stock Option Agreement (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S— 8 (File No. 333— 102842)).

10.13†		Form of Director Stock Option Agreement (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2003).

10.14		Note and Warrant Purchase Agreement by and among the Registrant, Charles E. Ramey and LaJolla Cove LA Investors, Inc., dated June 6, 2003 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.15		Form of Warrant Agreement between the Registrant and La Jolla Cove LA Investors, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.16		Convertible Debenture and Warrant Agreement dated June 30, 2003 by and between the Registrant and Societe Financiere Privee, S.A. (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.17		Warrant Agreement dated June 30, 2003 between the Registrant and Societe Financiere Privee, S.A. (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).


Exhibit
Number		Description of Document
10.18		Warrant Agreement dated July 10, 2003 between the Registrant and Charles E. Ramey (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.19		Subordinated Convertible Note and Warrant Agreement dated July 10, 2003 between the Registrant and Charles E. Ramey (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.20		Venison Warrant Agreement dated June 25, 2003 between the Registrant and Barry Venison (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.21		Voting Agreement dated June 30, 2003 between the Registrant and Societe Financiere Privee, S.A. (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.22		Form of 8% Subordinated Promissory Note dated June 6, 2003 between the Registrant and La Jolla Cove Investors, Inc. (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.23		5% Convertible Debenture between the Registrant and Societe Financiere Privee, S.A. (incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.24		Convertible Subordinated Promissory Note dated July 10, 2003 between the Registrant and Charles Ramey. (incorporated by reference to Exhibit 10.11 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.25		8% Convertible Promissory Note between the Registrant and Barry Venison. (incorporated by reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.26		Form of Note and Warrant Conversion Agreement dated June 25, 2003 between the Registrant and Barry Venison, Brad Friedel, John Barnes and Darren Ridge (incorporated by reference to Exhibit 10.13 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.27		Form of replacement Warrant Agreement between the Registrant and each of Barry Venison, Brad Friedel, John Barnes and Darren Ridge. (incorporated by reference to Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.28		Promissory Note dated December 31, 2002 between the Registrant and ACI Communications holdings, Inc. f/k/a/ AllState Communications, Inc. . (incorporated by reference to Exhibit 10.15 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.29		Amendment No. 1 to Settlement Agreement dated December 31, 2002 between the Registrant, Frank Montelione, Russel Leventhal, ACI Communications Holdings, Inc. f/k/a/ AllState Communications, Inc. (incorporated by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).


Exhibit
Number		Description of Document
10.30		Security Agreement dated December 31, 2002 between the Registrant and ACI Communications Holdings, Inc. f/k/a/ AllState Communications Inc. (incorporated by reference to Exhibit 10.17 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.31†		Nonstatutory Stock Option Agreement dated May 21, 2003 between the Registrant and Mario Villarreal. (incorporated by reference to Exhibit 10.18 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.32†		Nonstatutory Stock Option Agreement dated May 21, 2003 between the Registrant and Terry E. Stepanik. (incorporated by reference to Exhibit 10.19 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.33†		Employment Agreement dated April 2, 2003 between the Registrant and Terry Stepanik (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly report on Form 10— QSB for the quarter ended September 30, 2003).

10.34†		Employment Agreement dated April 2, 2003 between the Registrant and Mario Villarreal (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly report on Form 10— QSB for the quarter ended September 30, 2003).

10.35†		Employment Agreement dated May 13, 2003 between the Registrant and Charles E. Ramey (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly report on Form 10— QSB for the quarter ended September 30, 2003).

10.36†		Employment Agreement dated April 2, 2003 between the Registrant and John J. Figone (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly report on Form 10— QSB for the quarter ended September 30, 2003).

10.37†		Form of Nonstatutory Stock Option Agreement (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended September 30, 2003).

10.38		Common Stock Purchase and Warrant Agreement dated September 30, 2003 between the Registrant and ACI Communications Holdings, Inc. (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended September 30, 2003).

10.39		Form of Common Stock Purchase and Warrant Agreement between the Registrant and ACI Communications Holdings, Inc. (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended September 30, 2003).

10.40		Advisory Agreement dated June 6, 2003 between the Registrant and Merriman Curhan Ford & Co. (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended September 30, 2003).

10.41		Advisory Agreement dated July 2, 2003 between the Registrant and Merriman Curhan Ford & Co. (incorporated by reference to Exhibit 10.42 to the Registrant’s Registration Statement on Form SB— 2/A filed November 26, 2003 (File No. 333— 108536)).

10.42		Common Stock Purchase and Warrant Agreement dated as of October 2, 2003 between the Registrant and the signatories thereto (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8— K filed October 9, 2003).

10.43		Convertible Debenture and Warrant Agreement dated as of October 2, 2003 between the Registrant and John Winfield IRA (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8— K filed October 9, 2003).


Exhibit
Number		Description of Document
10.44		Securities Purchase Agreement, dated as of April 16, 2004, by and among the Registrant and the signatories thereto (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2004).

10.45		Form of Series A Common Stock Purchase Warrant (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2004).

10.46		Form of Series B Common Stock Purchase Warrant (incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2004).

10.47		Settlement & Release Agreement, dated as of April 26, 2004, by and between the Registrant and Icon Investors, Ltd. (incorporated by reference to Exhibit 99.4 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2004).

10.48†		Additional Compensation Agreement made and effective as of April 12, 2004, by and between the Company and John S. Reiland (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004).

10.49		Settlement Agreement and Mutual Release dated November 12, 2004, by and between the Registrant and Peter Simons (incorporated by reference to Exhibit 99.1 to Registration Statement on Form S-3 (File No. 333-121951) filed by the Registrant on January 11, 2005).

10.50		Amended Warrants Agreement dated December 6, 2004 (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on December 8, 2004).

10.51		First Amendment to Amended Warrants Agreement dated December 9, 2004 (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on December 13, 2004).

23.1		Consent of Independent Registered Public Accounting Firm.

24.1		Power of Attorney (included on signature page).

31.1		Section 302 Certification of Chief Executive Officer.

31.2		Section 302 Certification of Chief Financial Officer.

32.1		Section 906 Certification of Chief Executive Officer.

32.2		Section 906 Certification of Chief Financial Officer.


†		Indicates management contract or compensatory plan or arrangement.

Item 14. Principal Accountant Fees and Services

Audit Fees

The aggregate fees billed for professional services rendered by Ham, Langston & Brezina, LLP for the audit of our financial statements for each of the fiscal years ended March 31, 2005 and March 31, 2004, and the reviews of the financial statements included in our Forms 10- QSB for such fiscal years were $54,000 and $50,500, respectively.

Audit— Related Fees

The aggregate fees billed in each of the fiscal years ended March 31, 2005 and March 31, 2004 for assurance and related services rendered by Ham, Langston & Brezina, LLP that are related to the performance of the audit or review of our financial statements but not reportable as Audit Fees were $8,100 and $38,100, respectively. Audit— Related Fees in both fiscal 2005 and fiscal 2004 were primarily for review of the financial statements and other information contained in our SB— 2, S— 3 and S-8 filings with the SEC.

Tax Fees

The aggregate fees billed for professional services rendered by Ham, Langston & Brezina, LLP for tax compliance, tax advice, and tax planning in each of the fiscal years ended March 31, 2005 and March 31, 2004 were $10,600 and $7,600. Tax Fees in both fiscal 2005 and fiscal 2004 were incurred for: (i) preparation of the preceding calendar year’s Federal corporate tax return; (ii) preparation of state franchise tax returns; and (iii) consultation.

All Other Fees

There were no other fees billed for services rendered by Ham, Langston & Brezina, LLP not reportable as Audit Fees, Audit Related Fees or Tax Fees for each of the fiscal years ended March 31, 2005 and March 31, 2004.

Audit Committee Pre— Approval Policies

The Audit Committee has established a policy intended to clearly define the scope of services performed by our independent auditors for non— audit services. This policy relates to audit services, audit— related services, tax and all other services which may be provided by our independent auditor and is intended to assure that such services do not impair the auditor’s independence. The policy requires the pre— approval by the Audit Committee of all services to be provided by our independent auditor. Under the policy, the Audit Committee will annually review and pre— approve the services that may be provided by the independent auditor without obtaining specific pre— approval from the Audit Committee or its designee. In addition, the Audit Committee may delegate pre— approval authority to one or more of its members. The member or members to whom such authority is delegated is required to report to the Audit Committee at its next meeting any services which such member or members has approved. The policy also provides that the Audit Committee will pre— approve the fee levels for all services to be provided by the independent auditor. Any proposed services exceeding these levels will require pre— approval by the Audit Committee.

All of the services provided by our principal accounting firm described above under the captions Audit Fees, Audit— Related Fees and Tax Fees were approved in accordance with this policy and the Audit Committee has determined that the auditor independence has not been compromised as a result of providing these services and receiving the fees for such services as noted above.

SIGNATURES

In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		US DATAWORKS, INC.

		By:		/s/ Charles E. Ramey

				Charles E. Ramey
				Chief Executive Officer
		Date: September 30, 2005

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles E. Ramey and John S. Reiland, and each of them, his true and lawful attorneys— in— fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10- KSB/A and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys— in— fact or their substitute or substitutes may do or cause to be done by virtue hereof.

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Name	Title	Date
/ s/ Charles E. Ramey	Chief Executive Officer	September 30, 2005

Charles E. Ramey	(Principal Executive Officer)
	and Director

	Chief Financial Officer
/s/ John S. Reiland	(Principal Accounting and	September 30, 2005

John S. Reiland	Financial Officer)

/s/ Joe Abrell	Director	September 30, 2005

Joe Abrell

/s/ J. Patrick Millinor	Director	September 30, 2005

J. Patrick Millinor

/s/ John L. Nicholson, M.D.	Director	September 30, 2005

John L. Nicholson, M.D.

/s/ Terry Stepanik	Director	September 30, 2005

Terry Stepanik

/s/ Hayden D. Watson	Director	September 30, 2005

Hayden D. Watson.

/s/ Thomas L. West, Jr.	Director	September 30, 2005

Thomas L. West, Jr.

EXHIBIT INDEX


Exhibit
Number		Description of Document
3(i).1		Articles of Incorporation of Sonicport.com, Inc. (incorporated by reference to Exhibit 3(i).1 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

3(i).2		Certificate of Designation of Series A Convertible Preferred Stock of Sonicport.com, Inc. (incorporated by reference to Exhibit 3.1(g) to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2000).

3(i).3		Certificate of Designation of Series B Convertible Preferred Stock of Sonicport.com, Inc. (incorporated by reference to Exhibit 3(1).3 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

3(i).4		Certificate of Amendment to Articles of Incorporation of Sonicport.com, Inc. (incorporated by reference to Exhibit 3.1(h) to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2001).

3(i).5		Certificate of Amendment to Articles of Incorporation of Sonicport, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s registration statement on Form S— 3 filed May 14, 2002).

3(ii)		Amended and Restated Bylaws. (incorporated by reference to Exhibit 3(ii) to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended December 31, 2002).

4.1		Specimen common stock certificate. (incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

4.2		Registration Rights Agreement dated as of June 30, 2003 between the Registrant and Icon Investors Ltd. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8— K, filed with the SEC on July 10, 2003).

4.3		Finder’s Fee and Piggyback Registration Rights Agreement dated June 30, 2003 between the Registrant and Bridgewater Capital (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003.)

4.4		Registration Agreement dated September 30, 2003 between the Registrant and ACI Communications Holdings, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended September 30, 2003).

4.5		1% Convertible Debenture (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8— K filed October 9, 2003).

4.6		Form of Common Stock Purchase Agreement (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8— K, filed with the SEC on October 9, 2003).

4.7		Registration Rights Agreement, dated as of October 2, 2003, by and among the Registrant and the signatories thereto (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8— K, filed with the SEC on October 9, 2003).

4.8		Registration Rights Agreement, dated as of April 16, 2004, by and among the Registrant and the signatories thereto (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2004).


Exhibit
Number		Description of Document
4.9		Registration Agreement dated as of November 12, 2004, between the Registrant and Peter Simons (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-3 (File No. 333-121951) filed by the Registrant on January 11, 2005).

4.10		Common Stock Purchase Warrant to purchase up to 160,000 shares of the Registrant Common Stock issued to Peter Simons (incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-3 (File No. 333-121951) filed by the Registrant on January 11, 2005).

4.11		10% Convertible Debenture issued by the Registrant for the benefit of Peter Simons dated effective September 15, 2004 (incorporated by reference to Exhibit 99.2 to Registration Statement on Form S-3 (File No. 333-121951) filed by the Registrant on January 11, 2005).

10.1†		Amended and Restated 2000 Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S— 8 (File No. 333— 102840)).

10.2†		Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2003).

10.3		Lease Agreement dated as of November 18, 1997, by and between Allstate Dataworks, LLC and 5301 Hollister, L.P. (incorporated by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.4		Second Addendum to Lease Contract dated as of October 28, 2000, by and between US Dataworks, Inc., a Delaware corporation, and 5301 Hollister, L.P. (incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.5		Fourth Amendment to Lease Agreement dated as of May 14, 2002 by and between the Registrant and MLCV Hollister LP. (incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.6		Form of Warrant Agreement between the Registrant and each of Messrs. Cooper, Shapiro, Stepanik and Villarreal (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.7		Form of Warrant Agreement. (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.8		Form of Convertible Promissory Note (incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.9		Warrant Agreement for Common Stock of Sonicport, Inc. dated as of January 21, 2002, by and between the Registrant and Red Rock Bridge Fund, L.L.C. (incorporated by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.10		Convertible Secured Promissory Note dated as of January 21, 2002, by and between the Registrant and Red Rock Bridge Fund, L.L.C. (incorporated by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).


Exhibit
Number		Description of Document
10.11		Form of Promissory Note between the Registrant and each of David Baeza and Stanton Dodson. (incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2002).

10.12†		Form of Stock Option Agreement (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S— 8 (File No. 333— 102842)).

10.13†		Form of Director Stock Option Agreement (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10— KSB for the year ended March 31, 2003).

10.14		Note and Warrant Purchase Agreement by and among the Registrant, Charles E. Ramey and LaJolla Cove LA Investors, Inc., dated June 6, 2003 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.15		Form of Warrant Agreement between the Registrant and La Jolla Cove LA Investors, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.16		Convertible Debenture and Warrant Agreement dated June 30, 2003 by and between the Registrant and Societe Financiere Privee, S.A. (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.17		Warrant Agreement dated June 30, 2003 between the Registrant and Societe Financiere Privee, S.A. (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.18		Warrant Agreement dated July 10, 2003 between the Registrant and Charles E. Ramey (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.19		Subordinated Convertible Note and Warrant Agreement dated July 10, 2003 between the Registrant and Charles E. Ramey (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.20		Venison Warrant Agreement dated June 25, 2003 between the Registrant and Barry Venison (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.21		Voting Agreement dated June 30, 2003 between the Registrant and Societe Financiere Privee, S.A. (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.22		Form of 8% Subordinated Promissory Note dated June 6, 2003 between the Registrant and La Jolla Cove Investors, Inc. (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.23		5% Convertible Debenture between the Registrant and Societe Financiere Privee, S.A. (incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.24		Convertible Subordinated Promissory Note dated July 10, 2003 between the Registrant and Charles Ramey. (incorporated by reference to Exhibit 10.11 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).


Exhibit
Number		Description of Document
10.25		8% Convertible Promissory Note between the Registrant and Barry Venison. (incorporated by reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.26		Form of Note and Warrant Conversion Agreement dated June 25, 2003 between the Registrant and Barry Venison, Brad Friedel, John Barnes and Darren Ridge (incorporated by reference to Exhibit 10.13 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.27		Form of replacement Warrant Agreement between the Registrant and each of Barry Venison, Brad Friedel, John Barnes and Darren Ridge. (incorporated by reference to Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.28		Promissory Note dated December 31, 2002 between the Registrant and ACI Communications holdings, Inc. f/k/a/ AllState Communications, Inc. . (incorporated by reference to Exhibit 10.15 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.29		Amendment No. 1 to Settlement Agreement dated December 31, 2002 between the Registrant, Frank Montelione, Russel Leventhal, ACI Communications Holdings, Inc. f/k/a/ AllState Communications, Inc. (incorporated by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.30		Security Agreement dated December 31, 2002 between the Registrant and ACI Communications Holdings, Inc. f/k/a/ AllState Communications Inc. (incorporated by reference to Exhibit 10.17 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.31†		Nonstatutory Stock Option Agreement dated May 21, 2003 between the Registrant and Mario Villarreal. (incorporated by reference to Exhibit 10.18 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.32†		Nonstatutory Stock Option Agreement dated May 21, 2003 between the Registrant and Terry E. Stepanik. (incorporated by reference to Exhibit 10.19 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended June 30, 2003).

10.33†		Employment Agreement dated April 2, 2003 between the Registrant and Terry Stepanik (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly report on Form 10— QSB for the quarter ended September 30, 2003).

10.34†		Employment Agreement dated April 2, 2003 between the Registrant and Mario Villarreal (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly report on Form 10— QSB for the quarter ended September 30, 2003).

10.35†		Employment Agreement dated May 13, 2003 between the Registrant and Charles E. Ramey (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly report on Form 10— QSB for the quarter ended September 30, 2003).

10.36†		Employment Agreement dated April 2, 2003 between the Registrant and John J. Figone (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly report on Form 10— QSB for the quarter ended September 30, 2003).

10.37†		Form of Nonstatutory Stock Option Agreement (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended September 30, 2003).


Exhibit
Number		Description of Document
10.38		Common Stock Purchase and Warrant Agreement dated September 30, 2003 between the Registrant and ACI Communications Holdings, Inc. (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended September 30, 2003).

10.39		Form of Common Stock Purchase and Warrant Agreement between the Registrant and ACI Communications Holdings, Inc. (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended September 30, 2003).

10.40		Advisory Agreement dated June 6, 2003 between the Registrant and Merriman Curhan Ford & Co. (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10— QSB for the quarter ended September 30, 2003).

10.41		Advisory Agreement dated July 2, 2003 between the Registrant and Merriman Curhan Ford & Co. (incorporated by reference to Exhibit 10.42 to the Registrant’s Registration Statement on Form SB— 2/A filed November 26, 2003 (File No. 333— 108536)).

10.42		Common Stock Purchase and Warrant Agreement dated as of October 2, 2003 between the Registrant and the signatories thereto (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8— K filed October 9, 2003).

10.43		Convertible Debenture and Warrant Agreement dated as of October 2, 2003 between the Registrant and John Winfield IRA (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8— K filed October 9, 2003).

10.44		Securities Purchase Agreement, dated as of April 16, 2004, by and among the Registrant and the signatories thereto (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2004).

10.45		Form of Series A Common Stock Purchase Warrant (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2004).

10.46		Form of Series B Common Stock Purchase Warrant (incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2004).

10.47		Settlement & Release Agreement, dated as of April 26, 2004, by and between the Registrant and Icon Investors, Ltd. (incorporated by reference to Exhibit 99.4 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 20, 2004).

10.48†		Additional Compensation Agreement made and effective as of April 12, 2004, by and between the Company and John S. Reiland (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004).

10.49		Settlement Agreement and Mutual Release dated November 12, 2004, by and between the Registrant and Peter Simons (incorporated by reference to Exhibit 99.1 to Registration Statement on Form S-3 (File No. 333-121951) filed by the Registrant on January 11, 2005).

10.50		Amended Warrants Agreement dated December 6, 2004 (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on December 8, 2004).


	2005			2004
Cash flows from financing activities:
Payments on capital lease obligations		—			(6,728	)
Repayment of notes payable		—			(172,990	)
Proceeds from convertible promissory notes		—			2,190,000
Repayment of convertible promissory notes		(500,000	)		(375,000	)
Repayment of note from discontinued operation		—			(136,340	)
Proceeds from stock sale		4,650,000			4,150,000
Stock issuance costs		(641,500	)		(244,954	)
Proceeds from the exercise of employee stock options		69,575			17,312
Proceeds from exercise of warrants		1,103,583			21,285
Repurchase of Treasury Stock		—			(500,000	)


Net cash provided by financing activities		4,681,658			4,942,585


Net increase in cash and cash equivalents		321,997			1,194,825
Cash and cash equivalents, beginning of year		1,203,389			8,564

Cash and cash equivalents, end of year	$	1,525,386		$	1,203,389


Supplemental disclosures of cash flow information
Interest paid	$	48,222		$	143,023


		Page
PART I
Item 1. Description of Business		2
Item 2. Description of Property		4
Item 3. Legal Proceedings		4
Item 4. Submission of Matters to a Vote of Security Holders		4

PART II
Item 5. Market for Common Equity and Related Stockholder Matters		5
Item 6. Management’s Discussion and Analysis or Plan of Operation		6
Item 7. Financial Statements		12
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		36
Item 8A. Controls and Procedures		36
Item 8B. Other Information		36

PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act		36
Item 10. Executive Compensation		39
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		42
Item 12. Certain Relationships and Related Transactions		43
Item 13. Exhibits		44
Item 14. Principal Accountant Fees and Services		50
Consent of Independent Registered Public Accounting Firm
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CFO Pursuant to Section 302